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HomeMy WebLinkAbout16 - Appendix A5/4/09 Draft 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. PDF created with pdfFactory Pro trial version www.softwarelabs.com GENERAL History 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 fimding 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 nonprofit, 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 trusted and nationally recognized health care leader. 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, financial stewardship, and community benefit and philanthropy. The strategic plan is reviewed and updated every three years. In the area of quality and service, the Corporation plans to deliver patient- centered care though demonstrated excellent quality outcomes across the continuum of care, the consistent delivery of an exceptional customer experience through effective communication across all settings, and the provision of reliable, safe care to all patients. The Corporation's people strategy is to inspire and empower people through the development of a learning culture that values creativity and collaboration and the development and attraction of high - performing leaders throughout the organization. In the area of physician partnership, the Corporation is committed to creating trusting and mutually beneficial relationships with its affiliated physicians by providing access to clinical, administrative and outcome information through the use of electronic health records and health information exchange, assisting physicians in improving their practice viability by supporting the formation of larger medical groups and providing resources to assist in practice management, and effectively implementing physician/Corporation alignment options. With respect to strategic growth, the Corporation will expand its services through the opening of a second hospital campus in the neighboring community of Irvine in mid -2010, and is also planning the implementation of a Hoag - branded ambulatory network, focusing on core services in the communities of Irvine, Huntington Beach and Newport Beach to be implemented in the next three years. The Corporation's financial stewardship initiatives are to implement a `market- competitive" cost structure and pricing strategy, to enhance the capital management process, to optimize revenue cycle and patient access functions, and to achieve the financial goals of its Irvine expansion undertakings. Additionally, the Corporation is involved in a 10 -year initiative known as "Renaissance Hoag," a multi- year capital fundraising campaign targeting donations in the approximate aggregate amount of $315 million, to further the organization's strategies and mission, and to continue the development of the culture of philanthropy organization -wide. The Corporation will also seek to increase awareness and participation in community benefit and to reevaluate its portfolio of community benefit and reestablish funding priorities. A -1 PDF created with pdfFactory Pro trial version www.softwarelabs.com Hospital Facilities Newport Beach Campus 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 36 buildings, including 3 parking structures and approximately 2,500 parking spaces. The Corporation owns the land and facilities on the main campus in Newport Beach. The total gross building area for all buildings, including parking and temporary structures, as well as other spaces is approximately 1,857,000 square feet. The Hospital underwent major expansions in 1969, 1974, 1990, and 2005 and is currently licensed for 498 general acute care beds. The Hospital is licensed by the Department of Public Health of the State of California as a general acute care hospital and is accredited by The Joint Commission (the "Joint Commission "). In January of 1991, the Corporation opened the Patty and George Hoag Cancer Center (approximately 63,000 square feet) located on the Hospital's campus in Newport Beach (the "Cancer Center "). The Cancer Center provides three linear accelerators, an infusion center 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 (the "Pavilion "), 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 345,000 square -foot facility, with 102 licensed beds and 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, a 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 -load plant to generate power. The two-story, approximately 27,000 square -foot facility, is located on the lower portion of the Hospital's campus in Newport Beach and houses generators capable of supplying as much as 4.4 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. In the fall of 2008, the Corporation opened the Marilyn Herbert Hausman Advanced Technology Pavilion ( "ATP "), an approximately 7,800 square -foot outpatient imaging facility located on the lower campus of the Hospital. The ATP offers some of the latest in advanced technology imaging services, including high definition PET /CT, the only available large -bore 3T MRI in Orange County, and the Leksell ® Gamma Knife Perfexion TM. A portion of the Series 2009 Bond proceeds will be used to reimburse the Hospital for expenditures incurred for the acquisition of certain imaging equipment located at the ATP. The Corporation has funded improvements from its own resources and the proceeds of loans from prior revenue bond issues of the City. As of March 31, 2009, such loans were outstanding in the aggregate principal amount of $516,030,000. The Corporation utilized the proceeds of the City's 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 Cross Women's Pavilion, replacement of certain Hospital infrastructure and other general capital expenditures. Proceeds of the 2005 Bonds are fully expended. The Corporation utilized approximately $27 million of the new money proceeds of the City's Auction Rate Securities (Hoag Memorial Hospital Presbyterian) 2007 Series A, B, C, D and E (the "2007 Bonds "), and additional monies to fund construction, renovation and replacement of certain Hospital facilities and other general capital expenditures, including expanded and updated improvements to the Hospital campus. A significant portion (approximately $17 million) of the 2007 Bond proceeds was spent on the renovation and structural upgrade of the Ancillary Building at the Hospital which currently houses the Emergency Department ( "ED "), portions of Radiology Services and other ancillary services. See also "FACILITIES PLANNING AND CAPITAL PLAN — The Capital Plan" and "SELECTED UTILIZATION AND FINANCIAL INFORMATION - Certain Indebtedness and Liabilities" below. A -2 PDF created with pdfFactory Pro trial version www.softwarelabs.com Outpatient Surgery Facilities The Corporation currently operates two free - standing facilities for outpatient surgery. The first, the James Irvine Surgery Center, was opened on the Hospital campus in 1972 and contains three operating rooms. The second, Newport Surgicare, opened in 1983 and contains four operating rooms; it is located four miles from the Hospital in one of four major medical office buildings in Newport Center. Hoag Health Centers and Medical Office Buildings In 2006, the Corporation continued its commitment to community-based healthcare by establishing Hoag Health Center — Woodbury and Hoag Health Center — Newport Beach. With these two new additions, the Corporation now operates seven medical office buildings ( "Health Centers ") outside the primary Hospital facility in the communities of Irvine (approximately 21,000 square feet), North Irvine — Woodbury (approximately 5,800 square feet), Huntington Beach (approximately 53,000 square feet), Costa Mesa (approximately 20,000 square feet), Aliso Viejo (approximately 33,000 square feet), Fountain Valley (approximately 8,100 square feet) and Newport Beach (approximately 330,000 square feet). The Health Centers are fully operational except for the Hoag Health Center - Newport Beach, which is still under development as further described below. The Corporation owns the facilities and land at the Huntington Beach, Irvine and Aliso Viejo Health Centers, and leases space in the Costa Mesa, Fountain Valley and North Irvine — Woodbury Health Centers. The Health Center in Newport Beach is owned and operated by Newport Healthcare Center, LLC, a wholly -owned subsidiary of the Corporation and a Member of the Obligated Group as defined in the Master Trust Indenture, dated as of May 1, 2007 (the "Master Indenture "). From time to time, the Corporation considers opportunities with regards to its Health Centers and other real estate holdings, including possible sale or monetization of properties. The Corporation would only undertake such an opportunity if, following management and Board review, it was deemed to benefit the Corporation's finances or operations, and to fit within the strategic direction of the organization. Hoag Hospital Irvine — [CONTINUE TO UPDATE] hi July 2008, the Corporation achieved a significant milestone in its 55 -year history. The Corporation entered into a long -term agreement to lease a hospital facility in the community of Irvine to establish a second and new Hoag Hospital campus. The approximately 240,000 square foot facility is the site of a former hospital, established 19 years ago, and will be an extension of the Corporation's services in Newport Beach and the seven Hoag Health Centers located throughout Orange County. The facility is owned by HCP, Inc., a healthcare REIT. The Corporation's lease has an initial term of 15 years with two 10 -year extension options and a purchase option ten years following commencement of the lease. The Corporation obtained possession of the closed hospital facility in February 2009. The facility had been licensed for 176 beds, which are currently in suspension. Extensive interior renovations are necessary to bring the facility up to modem standards, including the expansion and addition of operating rooms and space for new and innovative technology. The renovations include resizing inpatient beds to 154 and increasing operating rooms from 8 to 14. Construction is expected to last 12 -24 months with estimated construction cost of $39 million, exclusive of required information technology amd equipment expenditures [to discuss]. The hospital facility will remain closed during construction. Construction contracts have not been awarded and certain regulatory approvals are pending, and the construction activity is subject to delay and construction cost overrun risks. See the section of the Official Statement entitled " Assuming the Corporation obtains the required regulatory approvals, the Corporation expects to commence renovations in the Summer of 2009. The Corporation expects to pay for the renovations from existing and current operating revenues, investment income and reserves, and, subject to market and other conditions, future borrowing. The Corporation plans to open the facility in two phases, eventually involving all of the newly renovated beds and new and renovated operating rooms. The first phase includes renovations necessary to open 84 inpatient beds and 7 operating rooms, and a newly renovated lobby and patient registration area. The Corporation plans to open the first phase in August 2010 as an operating division of the Corporation, operating under the same license of A -3 PDF created with pdfFactory Pro trial version www.softwarelabs.com the Corporation's Newport Beach campus. With the opening of this phase, the Corporation will operate general acute care and emergency services at Hoag Hospital Irvine. The Corporation plans to complete and open the second phase in March of 2011. The second phase involves the remaining 70 inpatient beds and 7 operating rooms. The second phase completes the facility needed to relocate the Corporation's Orthopedic Services Center of Excellence from the existing Newport Beach campus to the Irvine campus. This transfer of service will allow for the consolidation and expansion of all orthopedic services and development of the Hoag Orthopedic Institute ( "HOI "), to include an orthopedic specialty hospital. This transfer of service will also serve to free up inpatient beds and surgical capacity at the main Newport Beach campus providing for future growth at that location. The Corporation is currently considering various physician alignment strategies for HOI, including but not limited to a joint venture ( "Orthopedic Joint Venture ") to be formed between the Corporation, as a majority owner, and physician participants. As currently contemplated, the Orthopedic Joint Venture would sublease space from the Corporation at Hoag Hospital Irvine to operate HOI, including the orthopedic specialty hospital. As such, HOI and the corresponding 70 inpatient beds and 7 operating rooms would be operated under anew and separate license from the Corporation. The Orthopedic Joint Venture would require a significant capital contribution in the form of cash and assets from the Corporation. In the aggregate, the Hoag Hospital Irvine undertaking, and the Orthopedic Joint Venture is expected to be financially and operationally material to the Corporation. The Corporation expects the Hoag Hospital hvine division to incur non - operating losses through fiscal year 2010, prior to its opening, and operating losses during the early years of operations in fiscal years 2011 and 2012 particularly with respect to the first phase, in an aggregate annual amount less than 2% of the gross revenues of the Obligated Group. The Corporation expects the combined investment, comprising of renovations to the facility and operations of Hoag Hospital Irvine and HOI, to incur operating losses during fiscal years 2010 and 2011 and achieve positive, combined cash flows in 2012. These projections are estimates only and the Corporation can make no assurances that actual results will be in line with projections. Among other factors, delays with respect to regulatory approval and completion of the renovation, equipping and activation of the facility would adversely affect the estimated impact to the Corporation. See the section of the Official Statement entitled BONDHOLDERS' RISKS — Other Risk Factors — "Contributions" and "Construction Risk." It is possible that then existing legal and regulatory requirements or other factors will prevent establishment of the Orthopedic Joint Venture. In the event of such legal or regulatory requirements or other impediments to the establishment of the Orthopedic Joint Venture, the orthopedic services component of Hoag Hospital Irvine, namely HOI and the specialty hospital, are expected to be operated as an operating division of the Corporation without a separate independent legal structure and fiscal and cash flow impacts could be materially different, although the Corporation expects that it would not materially change the size, scope or timing of the HOI component of Hoag Hospital Irvine. The terms and conditions of the Orthopedic Joint Venture entity are not established and will ultimately be subject to approval of the Board of Directors and other conditions, including compliance with applicable legal and regulatory constraints, as well as Corporation financial covenant requirements. Currently pending legislation may affect the Corporation's ability to pursue or implement this strategy. See the section of the Official Statement entitled `BONDHOLDERS' RISKS - ". There can be no assurance that the Corporation will successfully complete the Orthopedic Joint Venture or on what terms, or the ultimate impact on the Corporation. If completed, however, it is likely that some existing patient revenues of the Corporation associated with the Orthopedic Center of Excellence would be transferred to the new orthopedic specialty hospital, and that the Corporation may guarantee significant financial elements of the transaction. hr any case, implementation of specific strategic affiliations and joint ventures is subject to significant risks and conditions precedent. The Corporation cannot predict whether any such material arrangements will be entered into or the ultimate terms on which they may be developed. Newport Healthcare Center In February 2006, Newport Healthcare Center, LLC ( "NHC "), a wholly -owned subsidiary of the Corporation, purchased an approximately 330,000 square -foot office complex located several blocks north of the A-4 PDF created with pdfFactory Pro trial version www.softwarelabs.com primary Hospital campus and referred to as "Hoag Health Center — Newport Beach ". The office complex will provide space for certain administrative support functions and clinical services, including expansion for outpatient imaging services, as well as physician medical office space. The