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Home My WebLink About16 - Preliminary Offical Statement Series A� o � o R 4 m 3 � n o� 9 5 3 y V a � Y? ao y� V U YO �o o � c „ �s co _ �a o .0 = T �W 5= o„ o� �t o° v m �y �dg — o c�a �Na ° z _ ° C o E� 4 R - �w v a'R 8 V y dr _ ' y 4 � U o A n o ° E o_ V _ FSL OHS 05/05/09 Draft PRELIMINARY OFFICIAL STATEMENT DATED MAY , 2009 NEW ISSUE — BOOK -ENTRY ONLY Ratings t In the opinion of Orrick Herrington & Sutcliffe LLP, Bond Counsel to the City, based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Bonds is excluded from gross income for federal income tax purposes under section 103 of the Internal Revenue Code of 1986 and is exempt from State of California personal income taxes. In the further opinion of Bond Counsel, interest on the Bonds is not a specific preference item for purposes of the federal individual and corporate alternative minimum taxes, nor is it included in adjusted current earnings when calculating corporate alternative minimum taxable income. Bond Counsel expresses no opinion regarding any other tax consequences relating to the ownership or disposition of or the accrual or receipt of interest on, the Bonds. See "TAX MATTERS" herein. $[2009A PAR]' City of Newport Beach Revenue Bonds (Hoag Memorial Hospital Presbyterian) Series 2009A Dated: Date of Delivery Due: As shown on the inside cover The City of Newport Beach Revenue Bonds (Hoag Memorial Hospital Presbyterian), Series 2009A (the "Bonds ") will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ("DTC"), under the book -entry only system maintained by DTC. Purchases of beneficial interests in the Bonds will be made in book - entry only form in denominations of $5,000 or any integral multiple thereof. So long as Cede & Co. is the registered owner of the Bonds, (i) principal of, premium, if any, and interest on the Bonds will be payable directly to DTC, which in turn will remit such payments to its participants for subsequent disbursement to beneficial owners of the Bonds, as more fully described herein, and (ii) all notices, including any notice of redemption, shall be mailed only to Cede & Co. See "THE BONDS — Book - Entry-Only System" herein. Concurrently with the Bonds offered hereby, the City expects to issue its Revenue Bonds (Hoag Memorial Hospital Presbyterian), Series 2009B (the "2009B Bonds "), Series 2009C (the "2009C Bonds "), Series 2009D (the "2009D Bonds ") and Series 2009E (the "2009E Bonds" and together with the 2009B Bonds, the 2009C Bonds, the "2009D Bonds and the 2009E Bonds, the "Additional 2009 Bonds ") The Bonds and the Additional 2009 Bonds are referred to collectively herein as the "2009 Bonds." The 2009 Bonds are being issued to 1) refund certain outstanding variable rate securities issued by the City for the benefit of Hoag Memorial Hospital Presbyterian ( "Hoag Hospital') in 2007 and 2008, 2) finance the acquisition and construction of certain additions and improvements to, and equipment for, the acute care hospital and related facilities owned by the Members and located on the campus known as One Hoag Drive, Newport Beach, California, or at 500 -540 Superior Avenue, Newport Beach, California, and 3) pay certain costs of issuance of the 2009 Bonds. See "PLAN OF FINANCE." The Bonds will accrue interest from the Date of Delivery at the rates set forth on the inside cover with interest payable on each June I and December 1, commencing December 1, 2009. The Bonds are limited obligations of the City of Newport Beach (the "City"), secured under the provisions of the Bond Indenture and the Loan Agreement, as described herein, and principal of, premium, if any, and interest thereon will be payable from Loan Repayments made by Hoag Hospital under the Loan Agreement and from certain funds held under the Bond Indenture. The obligation of Hoag Hospital to make payments to the Bond Trustee in an amount sufficient to pay principal of, premium, if any, and interest on the Bonds when due is further evidenced and secured by Obligation No. [X] issued under the Master Indenture, described herein, whereunder the members of the obligated group (the "Obligated Group "), including Hoag Hospital as the Credit Group Representative, are obligated to make payments on Obligation No. [X] in amounts sufficient to pay principal of, premium, if any, and interest on the Bonds when due. THE BONDS ARE LIMITED OBLIGATIONS OF THE CITY PAYABLE SOLELY FROM PAYMENTS REQUIRED TO BE MADE BY HOAG HOSPITAL PURSUANT TO THE LOAN AGREEMENT AND BY THE OBLIGATED GROUP PURSUANT TO OBLIGATION NO. [X] ISSUED PURSUANT TO THE MASTER INDENTURE. NEITHER THE STATE OF CALIFORNIA NOR THE CITY SHALL BE OBLIGATED TO PAY THE PRINCIPAL OF THE BONDS, OR THE PREMIUM OR INTEREST THEREON, EXCEPT FROM THE FUNDS PROVIDED UNDER THE LOAN AGREEMENT, OBLIGATION NO. [X] AND THE BOND INDENTURE, AND NEITHER THE FAITH AND CREDIT OHS West:260651432.3 NOR THE TAXING POWER OF THE CITY, THE STATE OF CALIFORNIA OR OF ANY POLITICAL SUBDIVISION THEREOF, IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF OR THE PREMIUM OR INTEREST ON THE BONDS. THE ISSUANCE OF THE BONDS SHALL NOT DIRECTLY OR INDIRECTLY OR CONTINGENTLY OBLIGATE THE CITY, THE STATE OF CALIFORNIA OR ANY POLITICAL SUBDIVISION THEREOF TO LEVY OR TO PLEDGE ANY FORM OF TAXATION OR TO MAKE ANY APPROPRIATION FOR THEIR PAYMENT. The Bonds are subject to optional, mandatory sinking fund and extraordinary optional redemption prior to their stated maturity as described herein. This cover page contains certain information for quick reference only. It is not intended to be a summary of the security or terms of the Bonds. Investors should read the entire Official Statement to obtain information essential to the making of an informed investment decision. The Bonds are offered when, as and if received by the Underwriter, subject to prior sale and to the approval of the validity of the Bonds and certain legal matters by Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the City, the approval of certain matters for the City by the City Attorney, for Hoag Hospital by Stradling Yocca Carlson & Rauth, a Professional Corporation, and for the Underwriter by its counsel, Foley & Lardner LLP, Chicago, Illinois. It is expected that the Bonds in book -entry form will be available for delivery to DTC in New York, New York, on or about June 1, 2009. Citi Date: 2009 Preliminary; subject to change. t For an explanation of the ratings, see "RATINGS" herein. OHS West:260651432.3 JPMorgan Maturity (October 1) Preliminary; subject to change. OHS West:260651432.3 MATURITY SCHEDULE $[2009A PAR]` City of Newport Beach Revenue Bonds (Hoag Memorial Hospital Presbyterian) Series 2009A Bonds Principal Interest Amount Rate Price or Yield Term Bonds due October 1, 20 Term Bonds due October 1, 20 CUSIP Priced to Yield % CUSIPt Priced to Yield % CUSIPt The information relating to the City contained herein under the headings "THE CITY" and "LITIGATION —The City" has been furnished by the City. The information relating to DTC and the Book -Entry-Only System has been furnished by DTC. Such information is believed to be reliable but is not guaranteed as to accuracy or completeness and is not to be construed as a representation by the City, Hoag Hospital and its affiliates or Citigroup Global Markets Inc. (the "Underwriter "). Other information contained herein has been obtained from Hoag Hospital and other sources (other than the City) that are believed to be reliable. Such other information is not guaranteed as to accuracy or completeness and is not to be relied upon or construed as a promise or representation by the City or the Underwriter. The Underwriter has provided the following sentence for inclusion in this Official Statement. The Underwriter has reviewed the information in this Official Statement in accordance with and as part of its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. No dealer, broker, salesperson or other person has been authorized by the City, Hoag Hospital or the Underwriter to give any information or to make any representations, other than those contained in this Official Statement, and, if given or made, such information or representation must not be relied upon as having been authorized by any of the foregoing. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of the Bonds by any person in any jurisdiction in which it is unlawful for such person to make such offer, solicitation or sale. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any statement nor any sale made hereunder shall create under any circumstances any implication that there has been no change in the affairs of the City, Hoag Hospital, or DTC since the date hereof. This Official Statement is submitted in connection with the issuance of securities referred to herein and may not be used, in whole or in part, for any other purpose. IN CONNECTION WITH THE OFFERING OF THE BONDS, THE UNDERWRITER MAY OVER -ALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THE BONDS AND OBLIGATION NO. [XI HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND NEITHER THE BOND INDENTURE NOR THE MASTER INDENTURE HAVE BEEN QUALIFIED UNDER THE TRUST INDENTURE ACT OF 1939, AS AMENDED, IN RELIANCE UPON EXEMPTIONS CONTAINED IN SUCH ACTS. THE REGISTRATION OR QUALIFICATION OF THE BONDS IN ACCORDANCE WITH APPLICABLE PROVISIONS OF LAWS OF THE STATES IN WHICH THE BONDS HAVE BEEN REGISTERED OR QUALIFIED AND THE EXEMPTION FROM REGISTRATION OR QUALIFICATION IN OTHER STATES CANNOT BE REGARDED AS A RECOMMENDATION THEREOF. NEITHER THESE STATES NOR ANY OF THEIR AGENCIES HAVE PASSED UPON THE MERITS OF THE BONDS OR THE ACCURACY OR COMPLETENESS OF THIS OFFICIAL STATEMENT. ANY REPRESENTATION TO THE CONTRARY MAY BE A CRIMINAL OFFENSE. CAUTIONARY STATEMENTS REGARDING FORWARD- LOOKING STATEMENTS IN THIS OFFICIAL STATEMENT Certain statements included or incorporated by reference in this Official Statement constitute "forward - looking statements." Such statements generally are identifiable by the terminology used such as "plan," "expect," "estimate," "budget" or other similar words. Such forward- looking statements include but are not limited to certain statements contained in the information under the captions "BONDHOLDERS' RISKS," and APPENDIX A — "INFORMATION CONCERNING HOAG MEMORIAL HOSPITAL PRESBYTERIAN, NEWPORT HEALTHCARE CENTER, LLC AND OTHER AFFILIATES — FACILITIES DESIGN AND CONSTRUCTION," " — SELECTED UTILIZATION AND FINANCIAL INFORMATION— Management's Discussion and Analysis of Financial Information" and " — POTENTIAL AFFILIATIONS AND TRANSACTIONS" in this Official Statement. The achievement of certain results or other expectations contained in such forward - looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements described to be materially different from any future results, performance or achievements expressed or implied by such forward - looking statements. Hoag Hospital does not plan to issue any updates or revisions to those forward - looking statements if or when its expectations or events, conditions or circumstances on which such statements are based occur. OHS We t:260651432.3 TABLE OF CONTENTS TAX MATTERS .................. ............................... APPROVAL OF LEGALITY ............................. INDEPENDENT AUDITORS ............................ INTERIM FINANCIAL STATEMENTS ........... LITIGATION ....................... ............................... Hoag Hospital and NHC ..... ............................... TheCity .............................. ............................... OHS West:260651432.3 Page INTRODUCTORY STATEMENT ............................................................................................... ..............................1 Purposeof the Official Statement ................................................................................... ............................... 1 The Obligated Group and the Master Indenture ............................................................. ............................... 1 Initial Interest Rates; Redemption .................................................................................. ............................... 2 Securityfor the Bonds .................................................................................................... ............................... 2 Planof Finance ............................................................................................................... ............................... 3 Bondholders' Risks ......................................................................................................... ..............................3 THECITY .................................................................................................................................... ............................... 3 THEBONDS ................................................................................................................................. ..............................3 General........................................................................................................................... ............................... 3 Redemption.................................................................................................................... ............................... 4 Book -Entry-Only System ............................................................................................... ............................... 7 Transfer, Exchange and Payment ................................................................................... ............................... 7 SECURITY FOR THE BONDS ................................................................................................... ............................... 7 General........................................................................................................................... ............................... 7 TheMaster Indenture ..................................................................................................... ............................... 7 Securityand Enforceability .......................................................................................... ............................... 10 Other............................................................................................................................. ............................... 12 PLANOF FINANCE ................................................................................................................. ............................... 13 General......................................................................................................................... ............................... 13 TheProject ................................................................................................................... ............................... 13 Refundingthe Prior Bonds ........................................................................................... ............................... 13 InterestRate Swaps ...................................................................................................... ............................... 14 ESTIMATED SOURCES AND USES OF FUNDS .................................................................. ............................... 14 ESTIMATED ANNUAL DEBT SERVICE REQUIREMENTS ............................................... ............................... 15 CONTINUINGDISCLOSURE .................................................................................................. ............................... 15 BONDHOLDERS' RISKS ......................................................................................................... ............................... 16 General......................................................................................................................... ............................... 16 Economic Conditions; Bad Debt and Indigent Care and Investment Losses ............... ............................... 16 Turmoilin U.S. Bond Markets ..................................................................................... ............................... 17 Interest Rate Swaps and Other Hedge Risk .................................................................. ............................... 17 SignificantRisk Areas Summarized ............................................................................. ............................... 17 Nonprofit Health Care Environment ............................................................................ ............................... 19 HealthcareReform Initiatives ....................................................................................... ............................... 21 PatientService Revenues ............................................................................................. ............................... 21 Negative Rankings Based on Clinical Outcomes, Cost, Quality, Patient Satisfaction and Other Performance Measures ................................................................................................. ............................... 24 RegulatoryEnvironment .............................................................................................. ............................... 24 Business Relationships and Other Business Matters .................................................... ............................... 27 Tax- Exempt Status and Other Tax Matters .................................................................. ............................... 31 OtherRisk Factors ........................................................................................................ ............................... 33 TAX MATTERS .................. ............................... APPROVAL OF LEGALITY ............................. INDEPENDENT AUDITORS ............................ INTERIM FINANCIAL STATEMENTS ........... LITIGATION ....................... ............................... Hoag Hospital and NHC ..... ............................... TheCity .............................. ............................... OHS West:260651432.3 TABLE OF CONTENTS (continued) Page RATINGS................................................................................................................................... ............................... 38 UNDERWRITING..................................................................................................................... ............................... 39 FINANCIAL ADVISOR TO HOAG HOSPITAL ..................................................................... ............................... 39 MISCELLANEOUS................................................................................................................... ............................... 39 APPENDIX A — INFORMATION CONCERNING HOAG MEMORIAL HOSPITAL PRESBYTERIAN, NEWPORT HEALTHCARE CENTER, LLC, AND OTHER AFFILIATES ......................................................... ............................... A -1 APPENDIX B -1 — FINANCIAL STATEMENTS OF HOAG MEMORIAL HOSPITAL PRESBYTERIAN AND OTHER AFFILIATES ........................... ............................... B -1 APPENDIX B -2 — HOAG MEMORIAL HOSPITAL PRESBYTERIAN AND AFFILIATES UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION .. ............................... B -2 APPENDIX C — SUMMARY OF PRINCIPAL DOCUMENTS ............................. ............................... C -1 APPENDIX D — FORM OF OPINION OF BOND COUNSEL ............................... ............................... D -1 APPENDIX E — FORM OF CONTINUING DISCLOSURE CERTIFICATE ............ ............................E -1 APPENDIX F — BOOK -ENTRY SYSTEM ................................................................. ............................F -1 OHS West260651432.3 ii OFFICIAL STATEMENT $12009A PAR]' City of Newport Beach Revenue Bonds (Hoag Memorial Hospital Presbyterian) Series 2009A INTRODUCTORY STATEMENT The following introductory statement is subject in all respects to the more complete information set forth in this Official Statement. All descriptions and summaries of documents referred to herein do not purport to be comprehensive or definitive and are qualified in their entirety by reference to each such document. Terms used in this Official Statement, including the Appendices, and not otherwise defined have the same meanings as in the Bond Indenture (as defined below) or if not defined therein or as context may require as defined in the Master Indenture (as defined below). See APPENDIX C — "SUMMARY OF PRINCIPAL DOCUMENTS — Definitions of Certain Terns." Purpose of the Official Statement This Official Statement, including the cover page, the inside cover page and the appendices hereto, is provided to furnish information in connection with the sale, delivery and issuance of the City of Newport Beach (the "City") $[2009A PAR] principal amount of Revenue Bonds (Hoag Memorial Hospital Presbyterian), Series 2009A (the `Bonds "). The Bonds will be issued pursuant to and secured by a bond indenture (the "Bond Indenture "), dated as of June 1, 2009, between the City and Wells Fargo Bank, National Association, as bond trustee (the "Bond Trustee "). The City will lend the proceeds of the Bonds to Hoag Hospital (defined below), which loan will be evidenced by a Loan Agreement, dated as of June 1, 2009 (the "Loan Agreement "), between the City and Hoag Hospital. The Obligated Group and the Master Indenture Hoag Memorial Hospital Presbyterian is a California nonprofit public benefit corporation which owns and operates a general acute care hospital in Newport Beach, California (both the corporation and the facilities it owns and operates are referred to as "Hoag Hospital "). Hoag Hospital is licensed to operate a total of [498] general acute care beds. Newport Healthcare Center, LLC ( "NHC "), a wholly -owned subsidiary of Hoag Hospital, owns and [expects to] operates a medical office complex providing outpatient services, physician office space and administrative functions. For a description of Hoag Hospital and NHC, their facilities and financial performance, see APPENDIX A — "INFORMATION CONCERNING HOAG MEMORIAL HOSPITAL PRESBYTERIAN, NEWPORT HEALTHCARE CENTER, LLC AND OTHER AFFILIATES." As of the date of the issuance of the Bonds, Hoag Hospital and NHC are the only Members (defined below) of the Obligated Group (the "Obligated Group ") established under the Master Indenture, dated as of May 1, 2007, between Hoag Hospital and Wells Fargo Bank, National Association, as master trustee (the Master Trustee "). Other entities may become members of the Obligated Group (each, a "Member ") in accordance with the procedures set forth in the Master Indenture. Each Member of the Obligated Group is jointly and severally obligated to pay when due the principal of, premium, if any, and interest on each Master Indenture Obligation issued under the Master Indenture, including Obligation No. [X] (as hereinafter defined), which will evidence and secure the payment of principal of and premium, if any, and interest on the Bonds. In addition, Obligation No. [Y] (defined below) will be issued under the Master Indenture concurrently with Obligation No. [X] to secure the payment of principal on and premium, if any, and interest on S aggregate principal amount of the City's Revenue Preliminary; subject to change. OHS West260651432.3 1 Bonds (Hoag Memorial Hospital Presbyterian), Series 2009B (the "2009B Bonds "), Series 2009C (the "Series 2009C Bonds "), Series 2009D (the "2009D Bonds ") and Series 2009E (the "Series 2009E Bonds" and together with the 2009B Bonds, the 2009C Bonds, the 2009D Bonds and the 2009E Bonds, the "Additional 2009 Bonds" and, together with the Bonds, the "2009 Bonds "). Hoag Hospital has previously issued Master Indenture Obligations, which are currently Outstanding and which will remain Outstanding upon issuance of the 2009 Bonds. See "SECURITY FOR THE BONDS – The Master Indenture – Additional Indebtedness." For more information about Hoag Hospital and its affiliates, see APPENDIX A — "INFORMATION CONCERNING HOAG MEMORIAL HOSPITAL PRESBYTERIAN, NEWPORT HEALTHCARE CENTER, LLC AND OTHER AFFILIATES – GENERAL" and APPENDIX B -1 "FINANCIAL STATEMENTS OF HOAG MEMORIAL HOSPITAL PRESBYTERIAN AND OTHER AFFILIATES." Under the Master Indenture, Hoag Hospital, as Credit Group Representative, may designate "Designated Affiliates" from time to time and rescind any such designation at any time. Designated Affiliates are not obligated to make payments with respect to Obligation No. [X] or any other Master Indenture Obligations issued under the Master Indenture, but may be required to pay or otherwise transfer to the Credit Group Representative amounts necessary to enable Hoag Hospital to pay when due the principal of and premium, if any, and interest on Outstanding Master Indenture Obligations. No entities have been designated as of the date hereof as Designated Affiliates. Provision is made in the Master Indenture for adding Members to the Obligated Group and for the withdrawal of Members from the Obligated Group under certain circumstances. For more information, see APPENDIX C "SUMMARY OF PRINCIPAL DOCUMENTS — MASTER INDENTURE — Membership in the Obligated Group" and "– Withdrawal From the Obligated Group." Hoag Hospital, NHC and any other party, upon becoming a Member of the Obligated Group under the Master Indenture, are herein sometimes collectively referred to as the "Obligated Group," "Obligated Group Members" or the "Members of the Obligated Group" and individually as a "Member of the Obligated Group" or an "Obligated Group Member." Initial Interest Rates; Redemption The Bonds will bear interest at the respective rate set forth on the inside cover with interest payable on each June 1 and December 1, commencing December 1, 2009. The Bonds are subject to optional, mandatory sinking fund and extraordinary optional redemption prior to their stated maturity, as described herein. Security for the Bonds Payment of principal of, premium, if any, and interest on the Bonds will be payable from payments made by Hoag Hospital under the Loan Agreement (the "Loan Repayments") and from certain funds held under the Bond Indenture. Payment of principal of, premium, if any, and interest on the Bonds when due is further secured by the delivery to the Bond Trustee by Hoag Hospital as Credit Group Representative of its Master Indenture Obligation No. [X] ("Obligation No. [X] ") issued pursuant to the Master Indenture, as supplemented and amended by Supplemental Master Indenture for Obligation No. [X], dated as of June 1, 2009, between Hoag Hospital, as Credit Group Representative, and the Master Trustee ( "Supplement No. [X] "). Pursuant to the Master Indenture, Hoag Hospital and NHC and any future Members of the Obligated Group agree to make payments on Obligation No. [X] in amounts sufficient to pay, when due, the principal of and premium, if any, and interest on the Bonds. Each Member of the Obligated Group is jointly and severally obligated to make payments on all Master Indenture Obligations issued under the Master Indenture, including Obligation No. [X]. The Members of the Obligated Group receive a credit on payments due on Obligation No. [X] to the extent of payments made by Hoag Hospital under the Loan Agreement. Hoag Hospital receives credit on payments due under the Loan Agreement to the extent of payment made by the Members of the Obligated Group under Obligation No. [X], if any. Obligation No. [X] will entitle the Bond