HomeMy WebLinkAboutResolution - 6011 - Revenue Bond Procceds - LHFDC - Reimburse Health Facilities Costs - 09_24_1998Resolution No. 6011
Item No. 30
September 24, 1998
RESOLUTION CONCERNING THE USE OF THE
PROCEEDS OF REVENUE BONDS ISSUEI)
BY THE LUBBOCK HEALTH FACILITIES DEVELOPMENT
CORPORATION TO REIMBURSE CERTAIN COSTS AND
TO FINANCE CERTAIN COSTS RELATING
TO HEALTH FACILITIES
WHEREAS, the Lubbock Health Facilities Development Corporation (the
"Issuer") was created by the City of Lubbock, Texas ("City of Lubbock") pursuant to the
provisions of the Health Facilities Development Act, Chapter 221, Texas Health and
Safety Code (the "Act");
WHEREAS, it has been proposed that the Issuer issue its limited obligation revenue
bonds (the "Bonds") and loan the proceeds thereof to St. Joseph Health System, a non-
profit benefit corporation duly organized and existing under the laws of the State of
Texas (the "Corporation"), to defease certain outstanding, indebtedness assumed by the
Corporation which was originally incurred to finance or refinance improvements and
additions to hospital facilities which were, at the time of the incidence of such debt,
owned and operated by Methodist Hospital, Lubbock, Texas (the "Project).
WHEREAS, pursuant to Section 147(f) of the Internal Revenue Code of 1986, as
amended (the "Code"), the Issuer has conducted a public hearing (the "Hearing") in the
City of Lubbock following reasonable public notice with respect to the Bonds and the
captioned project and has presented to the City of the City of Lubbock (the "Governing
Body") a summary of the proceedings from the Hearing;
WHEREAS, in order to satisfy the requirements of Section 147(f) of the Code, it
is necessary for the Governing Body or the Mayor, as the chief executive officer of the
City of Lubbock, to approve the Bonds after the Hearing has been held;
WHEREAS, it is deemed necessary and advisable that this Resolution be adopted;
THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY
OF LUBBOCK, TEXAS THAT:
SECTION 1. This Resolution is adopted for the purpose of satisfying the
requirements of the Issuer's articles of incorporation and by-laws andthe conditions and
requirements of Section 147(f) of the Code, the regulations promulgated thereunder, and
any other applicable requirements.
SECTION 2. The Governing Body hereby receives and accepts of the summary
of the proceedings from the Hearing.
SECTION 3. The Bonds, which may be issued in one or more series, are hereby
approved pursuant to Section 147(f) of the Code, the Issuer's articles of incorporation and
bylaws and other applicable laws, such Bonds to be issued in the maximum aggregate
face amount of $230,000,000, to provide funds to defease certain outstanding
indebtedness assumed by the Corporation and pay costs as described in the notice of
hearing.
SECTION 4. This approval is riot to be construed as a financial undertaking by
the City of Lubbock, and the Bonds shall never constitute an indebtedness or pledge of
the City of Lubbock within the meaning of any constitutional or statutory provision, and
the owners of the Bonds shall never be paid in whole or in part out of any funds raised or
to be raised by taxation or any other revenues of the City of Lubbock. The City of
Lubbock shall have no responsibility to furnish any person any continuing disclosure
information with respect to the Bonds.
SECTION 5. The Mayor and City Secretary of the City of Lubbock and each
councilmember of the City of Lubbock are hereby authorized, jointly and severally, to
execute and deliver such endorsements, instruments, certificates, documents, or papers
necessary and advisable to carry out the intent and purposes of this Resolution.
SECTION 6. This Resolution shall take effect immediately from the after its
adoption.
Passed by the City Council this 24th day of September , 1998.
DY S ON, MAYOR
ATTEST:
1"a�jma'
Ka a arnell, City Secretary
APPROVED AS TO CONTENT:
Aaosqueda
of Management Services
APPROVED AS TO FORM:
Anita Burgess, City Attorney
cr\ccdoc\ResoUseProccedHealthFac.RES.doc
September 17, 1998
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Resolution No. 6011
Item No. 30
September 24, 1998
NOTICE OF INTENTION TO ISSUE BONDS
STATE OF TEXAS §
CITY OF LUBBOCK §
LUBBOCK HEALTH FACILITIES §
DEVELOPMENT CORPORATION §
NOTICE IS HEREBY GIVEN TO THE CITY COUNCIL OF THE CITY OF LUBBOCK,
TEXAS, PURSUANT TO SECTION 221.062 OF THE TEXAS HEALTH AND SAFETY CODE
THAT ON OCTOBER 1, 1998, or as soon thereafter as possible, the Lubbock Health Facilities
Development Corporation (the "Issuer") intends to issue its REVENUE BONDS (ST. JOSEPH
HEALTH SYSTEM) SERIES 1998 (the "Bonds") in an aggregate principal amount not to exceed
$230,000,000 with a maximum stated maturity of not later than October 1, 2028 in accordance with
a Bond Indenture between the Issuer and Norwest Bank Texas, N.A., as trustee.
I. THE HEALTH FACILITIES
The proceeds of the Bonds will be used for the defeasance of the Lubbock Health Facilities
Development Corporation Revenue Bonds issued for the benefit of Methodist Hospital, Lubbock
("Methodist") in 1987, 1990 and 1993 in a remaining outstanding principal amount of $215,965,000
as well as the defeasance of additional debt of Methodist in the remaining outstanding principal
amount of $7,095,000. The proceeds of all of the debt which is proposed to be defeased, were used
to finance or refinance improvements and additions to the hospital facilities which were, at the time
of the incurrence of such` debt, owned and operated by Methodist and which are now owned and
operated by Covenant Health System, a non-profit corporation organized under the laws of the State
of Texas, ("CHS")"which is, in turn, controlled by the St. Joseph Health System, a nonprofit
corporation organized and existing under the laws of the State of California ("SJHS"). SJHS is
qualified to do business in the State of Texas. The principal addresses of the hospital facilities which
are being refinanced includes 361919°i Street for the main hospital, 2002 Miami Ave. for the School
of Nursing and related facilities, the corner of 21 ' and Louisville for the Knipling Education Center
and, the West Parking Garage, the corner of 2 1 " and Knoxville for the Lifestyles Center and East
'Parking Garage and 3610 21 g Street for the Children's Hospital (a total area including approximately
21.84 acres) all of which addresses are in Lubbock, Texas 79410. All such facilities are located
within the city limits of the City of Lubbock, Texas. In addition, the proceeds of the Bonds will be
used to pay underwriting, legal and other fees and costs relating to the issuance of the Bonds.
II. PROJECT COSTS
The total projected cost of the project as described above will not exceed $230,000,000.
Expenses associated with issuance of the Bonds will not exceed $5,000,000.
III. NECESSITY
Financing the project by the defeasance of the debt as described above is necessary in order
to reduce the cost of health facilities necessary to promote the present and prospective health, safety
and general welfare of the people of the City of Lubbock, Texas, and the State of Texas and to
improve the adequacy, cost, and accessibility of health care to the general public.
IV. USER
The user of the hospital facility being financed and refinanced through the issuance of the
Bonds is CHS which is controlled by SJHS. It is proposed that SJHS will be the Borrower under the
Loan Agreement relating to the Bonds.
SIGNED AND SEALED thVi , 1998.
LUBBOCK HEALTH FACILITIES
DEVELOPMENT CORPORATION
w
w
esident, Board of Directors
By:
Secretary, Board of Directors
FILED, this &1% day of 1998, with the City Council of the City of
Lubbock, Texas.
CITY OF LUBBOCK,
By:
Ci ecretary
[Seal]
Y:V�OR�11301L.LL'fII.TSrig01
4y..31. 191!
516489.1/892864
TEXAS
Resolution No. 6011
Item No. 30
September 24, 1998
MINUTES AND CERTIFICATION
On September 24, 1998, the City Council (the "Governing Body") of the City of Lubbock,
Texas, convened in regular session in the City Hall,1625 13' Street, Lubbock, Texas at which a duly
constituted quorum was present. Whereupon among other business transacted at the meeting, a
written
RESOLUTION CONCERNING THE USE OF THE
PROCEEDS OF REVENUE BONDS ISSUED
BY THE LUBBOCK HEALTH FACILITIES DEVELOPMENT
CORPORATION TO REIMBURSE CERTAIN COSTS AND
TO FINANCE CERTAIN COSTS RELATING
TO HEALTH FACILITIES
(the "Resolution") was duly introduced for the consideration of the Governing Body and discussed.
It was duly moved and seconded that the Resolution be adopted; said motion, carrying with it the
adoption of the Resolution, prevailed and carried by a majority vote of the Council.
The foregoing is a true and correct record of the action taken, and the attached copy of the
Resolution is hereby certified to be a correct copy of an official copy thereof, duly signed by the
appropriate officers(s), on file among the official records of the Governing Body, on this September
24, 1998.
BY:
City e retary, City of Lubbock, Texas
[SEAL]
CERTIFICATE OF PUBLIC HEARING
I, the undersigned, hereby certify in connection with the issuance by the Lubbock Health
Facilities Development Corporation (the "Issuer") of its Revenue Bonds (St. Joseph Health System)
Series 1998 (the "Bonds"), as follows:
1. I am the General Counsel of the Issuer and I have been duly authorized to conduct
a public hearing on the issuance of the Bonds to provide funds to defease certain outstanding
indebtedness assumed by St. Joseph Health System, a nonprofit public benefit corporation duly
organized and existing under the laws of the State of California and qualified to do business in the
State of Texas (the "Corporation"), and pay the costs of issuance of the Bonds.
2. Such hearing was conducted by me in accordance with published notice commencing
at 5:00 P.M. on Monday, September 21, 1998, at Room 103 (Committee Room), City Hall, 1625
13th Street, Lubbock, Texas 79401 which facilities were open to the public for purposes of the
hearing.
3. No members of the public appeared for the hearing even though I waited until 5:27
p.m. CDT for any persons to appear and offer comments or seek information. A representative of
the Corporation was available to answer questions concerning the financing.
4. At the hearing, no persons presented comments orally or in writing.
5. I imposed no time limitations on any public comments.
6. No continents were received by me in writing prior to or after the hearing.
IN WITNESS WHEREOF, I have hereunto set my hand this 22nd day of September, 1998.
Printed Name: Don Dennis
HEARING.RPT/892864
No comments were made or received.
M:ILHFDC\STJOS98\HEARING.RPT
September 22, 1998
HEARING.RPT/892864
• $ B&W
= Draft #2
a .2 9/10/98
PRELIMINARY OFFICIAL STATEMENT DATED OCTOBER _,1998
u �
o NEW ISSUE - BOOK ENTRY ONLY
o In the opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel, based upon an analysis of existing laws, regulations, rulings and court
a decisions, and assuming, among other matters, compliance with certain covenants, Interest on the Bonds is excluded from gross income for federal
w income tax purposes under Section 103 of the Internal Revenue Code of 1986. In the further opinion of Bond Counsel, interest on the Bonds is not a
specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Bond Counsel observes that such
interest is included in adjusted current earnings when calculating corporate alternative minimum taxable income. Bond Counsel is of the further
opinion that interest on the Bonds is exempt from taxation by the State of Texas, and any municipality or other political subdivision of the State of Texas,
excluding inheritance tax. Bond Counsel expresses no opinion regarding an other tax consequences related to the ownership or disposition o , or the
�� g� P P 8 g Y 4 P P f
• 2 accrual or receipt of interest on, the Bonds. See "Tax Matters " herein.
0
u 3
oLubbock Health Facilities Development Corporation
— c Revenue Bonds
y (St. Joseph Health System),
Series 1998
R o
,..• y
E r Dated: October 1, 1998
_ u
o The Bonds are being executed and delivered as fully registered bonds and will be registered in the name of Cede & Co. as nominee of The
c Depository Trust Company, New York, New York ("DTC"). Beneficial owners of Bonds will not receive physical certificates representing the Bonds
purchased, but will receive a credit balance on the books of the nominees of such purchasers. So long as Cede & Co. is the registered owner of the
Bonds, principal, premium, if any, and interest on the Bonds will be paid by the Trustee to DTC, which will in tum remit such principal, premium, if
any, and interest to its participants for subsequent disbursement to the beneficial owners of the Bonds as described herein.
c'
The Bonds are subject to optional, mandatory and extraordinary redemption prior to their respective maturity dates as described herein.
u c
E • The Issuer's obligations under the Bonds are limited obligations of the Issuer, secured under the provisions of the Indenture, and are payable
usolely from Loan Repayments and other moneys and assets received by the Issuer from St. Joseph Health System (the "Corporation") from payments
E = made by the Obligated Group under Obligation No. 33, issued under the Master Indenture described herein, and from certain other moneys held under
the Indenture. THE ISSUER SHALL NOT BE OBLIGATED TO PAY THE PRINCIPAL OF THE BONDS, OR THE INTEREST, OR THE
c PREMIUM, IF ANY, THEREON EXCEPT FROM PAYMENTS MADE TO THE ISSUER FOR SUCH PURPOSE, AND NEITHER THE FAITH
AND CREDIT NOR THE TAXING POWER OF THE STATE OF TEXAS OR THE CITY OF LUBBOCK IS PLEDGED TO THE PAYMENT OF
THE PRINCIPAL OF, PREMIUM IF ANY OR INTEREST ON THE BONDS. THE BONDS ARE NOT, IN ANY RESPECT, OBLIGATIONS OF
E THE STATE OF TEXAS OR THE CITY OF LUBBOCK AND SAID STATE AND CITY ARE NOT LIABLE FOR THE PAYMENT THEREOF.
THE ISSUER HAS NO TAXING POWER.
O u
y This cover page contains information for general reference only. It is not intended as a summary of this transaction. Potential investors are advised to
u y read the entire Official Statement to obtain information essential to making an informed investment decision.
� u
o MATURITY SCHEDULE'
R qu
e ca $ Serial Bonds
Maturity Principal interest Price or Maturity Principal Interest Price or
79 „ (July 1) Amount Rate Yield (July 1) Amount Rate Yield
c
cc 1999 S 2006 S
S 2000 2007
c � .E 2001 2008
c 2002 2009
9 o,� 2003 2010
120
>, 2004 2011
.E .0o y 2005
d o >+
S _% Term Bonds due July I, 20_— Priced to Yield %
o o S _% Term Bonds due July 1, 20 _ — Priced to Yield %
(Plus accrued interest from October 1, 1998)
u
u o
The Bonds are offered when, as and if received by the Underwriters, subject to prior sale and to the approval of validity by Orrick, Herrington &
Sutcliffe LLP, Sacramento, California, Bond Counsel, the delivery of the approving opinion of the Attorney General of the State of Texas and the
approval of certain legal matters by Fulbright & Jaworski, Austin, Texas, Special Texas Counsel, and the approval of certain matters for the Issuer by its
0 counsel, the approval of certain matters for the Corporation and the other California Obligated Group Members and the Texas Obligated
Group Members by .. their P, Dallas,
Texas, and for the U derwriters by their Counse counsels, ecnFrancisco,�SFrancisco, California
Brown& Wood LLP San Calt orniaan It expected that the Bonds to book - entry form will
c o yp
c be available for delivery to The Depository Trust Company in New York, New York, on or about _ 1998.
n R w Morgan Stanley Dean Witter
c o, Date: 1998.
• Preliminary, subject to change.
SFLiSI/I047260/3/14040l0034S'duffvn!Sentember 10. IPO - 5:01
1k
This Official Statement does not constitute an offer to sell the Bonds or the solicitation of an offer
to buy, nor shall there be any sale of the Bonds by any person in any state or other jurisdiction to any
person to whom it is unlawful to make such offer, solicitation or sale in such state or jurisdiction. No
dealer, salesman or any other person has been authorized to give any information or to make any
representation other than those contained herein in connection with the offering of the Bonds and, if given
or made, such information or representation must not be relied upon.
The information set forth herein under the caption "The Issuer" has been furnished by the Issuer
and is believed to be reliable, but it is not guaranteed as to accuracy or completeness and is not to be
construed as a representation by the Underwriters. All other information set forth herein has been
obtained from the Corporation, DTC and other sources that are believed to be reliable, but it is not
guaranteed as to accuracy or completeness and is not to be construed as a representation by the Issuer or
the Underwriters. The information and expressions of opinion herein are subject to change without notice
and neither the delivery of this Official Statement nor any sale of the Bonds made hereunder shall, under
any circumstances, create any indication that there has been no change in the affairs of the Issuer, the
Members of the Obligated Group or DTC since the date hereof.
IN CONNECTION WITH THE OFFERING OF THE BONDS, THE UNDERWRITER MAY
OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET
PRICE OF THE BONDS OFFERED HEREBY AT LEVELS ABOVE THAT WHICH MIGHT
OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
SFLIB 1 /1047260/3/14040/00348/duffyp/September 10, 1998 - 5:01
TABLE OF CONTENTS
Page
INTRODUCTORY STATEMENT...............................................................................................................3
Purpose of this Official Statement.......................................................................................................3
The Corporation and the Obligated Group Members...........................................................................3
TheMaster Indenture...........................................................................................................................4
Estimated Uses and Sources of Funds.................................................................................................6
TheLoan Agreement............................................................................................................................6
THEISSUER................................................................................................................................................6
THEBONDS.................................................................................................................................................7
General................................................................................................................................................. 7
Optional and Mandatory Redemption of Bonds..................................................................................7
ExtraordinaryRedemption...................................................................................................................8
Notice of Redemption; Effect of Redemption......................................................................................8
Book -Entry System.............................................................................................................................. 8
SECURITY FOR THE BONDS.................................................................................................................10
General...............................................................................................................................................10
TheMaster Indenture......................................................................................................................... I I
OUTSTANDING OBLIGATIONS OF THE OBLIGATED GROUP......................................................13
THEPROJECT...........................................................................................................................................13
The1987 Bonds.................................................................................................................................14
The1990 Bonds.................................................................................................................................14
The1991 Bonds.................................................................................................................................14
The1993 Bonds.................................................................................................................................15
ESTIMATED SOURCES AND USES OF FUNDS...................................................................................16
CONTINUINGDISCLOSURE..................................................................................................................16
TheObligated Group..........................................................................................................................16
TheIssuer...........................................................................................................................................19
BONDHOLDERS' RISKS....................................................................................................I.....................19
General...............................................................................................................................................19
Federal and State Legislation.............................................................................................................19
Tax -Exempt Status..........................................................................................................................'.20
TheMedicare Program.......................................................................................................................21
TheMedicaid Program.......................................................................................................................24
CaliforniaMedi-Cal Program............................................................................................................25
TexasMedicaid Program...................................................................................................................26
IndigentCare ......................................................................................................................................26
Private Health Plans and Managed Care ............................................................................................27
Physician Alliances and Affiliation...................................................................................................28
Hospital Affiliation, Merger, Acquisition and Disposition................................................................29
Loss of Affiliates or Obligated Group Members...............................................................................30
Affiliates.............................................................................................................................................30
SFLIBI/1047260.'3/14040/00348/duffyp/September 10, 1998 -5:0I
OtherAcquisitions and Affiliations...................................................................................................30
Antitrust.............................................................................................................................................31
ReferralLaws.............................................................:.......................................................................31
Risksin Health Care Delivery ............................................................................................................32
Licensing, Surveys, Investigations and Audits..................................................................................34
California Seismic Requirements ................................................ 34
.......................................................
Environmental Laws and Regulations................................................................................................35
Factors That Could Affect the Enforceability of the Loan Agreement and Obligation No. 33.........35
Bankruptcy.........................................................................................................................................36
Enforceability of the Master Indenture..............................................................................................36
Cost Overruns and Cash Commitments...........................................................................................36
General Litigation and Insurance.......................................................................................................37
Year2000 Issues................................................................................................................................37
OtherFactors......................................................................................................................................38
ABSENCE OF MATERIAL LITIGATION...............................................................................................38
TAXMATTERS.........................................................................................................................................39
APPROVAL OF LEGALITY.....................................................................................................................40
VERIFICATION OF MATHEMATICAL COMPUTATIONS ..................... .................40
...........................
UNDERWRITING......................................................................................................................................41
FINANCIALADVISOR.............................................................................................................................41
FINANCIAL STATEMENTS....................................................................................................................41
RATINGS....................................................................................................................................................42
MISCELLANEOUS....................................................................................................................................42
APPENDIX A — INFORMATION CONCERNING ST. JOSEPH HEALTH SYSTEM AND
THE OTHER MEMBERS OF THE OBLIGATED GROUP...................................A-1
APPENDIX B — AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF
ST. JOSEPH HEALTH SYSTEM AND AFFILIATES...........................................B-1
APPENDIX C — AUDITED (FOR THE FISCAL YEARS ENDED MAY 31,1996 AND
1997) AND UNAUDITED (FOR THE FISCAL YEAR ENDED MAY 31,
1998) CONSOLIDATED FINANCIAL STATEMENTS OF LUBBOCK
METHODIST HOSPITAL SYSTEM AND AFFILIATES.....................................C-1
APPENDIX D — SUMMARY OF PRINCIPAL DOCUMENTS ..................................................D-1
APPENDIX E — FORM OF BOND COUNSEL OPINION................................................................ E-1
SFL1B1/1047260/3/14040/00348/duffyp/September 10,1998 - 5;01
ii
OFFICIAL STATEMENT
Lubbock Health Facilities Development Corporation
Revenue Bonds
(St. Joseph Health System),
Series 1998
INTRODUCTORY STATEMENT
The following introductory statement is subject in all respects to the more complete information
set forth in this Official Statement. The descriptions and summaries of various documents hereinafter set
forth do not purport to be comprehensive or definitive, and are qualified in their entirety by reference to
each document. All capitalized terms used in this Official Statement and not otherwise defined herein
have the same meaning as in the Master Indenture or the Indenture (each as defined below). See
"APPENDIX D — SUMMARY OF PRINCIPAL DOCUMENTS — Master Indenture — Definitions of
Certain Terms and — Documents Relating to Bonds — Definitions of Certain Terms."
Purpose of this Official Statement
This Official Statement, including the cover page and the appendices hereto, is provided to
furnish information in connection with the offering of the Lubbock Health Facilities Development
Corporation's (the "Issuer") $ * aggregate principal amount of Revenue Bonds (St. Joseph
Health System), Series 1998 (the "Bonds") issued pursuant to an Indenture, dated as of October 1, 1998
(the "Indenture"), between the Issuer and Norwest Bank Texas, N.A., Fort Worth, Texas (the "Trustee").
The net proceeds of the Bonds will be loaned by the Issuer to St. Joseph Health System (the
"Corporation") pursuant to a Loan Agreement, dated as of October 1, 1998 (the "Loan Agreement"),
between the Issuer and the Corporation. Under the Loan Agreement, the Corporation is required to make
loan repayments at times and in amounts sufficient to enable the Issuer to pay in full, when due, all
principal, premium, if any, and interest on the Bonds.
The Corporation and the Obligated Group Members
The Corporation is a California nonprofit public benefit corporation based in Orange, California,
and is exempt from federal income taxation under Section 501(a) of the Internal Revenue Code of 1986.
The Corporation serves as the parent of a health care system which operates in California and Texas. The
following health care organizations, collectively with the Corporation, are the Existing Members of the
Obligated Group:
• Mission Hospital Regional Medical Center
• Queen of the Valley Hospital of Napa, California
• Redwood Memorial Hospital of Fortuna
* Preliminary, subject to change.
SFLIBI/1047260/3/14040/00348/duffyp/September 10, 1998 - 5:01
3
• St. Joseph Hospital of Eureka
• St. Joseph Hospital of Orange
• St. Jude Hospital, Inc, doing business as St. Jude Medical Center
• St. Mary Desert Valley Hospital doing business as St. Mary Regional Medical Center
• Santa Rosa Memorial Hospital
• SRM Alliance Hospital Services, doing business as Petaluma Valley Hospital ("SRMAHS")
• Sisters of St. Joseph of Texas, doing business as St. Mary of the Plains Hospital and
Rehabilitation Center
On June 10, 1998, the Corporation and Sisters of St. Joseph of Texas, doing business as St. Mary
of the Plains Hospital and Rehabilitation Center, a Texas nonprofit corporation and an affiliate of the
Corporation ("St. Mary of the Plains") consummated an affiliation with Lubbock Methodist Hospital
System ("LMHS"), Methodist Hospital, Lubbock, Texas ("Methodist Lubbock"), the direct and indirect
subsidiaries of St. Mary of the Plains, LMHS and Methodist Lubbock (including Methodist Hospital,
Levelland ("Methodist Levelland"), Methodist Hospital, Plainview ("Methodist Plainview") and
Methodist Children's Hospital ("Methodist Children's")) and a newly created local parent corporation,
Covenant Health System ("CHS"). As of the date of the issuance of the Bonds, CHS, Methodist
Lubbock, Methodist Children's, Methodist Levelland and Methodist Plainview (collectively, the "New
Members") will become Members of the Obligated Group (described below). See APPENDIX A —
"INFORMATION CONCERNING ST. JOSEPH HEALTHCARE SYSTEM AND THE OTHER
OBLIGATED GROUP MEMBERS."
The Master Indenture
The Obligated Group
In order to secure its obligations to make Loan Repayments, the Corporation will execute and
deliver to the Trustee its Obligation No. 33, issued pursuant to the terms of a Master Trust Indenture,
dated as of December 1, 1983, as amended and supplemented (the "Master Indenture"), as more fully
described herein, between the Members of the Obligated Group (defined below) and Chase Manhattan
Trust Company, National Association, as successor master trustee ("Chase"; Chase and any successor
master trustee being herein referred to as the "Master Trustee").
As of the date of delivery of the Bonds, the Existing Members and the New Members will be
joint and several obligors and guarantors of obligations issued under the Master Indenture. The Existing
Members and the New Members are collectively referred to herein as the "Obligated Group," and each is
individually referred to herein as a "Member." See APPENDIX A — "INFORMATION CONCERNING
ST. JOSEPH HEALTH SYSTEM AND THE OTHER MEMBERS OF THE OBLIGATED GROUP —
History and Development of the Obligated Group" for additional information about the Members.
Each Member of the Obligated Group will jointly and severally be obligated to make payments
on all Obligations issued under the Master Indenture, including Obligation No. 33. Payments on
Obligation No. 33 are required to be sufficient to pay the principal of, redemption premium, if any, and
interest on the Bonds, when due. Obligation No. 33 is an unsecured general obligation of the Obligated
Group. Although Obligation No. 33 is not secured by any security interest in the revenues or other
SFLIBI/1047260/3/14040/00348/duffyp/Septembcr 10, 1998-5:01
4
moneys of the Obligated Group or by a mortgage or other lien on the physical assets of any Member of
the Obligated Group, each Member of the Obligated Group has covenanted not to create a lien on its
revenues or assets except as provided in the Master Indenture.
Each Member (except the Corporation) has the right to withdraw from the Obligated Group under
certain conditions as set forth in the Master Indenture. See "SECURITY FOR THE BONDS" herein and
APPENDIX D — "SUMMARY OF PRINCIPAL DOCUMENTS — Master Indenture." After withdrawal
by a Member from the Obligated Group, the withdrawing corporation will no longer be an obligor or
guarantor of Obligations issued under the Master Indenture, including Obligation No. 33.