Corporation began relocation of certain administrative functions to Hoag Health Center - Newport Beach in 2007 and completed relocation of additional administrative functions in the latter half of 2008. Certain clinical services were established and operational at Hoag Health Center — Newport Beach in the latter half of 2008. The Corporation currently expects to lease approximately 40% to 50% of the leaseable space in Hoag Health Center — Newport Beach from NEC. One of the primary services available at Hoag Health Center — Newport Beach is Hoag Outpatient Imaging. The outpatient imaging center, approximately 33,500 square feet, offers state -of -the -art technology, including computed tomography ("CT ") scan, magnetic resonance imaging ( "MRI ") and diagnostic radiology. By the middle of 2009, outpatient ultrasound and nuclear medicine services are also expected to be available at Hoag Health Center — Newport Beach. NHC has obtained city approvals to fully transition the property to medical office space. Leasing of medical office space commenced in the latter half of 2008, with substantial occupancy expected by 2010. Approximately 30% percent of the facility remains vacant as of March 31, 2009. The remaining estimated cost to develop NHC's property is approximately $75 million comprised primarily of further tenant improvements and site development; however, the ultimate uses for Hoag Health Center — Newport Beach are subject to change. In January 2008, NBC purchased a medical office building, known as Newport Medical Center, in close proximity to the Hospital campus. The building, which provides approximately 24,209 square feet of leaseable space, is currently 93% occupied. The leases are subject to different terms and there can be no assurance that the various leases will be renewed at the time of expiration. As of March 31, 2009, NEC represented 8% of the Total Assets of the Obligated Group. NHC generated $1.9 million of revenue and reported a net loss of $0.4 million in the six-month period ended March 31, 2009. See "SELECTED UTILIZATION AND FINANCIAL INFORMATION." For federal tax purposes, NHC is treated as a disregarded entity and a division of the Corporation. ORGANIZATIONAL STRUCTURE Obligated Group Pursuant to the Master Indenture, the Corporation and NEC 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 in the future other entities may become Members of the Obligated Group or Members may withdraw from the Obligated Group in accordance with the terms of the Master Indenture. In 2005, the Corporation formed NBC as a Delaware limited liability company, the sole member of which is the Corporation, to own and operate Hoag Health Center — Newport Beach and other medical office building properties in Newport Beach as described above. The Corporation originally capitalized NHC with $85 million. Although NHC is a Member of the Obligated Group, the Corporation expects to make all payments with respect to the City's Revenue Bonds (Hoag Memorial Hospital Presbyterian), Series 2009A, 2009B, 2009C, 2009D, and 2009E (collectively, the "2009 Bonds ") from its own funds. 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 of the board members for Hoag Management Services Inc. ( "HMSI "), formerly known as Hoag Practice Management Inc., a for -profit corporation which until December A -5 PDF created with pdfFactory Pro trial version www.softwarelabs.com 31, 2007, provided administrative services to other entities including the Corporation and physicians. Effective December 31, 2007, the Corporation discontinued a substantial portion of this line of business, which included the sale of the majority of its assets and assignment of its management contracts to a third party which assumed certain HMST's liabilities. The Corporation was also the sole member of Bluff View, LLC, until September 1, 2008 at which time the entity was dissolved and all assets and liabilities were transferred to NHC. CPPG and HMSI (and, for periods prior to September 1, 2008, Bluff View LLC) are collectively referred to herein as "Immaterial Affiliates" and they currently constitute Immaterial Affiliates as defined in the Master Indenture. They are not Members of the Obligated Group and are not obligated with respect to the 2009 Bonds. References herein to the "Wholly -Owned Subsidiaries" shall mean CPPG, HMSI and NHC; however, CPPG and HMSI 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, Main Street Specialty Surgery Center, Newport Imaging Center, Newport Beach Lido Surgery Center, Hoag Endoscopy Center and Orthopedic Surgery Center of Orange County, and these entities 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 2009 Bonds. See "Other Affiliates" below. Current plans contemplate creation of a significant affiliate in connection with Hoag Hospital Irvine. See "POTENTIAL AFFILIATIONS AND TRANSACTIONS." Hoae 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 two support groups with a total membership of over 4,000 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 the fiscal year ended September 30, 2008, the Foundation's total assets and total net assets were $163.6 million and $161.0 million, respectively. In fiscal years ended September 30, 2008 and August 31, 2007, the Foundation distributed funds to the Corporation for property and capital additions in the amount of approximately $7.2 million and $6.9 million, respectively. The Foundation is not a Member of the Obligated Group and is not obligated with respect to the 2008 Bonds. In addition to the Foundation, there is also an independent 800 - member Auxiliary that supports the Hospital with volunteers and contributions. In addition to the members of the Auxiliary, there are approximately 700 additional volunteers supporting the Corporation on the campus in Newport Beach. OtherA>rliates In December 2008, the Corporation acquired 51% ownership interest in Main Street Specialty Surgery Center, LLC ( "MSSSC "). In addition to the Corporation, MSSSC has 23 individual physician owners and one management company owner. MSSSC operates an outpatient ambulatory surgery center in the City of Orange in Orange County, California. The Corporation is a managing member of Newport Imaging Center, LLC ("NIC "), a multi - location imaging center, with centers located in Newport Beach. In 2008, NIC converted from a limited partnership (of which the Corporation was the sole general partner) to a limited liability company, and the Corporation increased its majority membership interest to 99.9 %. The Corporation has the option to purchase the remaining 0.1% interest at any time. 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. The Corporation's current ownership interest in the company is 51 %. The ASC commenced operations in the summer of 2007. A -6 PDF created with pdfFactory Pro trial version www.softwarelabs.com The Corporation is also a member of Hoag Endoscopy Center, LLC ( "HEC "), a joint venture between the Corporation and physicians, formed to operate an endoscopy surgery center (the "' Endoscopy Surgery Center "). The Corporation's current ownership interest in the company is 53 %. The Endoscopy Surgery Center expects to commence operations in the summer of 2009. 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 MSSSC, NIC, NBLSC and HEC are consolidated with those of the Corporation. The results of operations of OSCOC are not consolidated with the results of operations of the Corporation in its financial statements. MSSSC, OSCOC, NBLSC, HEC and NIC are not Members of the Obligated Group and are not obligated with respect to the 2009 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 in accordance with its 10 -year strategic plan. See "POTENTIAL AFFILIATIONS AND TRANSACTIONS" below. 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 Hoag Memorial Hoag The Other Hospital Hospital Affiliated Presbyterian Surgery Foundation Newport Entities (the Center of (the "Corporation ")* Newport Coastal Hoag Center, LLC "Foundation ") *The Corporation and NHC are the only Members of the Obligated Group. in Street Specialty Surgery Center, LLC ( "MSSSC ") A -7 PDF created with pdfFactory Pro trial version www.softwarelabs.com The Orthopedic Surgery Newport Center of Imaging Orange Newport Coastal Hoag Center, LLC County Healthcare Physicians Management ( "NIC ") ( "OSCOC ") Center, LLC Purchasing Services, Inc. ( "NHC ")* Group, Inc. ( "CPPG ") New Hoag Beach Lido Endoscopy Surgery Center, LLC Center, LLC ( "HEC ") ( "NBLSC ") *The Corporation and NHC are the only Members of the Obligated Group. in Street Specialty Surgery Center, LLC ( "MSSSC ") A -7 PDF created with pdfFactory Pro trial version www.softwarelabs.com Integrated Physician Group Relationship As of the fiscal period ended September 30, 2008, approximately 10% of the Corporation's and its Wholly - Owned Subsidiaries' Operating Revenue was derived through capitated payment arrangements with health plans in connection with the Corporation's contractual relationship with Greater Newport Physicians Medical Group, htc. ( "Greater Newport"), an independent physicians association ("IPA"), Prior to January 1, 2008, that contractual relationship included commercial and Medicare Advantage enrollees. Subsequent to January 1, 2008, that contractual relationship included only Medicare Advantage enrollment approximating 11,000 enrollees. The Corporation is the primary facility under that contractual relationship for the provision of acute care services and most outpatient services for those enrollees. See also "SELECTED UTILIZATION AND FINANCIAL INFORMATION — Management's Discussion and Analysis of Financial Information." HOSPITAL SERVICES Description of Services The Hospital is an acute care, nonprofit 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 498; from 68 medical staff doctors to over 1,200 and from 60 employees to more than 3,500. In the 13 -month fiscal year ended September 30, 2008, the Corporation treated over 29,000 inpatients and over 396,000 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 2008 Distinguished Hospital Award for Clinical Excellence. National Research Corporation has endorsed the Hospital as Orange County's most preferred hospital for the past 13 consecutive years. For the past 13 years, residents have expressed their consumer preference for the Hospital as Orange 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 /cardiovascular surgery • comprehensive cancer services • women's health • orthopedics and joint replacement • radiology (e.g., MRIs and X -rays) • neurological and neurosurgical services, including Gamma Knife • general acute medical and surgical services • robotics • community medicine • chemical dependency • critical care • specialty programs such as sleep disorders and epilepsy Approximately 46% of all inpatient admissions in the fiscal year ended September 30, 2008, excluding newborns, were admitted to the Hospital through the Emergency Department ( "ED "). Within the last year, the ED has seen in excess of 67,000 patients, approximately 184 per day. 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 Neurosciences Center — through which the Corporation provides a wide range of specialized medical, surgical, diagnostic and therapeutic services. Hoa,¢ 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 A -8 PDF created with pdfFactory Pro trial version www.softwarelabs.com 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 2,200 new patients annually. In 2008, the Commission on Cancer of the American College of Surgeons ( "CoU) awarded Hoag Cancer Center the CoC Outstanding Achievement Award and granted a new three -year accreditation with commendation as a Comprehensive Community Center Program. Established in 2004, the CoC Outstanding Achievement Award was designated to recognize cancer programs that excel in providing quality care to cancer patients. The CoC recognizes programs that strive for excellence, motivate improvement, foster communication and share best practices and bases its commendations on comprehensive periodic evaluations, including physician surveys. 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 continuing 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 • multidisciplinary site - specific tumor case conferences Hoag Cancer Center continues to achieve five -year relative survival rates that exceed national figures for most cancers, as reported in 2008 by the National Cancer Institute's Surveillance, Epidemiology and End Results (SEER) data for 1996 -2003. Hoag Heart and Vascular Im itute Hoag Heart and Vascular Institute delivers comprehensive care for the cardiovascular patient, from emergency care to complex cardiovascular surgery. With respect to emergency heart care, angioplasty and cardiac stent placement services are available twenty -four hours a day. The Hoag Heart and Vascular Institute's team of cardiac surgeons have expertise in complex valve surgery including mitral valve repair, in addition to other advanced surgical techniques, such as minimally invasive heart surgery, surgical treatment of arrhythmia and robotic surgery. The Corporation has received high marks in two recently released reports that evaluate hospital -based cardiac surgical programs: The Society of Thoracic Surgeons' ( "STS ") assessment of clinical performance and The Leapfrog Group's Hospital Quality and Safety Survey's A -9 PDF created with pdfFactory Pro trial version www.softwarelabs.com examination of high risk treatments. The STS designated the Corporation with a 3 -star rating, the highest possible rating, achieved by only approximately 10 percent of the more than 700 hospitals nationwide that participated in the data submission from which the ratings were derived. The Leapfrog Hospital Quality and Safety Survey findings also reflected the Corporation's excellence in cardiac surgery in an examination of procedural volume, surgical experience and outcomes. In June 2006, the Corporation introduced the new Hoag 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 Hoag Heart and Vascular 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 Hoag Heart and Vascular Institute is one of a limited number of Regional Education Centers in California authorized to educate other physicians in this new technology. Hoag Heart and Vascular Institute specialties include: • anticoagulation clinic • cardiac rehabilitation • cardiac surgery • diagnostic & interventional cardiology • electrophysiology services • emergency treatment • endovascular diagnosis and therapy • arrhythmia center Hoag Orthopedic Services • patient & community education • clinical trials and research • vascular surgery • vascular tab • heart valve center • cardiac catheterization lab • endovascular lab 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 for the last ten years ended as of December 2007, the Hospital's physicians perform more orthopedic inpatient procedures than any other hospital in Orange County and more total joint replacements (hip and knee) than any other hospital in California. 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 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 that enhances the spine surgery center. 