Trustee, as the Holder thereof, to the benefit of the covenants, restrictions and other obligations imposed upon the Obligated Group under the Master Indenture. As of the date of issuance and delivery of the Bonds, Hoag Hospital and NHC are the only Members of the Obligated Group. OHS West:260651432.3 2 Plan of Finance Hoag Hospital will use the proceeds of the 2009 Bonds to 1) refund certain outstanding variable rate securities issued by the City for the benefit of Hoag Memorial Hospital Presbyterian ( "Hoag Hospital ") in 2007 and 2008 as further identified under the caption "PLAN OF FINANCE," 2) finance the acquisition and construction of certain additions and improvements to, and equipment for, the acute care hospital and related facilities owned by the Members and located on the campus known as One Hoag Drive, Newport Beach, California, or at 500 -540 Superior Avenue, Newport Beach, California, and 3) pay certain costs of issuance of the 2009 Bonds. See "PLAN OF FINANCE." Bondholders' Risks There are risks associated with the purchase of the Bonds. See `BONDHOLDERS' RISKS" for a discussion of certain of these risks. THE CITY The City of Newport Beach, California was incorporated in 1906. The City operates under a freeholder's charter providing for a Council - Manager form of government with a Council- member City Council. Councilpersons are elected by district for four -year terms, and the Mayor is elected by the Council from among its members. On August 26, 1985, the City Council adopted the "Health Care and Recreation Facilities Revenue Bond Ordinance," amending the "Health Care Facility Revenue Bond Ordinance" adopted by the City Council on February 13, 1984, (as so amended, the "Law ") establishing a method and powers and procedures whereby revenue bonds may be issued for the purpose of providing financing to participating health institutions for specified purposes. THE BONDS The following is a summary of certain provisions of the Bonds. Reference is made to the Bonds for the complete text thereof and to the Bond Indenture for all of the provisions relating to the Bonds. The discussion herein is qualified by such reference. General The Bonds will be issued in the principal amount set forth on the cover of this Official Statement. Purchases of beneficial interests in the Bonds will be made in book -entry only form in denominations of $5,000 or any integral multiple thereof. The Bonds will be delivered in fully registered form without coupons. The Bonds will be dated their date of delivery and will be payable as to principal, subject to the redemption provisions described herein, on the dates and in the amounts set forth on the inside cover page hereof. The Bonds will be transferable and exchangeable as set forth in the Bond Indenture and, when issued, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ( "DTC "). DTC will act as securities depository for the Bonds. See "THE BONDS — Book -Entry-Only System." The Bonds will accrue interest from the Date of Delivery at the rates set forth on the inside cover with interest payable on each June I and December 1, commencing December 1, 2009. While the Bonds are book -entry bonds, as described below, payment of the principal of, premium, if any, and interest on the Bonds will be made by wire transfer to The Depository Trust Company, New York, New York ( "DTC "), to the account of Cede & Co. In the event the Bonds are no longer book -entry bonds, principal of and premium, if any, on the Bonds will be payable at the designated corporate trust office of the Bond Trustee and interest payments on the Bonds are to be made by check mailed on the date due by the Bond Trustee to the registered owners of such Bonds as of the Record Date (as defined below); provided, however, that, if a Holder of $1,000,000 or more aggregate outstanding principal amount of the Bonds gives the Bond Trustee written notice of such holding accompanied by sufficient wire transfer instructions, the payments of interest on such Bonds will be payable by wire transfer of immediately available funds on the date due. The "Record Date" means the 15th day OHS West:260651432.3 (whether or not a Business Day) of the calendar month immediately preceding the calendar month in which the related Interest Payment Date falls. See "THE BONDS — Book -Entry Only System." Redemption Optional Redemption. The Bonds are subject to redemption prior to their stated maturity, at the option of the City (which option shall be exercised upon Request of Hoag Hospital given to the Bond Trustee (unless waived by the Bond Trustee) at least two Business Days prior to the date notice of such redemption is required to be given pursuant to the Bond Indenture, in whole or in part, on any date on or after December 1, 20 at a redemption price equal to the principal amount of Bonds called for redemption, plus accrued interest thereon (if any) to the date fixed for redemption, without premium. Extraordinary Optional Redemption. The Bonds are subject to extraordinary optional redemption prior to their stated maturity, at the option of the City (which option shall be exercised upon Request of Hoag Hospital given to the Bond Trustee (unless waived by the Bond Trustee) at least two Business Days prior to the date notice of redemption is required to be given pursuant to the Bond Indenture), in whole or in part (in such amounts and with respect to such Mandatory Sinking Account Payments as may be specified by Hoag Hospital) on any date, in the event of any damage to or destruction or condemnation of any part of Hoag Hospital's or NHC's facilities (or the facilities of any future additional Members) to the extent that the proceeds of any hazard insurance or condemnation award relating thereto are not applied to the repair, reconstruction or restoration of such facilities and Hoag Hospital elects to use such unapplied proceeds for an optional redemption. If called for redemption prior to maturity as described in this paragraph, the Bonds may be redeemed at a redemption price equal to the principal amount of Bonds called for redemption, plus accrued interest thereon (if any) to the date fixed for redemption, without premium. Optional Redemption in the Event of a Change in Law. The Bonds are subject to optional redemption prior to their stated maturity, at the option of the City (which option shall be exercised upon Request of Hoag Hospital given to the Bond Trustee (unless waived by the Bond Trustee) at least two Business Days prior to the date notice of redemption is required to be given pursuant to the Bond Indenture), in whole on any date at a redemption price equal to the principal amount thereof, without premium, plus accrued interest to the redemption date if, as a result of any change in the Constitution of the United States of America or any state, or legislative or administrative action or inaction by the United States of America or any state, or any agency or political subdivision thereof, or by reason of any judicial decisions, there is a good faith determination by the Credit Group Representative that (a) the Master Indenture has become void or unenforceable or impossible to perform, or (b) unreasonable burdens or excessive liabilities have been imposed on any Member, including without limitation, federal, state or other ad valorem property, income or other taxes being then imposed which were not being imposed on the date of issuance of the Bonds. OHS WesC260651432.3 Mandatory Redemption. The Bonds maturing on December 1, 20 are also subject to redemption prior to their stated maturity in part, by lot, from Mandatory Sinking Account Payments, on any December 1, on or after December 1, 20_, at the principal amount thereof and interest accrued thereon to the date fixed for redemption, without premium, as follows (subject to adjustment as may be directed by Hoag Hospital following an optional redemption): Redemption Date Mandatory Sinking Redemption Date Mandatory Sinking (December 1) Account Payments (December 1) Account Payments Final Maturity The Bonds maturing on December 1, 20_ are also subject to redemption prior to their stated maturity in part, by lot, from Mandatory Sinking Account Payments, on any December 1, on or after December 1, 20 , at the principal amount thereof and interest accrued thereon to the date fixed for redemption, without premium, as follows (subject to adjustment as may be directed by Hoag Hospital following an optional redemption): Redemption Date Mandatory Sinking Redemption Date Mandatory Sinking (December 1) Account Payments (December 1) Account Payments Final Maturity Notice of Redemption of the Bonds. Notice of redemption will be mailed by the Bond Trustee not less than 30 nor more than 60 days prior to the redemption date, to the respective Holders of any Bonds designated for redemption at their addresses appearing on the bond registration books of the Bond Trustee, to the Master Trustee and to one or more securities depositories and /or securities information services as specified by Hoag Hospital, with a copy to the City. OHS West:260651432.3 Failure by the Bond Trustee to the Master Trustee or any one or more of the securities information services or securities depositories or the insufficiency of any such notice shall not affect the sufficiency of the proceedings for redemption. Failure by the Bond Trustee to mail notice of redemption as described to any one or more of the respective Holders of any Bonds designated for redemption shall not affect the sufficiency of the proceedings for redemption with respect to the Holders to whom such notice was mailed. In the event any of the Bonds are called for redemption, the Bond Trustee will give notice of the redemption of such Bonds, which notice must (i) specify the date of such notice, the date of issue of the Bonds, the redemption date, the redemption price, and the place or places of redemption, the maturity, CUSIP numbers, if any, and, if less than all of the Bonds are to be redeemed, the portions of the principal amount thereof to be redeemed, and (ii) state that, on said date, there will become due and payable on each of said Bonds the redemption price thereof or of said specified portion of the principal amount thereof in the case of a Bond to be redeemed in part only, together with interest accrued thereon to the redemption date, and that from and after such redemption date interest thereon shall cease to accrue, and shall require that such Bonds be then surrendered. Such notice is required to set forth the fact that redemption is conditional upon receipt by the Bond Trustee of sufficient funds to pay the redemption price. Any redemption notice may be rescinded by written notice from Hoag Hospital to the Bond Trustee at least two Business Days prior to the date specified for such redemption. The Bond Trustee shall give notice of such rescission in the same manner as for the notice of redemption. Effect of Redemption. As of the date of redemption, interest on the Bonds so called for redemption shall cease to accrue from and after the date fixed for redemption thereof, if, on the date fixed for redemption, sufficient moneys for the redemption of such Bonds, together with interest to the date fixed for redemption, are held by the Bond Trustee for such purposes. Said Bonds shall cease to be entitled to any benefit or security under the Bond Indenture after the date of redemption, and Holders of said Bonds shall have no rights in respect thereof except to receive payment of the Redemption Price plus accrued interest to the date fixed for redemption from funds held by the Bond Trustee for such payment. Redemption of Portion of Bonds. The Bonds will be redeemed only in authorized denominations. If less than all of the Bonds are called for redemption, the Bond Trustee will select the Bonds or portions thereof by lot, and the remaining Bonds or portions thereof that have not been so called for redemption will be in authorized denominations. SO LONG AS THE ONLY OWNER OF THE BONDS IS DTC, SUCH SELECTION WILL, HOWEVER, BE MADE BY DTC. If a portion of a Bond is called for redemption, a new Bond of the same Series, maturity and in the principal amount equal to the unredeemed portion thereof will be issued to the Holder upon surrender thereof. Purchase in Lieu of Optional Redemption. Each Holder or Beneficial Owner, by purchase and acceptance of any Bond, irrevocably grants to Hoag Hospital the option to purchase such Bond at any time such Bond is subject to optional redemption as described under "Optional Redemption" and "Extraordinary Optional Redemption" above. Such Bond is to be purchased at a purchase price equal to the then applicable redemption price of such Bond, plus accrued interest. In the event Hoag Hospital determines to exercise such option, Hoag Hospital shall deliver a Favorable Opinion of Bond Counsel to the Bond Trustee, and shall direct the Bond Trustee to provide notice of mandatory purchase, such notice to be provided, as and to the extent applicable, in accordance with the provisions of the Bond Indenture relating to notice of redemption and to select Bonds subject to mandatory purchase in the same manner as such Bonds are called for redemption pursuant to the Bond Indenture. On the date fixed for purchase of any Bond in lieu of redemption as described in this paragraph, Hoag Hospital shall pay the purchase price of such Bond to the Bond Trustee in immediately available funds, and the Bond Trustee shall pay the same to the Holders of the Bonds being purchased against delivery thereof. No purchase of any Bond in lieu of redemption as described in this paragraph shall operate to extinguish the indebtedness of the City evidenced by such Bond. No Holder or Beneficial Owner may elect to retain a Bond subject to mandatory purchase in lieu of redemption. OHS West:2606514323 6 Book -Entry -Only System The Bonds, when issued, will be registered in the name of Cede & Co., DTC's partnership nominee. When the Bonds are issued, ownership interests will be available to purchasers only through a book -entry-only system maintained by DTC (the "Book -Entry-Only System "). One fully- registered bond certificate will be issued for the principal amount of each maturity of the Bonds and will be deposited with DTC. See APPENDIX F — `BOOK - ENTRY SYSTEM." Transfer, Exchange and Payment In the event the book -entry system is discontinued, the following provisions will apply. Any Bond may, in accordance with its terms, be transferred, upon the books required to be kept pursuant to the provisions of the Bond Indenture, by the Person in whose name it is registered, in person or by such Person's duly authorized attorney, upon surrender of such Bond for cancellation, accompanied by delivery of a written instrument of transfer, duly executed in a form approved by the Bond Trustee. Whenever any Bond or Bonds shall be surrendered for transfer, the City shall execute and the Bond Trustee shall authenticate and deliver a new Bond or Bonds, of the same maturity and for a like aggregate principal amount of authorized denominations. Bonds may be exchanged at the Corporate Trust Office of the Bond Trustee for a like aggregate principal amount of Bonds of other authorized denominations of the same maturity. The Bond Trustee shall require the Bondholder requesting such transfer to pay any tax or other governmental charge required to be paid with respect to such transfer or exchange, and the Bond Trustee may also require the Bondholder requesting such transfer to pay a reasonable sum to cover expenses incurred by the Bond Trustee or the City in connection with such transfer or exchange. For a description of the registration of transfer or exchange procedures while the Bonds are in the book -entry-only system, see "THE BONDS — Book - Entry-Only System" herein. SECURITY FOR THE BONDS General In the Loan Agreement, Hoag Hospital agrees to make the Loan Repayments to the Bond Trustee, which payments, in the aggregate, will be in amounts sufficient for the payment in full of all amounts payable with respect to the principal of, premium, if any, and interest on the of Bonds to the date of maturity of the Bonds or earlier redemption, and certain other fees and expenses identified as "Additional Payments" under the Loan Agreement, less any amounts available for such payment as provided in the Bond Indenture. The Bonds are also payable from payments made on Obligation No. [X], proceeds of the Bonds (to the extent available), investment earnings on proceeds of the Bonds, certain amounts on deposit under the Bond Indenture and proceeds of insurance or condemnation awards, each in the manner and to the extent set forth in the Bond Indenture. A portion of the proceeds of the Bonds will be used to redeem the Prior Bonds on the Redemption Date (as defined and discussed under the caption "PLAN OF FINANCE" below). Such amounts will not be available for payment of the Bonds. To further secure payment of the principal of and premium, if any, and interest on the Bonds, Hoag Hospital, as Credit Group Representative, concurrently with the issuance of the Bonds will issue Obligation No. [X] to the Bond Trustee pursuant to which the Obligated Group and any future Members of the Obligated Group agree to make payments to the Bond Trustee in amounts sufficient to pay, when due, the principal of and premium, if any, and interest on the Bonds. As of the date of issuance and delivery of the Bonds, Hoag Hospital and NHC are the only Members of the Obligated Group under the Master Indenture. Each Member is jointly and severally liable for payment of the Master Indenture Obligations issued under the Master Indenture, including Obligation No. tX]. See "SECURITY FOR THE BONDS — The Master Indenture" below. There is no debt service reserve fund for the Bonds. The Master Indenture The Master Indenture includes covenants that require Members of the Obligated Group to restrict certain actions, including incurring additional Indebtedness. In determining whether Hoag Hospital, NHC and future Members of the Obligated Group have satisfied such covenants and tests, the Master Indenture requires the OHS West 260651432.3 Obligated Group to combine all Members' income and assets at any point of calculation, including any other future Members of the Obligated Group. See APPENDIX C — "SUMMARY OF PRINCIPAL DOCUMENTS — MASTER INDENTURE — Membership in the Obligated Group." Unsecured Debt. Master Indenture Obligations issued under the Master Indenture are not secured by a lien on real or personal property of any Member, including Hoag Hospital and NHC. Accordingly, holders of Master Indenture Obligations would be unsecured creditors in any bankruptcy or insolvency proceeding involving Hoag Hospital, NHC or any other Member of the Obligated Group. Covenant Against Liens. Pursuant to the Master Indenture, each Member of the Obligated Group agrees that it will not, and each Controlling Member covenants that it will not permit any of its Designated Affiliates to, create, assume or suffer to be created or permit the existence of any Lien upon any of its Property, except for Permitted Liens. Permitted Liens include Liens on Property of the Obligated Group, including Liens which may be granted to secure additional Master Indenture Obligations and other Indebtedness, provided that the Value of the Property that is encumbered is not more than 30% of the Value of all Property. See the definition of "Permitted Liens" in APPENDIX C — "SUMMARY OF PRINCIPAL DOCUMENTS Definitions of Certain Terms" and " — MASTER INDENTURE — Particular Covenants of Each Member of the Obligated Group Against Encumbrances." Grant of Security Interest in Gross Receivables. Pursuant to Supplemental Master Indenture No. [X] and Supplemental Master Indenture No. [Y], Hoag Hospital and NHC, as the Members of the Obligated Group, each agree to pledge, assign, convey, transfer and grant to the Master Trustee, for the benefit of the Holders of Master Indenture Obligations, but only so long as Obligation No. [X] or Obligation No. [Y] remain Outstanding, subject in all cases to Permitted Liens, a security interest in, general lien upon, and the right of setoff against all right, title and interest in the Gross Receivables (as defined in Supplement No. [X]), whether now owned or hereafter acquired. The security interest in Gross Receivables described above has been perfected to the extent, and only to the extent, that such security interest may be perfected under the Uniform Commercial Code of the State of California ( "UCC ") by filing and maintenance of UCC financing statements. The grant of a security interest in Gross Receivables may be subordinated to the interest and claims of others in several instances. See "SECURITY FOR THE BONDS – Security and Enforceability." Additional Indebtedness. In addition to the 2009 Bonds and the 2008C Bonds (defined below) all of which will remain outstanding after the Date of Issue, Indebtedness may be incurred by Hoag Hospital, NHC or any other Member and secured on a parity with Master Indenture Obligations issued under the Master Indenture for the purposes, upon the terms and subject to the conditions provided in the Master Indenture. Each Master Indenture Obligation will be the full and unlimited obligation of the issuing Member and each Member will jointly and severally guarantee the payment of any and all amounts payable under the Master Indenture Obligation. Subject to the conditions therein, the Master Indenture also permits Hoag Hospital, NHC and any other Member to incur secured and unsecured indebtedness in addition to Master Indenture Obligations and to enter into Guarantees. See APPENDIX C– "SUMMARY OF PRINCIPAL DOCUMENTS" and "– MASTER INDENTURE – Particular Covenants of Each Member of the Obligated Group." After the issuance of the Bonds, the Interest Rate Swap Agreements (defined below) will continue to be secured by Master Indenture Obligation No. 3, as amended, issued under the Master Indenture, the 2008C Bonds and the 2008D -F Bonds (defined below) will continue to be secured by Master Indenture Obligation No. 4 and Master Indenture Obligation No. 5 ("Obligation No. 5 "), respectively, each issued under the Master Indenture, and Hoag Hospital's reimbursement obligations to the provider of the letter of credit securing the 2008D -F Bonds are secured by Master Indenture Obligation No. 6, issued under the Master Indenture. See also APPENDIX A – "INFORMATION CONCERNING HOAG MEMORIAL HOSPITAL PRESBYTERIAN, NEWPORT HEALTHCARE CENTER, LLC AND OTHER AFFILIATES – SELECTED UTILIZATION AND FINANCIAL INFORMATION – Capitalization." OHS West260651432.3 8 Release of Obligation No. JXJ. Under the circumstances described in the Bond Indenture, the Bond Trustee is required to exchange Obligation No. [X] for a note or similar obligation (the "Replacement Obligation ") of a credit group that could be financially and operationally different from the Obligated Group, and the new credit group could have substantial debt outstanding that would rank on a parity with the Replacement Obligation. Such exchange could adversely affect the market price for and marketability of the Bonds. For a summary of the conditions that must be satisfied before a Replacement Obligation could be exchanged for Obligation No. [X], see APPENDIX C– "SUMMARY OF PRINCIPAL DOCUMENTS – BOND INDENTURE – Replacement of Obligation No. [X]." Designated AJJiliates. Under the Master Indenture, Hoag Hospital, as the Credit Group Representative, may by resolution designate "Designated Affiliates" from time to time, and may rescind any such designation at any time. Currently no entities have been designated by Hoag Hospital, as Designated Affiliates. Management of Hoag Hospital has no intention of designating any Designated Affiliates in the immediately foreseeable future. The Master Indenture provides that Hoag Hospital, as Credit Group Representative, must, by resolution, designate a Controlling Member (who must be a Member of the Obligated Group) for each Designated Affiliate. Each Controlling Member is required under the Master Indenture to cause each of its Designated Affiliates to pay or otherwise transfer to the Credit Group Representative or other Member amounts necessary to enable the Members to pay when due the principal of, premium, if any, and interest on any Outstanding Master Indenture Obligations. Designated Affiliates are not obligated under Obligation No. [X] or any other Master Indenture Obligations, nor may the Bond Trustee or any Holder seek to enforce compliance with the Master Indenture against any Designated Affiliate. Compliance with the Master Indenture by a Designated Affiliate may only be enforced by its Controlling Member or the Credit Group Representative and the ability of such Controlling Member or the Credit Group Representative to enforce compliance with the Master Indenture will vary and the available remedies may be limited depending on the nature of the relationship between the Designated Affiliate and the Controlling Member. Under the Master Indenture the Controlling Member for a Designated Affiliate must either: (i) maintain, directly or indirectly, control of the Designated Affiliate, including the power to direct the management, policies, disposition of assets and actions of such Designated Affiliate to the extent required to cause the Designated Affiliate to comply with the Master Indenture, or (ii) have in effect such contracts or other agreements, which in the judgment of the Governing Bodies of the Credit Group Representative and the Controlling Member, are sufficient to allow such Controlling Member to enforce compliance by the Designated Affiliate with the terms of the Master Indenture. If the Controlling Member maintains organizational control of the Designated Affiliate, compliance with the Master Indenture generally may be enforced by the Controlling Member exercising its reserved powers to direct actions of the Designated Affiliate, including replacing the members of the governing body of such Designated Affiliate, if necessary. The level of organizational control and the procedures for exercising such control may vary among Designated Affiliates and there is no assurance that a Controlling Member would be able to enforce compliance by its Designated Affiliate in a timely manner. With respect to those Designated Affiliates who are not subject to organizational control but have only a contractual relationship with a Controlling Member, the ability of the Controlling Member to enforce compliance with the Master Indenture will be based solely on the applicable contract. Should any such non - controlled Designated Affiliate refuse to comply with the covenants and requirements of the Master Indenture, the Controlling Member's remedies would be limited to litigation to specifically enforce the provisions of the applicable written contract. In particular, the execution of a written contract may not give the Obligated Group the power or authority to replace the governing body or management of a Designated Affiliate. Moreover, the Designated Affiliate may have certain defenses to such litigation, and there is no assurance that the Controlling Member would prevail in such an action. See "SECURITY FOR THE BONDS — Security and Enforceability — Enforceability of the Master Indenture, the Loan Agreement and Obligation No. [X]." The Master Indenture provides that after an entity is designated as a Designated Affiliate, the Credit Group Representative may at any time declare that such entity is no longer a Designated Affiliate. Accordingly, there can