Consent to Proposed Amendment to Master Indenture
Beneficial Owners of the Bonds are deemed to have consented to an amendment to the Master
Indenture which may be proposed by the Corporation at a later date (the "Proposed Amendment"). Such
amendment authorizes the Corporation, on behalf of each Member, and the Master Trustee to amend in
any way certain provisions of the Master Indenture (including but not limited to provisions relating to
financial conditions for membership in the Obligated Group, withdrawal from the Obligated Group,
limitations on creation of liens, limitations on incurrence of additional indebtedness, restrictions on
guaranties, debt service on balloon indebtedness, sale, lease or other disposition of property and financial
conditions for consolidation, merger, sale or conveyance). This amendment and any amendment adopted
pursuant thereto could materially and adversely affect the interests of the Holders and Beneficial Owners
and the ratings on the Bonds in the future without the further consent or notice to Holders or Beneficial
Owners if certain conditions are met. The Proposed Amendment would take effect upon the receipt of the
consent of the Holders of all other then Outstanding Indenture Indebtedness. As of the date hereof, all
holders of Outstanding Obligations have agreed to consent to such amendment if requested. For a
description of the proposed amendment to the Master Indenture, see "APPENDIX D — SUMMARY OF
PRINCIPAL DOCUMENTS — Master Indenture — Proposed Amendment to Master Indenture." For
additional information concerning the security for the Bonds, see "SECURITY FOR THE BONDS" and
"OTHER FINANCINGS OF THE CORPORATION' herein.
Consent to Future Amendments to Master Indenture and/or Replacement of
Obligation No. 33
Pursuant to the Indenture, the Trustee acknowledges that by virtue of its acceptance of Obligation
No. 33, it has consented to any and all amendments to the Master Indenture if and when and each time so
requested by the Corporation in a Request of the Corporation, provided that certain conditions (the
"Amendment Conditions") are met. Beneficial Owners of the Bonds are deemed to have consented to any
such amendment so long as the Amendment Conditions are met. For a description of the Amendment
Conditions, see "APPENDIX D — SUMMARY OF PRINCIPAL DOCUMENTS — Indenture —
Amendment of Master Indenture."
The Indenture also provides that, at the option of the Corporation, if the Corporation becomes a
member of an obligated group under a master indenture, other than the Master Indenture, or has obligated
itself pursuant to another form of indebtedness security arrangement, and certain conditions (the
"Replacement Conditions") are met, Obligation No. 33 will be cancelled and an obligation issued to the
Trustee under such replacement master indenture or security arrangement. For a description of the
Amendment Conditions and the Replacement Conditions, see "APPENDIX D — SUMMARY OF
PRINCIPAL DOCUMENTS — Indenture — Replacement of Obligation No. 33."
Any such future amendment or replacement could materially and adversely affect the interests of
the Holder and Beneficial Owners. Such future amendment or replacement could occur only with the
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consent of the holders of all obligations outstanding under the Master Indenture. As of the date hereof,
there are Obligations Outstanding in the aggregate principal amount of . As of the
date hereof, no holders of Outstanding Obligations have been requested to consent to the replacement of
their Obligations or any future amendments to the Master Indenture, other than the Proposed Amendment.
The Corporation has no current plans to accomplish such replacement of obligations or amendment of the
Master Indenture.
For additional information concerning the security for the Bonds, see "SECURITY FOR THE
BONDS" and "OTHER FINANCINGS OF THE CORPORATION" herein.
Estimated Uses and Sources of Funds
The proceeds to be received from the sale of the Bonds will be used to (a) defease the Prior Debt
(defined below) repayment obligations for which were assumed by the Corporation in connection with the
acquisition by CHS of the membership interest in Methodist Lubbock (the "Project"); and (b) pay certain
expenses in connection with the delivery of the Bonds. The Prior Debt consists of (i) the Issuer's Hospital
Revenue Refunding Bonds (Methodist Hospital, Lubbock, Texas) Series 1987, issued in the original
aggregate principal amount of $67,895,000, $55,030,000 of which is currently outstanding (the "1987
Bonds"), (ii) the Issuer's Hospital Revenue Bonds (Methodist Hospital, Lubbock, Texas) Series 1990,
issued in the original aggregate principal amount of $99,960,000, $5,945,000 of which is currently
outstanding (the "1990 Bonds"), (iii) Methodist Lubbock's Hospital Revenue Bonds, Series 1991, issued
in the original aggregate principal amount of $7,500,000, $7,095,000 of which is currently outstanding
(the "1991 Bonds"), and (iv) the Issuer's Hospital Revenue Bonds (Methodist Hospital, Lubbock, Texas
Project) Series 1993A and 1993B, issued in the original aggregate principal amount of $152,040,000,
$147,895,000 of which is currently outstanding (the "1993 Bonds"). See "THE PROJECT" herein.
The Loan Agreement
Under the Loan Agreement, the Corporation is required to make payments at times and in
amounts sufficient to enable the Issuer to pay in full when due all principal, premium, if any, and interest
on the Bonds.
THE ISSUER SHALL NOT BE OBLIGATED TO PAY THE PRINCIPAL OF THE BONDS,
OR THE INTEREST, OR THE PREMIUM, IF ANY, THEREON EXCEPT FROM PAYMENTS MADE
TO THE ISSUER FOR SUCH PURPOSE, AND NEITHER THE FAITH AND CREDIT NOR THE
TAXING POWER OF THE STATE OF TEXAS OR THE CITY OF LUBBOCK IS PLEDGED TO THE
PAYMENT OF THE PRINCIPAL OF, PREMIUM IF ANY OR INTEREST ON THE BONDS. THE
BONDS ARE NOT, IN ANY RESPECT, OBLIGATIONS OF THE STATE OF TEXAS OR THE CITY
OF LUBBOCK AND SAID STATE AND CITY ARE NOT LIABLE FOR THE PAYMENT THEREOF.
THE ISSUER HAS NO TAXING POWER.
THE ISSUER
Lubbock Health Facilities Development Corporation is a nonprofit public corporation created
with the approval of the City of Lubbock, Texas in accordance with the Health Facilities Development
Act (Chapter 221, Texas Health and Safety Code, as amended) (the "Texas Act"). The Issuer is
authorized, among other things, to issue limited obligation revenue bonds and to loan the proceeds thereof
for the purposes of acquiring, constructing, providing, improving, financing and refinancing health
facilities found by the Issuer to assist in providing, expanding and improving health facilities which will
improve the adequacy, cost and accessibility of health care, research and education in the State of Texas.
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All findings and determinations by the Issuer and the City of Lubbock, respectively, are and have
been made by each for its own internal uses and purposes in performing their duties under the Texas Act,
and under the Issuer's Statement of Policy.
THE BONDS
General
The Bonds will be issued only in fully registered form in denominations of $5,000 and integral
multiples thereof. The Bonds will be dated October 1, 1998, and are payable as to principal on the dates
and in the amounts set forth on the cover of this Official Statement. Interest on the Bonds will be
payable at the rates set forth on the cover hereof on January 1, 1999, and on each January 1 and July 1
thereafter (each an "Interest Payment Date" for the Bonds) to the registered owner thereof as of the
fifteenth day of the month immediately preceding the Interest Payment Date (except with respect to
interest in default, for which a special record date shall be established).
The Bonds will be delivered in fully registered form only, will be transferable and exchangeable
as set forth in the Indenture and, when executed and delivered, 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. Ownership interests in the Bonds may be purchased in book -entry
form only, in the denominations set forth above. See "Book -Entry System" herein. So long as Cede &
Co. is the registered owner of the Bonds, as nominee of DTC, references herein to the Holders shall mean
Cede & Co. and shall not mean the "Beneficial Owners" of the Bonds. In this Official Statement, the
terms "Beneficial Owner" or "purchaser" shall mean the person for whom the DTC participant acquires an
interest in the Bonds.
Optional and Mandatory Redemption of Bonds
Optional Redemption of the Bonds. The Bonds maturing on and after July 1, are subject to
redemption prior to their stated maturities on and after July 1, , as a whole on any date, or in part, in
such amounts and of such maturities, respectively, as may be specified by the Corporation (or if the
Corporation fails to designate such maturities, in inverse order of maturity), and by lot among the Bonds
with the same maturity, on any Interest Payment Date, at the option of the Issuer (which shall be
exercised as directed in writing by the Corporation, or from any other source of available funds, at the
following Redemption Prices (expressed as a percentage of the principal amount of the Bonds called for
redemption), plus accrued interest to the date fixed for redemption:
Redemption Period Redemption
(Dates Inclusive) Price
July 1, through June 30, %
July 1, through June 30,
July 1, and thereafter
Mandatory Redemption of the Bonds. The Bonds maturing on July 1, and July 1, are
subject to mandatory sinking fund redemption on July 1, and July 1, , respectively, and on each
July 1 thereafter until and including July 1, and July 1, , respectively, at a redemption price
equal to 100% of the principal amount so redeemed and interest accrued with respect thereto to the date
fixed for redemption, as set forth below:
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Redemption Dates
July 1
* Maturity.
Extraordinary Redemption
Principal Redemption Dates Principal
Amount July 1 Amount
The Bonds are subject to redemption prior to their stated maturity as a whole on any date, or in
part, in such amounts and of such maturities as may be specified by the Corporation (or if the Corporation
fail to designate such maturities, in inverse order of maturities and by lot within a maturity) on any
Interest Payment Date, at the option of the Issuer (which shall be exercised as directed in writing by the
Corporation), from certain hazard insurance proceeds and condemnation awards, at the principal amount
plus interest accrued with respect thereto to the date fixed for redemption, without premium.
The Bonds are subject to redemption, as a whole (but not in part) on any date at the option of the
Issuer, upon the request of the Corporation if as a result of final judgment, order or determination of a
court of competent jurisdiction or of legislative or administrative action, the Corporation or any Member
of the Obligated Group shall be legally required (by reason of any Member of the Obligated Group being
a party to the Loan Agreement or the issuance of the Bonds) to take any action which the Corporation
believes to be contrary to the principles and beliefs of the Roman Catholic Church, at a price equal to
100% of the principal amount thereof, plus interest accrued thereon to the date fixed for redemption,
without premium.
Notice of Redemption; Effect of Redemption
Notice of redemption will be mailed by first-class mail by the Trustee, not less than thirty (30)
days and not more than sixty (60) days prior to the redemption date, to the Holders of any Bonds
designated for redemption at their addresses appearing on the registration books of the Trustee. The
failure of the Trustee to mail notice of redemption to any one or more of the Holders of any Bonds
designated for redemption shall not affect the sufficiency of the proceedings for the redemption of the
Bonds with respect to the Holder or Holders to whom such notice was mailed. The Bonds so called for
redemption shall become due and payable at the Redemption Price (and accrued interest) specified in
such notice, interest with respect to such Bonds shall cease to accrue from and after the redemption date,
said Bonds (or portions thereof) shall cease to be entitled to any benefit or security under the Indenture,
and the Holders of said Bonds shall have no rights in respect thereof except to receive payment of said
Redemption Price and accrued interest.
Book -Entry System
The Bonds will be executed and delivered in book -entry form. DTC will act as securities
depository for the Bonds. The Bonds will be executed and delivered as fully -registered securities
registered in the name of Cede & Co. (DTC's partnership nominee). One fully -registered Bond will be
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issued for each maturity of the Bonds in the total aggregate principal amount of such maturity, and will be
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. DTC holds securities that its participants (the "Participants") deposit with DTC. DTC also
facilitates the settlement among Participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book -entry changes in Participants' accounts,
thereby eliminating the need for physical movement of securities certificates. Direct Participants include
securities brokers and dealers, banks, trust companies, clearing corporations, and certain other
organizations. DTC is owned by a number of its Direct Participants and by the New York Stock
Exchange, Inc., the American Stock Exchange, Inc., and the National Association of Securities Dealers,
Inc. Access to the DTC system is also available to others such as securities brokers and dealers, banks,
and trust companies that clear through or maintain a custodial relationship with a Direct Participant, either
directly or indirectly ("Indirect Participants"). The Rules applicable to DTC and its Participants are on
file with the Securities and Exchange Commission.
Purchases of the Bonds under the DTC system must be made by or through Direct Participants,
which will receive a credit for the Bonds on DTC's records. The ownership interest of each actual
purchaser of each Bond (the "Beneficial Owner") is in turn to be recorded on the Direct and Indirect
Participants' records. Beneficial Owners will not receive written confirmation from DTC of their
purchase, but Beneficial Owners are 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 interest in the
Bonds are to be accomplished by entries made on the books of Participants acting on behalf of Beneficial
Owners. Beneficial Owners will not receive certificates representing their ownership interests in the
Bonds, except in the event that use of the book -entry system for the Bonds is discontinued.
To facilitate subsequent transfers, all Bonds deposited by Participants with DTC are registered in
the name of DTC's partnership nominee, Cede & Co. The deposit of Bonds with DTC and their
registration in the name of Cede & Co. effect no change in beneficial ownership. DTC has no knowledge
of the actual Beneficial Owners of the Bonds; DTC's records reflect only the identity of the Direct
Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners.
The Participants will remain responsible for keeping account of their holdings on behalf of their
customers.
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.
Redemption notices shall be sent to Cede & Co. If less than all of the Bonds within a maturity
are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct
Participant in such issue to be redeemed.
Neither DTC nor Cede & Co. will consent or vote with respect to the Bonds. Under its usual
procedures, DTC will mail an Omnibus Proxy to the Issuer 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).
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Principal, sinking fund and interest payments on the Bonds will be made to DTC. DTC's practice
is to credit Direct Participants' accounts on each payable date in accordance with their respective holdings
shown on DTC's records unless DTC has reason to believe that it will not receive payment on the date
payable. Payments by Participants to Beneficial Owners will be governed by standing instructions and
customary practices, as is the case with securities held for the accounts of customers in bearer form or
registered in "street name," and will be the responsibility of such Participant and not of DTC, the
Corporation, the Issuer or the Trustee, subject to any statutory or regulatory requirements as may be in
effect from time to time. Payment of principal and interest to DTC is the responsibility of the Issuer or
the Trustee, disbursement of such payments to Direct Participants shall be the responsibility of DTC, and
disbursement of such payments to the Beneficial Owners shall be responsibility of Direct and Indirect
Participants.
DTC may discontinue providing its services as securities depository with respect to the Bonds at
any time by giving reasonable notice to the Issuer or the Trustee. Under such circumstances, in the event
that a successor securities depository is not obtained, Bonds are required to be printed and delivered as
described in the Indenture.
The Issuer may decide to discontinue use of the system of book -entry tninsfers through DTC (or
a successor securities depository). In that event, Bonds will be printed and delivered as described in the
Indenture.
The Corporation, the Members of the Obligated Group and the Issuer cannot and do not
give any assurances that DTC will distribute to DTC Participants, or that DTC Participants or
others will distribute to the Beneficial Owners, payments of principal, interest and premium, if any,
with respect to 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. Neither the
Corporation, the Members of the Obligated Group nor the Issuer is responsible or liable for the
failure of DTC or any DTC 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.
The foregoing description of the procedures and record keeping with respect to beneficial
ownership interests in the Bonds, payment of principal, interest and other payments on the Bonds to DTC
Participants, Indirect Participants or Beneficial Owners, confirmation and transfer of beneficial ownership
interest in such Bonds and other related transactions by and between DTC, the DTC Participants, the
Indirect Participants and the Beneficial Owners is based solely on information provided by DTC.
Accordingly, no representations can be made concerning these matters and neither the DTC Participants,
the Indirect Participants nor the Beneficial Owners should rely on the foregoing information with respect
to such matters but should instead confirm the same with DTC or the DTC Participants, as the case may
be.
SO LONG AS CEDE & CO. IS THE REGISTERED OWNER OF THE BONDS, AS NOMINEE
OF DTC, REFERENCES HEREIN TO THE HOLDERS SHALL MEAN CEDE & CO., AS
AFORESAID, AND SHALL NOT MEAN THE BENEFICIAL OWNERS OF THE BONDS.
SECURITY FOR THE BONDS
General
THE BONDS ARE LIMITED OBLIGATIONS OF THE ISSUER AND ARE NOT A LIEN OR
A CHARGE UPON THE FUNDS OR PROPERTY OF THE ISSUER. EXCEPT TO THE EXTENT OF
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THE HEREINAFTER MENTIONED PLEDGE AND ASSIGNMENT THE ISSUER IS NOT
OBLIGATED TO PAY THE PRINCIPAL OF THE BONDS, OR THE INTEREST OR THE
PREMIUM, IF ANY, THEREON. THE ISSUER SHALL NOT BE OBLIGATED TO PAY THE
PRINCIPAL OF THE BONDS, OR THE INTEREST, OR THE PREMIUM, IF ANY, EXCEPT FROM
PAYMENTS MADE TO THE ISSUER FOR SUCH PURPOSE, AND NEITHER THE FAITH AND
CREDIT NOR THE TAXING POWER OF THE STATE OF TEXAS OR THE CITY OF LUBBOCK IS
PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF, PREMIUM, IF ANY, OR INTEREST ON
THE BONDS. THE BONDS ARE NOT IN ANY RESPECT OBLIGATIONS OF THE STATE OF
TEXAS OR THE CITY OF LUBBOCK, AND SAID STATE AND CITY ARE NOT LIABLE FOR
THE PAYMENT THEREOF. THE ISSUER HAS NO TAXING POWER.
NOTWITHSTANDING THE APPROVAL OF THE BONDS AND THE PROJECT, THE CITY
OF LUBBOCK DOES NOT ENDORSE OR IN ANY MANNER, DIRECTLY OR INDIRECTLY,
GUARANTEE OR PROMISE TO PAY THE BONDS FROM ANY SOURCE OF FUNDS OR
GUARANTEE, WARRANT OR ENDORSE THE CREDITWORTHINESS OR CREDIT STANDING
OF THE CORPORATION, OR IN ANY MANNER GUARANTEE, WARRANT OR ENDORSE THE
INVESTMENT QUALITY OR VALUE OF THE BONDS. BY ITS ISSUANCE THEREOF, THE
ISSUER DOES NOT IN ANY MANNER DIRECTLY OR INDIRECTLY, GUARANTEE, WARRANT
OR ENDORSE THE CREDITWORTHINESS OR CREDIT STANDING OF THE CORPORATION OR
THE INVESTMENT QUALITY OR VALUE OF THE SAME.
The Bonds are limited obligations of the Issuer payable from pledged funds held by the Trustee
under the Indenture and from Loan Repayments made by the Corporation pursuant to the Loan
Agreement which, in the aggregate, are required to be in an amount sufficient to pay (1) in full, when due,
the total interest payable on the Bonds to their respective maturities or earlier redemption, and the total
principal amount of the Bonds and the premium, if any, payable on redemption prior to their stated
maturity or at maturity, and (2) certain expenses of the Trustee.
Concurrently with the delivery of the Bonds, the Corporation, on behalf of itself and the
Obligated Group, will issue its Obligation No. 33 (described below) to the Trustee pursuant to which the
Members of the Obligated Group agree to make payments to the Trustee in amounts sufficient to pay,
when due, the Loan Repayments. See "The Master Indenture" below.
Pursuant to the provisions of the Indenture, the Issuer will pledge and assign all amounts held in
any fund or account established under the Indenture (other than the Rebate Fund) to the Trustee, and grant
a security interest in and assign to the Trustee such pledged funds and all Revenues and any other
amounts held in any fund or account established pursuant to the Indenture (other than the Rebate Fund)
and all right, title and interest in the Loan Agreement (except certain rights to receive administrative fees
and the right to indemnification) and Obligation No. 33, described below.
The Master Indenture
The obligation of the Corporation to make Loan Repayments is absolute and unconditional, and is
secured by Obligation No. 33, issued by the Corporation under a Master Trust Indenture, dated as of
December 1, 1983, as amended, among the Master Trustee and the Members of the Obligated Group, and
a Supplemental Master Indenture for Obligation No. 33, dated as of October 1, 1998 (the "Supplemental
Master Indenture for Obligation No. 33"), each between the Corporation and the Master Trustee. Such
Master Trust Indenture, including the Supplemental Master Indenture for Obligation No. 33, and other
Supplemental Master Indentures and agreements relating to membership in and withdrawal from the
Obligated Group are herein collectively referred to as the "Master Indenture."
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Under the Master Indenture, each Member of the Obligated Group jointly and severally, is
obligated to make payments of Obligations. Payments of the principal of, premium, if any, and interest
on Obligation No. 33 are required to be sufficient to pay the principal of, redemption premium, if any, and
interest on the Bonds, when due. Obligation No. 33 is a general obligation of the Obligated Group and is
not secured by any security interest in the revenues or other moneys of the Obligated Group or by a
mortgage or other lien on the physical assets of any Member of the Obligated Group. However, pursuant
to the provisions of the Master Indenture, each Member of the Obligated Group agrees that it will not
create or suffer to be created or exist any Lien upon its property or revenues, receipts or other moneys,
whether now or hereafter acquired, other than Permitted Liens. See "APPENDIX D — SUMMARY OF
PRINCIPAL DOCUMENTS — Master Indenture — Particular Covenants of Each Member of the
Obligated Group — Limitations on Creation of Liens."
All Obligations issued under the Master Indenture are secured on a parity basis. The Corporation
has previously issued 32 Obligations, of which are currently Outstanding. See
"APPENDIX A — INFORMATION CONCERNING ST. JOSEPH HEALTH SYSTEM AND OTHER
MEMBERS OF THE OBLIGATED GROUP — Financings of the Corporation." The Corporation and the
other Members of the Obligated Group may also issue additional Obligations under the Master Indenture
and incur or assume other indebtedness or financial obligations as summarized under "APPENDIX D —
SUMMARY OF PRINCIPAL DOCUMENTS — Master Indenture — Particular Covenants of Each
Member of the Obligated Group — Limitations on Incurrence of Additional Indebtedness."
Proposed Amendment to Master Indenture
The Corporation may propose at a later date an amendment to the Master Indenture (the
"Proposed Amendment") which would permit, under certain circumstances, amendments or modifications
to certain provisions of the Master Indenture which could materially and adversely affect the interests of
the Holders of Obligations, and the holders of the indebtedness secured thereby, including the Bonds, by
permitting amendment without further notice to or further consent of the Holders of such Obligations or
the Holders or Beneficial Owners of indebtedness secured thereby, including the Bonds. See
"APPENDIX D — SUMMARY OF PRINCIPAL DOCUMENTS — Master Indenture — Proposed
Amendment to Master Indenture" for a description of such amendment. Holders and Beneficial Owners
of the Bonds are deemed by such purchase to have consented to such amendment. Consequently, the
Trustee, as the Holder of Obligation No. 33, will consent to such amendment if so requested by the
Corporation. The Proposed Amendment would take effect upon the receipt of the consent of the Holders
of all other then Outstanding Indenture Indebtedness, but only if such consent is received on or before a
date which is three years after a request for such consent is made. As of the date hereof, all holders of
Outstanding Obligations have agreed to consent to such amendment if requested.
Future Amendments of Master Indenture and/or Replacement of Obligation No. 33
Pursuant to the Indenture, the Trustee acknowledges that by virtue of its acceptance of Obligation
No. 33, it has consented to any and all amendments to the Master Indenture if and when and each time so
requested by the Corporation in a Request of the Corporation, provided that the Amendment Conditions
are met.
The Indenture also provides that, at the option of the Corporation, if the Corporation becomes a
member of an obligated group under a master indenture, other than the Master Indenture, or has obligated
itself pursuant to another form of indebtedness security arrangement, and the Replacement Conditions are
met, Obligation No. 33 will be cancelled and an obligation issued to the Trustee under such replacement
master indenture or security arrangement.
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Holders and Beneficial Owners of the Bonds are deemed by such purchase to have consented to
any such future amendment of the Master Indenture or replacement of Obligation No. 33. Consequently,
the Trustee, as the Holder of Obligation No. 33, will consent to any such future amendment or
replacement of Obligation No. 33 if so requested by the Corporation.
Any such future amendment or replacement could materially and adversely affect the interests of
the Holders and Beneficial Owners. Any such future amendment or replacement could occur only with
the consent of the holders of all Obligations outstanding under the Master Indenture. As of the date
hereof, there are Obligations Outstanding in the aggregate principal amount of . As of
the date hereof, no holders of Outstanding Obligations have been requested to consent to the replacement
of their Obligations or any amendments to the Master Indenture (other than the Proposed Amendment).
The Corporation has no current plans to accomplish such replacement of Obligation No. 33 or amendment
of the Master Indenture (other than the Proposed Amendment).
For a description of the Amendment Conditions and the Replacement Conditions, see
"APPENDIX D — SUMMARY OF PRINCIPAL DOCUMENTS — Indenture." For additional information
concerning the security for the Bonds, see "SECURITY FOR THE BONDS" and "OTHER
FINANCINGS OF THE CORPORATION" herein.
OUTSTANDING OBLIGATIONS OF THE OBLIGATED GROUP
As of October 1, 1998, the Corporation had issued and Outstanding Obligations under the Master
Indenture in the aggregate principal amount of $ ($ of which reflects guaranty
agreements accounted for under the Master Indenture), net of unamortized discount. Such Obligations are
secured on a parity basis with Obligation No. 33 by the joint and several obligation and guarantee of each
Member of the Obligated Group. After giving effect to the issuance of Obligation No. 33, the total
Outstanding indebtedness under the Master Indenture is expected to be approximately $
($ of which reflects guaranty agreements accounted for under the Master Indenture), net of
unamortized discount. See "APPENDIX A — INFORMATION CONCERNING ST. JOSEPH HEALTH
SYSTEM AND THE OTHER MEMBERS OF THE OBLIGATED GROUP — HISTORICAL
FINANCIAL INFORMATION — Long -Term Debt to Capitalization" and "APPENDIX B — AUDITED
CONSOLIDATED FINANCIAL STATEMENTS OF ST. JOSEPH HEALTH SYSTEM AND
AFFILIATES" for a description of such Obligations.
THE PROJECT
The Project consists of the defeasance of the Prior Bonds, repayment obligations for which were
assumed by the Corporation in connection with the acquisition by CHS of the membership interest in
Methodist Lubbock. The Prior Debt consists of (i) the Issuer's Hospital Revenue Refunding Bonds
(Methodist Hospital, Lubbock, Texas), Series 1987 issued in the original aggregate principal amount of
$67,895,000, $55,030,000 of which is currently outstanding (the "1987 Bonds"), (ii) the Issuer's Hospital
Revenue Bonds (Methodist Hospital, Lubbock, Texas), Series 1990, issued in the original aggregate
principal amount of $99,960,000, $5,945,000 of which is currently outstanding (the "1990 Bonds"),
(iii) Methodist Lubbock's Hospital Revenue Bonds, Series 1991 issued in the original aggregate principal
amount of $7,500,000, $7,095,000 of which is currently outstanding (the "1991 Bonds"), and (iv) the
Issuer's Hospital Revenue Bonds (Methodist Hospital, Lubbock, Texas Project), Series 1993A and 1993B
issued in the original aggregate principal amount of $152,040,000, $147,895,000 of which is currently
outstanding (the "1993 Bonds").