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, JointWorks ®, 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. A -10 PDF created with pdfFactory Pro trial version www.softwarelabs.com The Corporation plans to relocate its Orthopedic Center of Excellence from the existing Newport Beach campus to the Hoag Hospital Irvine facility, and is considering alternative physicial alignment strategies. See "GENERAL — Hospital Facility — Hoag Hospital Irvine," "SELECTED UTILIZATION AND FINANCIAL INFORMATION — Management Discussion and Analysis of Financial Information" and "POTENTIAL AFFILIATIONS AND TRANSACTIONS." lloar Women's Health Services Providing high quality health care for women has always been a priority at the Hospital. In late 2005, the Corporation opened the Sue and Bill Gross Women's Pavilion, a comprehensive center that combines progressive technology with patient education, comfort and exceptional care. The many aspects of Women's Health encompassed in the Pavilion include a maternal /child program that provides advanced mother and infant care through the philosophy of family - centered maternity care. Also available is a wide variety of prenatal and postpartum education resources and support services. Total births were 5,436, or approximately 15 -18 per day, for the 13 -month fiscal period ended September, 2008. The Sue and Bill Gross Women's Wellness Center, the first of its kind in Southern California, strives to promote 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. The Corporation's Breast Care Center provides direct -to- digital mammography, dedicated breast MRL breast ultrasound, minimally invasive breast biopsy, as well as innovative breast - conserving surgical procedures provided by a team of fellowship - trained breast specialists. The Corporation's Sexual Medicine Program addresses sexual health and intimacy issues for women of all ages and sexual orientation, specializing in those with chronic or life threatening illness. Additional Hoag Women's Health Services include: • pregnancy & prepared childbirth • fetal diagnostics and high -risk obstetrics • neonatal intensive care • patient & family education • minimally invasive surgery and robotics • community education • obstetrics education • gynecologic oncology • survivorship medicine • comprehensive gynecologic services, including gynecologic oncology Hoar Hospital Neurosciences Center The Hospital is one of only a few medical centers in Orange County with a dedicated neurosciences 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 Neurosciences Center 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 advanced interventional procedures such as carotid stenting and brain aneurysm coiling. With dedicated neurohospitalists, the Hospital is well - equipped to respond to neurological emergencies. Hoag Neurosciences Center provides an integration of services specializing in the following: • stroke • neuro radiation oncology • brain tumors • nemoradiology • brain aneurysms /vascular malformations • interventional neuroradiology • Alzheimer's /Dementia • epilepsy monitoring A -11 PDF created with pdfFactory Pro trial version www.softwarelabs.com • movement disorders / Parkinson's disease • gamma knife • epilepsy • neuro hospitalists • sleep disorders • neuropathology • spinal tumors • neuropsychology • headache • neuro rehab • pain and sensory disturbances • neurodiagnostic lab • neurosurgery • sleep lab • neurology Other Services Community Medicine The Corporation provides charitable community benefit programs in compliance with 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 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. Providing in -kind services and direct monetary donations to support nonprofit organizations, and focusing on disproportionate unmet health needs, the Corporation's 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 ofOran2e 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 created an expedited system of evaluation and transfer of children and infants with critical illnesses and special needs to CHOC. 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 entrancement to care is available 24 hours a day to children seen in the Hoag ED. Emergency transport services between the Corporation and CHOC are also improved. Dedicated transport teams from CHOC, consisting of a physician, nurse and respiratory therapist, are readily available to transport pediatric patients via ambulance when a child's complexity of care or severity of illness requires admission at CHOC. Bed Distribution Hoag Hospital Newport Beach is currently licensed for 498 beds, 422 of which are currently staffed and operating. The Corporation received possession of the Hoag Hospital Irvine facility with the facility license placed in suspense. Upon completion of renovations at Hoag Hospital Irvine, the Corporation expects to seek approval from A -12 PDF created with pdfFactory Pro trial version www.softwarelabs.com the California Department of Health Services to place the suspended beds at Hoag Hospital Irvine into service to allow operation of Hoag Hospital Irvine as planned. See "GENERAL — Hoag Hospital Irvine." The following table shows the existing distribution of licensed, staffed and suspended beds by bed category, excluding projected beds for Hoag Hospital Irvine: A -13 PDF created with pdfFactory Pro trial version www.softwarelabs.com Hoag Hospital — Newport Beach Licensed Staffed Medical/Surgical 320 265 Intensive Care 45 22 Coronary Care 12 10 Maternity/LDR 70 74 Intensive Care Nurser 21 21 Pediatrics 9 9 Chemical Dependency 21 21 Total 498 422 A -13 PDF created with pdfFactory Pro trial version www.softwarelabs.com 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 March 31, 2009, the Hospital's Medical Staff was comprised of 1,219 physicians, dentists, oral surgeons and podiatrists. The average age of the medical staff is approximately 49.2 years. For the six months ended March 31, 2009, the top 20 attending physicians, whose average age was 37.9 years, accounted for approximately 28.4% 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 March 31, 2009: Specialty Number of Physicians Allergy & Immunology 14 Anesthesia 54 Cardiology 66 Cardiovascular Surgery 4 Colon- Rectal Surgery 4 Critical Care 21 Dental /Oral Surgery 26 Dermatology 39 Emergency Medicine 20 Endocrinology 15 Family Medicine 126 Gastroenterology 26 General Internists 148 General Surgery 35 Infectious Diseases 11 Nephrology 16 Neurologists 18 Neurosurgeons 12 Obstetrics/Gynecology 81 Oncology 32 Ophthalmology 59 Orthopedic Surgery 33 Otolaryngology 24 Pathology 10 Pediatrics 75 Pediatric Surgery 6 Perinatology & Neonatology 23 Physical Medicine /Rehab 9 Plastic Surgery 72 Podiatry 15 Psychiatry 12 Pulmonologists 26 Radiology & Radiation Oncology 39 Rheumatologists 12 Thoracic Surgery 11 Urology 15 Vascular Surgery 10 TOTAL 1,219 Source: Corporation A -14 PDF created with pdfFactory Pro trial version www.softwarelabs.com SERVICE AREA AND COMPETITION Service Area 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 its service area by patient origin, geographic accessibility to the Hospital and location of a majority of the physician offices of its Medical Staff. The Corporation's Primary Service Area, or "PSA ", 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 66% of its inpatient discharges for the fiscal periods ending August 31, 2007 and September 30, 2008. Hoag Hospital Irvine is located in the City of Irvine in the Corporation's primary service area. Irvine has a Population of approximately 201,000 and has no general acute care hospital other than a facility owned and operated by Kaiser Permanente, a health maintenance organization, which opened in 2008. Hoag Hospital Service Area �I4 Wx�,1fTM1�. SOW 'T'�I�r.mi �MnWN r .n +1eNW nM r 1. yrWr. W.in Y inn Mn n„,rry L W nrb �. V .r..n.,, CENTRAL NORTH orx t, .• .. i. AS.�:, arrn NanU an. PSA -NW � - Y. r PSA -NE 61POq f u. 4A' ..... •y �Y1 _M.Y •.. w .IV'AN ��•- + a'w "�SOUTH� m • Ilrug }{ospital ..;.. ,. ..w.r_., PSA -Core . Primary Service Area includes Newport Beach/Corona Del Mar, Costa Mesa, Huntington Beach, Irvine, Fountain Valley, and Laguna Beach. Core Primary Service Area includes Newport Beach, Newport Coast, Coronal Del Mar, Costa Mesa & Laguna Beach, South Service Area includes Aliso Viejo, Capistrano Beach, Dana Point, Foothill Ranch, Ladem 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, Sea] Beach, and Stanton. Central Service Area includes Anaheim, Brea, Fullerton, La Habra, Orange, Santa Ana, Tustin, and Yorba Linda A - I� PDF created with pdfFactory Pro trial version www.softwarelabs.com Market Share and Competition The following illustrates market share data for some of the general acute care providers of service for the Corporation's Primary Service Area for the calendar years 2005, 2006 and 2007. This data is based solely upon discharges from the Corporation's Primary Service Area which are determined by zip code. The 2007 data is the most recent data available. The Corporation's market share has remained the highest in the service area over the three years shown. Hospital Hoag Memorial Hospital Presbyterian Orange Coast Memorial Medical Centerltl Fountain Valley Regional Hospital & Medical Center1 �l Irvine Regional Hospitall "'1 Huntington Beach Hospital & Medical Center [41 St. Joseph Hospital- Orange [5] University of California - Irvine Medical Center(" Kaiser Anaheim [71 Saddleback Memorial Medical Center[" South Coast Medical Center[91 Western Medical Center - Santa Ana[8) Coastal Communities Hospita0l Mission Hospital Regional Medical Center[" 2005 2006 2007 32.5% 34.3% 34.7% 8.6 8.7 9.5 9.4 8.4 8.5 7.1 7.1 7.1 4.4 4.5 4.7 4.0 3.8 3.4 3.8 3.6 3.1 2.5 2.6 2.5 2.3 2.2 2.2 2.2 2.1 1.9 2.1 2.1 1.9 1.4 1.2 1.4 1.5 1.6 1.5 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: of Memorial Care E'l Tenet Healthcare Corporation t'l Tenet Healthcare Corporation closed the Irvine facility in early 2009. The Corporation expects to open Hoag Hospital Irvine at this site. J41 Prime Healthcare Services, Inc. [51 St. Joseph Health System [61 University of California rn Kaiser Foundation Hospitals. Kaiser Irvine Hospital did not open until 2008. Bi Integrated Healthcare Holdings Inc. [91 Adventist Healthcare A -16 PDF created with pdfFactory Pro trial version www.softwarelabs.com The following illustrates the Corporation's market share in Orange County, California: 10.590 - Lo.o% 9.9% 9.6 i 9.5% - E 9.0% 8.9 V 9.0% - 8.8No O 8.7% 8.6% 3.6 x^ 8.5% - 8.0% 2000 2003 2002 2003 2004 2008 2006 2007 Source: Office of Statewide Health Planning and Development (OSHPD) inpatient discharge data Demographics The following table presents an estimate of population growth in Orange County. The Corporation's Primary Service Area is estimated to experience an approximately 8.4% increase in population through 2013. The Corporation provides no assurance regarding the accuracy of such estimates. Orange County Area 2008 2013 % Change Primary Service Area 687,269 744,787 8.4% North 494,681 511,514 3.4 Central 1,375,724 1,433,754 4.2 South 579,416 626.165 8.1 Total Orange County 3,086,980 3,264,522 5.8% s Source: Thomson Reuters' Market Expert using information provided by Claritas. The table below summarizes average income per household for the calendar year 2008 for each of the Hospital's Service Areas (as referenced below and defined above). The Corporation provides no assurance regarding the accuracy of the household and average income numbers below. Core Primary Service Area nl Number of Households 89,606 • Household Income > $75K 53.0% • Household Income > $100K 39.4% Primary Service Area Number of Households 259,614 • Household Income > $75K 55.3% • Household Income > $100K 40.7% South Service Area Number of Households 210,003 A -17 PDF created with pdfFactory Pro trial version www.softwarelabs.com % Household Income > $75K 59.4% % Household Income > $100K 44.4% North Service Area Number of Households 150,387 % Household Income > $75K 39.9% % Household Income > $100K 25.3% Central Service Area Number of Households 393,663 % Household Income > $75K 41.7% % Household Income > $100K 27.6% O] The Hospital is located in Newport Beach. Core Primary Service Area includes Newport Beach, Newport Coast, Coronal Del Mar, Costa Mesa & Laguna Beach. Source: Thomson Reuters' Market Expert using information provided by Claritas. FACILITIES PLANNING AND CAPITAL PLAN The Capital Plan The Corporation maintains a comprehensive capital plan (the "Capital Plan') to plan for ongoing development of the Hospital campus and other sites as well as capital investment in key programs and strategic initiatives. The Capital Plan and other planning activities of the Corporation actively address, among other matters, build out of the primary Hospital campus in Newport Beach in accordance with existing Development Agreement entitlements, Hoag Hospital Irvine improvements, development of Hoag Health Center -- Newport Beach, SB 1953 compliance (described below) and other matters. Capital expenditures amounted to $137.3 million for the 13 -month fiscal period ended September 30, 2008, or an annual equivalent of $126.7 million. This represents an 82% increase over the $69.5 million in capital expenditures for the fiscal year ended August 31, 2007 and 14% increase over the $147.9 million in capital expenditures for the fiscal year ended August 31, 2006. In October 2008, in response to the worsening economic environment, the Board of Directors suspended most current and all future major infrastructure expenditures pending reevaluation of the Corporation's goals, priorities and capabilities. Certain existing capital projects are going forward and are described further below. The Corporation's Capital Plan included construction of a building on the upper portion of the primary Hospital campus to house predominantly inpatient services associated with the Hoag Heart and Vascular Institute. This new building would also have increased available intensive care beds. Plans for construction of this building have been cancelled, and the Corporation expects programmatic and expansion needs to be met within the existing envelope of the Newport Beach campus, as well as through the new capacity at Hoag Hospital Irvine. A portion of this construction would have been funded with the unspent proceeds of the 2007 Bonds. Consequently such proceeds have since been applied to effect a partial redemption of the 2007 Bonds in January of 2009 based on the decision to suspend future major capital expenses. Existing Capital Projects. The Corporation has in- process or has maintained commitments of approximately $93 in capital projects through fiscal 2009, including approximately $89 million in improvements to the existing hospital campus and Hoag Health Centers and approximately [$ ] million for the planning and design of Hoag Hospital Irvine. In addition, further improvements to the Ancillary Building housing the Emergency Department, portions of Radiology Services and other services at the Hospital Campus and Hoag Health Centers, as well as the planned renovation/construction costs for Hoag Hospital Irvine are expected to continue, and are estimated at [$ ]over the next 12 -24 months. See "GENERAL -Hoag Hospital Irvine" above. A -18 PDF created with pdfFactory Pro trial version www.softwarelabs.com The Corporation expects that net new money proceeds of the 2009 Bonds will be used primarily for reimbursement of selected capital expenditures associated with existing projects at the primary Hospital campus or nearby facilities, including outpatient imaging center equipment, as well as construction of a sound attenuation wall, and other capital expenditures which were begun prior to suspension of future capital programs, including the Ancillary Building project described above. The Corporation expects to pay for the Hoag Hospital Irvine improvements and the balance of the existing capital projects not funded with 2009 Bonds proceeds from existing and current operating revenues, investment income and reserves, fixture charitable contributions, and subject to market and other conditions, future borrowing, The Corporation has the necessary land use entitlements which are necessary for the completion of the improvements planned for the primary Hospital campus and Hoag Hospital Irvine and expects to obtain building permit and construction approvals from OSHPD, the City of Newport Beach, and the City of Irvine, as applicable, on a timely basis to complete the work. Revised Capital Plan. The Corporation is currently revising its Capital Plan within the context of the current financial environment and strategic priorities. This revised Capital Plan is expected to be considered by the Board of Directors in 2009. Management expects the revised Capital Plan projected for fiscal years 2010 through 2014 to include approximately $218 million of future capital facilities and construction expenditures, including construction expenditures for completion of Hoag Hospital Irvine and amounts for SB1953 compliance. The revised Capital Plan also includes completion of the Ancillary Building housing the Emergency Department and final build - out of Hoag Health Center — Newport Beach. SB 1953 requires all acute care hospitals to be upgraded to new seismic standards by 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 acute care 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. The Corporation has received approval for a five -year extension of SB 1953 compliance to 2013 and is currently re- evaluating the scope and estimated cost of such compliance. In any case, the Corporation's Capital Plan includes plans to achieve compliance by the 2013 deadline. As part of its reevaluation of the Capital Plan, the Corporation will consider strategic future capital expenditures. Before any component of the plan is undertaken the Board will consider, among other factors, the financial feasibility of the proposed projects. The Corporation cannot make any representation that such projects will occur, or, if they do occur, the cost or timing or timing of such improvements. Such projects, including construction projects currently under way are subject to significant risks. See the section of the Official Statement entitled BONDHOLDERS' RISKS — Other Risk Factors — "Contributions" and "Construction Risk." Future Project Approvals. 