be no assurance that an entity designated as a Designated Affiliate will continue to be a Designated Affiliate for the term of Obligation No. [X]. OHS West:260651432.3 9 Proposed Amendments to Master Indenture — Purchasers Deemed to Have Consented Supplement No. [X] includes proposed amendments to the Master Indenture, including, but not limited to, amendments to the definition of "Income Available for Debt Service" and the Section of the Master Indenture titled "Debt Coverage" (the "Proposed Amendments "). See APPENDIX C — "SUMMARY OF MASTER INDENTURE — Proposed Amendments." The Proposed Amendments are not effective until the consent of not less than a majority in aggregate principal amount of the Holders of Outstanding Master Indenture Obligations and the consent of the provider of the letter of credit securing the 2008D -F Bonds are obtained. By purchasing the Bonds offered hereby, the purchasers and the beneficial owners thereof will be deemed to have consented to the Proposed Amendments, and that consent will be binding upon all successive owners of such Bonds. The Bond Trustee, upon acceptance of Obligation No. [X], will be deemed to have consented to the Proposed Amendments. Supplement No. [Y] also includes the Proposed Amendments and the purchasers and beneficial owners of the Additional 2009 Bonds will also be deemed to have consented to the Proposed Amendments, and, accordingly, the Holder of Obligation No. [Y], upon acceptance thereof, will be deemed to have consented to the Proposed Amendments. Following the issuance of the 2009 Bonds, the Holders of S in aggregate principal of Outstanding Master Indenture Obligations will have consented to the Proposed Amendments, representing approximately _% of the aggregate principal amount of all Outstanding Master Indenture Obligations. Hoag Hospital, as Credit Group Representative, has requested the consent to the Proposed Amendments by the provider of the letter of credit securing the 2008D -F Bonds (the `Bank "). Under the bond indenture pursuant to which the 2008D -F Bonds were issued the Bank may act as sole holder of such bonds for purposes of directing the bond trustee thereunder (the "2008 Bond Trustee ") with respect to Obligation No. 5, which secures the 2008D -F Bonds. The consent of the Bank will also act as a direction to the 2008 Bond Trustee from the holders of the 2008D -F Bonds to consent to the Proposed Amendments as Holder of Obligation No. 5. If Hoag Hospital obtains the consent of the Bank to the Proposed Amendments the resulting consent of the Holder of Obligation No. 5 together with the consents of the Holders of Obligation No. [X] and Obligation No. [Y] will represent a majority in aggregate principal amount of all Outstanding Master Indenture Obligations C° /a). Accordingly, the Proposed Amendments will become effective on the later of the receipt by Hoag Hospital of the consent of the Bank or the issuance of Obligation No. [X] and Obligation No. [Y] on the Date of Issue. Security and Enforceability Enforceability of the Master Indenture, the Loan Agreement and Obligation No. [XI. The state of the insolvency, fraudulent conveyance and bankruptcy laws relating to the enforceability of guaranties or obligations issued by one corporation in favor of the creditors of another or the obligations of another Obligated Group Member to make debt service payments on behalf of an Obligated Group Member is unsettled, and the ability to enforce the Master Indenture and the Master Indenture Obligations against NHC or any other Obligated Group Member that would be rendered insolvent thereby could be subject to challenge. In particular, such obligations may be voidable under the Federal Bankruptcy Code or applicable state fraudulent conveyance laws if the obligation is incurred without "fair" and/or "fairly equivalent' consideration to the obligor and if the incurrence of the obligation thereby renders the Obligated Group Member insolvent. The standards for determining the fairness of consideration and the manner of determining insolvency are not clear and may vary under the Federal Bankruptcy Code, state fraudulent conveyance statutes and applicable cases. The joint and several obligation described herein of each Member of the Obligated Group to pay debt service on Obligation No. [X] may not be enforceable under any of the following circumstances: (i) to the extent payments on Obligation No. [X] are requested to be made from assets of a Member (such as NHC or any future Member) other than Hoag Hospital which are donor - restricted or which are subject to a direct, express or charitable trust that does not permit the use of such assets for such payments; (ii) if the purpose of the debt created and evidenced by Obligation No. [X] is not consistent with the charitable purposes of the Member (other than Hoag Hospital) from which such payment is requested or required, or if the debt was incurred or issued for the benefit of an entity other than a nonprofit corporation that is exempt from federal income taxes under sections 501(a) OHS We t:260651432.3 10 and 501(c)(3) of the Internal Revenue Code of 1986, as amended (the "Code ") and is not a "private foundation" as defined in section 509(a) of the Code; (iii) to the extent payments on Obligation No. [X] would result in the cessation or discontinuation of any material portion of the health care or related services previously provided by such Member (other than Hoag Hospital); or (iv) if and to the extent payments are requested to be made pursuant to any loan violating applicable usury laws. These limitations on the enforceability of the joint and several obligations of the Members of the Obligated Group on Obligation No. [X] also apply to their obligations on all Master Indenture Obligations. If the obligation of a particular Member of the Obligated Group to make payment on a Master Indenture Obligation is not enforceable and payment is not made on such Master Indenture Obligation when due in full, then Events of Default will arise under the Master Indenture. In addition, common law authority and authority under state statutes exists for the ability of courts in such states to terminate the existence of a nonprofit corporation or undertake supervision of its affairs on various grounds, including a finding that such corporation has insufficient assets to carry out its stated charitable purposes. Such court action may arise on the court's own motion or pursuant to a petition of the attorney general of such states or such other persons who have interests different from those of the general public, pursuant to the common law and statutory power to enforce charitable trusts and to see to the application of their funds to their intended charitable uses. The legal right and practical ability of the Bond Trustee to enforce its rights and remedies against Hoag Hospital under the Loan Agreement and related documents and of the Master Trustee to enforce its rights and remedies against Obligated Group Members under Obligation No. [X] may be limited by laws relating to bankruptcy, insolvency, reorganization, fraudulent conveyance or moratorium and by other similar laws affecting creditors' rights. In addition, the Bond Trustee's and the Master Trustee's ability to enforce such terms will depend upon the exercise of various remedies specified by such documents which may in many instances require judicial actions that are often subject to discretion and delay or that otherwise may not be readily available or may be limited. The various legal opinions delivered concurrently with the issuance of the Bonds are qualified as to the enforceability of the various legal instruments by limitations imposed by state and federal laws, rulings, policy and decisions affecting remedies and by bankruptcy, reorganization or other laws of general application affecting the enforcement of creditors' rights, including fraudulent conveyance considerations, or the enforceability of certain remedies or document provisions. For a further description of the provisions of the Bond Indenture, the Loan Agreement and the Master Indenture, including covenants that secure the Bonds, events of default, acceleration and remedies under the Master Indenture, see APPENDIX C — "SUMMARY OF PRINCIPAL DOCUMENTS." Security for Master Indenture Obligations. All Master Indenture Obligations issued and Outstanding under the Master Indenture are equally and ratably secured by the Master Indenture except to the extent specifically provided otherwise in the Master Indenture. Any one or more series of Master Indenture Obligations issued under the Master Indenture may, so long as any Liens created in connection therewith constitute Permitted Liens, be secured by security not otherwise provided for under the Master Indenture (including, without limitation, letters or lines of credit, insurance, Liens on Property of the Members or Designated Affiliates, or security interests in a depreciation reserve, debt service or interest reserve or debt service or similar funds). Such security need not extend to any other Indebtedness (including any other Master Indenture Obligations or series of Master Indenture Obligations). Consequently, the Related Supplement pursuant to which any one or more series of Master Indenture Obligations is issued may provide for such supplements or amendments to the provisions of the Master Indenture, as are necessary to provide for such security and to permit realization upon such security solely for the benefit of the Master Indenture Obligations entitled thereto. OHS West:260651432.3 11 Bankruptcy. In the event of bankruptcy of an Obligated Group Member, the rights and remedies of the Bondholders are subject to various provisions of the federal Bankruptcy Code. If an Obligated Group Member were to file a petition in bankruptcy, payments made by that Obligated Group Member during the 90 day (or perhaps one- year) period immediately preceding the filing of such petition may be avoidable as preferential transfers to the extent such payments allow the recipients thereof to receive more than they would have received in the event of such Obligated Group Member's liquidation. Security interests and other liens granted to a Bond Trustee or the Master Trustee and perfected during such preference period also may be avoided as preferential transfers to the extent such security interest or other lien secures obligations that arose prior to the date of such perfection. Such a bankruptcy filing would operate as an automatic stay of the commencement or continuation of any judicial or other proceeding against the Obligated Group Member and its property and as an automatic stay of any act or proceeding to enforce a lien upon or to otherwise exercise control over its property, as well as various other actions to enforce, maintain or enhance the rights of the Bond Trustee and the Master Trustee. If the bankruptcy court so ordered, the property of the Obligated Group Member, including accounts receivable and proceeds thereof, could be used for the financial rehabilitation of such Obligated Group Member despite any security interest of the Bond Trustee therein. The rights of the Bond Trustee and the Master Trustee to enforce their respective security interests and other liens could be delayed during the pendency of the rehabilitation proceeding. Such Obligated Group Member could file a plan for the adjustment of its debts in any such proceeding, which plan could include provisions modifying or altering the rights of creditors generally or any class of them, secured or unsecured. The plan, when confirmed by a court, binds all creditors who had notice or knowledge of the plan and, with certain exceptions, discharges all claims against the debtor to the extent provided for in the plan. No plan may be confirmed unless certain conditions are met, among which are conditions that the plan be feasible and that it shall have been accepted by each class of claims impaired thereunder. Each class of claims has accepted the plan if at least two - thirds in dollar amount and more than one -half in number of the class cast votes in its favor. Even if the plan is not so accepted, it may be confirmed if the court finds that the plan is fair and equitable with respect to each class of non - accepting creditors impaired thereunder and does not discriminate unfairly. In the event of bankruptcy of any Member, there is no assurance that certain covenants, including tax covenants, contained in the Loan Agreement and certain other documents would survive. Accordingly, a bankruptcy trustee could take action that would adversely affect the exclusion of interest on the Bonds from gross income of the Bondholders for federal income tax purposes. Other THE BONDS ARE LIMITED OBLIGATIONS OF THE CITY PAYABLE SOLELY FROM PAYMENTS REQUIRED TO BE MADE BY HOAG HOSPITAL PURSUANT TO THE LOAN AGREEMENT AND BY THE OBLIGATED GROUP PURSUANT TO OBLIGATION NO. [X] ISSUED PURSUANT TO THE MASTER INDENTURE. NEITHER THE STATE OF CALIFORNIA NOR THE CITY SHALL BE OBLIGATED TO PAY THE PRINCIPAL OF THE BONDS, OR THE PREMIUM OR INTEREST THEREON, EXCEPT FROM THE FUNDS PROVIDED UNDER THE LOAN AGREEMENT, OBLIGATION NO. [X] AND THE BOND INDENTURE, AND NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE CITY, THE STATE OF CALIFORNIA OR OF ANY POLITICAL SUBDIVISION THEREOF, IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF OR THE PREMIUM OR INTEREST ON THE BONDS. THE ISSUANCE OF THE BONDS SHALL NOT DIRECTLY OR INDIRECTLY OR CONTINGENTLY OBLIGATE THE CITY, THE STATE OF CALIFORNIA OR ANY POLITICAL SUBDIVISION THEREOF TO LEVY OR TO PLEDGE ANY FORM OF TAXATION OR TO MAKE ANY APPROPRIATION FOR THEIR PAYMENT. OHS West:260651432.3 12 PLAN OF FINANCE General Concurrently with the Bonds offered hereby, the City expects to issue $ aggregate principal amount of its Revenue Bonds (Hoag Memorial Hospital Presbyterian), Series 2009B (the "2009B Bonds "), Series 2009C (the "Series 2009C Bonds "), Series 2009D (the "2009D Bonds ") and Series 2009E (the "Series 2009E Bonds" and together with the 2009B Bonds, the 2009C Bonds, the 2009D Bonds and the 2009E Bonds, the "Additional 2009 Bonds" and together with the Bonds, the "2009 Bonds "). The issuance of the 2009 Bonds and the loan of the proceeds thereof is for the benefit of Hoag Hospital to (i) finance the costs of certain capital improvements at the facilities owned and operated by the Members, (ii) refund the Prior Bonds identified below and (iii) pay certain costs of issuance for the 2009 Bonds. The Project A portion of the proceeds from the sale of the 2009 Bonds will be used by Hoag Hospital to finance the Project, consisting of the acquisition and construction of certain additions and improvements to, and equipment for, the acute care hospital and related facilities owned by the Members and located on the campus known as One Hoag Drive, Newport Beach, California, or at 500 -540 Superior Avenue, Newport Beach, California, See APPENDIX A — "INFORMATION CONCERNING HOAG MEMORIAL HOSPITAL PRESBYTERIAN, NEWPORT HEALTHCARE CENTER, LLC AND OTHER AFFILIATES — FACILITIES DESIGN AND CONSTRUCTION." Refunding the Prior Bonds Hoag Hospital has determined to refund certain outstanding bonds identified in the table below (the "Prior Bonds ") to [1) eliminate Hoag Hospital's exposure to certain financial markets for bonds issued as auction rate securities, 2) adjust the timing of mandatory tenders of a portion of Hoag Hospital's portfolio of outstanding variable rate debt subject to self - liquidity arrangements to a different point in Hoag Hospital's fiscal year, and 3) amend the existing master indenture security documents]. All of the Prior Bonds are to be refunded in whole with bond proceeds and such bonds and the amounts thereof outstanding as of the date of issue of the Bonds are described in the following chart. See "SECURITY FOR THE BONDS —Master Indenture —Proposed Amendment to Master Indenture —Purchasers Deemed to Have Consented" and "BONDHOLDERS' RISKS — Turmoil in U.S. Bond Markets." $AMOUNT PRIOR BONDS OUTSTANDING City of Newport Beach Insured Revenue Bonds (Hoag Memorial Hospital Presbyterian), Series 2007D (the "2007 Refunded Bonds ") ............................. City of Newport Beach Refunding Revenue Bonds (Hoag Memorial Hospital Presbyterian), Series 2008A (the "2008A Refunded Bonds ") and Series 2008B (the "2008B Refunded Bonds, and together with the 2008A Refunded Bonds, the "2008 Refunded Bonds ") ............................................ ............................... Total $ A portion of the net proceeds of the 2009 Bonds (the "Refunding Proceeds ") will be applied on the Date of Issuance of the Bonds to redeem all of the 2007 Refunded Bonds and the 2008A Refunded Bonds at a redemption price equal to the principal amount thereof (collectively, the "Prior Bonds "). The remaining Refunding Proceeds will be applied on June 16, 2009 to the redemption of the 2008B Refunded Bonds at a redemption price equal to the principal amount thereof. The total amount of 2009 Bonds expected to be issued by the City is not expected to exceed $[220,000,000]. Following issuance of the 2009 Bonds and redemption of the Prior Bonds, the only outstanding bonds secured under the Master Indenture will be the 2009 Bonds, $ of the City's Refunding Revenue OHS West:260651432.3 13 Bonds (Hoag Memorial Hospital Presbyterian), Series 2008C (the "2008C Bonds ") and $ of the City's Refunding Revenue Bonds (Hoag Memorial Hospital Presbyterian), Series 2008D, Series 2008E and Series 2008F Bonds (the "2008D -F Bonds "). Interest Rate Swaps Hoag Hospital has entered into interest rate swap agreements (the "Interest Rate Swap Agreements ") to correspond to the 2008D -F Bonds, in the aggregate principal amount of $250 million, to achieve a targeted mix of fixed and floating rate indebtedness. Citibank N.A., New York (the "Swap Provider ") is the counterparty to the Interest Rate Swap Agreements. The Interest Rate Swap Agreements have a term equal to the term of the applicable Series of the 2008D -F Bonds, respectively, and the aggregate notional amount and amortization of the Interest Rate Swap Agreements is equal to the aggregate principal amount and approximately equal to the amortization of each such Series of the 2008D -F Bonds. Under the Interest Rate Swap Agreements, Hoag Hospital pays a fixed rate equal to 3.229% and receives a floating rate based on an index, in each case based on a notional amount set forth in the respective Interest Rate Swap Agreement. The Interest Rate Swap Agreements are secured by a Master Indenture Obligation entitled to the benefits of the Master Indenture. There can be no assurance that the Interest Rate Swap Agreements will be effective to mitigate related floating rate risk. See "BONDHOLDERS' RISKS — Turmoil in U.S. Bond Markets." To the extent they do not match, the Obligated Group Members are exposed to "basis risk" in that the floating amount it receives from the Swap Provider will not equal the variable amount it is required to pay on the 2008D -F Bonds. Under certain circumstances, each Interest Rate Swap Agreement is subject to termination by Hoag Hospital or the Swap Provider prior to the maturity of the Series of the Bonds to which it relates and prior to the scheduled termination date thereof. In the event of an early termination of any Interest Rate Swap Agreement, there can be no assurance that (i) Hoag Hospital will receive any termination payment payable to it by the Swap Provider, (ii) Hoag Hospital will have sufficient amounts to make a termination payment payable by it to the Swap Provider, or (iii) Hoag Hospital will be able to obtain a replacement swap agreement with comparable terms. Payments due upon early termination may be substantial. below: ESTIMATED SOURCES AND USES OF FUNDS The proceeds to be received from the sale of the. 2009 Bonds will be applied approximately as set forth Sources of Funds: Bond Proceeds [Plus/Less) Net Original Issue [Premium/Discount] Total Sources of Funds Uses of Funds: Refunding of 2007 Refunded Bonds Refunding of 2008 Refunded Bonds Projects Costs Costs of Issuance(') Total, Uses of Funds 2009A Bonds 2009B /C/D/E Bonds (') Includes legal, printing, rating agency, accounting, Bond Trustee and Master Trustee fees, underwriting discount, and other miscellaneous costs of issuance with respect to the Bonds. OHS West:260651432.3 14 ESTIMATED ANNUAL DEBT SERVICE REQUIREMENTS The following table sets forth, for each Fiscal Year ending September 30, the amounts required for the payment of the principal of and the interest on the Bonds. In addition, the table sets forth total debt service on the 2008C Bonds, the 2008D -F Bonds and the Additional 2009 Bonds, which represents the only other long -tern indebtedness of the Corporation expected to be outstanding immediately following the issuance of the 2009 Bonds and the application of the proceeds thereof. See APPENDIX A — "INFORMATION CONCERNING HOAG MEMORIAL HOSPITAL PRESBYTERIAN, NEWPORT HEALTHCARE CENTER, LLC AND OTHER AFFILIATES — [MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL PERFORMANCE — HISTORICAL AND PRO FORMA DEBT SERVICE COVERAGE RATIO "] for certain calculations of debt service coverage. Fiscal Year Ending 2009A Bonds September 30, Principal* Interest 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Preliminary; subject to change. t [Insert assumptions re interest rates on variable rate bonds 1. 2008C 2008 D -F 2009B /C/D/E Total Debt Bondst Bondst Bonds *,t Service CONTINUING DISCLOSURE Since the Bonds are limited obligations of the City, payable solely from amounts received from Hoag Hospital under the Loan Agreement and from the Obligated Group pursuant to Obligation No. [X], financial or operating data concerning the City is not material to an evaluation of the offering of the Bonds or to any decision to purchase, hold or sell the Bonds, and the City is not providing any such information. Hoag Hospital has undertaken all responsibilities for any continuing disclosure to Holders of the Bonds, as described below, and the City shall have no liability to the Holders of the Bonds or any other person with respect to Rule 15c2 -12 promulgated by the Securities and Exchange Commission (the "Rule "). Hoag Hospital has covenanted for the benefit of Holders and beneficial owners of the Bonds to provide certain financial information and operating data relating to Hoag Hospital by not later than six months following the end of Hoag Hospital's fiscal year (which currently is September 30) (the "Annual Report"), commencing with the report for the fiscal year ending September 30, 2009 (due on or before a date no later than six months after close of the fiscal year) and to provide notices of the occurrence of certain enumerated events, if material. The Annual Report and notices of material events, if any, will be filed by Hoag Hospital or its dissemination agent as required OHS WesC260651432.3 15 by the Rule. See APPENDIX E —'FORM OF CONTINUING DISCLOSURE AGREEMENT." These covenants have been made to assist the Underwriter in complying with the Rule. Hoag Hospital has never failed to comply in all material respects with any previous undertaking with regard to said Rule to provide annual reports or notices of material events. BONDHOLDERS' RISKS The purchase of the Bonds involves investment risks that are discussed throughout this Official Statement. Prospective purchasers of the Bonds should evaluate all of the information presented in this Official Statement. This section on Bondholders' Risks focuses primarily on the general risks associated with hospital or health system operations; whereas APPENDIX A describes Hoag Hospital and the Obligated Group specifically. These should be read together. General Except as noted under "SECURITY FOR THE BONDS," the Bonds are payable from Loan Repayments made pursuant to the Loan Agreement and funds provided under Obligation No. [X] and the Bond Indenture. No representation or assurance can be made that revenues will be realized by Hoag Hospital or the Obligated Group in amounts sufficient to make the payments under the Loan Agreement or Obligation No. [X] and thus, to pay principal of and interest on the Bonds. Hoag Hospital is subject to a wide variety of federal and state regulatory actions and legislative and policy changes by those governmental and private agencies that administer Medicare, Medicaid and other payors and are subject to actions by, among others, the National Labor Relations Board, The Joint Commission, the Centers for Medicare and Medicaid Services ( "CMS ") of the U.S. Department of Health and Human Services ( "DHHS "), and other federal, state and local government agencies. The future financial condition of Hoag Hospital and NHC could be adversely affected by, among other things, changes in the method and amount of payments for healthcare services by governmental and nongovernmental payors, the financial viability of these payors, increased competition from other health care entities, demand for health care, other forms of care or treatment, changes in the methods by which employers purchase health care for employees, capability of management, changes in the structure of how health care is delivered and paid for (e.g., a "single payor" system), future changes in the economy, demographic changes, availability of physicians, nurses, and other healthcare professionals, and malpractice claims and other litigation. These factors and others may adversely affect both payment by Hoag Hospital under the Loan Agreement and payment by the Obligated Group on Obligation No. [X] and, consequently, payment of principal of and interest on the Bonds. Economic Conditions; Bad Debt and Indigent Care and Investment Losses Hospitals are economically influenced by the environment in which they operate. To the extent that (1) employers reduce their workforces, (2) employers reduce their budgets for employee health care coverage, or (3) private and public insurers seek to reduce payments to or utilization of hospital services, hospitals may experience decreases in insured patient volume and payments for services. In addition, to the extent that state, county or city governments are unable to provide a safety net of medical services, pressure is applied to local hospitals to increase free care. Economic downturns and lower funding of federal Medicare and state Medicaid and other state health care programs may increase the number of patients treated by hospitals who are uninsured or otherwise unable to pay for some or all of their care. An increase in unemployment may result in a significant number of patients no longer having health insurance coverage, which may result in decreased payments to hospitals or loss of payment for services provided. These conditions may give rise to increased bad debt and higher indigent care utilization. In the current economic environment, nonoperating revenue from investments may be reduced or eliminated. Investment losses (even if unrealized) may trigger debt covenants to be violated and may jeopardize hospitals' economic security. Losses in pension and benefit funds may result in increased funding requirements by hospitals. Potential failure of lenders, insurers or vendors may negatively impact hospital financial conditions and operations and philanthropic support may decrease. These factors may have a material adverse impact on hospitals and health systems. For a discussion of Hoag Hospital's investments and recent declines, see APPENDIX A — INFORMATION CONCERNING HOAG MEMORIAL HOSPITAL PRESBYTERIAN, NEWPORT