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The 1987 Bonds
The 1987 Bonds were issued in February 1987, pursuant to a Trust Indenture, dated as of
January 1, 1987, as supplemented, and as amended and restated, by an Amended and Restated Trust
Indenture dated as of June 1, 1993, between the Issuer and the Trustee, as successor trustee (the "Prior
Indenture").
Simultaneously with the delivery of the Bonds, pursuant to an Escrow Agreement between
Methodist Lubbock and the Trustee, dated as of October 1, 1998 (the "1987 Escrow Agreement"), a
portion of the proceeds of the Bonds which will be deposited into the Escrow Fund established under the
Indenture, together with certain amounts transferred from funds held under the Prior Indenture, will be
used to purchase direct obligations of, or obligations which are unconditionally guaranteed by, the United
States of America, which investments will be irrevocably deposited in an escrow fund (the "1987 Escrow
Fund") established pursuant to the 1987 Escrow Agreement and which will provide sufficient moneys to
pay the principal of and interest on the 1987 Bonds, when due, until December 1, 2001 and to redeem on
such date all remaining 1987 Bonds at par. Upon such irrevocable deposit, the 1987 Bonds will be
deemed paid and no longer outstanding.
The 1990 Bonds
The 1990 Bonds were issued in September 1990, pursuant to the Prior Indenture, 1990 Bonds
maturing on and after December 1, 2001 were advance refunded with a portion of the 1993 Bonds.
Simultaneously with the delivery of the Bonds, pursuant to an Escrow Agreement between
Methodist Lubbock and the Trustee, dated as of October 1, 1998 (the "1990 Escrow Agreement"), a
portion of the proceeds of the Bonds which will be deposited into the Escrow Fund established under the
Indenture, together with certain amounts transferred from funds held under the Prior Indenture, will be
used to purchase direct obligations of, or obligations which are unconditionally guaranteed by, the United
States of America, which investments will be irrevocably deposited in an escrow fund (the "1990 Escrow
Fund") established pursuant to the 1990 Escrow Agreement and which will provide sufficient moneys to
pay the principal of and interest on the 1990 Bonds when due on each maturity date from December 1,
1998 through and including December 1, 2000. Upon such irrevocable deposit, the 1990 Bonds will be
deemed paid and no longer outstanding.
The 1991 Bonds
The 1991 Bonds were issued in September 1991, pursuant to a Trust Indenture, dated as of
August 1, 1991, between Methodist Lubbock and the Trustee, as successor trustee (the "Methodist
Indenture").
Simultaneously with the delivery of the Bonds, pursuant to an Escrow Agreement between
Methodist Lubbock and the Trustee, dated as of October 1, 1998 (the "1991 Escrow Agreement"), a
portion of the proceeds of the Bonds which will be deposited into the Escrow Fund established under the
Indenture, together with certain amounts transferred from funds held under the Methodist Indenture, will
be used to purchase direct obligations of, or obligations which are unconditionally guaranteed by, the
United States of America, which investments will be irrevocably deposited in an escrow fund (the "1991
Escrow Fund") established pursuant to the 1991 Escrow Agreement and which will provide sufficient
moneys to pay the principal of and interest on the 1991, Bonds, when due, until December 1, 2003 and to
redeem on such date all remaining 1991 Bonds at par. Upon such irrevocable deposit, the 1991 Bonds
will be deemed paid and no longer outstanding.
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The 1993 Bonds
The 1993 Bonds were issued in July 1993, pursuant to the Prior Indenture.
Simultaneously with the delivery of the Bonds, pursuant to an Escrow Agreement between
Methodist Lubbock and the Trustee, dated as of October 1, 1998 (the "1993 Escrow Agreement"), a
portion of the proceeds of the Bonds which will be deposited into the Escrow Fund established under the
Prior Indenture, together with certain amounts transferred from funds held under the Prior Indenture will
be used to purchase direct obligations of, or obligations which are unconditionally guaranteed by, the
United States of America, which investments will be irrevocably deposited in an escrow fund (the "1993
Escrow Fund") established pursuant to the 1993 Escrow Agreement and which will provide sufficient
moneys to pay (i) the principal of and interest on the Series 1993A Bonds, when due, until December 1,
2005 and to redeem on such date all remaining Series 1993A Bonds at par; and (ii) the principal of and
interest on the Series 1993B Bonds, when due, until December 1, 2003 and to redeem on such date all
remaining Series 1993B Bonds at par. Upon such irrevocable deposit, the 1993 Bonds will be deemed
paid and no longer outstanding.
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ESTIMATED SOURCES AND USES OF FUNDS
The proceeds to be received from the sale of the Bonds (exclusive of accrued interest) will be
applied as set forth in the following table.
Sources of Funds
PrincipalAmount of Bonds........................................................... $
Total........................................................................................ $
Uses of Funds
EscrowFunds................................................................................
Costs of Issuance(')...............................................................................
Original Issue Discount.................................................................
Total........................................................................................
P,
(1) Includes legal, printing, consulting, Issuer's fees and expenses, the underwriters' discount and other
miscellaneous issuance costs.
CONTINUING DISCLOSURE
The Obligated Group
Under a Master Continuing Disclosure Certificate (the "Master Continuing Disclosure
Undertaking") dated as of October 1, 1997, the Corporation, acting as Obligated Group Representative
(the "Obligated Group Representative") and as initial dissemination agent thereunder (the Corporation in
such capacity, and any other person appointed as replacement dissemination agent pursuant to the terms
thereof, being herein referred to as the "Dissemination Agent"), has agreed to provide (to the
Dissemination Agent, if a person other than the Corporation is then acting as Dissemination Agent)
certain financial information and operating data for each of the Obligated Group's fiscal years,
commencing with the fiscal year ending June 30, 1998, in accordance with the requirements of
Rule 15c2-12 of the Securities and Exchange Commission (the "SEC") under. the Securities and
Exchange Act of 1934, as amended. The Obligated Group will execute a 1998 Continuing Disclosure
Certificate concurrently with the execution and delivery of the Certificates (the "1998 Continuing
Disclosure Certificate") designating the Master Continuing Disclosure Undertaking as its written
undertaking under paragraph (b)(5) of said Rule 15c2-12. The financial information and operating data
that will be provided with respect to those Persons who were members of the Obligated Group during the
fiscal years to which such information and data relate will consist of the following:
Audited Financial Statements. The audited consolidated financial statements of the
Corporation and affiliates will be prepared in accordance with generally accepted accounting principles
(except as disclosed in the independent auditors report and footnotes to such financial statements) on a
comparative basis for the two Fiscal Years immediately preceding the date of the Annual Report.
Financial Information. The financial information will consist of an update of the information
contained in the tables under the following captions under "HISTORICAL FINANCIAL
INFORMATION" in Appendix A to this Official Statement: "Summary of Revenues and Expenses,"
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"Historical Debt Service Coverage," "Capitalization" and "Sources of Revenue - Obligated Group," each
for the Fiscal Year immediately preceding the date of the Annual Report.
Operating Data. The operating data will consist of aggregate operating data for the Obligated
Group of the type which is set forth in Appendix A to this Official Statement in the tables under the
captions INFORMATION CONCERNING THE ST. JOSEPH OBLIGATED GROUP MEMBERS -
General" and "HISTORICAL UTILIZATION - The Obligated Group Facilities Acute Care Utilization,"
and the number of employees employed by the Obligated Group and the percentage of those employees
who were unionized.
The Corporation may from time to time deliver (to the Dissemination Agent, if a person other
than the Corporation is then acting as Dissemination Agent) a new Continuing Disclosure Certificate (a
"Replacement Continuing Disclosure Certificate") which (i) shall specify other types of Financial
Information or Operating Data to be contained in the Annual Reports prepared subsequent to the delivery
of such Replacement Continuing Disclosure Certificate (the "Future Annual Reports") which shall be in
addition to, or in lieu of, the types of Financial Information and Operating Data described above
(collectively, the "Prior Information") specified in the 1998 Continuing Disclosure Certificate or (ii) shall
specify that certain types of Prior Information shall be deleted from the Future Annual Reports.
Any Replacement Continuing Disclosure Certificate shall (a) identify the Prior Information which
shall no longer be included in the Future Annual Reports; (b) state that the deletion of the Prior
Information is being made in connection with a change in (1) the identity, nature or status of any Member
of the Obligated Group, (2) the types of business conducted by the Members of the Obligated Group
and/or (3) the laws applicable to the Members of the Obligated Group; and (c) be accompanied by an
opinion of nationally recognized disclosure counsel (which may also act as counsel to one or more
Members of the Obligated Group) to the effect that the Corporation's undertaking pursuant to the Master
Continuing Disclosure Undertaking (taking into account the types of Financial Information and Operating
Data identified in the Replacement Continuing Disclosure Certificate for inclusion in the Future Annual
Reports) would have complied with the Rule, as in effect on the date of the first Offering of Related
Bonds (as defined in the Master Continuing Disclosure Undertaking), taking into account any amendment
or interpretation of the Rule by the SEC or any adjudication of the Rule by a final decision of a court of
competent jurisdiction which may have occurred subsequent to the execution and delivery of the Master
Continuing Disclosure Undertaking.
In addition, a determination by a party unaffiliated with any Obligated Group member or any
Related Bond Issuer that the substitution of the Substituted Information for Prior Information or the
deletion of Prior Information will not adversely affect the Certificateholders in any material respect or, the
consent of the majority of the Certificateholders to such substitution or deletion, will be required in
connection with such Replacement Continuing Disclosure Certificate.
The Replacement Continuing Disclosure Certificate also shall explain, in narrative form, the
reasons for the Replacement Continuing Disclosure Certificate and the impact of the change in the type of
operating data or financial information being provided.
However, such opinions or consents may no longer be required in connection with a Replacement
Continuing Disclosure Certificate if (i) an amendment or interpretation of the Rule by the SEC has
occurred, or (ii) an adjudication of the Rule by a final decision of a court of competent jurisdiction has
occurred, or (iii) an opinion of nationally recognized disclosure counsel (which may also act as counsel to
one or more Members of the Obligated Group) has been given, in each case, to the effect that such items
shall no longer be deemed to be required in order for the Master Continuing Disclosure Undertaking to
comply with the Rule.
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The Master Continuing Disclosure Undertaking requires the Corporation to provide such
financial information and operating data (to the Dissemination Agent, if a person other than the
Corporation is then acting as Dissemination Agent) not later than the last day of the sixth calendar month
after the end of each of the Obligated Group's fiscal years, commencing with the fiscal year ending
June 30, 1998. Pursuant to the Master Continuing Disclosure Undertaking, the Dissemination Agent
agrees to provide such information and data within five (5) business days after receipt thereof to each
nationally recognized municipal securities information repository ("NRMSIR") designated by the SEC
and to the state information depositories ("SID"), if any, operated or designated by the States of California
and Texas and recognized as such by the SEC. As of the date hereof, there is no state information
repository for the State of California, and the sole SID designated by the State of Texas is the Municipal
Advisory Council of Texas.
Pursuant to the Master Continuing Disclosure Undertaking, the Dissemination Agent is required
to give notice to each NRMSIR and each SID, if any, if the Corporation fails to provide such financial
information and operating data within the time period specified in the preceding paragraph.
The Master Continuing Disclosure Undertaking also requires the Corporation to provide (to the
Dissemination Agent, if a person other than the Corporation is then acting as Dissemination Agent) on a
timely basis, for dissemination within three (3) business days by the Dissemination Agent to each
NRMSIR and each SID, if any, notice of the occurrence of any of the following events if such event is
material:
(1) Principal and interest payment delinquencies;
(2) Non-payment related defaults;
(3) Modifications to rights of Certificateholders;
(4) Optional, contingent or unscheduled prepayment of Certificates;
(5) Defeasances;
(6) Rating changes;
(7) Adverse tax opinions or events affecting the tax-exempt status of the Certificates;
(8) Unscheduled draws on debt service reserves reflecting financial difficulties;
(9) Unscheduled draws on credit enhancements reflecting financial difficulties;
(10) Substitution of credit or liquidity providers, or their failure to perform; and
(11) Release, substitution or sale of property securing repayment of the Certificates.
The Master Continuing Disclosure Undertaking will remain in effect as long as any Certificates
or any Related Bonds remain Outstanding and shall require the Corporation to provide the above -
described financial information and operating data for a Person as long as such Person is a member of the
Obligated Group during the fiscal years to which such information and data relate. The Master
Continuing Disclosure Undertaking will be entered into for the benefit of the Holders and Beneficial
Owners of the Certificates and the Holders and Beneficial Owners of any other series of Related Bonds.
The Master Continuing Disclosure Undertaking maybe specifically enforced by any Holder or Beneficial
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Owner of the Certificates (or by the Dissemination Agent, if other than the Corporation) and shall be
specifically enforced by the Dissemination Agent (if other than the Corporation) at the direction of the
Holders or Beneficial Owners of at least 25% in aggregate principal amount of the Certificates or any
series of Related Bonds.
The Issuer
The Issuer has determined that no financial or operating data concerning the Issuer is material to
any decision to purchase, hold or sell the Certificates, and the Issuer will not provide any such
information. The Corporation, on behalf of itself and the other members of the Obligated Group, has
undertaken all responsibilities for any continuing disclosure to Holders of the Certificates as described
above, and the Issuer shall have no liability to the Holders or any other person with respect to such
disclosures.
BONDHOLDERS' RISKS
General
Except as noted herein under "Security for the Bonds," the Bonds are payable solely from
Revenues which consist primarily of payments to be made by the Corporation, pursuant to the Loan
Agreement and by the Obligated Group pursuant to Obligation No. 33, respectively. No representation or
assurance can be made that Revenues will be realized by the Obligated Group in amounts sufficient to
make Loan Repayments and thus to pay principal, mandatory sinking fund and interest payments on the
Bonds. The future financial condition of the Obligated Group could be adversely affected by, among
other things, legislation, regulatory actions, natural disasters, increased competition from other healthcare
providers, demand for healthcare services, the impact of technological and demographic changes on the
ability of the Members to provide the services required by patients, confidence of physicians and the
public in the Members, economic developments in the service area, malpractice claims and other
litigation, competition, changes in the rates, timing and methods of payment for hospital services. Such
factors may also consequently affect payment by the Corporation and the Obligated Group Members, as
applicable, of Loan Repayments. There can be no assurance given that the financial condition of the
Obligated Group and/or utilization of the Members' facilities will not be adversely affected.
Federal and State Legislation
The Members are subject to a wide variety of federal, state and local regulatory, legislative and
policy changes which could have a significant impact on the Obligated Group. Federal, state and local
legislative bodies have broad discretion in altering or eliminating programs that contribute significantly to
the revenues of the Obligated Group Members, including the Medicare and Medicaid programs. In
addition, such entities may enact legislation that imposes significant new burdens on the operations of the
Obligated Group Members. There can be no assurance that such legislative bodies will not make
legislative policy changes (or direct governmental agencies to promulgate regulatory changes) that have
adverse effects upon the ability of the Obligated Group Members to generate revenues or upon the
favorable utilization of their facilities.
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19
Tax -Exempt Status
Tax -Exempt Status of Interest on the Bonds
The Internal Revenue Code of 1986 (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 of bond proceeds prior to expenditure, a requirement that certain arbitrage
earned on investment of bond proceeds be paid periodically to the United States, and a requirement that
the issuers file an information report with the Internal Revenue Service ("IRS"). The Issuer and the
Members have covenanted in certain of the documents referred to herein that they will comply with such
requirements. Failure by the Members to comply with the requirements stated in the Code and related
regulations, rulings and policies may result in the treatment of the interest received with respect to the
Bonds as taxable, retroactive to the date of issuance.
Tax -Exempt Status of the Members
The tax-exempt status of the Bonds presently depends upon maintenance by each Obligated
Group Member that receives proceeds of the Bonds of its status as an organization described in
section 501(c)(3) of the Code. The maintenance of such status is contingent on compliance with general
rules promulgated in the Code and related regulations regarding the organization and operation of tax-
exempt entities, including their operation for charitable and educational purposes and their avoidance of
transactions which may cause their earnings or assets to inure to the benefit of private individuals.
The only adverse consequence to a tax-exempt entity for inurement or unlawful private benefit
available to the Internal Revenue Service under the Code is revocation of tax-exempt status. Although
the IRS has not often revoked the 501(c)(3) tax-exempt status of an organization, it could do so in the
future. The loss of tax-exempt status by even one Member of the Obligated Group could result in loss of
tax exemption of the Bonds and of other tax-exempt debt of the Obligated Group, and defaults in
covenants regarding the Bonds and other related tax-exempt debt would likely be: triggered. Loss of tax-
exempt status could also result in substantial tax liabilities on income of affected Members. For these
reasons, loss of tax-exempt status of any Member could have a material adverse effect on the financial
condition of the Obligated Group, taken as a whole.
"Intermediate" sanctions have been enacted that focus enforcement on private individuals who
transact business with an exempt organization rather than the exempt organization, but these sanctions do
not replace the other remedies available to the IRS as mentioned above. Imposition of intermediate
sanctions would not affect the tax status of the Bonds.
In 1990 the Employee Plans and Exempt Organizations Division of the IRS expanded the
Coordinated Examination Program ("CEP") of the IRS to tax-exempt health care organizations. ' To
qualify for the CEP program, a taxpayer must have at least $500 million in assets or $1 billion in gross
receipts. CEP audits are conducted by teams of revenue agents. CEP audits often take years to complete
and require the expenditure of significant staff time by both the IRS and taxpayers. CEP revenue agents
often occupy office space on the taxpayer's premises for the duration of the audit.
The CEP audit teams that examine tax-exempt health care organizations are led by senior
Employee Plans and Exempt Organizations Division revenue agents who consider examining a wide
range of possible issues, including the community benefit standard, private inurement and private benefit,
partnerships and joint ventures, retirement plans and employee benefits, employment taxes, tax-exempt
SFLIBI/1047260/3/14040/00348/duffyp/September 10, 1998 - 5:01
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bond financing, political contributions and unrelated business income. Income that is under the tax laws
unrelated to a tax-exempt entity's exempt purpose is taxable and is called unrelated business income.
The IRS announced that as of June 30, 1997 there were 377 tax-exempt health care organizations
that qualified for CEP audits. The IRS announced that the additional revenue raised per completed CEP
audit approximated $1 million. The St. Joseph System qualifies for CEP audits. As a result, Members of
the Obligated Group [have been and most likely will be] audited regularly by the IRS. Management
believes that it has properly complied with the tax laws. Nevertheless, because of the complexity of the
tax laws and the presence of issues about which reasonable persons can differ, a CEP audit could result in
additional taxes, interest and penalties. A CEP audit could ultimately affect the tax-exempt status of an
Obligated Group Member as well as the exclusion from gross income for federal income tax purposes of
the interest payable on the Bonds and other tax-exempt debt of the Members.
[Discuss Methodist Closing Agreement?]
State Income Tax Exemption and Local Property Tax Exemption
Until recently, the States of California and Texas have not been as active as the Internal Revenue
Service in scrutinizing the income tax exemption of healthcare organizations. However, the California
Assembly's Revenue and Taxation Committee recently concluded hearings in which state officials and
representatives of the largest health union in California raised questions about the tax benefits enjoyed by
nonprofit health systems, and it is possible that legislation may be proposed to strengthen the role of the
state Franchise Tax Board in supervising nonprofit health systems. It is likely that the loss by a Member
of federal tax exemption would also trigger a challenge to the state tax exemption of such Member.
Depending on the circumstances, such event could be adverse and material.
In recent years, state, county, and local taxing authorities have been undertaking audits and
reviews of the operations of tax-exempt healthcare providers with respect to their real property tax
exemption. In some cases, particularly where such authorities are dissatisfied with the amount of services
provided to indigents, the real property tax-exempt status of the healthcare providers has been questioned.
The majority of the facilities of the Members are tax-exempt. Although the real property tax exemption
with respect to the facilities of any of the Members has not, to the knowledge of management of the
Members, been challenged by such authorities, investigations or audits could lead to one or more
challenges that, if successful, could adversely affect the real property tax exemption with respect to
certain of the facilities of the Members.
Unrelated Business Income. In recent years, the IRS and state, county and local taxing
authorities have been undertaking audits and reviews of the operations of tax-exempt hospitals with
respect to their exempt activities and the generation of unrelated business taxable income ("UBTI"). The
Members participate in activities which generate minimal UBTI. Management believes it has properly
accounted for and reported UBTI. In the event that the amount of UBTI generated by the Members were
to become material, an investigation or audit could lead to a challenge which could result in taxes, interest
and penalties with respect to unreported UBTI and in some cases could ultimately affect the tax-exempt
status of the Members as well as the exclusion from gross income for federal income tax purposes of the
interest payable with respect to the Bonds and other tax-exempt debt of the Obligated Group.
The Medicare Program
The facilities operated by the Members are certified as providers for Medicare services and the
Members intend to continue to participate in the Medicare program.
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21
For the fiscal year ended June 30, 1998, the Obligated Group Members received approximately
45% of their gross patient service revenues from Medicare. The Obligated Group Members depend
significantly on Medicare as a source of revenue, and changes in the Medicare program may have a
material effect on the Obligated Group. See APPENDIX A — "INFORMATION CONCERNING ST.
JOSEPH HEALTH SYSTEM AND THE OTHER OBLIGATED GROUP MEMBERS — Sources of
Revenue — Obligated Group." The requirements for Medicare certification are subject to change, and in
order to remain qualified for the program, it may be necessary for the Members to effect changes from
time to time in their facilities, equipment, personnel, billing processes, policies and services.
Medicare Reimbursement of Hospitals. Under the prospective payment system, Medicare pays
a predetermined rate for each covered hospitalization. Each such hospitalization is classified into one of
several hundred categories of possible treatments or conditions, known as "diagnosis related groups"
("DRGs"). Hospitals are paid a predetermined amount based on the DRG to which each patient is
assigned. The DRG rate is not related to the actual cost to a specific hospital of treating a specific patient.
It is a fixed sum, generally based on national cost data.
DRG rates may be adjusted on an annual basis as part of the federal budget reconciliation process
and are thus subject to deficit reduction activities aimed at the federal budget generally and/or the
Medicare program specifically. In fact, under the recently enacted Balanced Budget Act of 1997
("BBA"), Congress, in order to reduce Medicare -related spending, froze DRG rates to their current level
for the 1998 federal fiscal year and set decreasing adjustments for 1999 to 2002. There is no guarantee
that such Medicare reimbursement rates, as they change from time to time, will cover the Members' actual
costs of providing services to Medicare patients.
As a result of the BBA, Medicare beneficiaries will have increased Medicare participation options
under the Medicare+Choice Program. For example, Medicare+Choice generally allows Medicare
beneficiaries to participate in the Medicare program through the traditional Medicare plan, managed care
plans including health maintenance organizations and provider networks sponsored by hospitals,
physicians or other providers. In addition, Medicare beneficiaries may establish medical savings accounts
under a pilot project which allows certain seniors to take out high deductible catastrophic insurance
policies and obtain Medicare contributions to their own tax free account to help pay smaller medical
expenses. It is unclear how the Medicare+Choice Program may impact the Obligated Group Members;
however, it could adversely affect their financial condition.
Disproportionate Share Hospitals. The Medicare program provides additional payment for
hospitals that serve a disproportionate share of low income patients, or are located in an urban area, have
more than 100 beds, and can demonstrate that more than 30% of their revenues are derived from state and
local government payments for indigent care provided to patients not covered by Medicare or Medicaid.
Certain members qualify as disproportionate share hospitals. There can be no assurance that these
Members will continue to qualify for disproportionate share status. In addition, disproportionate share
payments are frequently the target of proposed Medicare payment reductions. In fact, the BBA provides
that disproportionate share payments will be reduced 1% in 1998, 2% in 1999, 3% in 2000, 4% in 2001
and 5% in 2002. Such reductions, as well as any future efforts to further reduce or eliminate the
disproportionate share payment, may have a material adverse impact on the financial condition of these
Members.
Audits and Withholds. Medicare participating hospitals are subject to audits and retroactive
audit adjustments with respect to the Medicare program. Generally, the Members maintain reserves for
anticipated or proposed audit adjustments which are likely to be contested based upon the best estimate of
management, which management considers to be conservative. Nevertheless, such adjustments could
exceed reserves and could be substantial. Medicare regulations also provide for withholding Medicare
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payment in certain circumstances, and such withholds could have a substantial adverse effect on the
ability of the Obligated Group Members to make Loan Repayments or payments on Obligation No. 33, or
on their overall financial condition. Management of the Corporation is not aware of any situation where a
material amount of Medicare payment is being withheld.
False Claims Act and Related Laws. Medicare also requires that extensive financial and related
information be reported on a periodic basis and in a specific format or content. These requirements are
numerous, technical and complex and may not be fully understood or properly implemented by hospital
billing or reporting personnel. With respect to certain types of classifications of information, the
Medicare False Claims Act and other similar laws may be violated merely by reason of inaccurate or
incomplete claims or reports if it is determined that the entity submitting such claims or reports knew or
should have known that they were incorrect. As a consequence, ordinary course errors or omissions may
also result in liability. New billing systems, new medical procedures and procedures for which there is
not clear guidance from the Health Care Financing Administration or other regulatory authorities may all
result in liability under the False Claims Act. The penalties for violation include criminal and civil fines
and may include, for serious or repeated violations, exclusion from participation in the Medicare program.
The size and growth of the Health System may enhance these risks.
Enforcement activity in this area appears to be increasing and enforcement authorities may be
adopting more aggressive approaches. Enforcement authorities are in a position to compel settlements by
providers charged with false claims violations by withholding or threatening to withhold Medicare and/or
Medicaid payments, and/or by threatening criminal action. In addition, the cost of defending such an
action, the time and management attention consumed thereby and the facts of a particular case may
dictate settlement. Therefore, regardless of the merits of a particular case or cases, the Obligated Group
could experience materially adverse settlement costs. Prolonged and publicized investigations could be
damaging to the reputation, business and credit of Obligated Group Members or the Health System as a
whole, regardless of their outcome.
Management is not currently aware of any investigation or enforcement action of this type
targeted at the Corporation or any of the Obligated Group Members or their affiliates of subsidiaries.
Reimbursement for Rehabilitation, Psychiatric and Outpatient Services. Rehabilitation,
psychiatric and outpatient services are currently exempt from the prospective payment system. As a
result, providers of these services, such as the Obligated Group Members, may obtain payments for
providing such services to Medicare beneficiaries based on the cost of, or a portion of the cost of,
providing the services. In an effort to reduce Medicare costs, the BBA includes the gradual elimination of
much of the cost -based reimbursement available under the Medicare Program. Accordingly, under the
BBA, outpatient services will be reimbursed under the prospective payment system by January 1, 1999
and rehabilitation services will be similarly reimbursed beginning October 1, 2000. Given these changes,
it is possible that the revenues received by the Obligated Group Members from providing such services to
Medicare beneficiaries will decrease. Although the impact of these changes on Obligated Group
Members cannot be predicted at this time, the BBA could have a materially adverse effect on the financial
condition of the Obligated Group Members.