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 revised over time as various elements have been constructed. The City has entered into an amended Development Agreement with the City which provides for an eventual build out of the primary Hospital campus with 1,343,238 square feet of medical facilities. The current square footage, measured for purposes of City land use entitlements, is approximately L886,000 square feet — FD &C confirming]. The Development Agreement is subject to certain terms and conditions and provides a vested right to develop through March 16, 2019. Building permits are required prior to construction of future facilities, and OSHPD approval is required for the design of new inpatient and certain other facilities. The construction of buildings on the lower campus is also subject to review by the California Coastal Commission. Moreover, significant elements of any future development at the primary Hospital campus or Hoag Hospital Irvine will require licensure by the State Health Department upon completion. A -19 PDF created with pdfFactory Pro trial version www.softwarelabs.com PHILANTHROPY Charitable fundraising has historically provided major support to the Corporation. Through the Foundation's Renaissance Hoag campaign, the Corporation started a major fimdmising effort in fiscal year 2007 associated with the Capital Plan. The Foundation has established a 10 -year strategic plan (the "Strategic Plan") which includes a number of campaign initiatives to support the Corporation's capital projects and program development, as well as endowment growth. Key initiatives focus on raising funds for the Centers of Excellence, including the Heart and Vascular, Cancer, Neurosciences, and Women's Services, in addition to a major initiative focused on nursing. The Strategic Plan is consistent with and supports the Corporation's Capital Plan. The Corporation expects to receive as much as $315 million in charitable contributions over 10 years, a portion of which may be applied to the cost of capital projects. Through March 31, 2009, the Foundation has raised approximately $97 million in pledges and receipts in the first 2'h years of the Renaissance Hoag campaign. Although the Foundation has a history of successful fundraising, there can be no assurance that such efforts will raise the estimated funds. The pace of major gift decisions ($250,000 or more) has slowed down during the past eight months as donors/prospects determine their new wealth base. See the section of the Official Statement entitled "BONDHOLDERS' RISKS —Other Risk Factors "Contributions" 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 (HMOs). The federal government, through the Medicare program, pays for most services for persons over 65 years old and the State of California and the federal government pay 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 periods. Fiscal Periods Ended For a further discussion of Medicare, Medi -Cal and other payors, please refer to the section of this Official Statement entitled `BONDHOLDERS' RISKS." A -20 PDF created with pdfFactory Pro trial version www.softwarelabs.com S_ eptember 30, 2008 August 31, 2007 August 31, 2006 Medicare 34.5% 34.5% 34.8% PPO 25.9% 26.7 27.5 HMO (1) 30.4% 30.9 29.7 Medi -Cal & MSI 4.5% 3.9 3.9 Other 4.7% 4.0 4.1 p ]nclu"–I- es capitated commercial and Medicare contracts. For a further discussion of Medicare, Medi -Cal and other payors, please refer to the section of this Official Statement entitled `BONDHOLDERS' RISKS." A -20 PDF created with pdfFactory Pro trial version www.softwarelabs.com Historical Utilization The Corporation's utilization statistics for the fiscal year ended August 31, 2007 and the comparable 12- month period ended August 31, 2008, as well as for the 6- months ended March 31, 2009 and 2008 are presented below. Summary of Financial Information The following statement of operations and balance sheet of the Obligated Group for the 13 -month period ended September 30, 2008, 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 -1 (the "Audited Financial Statements "). For purposes of analysis by the Corporation's management, the financial information of the Obligated Group is consolidated and presented in the column named "Hospital and NHC" in the consolidating statements of operations and balance sheets to the Annual Financial Statements. The summary of financial information should be read in conjunction with the consolidated financial statements and related notes contained in APPENDIX B -1 and APPENDIX B -2. The financial information for the six months ended March 31, 2009 and March 31, 2008, is derived by management from the internal unaudited financial statements of the Obligated Group. The unaudited financial data for the six months ended March 31, 2009 and March 31, 2008, 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 March 31, 2009, are not necessarily indicative of the results which may be expected for the entire fiscal year ending September 30, 2009. The Corporation changed its fiscal year from August 31 to September 30, effective in 2008. As such, the 2008 fiscal period covered thirteen months. Results of operations in the thirteen month period are not directly comparable to prior year periods. See "Management's Discussion and Analysis of Financial Information - Results of Corporation's Operations." A -21 PDF created with pdfFactory Pro trial version www.softwarelabs.com 6 -Month Period 6 -Month Period 12 -Month Period Fiscal Year Ended March 31, Ended March 31, Ended August 31, Ended August 2009 2008 2008 31, 2007 Licensed Beds — acute care 498 498 498 498 Inpatient Statistics Staffed Beds — acute care 422 419 419 419 Admissions — acute care 13,710 13,900 27,386 27,909 Average Length of Stay (days) 4.08 4.24 4.19 4.11 Patient Days — acute care 59,539 59,457 118,000 114,741 Births 2,732 2,674 5,459 5,240 Percent Occupancy (staffed bed) 78% 78% 77% 75.0% Average Daily Census — acute 327 325 322 314 Case Mix Index — All 1.42 1.41 1.41 1.35 Case Mix Index — Medicare 1.67 1.65 1.69 1.64 Outpatient Statistics Emergency Visits 33,558 33,244 66,972 64,844 Outpatient Visits 132,558 125,440 253,513 237,359 Outpatient Surgeries 4,902 5,562 1M25 11,442 Total Outpatient Volume 171 Ol 164.246 331.360 313.645 Summary of Financial Information The following statement of operations and balance sheet of the Obligated Group for the 13 -month period ended September 30, 2008, 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 -1 (the "Audited Financial Statements "). For purposes of analysis by the Corporation's management, the financial information of the Obligated Group is consolidated and presented in the column named "Hospital and NHC" in the consolidating statements of operations and balance sheets to the Annual Financial Statements. The summary of financial information should be read in conjunction with the consolidated financial statements and related notes contained in APPENDIX B -1 and APPENDIX B -2. The financial information for the six months ended March 31, 2009 and March 31, 2008, is derived by management from the internal unaudited financial statements of the Obligated Group. The unaudited financial data for the six months ended March 31, 2009 and March 31, 2008, 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 March 31, 2009, are not necessarily indicative of the results which may be expected for the entire fiscal year ending September 30, 2009. The Corporation changed its fiscal year from August 31 to September 30, effective in 2008. As such, the 2008 fiscal period covered thirteen months. Results of operations in the thirteen month period are not directly comparable to prior year periods. See "Management's Discussion and Analysis of Financial Information - Results of Corporation's Operations." A -21 PDF created with pdfFactory Pro trial version www.softwarelabs.com Statements of Operations of the Obligated Group Condensed and Consolidated (Dollars in Thousands) Net Patient Service Revenue Revenue Earned on Prepaid Contracts Other Operating Revenue TOTAL OPERATING REVENUE Operating Expenses: Salaries & Benefits Supplies Purchased Services Professional Fees Depreciation and Amortization Provision for Doubtful Accounts Interest Other TOTAL OPERATING EXPENSES INCOME FROM OPERATIONS Nonoperating Revenues/Expenses: Investment Income, Net Change in fair value of interest rate swap Other TOTAL NONOPERATING REVENUES /EXPENSES (DEFICIENCY) EXCESS OF REVENUE OVER EXPENSES Transfers from Foundation, restricted contributions and other changes in net assets (DECREASE) INCREASE IN NET ASSETS NET ASSETS, BEGINNING OF THE PERIOD NET ASSETS, END OF THE PERIOD Fiscal Year Thirteen- Six Month Periods Ended Ended Month Period August 31, Ended March 31, September 30, 2007 2008 2008 2009 Unaudited Unaudited $508,475 $617,765 $285,243 $308,460 80,267 73,952 34,264 32,283 39534 29309 13373 13888 628,276 721,026 322,880 354,631 286,129 315,686 143,243 155,481 104,037 122,255 55,674 60,138 71,498 79,493 33,846 36,563 8,075 10,397 4,428 5,351 40,542 48,988 21,927 25,955 18,546 25,635 10,885 12,301 24,317 31,214 14,950 8,790 40 072 49657 23264 25 109 593,216 683,325 308,217 329,688 35,060 37,701 24,663 24,943 95,027 (50,107) (8,828) (89,076) - (14,300) (16,625) (31,961) (7,174) 3( 1.704) 901 2( ,250) 87,853 (96,111) (24,552) (123,287) 122,913 (58,410) 111 (98,344) 5 601 12 836 6 357 13495 128,514 (45,574) 6,468 (84,849) 1,089,740 1.218.254 1,237.826 1.172,680 1 218 254 1 172 1.244.294 1.087.831 A -22 PDF created with pdfFactory Pro trial version www.softwarelabs.com Balance Sheet of the Obligated Group Condensed and Consolidated (Dollars in Thousands) 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 payer settlements Current portion of bonds payable Due to Related Parties TOTAL CURRENT LIABILITIES: NONCURRENT LIABILITIES: Estimated malpractice claims Bonds payable Interest Rate Swap Other long -term liabilities TOTAL NONCURRENT LIABILITIES TOTAL LIABILITIES TOTAL NET ASSETS TOTAL LIABILITIES & NET ASSETS 651,625 714,115 741,734 30,616 34,737 46,721 $1,936,125 $1,926,336 $1,744,364 $23,562 August 31, September 30, March 31, 55,336 2007 2008 2009 8,079 918 511 Unaudited ASSETS 202,080 202,080 717,871 CURRENT ASSETS: 656,533 Cash and Cash Equivalents $78,801 $74,380 $81,817 Patient accounts receivable, net of allowance for doubtful accounts 63,056 74,648 82,389 Investments 5,378 4,810 4,584 Other Current Assets 16,517 14,933 19,396 Board designated for short-term cash needs - 219,159 180,771 Due From Related Parties 1,932 811 2,451 TOTAL CURRENT ASSETS: 165,684 388,741 371,408 ASSETS LIMITED AS TO USE: Board designated for Capital Improvements 937,885 658,568 552,474 Under indenture agreement held by trustee 131,485 1 17,583 1,441 Cash collateral held by swap counterparty - - 19,181 Under malpractice claims funding arrangement held by trustee 18,830 12,592 11,405 TOTAL ASSETS LIMITED AS TO USE 1,088,200 788,743 584,501 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 payer settlements Current portion of bonds payable Due to Related Parties TOTAL CURRENT LIABILITIES: NONCURRENT LIABILITIES: Estimated malpractice claims Bonds payable Interest Rate Swap Other long -term liabilities TOTAL NONCURRENT LIABILITIES TOTAL LIABILITIES TOTAL NET ASSETS TOTAL LIABILITIES & NET ASSETS 651,625 714,115 741,734 30,616 34,737 46,721 $1,936,125 $1,926,336 $1,744,364 $23,562 $31,715 $22,307 44,986 55,336 48,231 11,119 11,903 8,079 918 511 882 - 202,080 202,080 238 - 80,823 301,545 11,269 10,984 11,953 622,950 422,950 313,950 356 14,300 46,261 2,473 3,877 2,790 637,048 452,111 374,954 717,871 753,656 656,533 1,218,254 1,172,680 1,087,831 1 6 125 1 926 336 1 744 64 A -23 PDF created with pdfFactory Pro trial version www.softwarelabs.com Management's Discussion and Analysis of Financial Information Results of Corporation's Operations The Corporation changed its fiscal year from August 31 to September 30, effective in 2008. As such, the 2008 fiscal period covered thirteen months. Results of operations in the thirteen month period are not directly comparable to prior year periods. Therefore, for purposes of comparison and analysis only, management has calculated twelve -month equivalents for 2008. Amounts described as "annual equivalent" in this section are derived by multiplying the amount from the thirteen -month period ended September 30, 2008 by 12/13. For the fiscal period ended September 30, 2008, the Corporation reported annual equivalent Net Patient Service Revenue totaling approximately $570 million, in comparison to $508 million for the year prior. The approximately $62 million, or 12% increase, is due primarily to growth in outpatient services, rate increases and the termination of commercial capitated contracts and subsequent conversion to fee - for - service contracts. Annual equivalent outpatient volume for the year totaled 331,360, a 6% increase over the prior year. The Emergency Department experienced moderate growth of 3% while outpatient surgeries contracted 5% over the prior year, in part due to the opening of Newport Beach Lido Surgery Center (See "ORGANIZATIONAL STRUCTURE — Other Affiliated Entities Not Members of the Obligated Group — Other Affiliates." Referred outpatients, which include services such as imaging and lab, grew solidly at 7% during the year. For the interim six -month periods ended March 31, 2009 and 2008, Net Patient Service Revenue totaled approximately $308 million and $285 million, respectively. The year- over -year growth of approximately 8% is the result of increased inpatient and outpatient volume and price gains with contracted payers. Approximately 1% of the year -over -year increase is directly attributed to the Corporation's termination of a commercial capitated contract effective December 31, 2007, as mentioned above (See "ORGANIZATIONAL STRUCTURE — Integrated Physician Group Relationship ") and further discussed below. For the fiscal period ended September 30, 2008, the Corporation reported Revenue Earned on Prepaid Contracts of approximately $68 million on an annual equivalent basis, in comparison to $80 million for the year prior. Revenue Earned on Prepaid Contracts consists of revenue earned by the Corporation through capitated payment arrangements with payers and in connection with the Corporation's contractual relationshio with Greater Newport. For the interim six -month periods ended March 31, 2009 and 2008, Revenue Earned on Prepaid Contracts totaled approximately $32 and $34 million, respectively. The Corporation terminated its commercial capitated contract and converted such business to fee- for - service effective January 1, 2008. The Corporation continues to contract for senior capitated contracts; however, the Corporation does not expect to grow this business. As of September 30, 2008, the Corporation had approximately 11,250 senior lives covered under prepaid contracts. As of March 31, 2009, senior lives under prepaid contracts was approximately 11,299. See also "ORGANIZATIONAL STRUCTURE - Integrated Physician Group Relationship" above. The Corporation's inpatient activity remains strong as evidenced by continued high occupancy rates of 74 %, 75% and 77% for fiscal years 2006, 2007 and 2008, respectively. Results for the fiscal period ended September 30, 2008 benefited from strength in outpatient volume which grew 6% over the prior year. Successful outreach strategies and investment in key outpatient technologies and programs have contributed to this continued growth. Other Operating Revenue of the Corporation was $27 million on an annual equivalent basis in the fiscal period ended September 30, 2008, as compared to $40 million for 2007, 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. The Corporation terminated its management agreement with Greater Newport following the planned expiration of its long -term contract effective December 31, 2007, resulting in the $13 million year- over -year decline in Other Operating Revenue. The Corporation transferred the business operations of the business unit, primarily labor, to Greater Newport. As a result, the operating expenses related to that management contract, primarily labor, declined proportionately. See also "Integrated Physician Group Relationship" above. For the six months ended March 31, 2009 and 2008, Other Operating Revenue totaled $14 and $13 million, respectively. A -24 PDF created with pdfFactory Pro trial version www.softwarelabs.com Salaries and benefits for the fiscal period ended September 30, 2008 totaled $291 million on an annual equivalent basis, a 2% increase over 2007 at $286 million. The moderate increase in salaries and benefits is largely attributable to increased volume and wage increases, offset by the impact of terminated management agreements effective December 31, 2007, as mentioned above. The Corporation's annual overall turnover rate remains below 20% with nursing at approximately 12% for the twelve -month period ending March 31 2009. The Corporation manages outside registry and traveler costs to less than 1% of labor. For the six months ended March 31, 2009 and 2008, salaries and benefits totaled approximately $155 and $143 million, respectively. The Corporation staffs to the current State - mandated nurse-staffing ratios. Supplies expense for the fiscal period ended September 30, 2008, totaled approximately $113 million on an annual equivalent basis. This represents an approximate 8% increase over the 2007 total of $104 million, which is due largely to volume, particularly in surgically intensive services. For the six months ended March 31, 2009 and 2008, supplies expense totaled approximately $60 and $56 million, respectively. Purchased Services for the fiscal period ended September 30, 2008, totaled approximately $73 million on an annual equivalent basis, as compared to $71 million for the year prior. Purchased services include such items as medical services, repairs and maintenance, IT- related maintenance fees and marketing. For the six months ended March 31, 2009 and 2008, purchased services totaled approximately $37 and $34 million, respectively. 