OHS West:260651432.3 16 HEALTHCARE CENTER, LLC AND OTHER AFFILIATES — "SELECTED UTILIZATION AND FINANCIAL INFORMATION — Management's Discussion and Analysis of Financial Information." Turmoil in U.S. Bond Markets In recent months the U.S. financial markets have experienced significant turmoil, including dislocations in the hospital tax- exempt bond markets. Accompanying the repeated downgrading of certain bond insurers and concerns about the ongoing stability of others, obligations insured by these insurers have been negatively impacted. Generally, bond insurance premiums are paid in full with no provision for refund of the premium in the event the insurer is unable to satisfy its obligations or in the event that its rating or market perception has a negative impact on the insured party's debt. Interest Rate Swaps and Other Hedge Risk. Any interest rate swap or other hedge agreement to which Hoag Hospital is a party, including the Interest Rate Swap Agreements, may, at any time, have a negative value to Hoag Hospital. If either a swap or other hedge counterparty or Hoag Hospital terminates such an agreement when the agreement has a negative value to Hoag Hospital, Hoag Hospital would generally be obligated to make a termination payment to the counterparty in the amount of such negative value, and such payment could be substantial and potentially materially adverse to Hoag Hospital's financial condition. A counterparty may generally only terminate such an agreement upon the occurrence of defined termination events such as nonpayment by Hoag Hospital, noncompliance with certain covenants by the Obligated Group Members or in the event ratings agencies withdraw or downgrade the ratings of the Obligated Group below specified levels. [See "PLAN OF FINANCE — Interest Rate Swaps" herein.] Significant Risk Areas Summarized Certain of the primary risks associated with the operations of Hoag Hospital are briefly summarized in general terms below and are explained in greater detail in subsequent sections. The occurrence of one or more of these risks could have a material adverse effect on the financial conditions and results of operations of one or more Members of the Obligated Group and, in turn, the ability of the Obligated Group to make payments under the Loan Agreement and Obligation No. [X]. Nonprofit Healthcare Environment. Recently, an increasing number of the operations or practices of nonprofit healthcare providers have been challenged or questioned with respect to whether they are consistent with the tax- exempt benefits conferred on such providers. Areas which have come under examination have included pricing practices, billing and collection practices, charitable care, methods of providing and reporting community benefit, executive compensation, exemption of property from real property taxation, private use of tar- exempt bond financed assets and others. These challenges and questions have come from a variety of sources, including state attorneys general, including the California Attorney General, the Internal Revenue Service ( "IRS "), labor unions, Congress, state legislatures, patients, taxpayer groups and patient advocacy groups; these issues have been raised in a variety of forums, including hearings, audits and litigation. These challenges and examinations, and any resulting legislation, regulations, judgments or penalties, could materially change the operating environment for nonprofit providers and have a material adverse effect on Hoag Hospital and the Obligated Group. Capital Needs vs. Capital Capacity. Hospital operations are capital intensive. Regulation, technology and physician/patient expectations require constant and often significant capital investment. In California, seismic requirements mandated by the State of California may require that many hospital facilities be substantially modified, replaced or closed. Nearly all hospitals in California are affected. Estimated construction costs are substantial and actual costs of compliance may exceed estimates. Total capital needs may outstrip capital capacity. Furthermore, capital capacity of hospitals and health systems may be reduced as a result of recent credit market dislocations. It is uncertain how long those conditions may persist and it is possible that capital capacity may be negatively affected over the long term for reasons related to the credit markets. Technical and Clinical Developments. New clinical techniques and technology, as well as new pharmaceutical and genetic developments and products, may alter the course of medical diagnosis and treatment in OHS West260651432.3 17 ways that are currently unanticipated, and that may dramatically change medical and hospital care. These could result in higher hospital costs, reductions in patient populations and/or new sources of competition for hospitals. Reliance on Medicare. Inpatient hospitals such as Hoag Hospital rely to a high degree on payment from the federal Medicare program. Future changes in the underlying law and regulations, as well as in payment policy and timing, create uncertainty and could have a material adverse impact on hospitals' payment stream from Medicare. With health care and hospital spending reported to be increasing faster than the rate of general inflation, Congress and/or CMS may take action in the future to decrease or restrain Medicare outlays for hospitals. Rate Pressure from Health Insurers and Major Purchasers. Certain hospital markets, including many communities in California, are strongly impacted by large health insurers and, in some cases, by major purchasers of health services. In those areas, health insurers may have significant influence over hospital rates, utilization and competition. Rate pressure imposed by health insurers or other major purchasers may have a material adverse impact on hospitals, particularly if major purchasers put increasing pressure on payers to restrain rate increases. Business failures by health insurers also could have a material adverse impact on contracted hospitals in the form of payment shortfalls or delay, and/or continuing obligations to care for managed care patients without receiving payment. Nonoperating Revenues. Nonoperating revenue from investments can be significant to hospitals and is particularly important to the strategies and future plans of Hoag Hospital. Such nonoperating revenue may be reduced or eliminated as a result of general market conditions or specific investment selection and performance. See APPENDIX A — "INFORMATION CONCERNING HOAG MEMORIAL HOSPITAL PRESBYTERIAN, NEWPORT HEALTHCARE CENTER, LLC AND OTHER AFFILIATES — SELECTED UTILIZATION AND FINANCIAL INFORMATION — Management's Discussion and Analysis of Financial Information." Costs and Restrictions from Governmental Regulation. Nearly every aspect of hospital operations is regulated, in some cases by multiple agencies of government. The level and complexity of regulation and compliance audits appear to be increasing, imposing greater operational limitations, enforcement and liability risks; and significant and sometimes unanticipated costs. Government "Fraud" Enforcement. "Fraud" in government funded health care programs is a significant concern of DHHS, CMS and many states, and is one of the federal government's prime law enforcement priorities. The federal government, and to a lesser degree, state governments impose a wide variety of extraordinarily complex and technical requirements intended to prevent over - utilization based on economic inducements, misallocation of expenses, overcharging and other forms of "fraud" in the Medicare and Medicaid programs, as well as other state and federally - funded health care programs. This body of regulation impacts a broad spectrum of hospital commercial activity, including billing, accounting, recordkeeping, medical staff oversight, physician contracting and recruiting, cost allocation, clinical trials, discounts and other functions and transactions. Violations and alleged violations may be deliberate, but also frequently occur in circumstances where management is unaware of the conduct in question, as a result of mistake, or where the individual participants do not know that their conduct is in violation of law. Violations may occur and be prosecuted in circumstances that do not have the traditional elements of fraud, and enforcement actions may extend to conduct that occurred in the past. The government periodically conducts widespread investigations covering categories of services or certain accounting or billing practices. Violations carry significant sanctions. The government and /or private "whistleblowers" often pursue aggressive investigative and enforcement actions. The government has a wide array of civil, criminal and monetary penalties, including withholding essential hospital payments from the Medicare or Medicaid programs, or exclusion from those programs. Aggressive investigation tactics, negative publicity and threatened penalties can be, and often are, used to force settlements, payment of fines and prospective restrictions that may have a materially adverse impact on hospital operations, financial condition, results of operations and reputation. Multi- million dollar fines and settlements are common. These risks are generally uninsured. Government enforcement and private whistleblower suits may increase in the hospital sector. Similarly, parties contracting with hospitals regarding research and clinical trials may also pursue investigations and claims that could result in negative publicity, penalties, fines or uninsured settlements. OHS West:260651432.3 18 Professional Staff Shortages. Currently, a nursing shortage exists which may have its primary impact on hospitals. In California, state regulation of nursing staff to patient ratios may intensify the nursing shortages. In addition, shortages of other professional and technical staff such as pharmacists, therapists, laboratory technicians and others may occur or worsen. Hospital operations, patient and physician satisfaction, financial condition, results of operations and future growth could be negatively affected by these shortages, resulting in material adverse impact to hospitals. Proliferation of Competition. Hospitals increasingly face competition from specialty providers of care. This may cause hospitals to lose essential inpatient or outpatient market share. Competition may be focused on services or payor classifications where hospitals realize their highest margins, thus negatively affecting programs that are economically important to hospitals. Specialty hospitals or special use surgery and imaging centers may attract specialists as investors and may seek to treat only profitable classifications of patients, leaving full- service hospitals with higher acuity and/or lower paying patient populations. These new sources of competition may have a material adverse impact on hospitals, particularly where a group of a hospital's principal physician admitters may curtail their use of a hospital service in favor of competing facilities. See APPENDIX A — "INFORMATION CONCERNING HOAG MEMORIAL HOSPITAL PRESBYTERIAN, NEWPORT HEALTHCARE CENTER, LLC AND OTHER AFFILIATES — POTENTIAL AFFILIATIONS AND TRANSACTIONS." Labor Costs and Disruption. Hospitals are labor intensive. Labor costs, including salary, benefits and other liabilities associated with the workforce are a significant component of hospital expenses and therefore, have significant impact on hospital operations and financial condition. Hospital employees are increasingly organized in collective bargaining units and may be involved in work actions of various kinds, including work stoppages and strikes. Overall costs of the hospital workforce are high, and turnover is high. Pressure to recruit, train and retain qualified employees is expected to accelerate. These factors may materially increase hospital costs of operation. Workforce disruption may negatively impact hospital revenues and reputation. See APPENDIX A — "INFORMATION CONCERNING HOAG MEMORIAL HOSPITAL PRESBYTERIAN, NEWPORT HEALTHCARE CENTER, LLC AND OTHER AFFILIATES — EMPLOYEES." Pension and Benefit Funds. As large employers, hospitals may incur significant expenses to fund pension and benefit plans for employees and former employees, and to fund required workers' compensation benefits. Funding obligations in some cases may be erratic or unanticipated and may require significant commitments of available cash needed for other purposes. Hoag Hospital does not provide a defined benefit pension plan for its employees or former employees although it does maintain a defined contribution plan. State Medicaid Programs. While state Medicaid and other state healthcare programs are rarely as important to hospital financial results as Medicare, they nevertheless constitute an important payor source to many hospitals. These programs often pay hospitals and physicians at levels that may be below the actual cost of the care provided. As Medicaid is partially funded by states, the financial condition of states may result is lower Medicaid funding levels and/or payment delays. These could have a material adverse impact on hospitals. Medical Liability Litigation and Insurance Medical liability litigation is subject to public policy determinations and legal and procedural rules that may be altered from time to time, with the result that the frequency and cost of such litigation, and resultant liabilities, may increase in the future. Hospitals may be affected by negative financial and liability impacts on physicians. Costs of insurance, including self - insurance, may increase dramatically. Facility Damage. Hospitals are highly dependent on the condition and functionality of their physical facilities. Damage from earthquake, floods, fire, other natural causes, deliberate acts of destruction, or various facilities system failures may have a material adverse impact on hospital operations and financial conditions. Nonprofit Health Care Environment As a nonprofit tax- exempt organization, Hoag Hospital is subject to federal, state and local laws, regulations, rulings and court decisions relating to its organization and operation, including its operation for charitable purposes. At the same time, Hoag Hospital conducts large -scale complex business transactions and is a OHS We t:260651432.3 19 major employer in its geographic area. There can often be a tension between the rules designed to regulate a wide range of charitable organizations and the day -to -day operations of a complex healthcare organization. Recently, an increasing number of the operations or practices of healthcare providers have been challenged or questioned to determine if they are consistent with the tax exemption benefits conferred on such providers or the regulatory requirements for nonprofit tax- exempt organizations. These challenges, in some cases, are broader than concerns about compliance with federal and state statutes and regulations, and instead in many cases are examinations of core business practices of the healthcare organizations. An overarching concern is that nonprofit hospitals may not confer community benefits that exceed or are equal to the benefit received from their tax- exempt status. Areas which have come under examination have included pricing practices, billing and collection practices, charitable care, providing and reporting community benefit, executive compensation, exemption of property from real property taxation, and others. These challenges and questions have come from a variety of sources, including state attorneys general, the IRS, labor unions, Congress, state legislatures, taxpayer groups, the press, and patients, and in a variety of forums, including hearings, audits and litigation. These challenges or examinations include the following, among others: Congressional Hearings. In recent years, three Congressional Committees have conducted hearings and other proceedings inquiring into various practices of nonprofit hospitals and health care providers. Among the legislation proposed or discussed as a result of these hearings and proceedings are: (1) establishment of minimum required levels of charity care to be provided by nonprofit health care providers; (2) periodic review of hospitals' tax - exempt status by the IRS; and (3) greater and more uniform reporting of charitable and community benefit activities. Internal Revenue Service Examination of Compensation Practices. In February 2009, the IRS issued its Hospital Compliance Project Final Report (the "IRS Final Report") that examined tax- exempt organizations' practices and procedures with regard to compensation and benefits paid to their officers and other defined "insiders." The IRS Final Report indicates that the IRS (1) will continue to heavily scrutinize executive compensation arrangements, practices and procedures, and (2) in certain circumstances, may conduct further investigations or impose fines on tax- exempt organizations. Litigation Relating to Billing and Collection Practices. Lawsuits have been filed in federal and state courts alleging, among other things, that hospitals have failed to fulfill their obligations to provide charity care to uninsured patients and have overcharged uninsured patients. Some of these cases have since been dismissed by the courts and some hospitals and health systems have entered into substantial settlements. A number of cases are still pending in various courts around the country with inconsistent results. Action by Purchasers of Hospital Services and Consumers. Major purchasers of hospital services could take action to restrain hospital charges or charge increases. The California Public Employees' Retirement System ( "CALPERS "), the nation's third largest purchaser of employee health benefits, has pledged to take action to restrain the rate of growth of hospital charges and has excluded certain California hospitals from serving its covered members. Hoag Hospital is not excluded from serving covered members of CALPERS. As a result of increased public scrutiny, it is also possible that the pricing strategies of hospitals may be perceived negatively by consumers, and hospitals may be forced to reduce fees for their services. Decreased utilization could result, and hospitals' revenues may be negatively impacted. Charity Care and Financial Assistance. California law requires California hospitals to maintain written policies about discount payment and charity care and to provide copies of such policies to patients and the Office of Statewide Health Planning and Development ( "OSHPD "). California hospitals are also required to follow specified billing and collection procedures. Challenges to Real Property Tax Exemptions. Recently, the real property tax exemptions afforded to certain nonprofit health care providers by state and local taxing authorities have been challenged on the grounds that the health care providers were not engaged in sufficient charitable activities. These challenges have been based on a variety of grounds, including allegations of aggressive billing and collection practices and excessive financial margins. While Hoag Hospital is not aware of any current challenge to the tax exemption afforded to any material real property of Hoag Hospital, there can be no assurance that these types of challenges will not occur in the future. OHS West260651432.3 20 The foregoing are some examples of the challenges and examinations facing nonprofit healthcare organizations. They are indicative of a greater scrutiny of the billing, collection and other business practices of these organizations and may indicate an increasingly more difficult operating environment for healthcare organizations, including Hoag Hospital and, indirectly, NHC. The challenges and examinations, and any resulting legislation, regulations, judgments, or penalties, could have a material adverse effect on one or more Members of the Obligated Group and, in turn, their ability to make payments under the Loan Agreement and under Obligation No. [X]. Healthcare Reform Initiatives Healthcare reform has been identified as a priority by business leaders, public advocates, policy experts, political leaders and candidates for office at the federal, state and local levels. Proposals include: (1) establishing universal healthcare coverage or purchasing pools; (2) modifying how hospitals, physicians and other healthcare providers are paid; and (3) evaluating hospitals, physicians and other healthcare providers on a variety of quality and efficacy standards to support pay- for - performance systems. Congress and the new administration have indicated their intent to institute significant health reform in the coming year. The President's budget for fiscal year 2010 proposes a $634 billion health care reserve fund to implement comprehensive health reforms over a ten -year period; the reforms themselves are as yet unspecified. Although health reform may be financed by payment cuts in government healthcare programs, healthcare reform could be implemented in a way that is beneficial to hospitals if more people who are currently uninsured or underinsured have access to fuller coverage for hospital services. In order to pay for health reform initiatives, the administration proposes to make significant cuts in Medicare payments to providers, including those to hospitals. Some of the specifics that could adversely impact hospital revenues include: (1) significant cuts to Medicare Advantage health plans resulting in reduced payments by such plans to providers; (2) changes in reimbursement designed to discourage hospital readmission rates; (3) bundled payments that cover hospital services, post -acute setting services and professional services; (4) restricted access to or payments for ancillary services (e.g., establishing prior authorization from radiology benefit managers for medical imaging procedures); (5) further quality incentive programs that pay providers based on specified performance parameters; and (6) further restrictions on Medicare payments and increased processing and auditing designed to enhance payment accuracy. Patient Service Revenues The Medicare Program. Medicare is the federal health insurance system under which hospitals are paid for services provided to eligible elderly and disabled persons. Medicare is administered by CMS, which delegates to the states the process for certifying hospitals to which CMS will make payment. To achieve and maintain Medicare certification, hospitals must meet CMS's "Conditions of Participation" on an ongoing basis, as determined by the state and/or The Joint Commission. The requirements for Medicare certification are subject to change, and, therefore, it may be necessary for hospitals to effect changes from time to time in their facilities, equipment, personnel, billing, policies and services. [For each of the fiscal years ended August 31, 2005, August 31, 2006 and August 31, 2007, Medicare charges (excluding capitation) represented approximately 35.4°/x, 34.8% and 34.5 %, respectively, of Hoag Hospital's gross patient service revenue. See APPENDIX A — "INFORMATION CONCERNING HOAG MEMORIAL HOSPITAL PRESBYTERIAN, NEWPORT HEALTHCARE CENTER, LLC AND OTHER AFFILIATES — SELECTED UTILIZATION AND FINANCIAL INFORMATION — Sources of Patient Services Revenue. "] Updatepresentation. Hospital Inpatient Reimbursement Hospitals are generally paid for inpatient services provided to Medicare beneficiaries based on established categories of treatments or conditions known as diagnosis related groups ( "DRGs "). The actual cost of care, including capital costs, may be more or less than the DRG rate. DRG rates are subject to adjustment by CMS and are subject to federal budget considerations. There is no guarantee that DRG rates, as they change from time to time, will cover actual costs of providing services to Medicare patients. OHS West260651432.3 21 Hospital Outpatient Reimbursement. Hospitals are also paid a pre - determined payment amount for most outpatient services based upon ambulatory payment classification ( "APC ") groups. An APC group includes various services and procedures determined to be similar. There can be no assurance that the hospital APC payment, which bases payment on APC groups rather than on individual services, will be sufficient to cover the actual costs of the outpatient services. Other Medicare Service Payments. Medicare payment for skilled nursing services, psychiatric services, inpatient rehabilitation services, general outpatient services and home health services are based on regulatory formulas or pre - determined rates. There is no guarantee that these rates, as they may change from time to time, will be adequate to cover the actual cost of providing these services to Medicare patients. Reimbursement of Hospital Capital Casts. Hospital capital costs apportioned to Medicare patient use (including depreciation and interest) are paid by Medicare exclusively on the basis of a standard federal rate (based upon average national costs of capital), subject to limited adjustments specific to the hospital. There can be no assurance that future capital- related payments will be sufficient to cover the actual capital- related costs of Hoag Hospital's facilities applicable to Medicare patient stays or will provide flexibility for Hoag Hospital to meet changing capital needs. Medical Education Payments. Medicare currently pays for a portion of the costs of medical education at hospitals that have teaching programs. These payments are vulnerable to reduction or elimination. Recovery Audit Contractors Demonstration Project. In addition to periodic annual audits of Medicare payments, in 2005 CMS announced a demonstration project using recovery audit contractors ( "RACs ") as part of CMS' continuing efforts to assure accurate payments to providers. RACs search for potentially improper Medicare payments made to healthcare providers in prior years that were not detected through existing CMS program integrity efforts. The RACs use their own software and independent knowledge of Medicare to determine areas to review. Once a RAC identifies a potentially improper claim as a result of an audit, it makes an assessment from the provider's Medicare reimbursement in an amount estimated to equal the overpayment from the provider pending resolution of the audit. The demonstration project operated in California and four other states until it ended in 2008. Nationwide rollout of a permanent program began in 2009. Such audits may have the effect of slowing future Medicare payments to providers pending an evolving appeals process with the RACs. Medicaid Program. Medicaid is a program of medical assistance, funded jointly by the federal government and the states, for certain needy individuals and their dependants. Under Medicaid, the federal government provides limited funding to states that have medical assistance programs that meet federal standards. Attempts to balance or reduce federal and state budgets will likely negatively impact Medicaid and other state healthcare program spending. Federal and state budget proposals contemplate significant cuts in Medicaid spending which will likely negatively impact provider reimbursement. California Medi -Cal. Medi -Cal is the California Medicaid program. The State of California selectively contracts with general acute care hospitals to provide inpatient services to Medi -Cal patients. The state is obligated to make contractual payments only to the extent the legislature appropriates adequate funding. Except in areas of the state that have been