Medicare Reimbursement of Skilled Nursing Facilities. Extended care services furnished to
inpatients of a skilled nursing facility ("SNF") are currently reimbursed on a cost basis subject to per diem
limits set by the Secretary of the Department of Health and Human Services for both freestanding and
hospital -based SNFs. However, to again reduce Medicare costs, the BBA provides that SNF
reimbursement will switch to a prospective payment system effective July 1, 1993. Given these changes,
it is possible that the revenues the Obligated Group Members receive from providing such services to
Medicare beneficiaries will decrease. Although the impact of these changes on the Obligated Group
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23
Members cannot be predicted at this time, the BBA could have a materially adverse effect on the financial
condition of the Obligated Group Members.
Capital Cost Reimbursement. Capital costs are being phased into the prospective payment
system over a period of ten years ending in 2001. Such phase -in will most likely constitute an overall
reduction of hospital reimbursement for capital costs. Moreover, the BBA provides that payments under
the capital prospective payment system which relate to Medicare services provided to Medicare
beneficiaries discharged during the period starting on July 1, 1998 and ending on September 30, 2002 will
be reduced by 2.1%. Management of the Corporation believes that the changes, while significant, are
unlikely to have a material adverse effect on the financial condition of the Obligated Group.
Funded Depreciation Accounts. The Members maintain "funded depreciation accounts" which
are composed of funds set aside for the replacement of depreciable assets. Failure to use and maintain
these accounts in accordance with Medicare requirements may result in reduction of reimbursement for
certain expenses. As these regulations are numerous and complex, there can be no assurance that the
Medicare program may not disallow interest expense in amounts which may be material to the operations
and financial condition of the Obligated Group Members.
Patient Transfers. In response to concerns regarding inappropriate hospital transfers of
emergency patients based on the patient's inability to pay for the services provided, Congress has enacted
an "anti -dumping" statute. Failure to comply with the law can result in exclusion from the Medicare
and/or Medicaid programs, as well as civil and criminal penalties. Substantial failure of any Member to
meet its responsibilities under the law could materially adversely affect the financial condition of such
Member and thus of the Obligated Group.
Waiver Programs. Hospitals are engaged in programs which waive certain Medicare
coinsurance and/or deductible amounts. Such waiver programs may be considered to be in violation of
certain rules and policies applicable to the Medicare program and may be subject to enforcement action.
Members may at times waive certain Medicare coinsurance and/or deductible amounts. If an agency or
court were to conclude that such waivers violate the applicable law, there is a possibility that such
Member could be assessed fines, which could be substantial, that certain Medicare payments might be
withheld or, in a serious case, that such Member could be excluded from the Medicare program. While
management is not aware of any challenge or investigation with respect to such matters, there can be no
assurance that such challenge or investigation will not occur in the future.
The Medicaid Program
For the fiscal year ended June 30, 1998, the Obligated Group received approximately 8% of gross
patient service revenues from state Medicaid programs. See APPENDIX A — "INFORMATION
CONCERNING ST. JOSEPH HEALTH SYSTEM AND THE OTHER OBLIGATED GROUP
MEMBERS — HISTORICAL FINANCIAL INFORMATION — Sources of Revenue — -Obligated Group."
Medicaid is a program of medical assistance, funded jointly by the federal government and the
states, for certain needy individuals and their dependents. Under Medicaid, the federal government
provides grants to states that have medical assistance programs that are consistent with federal standards.
The attempts to balance the federal budget described above with respect to the Medicare program
have also had similar effects on federal Medicaid program spending. As a result of changes and
reductions made by the BBA, it is anticipated that federal Medicaid spending over the next 5 years will be
reduced by approximately $13 billion. Such decreases in spending may have a material adverse effect on
the financial condition of the Obligated Group Members.
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California Medi-Cal Program
General. Medi-Cal is the Medicaid program in California. Like federal programs, Medi-Cal has
implemented cost-cutting policies. Further cost-cutting policies, including eligibility reductions and
restrictions, may be undertaken in the future. California law provides that the State shall selectively
contract with general acute care hospitals to provide acute inpatient services to Medi-Cal patients.
Generally, such selective contracting is made on a flat per diem or per discharge payment basis for all
inpatient services to Medi-Cal beneficiaries, and generally such payments have not increased in relation
to inflation, costs or other factors. Reductions or limitations may be imposed on payment for services
rendered to Medi-Cal beneficiaries in the future. Medi-Cal contracts currently apply only to acute
inpatient services, but may be extended to include outpatient services as well. No assurances can be made
that the Obligated Group Members will in the future be reimbursed under the Medi-Cal program at
favorable rates. See APPENDIX A — "INFORMATION CONCERNING ST. JOSEPH HEALTH
SYSTEM AND THE OTHER OBLIGATED GROUP MEMBERS — HISTORICAL FINANCIAL
INFORMATION — Sources of Revenue — Obligated Group."
Under the above -described selective contracting rules, in most geographical areas of California,
only those hospitals which enter into a Medi-Cal contract will be paid for non -emergency hospital
inpatient services to Medi-Cal beneficiaries. Generally, either party may terminate such contracts on 120
days' notice. The State may also terminate without notice under certain circumstances (e.g., breach by
the provider or failure to remain qualified under the Medi-Cal program) and is obligated to make
contractual payments only to the extent the Legislature appropriates adequate funding.
California Budget and Other Legislative Matters. A State budget for fiscal year 1998-99 has
been passed by the State legislature. The budget will not contain additional State funding for Medi-Cal
hospital rate increases. There can be no guarantee that the Medi-Cal program, in the future, will not again
become the target of State spending cuts. In the past, the California Legislature has enacted a number of
provisions that resulted in reductions in payments to Medi-Cal providers with respect to various services.
In fact, federal Medicaid cuts contained in the BBA may lead to or result in future State Medi-Cal
spending cuts which could have a material adverse effect on the financial conditions of the Obligated
Group Members.
Medi-Cal Managed Care Initiatives. In 1993, the State of California announced its intention to
move large numbers of Medi-Cal beneficiaries into managed care payment systems. The initiative is
intended to reduce hospital use. California initially designated thirteen counties for managed care
expansion, including counties in which certain Members are located. Medi-Cal payments to participating
hospitals may be capitated so that the hospitals receive a predetermined, periodic rate for each Medi-Cal
beneficiary. In effect, this payment methodology will transfer economic risk for the cost of a patient's
care to the participating hospital. The degree of risk will depend on the number of Medi-Cal beneficiaries
involved in a particular area, their health status, the amount of the capitation payment, utilization and cost
of hospital services, reinsurance levels and potentially other factors. These Medi-Cal risk contracts could
prove beneficial to hospital providers by increasing the aggregate Medi-Cal hospital payment, or they
could have the effect of reducing total payments. Monterey County is not one of the thirteen counties
designated for managed care contracting.
Disproportionate Share Status. As described above in relation to the Medicare program, the
Medi-Cal program also provides additional reimbursement for hospitals that treat a disproportionate
number of Medi-Cal and low-income patients. Generally, "disproportionate share" status under
California's Medi-Cal program requires that a hospital have either (1) a Medi-Cal inpatient utilization rate
at least one standard deviation above the mean Medi-Cal inpatient utilization rate for hospitals receiving
Medi-Cal payments in California or (2) a low-income utilization rate which exceeds 25%.
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Certain Members currently receive significant disproportionate share payments from the
Medi-Cal program. Currently, both federal and state legislation places a cap on the amount of
disproportionate share funding individual qualifying hospitals may receive. [The Members'
disproportionate share funding has not yet reached this cap.] There can be no assurance that the cap will
not be lowered as a result of further legislation. Other legislative changes to the Medi-Cal program may
affect the Medi-Cal inpatient utilization rates and, subsequently, have an adverse effect on the
disproportionate share status of, and reimbursement to, the Members and other hospitals throughout the
State.
Given the above -described uncertainty surrounding disproportionate share reimbursement under
the Medi-Cal program, there can be no assurance that disproportionate share payments will not be further
decreased or eliminated, or that the Members that now qualify will continue to qualify for
disproportionate share status. Such changes would have a material adverse impact on the financial
condition of the Obligated Group. See APPENDIX A — "INFORMATION CONCERNING ST. JOSEPH
HEALTH SYSTEM AND THE OTHER OBLIGATED GROUP MEMBERS — Management's
Discussion of Financial Performance" for a discussion of the financial effect of the disproportionate share
status of the Members. Also see the audited financial statements and accompanying notes which are
provided in Appendix B.
Texas Medicaid Program
Texas legislation provides that the State of Texas will reimburse contracted hospitals for
Medicaid inpatient hospital services on or after July 1, 1986, on the basis of a predetermined rate for each
covered hospitalization. Each hospitalization is classified into one of several hundred diagnosis related
groups ("DRG") which determines the rate paid for the hospitalization.
[In October of 1994, St. Mary agreed to treat Medicaid eligible patients based on a percentage
discount from standard Medicaid rates. This arrangement provided St. Mary access to a larger pool of
potential patients. This increase in patient volume would theoretically offset the discounts required to
access the pool. St. Mary is currently in the process of renegotiating this arrangement.]
[In October of 1996, the State of Texas introduced a managed care program for the treatment of
certain Medicaid beneficiaries residing in both Lubbock County, where the facilities of the Texas
Members are located, and in the contiguous counties. Under this program, an eligible Medicaid
beneficiary chooses one of three managed care plans. The Texas Members currently contract with each
of these managed care plans. Two of these plans reimburse for medically necessary treatments based on a
per diem rate determined by statewide averages for lengths of hospitals stays. Additionally, one of these
plans reimburses partially on a DRG rate. The third plan reimburses based on a capitated rate. As
discussed above under "Medi-Cal Managed Care Initiatives," this type of payment arrangement places the
Texas Members at some risk that the aggregate amount of medical expenses incurred by the program
enrollees will exceed the amount paid for the anticipated cost of treatment. On the other hand, the Texas
Members may receive payment in excess of the expenses incurred in treating the plan enrollees.]
Indigent Care
Tax-exempt hospitals often treat large numbers of "indigent" patients who, for various reasons,
are unable to pay for their medical care. These hospitals may be susceptible to economic and political
changes which could increase the number of indigents or their responsibility for caring for this
population. General economic conditions which affect the number of employed individuals who have
health coverage will similarly affect 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 healthcare
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26
programs (including Medicare and Medicaid) may increase the frequency and severity of indigent
treatment in such hospitals. It is also possible that future legislation could require that tax-exempt
hospitals maintain minimum levels of indigent care as a condition to federal income tax exemption or
local property tax exemption. In sum, indigent care commitments of the Members could constitute a
material and adverse risk in the future.
Private Health Plans and Managed Care
Health care, including hospital services, is increasingly paid for by various "managed care" plans
which generally use discounts and other economic incentives to reduce or limit the cost and utilization of
expensive healthcare services such as inpatient hospital care. For the fiscal year ended June 30, 1998,
non -governmental managed care payments, including both capitated and non-capitated contracts,
constituted approximately 36% of the gross patient service revenues of the Obligated Group. See
APPENDIX A — "INFORMATION CONCERNING ST. JOSEPH HEALTH SYSTEM AND THE
OTHER OBLIGATED GROUP MEMBERS — HISTORICAL FINANCIAL INFORMATION — Sources
of Revenue."
In many markets, including California, managed care plans, primarily health maintenance
organizations ("HMOs"), are steadily replacing indemnity insurance as the prime source of
nongovernmental payment for hospital services. In these markets, it is probable that hospital inpatient
utilization and hospital inpatient revenues per admission will decline as managed care plans penetrate
regional markets. In addition, Medicare and Medicaid are instituting managed care contracting programs
in certain markets.
Certain private insurance companies contract with hospitals on an "exclusive" or a "preferred"
provider basis, and some insurers have introduced plans known as "preferred provider organizations"
("PPOs"). Under such plans, there may be financial incentives for subscribers to use only those hospitals
which contract with the plans. Under an exclusive provider plan, which includes most HMOs, private
payors limit coverage to those services provided by selected hospitals. With this contracting authority,
health plans and HMOs may direct patients away from nonselected hospitals by denying coverage for
services provided by them.
Most PPOs and HMOs currently pay hospitals on a discounted fee -for -service basis or on a
discounted fixed rate per day of care. Many healthcare providers, including the Members, do not have
accurate information about their actual costs of providing specific types of care. Consequently, the
discounts offered to HMOs and PPOs may result in payment at less than actual cost and the volume of
patients directed to a hospital may vary significantly from projections. Changes in utilization of certain
services may be dramatic and unexpected.
Some HMOs mandate a "capitation" payment method under which hospitals are paid a
predetermined periodic rate for each enrollee in the HMO who is "assigned" to, or otherwise directe+d to
receive care at, a particular hospital. In a capitation payment system, the hospital assumes an insurance
risk for the cost and scope of care given to such HMO's enrollees. In some cases, the capitated payment
covers total patient care provided, including physician charges. If payment under an HMO or PPO
contract is insufficient to meet the hospital's costs of care, the financial condition of the hospital could
erode rapidly and significantly. Often, contracts are enforceable for a stated term, regardless of hospital
losses. Further, HMO contracts may contain a requirement that the hospital care for enrollees for a
certain period of time regardless of whether the HMO has funds to make payment to the hospital.
Increasingly, physician practice groups, independent practice associations and physician
management companies have become a part of the process of negotiating payment rates to hospitals. This
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involvement has taken many forms, but typically increases the competition for limited payment resources
from health plans and HMOs. In California, these groups may qualify for a license to receive a "global
capitation" payment from HMOs, thus making hospitals subcontractors with potentially less influence
over hospital payment rates.
In regions where managed care is becoming prevalent, including the urban areas of California,
hospitals must be capable of attracting and maintaining managed care business, often on a regional basis.
To do so, 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 innovative cost containment efforts. There is no assurance that the Members will maintain
managed care contracts or obtain other similar contracts in the future. Failure to maintain contracts could
have the effect of reducing the Members' market share and gross patient services revenues. Conversely,
participation may maintain or increase the patient base, but could result in lower net income to the
Members if they are unable to adequately contain their costs. Thus, managed care poses one of the most
significant business risks (and opportunities) the Obligated Group faces.
As a consequence, the effect of managed care on the Members' future financial condition is
difficult to predict and may be different in the future than that reflected in the financial statements for the
current period. See APPENDIX A — "INFORMATION CONCERNING ST. JOSEPH HEALTH
SYSTEM AND THE OTHER OBLIGATED GROUP MEMBERS "
Physician Alliances and Affiliation
Many hospitals and health systems, including the Members, are pursuing strategic alliances with
physicians that may be capital intensive and may create certain business and legal liabilities for the related
hospital or health system. These alliances range from formalized relationships for managed care
contracting to full ownership of physician practices and integration of the professional and institutional
components of medical care in a unified delivery model. Such integration strategies take many forms,
including management service organizations ("MSOs") or physician -hospital organizations ("PHOs"),
which may provide a combination of financial and managed care assistance, as well as management,
facilities and equipment to groups of physicians. Other integration structures include hospital -based
clinics or medical practice foundations, which may purchase, own and operate physician practices. See
APPENDIX A — "INFORMATION CONCERNING ST. JOSEPH HEALTH SYSTEM AND THE
OTHER OBLIGATED GROUP MEMBERS — AFFILIATES OF THE CORPORATION NOT
OBLIGATED GROUP MEMBERS — St. Jude Heritage Health Foundation." Other integration structures
include hospital -based clinics or medical practice foundations, which may purchase, own and operate
physician practices.
Other Obligated Group Members are considering or undertaking the development of local MSOs
and other integration activities. See APPENDIX A — "INFORMATION CONCERNING ST. JOSEPH
HEALTH SYSTEM AND THE OTHER OBLIGATED GROUP MEMBERS."
The Corporation envisions that the St. Joseph Health System multi -hospital system (as a whole,
the "Health System") will gradually become a "fully integrated health system," meaning that it seeks
comprehensive and close alliances with its physicians in virtually all of its major markets. This strategy
is not unusual for a major health system, but it implies significant organizational, operational and
management changes and significant costs and risks over time. Such changes could have a material
adverse impact on the Obligated Group. See APPENDIX A — "INFORMATION CONCERNING
ST. JOSEPH HEALTH SYSTEM AND THE OTHER OBLIGATED GROUP MEMBERS."
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Generally, the sponsoring hospital or health system will be the primary capital source for such
alliances. Depending on the size and organizational characteristics of a particular development, these
capital requirements may be substantial. In some cases, the sponsoring hospital or health system may be
asked to provide a financial guarantee for the debt of a related entity which is carrying out the physician
affiliation. In some cases, the sponsoring hospital or health system may have an ongoing financial
commitment to provide growth capital or support operating deficits, which may be substantial on an
annual or aggregate basis. While there are many benefits which may be derived from such alliances, most
are relatively new developments with uncertain outcomes, and, therefore, invested capital is subject to
risk of loss.
These types of alliances are generally designed to respond to existing trends in the delivery of
medicine, to increase physician availability to the community and/or to enhance the managed care
capability of the affiliated hospital and physicians. However, these goals may not be achieved, and, if the
development is not successful, it may produce materially adverse results that are counterproductive to
some or all of the above -stated goals.
All such integrated delivery developments carry with them the potential for legal or regulatory
risks in varying degrees. Such developments may call into question compliance with the anti -referral
laws and relevant antitrust laws (discussed below under "Antitrust" and "Referral Laws"). Such
developments may also subject the Members to state insurance department regulation. Questions of
federal or state tax exemption may arise in certain types of developments or as a result of formation,
operation or future modification of such developments. MSOs which operate at a deficit over an
extended period of time may raise significant risks of investigation or challenge regarding tax exemption
or compliance with the anti -referral laws. In addition, depending on the type of development, a wide
range of governmental billing and reimbursement issues may arise, including questions of the
authorization of the entity to bill or collect revenue for or on behalf of the physicians involved. Other
legal and regulatory risks may arise, relating to employment, pension and benefits, and corporate practice
of medicine, particularly in the current atmosphere of frequent and often unpredictable changes in federal
and state legal requirements regarding healthcare. There can be no assurance that such issues and risks
will not lead to material adverse consequences in the future. See APPENDIX A — "INFORMATION
CONCERNING ST. JOSEPH HEALTH SYSTEM AND THE OTHER OBLIGATED GROUP
MEMBERS."
Hospital Affiliation, Merger, Acquisition and Disposition
The Health System has been in a period of potentially significant growth. As with many
multi -hospital systems, the Corporation plans for, evaluates and pursues potential merger and affiliation
candidates on a regular basis as part of its overall strategic planning and development process.
Discussions with respect to affiliation, merger, acquisition, disposition, or change of use, including those
which may affect Obligated Group Members, are held on a frequent, and usually confidential, basis with
other parties and may include the execution of nonbinding letters of intent. These are most often
conducted with acute care hospitals and most often relate to such hospitals joining the Health System. As
a result, it is probable that the organizations and assets which currently make up the Obligated Group will
change from time to time, and it is possible that new hospitals will be added as Obligated Group Members
in the future.
As part of its on -going planning and property management functions, the Corporation reviews the
use, compatibility and business viability of many of the Health System's operations, including the
Obligated Group Members, and from time to time the Corporation may pursue changes in the use of, or
disposition of, various Health System assets, including hospital facilities. Likewise, the Corporation
occasionally receives offers from, or conducts discussions with, third parties about the potential sale of
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some of the operations and properties which are a part of the Health System or the Obligated Group. The
Master Indenture does not prohibit an Obligated Group Member from withdrawing from the Obligated
Group if certain financial tests are met.
There can be no assurance that the Corporation or Members will have the capacity to manage
growth successfully, or to efficiently integrate new facilities and operations into the Health System.
Some recent experience in large multi -hospital systems indicates that rapid growth may impair the ability
of management to maintain economic performance or effectively control operating and legal risks.
Loss of Affiliates or Obligated Group Members
There is no assurance that all completed affiliations will be permanent, even when they are
originally intended to be, or that existing affiliates or Obligated Group Members will remain part of the
Health System. In California, a number of healthcare districts have initiated actions or negotiations to
revoke or revise leases of hospital facilities to nonprofit health systems. Certain Obligated Group
Members lease their hospital facilities from third parties, including California healthcare districts.
Although Obligated Group Members are subject to the provisions of the Master Indenture and other
financing documents which apply to withdrawal from the Obligated Group, the size and character of the
Obligated Group may change and could exclude some current Members. See APPENDIX A —
"INFORMATION CONCERNING ST. JOSEPH HEALTH SYSTEM AND THE OTHER OBLIGATED
GROUP MEMBERS — Hospital Leases."
Affiliates
Currently, the Obligated Group Members also have operating affiliations and joint ventures with
other nonprofit and for profit corporations. In certain instances, such affiliates may conduct operations
which are of strategic importance to the applicable Obligated Group Member, or their operations may
subject the Obligated Group Member to potential legal or financial liabilities. In many cases, Obligated
Group Members fund the affiliates on a start-up or ongoing basis, and this funding may be significant.
For more information regarding a potential affiliation involving the Corporation that is currently
under discussion, see APPENDIX A — "INFORMATION CONCERNING ST. JOSEPH HEALTH
SYSTEM AND THE OTHER OBLIGATED GROUP MEMBERS — Growth of Obligated Group — North
Coast Health Care Centers."
Other Acquisitions and Affiliations
In addition to relationships with hospitals and physicians, the Corporation and other Members
may consider investments, ventures, affiliations, development and acquisition of other healthcare -related
entities. These may include home health care, long-term care entities or operations, infusion providers,
pharmaceutical providers, and other healthcare enterprises which support the overall operations of the
Obligated Group. In addition, the Corporation may pursue such transactions with health insurers, HMOs,
preferred provider organizations, third -party administrators and other health insurance -related businesses.
Because of the integration occurring throughout the healthcare field, the Corporation will consider such
arrangements where there is a perceived strategic or operational benefit for the Obligated Group. Because
of rapid growth and fraud in the home health care arena, the Medicare program recently placed a
moratorium on issuing new home healthcare agency provider numbers. It is unclear how such a
moratorium could affect potential arrangements with home healthcare providers.
All such initiatives may involve significant capital commitments and/or capital or operating risk
(including, potentially, insurance risk) in a business in which the Corporation may have less expertise
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30
than in hospital operations. There can be no assurance that these projects, if pursued, will not lead to
material adverse consequences.
Antitrust
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 and 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 still evolving, and enforcement activity by federal
and state agencies appears to be increasing. Violators of the antitrust laws may be subject to criminal
and/or civil enforcement by federal and state agencies, as well as by private litigants. Common areas of
potential liability are joint action among providers with respect to payor contracting and medical staff
credentialing. With respect to payor contracting, the Obligated Group Members may, from time to time,
be involved in joint contracting activity with hospitals, physicians or other providers. The precise degree,
if any, to which this or similar joint contracting activities may expose the participants to antitrust risk is
dependent on a myriad of factual matters. Physicians who are subject to adverse peer review proceedings
may file federal antitrust actions against hospitals and seek treble damages. Hospitals, including the
Members, regularly have disputes regarding credentialing and peer review, and therefore may be subject
to liability in this area. In addition, hospitals occasionally indemnify medical staff members who are
involved in such credentialing or peer review activities, and may also be liable with respect to such
indemnity.
Another potential area of liability is merger and affiliation activity if a hospital's local market
power in the inpatient hospital market or related healthcare business becomes too great. In addition, the
creation of market power or monopoly power through contracting with a high percentage of physicians
within a given market may result in antitrust risks. The Members may also work with, rely upon and
sometimes invest in medical groups or physician practice management companies. If any of these
medical groups or management companies is determined to have violated the antitrust laws, the Member
also may be subject to liability.
From time to time, the Members may be involved with all of these types of activities, and it
cannot be predicted in general when or to what extent liability may arise, if any. Liability in any of these
or other trade regulation areas may be substantial, depending on the facts and circumstances of each case.
Referral Laws
There is an expanding body of federal and state law which regulates and, to some extent,
prohibits referrals of physicians to hospitals where there exists certain broadly defined economic
relationship between the parties. As both economic relationships and referrals are prevalent among
various types of providers, and particularly between hospitals and physicians, the potential risk of
violation of these referral laws is significant, and the consequences may be materially adverse.
Under federal law, there are two statutory schemes by which referrals are regulated. These
statutes are broadly drafted and are inordinately complex. As a result, both their coverage and their effect
on provider behavior is uncertain in many respects. Yet, failure to comply with these statutes may result
in material penalties, including permanent or temporary exclusion from the Medicare and Medicaid
programs, nonpayment (or recoupment of prior payments) for Medicare and Medicaid services rendered
in connection with the prohibited referrals, substantial fines, and criminal and civil penalties.
Various states, including California [and Texas], also have one or more bodies of law designed to
prevent or regulate certain types of referrals. These restrictions are generally simpler than the federal
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restrictions, but may be equally vague with respect to their coverage and effect. Generally, the state
referral laws have less onerous penalties, but, as a practical matter, they could be materially adverse in
certain circumstances.
The above -referenced referral laws are numerous, complex, partially overlapping, and sometimes
lacking in consistency, either among themselves or with other statutory or regulatory requirements. As a
result, healthcare managers are often unfamiliar with the specific requirements of these statutes, believe
they are inapplicable or unenforceable, or misunderstand their applicability. Since many relationships
which are common to healthcare may be prohibited by various of the referral laws, it is possible that
many existing relationships could be challenged and enforcement action may be taken. While no clear
patterns of enforcement have emerged, enforcement activity appears to be increasing and enforcement
authorities appear to be taking more aggressive approaches.
Because of its size, the ambit of its operations, and the various transactions undertaken, the
Health System or one or more of the Obligated Group Members are likely targets of investigation, and,
potentially, enforcement action. In any such enforcement action, the enforcement authorities are in a
position to compel provider settlements through withholding or threatening to withhold Medicare and/or
Medicaid payments, and/or by threatening criminal action. In addition, the cost of defending such an
action, the time and management attention consumed thereby and the facts of a particular case may
dictate settlement. Therefore, regardless of the merits of a particular case or cases, the Obligated Group
could experience materially adverse settlement costs. Prolonged and publicized investigation could be
damaging to the reputation, business and credit of Obligated Group Members or the Health System as a
whole, regardless of their outcome.
Management is not currently aware of any investigation or enforcement action of this type
targeted at the Corporation or any of the Obligated Group Members or their affiliates or subsidiaries.
While the Health System has a compliance program in place, Management can give no assurance that an
investigation or enforcement action will not occur in the future, or that an unannounced investigation is
not now occurring.