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 obstetrics night call coverage, to provide needed patient care. For the fiscal period ended September 30, 2008, the Corporation reported professional fees of $10 million on an annual equivalent basis as compared to $8 million in 2007. For the six months ended March 31, 2009 and 2008, professional fees totaled approximately $5 and $4 million, respectively. Increases in 2008 and 2009 are attributable to strategies to recruit specialists and needed general practitioners to the Corporation's service area. For the fiscal period ended September 30, 2008, depreciation and amortization expense totaled .approximately $45 million on an annual equivalent basis, a 12% increase over the prior year, attributed primarily to completion of portions of the NHC properties. For the six months ended March 31, 2009 and 2008, depreciation and amortization expense totaled approximately $26 and $22 million, respectively. Provisions for doubtful accounts totaled $24 million on an annual equivalent basis for the fiscal period ended September 30, 2008, as compared to $18 million for the prior year. This 28% increase in Provision for Doubtful Accounts is primarily attributable to greater levels of co-pay and deductibles due directly from patients under health benefit plans, as well as an increase in uninsured patients that do not qualify for the Corporation's charity care program. For the six months ended March 31, 2009 and 2008, provisions for doubtful accounts totaled approximately $12 and $11 million, respectively. Interest expense for the 13 -month fiscal year ended September 30, 2008, totaled approximately $29 million on an annual equivalent basis, as compared to $24 million for the 12 -month year prior. The increase in the interest expense was primarily due to higher interest payments on auction rate securities issued on behalf of the Corporation in August 2005 and May 2007, as well as net payments made by the Corporation under interest rate swap agreements. See also "Indebtedness and Certain Liabilities ". For the six -month period ended March 31, 2009, the Corporation incurred $9 million of interest expense, as compared to $15 million for the same prior -year period. The decline in interest expense was primarily due to the reduction in the Corporation's total debt from $623 million at the end of 2008 fiscal year to $516 million as of March 31, 2009, as well as the restructuring of the Corporation's debt portfolio in May 2008 to refund a significant portion of the Corporation's auction rate securities by issuing $132 million of one -year Serial Bond Interest Rate bonds and $320 million of weekly variable rate bonds. See also "Indebtedness and Certain Liabilities ". The continuing economic crisis has had a significant impact on the capital markets, including investments and indebtedness of the Corporation. In the fall of 2008, the interest rates on the Corporation's auction rate securities and variable rate bonds briefly reset at levels as high as 11% and 7.7 %, respectively. While the Corporation's total cost of capital has declined since December 2008, the Corporation can make no assurances that interest rates will not A -25 PDF created with pdfFactory Pro trial version www.softwarelabs.com increase in the future. In addition, the Corporation has experienced increased tender activity by bondholders of its weekly variable rate bonds supported by a letter of credit provided by Bank of America. While the Corporation has not experienced any failed remarketings of tendered bonds, there is no guaranty that such failed remarketings will not occur in the future. See also "Certain Indebtedness and Liabilities" below. See the section of this Official Statement entitled `BONDHOLDERS' RISKS — Turmoil in U.S. Bond Markets." Total other expenses, including utilities, rent, insurance and other expenses totaled an annual equivalent of $46 million for the fiscal period ended September 30, 2008, a 14% increase over prior year levels of $40 million. The year- over -year increase was primarily due to greater levels of physician recruitment activity. For the six months ended March 31, 2009 and 2008, other operating expenses totaled approximately $25 and $23 million, respectively. Overall, the Corporation's operations have remained financially strong. Top line revenue grew 5.9% on an annual equivalent basis in the 12 -month period ended September 30, 2008 and 6.5% in the six -month period ended March 31, 2009 over same prior -year period. The Corporation continues to be successful in rate negotiations, implementing certain cost containment strategies, focusing on recruitment and retention and growing 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 2009. 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 and market expansion into the Irvine community with the opening of the Hoag Hospital Irvine campus. See also "GENERAL — Hospital Facilities — Hoag Hospital Irvine." Results of Corporation's Non- OneradwActiyity Investment Loss/Income Investments in equity securities with readily determinable fair values and all investments in debt securities are measured at far value. In accordance with the AICPA Audit and Accounting Guide, Health Care Organizations (the "Guide "), the Corporation classifies its investment portfolio as "trading ". The Guide requires that the changes in unrealized gains and losses on marketable securities designated as "trading" be reported within the excess of revenue over expenses. Therefore, all investment income or loss (including realized and unrealized gains and losses on investments, interest and dividends) is included in the investment income within the excess (deficiency) of revenue over expenses. In addition, the Corporation has adopted the equity method of accounting for certain investments in partnerships, limited liability companies and similarly structured entities. Under the equity method of accounting, the Corporation records its proportionate share of income or loss reported by the underlying entity. All investment earnings or losses (both realized and unrealized) on investments accounted for under the equity method of accounting are recognized and recorded as investment income within the excess (deficiency) of revenue over expenses. Investment loss for the 13 -month fiscal year ended September 30, 2008, totaled $50 million, $46 million on an annual equivalent basis, in comparison to investment income of $95 million in prior year. The fluctuation in periods is due primarily to changes in market conditions. The global economic crisis and its impact on the capital markets resulted in sharp declines in domestic and international stocks and bonds. Virtually all investment securities declined in value with the exception of obligations issued or guaranteed by the federal government. The Corporation incurred significant losses in its investment portfolio through March 31, 2009. The Corporation yielded gross of fees investment losses on Board- designated investment reserves of approximately 8% for the twelve -month period ended September 30, 2008. Investment loss of the Obligated Group for the six -month period ended March 31, 2009 totaled $89 million in comparison to investment loss in the amount of $9 million for the same period during the year prior. For the six months ended March 31, 2009, the Corporation yielded a gross of fees loss. on Board- designated investments of approximately 10 %. Achievement of investment objectives is subject to significant risks and the Corporation can give no assurance that its investments will generate any particular level of return. See `BONDHOLDERS' RISKS" in the forepart of this Official Statement and "Liquidity, Investment Policy, and Investment Portfolios" A -26 PDF created with pdfFactory Pro trial version www.softwarelabs.com below. During periods when the Corporation suffers investment losses, its current and future business plans and financial results could be materially impacted. Unrealized Losses on Interest Rate Swaps In 2007, the Hospital entered into interest rate swap agreements with an effective date of May 31, 2007. The swaps were initially designated and qualified as cash flow hedges. In May 2008, the swap agreements were amended to cancel a swap surety provided by a bond insurer (Ambac) and integrate the swaps with the Series 2008 D -F Bonds. Upon re- designation of the swaps to the 2008 Series D -F, the Corporation discontinued the use of the cash flow hedge method of accounting. The Corporation now recognizes any change in the fair value of the swap in the excess of revenue over expenses. The rapid decline in interest rates in late 2008 caused the market value of the Corporation's swaps to significantly decline in value. As of March 31, 2009, the Corporation's mark -to- market liability on the swap totaled approximately $46 million. Following the discontinuance of hedge accounting, the Corporation reported a decline or loss in the total fair value of the swaps of $14 million for the 13 -month fiscal period ended September 30, 2008. For the six months ended March 31, 2009 and 2008, the declines in the total fair value of the swaps totaled $32 million and $17 million, respectively. In addition, the Corporation is required to post collateral under these swap agreements to secure its obligations to the swap counterparty when exposure exceeds certain stated thresholds. As of March 31, 2009, the Corporation had posted approximately $19 in cash collateral, which is reported on the Obligated Group's Balance Sheet as Assets Limited as to Use. See also "Indebtedness and Certain Liabilities ". Other Non - Operating Losses and Expenses For the fiscal period ended September 30, 2008, other non - operating gains (losses) totaled approximately $29 million loss on an annual equivalent basis as compared to a loss of $7 million for the prior year. For the six months ended March 31, 2009 and 2008, other non - operating gains (losses) amounted to a loss of $2 million and gain of $1 million, respectively. Non- operating losses in 2007, 2008 and into 2009 have been primarily attributable to early extinguishment of debt and abandonment of project write offs as further described below. In May 2008, the Corporation refunded $200 million of Series 2005 auction rate securities and $250 million of its Series 2007 auction rate securities. The refunding resulted in a loss on early extinguishment of debt related to write off of bond issuance costs in the amount of approximately $7.5 million in fiscal year 2008 and $1.7 million in January 2009. These losses were reported as non - operating losses on the Obligated Group's Statement of Operations. In addition, the Corporation reported non - operating losses in the amount of $26.6 million due to the abandonment of certain capital improvement projects in fiscal year 2008. See also "FACILITIES PLANNING AND CAPITAL PLAN —The Capital Plan". A component of the expenses reported for the six months ended March 31, 2009, includes $1.7 million in start -up expenditures in connection with the planning and development of Hoag Hospital Irvine. These costs are comprised primarily of lease rental costs. See "GENERAL — Hoag Hospital Irvine ". Results for Newport Healthcare Center. LLC ("NHC") For the fiscal period ended September 30, 2008, Newport Healthcare Center, LLC ("NHC ") generated an operating loss of $0.9 million as compared to a loss of $1.1 million in the prior year. NHC completed construction of a second multi -level parking structure at the Hoag Health Center — Newport Beach in January 2009 that was a critical requirement for many prospective tenants. For the six -month period ended March 31, 2009, NHC generated an operating loss of $0.4 million. As of March 31, 2009, approximately 70% of the total 330,000 square feet are leased and occupied, or leased and in the process of being built -out prior to lease commencement. The Corporation is currently committed to lease 36% of the total property, and is expected to occupy between 40% and 50% when he project is complete. NHC's EBITDA for the 6 -months ended March 31, 2009 totaled $0.2 million. The Other Operating Revenues and Other Expenses of NHC are incorporated in the above discussions of individual line items of the Obligated Group's statement of operations. A -27 PDF created with pdfFactory Pro trial version www.softwarelabs.com Balance Sheet and Cash Position As of March 31, 2009, the Obligated Group had unrestricted cash and investments of approximately $820 million. While the Obligated Group's liquidity position has been impacted by the recent economic crisis, its balance sheet and cash position remained strong with 491 days cash on hand at March 31, 2009, and unrestricted cash -to- puttable debt of 159% and cash - to-total debt of $159 %. See table in "Liquidity, Investment Policy and Investment Portfolios" section below. Declines in days cash on hand have been primarily market driven as positive cash flow from operations coupled with contributions from the Foundation have been sufficient to fund operations and continuing capital expenditures, as well as swap collateral requirements. See also "Liquidity, Investment Policy and Investment Portfolios" below. Capital expenditures were approximately $137 million for the 13 -month fiscal period ended September 30, 2008. A significant amount was incurred by the Obligated Group on ongoing infrastructure and expansion projects. As a result of the turmoil in the financial markets which had broad and sweeping effects on companies across all industry sectors, including healthcare, the Corporation has re- evaluated its capital spending and its Capital Plan. See also "FACILITIES PLANNING AND CAPITAL PLAN — The Capital Plan". Liquidity, Investment Policy and Investment Portfolios At March 31, 2009, the Obligated Group had approximately $820 million of unrestricted cash, cash equivalents and investments, including Board - designated funds and other investments. The following table sets forth the Obligated Group's unrestricted cash and investments for fiscal periods ended September 30, 2008 and August 31, 2007, as well as the six months ended March 31, 2009. Cash and cash equivalents consist mainly of bank deposits and short-term investments in money market funds. The Board- designated portfolio is segregated into two pools: Short-Term Portfolio and Long -Term Portfolio. In determining the asset allocation targets for each pool, the Corporation considers the operating characteristics, including time horizon, liquidity requirement, return expectations and risk tolerance. The Corporation updates its investment policy on an annual basis or as needed based on the Corporation's revised long -range financial plans and liquidity requirements. Unrestricted Cash and Investments (Dollars in Thousands) August 31, 2007 September 30, 2008 March 31, 2009 Cash & Cash Equivalents $ 78,801 7.7% $74,380 7.8% $81,817 10.0% Other Short -Term Investments") 5,378 0.5% 4,810 0.5% 4,584 0.6% Board - Designated Short -Term Portfolio Fixed Income 175,835 17.2% 219,159 22.9% 180,771 22.0% Board - Designated Long -Term Portfolio Fixed Income 223,671 175,756 239,578 Equities 277,940 289,814 143,138 Hedge Funds 257,483 186 430 161,203 Private Equity 2,956 5,790 7,558 Real Assets - 778 996 Total Long -Term Portfolio 762,050 74.6% 658,568 68.8% 552,474 67.4% Total Cash & Investments1�1 $ 1,022,064 $956,917 $819,646 Days Cash on Hand"' 675 lu Comprised of investments in debt and equity mutual funds. 