excluded from contracting, a general acute care hospital generally will not qualify for payment for non - emergency acute inpatient services rendered to a Medi -Cal beneficiary unless it is a contracting hospital. Typically, either party may terminate such contracts on 120 days' notice and the state may terminate without notice under certain circumstances. No assurances can be made that hospitals will be awarded Medi -Cal contracts or that any such contracts will reimburse hospitals for the cost of delivering services. As of the date hereof, Hoag Hospital does not have a Medi -Cal contract. [For each of the fiscal years ended August 31, 2005, August 31, 2006 and August 31, 2007, Hoag Hospital received approximately 4.0 %, 3.9% and 3.9% respectively, of gross patient service revenues from state Medicaid programs. See APPENDIX A — "INFORMATION CONCERNING HOAG MEMORIAL HOSPITAL PRESBYTERIAN, NEWPORT HEALTHCARE CENTER, LLC AND OTHER AFFILIATES — SELECTED UTILIZATION AND FINANCIAL INFORMATION — Sources of Patient Services Revenue. "] Update presentation. OHS We t:260651432.3 22 California Budget and Other Legislative Matters. Many states, including California, face significant financial challenges, including erosion of general fund tax revenues, falling real estate values, slowing economic growth and higher unemployment, each of which may continue or worsen over the coming years. These factors have resulted in a sizeable shortfall between anticipated revenues and spending demands. California faces a significant gap between the expected level of tax revenues and projected expenditures for the current fiscal year and in the projected 2009 -2010 budget. In early 2009, California's legislature and Governor took action to close an estimated $42 billion shortfall. Subsequent to those actions, the California Legislative Analyst's Office reported that due to falling revenues, additional shortfalls are likely. The proposed solutions to a significant portion of the known budget shortfall will be subject to voter approval on a series of initiatives on May 19, 2009. If the voters do not approve all of the proposed revenue enhancements and expenditure adjustments, the State of California will be required to take additional steps to reconcile actual revenues and expenses. It is possible that additional cuts in the levels and timing of healthcare provider reimbursement, including that to hospitals under Medi -Cal, could materially adversely affect the Obligated Group. Financial challenges facing the State of California may negatively affect hospitals due to increasing numbers of indigent, uninsured and underinsured patients who are unable to pay for their care or access primary care facilities. A greater number of individuals may also qualify for Medicaid and/or reduced rate care. Health Plans and Managed Care. Most private health insurance coverage is provided by various types of "managed care" plans, including health maintenance organizations ("HMOs ") and preferred provider organizations ("PPOs" ), that generally use discounts and other economic incentives to reduce or limit the cost and utilization of health care services. Medicare and Medicaid also purchase hospital care using managed care options. Payments to hospitals from managed care plans typically are lower than those received from traditional indemnity or commercial insurers. In California, managed care plans have replaced indemnity insurance as the prime source of non- governmental payment for hospital services, and hospitals must be capable of attracting and maintaining managed care business, often on a regional basis. Regional coverage and aggressive pricing may be required. However, it is also essential that contracting hospitals be able to provide the contracted services without significant operating losses, which may require multiple forms of cost containment. [Defined broadly, for each of the fiscal years ended August 31, 2005, August 31, 2006 and August 31, 2007, managed care payments (including capitated Medicare contracts and all capitated and non - capitated managed care) constituted approximately 57.2 %, 57.2% and 57.6 %, respectively, of gross patient service revenues of Hoag Hospital. See APPENDIX A — "INFORMATION CONCERNING HOAG MEMORIAL HOSPITAL PRESBYTERIAN, NEWPORT HEALTHCARE CENTER, LLC AND OTHER AFFILIATES — SELECTED UTILIZATION AND FINANCIAL INFORMATION Sources of Patient Services Revenue. "] Update presentation. Many HMOs and PPOs currently pay providers on a negotiated fee - for - service basis or, for institutional care, on a fixed rate per day of care, which, in each case, usually is discounted from the typical charges for the care provided. As a result, the discounts offered to HMOs and PPOs may result in payment to a provider that is less than its actual cost. Additionally, the volume of patients directed to a provider may vary significantly from projections, and/or changes in the utilization may be dramatic and unexpected, thus jeopardizing the provider's ability to manage this component of revenue and cost. Some HMOs employ a "capitation" payment method under which hospitals are paid a predetermined periodic rate for each enrollee in the HMO who is "assigned" or otherwise directed to receive care at a particular hospital. A hospital may assume financial risk for the cost and scope of institutional care given. If payment is insufficient to meet the hospital's actual costs of care, or if utilization by such enrollees materially exceeds projections, the financial condition of the hospital could erode rapidly and significantly. Often, HMO contracts are enforceable for a stated term, regardless of hospital losses and may require hospitals to care for enrollees for a certain time period, regardless of whether the HMO is able to pay the hospital. OHS West:260651432.3 23 Hospitals from time to time have disputes with managed care payors concerning payment and contract interpretation issues. Failure to maintain contracts could have the effect of reducing Hoag Hospital's market share and net patient services revenues. Conversely, participation may result in lower net income if participating hospitals are unable to adequately contain their costs. Thus, managed care poses one of the most significant business risks (and opportunities) the hospitals face. Negative Rankings Based on Clinical Outcomes, Cost, Quality, Patient Satisfaction and Other Performance Measures Health plans, Medicare, Medicaid, employers, trade groups and other purchasers of health services, private standard- setting organizations and accrediting agencies increasingly are using statistical and other measures in efforts to characterize, publicize, compare, rank and change the quality, safety and cost of health care services provided by hospitals and physicians. Published rankings such as "score cards," "pay for performance" and other financial and non - financial incentive programs are being introduced to affect the reputation and revenue of hospitals and the members of their medical staffs and to influence the behavior of consumers and providers such as Hoag Hospital. Currently prevalent are measures of quality based on clinical outcomes of patient care, reduction in costs, patient satisfaction, and investment in health information technology. Measures of performance set by others that characterize a hospital negatively may adversely affect its reputation and financial condition. Regulatory Environment "Fraud" and "False Claims." Health care "fraud and abuse" laws have been enacted at the federal and state levels to broadly regulate the provision of services to government program beneficiaries and the methods and requirements for submitting claims for services rendered to the beneficiaries. Under these laws, hospitals and others can be penalized for a wide variety of conduct, including submitting claims for services that are not provided, billing in a manner that does not comply with government requirements or including inaccurate billing information, billing for services deemed to be medically unnecessary, or billings accompanied by an illegal inducement to utilize or refrain from utilizing a service or product. Federal and state governments have a broad range of criminal, civil and administrative sanctions available to penalize and remediate health care fraud, including the exclusion of a hospital from participation in the Medicare/Medicaid programs, civil monetary penalties, and suspension of Medicare/Medicaid payments. Fraud and abuse cases may be prosecuted by one or more government entities and/or private individuals, and more than one of the available sanctions may be, and often are, imposed for each violation. Laws governing fraud and abuse may apply to a hospital and to nearly all individuals and entities with which a hospital does business. Fraud investigations, settlements, prosecutions and related publicity can have a catastrophic effect on hospitals. See "Enforcement Activity," below. Major elements of these often highly technical laws and regulations are generally summarized below. False Claims Act The federal False Claims Act ( "FCA ") makes it illegal to submit or present a false, fictitious or fraudulent claim to the federal government, and may include claims that are simply erroneous. Because the tern "knowingly" is defined broadly under the law to include not only actual knowledge but also deliberate ignorance or reckless disregard of the facts, the FCA can be used to punish a wide range of conduct. FCA investigations and cases have become common in the healthcare field and may cover a range of activity from intentionally inflated billings, to highly technical billing infractions, to allegations of inadequate care. Violation or alleged violation of the FCA most often results in settlements that require multi - million dollar payments and costly corporate integrity agreements. The FCA also permits individuals to initiate civil actions on behalf of the government in lawsuits called "qui tam" actions. Qui tam plaintiffs, or "whistleblowers," can share in the damages recovered by the government or recover independently if the government does not participate. The FCA has become one of the government's primary weapons against healthcare fraud. FCA violations or alleged violations could lead to settlements, fines, exclusion or reputation damage that could have a material adverse impact on a hospital. OHS West: 260651432.3 24 Anti - Kickback Law. The federal "Anti- Kickback Law" prohibits anyone from soliciting, receiving, offering or paying any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, in return for a referral of a patient for, or the ordering or recommending of the purchase or lease of any item or service that is paid by any federal or state healthcare program. The Anti - Kickback Law applies to many common health care transactions between persons and entities with which a hospital does business, including hospital - physician joint ventures, medical director agreements, physician recruitment agreements, physician office leases and other transactions. Violation or alleged violation of the Anti - Kickback Law most often results in settlements that require multi - million dollar payments and costly corporate integrity agreements. The Anti- Kickback Law can be prosecuted either criminally or civilly. Violation is a felony, subject to potentially substantial fines, imprisonment and/or exclusion from the Medicare and Medicaid programs, any of which would have a significant detrimental effect on the financial stability of most hospitals. In addition, civil monetary penalties may be imposed. Increasingly, the federal government is prosecuting violations of the Anti- Kickback Law under the FCA, based on the argument that claims resulting from an illegal kickback arrangement are also false claims for FCA purposes. See the discussion under the subheading "False Claims Act" above. Stark Referral Law. The federal "Stark" statute prohibits the referral of Medicare and Medicaid patients for certain designated health services (including inpatient and outpatient hospital services, clinical laboratory services, and radiology and other imaging services) to entities with which the referring physician has a financial relationship. It also prohibits a hospital furnishing the designated services from billing Medicare, or any other payor or individual, for Medicare- covered services performed pursuant to a prohibited referral. The government does not need to prove that the entity knew that the referral was prohibited to establish a Stark violation. If certain technical requirements are met, many ordinary business practices and economically desirable arrangements between hospitals and physicians arguably constitute "financial relationships" within the meaning of the Stark statute, thus triggering the prohibition on referrals and billing. Most providers of the designated health services with physician relationships have some exposure to liability under the Stark statute. Recent changes to the regulations issued under the Stark statute have rendered illegal a number of common arrangements under which physician -owned entities provide services and/or equipment to hospitals and may increase risk of violation due to lack of clarity of the technical requirements. Medicare may deny payment for all services related to a prohibited referral and a hospital that has billed for prohibited services may be obligated to refund the amounts collected from the Medicare program. For example, if an office lease between a hospital and a large group of heart surgeons is found to violate Stark, the hospital could be obligated to repay CMS for the payments received from Medicare for all of the heart surgeries performed by all of the physicians in the group for the duration of the lease; a potentially significant amount. The government may also seek substantial civil monetary penalties, and in some cases, a hospital may be liable for fines up to three times the amount of any monetary penalty, and/or be excluded from the Medicare and Medicaid programs. Settlements, fines or exclusion for a Stark violation or alleged violation could have a material adverse impact on a hospital. Increasingly, the federal government is prosecuting violations of the Stark statute under the FCA, based on the argument that claims resulting from an illegal referral arrangement are also false claims for FCA purposes. See the discussion under the subheading "False Claims Act" above. In September 2007, CMS sent a "Disclosure of Financial Relationships Report" (DFRR ") to approximately 500 specialty and acute -care hospitals requiring the recipient to report its physician investment, ownership and compensation relationships. The DFRR included questions relating to (1) disclosure of all hospital ownership interests (both physician and non - physician), (2) disclosure by all investing physicians concerning their ownership interests (including loans or loan guarantees), (3) disclosure of all leases or "under arrangement" relationships with physicians or their family members and (4) disclosure of other compensation arrangements between physicians and the hospital, including leases, medical director agreements, on -call stipends, nonmonetary compensation arrangements and charitable donations. The DFRR also required hospitals to provide supporting documentation, including verification of fair -market -value determinations for certain arrangements. It is possible that further reporting may be mandated for all Medicare participating hospitals thereby exposing additional business arrangements to scrutiny and investigation. OHS West260651432.3 25 HIPAA. The Health Insurance Portability and Accountability Act of 1996 ( "HIPAA ") adds additional criminal sanctions for healthcare fraud and applies to all healthcare benefit programs, whether public or private. HIPAA also provides for punishment of a health care provider for knowingly and willfully embezzling, stealing, converting or intentionally misapplying any money, funds, or other assets of a health care benefit program. A healthcare provider convicted of health care fraud could be subject to mandatory exclusion from Medicare. Exclusions from Medicare or Medicaid Participation. The government may exclude a hospital from Medicare/Medicaid program participation that is convicted of a criminal offense relating to the delivery of any item or service reimbursed under Medicare or a state health care program, any criminal offense relating to patient neglect or abuse in connection with the delivery of health care, fraud against any federal, state or locally financed healthcare program or an offense relating to the illegal manufacture, distribution, prescription, or dispensing of a controlled substance. The government also may exclude individuals or entities under certain other circumstances, such as an unrelated conviction of fraud, or other financial misconduct relating either to the delivery of health care in general or to participation in a federal, state or local government program. Exclusion from the Medicare/Medicaid program means that a hospital would be decertified and no program payments can be made. Any hospital exclusion could be a materially adverse event. In addition, exclusion of hospital employees may be another source of potential liability for hospitals or health systems based on services provided by those excluded employees. Administrative Enforcement. Administrative regulations may require less proof of a violation than do criminal laws, and, thus, health care providers may have a higher risk of imposition of monetary penalties as a result of an administrative enforcement actions. Compliance with Conditions of Participation. CMS, in its role of monitoring participating providers' compliance with conditions of participation in the Medicare program, may determine that a provider is not in compliance with its conditions of participation. In that event, a notice of termination of participation may be issued or other sanctions potentially could be imposed. Enforcement Activity. Enforcement activity against health care providers has increased, and enforcement authorities have adopted aggressive approaches. In the current regulatory climate, it is anticipated that many hospitals and physician groups will be subject to an audit, investigation, or other enforcement action regarding the health care fraud laws mentioned above. In addition, enforcement agencies increasingly pursue sanctions for violations of healthcare fraud and abuse laws mentioned above. Enforcement authorities are often in a position to compel settlements by providers charged with or being investigated for false claims violations by withholding or threatening to withhold Medicare, Medicaid and/or similar payments and/or by instituting criminal action. In addition, the cost of defending such an action, the time and management attention consumed, and the facts of a case may dictate settlement. Therefore, regardless of the merits of a particular case, a hospital could experience materially adverse settlement costs, as well as materially adverse costs associated with implementation of any settlement agreement. Prolonged and publicized investigations could be damaging to the reputation and business of a hospital, regardless of outcome. Certain acts or transactions may result in violation or alleged violation of a number of the federal healthcare fraud laws described above, and therefore penalties or settlement amounts often are compounded. Generally these risks are not covered by insurance. Enforcement actions may involve multiple hospitals in a health system, as the government often extends enforcement actions regarding health care fraud to other hospitals in the same organization. Therefore, Medicare fraud related risks identified as being materially adverse as to a hospital could have materially adverse consequences to a health system taken as a whole. Liability Under State "Fraud" and "False Claims" Laws. Hospital providers in California also are subject to a variety of state laws, related to false claims (similar to the FCA or that are generally applicable false claims laws), anti - kickback (similar to the federal Anti- Kickback Law or that are generally applicable anti - kickback or fraud laws), and physician referral (similar to Stark). A violation of these laws could have a material adverse impact on a hospital for the same reasons as the federal statutes. See discussion under the subheadings "False Claims Act," "Anti- Kickback Law" and "Stark Referral Law" above. OHS West260651432.3 26 Privacy Requirements. HIPAA, along with new privacy rules arising from federal and state statutes, addresses the confidentiality of individuals' health information. Disclosure of certain broadly defined protected health information is prohibited unless expressly permitted under the provisions of the HIPAA statute and regulations or authorized by the patient. Such confidentiality provisions extend not only to patient medical records, but also to a wide variety of health care clinical and financial settings where patient privacy restrictions often impose new communication, operational, accounting and billing restrictions. These add costs and create potentially unanticipated sources of legal liability. EMTALA. The Emergency Medical Treatment and Active Labor Act ( "EMTALA ") is a federal civil statute that requires hospitals to treat or conduct a medical screening for emergency conditions and to stabilize a patient's emergency medical condition before releasing, discharging or transferring the patient. A hospital that violates EMTALA is subject to civil penalties of up to $50,000 per offense and exclusion from the Medicare and Medicaid programs. In addition, the hospital may be liable for any claim by an individual who has suffered harm as a result of a violation. Licensing, Surveys, Investigations and Audits. Health facilities are subject to numerous legal, regulatory, professional and private licensing, certification and accreditation requirements. These include, but are not limited to, requirements of state licensing agencies and The Joint Commission. Renewal and continuation of certain of these licenses, certifications and accreditations are based on inspections or other reviews generally conducted in the normal course of business of health facilities. Loss of, or limitations imposed on, hospital licenses could reduce hospital utilization or revenues, or a hospital's ability to operate all or a portion of its facilities. Environmental Laws and Regulations. Hospitals are subject to a wide variety of federal, state and local environmental and occupational health and safety laws and regulations. These include, but are not limited to: air and water quality control requirements; waste management requirements; specific regulatory requirements applicable to asbestos and radioactive substances; requirements for providing notice to employees and members of the public about hazardous materials handled by or located at the hospital; and requirements for training employees in the proper handling and management of hazardous materials and wastes. Hospitals may be subject to requirements related to investigating and remedying hazardous substances located on their property, including such substances that may have migrated off the property. Typical hospital operations include the handling, use, storage, transportation, disposal and/or discharge of hazardous, infectious, toxic, radioactive, flammable and other hazardous materials, wastes, pollutants and contaminants. As such, hospital operations are particularly susceptible to the practical, financial and legal risks associated with the environmental laws and regulations. Such risks may result in damage to individuals, property or the environment; may interrupt operations and/or increase their cost; may result in legal liability, damages, injunctions or fines; and may result in investigations, administrative proceedings, civil litigation, criminal prosecution, penalties or other governmental agency actions; and may not be covered by insurance. See "Other Risk Factors — Natural Gas" below. Business Relationships and Other Business Matters Integrated Physician Groups. Hospitals often own, control or have affiliations with relatively large physician groups. For a description of Hoag Hospital's affiliations, see APPENDIX A — "INFORMATION CONCERNING HOAG MEMORIAL HOSPITAL PRESBYTERIAN, NEWPORT HEALTHCARE CENTER, LLC AND OTHER AFFILIATES — GENERAL — Organizational Structure" Generally, the sponsoring hospital or health system will be the capital and funding source for such alliances and may have an ongoing financial commitment to provide growth capital and support operating deficits. These types of alliances are generally designed to respond to trends in the delivery of medicine to better integrate hospital and physician care, to increase physician availability to the community and/or to enhance the managed care capability of the affiliated hospitals and physicians. However, these goals may not be achieved, and an unsuccessful alliance may be costly and counterproductive to all of the above - stated goals. Integrated delivery systems carry with them the potential for legal or regulatory risks in varying degrees. The ability of hospitals or health systems to conduct integrated physician operations may be altered or eliminated in the future by legal or regulatory interpretation or changes, or by health care fraud enforcement. In addition, OHS West:260651432.3 27 participating physicians may seek their independence for a variety of reasons, thus putting the hospital investment at risk, and potentially reducing its managed care leverage and/or overall utilization. See APPENDIX A — "INFORMATION CONCERNING HOAG MEMORIAL HOSPITAL PRESBYTERIAN, NEWPORT HEALTHCARE CENTER, LLC AND OTHER AFFILIATES — ORGANIZATIONAL STRUCTURE — Other Affiliated Entities Not Members of Obligated Group." Physician Financial Relationships. In addition to the physician integration relationships referred to above, hospitals and health systems frequently have various additional business and financial relationships with physicians and physician groups. These are in addition to hospital- physician contracts for individual services performed by physicians in hospitals. They potentially include: joint ventures to provide a variety of outpatient services; recruiting arrangements with individual physicians and/or physician groups; loans to physicians; medical office leases; equipment leases from or to physicians; and various forms of physician practice support or assistance. These and other financial relationships with physicians (including hospital - physician contracts for individual services) may involve financial and legal compliance risks for the hospitals and systems involved. From a compliance standpoint, these types of financial relationships may raise federal and state "anti- kickback" and federal "Stark" issues (see "Regulatory Environment," above), tax- exemption issues (see "Tax- Exempt Status and Other Tae Matters ", below), as well as other legal and regulatory risks, and these could have a material adverse impact on hospitals. Hospital Pricing. Inflation in hospital costs may evoke action by legislatures, payors or consumers. It is possible that legislative action at the state or national level may be taken with regard to the pricing of health care services. Indigent Care. Tax - exempt hospitals often treat large numbers of indigent patients who are unable to pay in full for their medical care. Typically, urban, inner -city hospitals may treat