Given the lack of regulatory guidance and case law to date, it is not possible to accurately assess
the degree of risk and the potential that various relationships may be successfully challenged. Given that
an enforcement action could result in temporary or permanent exclusion from the Medicare or Medicaid
programs, a substantial withhold of payments from such programs, and/or substantial criminal or civil
fines and penalties, the risk must be assumed to be adverse and material. This risk applies to a wide
variety of activities undertaken by multiple Obligated Group Members, or by affiliates or subsidiaries for
which the Member may have direct or indirect liability.
In this context, please note the Obligated Group's substantial reliance on Medicare payments (see
"The Medicare Program," above). In addition, the IRS has stated that violations by tax-exempt entities of
certain of the federal referral laws may also result in revocation of the exempt entity's tax-exempt status,
[or, as a practical matter, in penalty payments to, or settlements with, the IRS.]
Risks in Health Care Delivery
General. Efforts by health insurers and governmental agencies to limit the cost of hospital
service and to reduce utilization of hospital facilities may reduce future revenues.
U.S. hospitals are considered to have significant excess capacity. Through various combinations
of changes in governmental policy, competition, advances in technology and treatment, and changes in
payment methodology to reduce incentives for inpatient hospital utilization, inpatient hospitalizations
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have generally decreased over the past five years. It is probable that these trends will continue, and the
factors mentioned above will continue to create operational and economic uncertainty for hospitals. It is
now generally acknowledged that hospital operations pose greater complexity and higher risk than in
years past, and this trend may also continue. It is not practical to enumerate each and every operating risk
which may result from hospital operations, and certain risks or combinations of risks which are now
unanticipated may have material adverse results in the future. Certain risks relating to hospital operations
are enumerated below.
Competition. Increased competition from a wide variety of potential sources, including, but not
limited to, other hospitals, inpatient and outpatient healthcare facilities, clinics, physicians and others,
may adversely and increasingly affect the utilization and/or revenues of the Obligated Group Members.
Existing and potential competitors may not be subject to various regulations and restrictions applicable to
the Members, and may be more flexible in their ability to adapt to competitive opportunities and risks.
Certain new competitors, such as home health and infusion providers, and certain niche providers, such as
specialized cardiology or oncology companies, specifically target hospital patients as their prime source
of revenue growth. Some of these companies have aggressive business and marketing plans, and some
are well capitalized. If these competitors are successful, some of the most profitable aspects of inpatient
hospital operations may be stripped away, and/or overall hospital utilization may decline further.
Competition may, in the future, arise from new sources not currently anticipated or prevalent.
Labor Relations. Hospitals are large employers with a wide diversity of employees.
Increasingly, employees of hospitals are becoming unionized, and many hospitals have collective
bargaining agreements with one or more labor organizations. Employees subject to collective bargaining
agreements may include essential nursing and technical personnel, as well as food service, maintenance
and other trade personnel. Certain Obligated Group Member employees are: covered by collective
bargaining agreements. See APPENDIX A — "INFORMATION CONCERNING ST. JOSEPH HEALTH
SYSTEM AND THE OTHER OBLIGATED GROUP MEMBERS — Employees."
Physician Contracting and Relations. The Members have entered into a wide variety of
relationships with physicians. Many of these relationships may be of material importance to the
operations of the Members' facilities, and, in an increasingly complex legal and regulatory environment,
these relationships pose a variety of legal or business risks. Increasingly, the focus of these relationships
is a physician practice group or independent practice association that concentrates a large number of
physicians in a limited number of contracting organizations. This increases the importance of these
contracts and increases the risk of the loss of one or more such contracts.
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, denied or revoked often file legal actions against hospitals and
medical staffs. Such actions may include a wide variety of claims, some of which could result in
substantial uninsured damages to a hospital. In addition, failure of the hospital governing body to
adequately oversee the conduct of its medical staff may result in hospital liability to third parties. All
hospitals, including those operated by the Members, are subject to such risks.
Certain contracts between hospitals and physicians may be void or voidable by challenge from a
party in situations where a hospital exercises certain aspects of control over a physician's practice or
where the physician is in a position to refer patients to the hospital and is compensated based on a
percentage of revenues formula. In many cases, the determination of the validity of such agreements and
the materiality of their loss is dependent on factual circumstances and on the relative position of the
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parties at a particular time. Consequently, the outcome cannot be determined with precision in advance of
a dispute or controversy with respect to the relationship. Management of the Corporation is not aware of
specific, related controversies that they believe would lead to the loss of a contractual relationship which
would be material with respect to the operation or financial condition of the entire Obligated Group.
Certain contracts entered into with physicians or physician groups create an exclusive
relationship. With increased competition among healthcare providers and the increasing frequency of the
application of antitrust principles in healthcare, such exclusive relationships are subject to challenge,
generally by other physicians competing with those who have the exclusive relationship. Absent facts
which may arise from a specific challenge or controversy, the validity of such agreements cannot in many
cases be accurately determined, nor can the materiality of the loss of the exclusive relationship to a
hospital or the damages, if any, which might be assessed against the parties to it. The Members presently
have limited exclusive relationships of the type described. As of the date hereof, management of the
Corporation is not aware of specific controversies which management believes might lead to the loss of
an exclusive contractual relationship, or to an award of damages, that would be material with respect to
the operation or financial condition of the entire Obligated Group.
Technology and Services. Scientific and technological advances, new procedures, drugs and
appliances, preventive medicine, occupational health and safety and outpatient healthcare delivery may
reduce utilization and revenues of the Obligated Group Members in the future. Technological advances
in recent years have accelerated the trend toward the use by hospitals of sophisticated, and costly,
equipment and services for diagnosis and treatment. The acquisition and operation of certain equipment
or services may continue to be a significant factor in hospital utilization, but the ability of the Obligated
Group Members to offer such equipment or services may be subject to the availability of equipment or
specialists, governmental approval or the ability to finance such acquisitions or operations.
Licensing, Surveys, Investigations and Audits
Health facilities, including those operated by the Members, are subject to numerous legal,
regulatory, professional and private licensing, certification and accreditation requirements. These
include, but are not limited to, requirements relating to Medicare and Medicaid participation and
payment, state licensing agencies, private payors and the Joint Commission on Accreditation of
Healthcare Organizations. Renewal and continuance of certain of these licenses, certifications and
accreditations are based on inspections, surveys, audits, investigations or other reviews, some of which
may require or include affirmative action or response by the Members. These activities generally are
conducted in the normal course of business of health facilities. Nevertheless, an adverse result could
result in a loss or reduction in the affected Member's scope of licensure, certification or accreditation, or
could reduce the payment received or require repayment of amounts previously remitted.
Management of the Corporation currently anticipates no difficulty renewing or continuing
currently held licenses, certifications or accreditation, nor does it anticipate a reduction in third -party
payments from such events which would materially adversely affect the operations or financial condition
of the entire Obligated Group. Nevertheless, actions in any of these areas could result in the loss of
utilization or revenues, or the Members' ability to operate all or a portion of their health facilities, and,
consequently, could have a material and adverse effect on the Members' ability to make the debt service
payments relating to the Certificates.
California Seismic Requirements
Many of the California Members' facilities are in close proximity to active earthquake faults.
Although all California Members' facilities are covered by earthquake insurance, a significant earthquake
SFLIBI/1047260/3/14040100348/dutiyp/Scptember 10, 1998 - 5:01
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in California could have a material adverse effect on one or more Members and could result in material
damage and temporary or permanent cessation of operations at affected facilities.
Earthquakes affecting California hospitals have prompted the State of California to impose new
hospital seismic safety standards. Under these new standards, generally by 2008, California hospitals will
be required to meet stringent seismic safety criteria which may necessitate major renovation in certain
facilities or even their partial or full replacement. The potential capital costs and negative operating
effects of such a replacement could be material and adverse. The Corporation has engaged a seismic
consultant to evaluate the Corporation's obligations under the new standards.
Environmental Laws and Regulations
Healthcare providers are subject to a wide variety of federal, state and local environmental and
occupational health and safety laws and regulations which address, among other things, provider
operations or facilities and properties owned or operated by providers. Among the types of regulatory
requirements faced by healthcare providers are: air and water quality control requirements; waste
management requirements; specific regulatory requirements applicable to asbestos, polychlorinated
biphenyls, and radioactive substances; requirements for providing notice to employees and members of
the public about hazardous materials handled by or located at the provider; requirements for training
employees in the proper handling and management of hazardous materials and wastes; and other
requirements.
In their role as owners and/or operators of properties or facilities, hospitals may be subject to
liability for investigating and remedying any hazardous substances that have come to be located on
hospital property, including any such substances that may have migrated off the property. Typical
healthcare provider operations include, but are not limited to, in various combinations, the handling, use,
treatment, storage, transportation, disposal and/or discharge of hazardous, infectious, toxic, radioactive
and flammable materials, wastes, pollutants or contaminants. As such, healthcare provider operations are
particularly susceptible to the practical, financial and legal risks associated with the obligations imposed
by applicable 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; may result in investigations, administrative proceedings, civil
litigation, criminal prosecution, penalties or other governmental agency actions; and may not be covered
by insurance. There can be no assurance that the Obligated Group Members will not encounter such risks
in the future, and such risks may result in material adverse consequences to the operations or financial
condition of the Obligated Group Members.
At the present time, management of the Corporation is not aware of any pending or threatened
claim, investigation or enforcement action regarding such environmental issues, or any instance of
contamination, which, if determined adversely to any Member, would have material adverse
consequences to the Obligated Group.
Factors That Could Affect the Enforceability of the Loan Agreement and Obligation No. 33
The legal right and practical ability of the Trustee to enforce its rights and remedies against the
Corporation under the Loan Agreement and related documents and of the Master Trustee to enforce its
rights and remedies against the Members under Obligation No. 33 may be limited by laws relating to
bankruptcy, insolvency, reorganization, fraudulent conveyance or moratorium and by other similar laws
affecting creditors' rights, including self-help remedies, applicable foreclosure procedures and application
of equitable principles. In addition, the 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
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instances require judicial actions that are often subject to discretion and delay or that otherwise may not
be readily available or may be limited. See "SECURITY FOR THE BONDS."
Bankruptcy
In the event of bankruptcy of a Member, the rights and remedies of the Bondholders are subject to
various provisions of the federal Bankruptcy Code. If such Member were to file a petition in bankruptcy,
payments made by the Members 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 Member's
liquidation. Security interests and other liens granted to the Trustee or the Master Trustee and perfected
during such preference period may also 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 a 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 Trustee and the Master Trustee. If the bankruptcy court so
ordered, the property of a Member, including accounts receivable and proceeds thereof, could be used for
the financial rehabilitation of such Member despite any security interest of the Trustee therein. The rights
of the Trustee and Master Trustee to enforce their respective security interests and other liens could be
delayed during the pendency of the rehabilitation proceeding.
A Member could file a plan for the adjustment of its debts in any such proceeding which 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.
Enforceability of the Master Indenture
The state of the insolvency, fraudulent conveyance and bankruptcy laws relating to the
enforceability of guaranties or obligations issued by one corporation in favor of the creditors of another or
the obligations of an Obligated Group Member to make debt service payments on behalf of another
Obligated Group Member is unsettled and the ability to enforce the Master Indenture and the Obligations
against any Obligated Group Member which 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.
Cost Overruns and Cash Commitments
The Obligated Group Members are currently undertaking a number of construction projects and
are expected to undertake additional projects in the future. Numerous risks are involved in any such
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project, including delays and increased costs due to strikes, shortages of materials, environmental laws
and regulations, adverse weather conditions, changes in project design, inflation and numerous other
factors. Risks may be particularly acute where projects must be undertaken on a cost-plus basis and
without precisely defined parameters, as in the development of new technologies. Therefore, there can be
no assurance that the costs of completing projects currently pursued or planned by the Obligated Group
Members will not greatly increase due to these and other factors.
General Litigation and Insurance
Litigation. As with most multi -hospital systems, there are, at any point in time, a number of
medical malpractice actions filed or pending. Generally, these will be paid or settled from insurance
and/or self-insurance coverage, and some will not be pursued by plaintiffs. However, certain actions may
seek punitive or other damages which may not be covered by insurance. Litigation also arises from the
corporate and business activities of the Members and certain affiliates, from their status as major
employers, and as a result of medical staff peer review activities or the denial of medical staff privileges.
A U.S. Supreme Court decision allows physicians who are subject to adverse peer review proceedings to
file federal antitrust actions against hospitals and seek treble damages. As with medical malpractice,
many of these risks are covered by insurance or self-insurance, but some are not. In the unlikely event
that a substantial number of uncovered claims were to be determined adversely to the Members as
defendants in such claims, and substantial monetary damages were to be awarded in each, there could be
a material negative effect on the Obligated Group's financial condition. See "ABSENCE OF
MATERIAL LITIGATION" herein.
Insurance. The Obligated Group Members currently have comprehensive general liability
insurance coverage through commercial insurers. While the Corporation's management considers such
insurance coverage to be adequate, no assurance can be given that such coverage will be available for
purchase in the same amounts in the future.
Year 2000 Issues
The year 2000 issue is the result of computer programs being written using two digits rather than
four to define the applicable year. Any of the Members' computer programs that have time -sensitive
software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations, including, among other things, a
temporary inability to process transactions, bill patients or other payors, or engage in similar normal
business activities.
[Based on a recent assessment, the Corporation has determined that it will be required to modify
or replace significant portions of its software so that its computer systems will function properly with
respect to dates in the year 2000 and thereafter. The Corporation has began a process of correction and
presently believes that with modifications to existing software and conversions to new software, the year
2000 issue will not pose significant operational problems for the Members' computer systems. However,
if such modifications and conversions are not made, or are not completed timely, the year 2000 issue
could have a material impact on the operations of the Members.
The Members have initiated formal communications with all of the Members' significant
suppliers and large payors to determine the extent to which the Members' interface systems are vulnerable
to those third parties' failure to remediate their own year 2000 issues. The Members total year 2000
project cost and estimates to complete include the estimated costs and time associated with the impact of
third party year 2000 issues based on presently available information. However, there can be no
SFLIBI/1047260/3/14040/00348/duffyp/September 10, 1998 - 5:01
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guarantee that the systems of other companies on which the Members' systems rely will be timely
converted and would not have an adverse effect on the Members' systems.
The Members will utilize both internal and external resources to reprogram, or replace, and test
the software for year 2000 modifications. The Members anticipate completing their year 2000 project not
later than . Management estimates the total cost of the year 2000 project at
$ million, which will be funded through operating revenues. Of the total project cost, approximately
$ million is attributable to the purchase of new software and equipment that will be capitalized. The
remaining $ , which will be expensed as incurred, is not expected to have a material effect on the
results of operations. To date, the Members have incurred approximately $ million (all capitalized
for new systems), related to the assessment of, and preliminary efforts on, its year 2000 project and the
development of a modification plan, purchase of new systems and systems modifications.]
The costs of the project and the date on which the Members believe they will complete the year
2000 modifications are based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated. Specific factors that might
cause such material differences include, but are not limited to, the availability and cost of personnel
trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties.
Additional risk factors associated with the year 2000 issue include the possibility of delayed
payments to Bondholders by the Trustee.
Other Factors
Additional factors that may affect future operations, and therefore revenues, of the Obligated
Group Members include the following, among others:
(1) A change in the federal income tax or other federal, state or local laws to require
the Obligated Group Members to render substantially greater services without charge or at a
reduced charge; '
(ii) Natural disasters, including floods and earthquakes, which could damage the
Members' facilities or otherwise impair the operations of the Obligated Group and the general
revenues from the Members' facilities.
ABSENCE OF MATERIAL LITIGATION
There is no controversy or litigation of any nature now pending against the Corporation or any
other Member of the Obligated Group, or to the knowledge of their respective officers (A) threatened,
restraining or enjoining the issuance, sale or execution of the Bonds, or (B) in any way contesting or
affecting/ (i) the validity of the Bonds or (ii) any proceedings of the Corporation or any other Member of
the Obligated Group taken concerning the issuance or sale thereof, or the collection of Revenues pledged
under the Indenture.
As with most hospitals, the Members of the Obligated Group are subject to certain legal actions
which, in whole or in part, are not or may not be covered by insurance 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 which permits full evaluation.
SFLIBI/1047260.'3/14040/00348/duffyp/September 10, 1998-5:01
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[Currently there are certain legal actions pending against Members known to the Senior Vice President
for Legal Services of the Corporation and for which insurance coverage in whole or in part is uncertain
for the reasons stated above.]
In the opinion of the Senior Vice President for Legal Services of the Corporation, no pending
case, individually or in the aggregate, including threatened cases known to such officer, is currently
anticipated to be likely to have a material adverse effect on the financial condition of the Obligated Group
as a whole.
TAX MATTERS
In the opinion of Orrick, Herrington & Sutcliffe LLP, Sacramento, California ('Bond Counsel'),
based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among
other matters, 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 (the "Code") and is
exempt from taxation by the State of Texas, and any municipality or other political subdivision of the
State of Texas, excluding inheritance tax. Bond Counsel is of the further opinion that interest on the
Bonds is not a specific preference item for purposes of the federal individual or corporate alternative
minimum taxes, although Bond Counsel observes that such interest is included in adjusted current
earnings in calculating federal corporate alternative minimum taxable income. A copy of the form of
opinion of Bond Counsel with respect to the Bonds is set forth in Appendix E hereto.
The difference (if any) between the issue price of any maturity of the Bonds and the amount to be
paid at maturity of such Bonds (excluding amounts stated to be interest and payable a least annually over
the term of such Bonds) constitutes 'original issue discount," the accrual of which, to the extent properly
allocable to each owner thereof, is treated as interest on the Bonds which is excluded from gross income
for federal income tax purposes. 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. 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 purchasers 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.
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 Issuer and
the Corporation have covenanted to comply with certain restrictions designed to insure that interest on the
Bonds will not be included in federal gross income. 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 compliance with these
covenants. The opinion of Bond Counsel also assumes that actions of the Corporation, the Issuer, and
other persons taken subsequent to the date of issuance of the Bonds will not cause any of the Bonds to
exceed the $150,000,000 limitation on qualified 501(c)(3) bonds that do not finance hospital facilities, as
set forth in Section 145(b) of the Code. 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) after the date of
issuance of the Bonds may adversely affect the value of, or the tax status of interest on, the Bonds.
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W
Further, no assurance can be given that pending or future legislation or amendments to the Code, if
enacted into law, or any proposed legislation or amendments to the Code, will not adversely affect the
value of, or the tax status of interest on, the Bonds.
In addition, Bond Counsel has relied on the opinions of McCutchen, Doyle, Brown & Enersen,
San Francisco, California and Strasburger & Price, LLP, Dallas, Texas, Counsel to the California
Members and the Texas Members, respectively, regarding the current qualification of the Obligated
Group Members as organizations described in Section 501(c)(3) of the Code and other matters. Neither
Bond Counsel nor the respective Counsels to the Members of the Obligated Group can give or has given
any opinion or assurance about the future activities of the Obligated Group Members, 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 Internal Revenue Service. Failure of each of the Obligated Group
Members 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 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.
Certain requirements and procedures contained or referred to in the Indenture, the Loan
Agreement, the Tax Certificate, and other relevant documents may be changed and certain actions
(including, without limitation, defeasance of the Bonds) may be taken or omitted under the circumstances
and subject to the terms and conditions set forth in such documents. Bond Counsel expresses no opinion
as to any Bond or the interest thereon if any such change occurs or action is taken or omitted upon the
advice or approval of counsel other than Orrick, Herrington & Sutcliffe LLP.
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 certain state taxes as described above, the
ownership or disposition of, or the accrual or receipt of interest on, the Bonds may otherwise affect a
Bondholder's federal or state tax liability. The nature and extent of these other tax consequences will
depend upon the particular tax status of the Bondholder or the Bondholder's other items of income or
deduction. Bond Counsel expresses no opinion regarding any such other tax consequences.
APPROVAL OF LEGALITY
Legal matters incident to the delivery of the Bonds are subject to the approval of validity by
Orrick, Herrington & Sutcliffe LLP, Sacramento, California, as Bond Counsel, and delivery of the
approving opinion of the Attorney General of the State of Texas and the approval of certain legal matters
by Fulbright & Jaworski, Austin, Texas, Special Texas Counsel, and the approval of certain matters for
the Issuer, by its counsel. Bond Counsel undertakes no responsibility to purchasers of the Bond for the
accuracy, completeness or fairness of this Official Statement. Certain legal matters as to the Bonds are
subject to the approval for the California Members by their Counsel, McCutchen, Doyle, Brown &
Enersen, San Francisco, California, and for the Texas Members by their counsel Strasburger & Price,
LLP, Dallas, Texas, and for the Underwriters by their counsel, Brown & Wood LLP, San Francisco,
California, which also undertake no responsibility to the purchasers of the Bonds for the accuracy,
completeness or fairness of this Official Statement.
VERIFICATION OF MATHEMATICAL COMPUTATIONS
Grant Thornton LLP, a firm of independent public accountants, will deliver to the Issuer its
special report indicating that they have prepared mathematically accurate computations based upon
SFLIBI/1047260/3/14040/00348/duffyp/September 10, 1998.5:01
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L�
V
information and assumptions provided to them by the Obligated Group Members and their
representatives. Included in the scope of their examination will be a verification of the mathematical
accuracy of. (a) the adequacy of the maturing principal amounts of and interest earned on certain
investments to be held in (i) the 1987 Escrow Fund to provide for the payment of all principal and interest
on the 1987 Bonds to the respective redemption dates thereof, (ii) the 1990 Escrow Fund to provide for
the payment of all principal and interest on the 1990 Bonds to the respective maturity dates thereof,
(iii) the 1991 Escrow Fund to provide for the payment of all principal and interest on the 1991 Bonds to
the respective redemption date thereof; and (iv) the 1993 Escrow Fund to provide for the payment of all
principal and interest on the 1993 Bonds to the respective redemption dates thereof and (b) certain
mathematical computations of yield supporting the conclusion of Bond Counsel that the Bonds are not
"arbitrage bonds" under the Code and the regulations promulgated thereunder.
The report of Grant Thornton LLP will include the statement that the scope of their engagement
was limited to preparing mathematically accurate computations contained in schedules prepared by them
and that they have no obligation to update their report because of events occurring, or data or information
coming to their attention, subsequent to the date of their report.
UNDERWRITING
The Bonds are being purchased by Morgan Stanley & Co., Incorporated as Underwriter. The
Underwriter has agreed to purchase the Bonds at an aggregate discount of $ from the par
amount set forth on the cover page hereof, which aggregate discount consists of an original issue discount
of $ and the Underwriter's discount of $ . The Bond Purchase Contract provides
that the Underwriter will purchase all of the Bonds, if any are purchased, and contains the agreements of
the Members to indemnify the Underwriter and the Issuer, as applicable, against certain liabilities to the
extent permitted by law. The initial public offering prices set forth on the cover page may be changed
without notice from time to time by the Underwriter.
FINANCIAL ADVISOR
John Nuveen & Co. Incorporated has acted as financial advisor to the Corporation in connection
with the execution and delivery of the Bonds.
FINANCIAL STATEMENTS
The Consolidated Financial Statements of St. Joseph Health System and Affiliates as of June 30,
1997 and 1998 and for each of the two years then ended, included in Appendix B to this Official
Statement, have been audited by Ernst & Young LLP, independent auditors, as stated in their report
appearing therein.
The Consolidated Financial Statements of Lubbock Methodist Hospital System and Affiliates as
of May 31, 1996 and 1997 and for each of the two years then ended, included in Appendix C to this
Official Statement, have been audited by KPMG Peat Marwick LLP, independent auditors, as stated in
their report appearing therein. The Consolidated Financial Statements of Lubbock Methodist Hospital
System and Affiliates as of May 31, 1998 and for the year then ended, included in Appendix C to this
Official Statement, are unaudited and have been prepared by the [Corporation].
SFLIBI/ID47260/3/14040/00348/duffyp/September 10, 1998 - 5:01
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4
RATINGS
Moody's Investors Service and Standard & Poor's Ratings Group have given the Bonds ratings of
[Aa3 and AA], respectively. No application was made to any other rating agency. for the purpose of
obtaining an additional rating on the Bonds. Any explanation of the significance of such ratings may only
be obtained from the rating agency furnishing the same. The Members furnished to the rating agencies
certain information and materials concerning the Bonds and the Obligated Group. 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 the ratings might not be lowered or
withdrawn entirely by the rating agencies if in their judgment circumstances so warrant. The Issuer, the
Members and the Underwriters have undertaken no responsibility either to bring to the attention of the
Holders of the Bonds any proposed change in or withdrawal of the applicable ratings or to the 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.
MISCELLANEOUS
The foregoing and subsequent summaries or descriptions of provisions of the Bonds, the
Indenture, the Loan Agreement, the Master Indenture, Supplemental Master Indenture No. 33, Obligation
No. 33 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.
Reference is made to said documents for full and complete statements of the provisions of such
documents. The appendices attached hereto are a part of this Official Statement. Copies, in reasonable
quantity, of the Indenture, the Loan Agreement and the Master Indenture may be obtained during the
offering period upon request to the Underwriters and thereafter upon request to the principal corporate
trust office of the Trustee.
SFLIBI/104726013/14040/00348/dufTyp/September 10, 1998 -5:01
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.1
This Official Statement has been approved by the Issuer and St. Joseph Health System on behalf
of the Obligated Group. This Official Statement is not to be construed as a contract or agreement
between the Issuer or any Member of the Obligated Group and the purchasers or Holders of any of the
Bonds.
LUBBOCK HEALTH FACILITIES DEVELOPMENT
CORPORATION
Lin
President
ST. JOSEPH HEALTH SYSTEM
By:
Authorized Representative
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.;, _4- r
Draft
B&W LLP
9/10/98
APPENDIX A
INFORMATION CONCERNING ST. JOSEPH HEALTH SYSTEM
AND THE OTHER OBLIGATED GROUP MEMBERS
The information contained herein as Appendix A to this Official Statement has been obtained
from St. Joseph Health System.