597 A -28 PDF created with pdfFactory Pro trial version www.softwarelabs.com 491 E21 Total Cash & Investments does not include trustee -held bond funds, self - insurance assets and swap collateral posted pursuant to the terms of the swap agreements. See "Certain Indebtedness and Liabilities." The total amount of cash collateral posted with the counterparty was approximately $19 million as of March 31, 2009. 131 Total unrestricted cash & investments divided by total cash expenses (Operating Expenses less Depreciation and Amortization) multiplied by 365 for fiscal year ended August 31, 2007, and multiplied by 396 for the 13 -month fiscal period ended September 30, 2008 and multiplied by 182 for the 6 -month period ended March 31, 2009.. The Corporation's Board - designated investments are invested pursuant to an investment policy, which has been approved by the Corporation's Board of Directors, and is designed to provide a framework within which to manage the assets. The Board has delegated the implementation of this policy to an Investment Management Committee ( "IMC "), which consists of members of the Board and other appointed members. The IMC is authorized to take any and all actions consistent with the investment policy and may further delegate authority to act within the guidance provided by this policy to the Corporation's management. The IMC may also designate an investment advisor. The overall investment objective, as delineated in the Corporation's investment policy, is to invest the Board- designated investments in a manner that ensures sufficient resources will be available to meet the Corporation's immediate and long -term cash flow requirements, while preserving principal and maximizing returns, given appropriate risk constraints. The policy seeks to identify acceptable risk levels associated with reaching long- term rate of return objectives. In addition, the Corporation currently complies with the liquidity requirements of certain of the bond rating agencies related to the portion of the 2008 and 2009 Bonds which are not supported by a liquidity facility, whereby it must maintain, in the aggregate, sufficient assets, primarily marketable fixed income securities, certain publicly traded equity securities and other liquidity support vehicles, to be used to repurchase such bonds in the event of a failed remarketing. The total investments in securities with same or next -day liquidity was approximately $446 million as of March 31, 2009, including cash equivalents held as operating reserves, fixed income securities of varying maturities held in the Corporation's Short -Term Portfolio, and certain fixed income holdings part of the Corporation's Long -Term Portfolio. While the Corporation expects to maintain sufficient liquidity to meet its obligations, the incurrence of any significant tender activity and subsequent failed remarketing related to the 2008 Bonds, whether directly (with respect to the 2008C Bonds) or pursuant to the Reimbursement Agreement (with respect to the Series 2008D, 2008E and 2008F Bonds), could materially adversely affect the financial position of the Obligated Group. See `BONDHOLDERS' RISKS — Other Risk Factors Risks Related to Outstanding Variable Rate Obligations." The Corporation's investments are currently managed by a number of professional investment managers under the supervision of the IMC of the Corporation's Board of Directors and the internal and external investment staff. The Corporation may hire new managers, expand the authority of or terminate existing ones subject to an approval process established by the IMC. Portfolio investments undergo significant turnover and are actively managed by the investment managers retained by the Corporation. Individual investment guidelines are established for separately managed accounts. The Corporation may also invest in commingled funds maintained by third parties. Investment guidelines for commingled funds should be consistent with the intent of the Corporation's investment policy, but need not comply with the policy in its entirety. Short -Term Portfolio. The Short -Term Portfolio is dedicated to meeting the funding requirements of the Corporation's Capital Plan in addition to other short-term liquidity needs, such as potential purchase of tendered 2008 Bonds in the event of a failed remarketing, provided that the Corporation expects to manage portions of the self - liquidity program with certain assets held in the Long -Term Portfolio. The Short-Term Portfolio is to be invested in high quality fixed income securities of varying maturities, including longer term assets. At March 31, 2009, the Short -Term Portfolio had an aggregate market value of approximately $181 million and represented approximately 22% of the Obligated Group's cash and investments. Long -Term Portfolio. The Long -Term Portfolio functions as a quasi - endowment. While not intended to experience a significant withdrawal of reserves, this pool serves as a source of cash to cover economic risks and strategic opportunities and, to the extent necessary, self - liquidity associated with funding any required repurchase or reimbursement obligation with respect to unremarketed tenders of 2008 Bonds, as required from time to time. In A -29 PDF created with pdfFactory Pro trial version www.softwarelabs.com addition, the Corporation evaluates the appropriate level of investments to be maintained in the Short-Term Portfolio annually or when significant cash flows occur and covers any shortage, if any, by liquidating investments in the Long -Term Portfolio and transferring the cash to the Short-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 March 31, 2009, the Long -Term Portfolio had an aggregate market value of approximately $552 million and represented approximately 67% of the Obligated Group's total unrestricted cash and investments. The IMC has established long -term asset allocation targets within certain ranges approved by the Corporation's Board of Directors. The allocation targets for the Long -Term Portfolio were established in September 2007 as follows: 25% fixed income, 40% public equity, 7% private equity, 3% real assets, and 25% hedge funds. Actual allocations differ from target allocations due to market fluctuations as well as implementation of a cash contingency plan developed by the Corporation in the fall of 2008 to manage liquidity in the event of possible further market declines and investment losses. This contingency plan prescribed thresholds or trigger points whereby pre - determined liquidations of alternative and equity investments were specified in an effort to preserve cash and reduce risk and volatility of the Board - designated investment portfolio. In accordance with this contingency plan, during the 6- months ended March 31, 2009, the Corporation has submitted notice of redemptions to investment managers totaling $97 million. From time to time, the Corporation may revise the Long -Term Targets for each asset class. In addition, actual allocations may differ from target allocations in the short -term or during periods of significant market fluctuations and there can be no assurance that the Corporation will rebalance its investment portfolios. Long -Term Portfolio Investments — Fixed Income. Approximately $64 million of the Long -Term Portfolio is currently invested in a AAA -rated money market fund with daily liquidity. The rest of the fixed income assets held in the Corporation's Long -Term Portfolio are managed by two investment managers. One of the investment managers is required to maintain average portfolio quality of "A -" and a minimum credit quality at purchase of `B -" or equivalent rating by at least one of the major rating services. As of March 31, 2009, the fixed income portfolio, which was invested primarily in this manager's open -ended mutual funds, had an aggregate market value of approximately $155 million with portfolio effective duration of 4.3 years. The average credit quality of the holdings in the fixed income portfolio was in the "AA-W' category from the major rating services. The market value of the other separately managed fixed income account totaled approximately $21 million as of March 31, 2009, with an effective duration of 3.8 years. The average credit quality of the holdings in this portfolio was "AA ". The Corporation has the discretion to amend the investment guidelines for these managers at any time. Long -Term Portfolio Investments — Equity. Currently, nine investment managers manage the Corporation's equity investments, with specific investment mandates among the following categories: • U.S. /Domestic Equity • International Equity, including emerging markets • Global Equity, including emerging markets Each separate account equity manager has specific investment guidelines and defined portfolio benchmarks appropriate for the managed asset class. The Corporation also has significant allocations, approximately $78 million as of March 31, 2009, to commingled investment vehicles, which are managed in accordance with the offering documents for each commingled fund investment and may have limited liquidity subject to prior redemption notice requirements. Included in the Corporation's investment policy is a statement that the investment restrictions for the commingled investment funds need not be in compliance with the restrictions of the Corporation's investment policy, but should be consistent with the intent of the policy. Long -Term Portfolio Investments — Alternative Investments. 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 current investment policies and procedures, the Corporation's current long -term target is to invest up to 35% of its Long -Term Portfolio in alternative investments, such as private equity, real assets, hedge funds and absolute return investments. Such investments involve a high degree of risk. A -30 PDF created with pdfFactory Pro trial version www.softwarelabs.com The Corporation's allocation to alternative investments currently includes direct hedge fund investments, "fund -of- funds" hedge funds, direct and fundof -fund private equity investments, real asset funds, including timberland investments, as well as investments under multiple asset class mandates with broad investment manager discretion. As of March 31, 2009, approximately 27% of the alternative investments 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 its assets in a limited number of underlying funds that primarily invest in equity and fixed income securities denominated in both U.S. and foreign currencies with an exposure to both emerging markets and developed markets. This absolute return investment is classified as "mutual fund" in the audited financial statements of the Corporation. However, for purposes of investment management and compliance with investment policy, this absolute return investment is included in the hedge fund category and contributes towards the hedge fund target allocation. As of March 31, 2009, approximately 13% of the alternative investments portfolio was invested directly in three offshore hedge funds which employ primarily long/short equity hedge fund strategies. The investment strategies of these hedge funds are speculative and involve significant risk of loss, and may also involve limited transferability and liquidity... The Corporation's risk of loss is limited to its investment in the funds. As of March 31, 2009, approximately 52% of the alternative investments portfolio was invested in three 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 "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- fonds" hedge funds include but are not limited to the use of leverage, 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 Corporation's private equity managers will achieve their investment objectives. The success of the funds depends, in large part, upon the skill and expertise of their key management personnel. Additionally, the activity of identifying, completing and realizing attractive investments is highly competitive, and involves a high degree of uncertainty. There can he no assurance that the funds will be able to locate, consummate and exit investments that satisfy the funds' rate of return objectives or realize upon their values. The private equity investments are highly illiquid and difficult to value. There is no organized secondary market for interests in the funds, and none is expected to develop. The Corporation has limited transferability and withdrawal rights with respect to the funds. With respect to its private equity investments, the Corporation is subject to capital calls with generally ten to fifteen days prior notice. As of March 31, 2009, the Corporation's unused capital commitments which are subject to future capital calls by these funds totaled approximately $24 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's Board of Directors. There can be no assurance that the Corporation will achieve its investment objectives or that it will receive any return on its investments. Investment performance may be volatile and the Corporation may lose a significant portion of its investment portfolio. Adverse economic and market conditions or other events could result in substantial or total loss to the Corporation in respect of some or all of its investments. Moreover, the Corporation may make certain investment decisions which involve realization of gains or losses based on compliance with its financial covenants under the Master Trust Indenture, the Reimbursement Agreement described below or other financial arrangements, under which realized gains or losses affect compliance with required debt service coverage ratios. A -31 PDF created with pdfFactory Pro trial version www.softwarelabs.com Certain Indebtedness and Liabilities The Corporation experienced significant increases in the interest rates home by its auction rate securities, with reset rates at auctions ranging from approximately 3% to 10% during the period beginning on January 1, 2008 and ending on March 31, 2008. In May 2008, the City issued, for the benefit of the Corporation, $452,080,000 aggregate principal amount of Refunding Revenue Bonds (Hoag Memorial Hospital Presbyterian) Series 2008 A -F (the 2008 Bonds). The proceeds of the 2008 Bonds were used to refund debt related to a portion of the Corporation's prior auction rate securities. The remaining $173 million of Series 2007 auction rate bonds remained outstanding until January 2009 when the Corporation redeemed an additional $109 million of Series 2007 auction rate securities using unspent bond proceeds. As of March 31, 2009, the Corporation had approximately $64 million of auction rate securities outstanding. The Corporation expects to refund the remaining $64 million concurrently with the issuance of the 2009 Bonds. See also "PLAN OF REFUNDING" in this Official Statement. The Series 2008A and 2008B Bonds, in the aggregate principal amount of approximately $132 million, were issued as Serial Bond Interest Rate Bonds, bearing interest at the initial Serial Bond Interest Rate of 1.80 %. The Series 2008A and 2008B Bonds are subject to mandatory tender at the end of each Serial Bond Interest Rate Period. The Corporation expects to refund Series 2008A and 2008B Bonds concurrently with the issuance of the 2009 Bonds. See also "PLAN OF REFUNDING" in this Official Statement. The Series 2008C Bonds, in the amount of approximately $70 million, were issued as variable rate bonds initially bearing interest at a Weekly Interest Rate. Bondholders have the right to tender the bonds on a daily basis with seven days notice. The Series 2008C Bonds are supported by self - liquidity, whereby the Hospital maintains, in the aggregate, sufficient assets, primarily marketable fixed income securities, certain publicly traded equity securities and other liquidity support vehicles, to be used to repurchase the bonds in the event that tender bonds are not successfully remarketed. See "Liquidity, Investment Policy and Investment Portfolios" above. The Series 2008D, 2008E and 2008F Bonds, in the aggregate principal amount of $250 million, were issued as variable rate bonds initially bearing interest at a Weekly Interest Rate. While the Series 2008D, 2008E and 2008F Bonds are in the Weekly Interest Rate Period, payment of principal and purchase price of, and interest on these bonds, is supported by an