significant numbers of indigents. These hospitals may be susceptible to economic and political changes that could increase the number of indigents or their responsibility for caring for this population. General economic conditions that affect the number of employed individuals who have health coverage affects the ability of patients to pay for their care. Similarly, changes in governmental policy, which may result in coverage exclusions under local, state and federal health care programs (including Medicare and Medicaid) may increase the frequency and severity of indigent treatment by such hospitals and other providers. It also is possible that future legislation could require that tax- exempt hospitals and other providers maintain minimum levels of indigent care as a condition to federal income tax exemption or exemption from certain state or local taxes. Physician Medical Staff. The primary relationship between a hospital and physicians who practice in it is through the hospital's organized medical staff. Medical staff bylaws, rules and policies establish the criteria and procedures by which a physician may have his or her privileges or membership curtailed, denied or revoked. Physicians who are denied medical staff membership or certain clinical privileges or who have such membership or privileges curtailed or revoked often file legal actions against hospitals and medical staffs. Such actions may include a wide variety of claims, some of which could result in substantial uninsured damages to a hospital. Realignment of medical staff along hospital service lines, as is expected to be pursued at Hoag Hospital, may involve such risks. See APPENDIX A "INFORMATION CONCERNING HOAG MEMORIAL HOSPITAL PRESBYTERIAN, NEWPORT HEALTHCARE CENTER, LLC AND OTHER AFFILIATES — SERVICE AREA AND COMPETITION" and " POTENTIAL AFFILIATIONS AND TRANSACTIONS." In addition, failure of the hospital governing body to adequately oversee the conduct of its medical staff may result in hospital liability to third parties. Physician Supply. Sufficient community -based physician supply is important to hospitals and health systems. Changes to physician compensation formulas by CMS could lead to physicians locating their practices in communities with lower Medicare populations. Hospitals and health systems may be required to invest additional resources for recruiting and retaining physicians, or may be required to increase the percentage of employed physicians in order to continue serving the growing population base and maintain market share. The physician -to- population ratio in certain parts of California is below the national average, and the shortage of physicians could become a significant issue for hospitals in those areas. Competition Among Health Care Providers. Increased competition from a wide variety of sources, including specialty hospitals, other hospitals and health care systems, inpatient and outpatient health care facilities OHS West260651432.3 28 including surgery centers and imaging centers, long -term care and skilled nursing services facilities, clinics, physicians and others, may adversely affect the utilization and/or revenues of hospitals. Existing and potential competitors may not be subject to various restrictions applicable to hospitals, and competition, in the future, may arise from new sources not currently anticipated or prevalent. See APPENDIX A — "INFORMATION CONCERNING HOAG MEMORIAL HOSPITAL PRESBYTERIAN, NEWPORT HEALTHCARE CENTER, LLC AND OTHER AFFILIATES SERVICE AREA AND COMPETITION" and POTENTIAL AFFILIATIONS AND TRANSACTIONS." Specialty hospital developments that attract away an important segment of an existing hospital's admitting specialists may be particularly damaging. For example, some large hospitals may have significant dependence on heart surgery programs, as revenue streams from those programs may cover significant fixed overhead costs. If a significant component of such a hospital's heart surgeons develop their own specialty heart hospital (alone or in conjunction with a specialty hospital operator or promoter) taking with them their patient base, the hospital could experience a rapid and dramatic decline in net revenues that is not proportionate to the number of patient admissions or patient days lost. It is also possible that the competing specialty hospital, as a for - profit venture, would not accept indigent patients or other payors and government programs, leaving low -pay patient populations in the full- service hospital. In certain cases, such an event could be materially adverse to the hospital. A variety of proposals have been advanced to prohibit such investments. Nonetheless, a prior governmental moratorium on certain specialty hospitals has been lifted, and therefore specialty hospitals may continue to represent a competitive challenge for full - service hospitals. Additionally, scientific and technological advances, new procedures, drugs and appliances, preventive medicine and outpatient health care delivery may reduce utilization and revenues of the hospitals in the future or otherwise lead the way to new avenues of competition. In some cases, hospital investment in facilities and equipment for capital- intensive services may be lost as a result of rapid changes in diagnosis, treatment or clinical practice brought about by new technology or new pharmacology. Antitrust While enforcement of the antitrust laws against hospitals has been less intense in recent years, antitrust liability may arise in a wide variety of circumstances, including medical staff privilege disputes, payor contracting, physician relations, joint ventures, merger, affiliation and acquisition activities, certain pricing or salary setting activities, as well as other areas of activity. The application of the federal and state antitrust laws to health care is evolving, and therefore not always clear. Currently, the most common areas of potential liability are joint action among providers with respect to payor contracting and medical staff credentialing disputes. Violation of the antitrust laws could result in criminal and/or civil enforcement proceedings by federal and state agencies, as well as actions by private litigants. In certain actions, private litigants may be entitled to treble damages, and in others, governmental entities may be able to assess substantial monetary fines. Employer Status. Hospitals are major employers, with mixed technical and non - technical workforces. Labor costs, including salary, benefits and other liabilities associated with the workforce, have significant impacts on hospital operations and financial condition. Developments affecting hospitals as major employers include: (1) imposing higher minimum or living wages; (2) enhancing occupational health and safety standards; and (3) penalizing employers of undocumented immigrants. Legislation or regulation on any of the above or related topics could have a material adverse effect on one or more Members of the Obligated Group and, in turn, their ability to make payments with respect to the Bonds. Labor Relations and Collective Bargaining. Hospitals are large employers with a wide diversity of employees. Increasingly, various labor unions repeatedly attempt to organize employees at hospitals, and many hospitals have collective bargaining agreements with one or more labor organizations. President Obama has encouraged enactment of "check -card" legislation which could make the attempt to organize healthcare employees easier or faster. Employees subject to collective bargaining agreements may include essential nursing and technical personnel, as well as food service, maintenance and other trade personnel. Renegotiation of such agreements upon expiration may result in significant cost increases to hospitals. Employee strikes or other adverse labor actions may have an adverse impact on operations, revenue and hospital reputation. OHS WesC260651432.3 29 Hoag Hospital's employees currently are not covered by collective bargaining agreements. See APPENDIX A — "INFORMATION CONCERNING HOAG MEMORIAL HOSPITAL PRESBYTERIAN, NEWPORT HEALTHCARE CENTER, LLC AND OTHER AFFILIATES— EMPLOYEES" Wage and Hour Class Actions and Litigation. Federal law and many states, including notably California, impose standards related to worker classification, eligibility and payment for overtime, liability for providing rest periods and similar requirements. Large employers with complex workforees, such as hospitals, are susceptible to actual and alleged violations of these standards. In recent years there has been a proliferation of lawsuits over these "wage and hour" issues, often in the form of large, sometimes multi- state, class actions. For large employers such as hospitals and health systems, such class actions can involve multi - million dollar claims, judgments and/or settlements. A major class action decided or settled adversely to Hoag Hospital could have a material adverse impact on their financial conditions and results of operations. Health Care Worker Class#lcadon. Health care providers, like all businesses, are required to withhold income taxes from amounts paid to employees. If the employer fails to withhold the tax, the employer becomes liable for payment of the tax imposed on the employee. On the other hand, businesses are not required to withhold federal taxes from amounts paid to a worker classified as an independent contractor. The IRS has established criteria for determining whether a worker is an employee or an independent contractor for tax purposes. If the IRS were to reclassify a significant number of hospital independent contractors (e.g., physician medical directors) as employees, back taxes and penalties could be material. Staffing. In recent years, the health care industry has suffered from a scarcity of nursing personnel, respiratory therapists, pharmacists and other trained health care technicians. A significant factor underlying this trend includes a decrease in the number of persons entering such professions. This is expected to intensify in the future, aggravating the general shortage and increasing the likelihood of hospital- specific shortages. Competition for employees, coupled with increased recruiting and retention costs will increase hospital operating costs, possibly significantly, and growth may be constrained. This trend could have a material adverse impact on the financial condition and results of operations of hospitals. Professional Liability Claims and General Liability Insurance. In recent years, the number of professional and general liability suits and the dollar amounts of damage recoveries have increased in health care nationwide, resulting in substantial increases in malpractice insurance premiums, higher deductibles and generally less coverage. Professional liability and other actions alleging wrongful conduct and seeking punitive damages are often filed against health care providers. Insurance does not provide coverage for judgments for punitive damages. Beginning in 2008, CMS refused to reimburse hospitals for medical costs arising from certain `never events," which include specific preventable medical errors. Certain private insurers and HMOs followed suit. The occurrence of "never events" may be more likely to be publicized and may negatively impact a hospital's reputation, thereby reducing future utilization and potentially increasing the possibility of liability claims. Litigation also arises from the corporate and business activities of hospitals, from a hospital's status as an employer or as a result of medical staff or provider network peer review or the denial of medical staff or provider network privileges. As with professional liability, many of these risks are covered by insurance, but some are not. For example, some antitrust claims or business disputes are not covered by insurance or other sources and may, in whole or in part, be a liability of Hoag Hospital if determined or settled adversely. There is no assurance that Hoag Hospital will be able to maintain coverage amounts currently in place in the future, that the coverage will be sufficient to cover malpractice judgments rendered against it or that such coverage will be available at a reasonable cost in the future. Other Class Actions. Hospitals have long been subject to a wide variety of litigation risks, including liability for care outcomes, employer liability, property and premises liability, and peer review litigation with physicians, among others. In recent years, consumer class action litigation has emerged as a potentially significant source of litigation liability for hospitals and health systems. These class action suits have most recently focused on hospital billing and collections practices, and they may be used for a variety of currently unanticipated causes of action. Since the subject matter of class action suits may involve uninsured risks, and since such actions often OHS Wesk260651432.3 30 involve alleged large classes of plaintiffs, they may have material adverse consequences on hospitals and health systems in the future. Tax - Exempt Status and Other Tax Matters Maintenance of the Tax - Exempt Status of Hoag Hospital The tax- exempt status of the Bonds depends upon the maintenance by each of Hoag Hospital and NHC of their status as organizations described in section 501(c)(3) of the Code. The maintenance of such status is dependent on compliance by Hoag Hospital with general rules promulgated in the Code and related regulations regarding the organization and operation of tax- exempt entities, including their operation for charitable and other permissible purposes and their avoidance of transactions that may cause their earnings or assets to inure to the benefit of private individuals. As these general principles were developed primarily for public charities that do not conduct large -scale technical operations and business activities, they often do not adequately address the myriad of operations and transactions entered into by a modern health care organization. Although traditional activities of healthcare providers, such as medical office building leases, have been the subject of interpretations by the IRS in the form of private letter rulings, many activities or categories of activities have not been fully addressed in any official opinion, interpretation or policy of the IRS. Hoag Hospital participates in a variety of joint ventures and transactions with physicians and others either directly or indirectly. Management believes that the joint ventures and transactions to which Hoag Hospital is a party are consistent with the requirements of the Code as to tax- exempt status, but, as noted above, there is uncertainty as to the state of the law. The IRS has periodically conducted audit and other enforcement activity regarding tax- exempt health care organizations. The IRS conducts special audits of large tax - exempt health care organizations with at least $500 million in assets or $1 billion in gross receipts. Such audits are conducted by teams of revenue agents, often take years to complete and require the expenditure of significant staff time by both the IRS and taxpayers. These audits examine a wide range of possible issues, including tax- exempt bond financing of partnerships and joint ventures, retirement plans and employee benefits, employment taxes, political contributions and other matters. If the IRS were to find that Hoag Hospital has participated in activities in violation of certain regulations or rulings, the tax- exempt status of such entity could be jeopardized. Although the IRS has not frequently revoked the 501(c)(3) tax - exempt status of nonprofit health care corporations, it could do so in the future. Loss of tax- exempt status by Hoag Hospital potentially could result in loss of tax exemption of the Bonds and of other tax- exempt debt of Hoag Hospital and defaults in covenants regarding the Bonds and other related tax- exempt debt and obligations likely would be triggered. Loss of tax- exempt status also could result in substantial tax liabilities on income of Hoag Hospital. For these reasons, loss of tax - exempt status of Hoag Hospital could have a material adverse effect on the financial condition of Hoag Hospital. In some cases, the IRS has imposed substantial monetary penalties on tax- exempt hospitals in lieu of revoking their tax - exempt status. In those cases, the IRS and tax- exempt hospitals entered into settlement agreements requiring the hospital to make substantial payments to the IRS. Given the size of Hoag Hospital, the wide range of complex transactions entered into by it, and potential exemption risks, Hoag Hospital could be at risk for incurring monetary and other liabilities imposed by the IRS. In lieu of revocation of exempt status, the IRS may impose penalty excise taxes on certain "excess benefit transactions" involving 501(c)(3) organizations and "disqualified persons." An excess benefit transaction is one in which a disqualified person or entity receives more than fair market value from the exempt organization or pays the exempt organization less than fair market value for property or services, or shares the net revenues of the tax- exempt entity. A disqualified person is a person (or an entity) who is in a position to exercise substantial influence over the affairs of the exempt organization during the five years preceding an excess benefit transaction. The statute imposes excise taxes on the disqualified person and any "organization manager" who knowingly participates in an excess benefit transaction. These rules do not penalize the exempt organization itself, so there would be no direct impact on Hoag Hospital or the tax status of the Bonds if an excess benefit transaction were subject to IRS enforcement, pursuant to these "intermediate sanctions" rules. OHS West:260651432.3 31 State and Local Tax Exemption. Until recently, the State of California has not been as active as the IRS in scrutinizing the income tax exemption of health care organizations. In California it is possible that legislation may be proposed to strengthen the role of the California Franchise Tax Board and the Attorney General in supervising nonprofit health systems. It is likely that the loss by Hoag Hospital of federal tax exemption would also trigger a challenge to its state tax- exemption. Depending on the circumstances, such event could be material and adverse. State, county and local taxing authorities undertake audits and reviews of the operations of tax- exempt health care providers with respect to their real property tax exemptions. In some cases, particularly where authorities are dissatisfied with the amount of services provided to indigents, the real property tax- exempt status of the health care providers has been questioned. The majority of the real property of Hoag Hospital is currently treated as exempt from real property taxation. Although the real property tax exemption of Hoag Hospital with respect to its core hospital facilities has not, to the knowledge of management, been under challenge or investigation, an audit could lead to a challenge that could adversely affect the real property tax exemption of Hoag Hospital. It is not possible to predict the scope or effect of future legislative or regulatory actions with respect to taxation of nonprofit corporations. There can be no assurance that future changes in the laws and regulations of state or local governments will not materially adversely affect the financial condition of Hoag Hospital by requiring payment of income, local property or other taxes. Maintenance of Tax- Exempl Status of Interest on the Bonds. The Code imposes a number of requirements that must be satisfied for interest on state and local obligations, such as the Bonds, to be excludable from gross income for federal income tax purposes. These requirements include limitations on the use of bond proceeds, limitations on the investment earnings of bond proceeds prior to expenditure, a requirement that certain investment earnings on bond proceeds be paid periodically to the United States Treasury, and a requirement that the City file an information report with the IRS. Hoag Hospital has covenanted in the Loan Agreement that it will comply with such requirements. Future failure by Hoag Hospital to comply with the requirements stated in the Code and related regulations, rulings and policies may result. in the treatment of interest on the Bonds as taxable, retroactively to the date of issuance. The City has covenanted in the Bond Indenture that it will not take any action or refrain from taking any action that would cause interest on the Bonds to be included in gross income for federal income tax purposes. IRS officials have recently indicated that more resources will be invested in audits of tax - exempt bonds in the charitable organization sector, with specific reviews of private use. The IRS sent post- issuance compliance questionnaires to several hundred nonprofit corporations that had borrowed on a tax- exempt basis. After analyzing responses, IRS representatives indicated that it had commenced a number of examinations of hospital tax- exempt bond issuances with wide- ranging areas of inquiry. One aspect of these examinations may be to determine if certain bond issues quality for their tax - exempt status. The IRS has also added a new Schedule H to IRS Form 990.— Return of Organizations Exempt From Income Tax, on which hospitals and health systems will be asked to report how they provide community benefit and to specify certain billing and collection practices. The new schedule also requests detailed information related to all outstanding bond issues of nonprofit borrowers, including information regarding operating, management and research contracts as well as private use compliance. There can be no assurance that responses by Obligated Group Members to an IRS examination or questionnaire, or Form 990, will not lead to an IRS review that could adversely affect the tax - exempt status or the market value of the Bonds or of other outstanding tax - exempt indebtedness of the Obligated Group. Additionally, the Bonds may be, from time to time, subject to examination by the IRS. Hoag Hospital believes that the Bonds properly comply with the tax laws. In addition, Bond Counsel will render an opinion with respect to the tax - exempt status of the Bonds, as described under the caption "TAX MATTERS." Hoag Hospital has not sought to obtain a private letter ruling from the IRS with respect to the Bonds, and the opinion of Bond Counsel is not binding on the IRS or the courts. There can be no assurance that an examination of the Bonds will not adversely affect the Bonds. See "TAX MATTERS" herein. OHS West:2 606 5 1432.3 32 Limitations on Contractual and Other Arrangements Imposed by the Internal Revenue Code. As a tax - exempt organization, Hoag Hospital is limited with respect to its use of practice income guarantees, reduced rent on medical office space, low interest loans, joint venture programs and other means of recruiting and retaining physicians. Uncertainty in this area has been reduced somewhat by the issuance by the IRS of guidelines on permissible physician recruitment practices. The IRS scrutinizes a broad variety of contractual relationships commonly entered into by hospitals and has issued a detailed audit guide suggesting that field agents scrutinize numerous activities of the hospitals in an effort to determine whether any action should be taken with respect to limitations on or revocation of their tax- exempt status or assessment of additional tax. Any suspension, limitation or revocation of Hoag Hospital's tax- exempt status or assessment of significant tax liability would have a materially adverse effect on Hoag Hospital and might lead to loss of tax exemption of interest on the Bonds. Charity Care Legislation. Legislative bodies have considered legislation concerning the charity care standards that nonprofit, charitable hospitals must meet to maintain their federal income tax- exempt status under the Code and legislation mandating that nonprofit, charitable hospitals have an open -door policy toward Medicare and Medicaid patients as well as offer, in a non - discriminatory manner, qualified charity care and community benefits. Excise tax penalties on nonprofit, charitable hospitals that violate these charity care and community benefit requirements could be imposed or their tax - exempt status under the Code could be revoked. The scope and effect of legislation, if any, that may be enacted at the federal or state levels with respect to charity care of nonprofit hospitals cannot be predicted. Any such legislation or similar legislation, if enacted, could have the effect of subjecting a portion of the income of Hoag Hospital and other Obligated Group Members to federal or state income taxes or to other tax penalties and adversely affect the ability of the Obligated Group Members individually and of the Obligated Group, taken as a whole, to generate net revenues sufficient to meet its obligations and to pay the debt service on the Bonds and its other obligations. Other Risk Factors Facittty Damage, Earthquakes and other Disasters. The occurrence of a natural or man-made disaster could damage the Obligated Group's facilities, interrupt utility service to such facilities, result in an abnormally high demand for health care services or otherwise impair the Obligated Group's operations and the generation of revenues from the facilities effected. Further, many hospitals in California, including Hoag Hospital, are in close proximity to active earthquake faults. A significant earthquake in California could destroy or disable the hospital facility of Hoag Hospital or one or more buildings owned by NHC. Risks related to natural or other disasters may be particularly acute for the Obligated Group which currently derives most of its operating revenues from a single campus location. California law requires each acute care hospital in the state to have either complied with new hospital seismic safety standards or to have ceased acute care operations by January 1, 2008. California law allows three types of extensions of the January 1, 2008 deadline. First, the compliance deadline can be extended if a hospital shows that capacity lost in the closure of a facility may not be provided by another facility in the area, or if a hospital agrees that, on or before January 1, 2013, designated services will be provided by moving into an existing conforming building, relocating to a newly built building or continuing in the building as retrofitted to comply with the standards. The second type of extension allows the above 2013 deadline to be delayed up to an additional two years if the hospital is under construction at the time of the extension request, has submitted building plans, permits, timelines and status reports to OSHPD by the requisite deadlines, and is making reasonable progress in meeting its timeline. The third type of extension allows an acute care hospital that serves an otherwise underserved community and that qualified for the 2013 to further delay the deadline to 2020 upon satisfaction of stated progress timelines set out in the statute. Hoag Hospital expects to achieve compliance with these deadlines. In addition, OSHPD has been directed to review the previously established seismic performance categories for hospital buildings using a software program, "HAZUS." Submission for requests for re- evaluation under HAZUS may result in buildings being re- categorized so that they will not be required