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i y r r
TABLE OF CONTENTS
Page
HISTORY AND DEVELOPMENT OF THE OBLIGATED GROUP........................................................I
AFFILIATION WITH LUBBOCK METHODIST HOSPITAL SYSTEM..................................................2
INFORMATION CONCERNING THE ST. JOSEPH OBLIGATED GROUP MEMBERS ......................2
General................................................................................................................................................. 2
ExistingMembers................................................................................................................................4
NewMembers......................................................................................................................................5
HISTORICAL UTILIZATION.....................................................................................................................6
AFFILIATES OF THE CORPORATION NOT OBLIGATED GROUP MEMBERS..............................10
IntegratedPhysician Operations........................................................................................................10
AmericanUnity Group, Ltd...............................................................................................................10
Hospital Fund -Raising Foundations...................................................................................................10
St. Joseph Professional Services Enterprises, Inc...............................................................................10
Lubbock Methodist Hospital Services, Inc........................................................................................10
HISTORICAL FINANCIAL INFORMATION.......................................................................................... I I
Summary of Revenues and Expenses of Existing Members..............................................................I I
Summary of Revenues and Expenses of the New Members.............................................................. I I
Unaudited Pro Forma Combined Summary of Revenue and Expenses.............................................12
Management's Discussion of Financial Performance........................................................................13
Historical Debt Service Coverage......................................................................................................18
ProForma Capitalization...................................................................................................................19
Pro Forma Sources of Revenue - Obligated Group............................................................................20
YEAR2000.................................................................................................................................................21
COMPETITION..........................................................................................................................................21
General...............................................................................................................................................21
Member Hospitals' Market Share......................................................................................................21
GOVERNANCE.........................................................................................................................................22
TheCorporation.................................................................................................................................22
OtherObligated Group Members.......................................................................................................23
Management.......................................................................................................................................24
EMPLOYEES.............................................................................................................................................29
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HISTORY AND DEVELOPMENT OF THE OBLIGATED GROUP
General
St. Joseph Health System, a California nonprofit public benefit corporation headquartered in
Orange, California (the "Corporation"), was incorporated in 1981 by its Roman Catholic order sponsor,
the Congregation of the Sisters of St. Joseph of Orange (the "St. Joseph Congregation"), to become the
sole corporate member and "parent" organization of the various corporations operating the St. Joseph
Congregation's hospitals and other affiliated healthcare entities then in existence. The healthcare
activities of the hospitals in the St. Joseph system date back to 1920 with the founding of the St. Joseph
Congregation's first hospital, St. Joseph Hospital of Eureka.
The Corporation and the various corporations operating the hospitals and other related healthcare
entities affiliated with the Corporation at any particular point in time are sometimes collectively referred
to herein as the "St. Joseph System." [Add System discussion: general description, strategy, regional
structure.]
The Corporation provides integrated strategic leadership and various centralized management
functions for the St. Joseph System, including strategic and financial planning, financial reporting,
treasury management, information systems services, human resource programs, centralized materials
management services, third -party payor contracting and continuous quality assurance services, insurance
and risk management programs, in-house legal services, marketing, public affairs and corporate
communications services, physician and other healthcare professional relationship coordination, Catholic
mission services, and bioethics consultation services through the Center for Health Care Ethics. Certain
powers of each of the hospitals and other corporations for which the Corporation is sole corporate
member are reserved to the Corporation while other powers are retained by such entities.
On June 10, 1998, the Corporation and Sisters of St. Joseph of Texas d/b/a. St. Mary of the Plains
Hospital and Rehabilitation Center, a Texas nonprofit corporation and a Member of the Obligated Group
("St. Mary of the Plains") and its direct and indirect subsidiaries consummared an affiliation (the
"Methodist Affiliation") with Lubbock Methodist Hospital System ("LMHS"), Methodist Hospital,
Lubbock, Texas ("Methodist Lubbock"), their direct and indirect subsidiaries and Covenant Health
System ("CHS"), a newly formed corporation, the members of which are the Corporation and LMHS. In
furtherance of the Methodist Affiliation, LMHS transferred its membership in Methodist Lubbock,
Methodist Hospital, Levelland ("Methodist Levelland"), Methodist Hospital, Plainview ("Methodist
Plainview"), Methodist Children's Hospital ("Methodist Children's") and certain other subsidiaries of
LMHS and the Corporation transferred its membership in St. Mary of the Plains to CHS. CHS, Methodist
Lubbock, Methodist Levelland, Methodist Plainview and Methodist Children's (collectively, the "New
Members") will join the Obligated Group as of the date of the issuance of the Bonds. See "Affiliation
with Lubbock Methodist Hospital System" below. See "INFORMATION CONCERNING THE ST.
JOSEPH OBLIGATED GROUP MEMBERS -- New Members" for more information concerning the
New Members.
The corporations in the St. Joseph System undertake the predominant portion of their borrowing
activities under a Master Trust Indenture, dated as of December 1, 1983, as amended and supplemented to
date (the "Master Indenture") pursuant to which the Corporation and Obligated Group Members
(described below) agree to be jointly and severally obligated for debt incurred under the Master Indenture.
As of June 30, 1998, the Corporation and ten other corporations in the St. Joseph System (described
below under "Information Concerning the St. Joseph Obligated Group Members") composed the
Obligated Group. Those ten corporations, together with the Corporation, are referred to herein as the
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l � Y
"Existing Members." The Existing Members and the New Members are collectively referred to as the
"Members" or the "Obligated Group," and individually each as a "Member".
Affiliation with Lubbock Methodist hospital System
On June 10, 1998, the Corporation executed an Amended and Restated Definitive Agreement (the
"Definitive Agreement") with St. Mary of the Plains, CHS, LMHS and Methodist Hospital to
consummate the Methodist Affiliation. Under the Definitive Agreement, CHS, a newly created
corporation, became the corporate parent of Methodist Lubbock, Methodist Children's, Methodist
Levelland, Methodist Plainview and St. Mary of the Plains. In addition, the other direct and indirect
subsidiaries of LMHS, Methodist Lubbock and St. Mary of the Plains were put under the control of CHS
(excluding LMHS, Methodist Hospital's fundraising foundation and an interest in a regional health
maintenance organization which LMHS owns pending an anticipated transfer to CHS. The Corporation
and LMHS each have membership rights related to CHS, with the Corporation's rights being more
extensive. (See the organizational chart on page [A-_] which depicts the structure of the affiliation and
its relationship to the St. Joseph Health System.)
CHS is governed by a 17-member board of directors. LMHS and the Corporation each appoint
eight members and the Corporation appoints the Chief Executive Officer of CHS, who is also a voting
member of the CHS board of directors. The Articles of Incorporation and Bylaws of CHS reserve certain
powers over each of the subsidiaries of CHS to the Corporation and LMHS as its members, while other
powers are retained by the subsidiaries. For a description of these reserved powers and the role of the
Corporation [and CHS], see "GOVERNANCE" herein. Through certain membership rights contained in
the bylaws of CHS, together with certain contractual rights, the Corporation retains extensive control over
the financial affairs of CHS, including, but not limited to, the approval of budgets of CHS and its
subsidiaries, [initiation of borrowing or debt] [to come, expanded explanation of borrowing/debt summary
of OGM Agreement], and selection and retention of auditors. Express terms in the Definitive Agreement
are intended to result in CHS operating as part of the St. Joseph Health System and, with some
exceptions, using System services, including, but not limited to, finance, human resources, information
systems, legal services and planning and market research.
Currently, CHS, St. Mary of the Plains, Methodist Lubbock and Methodist Children's share a
common Board of Directors and management team. After January 1, 1999, St. Mary of the Plains and
Methodist Lubbock will be consolidated into CHS. As of the date of the issuance of the Bonds, CHS,
Methodist Lubbock, Methodist Children's, Methodist Plainview and Methodist Levelland will become
Members of the Obligated Group. See "INFORMATION CONCERNING THE OBLIGATED GROUP
MEMBERS" for further discussion of the new Obligated Group Members.
[To come from McCDB&E: paragraph summarizing the Members Agreement, Local Funds
Management, Indemnity Agreements and/or Forbearance Agreements. Also, disclose IRS settlement and
technical default.]
INFORMATION CONCERNING THE OBLIGATED GROUP MEMBERS
General
As noted above, upon the issuance of the Bonds, the Obligated Group will be composed of the
Corporation, the other Existing Members and the New Members operating in these geographic regions:
Southern California; Northern California; and West Texas/Eastern New Mexico. The Corporation will be
SFLIBI/1051636/2/14040/00348/duffyp/September 10, 1998 -3:48
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the sole corporate member of each of the other Members except (i) SRM Alliance Hospital Services dba
Petaluma Valley Hospital ("SRMAHS"), whose sole corporate member is Santa Rosa Memorial Hospital,
(ii) the New Members (other than CHS) and St. Mary's of the Plains, whose sole corporate member is
CHS, and (iii) CHS whose corporate members are LMHS and the Corporation. The Corporation and the
other Obligated Group Members are joint and several obligors and guarantors of all Obligations issued
under the Master Indenture. Each of the Members located in California is a California nonprofit public
benefit corporation. The Members located in Texas are Texas nonprofit public benefit corporations. All
Members are exempt from federal income taxation under Section 501(a) of the Internal Revenue Code of
1986 (the "Code"). CHS received determination of federal income tax exempt status on f ,
1998]. The Obligated Group Members (other than CHS, which has no current operations) are set forth
below opposite their respective licensed and operated bed counts. The services offered at each hospital
vary with location, competitive factors and individual community needs.
Member
Southern California Region
St. Joseph Hospital of Orange
St. Jude Hospital, Inc., dba St. Jude Medical Center
Mission Hospital Regional Medical Center
St. Mary Desert Valley Hospital dba St. Mary Regional
Medical Center
Region Total
Northern California Region
Queen of the Valley Hospital of Napa, California
Santa Rosa Memorial Hospital
SRM Alliance Hospital Services dba Petaluma Valley
Hospital
St. Joseph Hospital of Eureka
Redwood Memorial Hospital of Fortuna
Region Total
West Texas/Eastern New Mexico Region
Sisters of Saint Joseph of Texas, dba St. Mary of the Plains
Hospital and Rehabilitation Center
Methodist Hospital, Lubbock, Texas
Methodist Children's Hospital
Methodist Hospital, Levelland, Texas
Methodist Hospital, Plainview, Texas
Region Total
Date
Date Joined
Licensed
Operated
Founded
Obligated Group
Beds(l)
Beds(i)
1926
1983
457
367
1942
1983
331
268
1991
1994
271
234
1956
1993
195
195
1,254
1,064
1953
1984
159
159
1950
1984
233
233
???
1997
86
66
1920
1984
140
105
1954
1984
47
35
665
598
1939
1984
422
410
1918
1998 t`1
843
535
1992
1998 t`l
73
50
1971
1998 (2)
100
28
1912
1998 R)
78
24
1,516
1,047
TOTAL
3,435 2,709
(1) As of June 30, 1998. Includes skilled nursing, acute psychiatric and chemical dependency beds where appropriate.
(2) Will join the Obligated Group as of the date of issuance of the Bonds
Source: Management of the Corporation.
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s
Existing Members
SRM Alliance Hospital Services, doing business as Petaluma Valley Hospital ("SRMAHS").
SRMAHS leases and operates Petaluma Valley Hospital ("PVH"), an 86-licensed bed hospital facility,
including a 20-bed short -stay skilled nursing facility located in Petaluma, California, pursuant to a 20-
year lease with Petaluma Valley Hospital District which expires
Mission Hospital Regional Medical Center ("Mission Hospital"). Mission Hospital owns and
operates a 271-licensed bed tertiary acute care facility, including a 30-licensed bed short -stay skilled
nursing facility located in Mission Viejo, California. The primary service area of Mission Hospital is
south Orange County, California.
St. Joseph Hospital of Orange ("St. Joseph Orange"). St. Joseph Hospital of Orange
("St. Joseph Orange") owns and operates a 457-licensed bed tertiary acute care facility, including a 37-
licensed bed distinct part acute psychiatric facility and a 34-licensed bed short -stay distinct part skilled
nursing facility located in Orange, California. The primary service area of this hospital is central Orange
County, California. Effective October 1, 1997, St. Joseph Orange entered into an agreement with
Children's Hospital of Orange County, a California nonprofit public benefit corporation ("CHOC"),
pursuant to which St. Joseph Orange will manage CHOC for a pre -determined management fee.
St. Joseph Orange will assume no risk for the financial operations of CHOC.
St. Jude Hospital, Inc., doing business as St. Jude Medical Center (St. Jude"). St. Jude owns
and operates a 331-licensed tertiary bed acute care facility, including a 24-licensed bed distinct part acute
psychiatric facility, an 8-licensed bed distinct part chemical dependency recovery facility and a
37-licensed bed short -stay skilled nursing facility located in Fullerton, California. The primary service
area of St. Jude is northern Orange County, California.
St. Mary Desert Valley Hospital, doing business as St. Mary Regional Medical Center
("St. Mary"). St. Mary owns and operates the largest acute care medical center serving northeastern San
Bernardino County, a 195-licensed bed tertiary facility, including a 20-bed short -stay skilled nursing
facility.
Queen of the Valley Hospital of Napa, California ("Queen of the Valley"). Queen of the
Valley owns and operates the major medical center for residents of Napa County, a 157-licensed tertiary
center care bed facility, including a 24-bed, short -stay distinct part skilled nursing facility.
Redwood Memorial Hospital of Fortuna ("Redwood Memorial"). Redwood Memorial owns
and operates a 474icensed bed acute care hospital facility. It provides acute medical/surgical care within a
1,260 square mile area in southern Humboldt County.
St. Joseph Hospital of Eureka ("St. Joseph Eureka"). St. Joseph Eureka owns and operates a
140-licensed bed facility that provides primary and/or tertiary services to all of Humboldt County and
portions of the northern California counties of Trinity, Del Norte, and Siskiyou.
Santa Rosa Memorial Hospital ("Santa Rosa Memorial"). Santa Rosa Memorial owns and
operates the major medical center for residents of Sonoma, Lake and Mendocino Counties, a 233-licensed
bed facility, including a distinct part 24-licensed bed skilled nursing facility. Santa Rosa Memorial also
operates an outpatient clinic in the City of Rohnert Park.
On [ 1, 1998, Santa Rosa Memorial acquired the assets of North Coast Health Care
Centers ("NCHCC"). NCHCC has six patient centers in Santa Rosa and one in Petaluma with [a total of]
SFLIBI/1051636/2/14040/00348/duffyp/September 10, 1998 -3:48
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138 licensed beds. NCHCC specializes in acute medical, psychiatric care, occupational health and
rehabilitation services. During fiscal 1997, NCHCC had $32 million in gross patient revenue,
discharges and 57,566 outpatient visits. In connection with the acquisition, Santa Rosa Memorial
assumed outstanding debt of $_._ million and will operate NCHCC as a division of Santa Rosa Memorial.
Sisters of Saint Joseph of Texas, doing business as St. Mary of the Plains Hospital and
Rehabilitation Center ("St. Mary of the Plains"). St. Mary of the Plains owns and operates a
422-licensed bed hospital facility located in Lubbock, Texas, serving west Texas and eastern
New Mexico. St. Mary of the Plains also manages four rural hospitals in west Texas which are located in
Snyder (99 beds), Crosbyton (46 beds), Tulia (30 beds), and Denver City (24 beds).
New Members
Covenant Health System ("CHS"). CHS is a Texas nonprofit corporation formed in May 1998
in connection with the Methodist Affiliation. CHS is the parent corporation of St. Mary of the Plains,
Methodist Lubbock, Methodist Levelland and Methodist Plainview, and after a three-way merger,
currently scheduled for January 1, 1999, CHS will become the successor to Methodist Lubbock and
St. Mary of the Plains. CHS has two "corporate members," LMHS and the Corporation. CHS also owns
or controls the subsidiaries depicted on the organizational chart on page [A-_J.
Methodist Hospital, Lubbock, Texas ("Methodist Lubbock"). Methodist Lubbock is a Texas
nonprofit corporation which owns and operates an 843-licensed bed acute tertiary care facility located in
Lubbock, Texas.
Methodist Children's Hospital ("Methodist Children's"). Methodist Children's is a Texas
nonprofit corporation which owns a 73 licensed bed children's hospital on the Methodist Lubbock
campus. All administrative, clinical, nursing and other support services required for Children's are
provided by Methodist Hospital, at cost, under a shared -service agreement between the two hospitals.
Methodist Hospital, Levelland ("Methodist Levelland"). Methodist Levelland") is a Texas
nonprofit corporation which leases a 78-bed general acute care hospital located in Levelland, Texas,
approximately 30 miles west of Lubbock, under a lease agreement which expires May 31, 2003.
Methodist Hospital, Plainview ("Methodist Plainview"). Methodist Plainview is a Texas
nonprofit corporation which leases a 100-bed general acute care hospital located in Plainview, Texas,
approximately 60 miles north of Lubbock from the Hale County Hospital Authority under a lease that
expires January 25, 2020.
Leased Facilities
[To come]
SFLIBI/1051636/2/14040/00348/duffyp/September 10, 1998 - 3:48
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Historical Utilization
The table below provides selected summary utilization statistics for each of the acute care
facilities operated by the Obligated Group Members (including the New Members) for their respective
three most recent fiscal years.
The Obligated Group Facilities
Acute Care Utilization
Fiscal Year Ended June 30,
1996t11
1997
1998
SOUTHERN CALIFORNIA REGION
St. Joseph Hospital of Orange
Operated Beds (2)
367
367
367
Discharges(3)
19,135
20,160
21,514
Patient Days (3)
82,848
87,553
91,183
Average Length of Stay
4.3
4.3
4.2
% Occupancy Based on Operated Beds
61.7%
65.40/6
68.1 %
Outpatient Visits (Including ER visits)
194,333
209,840
218,951
St. Jude Hospital doing business as St. Jude Medical
Center
Operated Beds (2)
268
268
268
Discharges (3)
13,951
15,195
16,283
Patient Days (3)
71,968
78,725
81,474
Average Length of Stay
5.2
5.2
5.0
% Occupancy Based on Operated Beds
73.4
80.5
83.3
Outpatient Visits (Including ER visits)
173,662
172,885
270,994
Mission Hospital Regional Medical Center
Operated Beds (2
208
234
234
Discharges (3)
11,693
13,250
15,460
Patient Days (3)
46,481
54,533
66,065
Average Length of Stay
4.0
4.1
4.3
% Occupancy Based on Operated Beds
61.1
63.8
77.4
Outpatient Visits (Including ER visits)
100,341
101,965
105,175
St. Mary Desert Valley Hospital doing business as St.
Mary Regional Medical Center
Operated Beds i2i
195
195
195
Discharges (3)
8,006
7,785
8,719
Patient Days (3)
33,382
34,106
36,320
Average Length of Stay
4.2
4.4
4.2
% Occupancy Based on Operated Beds
46.8
47.9
51.0
Outpatient Visits (Including ER visits)
50,793
51,120
63,817
41) Fiscal 1996 was a leap year.
(2) Includes skilled nursing, acute psychiatric and chemical dependency beds, where appropriate.
(3) Excluding well newborns.
(') Excludes information prior to January 19, 1997 when SRMAHS became affiliated with the Corporation.
(3) St. Joseph Eureka completed a major expansion of its facility and increased its operated beds from 62 to 105 as of June 4, 1997.
Reflects data for the periods June 1 through May 31 for 1996,1997 and 1998. Joined the St. Joseph System as of June 1,1999. Will join
the Obligated Group as of the date of issuance of the Bonds.
Source: Management of the Corporation.
SFLIBI/1051636/2/14040/00348/dufTyp/September 10, 1998 - 3:48
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Fiscal Year Ended June 30,
1996t'1 1997 1998
SOUTHERN CALIFORNIA REGION TOTAL
Operated Beds (2)
1,038
1,064
1,064
Discharges i3i
52,785
56,390
61,976
Patient Days (3)
234,679
254,917
275,042
Average Length of Stay
4.4
4.5
4A
% Occupancy Based on Operated Beds
61.8
65.6
70.8
Outpatient Visits (Including ER visits)
519,129
535,810
658,937
NORTHERN CALIFORNIA REGION
Queen of the Valley Hospital
Operated Beds (2)
159
159
159
Discharges i3i
7,154
7,594
7,507
Patient Days (3)
38,305
40,398
39,148
Average Length of Stay
5.4
5.3
5.2
% Occupancy Based on Operated Beds
65.8
69.6
67.5
Outpatient Visits (Including ER visits)
142,935
148,122
136,192
Santa Rosa Memorial Hospital
Operated Beds (2)
225
219
233
Discharges (3)
12,872
13,286
12,938
Patient Days (3)
57,609
56,359
57,807
Average Length of Stay
4.5
4.2
4.5
% Occupancy Based on Operated Beds
70.0
70.5
68.0
Outpatient Visits (Including ER visits)
63,950
64,969
74,149
SRM Alliance Hospital Services doing business as
Petaluma Valley Hospital (4)
Operated Beds (2)
0
66
66
Discharges i3i
0
1,884
4,004
Patient Days (3)
0
7,877
16,785
Average Length of Stay
0
4.2
4.2
% Occupancy Based on Operated Beds
0
73.7
69.7
Outpatient Visits (Including ER visits)
0
123,445
256,367
St. Joseph Hospital of Eureka ts)
Operated Beds (2)
62
105
105
Discharges (3)
3,480
3,748
4,630
Patient Days (3)
15,697
17,363
21,059
Average Length of Stay
4.5
4.6
4.5
% Occupancy Based on Operated Beds
69.2
45.3
54.9
Outpatient Visits (Including ER visits)
126,732
135,835
142,924
t1t Fiscal 1996 was a leap year.
(1) Includes skilled nursing, acute psychiatric and chemical dependency beds, where appropriate.
(3) Excluding well newborns.
(') Excludes information prior to January 19, 1997 when SRMAHS became affiliated with the Corporation.
(5) St. Joseph Eureka completed a major expansion of its facility and increased its operated beds from 62 to 105 as of June 4, 1997.
(6) Reflects data for the periods June 1 through May 31 for 1996, 1997 and 1998. Joined the St. Joseph System as of June I, 1998. Will join
the Obligated Group as of the date of issuance of the Bonds.
Source: Management of the Corporation.
SFLIBI/1051636/2/14040/00348/duffyp/September 10, 1998 - 3:48
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Fiscal Year Ended June 30,
1996t'1 1997 1998
Redwood Memorial Hospital
Operated Beds (2)
35
35
35
Discharges (3)
1,994
2,011
1,862
Patient Days (3)
7,431
7,805
7,351
Average Length of Stay
3.7
3.9
3.9
% Occupancy Based on Operated Beds
58.0
61.1
57.5
Outpatient Visits (Including ER visits)
31,569
31,421
31,549
NORTHERN CALIFORNIA REGION TOTAL
Operated Beds (2)
481
584
598
Discharges (3)
25,500
28,523
30,941
Patient Days (3)
119,042
129,802
142,150
Average Length of Stay
4.7
4.6
4.6
% Occupancy Based on Operated Beds
67.6
60.9
65.1
Outpatient Visits (Including ER visits)
365,186
503,792
641,181
WEST TEXAS/EASTERN NEW MEXICO REGION
Sisters of St. Joseph of Texas doing business as
St. Mary of the Plains Hospital and Rehabilitation
Center
Operated Beds (2)
410
410
410
Discharges (3)
13,596
14,473
14,469
Patient Days (3)
96,724
97,399
92,477
Average Length of Stay
7.1
6.7
6.4
% Occupancy Based on Operated Beds
64.5
65.1
61.8
Outpatient Visits (Including ER visits)
85,386
102,208
93,944
Methodist Hospital Lubbock(63
Operated Beds (2)
535
535
535
Discharges 0)
21,226
20,836
20,769
Patient Days (3)
130,112
129,696
128,264
Average Length of Stay
6.1
6.2
6.2
% Occupancy Based on Operated Beds
66.4
66.4
65.7
Outpatient Visits (including ER visits)
89,129
93,847
90,360
Methodist Children's Hospital (6)
Operated Beds (2)
50
50
50
Discharges (3)
3,502
3,320
2,977
Patient Days (3)
11,941
11,754
10,017
Average Length of Stay
3.4
3.5
3.4
% Occupancy Based on Operated Beds
65.3
64.4
54.9
Outpatient Visits (Including ER visits)
19,883
15,859
16,229
t° Fiscal 1996 was a leap year.
Includes skilled nursing, acute psychiatric and chemical dependency beds, where appropriate.
Excluding well newborns.
(4) Excludes information prior to January 19, 1997 when SRMAHS became affiliated with the Corporation.
(3) St. Joseph Eureka completed a major expansion of its facility and increased its operated beds from 62 to 105 as of June 4, 1997.
(6) Reflects data for the periods June I through May 31 for 1996, 1997 and 1998. Joined the St. Joseph System as of June 1, 1998. Will join
the Obligated Group as of the date of issuance of the Bonds.
Source: Management of the Corporation.
SFLIBI/1051636/2/14040/00348/duffyp/September 10, 1998 - 3:48
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Fiscal Year Ended June 30,
1996 (2) 1997 1998
Methodist Hospital, Levelland (6)
Operated Beds (2)
28
28
28
Discharges (3)
1,602
1,404
1,346
Patient Days (3)
6,421
5,342
5,405
Average Length of Stay
4.0
3.8
4.0
% Occupancy Based on Operated Beds
62.7
52.3
52.9
Outpatient Visits (Including ER visits)
43,282
40,470
23,622
Methodist Hospital, Plainview (6)
Operated Beds (2)
28
46
24
Discharges (3)
2,284
2,348
2,303
Patient Days (3)
10,866
10,693
9,539
Average Length of Stay
4.8
4.6
4.1
% Occupancy Based on Operated Beds
106.0
63.7
108.9
Outpatient Visits (Including ER visits)
60,602
71,420
54,403
NEST TEXAS/EASTERN NENY 1NEXICO
REGION TOTAL
Operated Beds (2)
1,051
1,069
1,047
Discharges (3)
42,210
42,381
41,864
Patient Days (3)
256,064
254,884
245,702
Average Length of Stay
6.1
6.0
5.9
% Occupancy Based on Operated Beds
66.6
65.3
64.3
Outpatient Visits (Including ER visits)
298,282
323,804
278,558
OBLIGATED GROUP TOTAL
Operated Beds (�)
2,570
2,717
2,709
Discharges (3)
120,495
127,294
134,781
Patient Days (3)
609,785
639,603
662,894
Average Length of Stay
5.1
5.0
4.9
% Occupancy Based on Operated Beds
64.8
64.5
67.0
Outpatient Visits (Including ER visits)
1,182,597
1,363,406
1,578,676
(1) Fiscal 1996 was a leap year.
(2) Includes skilled nursing, acute psychiatric and chemical dcpendcncy beds, where appropriate.
(3) Excluding well newborns.
") Excludes information prior to January 19, 1997 when SRMAHS became affiliated with the Corporation.
") St. Joseph Eureka completed a major expansion of its facility and increased its operated beds from 62 to 105 as of June 4, 1997.
(61 Reflects data for the periods June 1 through May 31 for 1996, 1997 and 1998. Joined the St. Joseph System as of June 1,1998. Will join
the Obligated Group as of the date of issuance of the Bonds.
Source: Management of the Corporation.
SFLIBI/1051636/2/14040/00348/duffyp/Scptember 10, 1998 - 3:48
"EM
AFFILIATES OF THE CORPORATION NOT OBLIGATED GROUP MEMBERS
The St. Joseph System and the Obligated Group conduct multiple operations such as home health,
outpatient surgery, imaging services and medical offices through various entities, some with shared
ownership, that are not Obligated Group Members. These are organized as subsidiaries (for -profit and
nonprofit), partnerships and other entities. Beyond these typical affiliate operations, other affiliates of
note are as follows:
Integrated Physician Operations
[To come -- See Dan Higgins' Sept. 8 fax]
American Unity Group, Ltd. American Unity Group, Ltd. is an insurance company incorporated under
the laws of Bermuda and organized in Hamilton, Bermuda that provides professional and general liability
insurance for all Members. See "BONDHOLDERS' RISKS - General" and "- Litigation and Insurance"
in this Official Statement.