irrevocable, direct -pay letter of credit (the "Letter of Credit ") issued by Bank of America, N.A. (the "Bank "), pursuant to and subject to the terms of a Letter of Credit Agreement, dated as of May 22, 2008 (the "Reimbursement Agreement "), among the Hospital, the Bank and certain other lenders. The Letter of Credit will expire on May 22, 2013, unless extended or earlier terminated pursuant to its provisions, and may, under certain circumstances, be replaced by a substitute letter of credit. In such events, the bonds are subject to mandatory tender for purchase. The Reimbursement Agreement is secured by separate financial covenants and as an Obligation under the Master Trust Indenture. In 2007, the Corporation entered into interest rate swap agreements (the "Interest Rate Swaps ") with respect to a portion of the 2007 Bonds, for the purpose of managing the Corporation's exposure to fluctuations in interest rates. Citibank N.A., New York is the counterparty to the Interest Rate Swap Agreements. As a result of the refunding of the 2007 Bonds in May 2008, the Interest Rate Swap Agreements were amended to correspond to the Series 2008D, 2008E and 2008F Bonds. The Interest Rate Swaps, which convert a portion of the Corporation's floating -rate debt to a fixed rate, hedge a total initial notional amount of $250 million at a 3.229% fixed interest rate against 55.7% of the USD- LIBOR -BBA rate plus 0.23 %. Settlements are made on a monthly basis with the counterparty, Citibank, N.A., over the term of the agreements, each of which expires in December 2040, unless earlier terminated by the Corporation. The floating rate payments received by the Corporation, which are intended to offset interest rate payments on a portion of the Corporation's variable rate bonds, have decreased substantially as a result of a significant fall in 1 -month USD- LIBOR -BBA rates. The Corporation is required to post collateral under the Interest Rate Swap Agreements. See "SELECTED UTILIZATION AND FINANCIAL INFORMATION — Management's Discussion and Analysis of Financial Information." In February 2009, the Corporation entered into a loan agreement with Union Bank, N.A. (the "Union Bank Line of Credit "), whereby Union Bank agreed to provide a revolving loan to the Corporation in an amount not to exceed $50 million in the aggregate at any one time. The Corporation may use the revolving loan proceeds to repurchase or redeem outstanding auction rate securities issued by the City for the benefit of the Corporation and /or for any other corporate purpose of the Corporation. This revolving loan facility expires on March 2, 2010. The A -32 PDF created with pdfFactory Pro trial version www.softwarelabs.com Corporation has the right to exercise a renewal option prior to the expiration of the revolving loan facility for an additional term of one year subject to satisfying certain conditions specified in the loan agreement with Union Bank The Union Bank Line of Credit will be secured as an Obligation under the Master Trust Indenture upon the issuance of the 2009 Bonds. Capitalization The following table sets forth the capitalization for the Obligated Group as of the fiscal period ended September 30, 2008. The pro forma capitalization has been adjusted to reflect (i) the issuance of the 2009 Bonds, as if such transaction had occurred on September 30, 2008, (ii) the redemption of $109 million of the City's Series 2007 Bonds which occurred in January 2009 whereby the Corporation used unspent 2007 Bond proceeds to redeem a portion of the Series 2007D and all of the Series 2007E Bonds, and (iii) the refunding of the remaining $64 million of the 2007D Bonds and the 2008 Refunded Bonds, all such transactions reflected as if they had occurred on September 30, 2008: Actual Pro Forma September 30, 2008 September 30, 2008 - (000's)- Outstanding Long -Term Debt $625,030 $ 625,030 Less: Redemption of 2007 Bonds Annual (109,000) Less: Refunded Bonds Equivalent(*) (195,335) Plus: The 2009 Bonds 215.935 Subtotal 625,030 536,030 Total Net Assets 1,172.680 1,172,680 Total Capitalization $1,797,710 $1,708,710 Percent Long -Term Debt to Capitalization 34.8% 31.3% Estimated Debt Service Coverage (Pro Forma MADS to be updated) The following table sets forth the Obligated Group's estimated debt service coverage for the fiscal period ended September 30, 2008. The pro forma debt service coverage has been adjusted to reflect (a) the issuance of the 2009 Bonds, as if such transaction had occurred on October 1, 2009, in the aggregate principal amount of $215,935,000, and (b) the assumption that a portion of the proceeds of the 2008 Bonds has been applied to refund the 2007 Bonds and a portion of the 2008 Refunded Bonds in the aggregate principal amount of $195,835,000 (all as more fully described in the "PLAN OF REFUNDING" in this Official Statement). There can be no assurance that the Obligated Group will generate income available for debt service in future years comparable to historical performance. (Deficiency) Excess of Revenue over Expenses(l) Plus: Depreciation and Amortization Plus: Unrealized Losses due to Changes in Fair Value of Interest Rate Swaps Plus: Unrealized Losses on Investments(') Preliminary, subject to change. Actual Actual Pro Forma 13 -Month Fiscal Annual Annual Equivalent Period Ended Equivalent(*) September 30, 2008 September 30, 20080) $ (58,410) $ (53,917) $ (53,917) 48,988 45,220 45,220 14,300 13,200 13,200 115,359 106,485 106,485 A -33 PDF created with pdfFactory Pro trial version www.softwarelabs.com Plus: Losses from Extinguishment of 7,465 6,891 6,891 Debe2) Plus: Extraordinary Non- Operating 26,606 24,559 24,543 Losses (3) Interest 3] 214 28 813 28 813 Income Available for Debt $185,522 $171,251 $171,251 Servicet�rz•s41 Maximum Annual Debt Service ls) n/a 34,695 Debt Service Coverage Ratio (times) n/a 4.9x [ *]The Corporation changed its fiscal year from August 31 to September 30, effective in 2008. As such, the 2008 fiscal period covered thirteen months. Results of operations in the thirteen month period are not directly comparable to earlier years. Therefore, for purposes of comparison and analysis only, management has calculated twelve -month equivalents for 2008. Amounts described as "annual equivalent' are derived by multiplying the amount from the thirteen -month period ended September 30, 2008 by 12/13. [1] Investments in equity securities with readily determinable fair values and all investments in debt securities are measured at fair value. In accordance with the A1CPA Audit and Accounting Guide, Health Care Organizations (the "Guide') the Corporation classifies its investment portfolio as `trading ". The Guide requires that the changes in unrealized gains and losses on marketable securities designated as "trading" be reported within the excess of revenue over expenses. Therefore, all investment income or loss (including realized and unrealized gains and losses on investments, interest and dividends) is included in the investment income within the (deficiency) excess of revenue over expenses. In addition, the Corporation has adopted the equity method of accounting for certain investments in partnerships, limited liability companies and similarly structured entities. Under the equity method of accounting, the Corporation records its proportionate share of income or loss reported by the underlying entity. All investment earnings or losses (both realized and unrealized) on investments accounted for under the equity method of accounting are recognized and recorded as investment income within the (deficiency) excess of revenue over expenses. However, for purposes of calculating the debt service coverage ratios, the Corporation has adjusted Income Available for Debt Service to exclude all changes in unrealized gains/losscs in accordance with the provisions of the Master Indenture dated as of May 1, 2007, as supplemented. [2I In May 2008, the Corporation refunded $200 million of its Series 2005 auction rate securities and $250 million of its Series 2007 auction rate securities. The refunding resulted in a loss on early extinguishment of debt as the Corporation had to write off bond issuance costs in the amount of approximately $7.5 million in fiscal year 2008. These losses were reported as non- operating losses on the Obligated Group's Statement of Operations. For purposes of calculating the debt service coverage ratios, the Corporation has adjusted Income Available for Debt Service to exclude such losses in accordance with the Master Indenture provisions. [31 Extraordinary losses include $26.6 million project write offs due to the abandonment of certain capital improvement projects in fiscal year 2008. For purposes of calculating the debt service coverage ratios, the Corporation has adjusted Income Available for Debt Service to exclude such losses in accordance with the Master Indenture provisions. [41 The presentation of Income Available for Debt Service does not include transfers to the Obligated Group Members from Hoag Hospital Foundation. Thus, it does not correlate to the determination of Income Available for Debt Service under the Master Indenture dated as of May 1, 2007, as supplemented. [51 [TO BE UPDATEDI The actual and pro forma Maximum Annual Debt Service ( "MADS ") is calculated based on certain assumptions of interest and amortization of existing debt as delineated in the Master Indenture. For purposes of calculating pro forma MARS, (i) the interest rate used on $250 million of indebtedness subject to swap agreements was 3.229 %, (ii) the rate used on the Serial Interest Rate Bonds was the actual rate during the Initial Serial Interest Rate period, and the 30- year Revenue Bond index rate as of March 31, 2009 thereafter, (iii) the rate used for the fixed rate bonds was _% (iv) the rate used for the remaining variable rate bonds was 30 -year Revenue Bond index rate as of March 31, 2009. For purposes of calculating actual MADS, the following interest rates were used (i) for the Series 2007D Bonds, the 12 -month average rate of 3.62 %; (ii) for the Series 2008A, 2008E and 2008C, 5.57% which is the 30 -year Revenue Bond index rate as of May I, 2009, and (iii) for Series 2008D, 2008E and 2008F Bonds, 3.229 %, which is the fixed rate under the Interest Rate Swaps., In addition, the calculation of MADS assumes a 100% effective swap and does not include adjustment for basis risk, i.e., the calculation assumes swap floating rate received equals floating rate paid. The actual interest rates and amortization will vary from these assumptions and could have the effect of increasing or decreasing maximum annual debt service and debt service coverage ratios. A -34 PDF created with pdfFactory Pro trial version www.softwarelabs.com 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 (the `Board "). 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 a director; for a total of thirteen to seventeen nominations. Board of Directors The current members of the Board are listed below: Name Years on Term Occupation Board Expires ttt Stephen Jones, Chair Commercial Construction Executive 7 2010 Robert W. Evans, Vice Chair Retired Sales & Marketing Executive 11 2009 John L Benner, Secretary Retired Financial Management Consultant 5 2010 Richard F. Afable, MD Hospital President & CEO 4 2011 Allyson Brooks, MD Physician, Gynecology 3 2009 John L. Curci Independent Real Estate Investment Manager 13 2009 Jake Easton BI Management Consultant 6 2009 Martin J. Fee, MD Physician, Internal Medicine, Infectious Diseases 2 2010 Joanne D. Fix Retired Accountant 17 2011 Max W. Hampton Retired Investment Executive 12 2010 Jeffrey H. Margolis Healthcare Information Technology Executive 1 2011 Gary S. McRitterick Attorney, Real Estate Law 2 2010 Richard A. Norling Healthcare Quality Management Executive 1 2011 Richard M. Ortwein Independent Real Estate Developer 9 2011 Virginia Ueberroth Philanthropist 6 2009 Yulun Wang, PhD Medical Technology Executive; Inventor 1 2011 Douglas R. Zusman Physician, Thoracic Surgery 1 2011 tll All terms expire at the end of the fiscal year - September 30. 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 Chief Executive Officer. Richard Afable, M.D., M.P.H., age 55, 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 nonprofit 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, communication, 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 Bachelor of Science degree from Loyola University in Chicago and an M.D. 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 A -35 PDF created with pdfFactory Pro trial version www.softwarelabs.com Chief Administrative Officer, Hoag Hospital Irvine. Robert T. Braithwaite, age 42, has served in various administrative capacities at Hoag Hospital during his career. He is currently serving as the Chief Administrative Officer for Hoag Hospital Irvine (2008 to present). Mr. Braithwaite received his Masters in Health Services Administration from Arizona State University and a Bachelor of Science in Health Promotion/ Management, graduating Magna Cum Laude. Mr. Braithwaite previously served as Senior Vice President, Hospital Services (2005- 2007), Vice President, Operations and Service Lines (1999 -2004) and Vice President of Support and Ancillary Services (1992- 1996). He has also served in senior executive positions with several other large nonprofit hospitals such as Rady Children's Hospital San Diego (2007- 2008), and St. Joseph Hospital in Orange California (1996- 1999). Senior Vice President — Clinical Excellence and Chief Quality Officer. Jack Cox, M.D., M.M.M., age 55, joined the Corporation in 2006 and directs the quality and performance improvement initiatives for the Corporation, directs Risk Management and Clinical Research, and oversees the five Centers of Excellence (Women's Health Services, Cardiovascular Services, Orthopedic Services, Neuroscience Services, Cancer Services) and the Diabetes Center. Prior to joining the Corporation, he served as Chief Medical Officer and Senior Vice President 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 for Premier. 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 Joint Commission 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 Tulane University. He has published and spoken nationally and internationally on various aspects of healthcare. Executive Director — Hoag Hospital Foundation. Ronald Guziak, age 62, is responsible for direction and supervision of the Corporation's fund raising activities, which are coordinated with 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, California), Memorial Hospital of Glendale (Glendale, California), Northwestern Memorial Hospital (Chicago, Illinois), 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 — Clinical Operations and Chief Nursing Officer. Richard Martin, MSN, RN, age 51, has been with the Corporation for 16 years and oversees all nursing departments and clinical operations departments, including the emergency care unit, chemical dependency, periopemtive services, pharmacy, laboratory services and imaging services. Mr. Martin is active on numerous nursing committees and boards, several of which were formed in response to the state and national nursing shortage. In the late 1990's, he was appointed to the Scott Commission, a panel of nursing industry leaders, to address the nursing shortage in California. He also serves on the Orange County Nurse Executive Council and on the Advisory Board for Nurseweek. At California State University, Long Beach, Mr. Martin is on the Advisory Board and Adjunct Faculty for the School of Nursing. Additionally, Mr. Martin participates in several professional organizations including: American College of Healthcare Executives, Association of California Nurse Leaders, American Organization of Nurse Executives, National League of Nurses, American Society for Quality and Leadership Tomorrow. He is also an active community member, serving as Administrative Representative on the Board of Directors for the Share Our Selves Clinic. Prior to joining the Corporation, Mr. Martin was Assistant Vice President of Patient Care Services at HCA Lewis -Gale Hospital in Salem, Virginia. Mr. Martin received his Masters in Nursing from the University of Virginia and a Bachelor of Science in Nursing from West Virginia University. Senior Vice President — Corporate Services and Chief Financial Officer. Jennifer C. Mitzner, age 40, has been with the Corporation since 1994. As Chief Financial Officer, she is responsible for all aspects of corporate A -36 PDF created with pdfFactory Pro trial version www.softwarelabs.com finance including treasury, accounting, finance, materials management, managed care contracting, patient financial