to meet seismic standards until 2030. See APPENDIX A — "INFORMATION CONCERNING HOAG MEMORIAL HOSPITAL PRESBYTERIAN, NEWPORT HEALTHCARE CENTER, LLC AND OTHER AFFILIATES — FACILITIES DESIGN AND CONSTRUCTION." OHS West:260651432.3 33 Natural Gas. Hoag Hospital is located in an area subject to the natural gas seepage of methane and hydrogen sulfide. Methane is a malodorous asphyxiate as well as being highly explosive at certain concentrations in the air. The gas seepage is the result of geological conditions that permit the vertical migration of gas from the West Newport Oil Field. This geological condition is in close proximity to the surface underneath the lower campus of Hoag Hospital's Newport Beach facilities. To address the potential hazards associated with this gas seepage Hoag Hospital has designed and constructed a gas extraction and treatment facility capable of extracting the gas from the underlying strata before it is able to reach the surface. Each year the Hoag Hospital plant removes approximately 42 million cubic feet of gases from the underlying strata. Hoag Hospital utilizes a portion of the extracted gas to assist in the heating and cooling of its facilities. In 2002, the extraction and treatment facility was awarded recognition from the Orange County Chapter of the American Society of Civil Engineers as the "Best Environmental Project of the Year." In addition, certain structures on the lower portion of the Hoag Hospital campus, including structures encompassed by the Capital Plan (as defined in APPENDIX A hereto), were and will be constructed with gas mitigation measures including subslab gas impermeable membrane, interior ventilation and interior gas detection systems, as required. Risks Related to Outstanding Variable Rate Obligations. The Additional 2009 Bonds will be, and the 2008C Bonds and the 2008D -F Bonds are, variable rate obligations (the "Variable Rate Obligations "), the interest rates on which could rise significantly. Such interest rates vary on a periodic basis and may be converted to a fixed interest rate. This protection against rising interest rates is limited, however, because Hoag Hospital would be required to continue to pay interest at the variable rate until it is permitted to convert the obligations to a fixed rate pursuant to the terms of the applicable transaction documents. Recent credit market turmoil in the auction rate markets and dislocation among various bond insurers triggered suddenly high interest costs to many healthcare organizations. The Obligated Group has covenanted to pay the tender price for any Variable Rate Bonds tendered from time to time. In addition, the tender price of any 2008D -F Bonds tendered for purchase is currently supported by a credit facility, however, Hoag Hospital may enter into a self - liquidity arrangement for such bonds under the terms of the related indenture. Any deterioration in the financial condition of the Obligated Group could result in optional tenders or higher variable interest rates on the Variable Rate Bonds. Many factors could cause optional and mandatory tenders of the Variable Rate Bonds and if remarketing proceeds, or in the case of the 2008D -F Bonds the liquidity draw under the credit facility, are insufficient to pay the tender price of any such tender, Hoag Hospital would have a substantial liquidity responsibility. Hoag Hospital has entered into the Interest Rate Swap Agreements which will be subject to periodic "mark - to- market" valuations and at any time may have a negative value to Hoag Hospital. The Swap Provider may terminate any Interest Rate Swap Agreement upon the occurrence of certain "termination events" or "events of default." Hoag Hospital may terminate the Swap at any time. If either the Swap Provider or Hoag Hospital terminates any of the Interest Rate Swap Agreements during a negative value situation, Hoag Hospital may be required to make a termination payment to the Swap Provider, and such payment could be material. See "PLAN OF FINANCE — Interest Rate Swap Agreements" and APPENDIX A — "INFORMATION CONCERNING HOAG MEMORIAL HOSPITAL PRESBYTERIAN, NEWPORT HEALTHCARE CENTER, LLC AND OTHER AFFILIATES — SELECTED UTILIZATION AND FINANCIAL INFORMATION." Contributions. Hoag Hospital regularly receives substantial contributions from the Hoag Hospital Foundation and members of the local community. While Hoag Hospital has an active contribution development program, there can be no assurances that Hoag Hospital will be the recipient of substantial contributions in the future. A significant portion of the total cost of the Capital Plan is expected to be paid from such contributions. Failure to raise this amount would require Hoag Hospital to modify the Project or provide additional funds from other reserves or sources. Any reduction in projected philanthropic support, whether in connection with the Project or otherwise, would have a material adverse impact on the financial condition of Hoag Hospital. Investments. Hoag Hospital has significant holdings in a broad range of investments. Adverse events and market fluctuations may affect the value of those investments and those fluctuations may be and historically have been at times material. For a discussion of Hoag Hospital's investments, see APPENDIX A "INFORMATION CONCERNING HOAG MEMORIAL HOSPITAL PRESBYTERIAN, NEWPORT HEALTHCARE CENTER, OHS West260651432.3 34 LLC AND OTHER AFFILIATES — SELECTED UTILIZATION AND FINANCIAL INFORMATION — Liquidity and Investment Policy." Construction Risks. Construction projects are subject to a variety of risks, including but not limited to delays in issuance of required building permits or other necessary approvals or permits, including environmental approvals, strikes, shortages of materials and adverse weather conditions. Such events could delay occupancy. Cost overruns may occur due to change orders, delays in the construction schedule, changes in scope of development, scarcity of building materials and other factors. Cost overruns could cause the costs to exceed available funds. In particular, substantial portions of the Project and Capital Plan involve construction of new facilities and rehabilitation and retrofitting of existing facilities of Hoag Hospital. In such circumstances, the possibility of cost overruns, scope of work revisions or inadequate initial estimates of cost of completion of the Project and the Capital Plan is particularly acute. Also, some components of the Project are in early stages of development where costs have been estimated based on architects' and engineers' estimates, but plans, specifications and construction drawings have not been developed and have not been bid to contractors or resulted in construction contracts. See APPENDIX A — "INFORMATION CONCERNING HOAG MEMORIAL HOSPITAL PRESBYTERIAN, NEWPORT HEALTHCARE CENTER, LLC AND OTHER AFFILIATES — FACILITIES DESIGN AND CONSTRUCTION — The Project " Other Future Risks. In the future, the following factors, among others, may adversely affect the operations of health care providers, including Hoag Hospital, or the market value of the Bonds, to an extent that cannot be determined at this time. (a) Adoption of legislation that would establish a national or statewide single -payor health program or other health care system legislation or that would establish national, statewide or otherwise regulated rates applicable to hospitals and other health care providers. (b) Reduced demand for the services of Hoag Hospital that might result from decreases in population. (c) Bankruptcy of an indemnity/commercial insurer, managed care plan or other payor. (d) Efforts by insurers and governmental agencies to limit the cost of hospital services, to reduce the number of beds and to reduce the utilization of hospital facilities by such means as preventive medicine, improved occupational health and safety and outpatient care, or comparable regulations or attempts by third -party payors to control or restrict the operations of certain health care facilities. (e) The occurrence of a natural or man -made disaster that could damage Hoag Hospital's facilities, interrupt utility service to the facilities, result in an abnormally high demand for health care services or otherwise impair Hoag Hospital's operations and the generation of revenues from the facilities. (f) Limitations on the availability of, and increased compensation necessary to secure and retain, nursing, technical and other professional personnel. TAX MATTERS In the opinion of Orrick, Herrington & Sutcliffe LLP, bond counsel to the City ( "Bond Counsel "), based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Bonds is excluded from gross income for federal income tax purposes under section 103 of the Code and is exempt from state of California personal income taxes. In the further opinion of Bond Counsel, interest on the Bonds is not a specific preference item for purposes of the federal individual and corporate alternative minimum taxes, nor is it included in adjusted current earnings when calculating corporate alternative minimum taxable income. Bond Counsel expects to deliver an opinion at the time of issuance of the Bonds substantially in the form set forth in APPENDIX D hereto. OHS West260651432.3 35 To the extent the issue price of any maturity of the Bonds is less than the amount to be paid at maturity of such Bonds (excluding amounts stated to be interest and payable at least annually over the term of such Bonds), the difference constitutes "original issue discount," the accrual of which, to the extent properly allocable to each Beneficial Owner thereof, is treated as interest on the Bonds which is excluded from gross income for federal income tax purposes and State of California personal income taxes. For this purpose, the issue price of a particular maturity of the Bonds is the first price at which a substantial amount of such maturity of the Bonds is sold to the public (excluding bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers). The original issue discount with respect to any maturity of the Bonds accrues daily over the term to maturity of such Bonds on the basis of a constant interest rate compounded semiannually (with straight -line interpolations between compounding dates). The accruing original issue discount is added to the adjusted basis of such Bonds to determine taxable gain or loss upon disposition (including sale, redemption, or payment on maturity) of such Bonds. Beneficial Owners of the Bonds should consult their own tax advisors with respect to the tax consequences of ownership of Bonds with original issue discount, including the treatment of Beneficial Owners who do not purchase such Bonds in the original offering to the public at the first price at which a substantial amount of such Bonds is sold to the public. Bonds purchased, whether at original issuance or otherwise, for an amount higher than their principal amount payable at maturity (or, in some cases, at their earlier call date) ( "Premium Bonds ") will be treated as having amortizable bond premium. No deduction is allowable for the amortizable bond premium in the case of bonds, like the Premium Bonds, the interest on which is excluded from gross income for federal income tax purposes. However, the amount of tax- exempt interest received, and a Beneficial Owner's basis in a Premium Bond, will be reduced by the amount of amortizable bond premium properly allocable to such Beneficial Owner. Beneficial Owners of Premium Bonds should consult their own tax advisors with respect to the proper treatment of amortizable bond premium in their particular circumstances. The Code imposes various restrictions, conditions and requirements relating to the exclusion from gross income for federal income tax purposes of interest on obligations such as the Bonds. The City and Hoag Hospital have made certain representations and have covenanted to comply with certain restrictions, conditions and requirements designed to ensure that interest on the Bonds will not be included in federal gross income. Inaccuracy of these representations or failure to comply with these covenants may result in interest on the Bonds being included in gross income for federal income tax purposes, possibly from the date of original issuance of the Bonds. The opinion of Bond Counsel assumes the accuracy of these representations and compliance with these covenants. Bond Counsel has not undertaken to determine (or to inform any person) whether any actions taken (or not taken) or events occurring (or not occurring), or any other matters coming to Bond Counsel's attention after the date of issuance of the Bonds may adversely affect the value of, or the tax status of interest on, the Bonds. Accordingly, the opinion of Bond Counsel is not intended to, and may not, be relied upon in connection with any such actions, events or matters. In addition, Bond Counsel has relied, among other things, on the opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, counsel to Hoag Hospital, regarding the current qualification of Hoag Hospital as an organization described in Section 501(c)(3) of the Code. Such opinion is subject to a number of qualifications and limitations. Bond Counsel has also relied upon representations of Hoag Hospital concerning Hoag Hospital's "unrelated trade or business" activities as defined in Section 513(a) of the Code. Neither Bond Counsel nor counsel to Hoag Hospital has given any opinion or assurance concerning Section 513(a) of the Code and neither Bond Counsel nor counsel to Hoag Hospital can give or has given any opinion or assurance about the future activities of Hoag Hospital, or about the effect of future changes in the Code, the applicable regulations, the interpretation thereof or the resulting changes in enforcement thereof by the IRS. Failure of Hoag Hospital to be organized and operated in accordance with the IRS's requirements for the maintenance of their status as organizations described in section 501(c)(3) of the Code, or to operate the facilities financed by the Bonds in a manner that is substantially related to Hoag Hospital's charitable purposes under Section 513(a) of the Code, may result in interest payable with respect to the Bonds being included in federal gross income, possibly from the date of the original issuance of the Bonds. Although Bond Counsel is of the opinion that interest on the Bonds is excluded from gross income for federal income tax purposes and is exempt from state of California personal income taxes, the ownership or disposition of, or the accrual or receipt of interest on, the Bonds may otherwise affect a Beneficial Owner's federal, OHS West:260651432.3 36 state or local tax liability. The nature and extent of these other tax consequences depends upon the particular tax status of the Beneficial Owner or the Beneficial Owner's other items of income or deduction. Bond Counsel expresses no opinion regarding any such other tax consequences. Future legislative proposals, if enacted into law, clarification of the Code or court decisions may cause interest on the Bonds to be subject, directly or indirectly, to federal income taxation or to be subject to or exempted from state income taxation, or otherwise prevent Beneficial Owners from realizing the full current benefit of the tax status of such interest. The introduction or enactment of any such future legislative proposals, clarification of the Code or court decisions may also affect the market price for, or marketability of, the Bonds. Prospective purchasers of the Bonds should consult their own tax advisors regarding any pending or proposed federal or state tax legislation, regulations or litigation, as to which Bond Counsel expresses no opinion. The opinion of Bond Counsel is based on current legal authority, covers certain matters not directly addressed by such authorities, and represents Bond Counsel's judgment as to the proper treatment of the Bonds for federal income tax purposes. It is not binding on the IRS or the courts. Furthermore, Bond Counsel cannot give and has not given any opinion or assurance about the future activities of the City or Hoag Hospital, or about the effect of future changes in the Code, the applicable regulations, the interpretation thereof or the enforcement thereof by the IRS. The City and Hoag Hospital have covenanted, however, to comply with the requirements of the Code. Bond Counsel's engagement with respect to the Bonds ends with the issuance of the Bonds, and, unless separately engaged, Bond Counsel is not obligated to defend the City, Hoag Hospital or the Beneficial Owners regarding the tax- exempt status of the Bonds in the event of an audit examination by the IRS. Under current procedures, parties other than the City, Hoag Hospital and their appointed counsel, including the Beneficial Owners, would have little, if any, right to participate in, the audit examination process. Moreover, because achieving judicial review in connection with an audit examination of tax- exempt bonds is difficult, obtaining an independent review of IRS positions with which the City or Hoag Hospital legitimately disagree, may not be practicable. Any action of the IRS, including but not limited to selection of the Bonds for audit, or the course or result of such audit, or an audit of bonds presenting similar tax issues may affect the market price for, or the marketability of, the Bonds, and may cause the City, Hoag Hospital or the Beneficial Owners to incur significant expense. APPROVAL OF LEGALITY Legal matters incident to the issuance of the Bonds are subject to the approving opinion of Orrick, Herrington & Sutcliffe LLP, as Bond Counsel to the City. Bond Counsel undertakes no responsibility for the accuracy, completeness or fairness of this Official Statement. Certain other legal matters will be passed upon for the City by the City Attorney, for Hoag Hospital by Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, for the Underwriter by its counsel, Foley & Lardner LLP, Chicago, Illinois, which also undertakes no responsibility for the accuracy, completeness or fairness of this Official Statement. From time to time Stradling Yocca Carlson & Rauth, a Professional Corporation, represents the Underwriter and the City in matters unrelated to the Bonds. INDEPENDENT AUDITORS The consolidated financial statements of Hoag Memorial Hospital Presbyterian and Affiliates as of the thirteen month period ended September 30, 2008 and the year ended August 31, 2007 and for the years then ended, included in APPENDIX B -1, have been audited by Ernst & Young LLP, independent auditors, as stated in their report included in APPENDIX B -1. INTERIM FINANCIAL STATEMENTS The consolidated financial statements of Hoag Memorial Hospital Presbyterian and Affiliates for the six - month periods ended March 31, 2009 and March 31, 2008, included in Appendix B -2, were compiled by management of Hoag Hospital and are unaudited. However, in the opinion of management of Hoag Hospital, all adjustments of a normal recurring nature necessary for a fair presentation of the financial statements have been OHS We t:260651432.3 37 included. Operating results for the six -month period ended March 31, 2009 are not necessarily indicative of the results which may be achieved for any future periods. LITIGATION Hoag Hospital and NHC There is no controversy or litigation of any nature now pending against Hoag Hospital or NHC or, to the knowledge of its officers, threatened, seeking to restrain or enjoin the issuance, sale, execution or delivery of the Bonds, or in any way contesting or affecting the validity of the Bonds, any proceedings of Hoag Hospital taken concerning the issuance or sale thereof, or the pledge or application of any moneys or security provided for the payment of the Bonds. There can be no assurance, however, that future litigation will not have a material adverse effect on Hoag Hospital, NHC or the Obligated Group as a whole. As with most health care providers, Hoag Hospital and NHC is each subject to certain legal actions that, in whole or in part, are not or may not be covered by insurance (or reinsurance as to certain self - insured risks) because of the type of action or amount or types of damages requested (e.g., punitive damages), because of a reservation of rights by an insurance carrier, or because the action has not proceeded to a stage that permits full evaluation. There are certain legal actions currently pending against Hoag Hospital known to management for which insurance coverage is uncertain or inapplicable for the above reasons. Management does not anticipate that any such suits will ultimately result in punitive damage awards or judgments in excess of applicable insurance limits, or if such awards or judgments were to be entered, that they would have a material adverse impact on the financial condition of Hoag Hospital, NHC or the Obligated Group. Other than as described above, there is no litigation of any nature now pending against Hoag Hospital or NHC, to the knowledge of each Member's respective officers, threatened, which, if successful, would materially adversely affect the operations or financial condition of Hoag Hospital, NHC or the Obligated Group. The City To the knowledge of the officers of the City, there is no litigation of any nature now pending or threatened against the City, restraining or enjoining the issuance, sale, execution or delivery of the Bonds, or in any way contesting or affecting the validity of the Bonds, any proceedings of the City taken concerning the issuance or sale thereof, the pledge or application of any moneys or security provided for the payment of the Bonds, or the existence or powers of the City relating to the issuance of the Bonds. RATINGS Hoag Hospital received ratings of [ "AA "] and [ "Aa3" 1 from Standard & Poor's Ratings Services, a Division of The McGraw -Hill Companies, Inc. ( "Standard & Poor's ") and Moody's Investors Service ( "Moody's), respectively, for the Bonds. Hoag Hospital has furnished to Standard & Poor's and Moody's certain information and materials concerning the Bonds and itself. No application was made to any other rating agency for the purpose of obtaining additional ratings on the Bonds. Any explanation of the significance of such ratings may only be obtained from the rating agency furnishing the same. Generally, rating agencies base their ratings on such information and materials and on investigations, studies and assumptions made by the rating agencies themselves. There is no assurance that the ratings mentioned above will remain in effect for any given period of time or that they might not be lowered or withdrawn entirely by the rating agencies, if in their judgment circumstances so warrant. The City has undertaken no responsibility either to bring to the attention of the Holder or beneficial owners of the Bonds any proposed change in or withdrawal of any rating or to oppose any such proposed revision or withdrawal. Any such downward change in or withdrawal of the ratings might have an adverse effect on the market price or marketability of the Bonds. OHS West: 260651432.3 38 UNDERWRITING The Bonds are being purchased by Citigroup Global Markets Inc. (the "Underwriter "). Pursuant to the Purchase Contract for the Bonds, the Underwriter has agreed to purchase the Bonds at a purchase price of $ (consisting of the aggregate principal amount of the Bonds of $[2009A PAR], [plus/less] net original issue [premium /discount] of $. less an underwriter's discount of $ ). The Purchase Contract for the Bonds provides that the Underwriter will purchase all of the Bonds, if any are purchased, and contains the agreements of Hoag Hospital to indemnify the Underwriter and the City against certain liabilities. Sale and purchase of the Bonds is contingent on a concurrent sale of the Additional 2009 Bonds. J.P. Morgan Securities Inc., one of the underwriters of the Bonds, has entered into an agreement (the "Distribution Agreement ") with UBS Financial Services Inc. for the retail distribution of certain municipal securities offerings at the original issue prices. Pursuant to the Distribution Agreement, J.P. Morgan Securities Inc. will share a portion of its underwriting compensation with respect to the Bonds with UBS Financial Services Inc. FINANCIAL ADVISOR TO HOAG HOSPITAL Kaufman, Hall & Associates, has served as financial advisor to Hoag Hospital in connection with the financing described in this Official Statement. Kaufman, Hall & Associates is a national consulting firm which acts as financial advisor to healthcare organizations, particularly in the areas of short- and long -term debt financings, mergers and acquisitions and overall capital planning. MISCELLANEOUS The foregoing and subsequent summaries or descriptions of provisions of the Bonds, the Bond Indenture, the Loan Agreement, the Master Indenture, Supplement No. [X] and Obligation No. [X] and all references to other materials not purporting to be quoted in full are only brief outlines of some of the provisions thereof and do not purport to summarize or describe all of the provisions thereof, and reference is made to said documents for full and complete statements of their provisions. The appendices attached hereto are a part of this Official Statement. Copies, in reasonable quantity, of the Bond Indenture, the Loan Agreement, the Master Indenture, Supplement No. [X] and Obligation No. [X] may be obtained during the offering period upon request directed to the Underwriter and, thereafter, upon request directed to the corporate trust office of the Bond Trustee. The information contained in this Official Statement has been compiled or prepared from information obtained from Hoag Hospital and official and other sources deemed to be reliable and, while not guaranteed as to completeness or accuracy, is believed to be correct as of the date of this Official Statement. The City furnished only the information contained under the headings "THE CITY" and "LITIGATION — The City" and, except for such information, makes no representation as to the adequacy, completeness or accuracy of this Official Statement or the information contained herein. Any statements involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. OHS West:260651432.3 39 This Official Statement has been delivered by the City and approved by Hoag Hospital. The Bond Trustee has not participated in the preparation of this Official Statement. This Official Statement is not to be construed as a contract or agreement among any of the City, Hoag Hospital and the purchasers or Holders of the Bonds. Approved: IQ(i7M &M!