Hospital Fund -Raising Foundations. Most of the Members are supported in part by the activities of
related hospital fund-raising foundations. Generally, the purpose of each such foundation is to support the
health care service delivery of the related hospital.
St. Joseph Professional Services Enterprises, Inc. St. Joseph Professional Services Enterprises, Inc.
("PSE") is a California nonprofit, taxable corporation formed in 1985 for the purpose of entering into
joint ventures and other investments related to the development of ambulatory and other health care
services with Members and physicians.
Lubbock Methodist Hospital Services, Inc. Lubbock Methodist Hospital Services, Inc. is a Texas
business corporation formed to participate in for -profit activities. It is a general partner in a diagnostic
imaging center, owns a clinical laboratory [and owns real estate, including a medical office building].
NONE OF THE NON-MEMBER AFFILIATES OF THE ST. JOSEPH SYSTEM IS
OBLIGATED, EITHER DIRECTLY OR INDIRECTLY, WITH RESPECT TO OBLIGATIONS
ISSUED UNDER THE MASTER INDENTURE OR WITH RESPECT TO THE BONDS.
SFLIBI/1051636/2/14040/00348/duffyp/Septembcr 10, 1998 - 3:48
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HISTORICAL FINANCIAL INFORMATION
Summary of Revenues and Expenses of Existing Members
The following condensed combined statement of revenues and expenses of the Existing Members
for each of the three fiscal years ended June 30, 1998 has been derived by Corporation management from
the consolidated financial statements of the Corporation and Affiliates for the fiscal years ended June 30,
1996, 1997 and 1998, financial statements for the two most recent of which are attached hereto as
Appendix B, and which have been audited by Ernst & Young LLP, independent auditors. Unaudited
financial data for the combined Existing Members is included with the unaudited "Other Financial
Information" following the audited consolidated financial statements in Appendix B.
Condensed Combined Statement of
Revenues and Expenses of the Existing Members(')
(000's omitted)
Patient service revenues
Deductions from revenues
Net patient service revenues
Other operating revenues
Total operating revenues
Operating expenses: Compensation, benefits,
supplies and other
Interest expenses
Depreciation
Total operating expenses
Income (Loss) from operations
Nonoperating revenues
Excess of revenues over expenses
Fiscal Year Ended June 30,
1996 1997(2) 1998
$2,132,737
$2,470,402
$2,840,642
1,221,611
1,454,993
1,698,951
911,126
1,015,409
1,141,691
24,282
25,686
32,775
935,408
1,041,095
1,174,466
804,004
901,967
1,039,027
22,466
22,641
20,421
54,926
58,879
60,178
881,396
983,487
1,119,626
54,012
57,608
54,840
36,736
31,766
62,303
$90,748
$89,374
$117,143
(n Adjusted to reflect transactions between Existing Members and between Existing Members and their affiliates. Dollar
amounts have been derived from unaudited "Other Financial Information" providing details of consolidation for the audited
consolidated financial statements of St. Joseph Health System and Affiliates.
(2) Fiscal year 1997 data includes SRMAHS-related data for the 5'/2 months beginning January 19, 1997.
Source: Management of the Corporation.
Summary of Revenues and Expenses of the New Members
The following condensed combined statement of revenues and expenses of the New Members
(other than CHS, for which no financial statements have been prepared) for each of the three fiscal years
ended May 31, 1998, has been derived by Corporation management from the consolidated financial
statements of Lubbock Methodist Hospital System and Affiliates for the fiscal years ended May 31, 1996
and 1997, financial statements for which are attached hereto as Appendix C, and which have been audited
by KPMG Peat Marwick LLP, independent auditors, and from the unaudited combined financial
SFLIBI/105163&VI4040/00348/duCfyp/Scptcmbcr 10, 1998 - 3:48
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statements of Lubbock Methodist Hospital System and Affiliates for the fiscal year ended May 31, 1998,
prepared by management of LMHS and the Corporation. Unaudited financial data for the combined New
Members (other than CHS) is included with the unaudited "Other Financial Information" following the
audited consolidated financial statements in Appendix C. The consolidated financial statements of
Lubbock Methodist Hospital System and Affiliates for the fiscal year ended May 31, 1998, were not
audited due to the anticipated affiliation with the Corporation and the subsequent audit of the consolidated
financial statements of the Corporation and Affiliates as of June 30, 1998, attached hereto as Appendix B,
which include the operations of the New Members (other than CHS) for the one month ended June 30,
1998.
Condensed Combined Statement of
Revenues and Expenses of the New Members(t)
(000's omitted)
Patient Service Revenues
Deductions from Revenues
Net Patient Service Revenues
Other Operating Revenues
Total Operating Revenues
Operating Expenses: Compensation, Benefits,
Supplies and Other
Interest Expense
Depreciation
Total Operating Expenses
Income (Loss) from Operations
Nonoperating Revenues
Excess Revenues Over Expenses
Fiscal Year Ended May 31,
1996 1997 1998
(unaudited)
$575,100 $602,936 $666,005
290,795
328,589
389,913
$284,305
$274,347
$276,092
18,514
19,966
20,107
$302,819
$294,313
$296,199
262,412
15,390
22,518
300,320
$2,499
250,850 239,666
15,148 14,898
23,155 23,219
289,153
$5,160
277,783
$18,416
(2,467) 2,012 3,760
$ 32 $7,172 $22,176
(tI Not adjusted to reflect transactions between New Members and between New Members and their affiliates. Dollar amounts
have been derived from unaudited "Other Financial Information" providing details of consolidation for the audited (fiscal
year 1996 and 1997) and unaudited (fiscal year 1998) consolidated and combined financial statements of Lubbock
Methodist Hospital System and Affiliates.
Source: Management of the Corporation.
Unaudited Pro Forma Combined Summary of Revenue and Expenses
The unaudited pro forma financial information set forth below summarizes the revenue and
expenses of the Obligated Group for the fiscal years ended June 30, 1996, 1997 and 1998, adjusted to
reflect the Methodist Affiliation and the addition of the New Members (other than CHS) as if such
affiliation and addition had occurred on July 1, 1995. The pro forma financial information has not been
audited but has been derived by Corporation management (i) unaudited "Other Financial Information"
included in the consolidated financial statements of the Corporation and affiliates for the fiscal years
ended June 30, 1996, 1997 and 1998 audited by Ernst & Young LLP, independent auditors, (ii) the
unaudited "Other Financial Information" included in the combined financial statements of Lubbock
SFLIBI/1051636/2/14040/00348/duffyp/September 10, 1998 -3:48
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Methodist Hospital System and Affiliates for the fiscal years ended May 31, 1996 and 1997, audited by
KPMG Peat Marwick LLP, independent auditors and (iii) the unaudited combined financial statements of
Lubbock Methodist Hospital System and Affiliates for the fiscal year ended May 31, 1998 prepared by
management of LMHS and the Corporation. The following summary should be read in conjunction with
such audited and unaudited financial statements and accompanying notes, which are provided in
Appendices B and C. The following summary is not necessarily indicative of the financial performance
that would have been achieved by the Obligated Group Members had the New Members joined the
Obligated Group as of July 1, 1995.
Unaudited Pro Forma Consolidated Combined Summary of
Revenue and Expenses of the Obligated Group(l)
(000's omitted)
Patient service revenues
Deductions from revenues
Net patient service revenues
Other operating revenues
Total operating revenues
Operating expenses: Compensation, benefits,
supplies and other
Interest expenses
Depreciation
Total operating expenses
Income (Loss) from operations
Nonoperating revenues
Excess of revenues over expenses
Fiscal Year Ended June 30,
1996
1997
1998
$2,707,837
$3,073,338
S3,506,647
1,512,406
1,783,582
2,088,864
1,195,431
1,289,756
1,417,783
42,796
45,652
52,882
1,238,227
1,335,408
1,470,665
1,066,416
1,152,817
1,278,693
37,856
37,789
35,319
77,444
82,034
83,397
1,181,716
1,272,640
1,397,409
56,511
62,768
73,256
34,269
33,778
66,063
$90,780
$96,546
$139,319
t�1 Includes results of operations of the New Members (other than CHS, for which no financial statements have been prepared)
for all periods and of SRMAHS since January 19, 1997. Financial information for the New Members is for Fiscal Years
ended May 31, 1996, 1997 and 1998 and for the Fiscal Year ended May 31, 1998 is unaudited. Adjusted to reflect
transactions between Existing Members and between Existing Members and their affiliate:;. Not adjusted to reflect
transactions between New Members and between New Members and their affiliates.
Source: Management of the Corporation.
Management's Discussion of Financial Performance
[TO BE UPDATED BY MANAGEMENT. Include discussion of investment risk -- to come from John
Myers.]
Fiscal Year Ending June 30,1997
Fiscal year 1997 was a successful year for the Corporation in terms of operating and net income
levels. Discharges and outpatient visits increased to new levels. In addition, it is expected that the
January 19, 1997 lease of the PVH facility by SRMAHS will significantly improve the Corporation's
strategic position in Sonoma County, California.
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Hospital Operations: The Obligated Group's financial performance, as measured by income
from operations and the related operating margin, increased in fiscal year 1997 to $57.9 million from
$54.0 million in fiscal year 1996 resulting in an operating margin of 5.5 percent. Excess of revenues over
expenses was $89.4 million, compared to $90.7 million in the prior year. The fiscal year 1997 net income
margin of the Obligated Group decreased to 8.6 percent from 9.7 percent in the prior year.
The Obligated Group continued to experience a strong increase in volumes as a result of the
Corporation's physician integration strategies, including the Corporation's integration strategy with
Heritage. Eight of the nine current Obligated Group Members realized an increase in discharges over
1996 levels and seven of the nine current Obligated Group Members reported an increase in outpatient
visits over 1996 levels. Total discharges and outpatient visits for the current Obligated Group Members
increased 5.9 percent and 6.0 percent respectively. Taking into account SRMAHS since January 19,
1997, total discharges and outpatient visits for the Obligated Group increased 8.0 percent and 18.7
percent, respectively, over fiscal 1996.
Due to the volume growth, total operating revenues increased 11.6 percent while operating
expenses increased 11.9 percent. The following items contributed significantly to the Obligated Group's
financial performance in 1997:
Six hospitals realized increases in operating income from 1996, with St. Jude, Mission
Hospital and Santa Rosa Memorial experiencing the largest increases.
St. Mary recorded an operating loss of $1.3 million due to an increase in the managed
care competitiveness and a resultant decline in volume. Management is aggressively
taking steps to attempt to correct this situation.
Operating costs measured on an inpatient expense per discharge basis increased only 2.6
percent over the prior year. This was less than the Hospital Care CPI inflation rate of 3.3
percent and the All Health Care CPI inflation rate of 2.9 percent.
As a result, the Obligated Group's operating income increased by 7.3 percent to $57.9 million,
with the operating margin declining from 5.8 percent to 5.5 percent. Like others in the healthcare
industry, the Corporation and the other Obligated Group Members continue to experience net operating
revenue pressure from government and other third -party payors.
The Corporation is committed to maintaining high -quality facilities and services in its markets
and invests strategic capital to strengthen its market position. During the fiscal year, the Corporation
invested approximately $106.1 million in property, plant and equipment and physician integration. Major
projects included the following:
Completed construction of a replacement patient tower at St. Joseph Eureka, including
the establishment of a family -centered obstetrics program and an open heart surgery
program;
Completed construction of a new cancer center at St. Jude;
Completed a major patient care remodeling project and a major emergency room
expansion at St. Joseph Orange; and
SFLIBI/1051636/2/14040/00348/duffyp/Septembcr 10, 1998 - 3:48
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Continued major investments in the information systems infrastructure to replace and
upgrade administrative and clinical systems to prepare the Corporation to meet fiscal year
2000 requirements.
Consolidated Operations: Consolidated excess of revenues over expenses was $62.5 million,
which is $22.5 million lower than last year's $85.0 million. The year-to-year changes were due to the
following:
Fiscal year 1997 was the first full year of Bristol Park Medical Group being a part of
Heritage. The combined operations resulted in net operating revenues increasing from
$34.7 million to $83.8 million and the operating shortfall increasing from $4.2 million to
$16.1 million. During the fiscal year, Heritage added five new service locations to
aggressively grow market shares and volumes. In addition, the 27-physician Yorba Park
Medical Group was acquired mid -year. Management presently expects to be able to
negotiate higher contracted rates with managed care organizations and to expand the
number of service locations and volume of capitated members served. If accomplished,
this will result in continued improvement in operations over the next few years. Based on
current operations, management expects Heritage will positively impact cash flow
beginning in fiscal year 2001. Management also expects to continue to explore additional
strategic opportunities to expand Heritage. If these growth opportunities materialize, the
expected improvements in operations may be delayed. For further discussion regarding
Heritage, see "AFFILIATES OF THE CORPORATION NOT OBLIGATED GROUP
MEMBERS -- St. Jude Heritage Health Foundation."
• In fiscal year 1997, the Heritage Members collectively experienced an 8.1 % increase in
discharges and an approximately 10.2% increase in operating income over 1996 levels,
attributable to the Corporation's physician integration strategy.
• In fiscal year 1997, PSE started a physician practice management ("PPM") company
which experienced first year operating losses of $250,000. The PPM is expected to break
even within two years as new clients are added. The balance of the losses in PSE relate
primarily to the operations of a medical office building on the campus of St. Joseph
Orange.
• A one-time adjustment due to a change in actuarial methodology applied to American
Unity Group, Ltd., the Corporation's captive insurance company providing general and
professional liability insurance, resulted in additional income in fiscal 1996 of
approximately $5.7 million.
• The St. Joseph Health System Foundation increased its commitment to the communities
it serves by $700,000 to a total of $7.3 million, reflective of the Corporation's
commitment to its mission.
Adoption of FAS No. 124: Effective July 1, 1996, the Corporation adopted Financial
Accounting Standards Board Statement of Financial Accounting Standards No. 124, "Accounting for
Certain Investments Held by Not -for -Profit Organizations" (FAS No. 124), which changes certain
reporting requirements for investments of nonprofit organizations, which resulted in recognition of $15.9
million of unrealized gains as a cumulative effect of the change in accounting principle. During fiscal
1997, the Corporation had an additional $30.0 million of net unrealized gains on investments. Such
amounts are not a component of excess revenues over expenses in the Corporation's consolidated
financial statements.
SFLIBI/1051636/2/14040/00348/duffyp/September 10, 1998 - 3:48
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Management of the Corporation anticipates that the recent lease of the PVH facility by
SRMAHS, the continued strong growth in volume from the successful implementation of physician
integration and managed care strategies, the expansion of the continuum of care in many of our
communities and market strength have positioned the Corporation to continue its leadership in the
markets it serves.
Fiscal Year Ending June 30, 1996
Fiscal year 1996 was the most successful year in the history of the Corporation in terms of
operating and net income levels. Discharges and outpatient visits also reached new heights. In addition,
tho June 1, 1996 acquisition of Bristol Park Medical Group will significantly improve the Corporation's
strategic position in Orange County, California.
Hospital Operations: The Obligated Group's financial performance, as measured by income
from operations and the related operating margin, increased in fiscal year 1996 to $54.0 million from
$52.2 million in 1995. Operating margin declined to 5.8 percent from 6.1 percent in fiscal year 1995.
Excess of revenues over expenses was $90.7 million, compared to $71.3 million in the prior year, an
increase of 27.2 percent. The fiscal year 1996 net income margin of the Obligated Group increased to 9.7
percent from 8.4 percent in the prior year.
The Obligated Group continues to experience increased volumes. Eight hospitals realized an
increase in discharges and six hospitals showed an increase in outpatient visits. With the opening of the
new patient beds and services at St. Mary Regional Medical Center, discharges increased 14.3 percent.
St. Jude's discharges increased 4.1 percent due to the impact of Heritage's physician acquisition activity.
In Texas, St. Mary of the Plains' outpatient visits increased 21.0 percent, as a result of the opening of 21
new patient clinics throughout Lubbock, west Texas and eastern New Mexico. Total discharges and
outpatient visits increased 6.1 percent and 8.4 percent, respectively, over the prior year.
Due to the volume growth, total operating revenues increased 10.1 percent while operating
expenses increased 10.5 percent. The following items contributed to the Obligated Group's financial
performance in 1996:
• The increase in income from operations due to the full year of Mission Hospital in 1996
versus ten months in 1995.
• Six hospitals realized increases in operating income from 1995, with Mission Hospital
Regional Medical Center and St. Mary of the Plains experiencing the largest increases.
• Santa Rosa Memorial Hospital's operating income declined 80.2 percent due to
competitive pressures on rates, the transfer of Medicare patients to Senior HMOs, the
writeoffs of unrealized physician integration initiative, and an increase in supply costs
brought on by a costly new cardiac procedure being performed under fixed fee payment
arrangements.
• Operating costs measured on an inpatient expense per discharge basis increased only
2.9 percent over the prior year. This was less than the hospital CPI inflation rate of 5.0
percent.
• Depreciation and interest expense increased due to the completion of the major bed and
service addition at St. Mary Regional Medical Center, completion of numerous
construction and improvement projects by the Members, and the full years' impact of the
SFLIBI/1051636/2/14040/00348/duffyp/September 10, 1998 -3:48
A-16
Mission Hospital acquisition debt. The effective interest rate paid on all debt increased to
5.15 percent from 4.69 percent in the prior year.
As a result, the Obligated Group's operating income increased by 3.4 percent, with the operating
margin declining to 5.8 percent.
The increase in excess of revenues over expenses of $19.5 million is largely due to a 92.8 percent
increase in investment income. The significant increase in investment income was primarily due to higher
returns experienced in both the fixed income and equity portfolios during calendar 1995. Liquidation of a
portion of the equity portfolio, in connection with a change in investment managers as well as natural
investment trading patterns, resulted in the recognition of capital gains of $9 million in excess of the prior
year. The Corporation plans to adopt FASB #124 in fiscal year 1997. This will result in an increase in
equity of $15 million in unrealized gains on investments on July 1, 1996.
The Corporation remains committed to maintaining high -quality facilities and services in its
markets and invests strategic capital to strengthen its market position. During the fiscal year, the
Corporation invested approximately $161.6 million in property, plant and equipment, and physician
integration. Major projects included:
• Continued construction of a replacement patient bed tower at St. Joseph Eureka,
including the establishment of a family -centered obstetrics program and an open heart
surgery program;
• The opening of 78 new hospital beds at St. Mary and expanded services including a
neonatal intensive care unit, an open heart surgery unit, and a transitional care unit;
• The opening of a new cancer center at St. Mary of the Plains;
• The refurbishment of St. Joseph Hospital Orange; and
• The acquisition of numerous physician groups including Bristol Park Medical Group,
three physician groups were purchased in Humboldt County and organized as outpatient
clinics of St. Joseph Eureka and Redwood Memorial, and St. Mary of the Plains opened
21 clinics in Lubbock, west Texas and eastern New Mexico.
Consolidated Operations: Consolidated net revenues over expenses was $85.0 million, a 32.4
percent increase from last year's $64.2 million. This increase is primarily due to increased investment
income. Heritage's loss was $1 million less than in fiscal year 1995 and ended the year with a positive
cash flow from operations. American Unity Group, the Corporation's captive insurance company
providing general and professional liability coverage, recorded profits of $10.2 million, reflecting
continued positive claims experience and a one time change in reserve assumptions. While profits for
PSE increased slightly, the gain is the result of intercompany sales of several partnerships back to the
hospitals; therefore, the increase will be eliminated in consolidation. The remaining significant
partnership interest within PSE will be sold to an affiliated hospital in fiscal year 1997, leaving the
medical office building located on the campus of St. Joseph Orange and a one percent general partnership
interest in a home health agency remaining with PSE. The St. Joseph Health System Foundation
increased its disbursements to $6.6 million under its Care for the Poor strategic plans.
Fiscal year 1996 results were exceptionally strong. The recent acquisition of Bristol Park
Medical Group, the strong growth in volume from the successful implementation of physician integration
and managed care strategies, the expansion of the continuum of care in many of our communities and the
SFLIB1/1051636/2/14040/00348/duffyp/September 10, 1998 - 3:48
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market strength we posses have positioned the Corporation to continue its leadership in the markets it
serves into fiscal year 1997 and beyond.
Historical Debt Service Coverage
The table below was prepared by Corporation management and sets forth Income Available for
Debt Service and the Debt Service Requirements (the "Debt Service Coverage") of the Existing Members
for the three fiscal years ended June 30, 1998 for each of these periods and the pro forma, as adjusted,
Debt Service Coverage, adjusted to reflect the Methodist Affiliation, the addition of the New Members
(other than CHS) and the debt service on the Prior Bonds as if such affiliation and addition of New
Members had occurred on July 1, 1997.
Excess of Revenues over Expenses
Depreciation
Interest Expense
Income Available for Debt Service
Debt Service Requirements(�)
Coverage Ratio (times)
Historical Debt Service Coverage
(000's omitted)
Fiscal Year Ended June 30,tt1
1996
1997
1998
$90,748
$89,374
$117,143
54,926
58,879
60,178
22,466
22,641
20,421
$168,140
$170,894
$197,742
37,634
40,048
37,634
4.47
4.27
5.25
Pro Forma,
Fiscal Year
Ended
June 30,1998
$139,319
83,397
35,319
$258,035
58,759
4.39
t11 Includes results of operations of SRMAHS since January 19, 1997.
(2) Equal to interest expense of the fiscal year shown plus current maturities of long term debt of the fiscal year shown
(which are generally due on the first day of the succeeding fiscal year).
Source: Management of the Corporation.
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Pro Forma Capitalization
The following table sets forth, on a pro forma basis, the capitalization of the Existing Members
for the three fiscal years ended June 30, 1998 and the pro forma capitalization of the Obligated Group as
of June 30, 1998 as adjusted to reflect the Methodist Affiliation, the addition of the New Members (other
than CHS), the defeasance of the Prior Bonds and issuance of the Bonds, all as if such affiliation, issuance
and defeasance had occurred on such date.
Pro Forma Long -Term Debt as Percentage of Total Capitalization
(000's omitted)
The Bonds(21
Other Revenue Bonds Payable(2)
Direct Obligation Notes
Guaranty Agreements("
Other Long -Term Debt(4)
Total Long -Term Debt(5)
Net Assets
Total Capitalization
Long -Term Debt as Percentage of Total
Capitalization(6)
Fiscal
Year Ended June 30,(')
Pro Forma
As of
June 30,1998
1996
1997
1998
(As Adjusted)
$ -
S - S
-
S 205,000
450,647
441,874
451,623
451,623
0
4,085
40,585
40,585
7.460
6,660
49,021
5,821
4,384
5,196
[5,196]
[5,196]
S 462,491
S 457,815 S
546,425
S 708,225
697,541
804,200
916,905
916,905
$ 1,160,032
S 1,262,015 S
1,463,330
S 1,625,130
39.9%
36.3%
37.3%
43.6%
(1) Includes information for SRMAHS since January 19, 1997 and New Members, other than CHS, from June 1, 1998.
(2) Net of unamortized original issue discount.
(3) Guaranty agreements with respect to the $17,104,843 and $12,000,000 debt of affiliates which are not Obligated Group
Members. Accordingly, pursuant to the Master Indenture, only 20% of the guaranteed debt is included in calculating
long-term debt to capitalization. If 100% of the debt were included, the long-term debt as a percentage of total capitalization
would be L__2% in 1996, �% in 1997, _% in 1998 and _% as of June 30, 1998] (as adjusted).
(41 In addition to the long-term debt reflected in the above table, the Corporation is obligated with respect to certain variable
rate certificates of participation and bonds (aggregating approximately [$ 1 as of June 30, 1998) in connection
with which the holders thereof have the right to tender their obligations for purchase on a daily or weekly basis. Under the
documents pursuant to which such variable rate obligations were delivered, the Corporation has covenanted to maintain
sufficient liquid assets to repurchase such obligations in the event that tendered obligations are not resold in the open
market. See footnote [E] in Appendix B to this Official Statement.
(5) Total Outstanding Debt for each period includes current maturities of Long -Term Debt.
(6) The Ratio of Long -Term Debt to Capitalization was calculated using Total Outstanding Debt as described above.
Source: Management of the Corporation.
SFLIBI/1051636/2/t4040/00348/dufTyp/September 10, 1998-3:48
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Pro Forma Sources of Revenue - Obligated Group
During the three fiscal years ended June 30, 1998 (with respect to the Existing Members), and
ended May 31, 1998 (with respect to the New Members), pro forma gross patient revenues (inpatient and
outpatient) for the Obligated Group, for all periods were generated from the following sources:
Medicare
Medl-Canledicald
Other Managed Care
Non
Non
Non
Other
PAYOR MIX
Capitated
Capitated v)
Capitated
Capitated (1)
Capitated
Capitated at
Payors
Total
PROFORMA
GFOSS REVENUE:
FY 1996
41.87%
4.49%
7.28%
0.31%
34.03%
2.78%
9.24%
100.00%
FY 1997
40.45%
5.09%
6.46%
1.01%
32.98%
3.26%
10.75%
100.00%
FY 1998
39.23%
5.94%
6.74%
0.94%
31.70%
4.15%
11.30%
100.00%
ttl Capitated revenues exclude outside purchased medical services.
t`1 Does not include results of operations of SRMAHS.
(3) Includes results of operations of SRMAHS since January 19, 1997, and includes the New Members other than CHS for all
periods.
Source: Management of the Corporation.
The following summarizes the number of member months and number of members for whom the
Obligated Group Members (including the New Members, other than CHS) and Heritage provide health
care services on a capitated basis.
CAPITATED LIVESt"1
1%ledi-Call Other
Medicare Medicaid Managed Care Total
MEMBER MONTHS CAPITATED: (2)
For the Twelve Months ending June 30, 1998 (Existing
Members) and May 31, 1998 (New Members)
Obligated Group Members
Heritage (3)
CAPITATED LIVES: t4
1
Obligated Group Members
Medical Practice Foundations (3)
t1t Includes results of operations of the New Members, other than CHS, and of SRMAHS since January 19, 1997.
m Member months are defined as the sum of the number of members capitated each month during the fiscal year.
(3) Medical Practice Foundations are not Obligated Group Members.
t't Each life is equal to one capitated member.
Source: Management of the Corporation.
For further discussion of Medicare, Medicaid and other payors, please refer to the section of this
Official Statement entitled "BONDHOLDERS' RISKS."
SFLIBI/1051636/2/14040/00348/duffyp/September 10, 1998 -3:48
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YEAR 2000
[Discuss System Plans, Costs, etc. To come from McCDB&E]
COMPETITION
General
California and Texas are highly competitive healthcare markets. In recent years competition has
shifted from competition among independent hospitals and their associated medical groups to competition
among healthcare systems. Many large national, regional or local health care providers with substantial
financial resources own well -established providers in the Obligated Group Members' markets. These
providers have significant competing facilities in the Obligated Group's principal markets. Local
competitors also compete in selected markets. In addition, certain competitors may be engaged in
discussions with other parties concerning affiliation. Certain large regional and national long-term care
providers also compete with the Obligated Group nursing facilities, and in all Obligated Group Member
markets there are independent for -profit and nonprofit providers offering competitive services.