services, patient access functions, and internal audit of the Corporation. Ms. Mitzner is also responsible for all corporate services including human resources, marketing, legal and compliance. Ms. Mitmer 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). Senior vice President — Real Estate and Facilities. Sanford Smith, ALA, age 51, joined the Corporation in 2008 and heads the departments responsible for the planning, development, operations and management of approximately 2 million square feet of facilities including the hospital, outpatient services and medical office buildings. Prior to joining the Corporation, Mr. Smith was the Corporate Manager of Real Estate and Facilities for Toyota Motor Sales, USA, Inc. While at Toyota, his department's work on environmental issues was recognized with many awards, including: the Global Innovators Award for Corporate Real Estate as well as honors from US Green Building Council, American Institute of Architects, Cal EPA, IFMA, and IIDA. Mr. Smith is an active member of the Partner's Circle of the College of Environmental Design at Cal Poly Pomona. He belongs to the American Institute of Architects and is a Director of Ability First (formerly Crippled Children's Society) and Chairman of their real estate committee. Mr. Smith received his Bachelor of Arts degree from California State Polytechnic University, Pomona. EMPLOYEES As of March 31, 2009, the Corporation and its Wholly -Owned Subsidiaries had approximately 3,018 full- time and 1,119 part-time employees, or 3,575 full -time equivalents. This includes all hospital related functions as well as support functions. Support functions include the Child Care Center, seven outreach medical office buildings known as the Hoag Health Centers, and management of the Foundation. Generally, the markets in which the Corporation operates are experiencing nursing shortages which the Corporation expects to continue for the foreseeable future. To address this shortage, the Corporation has implemented a number of initiatives to fund nursing education programs and expand the supply of nurses. In the fiscal year ending September 30, 2009, the Corporation expects to award approximately $100,000 in scholarships to its employees. The scholarship funds help nursing students buy books and pay for tuition and fees. In addition, to support local colleges and universities, the Corporation directly funds 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 the fiscal year ending September 30, 2009, the Corporation expects to fund approximately $1,000,000 in nursing professorships. 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. In 2005, the Hospital was designated as a Magnet Hospital by the American Nurses Credentialing Center (ANCC). The Magnet designation is a key component of the Corporation's nursing recruitment and retention strategy. The Magnet Recognition Program was developed by ANCC to recognize health care organizations that provide nursing excellence and is based on quality indicators and standards of nursing practice as defined in the American Nurses Association's Scope and Standards for Nurse Administrators (2004). The Corporation's certification as a Magnet Hospital is subject to a renewal process every 5 years. 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. A -37 PDF created with pdfFactory Pro trial version www.softwarelabs.com The Corporation does not sponsor any defined benefit retirement plans. The Corporation offers a defined contribution plan with a match provision that is funded annually. For additional information, see APPENDIX B-1. LEGAL & REGULATORY MATTERS 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 healthcare liability risks in excess of $2 million per occurrence are reinsured with major independent insurance companies up to an aggregate liability of $30 million. See "BONDHOLDERS' RISKS — Business Relationships and Other Business Matters Professional Liability Claims and General Liability Insurance" and "LITIGATION — Hoag Hospital and NHC" in the Forepart of this Official Statement for additional information regarding litigation and claims risks. POTENTIAL AFFILIATIONS AND TRANSACTIONS Management expects competitive pressures from competing health care delivery systems to intensify in the future. In particular, competition from specialty providers of care is expected to increase and may negatively affect programs that are economically important to the Corporation. See the section of this Official Statement entitled "BONDHOLDERS' RISKS — Significant Areas Summarized — Proliferation of Competition" and "— Business Relationships and Other Business Matters — Competition Among Healthcare Providers" and " — Integrated Physician Groups." Pursuant to the Corporation's strategic plan, the Corporation is committed to actively pursuing additional economic partnership opportunities with physicians and physician groups, including arrangements which are responsive to these competitive pressures, and may seek opportunities with other healthcare groups as well. In addition to the potential Orthopedic Joint Venture described under "GENERAL— Hoag Hospital Irvine ", the Corporation may negotiate for and enter into other affiliations, joint ventures or contractual arrangements in the future in furtherance of its strategic plans and community mission. Further acquisitions, affiliations or joint ventures may involve substantial capital expenditures or other financial commitments, all or a portion of which may be financed through debt incurred by the Corporation. Such affiliations or joint ventures may involve inpatient or outpatient specialty services performed at or outside the primary Hospital campus and may result in a significant transfer of patient revenues to the joint venture or affiliated entity. Taken individually or in the aggregate, such transactions may be material to the Corporation's finances. Overall, the Corporation expects that such arrangements would be beneficial to the Corporation and have a positive impact on the operating results of the Corporation, although short -term impact may be negative. Such transactions may involve significant risks. While the Corporation considers such opportunities as they are presented or in response to strategic initiatives, no definitive agreements with respect to any pending affiliations or joint ventures have been reached at this time. The terms and conditions of any future affiliations are not established and will ultimately be subject to approval of the Board of Directors and other conditions, including compliance with applicable legal and regulatory constraints, as well as Corporation financial covenant requirements. In any case, implementation of specific strategic affiliations and joint ventures is subject to significant risks and conditions precedent. The Corporation cannot predict whether any such material arrangements will be entered into or the ultimate terms on which they may be developed. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] A -38 PDF created with pdfFactory Pro trial version www.softwarelabs.com TABLE OF CONTENTS Page GENERAL........................................................................................................................ ............................... A -1 History.................................................................................................................. ............................A -1 Mission.......................................... .......................... .......................................................................... A -1 CoreStrategies ..................................................................................................... ............................... A -1 HospitalFacilities ................................................................................................. ............................... A -2 NewportBeach Campus .......................................................................... ............................... A -2 Outpatient Surgery Facilities ................................................................... ............................... A -3 Hoag Health Centers and Medical Office Buildings ................................. ............................... A -3 HospitalHospital Irvine ........................................................................................ ............................... A -3 Newport Healthcare Center ................................................................................... ............................... A-4 ORGANIZATIONAL STRUCTURE ................................................................................. ............................... A -5 ObligatedGroup ................................................................................................... ............................... A -5 Other Affiliated Entities Not Members of the Obligated Group .............................. ............................... A -5 Wholly -Owned Subsidiaries Which Are Immaterial Affiliates ................. ............................... A -5 HoagHospital Foundation ....................................................................... ............................... A -6 OtherAffil iates ....................................................................................... ............................... A -6 OrganizationChart ............................................................................................... ............................... A -7 Integrated Physician Group Relationship ............................................................... ............................... A -8 HOSPITALSERVICES ................................................. ................................................................................... A -8 Descriptionof Services ............................................................................................ ............................A -8 Centersof Excellence ........................................................................................... ............................... A -9 HoagCancer Center ................................................................................ ............................... A -9 Hoag Heart and Vascular Institute ......................................................... ............................... A -10 Hoag Orthopedic Services ..................................................................... ............................... A -11 Hoag Women's Health Services ............................................................ ............................... A -1 I Hoag Hospital Neuroscienoes Center ..................................................... ............................... A -12 OtherServices .................................................................................................... ............................... A -12 CommunityMedicine ........................................................................... ............................... A -12 Pediatric Care: Affiliation with Children's Hospital of Orange County .. ............................... A -13 BedDistribution ................................................................................................. ............................... A -13 MEDICALSTAFF ........................................................................................................... ............................... A -13 SERVICE AREA AND COMPETITION ............................................................................. ...........................A -15 ServiceArea ....................................................................................................... ............................... A -15 Market Share and Competition ............................................................................ ............................... A -16 Demographics.................................................................................................... ............................... A -17 FACILITIES PLANNING AND CAPITAL PLAN ........................................................... ............................... A -18 TheCapital Plan ................................................................................................. ............................... A -18 FutureProject Approvals .................................................................................... ............................... A -19 PHILANTHROPY........................................................................................................... ............................... A -20 SELECTED UTILIZATION AND FINANCIAL INFORMATION .................................. ............................... A -20 A -1 PDF created with pdfFactory Pro trial version www.softwarelabs.com TABLE OF CONTENTS ............................... A -35 (continued) ............................... A -35 Management....................................................................................................... Page Sources of Patient Services Revenue ................................................................... ............................... A -20 HistoricalUtilization .......................................................................................... ............................... A -21 Summary of Financial Information ...................................................................... ............................... A -21 Management's Discussion and Analysis of Financial Information ........................ ............................... A -24 Results of Corporation's Operations ...................................................... ............................... A -24 Results of Corporation's Non - Operating Activity .................................. ............................... A -26 Investment Loss / Income .......................................................... ............................... A -26 Unrealized Losses on Interest Rate Swaps ................................ ............................... A -27 Other Non - Operating Losses and Expenses .............................. ............................... A -27 Results for Newport Healthcare Center (" NHC") ................................... ............................... A -27 Balance Sheet and Cash Position ........................................................... ............................... A -28 Liquidity, Investment Policy and Investment Portfolios ....................................... ............................... A -28 Short-Term Portfolio ............................................................................. ............................... A -29 Long -Term Portfolio ............................................................................. ............................... A -30 Long -Tenn Portfolio — Fixed Income .................................................... ............................... A -30 Long -Tenn Portfolio — Equity ............................................................... ............................... A -32 Long -Term Portfolio — Alternative Investments ..................................... ............................... A -31 Certain Indebtedness and Liabilities .................................................................... ............................... A -32 Capitalizat ion..................................................................................................... ............................... A -33 Estimated Debt Service Coverage ....................................................................... ............................... A -33 ORGANIZATION AND MANAGEMENT ...................................................................... ............................... A -35 CorporateStructure ............................................................................................ ............................... A -35 Boardof Direct ors .............................................................................................. ............................... A -35 Management....................................................................................................... ............................... A -35 EMPLOYEES.................................................................................................................. ............................... A -37 LEGAL & REGULATORY MATTERS ........................................................................... ............................... A -38 POTENTIAL AFFILIATIONS AND TRANSACTIONS .............................. A -ii PDF created with pdfFactory Pro trial version www.softwarelabs.com ..A-38