„ [013Ma0CelliUITA a 9M133'iW9rMl LM Senior Vice President and Chief Financial Officer CITY OF NEWPORT BEACH By: Authorized Officer OHS West260651432.3 40 APPENDIX A INFORMATION CONCERNING HOAG MEMORIAL HOSPITAL PRESBYTERIAN, NEWPORT HEALTHCARE CENTER, LLC AND OTHER AFFILIATES OHS West:260651432.3 APPENDIX B -1 FINANCIAL STATEMENTS OF HOAG MEMORIAL HOSPITAL PRESBYTERIAN AND AFFILIATES OHS Wes[: 260651432.3 APPENDIX B -2 HOAG MEMORIAL HOSPITAL PRESBYTERIAN AND AFFILIATES UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION Hoag Memorial Hospital Presbyterian and Affiliates Six -Month Periods Ended March 31, 2009 and March 31, 2008 OHS We t:260651432.3 APPENDIX C SUMMARY OF PRINCIPAL DOCUMENTS OHS West:260651432.3 I:\» olzl t] I:U FORM OF OPINION OF BOND COUNSEL [Date of Delivery of Bonds] City of Newport Beach Newport Beach, California 92658 Re: City of Newport Beach Revenue Bonds (Hoar Memorial Hospital Presbyterian), Series 2009A (Final Opinion) Ladies and Gentlemen: We have acted as bond counsel to the City of Newport Beach (the "City") in connection with the issuance of $[2009A PAR]* aggregate principal amount of its Revenue Bonds (Hoag Memorial Hospital Presbyterian), Series 2009A (the " Bonds "), issued pursuant to the provisions of Ordinance No. 85 -23, adopted by the City Council on August 26, 1985 amending Ordinance No. 84-4 adopted by the City Council on February 13, 1984, under Sections 3, 5 and 7 of Article XI of the Constitution of the State of California and Section 200 of Article II of the Charter of the City, a resolution adopted by the City Council on 2009 and a Bond Indenture dated as of June 1, 2009 (the "Bond Indenture "), between the City and Wells Fargo Bank, National Association, as bond trustee (the "Bond Trustee "). The Bond Indenture provides that the Bonds are issued for the purpose of making a loan of the proceeds thereof to Hoag Memorial Hospital Presbyterian (the "Corporation ") pursuant to a Loan Agreement dated as of June 1, 2009 (the "Loan Agreement "), between the City and the Corporation. Capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Bond Indenture. In such connection, we have reviewed the Bond Indenture; the Loan Agreement; the Tax Certificate and Agreement, dated the date hereof (the "Tax Certificate and Agreement"), between the City and the Corporation; opinions of counsel to the City and the Corporation; certificates of the City, the Bond Trustee, the Corporation, and others; and such other documents, opinions and matters to the extent we deemed necessary to render the opinions set forth herein. We have relied on the opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, counsel to the Corporation, regarding, among other matters, the current qualification of the Corporation as an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986 (the "Code "). We note that the opinion is subject to a number of qualifications and limitations. We have also relied upon representations of the Corporation regarding the use of the facilities financed with the proceeds of Bonds in activities that are not considered unrelated trade or business activities of the Corporation within the meaning of Section 513 of the Code. We note that the opinion of counsel to the Corporation does not address Section 513 of the Code. Failure of the Corporation to be organized and operated in accordance with the Internal Revenue Service's requirements for the maintenance of its status as an organization described in Section 501(c)(3) of the Code, or use of the bond - financed facilities in activities that are considered unrelated trade or business activities of the Corporation within the meaning of Section 513 of the Code, may result in interest on the Bonds being included in gross income for federal income tax purposes, possibly from the date of issuance of the Bonds. The opinions expressed herein are based on an analysis of existing laws, regulations, rulings and court decisions and cover certain matters not directly addressed by such authorities. Such opinions may be affected by actions taken or omitted or events occurring after the date hereof. We have not undertaken to determine, or to inform any person, whether any such actions are taken or omitted or events do occur or any other matters come to our attention after the date hereof. Accordingly, this opinion speaks only as of its date and is not intended to, and may not, be relied upon in connection with any such actions, events or matters. Our engagement with respect to the Bonds has concluded with their issuance, and we disclaim any obligation to update this letter. We have assumed the genuineness of all documents and signatures presented to us (whether as originals or as copies) and the due and legal execution and delivery thereof by, and validity against, any parties other than the City. We have assumed, without undertaking to verify, the accuracy of the factual matters represented, warranted or certified in the documents, and OHS West:260651432.3 D -I of the legal conclusions contained in the opinions, referred to in the second and third paragraphs hereof. Furthermore, we have assumed compliance with all covenants and agreements contained in the Bond Indenture, the Loan Agreement and the Tax Certificate and Agreement, including (without limitation) covenants and agreements compliance with which is necessary to assure that future actions, omissions or events will not cause interest on the Bonds to be included in gross income for federal income tax purposes. We call attention to the fact that the rights and obligations under the Bonds, the Bond Indenture, the Loan Agreement and the Tax Certificate and Agreement and their enforceability may be subject to bankruptcy, insolvency, reorganization, arrangement, fraudulent conveyance, moratorium and other laws relating to or affecting creditors' rights, to the application of equitable principles and to the exercise of judicial discretion in appropriate cases. We express no opinion with respect to any indemnification, contribution, penalty, choice of law, choice of forum, choice of venue, waiver or severability provisions contained in the foregoing documents, nor do we express any opinion with respect to the state or quality of title to or interest in any of the real or personal property described in or as subject to the lien of the Bond Indenture or the Loan Agreement or the accuracy or sufficiency of the description contained therein of, or the remedies available to enforce liens on, any such property. Finally, we undertake no responsibility for the accuracy, completeness or fairness of the Official Statement or other offering material relating to the Bonds and express no opinion with respect thereto. Based on and subject to the foregoing, and in reliance thereon, as of the date hereof, we are of the following opinions: 1. The Bonds constitute the valid and binding limited obligations of the City. 2. The Bond Indenture has been duly executed and delivered by, and constitutes the valid and binding obligation of, the City. The Bond Indenture creates a valid pledge, to secure the payment of the principal of and interest on the Bonds, of the Revenues and any other amounts held by the Bond Trustee in any fund or account established pursuant to the Bond Indenture, except the Rebate Fund and the Bond Purchase Fund, subject to the provisions of the Bond Indenture. 3. The Loan Agreement has been duly executed and delivered by, and constitutes the valid and binding agreement of, the City. 4. The Bonds are not a lien or charge upon the funds or property of the City except to the extent of the aforementioned pledge. Neither the faith and credit nor the taxing power of the City, the State of California or of any political subdivision thereof is pledged to the payment of the principal of or interest on the Bonds. The Bonds are not a debt of the State of California, and said State is not liable for the payment thereof. 5. Interest on the Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Code and is exempt from State of California personal income taxes. Interest on the Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although we observe that it is included in adjusted current earnings when calculating corporate alternative minimum taxable income. We express no opinion regarding other tax consequences related to the ownership or disposition of, or the accrual or receipt of interest on, the Bonds. Faithfully yours, ORRICK, HERRINGTON & SUTCLIFFE t.1.r per OHS Wesk260651432.3 D -2 APPENDIX E FORM OF CONTINUING DISCLOSURE CERTIFICATE This Continuing Disclosure Certificate (the "Disclosure Certificate ") is executed and delivered by Hoag Memorial Hospital Presbyterian ( "Hospital "), a nonprofit public benefit corporation duly organized and existing under the laws of the State of California in connection with the execution and delivery of $[2009A PAR] aggregate principal amount of City of Newport Beach Revenue Bonds (Hoag Memorial Hospital Presbyterian) Series 2009A (the "Bonds "). The Bonds are being issued pursuant to a bond indenture, dated as of June 1, 2009 (the "Indenture "), between the City of Newport Beach (the "City") and Wells Fargo Bank, National Association, as Trustee. The proceeds of the Bonds are being loaned by the City to Hospital pursuant to a loan agreement, dated as of June 1, 2009 (the "Loan Agreement "), between the City and the Hospital. The Hospital covenants and agrees as follows: SECTION 1. Purpose of the Disclosure Certificate. This Disclosure Certificate is being executed and delivered by the Hospital for the benefit of the Holders and Beneficial Owners of the Bonds, and to assist the Participating Underwriter in complying with the Rule. The Hospital acknowledges that the City has not undertaken any responsibility with respect to any reports, notices or disclosures provided or required under this Disclosure Certificate, and has no liability to any person, including any Holder or Beneficial Owner of the Bonds, with respect to the Rule. This Disclosure Certificate shall not be deemed to create any monetary liability on the part of the City or the Hospital to any persons, including Holders and Beneficial Owners of the Bonds based on the Rule. The sole remedy in the event of any failure of the Hospital or its Dissemination Agent to comply herewith shall be an action to compel performance of any act required hereunder as detailed in Section 10 hereof. SECTION 2. Definitions. In addition to the definitions set forth in the Indenture, which apply to any capitalized term used in this Disclosure Certificate unless otherwise defined in this Section, the following capitalized terms shall have the following meanings: "Annual Report" shall mean any Annual Report provided by the Hospital pursuant to, and as described in, Section 3 and 4 of this Disclosure Agreement. "Beneficial Owner" or "Holder" shall mean any person which (a) has the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any Bonds (including persons holding Bonds through nominees, depositories or other intermediaries), or (b) is treated as the owner of any Bonds for federal income tax purposes. "Dissemination Agent" shall mean any Dissemination Agent designated in writing by the Hospital. "Listed Events" shall mean any of the events listed in Section 5(a) of this Disclosure Certificate. "National Repository" shall mean any Nationally Recognized Municipal Securities Information Repository for purpose of the Rule. The National Repositories currently approved by the Securities and Exchange Commission are listed at htti): / /www /sec.gov /info /municipal/nrmsir.htm. "Participating Underwriter" shall mean the original underwriter of the Bonds required to comply with the Rule in connection with the offering of the Bonds. "Repository" shall mean any Nationally Recognized Municipal Securities Information Repository for purpose of the Rule. Effective July 1, 2009, the Repository approved by the Securities and Exchange Commission is the Municipal Securities Rulemaking Board through its Electronic Municipal Market Access ( "EMMA ") website. "Rule" shall mean Rule 15c2 12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time. SECTION 3. Provision of Annual Reports. The Hospital shall, or shall cause the Dissemination Agent to, pot later than six months following the end of its fiscal year (which fiscal year as of the date hereof ends OHS West:260651432.3 E -1 September 30, 2009), commencing with the report for the 2009 fiscal year, provide to the Repository an Annual Report which is consistent with the requirements of Section 4 of this Disclosure Certificate. In each case, the Annual Report may be submitted as a single document or as separate documents comprising a package, and may cross - reference other information as provided in Section 4 of this Disclosure Certificate; provided that audited financial statements may be submitted separately from the balance of the Annual Report and later than the date required above for the filing of the Annual Report if they are not available by that date. If the Hospital's fiscal year changes, it shall give notice of such change in the same manner as for a Listed Event under Section 4. SECTION 4. Content of Annual Reports. The Hospital's Annual Report shall contain or include by reference the following: (a) The audited financial statements of the Obligated Group (which may be the audited financial statements of the Hospital consolidated with its Wholly -Owned Subsidiaries (as defined in Appendix A of the Official Statement) and/or affiliates for the prior fiscal year, audited by a firm of nationally recognized independent certified public accountants approved by the Hospital as having been prepared in accordance with generally accepted accounting principles (except in the case of special purpose financial statements, for required consolidations). If such audited financial statements are not available by the time the Annual Report is required to be filed pursuant to Section 3(a), the Annual Report shall contain unaudited financial statements in a format similar to the financial statements contained in the Official Statement (defined below), and the audited financial statements shall be filed in the same manner as the Annual Report when they become available. (b) Unless a single financial statement (including a single special purpose financial statement) is delivered pursuant to clause (a) above for the Obligated Group, an unaudited combined balance sheet and an unaudited combined statement of operations for such fiscal year for the Obligated Group, prepared by the Hospital; provided, if the Hospital is the only Member of the Obligated Group during the applicable fiscal year, such unaudited statement may include operations of the Hospital and its Wbolly -Owned Subsidiaries. (c) An update of the following information contained in Appendix A to the Official Statement, dated 2009 (the "Official Statement"), related to the Bonds: [BDV: review Appendix A.] 1. List of Obligated Group Members; 2. Updated information provided in tabular form under the caption "MEDICAL STAFF "; 3. Updated information provided in tabular form under the heading "Sources of Patient Service Revenue," for the most recent fiscal year; 4. Updated information provided in tabular form under the heading "Historical Utilization;" 5. Updated information provided in tabular form under the heading "Capitalization" presenting the actual capitalization of the Hospital and its Wholly -Owned Subsidiaries for the most recent fiscal year; 6. Updated information provided in tabular form under the heading "Estimated Debt Service Coverage," with no pro forma adjustments, for the Hospital and its Wholly- Owned Subsidiaries for the most recent fiscal year; and Number of employees and percentage of employees subject to collective bargaining agreements. OHS West:260651432.3 E -2 SECTION 5. Reporting of Significant Events. (a) The Hospital shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Bonds, if material: 1. principal and interest payment delinquencies; 2. non- payment related defaults; 3. unscheduled draws on debt service reserves reflecting financial difficulties; 4. unscheduled draws on credit enhancements reflecting financial difficulties; 5. substitution of credit or liquidity providers or their failure to perform; 6. adverse tax opinions or events affecting the tax- exempt status of the Bonds; 7, modifications to rights of Bondholders; 8. optional, contingent or unscheduled bond calls; 9. defeasances; 10. release, substitution or sale of property securing repayment of the Bonds; and 11. rating changes. (b) The Hospital shall file, or cause to be filed, such notice of the occurrence of a Listed Event, which is material, with the Repository. SECTION 6. Termination of Reporting Obligation. The Hospital's obligations under this Disclosure Certificate shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Outstanding Bonds or if less than all of the Bonds are defeased, with respect to those Bonds. If the Hospital's obligations under the Loan Agreement are assumed in full by some other entity, such person shall be responsible for compliance with this Disclosure Certificate in the same manner as if it were the Hospital and the Hospital shall have no further responsibility hereunder. If such termination or substitution occurs prior to the final maturity of the Bonds, the Hospital shall give notice of such termination or substitution in the same manner as for a Listed Event under Section 5. SECTION 7. Dissemination Agent. The Hospital may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Certificate, and may discharge any such Dissemination Agent, with or without appointing a successor Dissemination Agent. The Dissemination Agent shall not be responsible in any manner for the content of any notice or report prepared by the Hospital pursuant to this Disclosure Certificate. The Dissemination Agent may resign by providing thirty (30) days written notice to the Hospital. If at any time there is not any other designated Dissemination Agent, the Hospital shall be the Dissemination Agent. The initial Dissemination Agent shall be the Hospital. SECTION 8. Amendment: Waiver. Notwithstanding any other provision of this Disclosure Certificate, the Hospital may amend this Disclosure Certificate (and the Dissemination Agent shall agree to any amendment so requested by the Hospital which does not impose any greater duties, nor greater risk of liability, on the Dissemination Agent) and any provision of this Disclosure Certificate may be waived, provided that the following conditions are satisfied (a) If the amendment or waiver relates to the provisions of Sections 3, 5(a) or 8, it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law or change in the identity, nature or status of an obligated person with respect to the Bonds or the type of business conducted; (b) The undertaking, as amended or taking into account such waiver, would, in the opinion of nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the original issuance of the Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and (c) The amendment or waiver either (i) is approved by the Holders of the Bonds in the same manner as provided in the Indenture for amendments to the Indenture with the consent of Holders, or (ii) does not, in OHS West:260651432.3 E -3 the opinion of nationally recognized bond counsel, materially impair the interests of the Holders or Beneficial Owners of the Bonds. In the event of any amendment or waiver of a provision of this Disclosure Certificate, the Hospital shall describe such amendment in the next Annual Report, and shall include, as applicable, a narrative explanation of the reason for the amendment or waiver and its impact on the type (or, in the case of a change of accounting principles, on the presentation) of financial information or operating data being presented by the Hospital. In addition, if the amendment relates to the accounting principles to be followed in preparing financial statements, (i) notice of such change shall be given in the same manner as for a Listed Event under Section 5, and (ii) the Annual Report for the year in which the change is made should present a comparison in narrative form and also, if feasible, in quantitative form) between the financial statements as prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles. SECTION 9. Additional Information. Nothing in this Disclosure Certificate shall be deemed to prevent the Hospital from disseminating any other information, using the means of dissemination set forth in this Disclosure Certificate or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Certificate. If the Hospital chooses to include any information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is specifically required by this Disclosure Certificate, the Hospital shall have no obligation under this Disclosure Certificate to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event. SECTION 10. Default. In the event of a failure of the Hospital or the Dissemination Agent to comply with any provision of this Disclosure Certificate, the Trustee may, (and, at the written request of the Participating Underwriter or the Holders of at least twenty-five percent (25 %) aggregate principal amount of Outstanding Bonds, shall) or any Holder or Beneficial Owner of the Bonds may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the Hospital or the Dissemination Agent, as the case may be, to comply with its obligations under this Disclosure Certificate. A default under this Disclosure Certificate shall not be deemed an Event of Default under the Indenture or Loan Agreement, and the sole remedy under this Disclosure Certificate in the event of any failure of the Hospital or the Dissemination Agent to comply with this Disclosure Certificate shall be an action to compel performance. SECTION 11. Notices. Any notices or communications to the Hospital may be given as follows: One Hoag Drive P.O. Box 6100 Newport Beach, CA 92658 -6100 Attention: President The Hospital may, by written notice, designate a different address to which subsequent notices or communications should be sent. SECTION 12. Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of the City, the Dissemination Agent (if any), the Participating Underwriter and Holders and Beneficial Owners from time to time of the Bonds, and shall create no rights in any other person or entity. SECTION 13. Governine Law. The laws of the State of California shall govern the interpretation hereof and any right or liability arising hereunder. Dated: , 2009. HOAG MEMORIAL HOSPITAL PRESBYTERIAN Authorized Representative OHS WesC260651432.3 E -4 APPENDIX F BOOK -ENTRY SYSTEM THE INFORMATION PROVIDED IN THIS APPENDIX D HAS BEEN PROVIDED BY DTC. NO REPRESENTATION IS MADE BY THE CITY, HOAG HOSPITAL, NHC, THE UNDERWRITER OR THE BOND TRUSTEE AS TO THE ACCURACY OR ADEQUACY OF SUCH INFORMATION PROVIDED BY DTC OR AS TO THE ABSENCE OF MATERIAL ADVERSE CHANGES IN SUCH INFORMATION SUBSEQUENT TO THE DATE OF THIS REOFFERING CIRCULAR. The Depository Trust Company ( "DTC ") New York, NY, acts as securities depository for the Bonds. The Bonds will be offered as fully registered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully registered Bond certificate will be issued for each Series of the Bonds, each in the aggregate principal amount of such Series, and deposited with DTC. DTC, is a limited - purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934, as amended. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non -U.S. equity issues, corporate and municipal debt issues and money market instruments (from over 100 countries) that DTC's participants ( "Direct Participants") deposit with DTC. DTC also facilitates the post -trade settlement among Direct Participants of sales and other securities transactions in deposited securities through electronic computerized book -entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non -U.S. securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. DTC is a wholly owned subsidiary of The Depository Trust & Clearing Corporation ( "DTCC "). DTCC is the holding company of DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others, such as both U.S. and non -U.S. securities brokers and dealers, banks, trust companies and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ( "Indirect Participants "). DTC has Standard & Poor's highest rating: AAA. The DTC rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com and www.dtc.ore. Purchases of the Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC's records. The ownership interest of each actual purchaser of each Bond (`Beneficial Owner ") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are however expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their beneficial ownership interests in the Bonds, except in the event that use of the book -entry system for the Bonds is discontinued. To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC's partnership nominee, Cede & Co. or such other name as may be requested by an authorized representative of DTC. The deposit of the Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC's records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. OHS Wcst:260651432.3 F -I Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of the Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, defaults, and proposed amendments to the bond documents. For example, Beneficial Owners of the Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the Bond Trustee and request that copies of notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of a Series of the Bonds are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in the Bonds of such Series to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the Bonds unless authorized by a Direct Participant in accordance with DTC's MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the City as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts the Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Principal, premium, redemption proceeds and interest payments on the Bonds will be made to Cede & Co. or such other nominee as may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts, upon DTC's receipt of funds and corresponding detail information from the City or the Bond Trustee, on a payment date in accordance with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participants and not of DTC, its nominee, the Bond Trustee, Hoag Hospital, the Members of the Obligated Group, or the City, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal, premium, redemption proceeds and interest to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Bond Trustee. Disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of the Direct and Indirect Participants. DTC may discontinue providing its services as depository with respect to any Series of the Bonds at any time by giving reasonable notice to the City or the Bond Trustee. Under such circumstances, in the event that a successor depository is not obtained, Bond certificates are required to be printed and delivered. The City may decide to discontinue use of the system of book -entry-only transfers through DTC (or a successor securities depository). In that event, Bond certificates for such Bonds will be printed and delivered to DTC. OHS West260651432.3 F -2 THE BOND TRUSTEE, AS LONG AS A BOOK -ENTRY ONLY SYSTEM IS USED FOR THE BONDS OF A SERIES, WILL SEND ANY NOTICE OF REDEMPTION OR OTHER NOTICES TO OWNERS OF SUCH SERIES ONLY TO DTC. ANY FAILURE OF DTC TO ADVISE ANY PARTICIPANT, OR OF ANY PARTICIPANT TO NOTIFY ANY BENEFICIAL OWNER, OF ANY SUCH NOTICE AND ITS CONTENT OR EFFECT WILL NOT AFFECT THE VALIDITY OR SUFFICIENCY OF THE PROCEEDINGS RELATING TO THE REDEMPTION OF THE BONDS OF SUCH SERIES CALLED FOR REDEMPTION OR OF ANY OTHER ACTION PREMISED ON SUCH NOTICE. The City, Hoag Hospital, NHC, and the Bond Trustee cannot and do not give any assurances that DTC will distribute to Participants, or that Participants or others will distribute to the Beneficial Owners, payments of principal of and interest and premium, if any, on the Bonds paid or any redemption or other notices or that they will do so on a timely basis or will serve and act in the manner described in this Official Statement. None of the City, Hoag Hospital, NHC or the Bond Trustee is responsible or liable for the failure of DTC or any Direct Participant or Indirect Participant to make any payments or give any notice to a Beneficial Owner with respect to the Bonds or any error or delay relating thereto. OHS West260651432.3 F -3