In addition to the Obligated Group Members' historical competitors, for -profit health care
systems have been increasingly active in the California and Texas markets. In particular, Columbia/HCA,
Tenet Healthcare Corporation ("Tenet"), and others have acquired several nonprofit hospitals in
California and Texas and have bid on the acquisition of several other hospitals. For -profit enterprises
such as Columbia/HCA and Tenet may have access to capital at a lower cost or on more favorable terms
than the Obligated Group and other nonprofit hospitals and health care systems. In addition, these for -
profit providers are not subject to many of the restrictions on the Obligated Group which arise because of
its nonprofit status and are described above. Because many of these activities in the California and Texas
markets is recent, its ultimate success in those states and its effect on the Obligated Group are difficult to
predict. However, based on experiences in other regions, it can be expected that their presence will
heighten the level of competition in the Obligated Group's markets. See "BONDHOLDERS' RISKS --
Risks in Health Care Delivery -- Competition" in this Official Statement.
Member Hospitals' Market Share
Set forth below is primary service area discharge market share data, calculated by the Corporation
using publicly available information, for the Member hospitals (including the New Members, other than
CHS, for all periods and SRMAHS since January 19, 1997) for the three fiscal years ended June 30, 1998.
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Market Share for Discharges
Discharge Alarket Share
In Primary Service Area(l)
Fiscal Year Fiscal Year Fiscal Year
Ended June 30, Ended Ended
Member Hospital 1996 June 30,1997 June 30,1998
Southern California Region
St. Joseph Hospital of Orange
14.0%
14.2%
15.1 %
St. Jude Hospital dba St. Jude Medical Center
19.6
21.3
22.2
Mission Hospital Regional Medical Center
30.3
32.4
37.8
St. Mary Desert Valley Hospital dba St. Mary Regional Medical Center
28.5
27.6
31.5
Northern California Region
Queen of the Valley Hospital of Napa, California
60.7
61.2
61.2
Santa Rosa Memorial Hospital
39.3
39.6
37.2
SRM Alliance Hospital Services dba Petaluma Valley Hospital
48.1
50.2
46.3
St. Joseph Hospital of Eureka
37.6
38.9
49.2
Redwood Memorial Hospital of Fortuna
61.7
63.0
59.8
West Texas/Eastern New Mexico Region
Sisters of Saint Joseph of Texas, dba St. Mary of the Plains Hospital and
Rehabilitation Center
14.4
15.3
15.5
Methodist Hospital, Lubbock, Texas t21
22.4
22.0
22.0
Methodist Children's Hospitals (z)
3.7
3.5
3.2
Methodist Hospital, Levelland, Texas t21
1.7
1.5
1.4
Methodist Hospital, Plainview, Texas t�1
2.4
2.5
2.4
(1) Service Area is defined as the zip codes, ranked by market share, generating 70% or the hospital's total discharges (excluding newborns).
t�1 Data is for Fiscal years ended May 31, 1996, 1997 and 1998.
Sources: (a) California data from the California Office of Statewide Health Planning and Development, biannual discharge data for FY
1996 to FY 1997.
(b) Texas and New Mexico data from the American Hospital Association ("AHA") Annual Hospital Guide to The Health Care
Field and AHA Statistical Guide using yearly data for the twelve months ending September 30.
(c) Management of the Corporation for FY 1998.
GOVERNANCE
The Corporation
The Bylaws of the Corporation provide that the members of the General Council (the elected
leadership) of the St. Joseph Congregation will be the members of the Corporation. The Corporation's
Bylaws provide that the powers of the Corporation shall be exercised, its properties controlled and its
affairs conducted by a Board of Trustees. The Bylaws further provide that the Corporation shall be
operated and controlled by the Board of Trustees with certain powers reserved to the members.
SFLIBI/I051636J2/14040/00348/duffyp/September 10,1998 - 3:48
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These reserved powers of the members of the Corporation are substantially equivalent to the
powers that are reserved to the Corporation with respect to the Members of which it is sole corporate
member. See "Other Obligated Group Members" below.
The powers of the Corporation are otherwise exercised, its property controlled and its affairs
conducted by or under the direction of the Board of Trustees. The Board of Trustees includes the
President of the Corporation and the General Superior of the St. Joseph Congregation, who are ex officio
members.
The following table sets forth the current membership of the Board of Trustees, their titles and the
expiration date of their respective terms.
Board of Trustees
St. Joseph Health System
Expiration Date
of Term
Name
Title
(December 31)
Sister Marianna Gemmet, C.S.J.,
Assistant General Superior, Sisters of St. Joseph of
Chairperson
Orange
1999
Sister Marian Schubert, C.S.J.
Family Nurse Practitioner, Camino Health Center,
Mission Hospital Regional Medical Center
2000
Richard S. Blair
Vice President, Finance and Administration, Allina
Health System
1998
Donald A. Brennan
President and CEO, Daughters of Charity National Health
System
[1997]
Maria Elena A. Flood
Retired Educator
1999
Sister Nancy O'Connor, C.S.J.
General Superior, Sisters of St. Joseph of Orange
ex officio
Sister Mary Kathleen Small, C.S.J.
Director of Community Health Outreach, St. Mary of the
Plains Hospital
2001
Richard J. Statuto
President and Chief Executive Officer, St. Joseph Health
System
ex officio
Sister Mary Therese Sweeney, C.S.J.
Vice President, Sponsorship/Communication &
Marketing, St. Joseph Hospital
2001
Sister Joleen Todd, C.S.J.
Vice President, Sponsorship, Santa Rosa Memorial
Hospital
1999
Other Obligated Group Members
As previously described herein, the Corporation is the sole corporate member of each of the other
Members except SRMAHS, whose sole corporate member is Santa Rosa Memorial, CHS whose two
corporate members are the Corporation and LMHS, and Methodist Lubbock, Methodist Children's,
Methodist Plainview, Methodist Levelland and St. Mary of the Plains, whose sole corporate member is
CHS. Pursuant to the provisions of their respective Articles of Incorporation and Bylaws, which are
substantially identical, all Members are operated and controlled by their respective boards of trustees.
However, certain basic powers are reserved to the Corporation. Such reserved powers include, among
others, the power to approve:
the philosophy, objectives and purposes of each other Member;
all long-term financing of each other Member, i.e., financing in excess of one year;
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• short-term financing of each other Member in excess of 20% of the average monthly total
operating revenues for the preceding fiscal year for such Member or $500,000, whichever
is greater;
• the purchase, sale, lease, disposition or hypothecation of the real property owned by any
other Member; any merger, consolidation, affiliation, or dissolution of any other
Member;
• changes in the organizational structure of any other Member or any of its component
parts; and
• the appointment or removal of trustees or directors, officers of the board, chief executive
officer and chief administrative officer, if any, of each other Member.
In addition, the Corporation is empowered to exercise the powers which are reserved to each
Member in its capacity as a corporate member of any subsidiary organization and to remove a trustee of
any Member with or without cause.
Management
Certain members of the Corporation's management as well as senior officers of each of the
regions are described below.
RICHARD J. STATUTO, PRESIDENT AND CHIEF EXECUTIVE OFFICER, has been
associated with the St. Joseph Health System since 1990. He received his B.E. degree in Chemical
Engineering from Vanderbilt University in 1980 and his Masters in Business Administration from Xavier
University in 1983. From 1979 to 1983, he worked for Procter and Gamble in various product
development positions for both the International and Domestic Divisions. From 1983 to 1987, he served
as a Senior Management Consultant for Touche Ross & Company and provided general management
consulting for many industries, including health care, consumer products, publishing, telecommunications
and industrial manufacturing. From 1987 to 1990, he worked for Bon Secours Health System in Maryland
as Vice President for Business Development, Marketing and Planning. He is Vice Chairperson of the
Board of Trustees, chairs the Compensation Committee and serves on the Executive Committee for
Incarnate Word Health System, San Antonio, Texas. He is also a member of the IWHS/Sisters of
Charity, Houston Steering Committee. Mr. Statuto is also a member of the board of trustees for Catholic
Health Association, Consolidated Catholic Health Care, the Orange County Chapter of the American Red
Cross. He serves as a member of the CSJ St. Joseph Alliance, and is vice chairperson of the Partners for
Catholic Health Ministry Leadership board of trustees.
PAUL S. VIVIANO, EXECUTIVE VICE PRESIDENT AND CHIEF OPERATING
OFFICER, has been associated with the Corporation since 1987. He received his Bachelor's Degree in
Political Science from the University of California, Santa Barbara in 1975 and his Master's Degree in
Public Administration/Public Health from the University of California, Los Angeles, in 1976. He served
as the Director of Administration, County of Orange, California Public Health Department from 1976 to
1978; Assistant Administrator, Dominguez Valley Hospital, Compton, California, from 1978 to 1979;
Administrator and Chief Executive Officer, Lakewood General Hospital, Lakewood, California from
1979 to 1980; Executive Director and Chief Executive Officer, Los Alamitos Medical Center,
Los Alamitos, California, from 1980 to 1985; President and Chief Executive Officer, Long Beach
Community Hospital, Long Beach, California, from 1985 to 1987; President and Chief Executive Officer,
St. Jude Medical Center, Fullerton, California from 1987 to 1992; President and Chief Executive Officer,
St. Joseph Hospital of Orange from December 1992 to November 1994; Regional President and Chief
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Executive Officer for Southern California for the Corporation from May 1994 to June 1996 and Executive
Vice President and Chief Operating Officer of the Corporation from January 1995 to present. He has
served as Director of the Huntington Harbour Branch of the American Cancer Society; Director of the
COHR Connection; Director of the Blue Cross Liaison Committee; Director of the Long Beach Heart
Association; Director of the Los Alamitos Chamber of Commerce; Director of the Los Alamitos/Seal
Beach Unified School District Educational Foundation; Director of the Los Alamitos Municipal Usage
Corporation (Cable TV); Director and Treasurer of Preferred Health Network; Board member of the
Healthcare Association of Southern California; and was a member of the Long Beach Rotary. He
currently serves as a Director of the California Special Olympics; Director, Cornelia Connelly School of
the Holy Society of Jesus; and is an associate member of the Foundation of the American College of
Health Care Executives.
JOE RANDOLPH, SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER,
has been associated with the Corporation since 1987. He received his Bachelor of Science Degree from
California State University at Fullerton in 1980, and completed his Master's in Business Administration
at Pepperdine University in 1992. He served as Auditor for Pacific Health Resources/Lutheran Health
Systems, Los Angeles, California from 1980 to 1983; Audit Manager for National Medical Systems,
Santa Monica, California from 1983 to 1985; Controller at Long Beach Community Hospital, Long
Beach, California from 1985 to 1987; Controller at St. Jude Medical Center from 1987 to 1991; Executive
Vice President, Chief Financial Officer of St. Jude Medical Center from 1991 to 1996; and Senior Vice
President and Chief Financial Officer for the Corporation from September 1996 to present. Effective
April 1995, Mr. Randolph concurrently held the position of Senior Vice President and Chief Financial
Officer of St. Jude Heritage Health Foundation. Over the past ten years, Mr. Randolph has served on
various Boards including Physician Care Surgery Center, Fullerton Outpatient Surgery Medical Center,
LivingWell, and the St. Jude Heritage Health Foundation, Latino Health Access, the Sisters of St. Joseph
Healthcare Foundation Finance Committee and the Cal State University Fullerton Executive Council. At
the present time, he is Chair of the Fiscal Services Committee and the Investment Review Committee of
the Corporation, and President of St. Joseph Professional Services Enterprises, Inc.
LARRY K. AINSWORTH, REGIONAL PRESIDENT AND CHIEF EXECUTIVE
OFFICER, SOUTHERN CALIFORNIA, has been associated with the Corporation since 1994. He
received his B.S. Degree in Psychology 1972 and his Masters in Public Administration in 1974 from
Brigham Young University. He served as Director of Professional Services at Desert Hospital, Palm
Springs, California, from 1974 to 1979; Assistant Administrator at Hoag Hospital, Newport Beach,
California, from 1979 to 1983; Administrator of the Women's, Children's, Rehabilitation and Psychiatric
Hospitals at Long Beach Memorial Hospital, Long Beach, California, from 1983 to 1986; Chief
Operating Officer at Hoag Hospital, Newport Beach, California, from 1986 to 1994; Chief Executive
Officer at St. Joseph Hospital, Orange, California from 1994 to present; and Regional President and Chief
Executive Officer for Southern California for the Corporation from July 1996 to present. This position
encompasses responsibility for St. Jude Medical Center, Mission Hospital Regional Medical Center, the
St. Jude Heritage Health Foundation, the management services agreement with CHOC and the Home
Health Agency. He has served on a variety of boards and committees in the health care industry, has
served as Scoutmaster of Troop 156 in Irvine, California, and is a Diplomat in the American College of
Health Care Executives.
CHARLEY O. TRIMBLE, REGIONAL PRESIDENT AND CHIEF EXECUTIVE
OFFICER, WEST TEXAS/EASTERN NEW MEXICO, has been associated with the Corporation
since 1987. He received his Bachelor's Degree in Accounting in 1972 from Texas Tech University,
Lubbock, Texas and his Masters Degree in Healthcare Administration in 1974 from Trinity University,
San Antonio, Texas. He served as Associate Administrator, Brackenridge Hospital, Austin, Texas from
1976 to 1980; Associate Executive Director, Lubbock County Hospital District, Lubbock, Texas from
SFLIBI/1051636/2/14040/00348/duffyp/September 10,1998 - 3:48
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1980 to 1983; Executive Director, Lubbock County Hospital District, d/b/a Lubbock General Hospital
and Emergency Medical Services (now University Medical Center) from 1983 to 1986; Vice President,
Tulane Medical Center, New Orleans, Louisiana from 1986 to 1987; President and Chief Executive
Officer, St. Mary of the Plains Hospital, Lubbock, Texas from 1987 to date; President and Chief
Executive Officer of Covenant Health system d.b.a St. Mary of the Plains Hospital, Lubbock, Texas, and
Methodist Hospital and Methodist Children's Hospital, Lubbock, Texas 1998 to date; and Regional
President and Chief Executive Officer, West Texas/Eastem New Mexico Region for the Corporation from
1995 to date. He has served as President of Texas Conference of Catholic Health Facilities and President
of the Board of Directors of the American Heart Association, Lubbock, Texas, and Chairman of West
Texas Health Plans, L.L.C., doing business as HMO Blue West Texas, Lubbock, Texas. He is a member
of the Hospital Relations Committee, B1ueCross B1ueShield of Texas, Richardson, Texas and is a board
member of HMO Blue West Texas.
SUSAN WHITTAKER, SENIOR VICE PRESIDENT, GENERAL COUNSEL, has been
associated with the Corporation since 1986. She received her Nursing Degree from El Camino College in
1977, her Bachelor's Degree in Health Care Administration from California State University -Dominguez
Hills in 1980, and her J.D. Degree from Loyola Law School, Los Angeles in 1985. Prior to joining the
Corporation, she was a Neonatal Intensive Care nurse at Torrance Memorial Medical Center, Torrance,
California, from 1976-1978; Administrator, Perinatal Clinical Research Center, Harbor -UCLA Medical
Center, Los Angeles, California, from 1978 to 1985; and Associate Attorney in the health care law firm of
Carpenter, Higgins & Simonds, San Francisco, California, from 1985 to 1986. Her professional
memberships include the California Bar Association and the National Health Lawyers Association. She
is a frequent speaker on health law matters and has had over twenty articles published since 1980.
JENNIFER C. PERRY, SENIOR VICE PRESIDENT, PLANNING, AND MARKETING,
has been associated with the Corporation since January 1995. Her responsibilities include directing the
corporate and system -wide planning and market research functions. She also oversees corporate
communications and the Research and Development functions. She received her B.A. in Economics from
Pomona College, Claremont, California in 1985 and her Masters of Business Administration Degree in
1989 in Health Care Management and Strategic Planning from The Wharton School, University of
Pennsylvania. She served as a Financial Analyst in the Health Care Finance/Corporate Financing Group
of Dean Witter Reynolds from 1985 to 1987, involved in tax-exempt financings and mergers and
acquisitions for hospitals and managed care organizations. From 1988 through 1994, she worked in
management consulting, most recently as a Senior Manager of the West Coast Health Care practice of
Deloitte & Touche based in the Los Angeles office, specializing in strategic planning and managed care.
She is a member of the Boards of St. Joseph Health System Foundation, Taller San Jose, and is a member
of the Catholic Health System Planners and Marketers Association. She currently chairs the Board of
California Health Decisions.
ELEANOR V. BREWER, VICE PRESIDENT, RESEARCH AND DEVELOPMENT, has
been associated with the Corporation in multiple roles since 1983. She was previously responsible for the
Corporation's risk management activities, including the creation and management of American Unity
Group, Ltd., the general and professional liability insurer of the Corporation and Members. She also
served as Senior Vice President of The Health Plan of America from September 1.986 to June 1991. She
received her B.S. Degree in Medical Record Administration from Viterbo College in 1969, her Master's
Degree in Education, Curriculum and Instruction from Loyola University, Chicago, Illinois in 1976 and
her Masters in Business Administration from the University of California, Los Angeles, in 1986. Prior to
joining the Corporation, she was Assistant Professor of Medical Record Administration, University of
Illinois Medical Center, Chicago, Illinois, from 1974 to 1976; Manager of Medical Record Services,
Good Samaritan Hospital, Downers Grove, Illinois, from 1976 to 1979; and Vice President, Illinois
Hospital Association from 1979 to 1983.
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SISTER SUZANNE SASSUS, C.S.J., PH.D., VICE PRESIDENT, SPONSORSHIP, has been
associated with the Corporation since 1987. Sister Suzanne received her Bachelor's Degree from San
Francisco College for Women in 1954, her Master's Degree in 1960 and her Doctorate in 1963 from
Catholic University of America, Washington, D.C. Sister Suzanne began her career as Assistant
Professor, Modern Language Department, St. Joseph College of Orange in 1964. In 1968, she became
Associate Professor, Modern Language Department, Loyola-Marymount University in Los Angeles. In
1973, the Sisters of St. Joseph of Orange elected her to the General Council. In 1977, she was elected as
Assistant General Superior and General Superior in 1982. It was during this period that she oversaw the
formation of the Corporation and served as its first Board Chairperson from 1982 to 1986. Sister Suzanne
is former Chairperson of the Board of Directors of American Unity Group, Ltd. and is a member of the
Boards of St. Joseph Hospital Orange, St. Mary Regional Medical Center, California Association of
Catholic Hospitals and Catholic Charities of Orange County. She is a member of the Catholic Health
Association, the California Association of Catholic Hospitals and the CSJ Health Alliance.
DAVID R. SCHINDERLE, VICE PRESIDENT, FINANCE, AND TREASURER, has been
associated with the Corporation since 1983. His responsibilities include health care finance and
economics, investor relations, treasury management and banking relationships for the Members. He
received his Master's Degree in Business Administration from Pepperdine University in 1987 and his
Bachelor's Degree in Industrial Engineering from Bradley University in 1972. From 1972 to 1983, he
worked for Advanced Health Systems, Inc., Irvine, California, in various positions, including Senior
Consultant, Project Manager of the Management Services Division, General Manager of the Professional
Practices Divisions, Vice President and Division Manager of the Managed Facilities Group, and Vice
President of Financial Operations. During the period from 1974 to 1978 he was also the Chief Financial
Officer of Saginaw Osteopathic Hospital, a 218-bed teaching hospital in Saginaw, Michigan. From 1971
to 1972, he worked as a Unit Manager for St. Francis Hospital and Medical Center in Peoria, Illinois. He
is a member of the Mellon Bank, N.A. Master Trust Client Advisory Board, a member of the Board of
Directors of HealthCare EDI Corporation, a member of the Board of Directors of the Healthcare Data
Information Corporation, a member of the American National Standards Institute X12 Insurance
Subcommittee, an Advanced Member of the Health Care Financial Management Association and a
Certified Healthcare Finance Professional, a member of the Treasury Association of Southern California,
and a member of the Treasury Management Association. He is an author of several articles and a
frequent speaker on managed care, electronic data interchange and treasury management.
RICHARD ZBOROWSKI, VICE PRESIDENT, HUMAN RESOURCES, has been
associated with the Corporation since March 1996. He received his Bachelor's Degree in Business
Administration from Indiana State University in 1970 and his Master's Degree in Personnel Management
from Central Michigan University in 1975. He has over 25 years of experience in Human Resources
including the development and implementation of . He began his career in 1977 with Wendy's
International, Inc. in Columbus, Ohio where he established the Human Resources Department. He was
elected Corporate Vice President in 1981. In 1987, he became the Vice President of Human Resources at
R. G. Barry Corporation in Columbus, Ohio. In 1993, he moved to Orlando, Florida where he became the
Corporate Vice President of Human Resources of Orlando Regional Healthcare System. He is a member
of the National Human Resources Executive Planning Group, the American Hospital Association, the
American Society for Health Care Human Resources Administration and the Human Resources Planning
Society.
JACK GLASER, VICE PRESIDENT FOR THEOLOGY AND ETHICS, has been
associated with the Corporation since 1986. He received his BA from Loyola University in Chicago in
1956; an MA in English Literature from Loyola in 1958; a Licentiate in Philosophy from West Baden
College, West Baden, Indiana in 1958; a Licentiate in Theology from Professional School of Philosophy
and Theology in Frankfurt/Main, Germany in 1965; a Doctorate in Theology from Professional School of
SFLIBIII 051636/2/14040/00348/duffyp/September 10, 1998 - 3:48
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Philosophy and Theology in Frankfurt/Main, Germany in 1969; an MA in Psychology from University of
Detroit in 1976. From 1969-1971, he was Assistant Professor, Moral Theology St. Mary of the Lake
Seminary Mundelein, Illinois; from 1971 to 1976, he was Assistant Professor, University of Detroit
Department of Religious Studies; from 1976 to 1978, he practiced as a psychotherapist for individual and
group therapy/alcoholism rehabilitation at the Center for Pastoral Growth/Midwest Mental Health Clinic
in Detroit, Michigan; from 1978 to 1980, he was Vice President for Human Resource Development and
Ethics at Mount Carmel Mercy Hospital in Detroit, Michigan; from 1980 to 1986, he was Director:
Program of Ethics for Sisters of Mercy Health Corporation in Farmington Hills, Michigan; from 1986 to
the present, he has directed the ethics programs at St. Joseph Health System -- Director, Center for
Healthcare Ethics, Vice President, Theology and Ethics (1995). He has authored/co-authored five books
and several dozen articles on ethics. He has spoken at local and national forums and produced scores of
educational video tapes. He serves on several local non-profit community boards such as Share Our
Selves and Saint Joseph Ballet.
DR. ELLIOT B. STERNBERG, M.D., VICE PRESIDENT, CLINICAL QUALITY AND
HEALTH IMPROVEMENT, has been associated with the Corporation since 1997. Dr. Elliot obtained
his medical degree from the Medical College of Virginia in 1980. From 1980-1983, he fulfilled his
internship and residency requirements in Internal Medicine at the University of California Irvine and in
1984, completed a fellowship in Primary Care Internal Medicine from UCI. Dr. Stemberg began his
career with Bristol Park Medical Group as an internist and served in that capacity from 1984 to 1993. In
1993, he assumed the responsibility of medical director overseeing the medical care of 100 primary care
providers and has had significant input into physician governance, compensation, disease management
and utilization issues. He has served on the Board of Directors for Bristol Park Medical Group, as well as
Secretary for the Corporation. In 1997, Dr. Sternberg received the "Most Valuable Physician" award
from the University of California at Irvine, where he also currently serves as an Assistant Clinical
Professor in Medicine.
BENJAMIN R. WILLIAMS, VICE PRESIDENT, INFORMATION SERVICES & CHIEF
INFORMATION OFFICER, has been associated with the Corporation since 1998. He received his
Bachelors Degree in Business and Accounting from Appalachian State University in 1981 and passed the
CPA examination the same year. From 1981 to 1987 Ben worked as an auditor for Ernst & Whitney
performing auditing and related business consulting services to a variety of clients in the Healthcare,
Manufacturing, Banking/Finance, Defense and Service industries. In 1987, he became Manager of the
System Implementation group for Price Waterhouse responsible for developing and managing the vendor
services consulting practice serving Healthcare, Retail, Insurance, Manufacturing, Public Utilities and
Professional Services industries. He also managed strategic business projects in both organization and
systems areas. In 1993, Ben was recruited to Continental Medical Systems (CMS) as Vice President of
Information Services and Chief Information Officer for this $1 billion public company; operating 37
rehabilitation hospitals and providing rehabilitation and physician services at more than 125 outpatient
facilities. He guided development of a strategic plan and its subsequent implementation to maximize
systems integration and processes for core operations of the company. Horizon healthcare Corporation
acquired CMS in 1995 and he then became Vice President and Chief Information Officer of the combined
Horizon/CMS Healthcare Corporation. He directed the integration of the two companies systems and
technology and was a member of the executive management team. He is a Certified Public Accountant, a
member of the College of Healthcare Information Management Executives (CHIME) and Healthcare
Information and Management Systems Society (HIMSS), and is involved as a speaker and participant in a
variety of industry and technology organizations.
RICHARD J. SPINELLO, VICE PRESIDENT RISK MANAGEMENTANSURANCE
SERVICES, has been associated with the Corporation since March 1998. He received his Bachelor of
Business Administration Degree from Hofstra University, Hempstead, New York in 1969. He was
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employed by Caronia Corporation from 1973 through 1987, a nationally known risk management
organization, where he was responsible for the supervision of the claims staff, recruitment and training of
all personnel, management of audit teams, and providing reports and recommendations for multiple self -
insured hospital systems and commercial insurance carriers. From 1987 to 1991, he was employed by
American Medical International a publicly traded company, where he was responsible for the
administration and management of all professional and general liability claims in their self insurance
programs along with the design, development and implementation of their loss prevention program. Prior
to joining the Health System office, he was with GranCare, Inc., Atlanta, Georgia a publicly traded
company, where he served as Senior Vice President and Director of Risk and Insurance Management
from 1991 until March 1998. He was responsible for all aspects of their risk and insurance programs,
including professional liability an Worker's Compensation, premium allocations, loss prevention, as well
as operation of their captive insurance company.
EMPLOYEES
As of June 30, 1998, the Obligated Group (including the New Members) had approximately
18,581 total employees representing 14,391 full-time equivalent employees, including [5,582] in the
Southern California Region, [3,155] in the Northern California Region and [5,634] in the West
Texas/Eastem New Mexico Region. Approximately 710 total employees representing 414 full-time
equivalent employees are unionized. Union organizing activities occur with respect to the employees of
the Obligated Group Members from time to time. Santa Rosa Memorial and SRMAHS are currently the
only Obligated Group Members that are parties to union contracts. Santa Rosa Memorial's contract with
its registered nurses was successfully renegotiated for a two-year term ending on September 30, 1998
[renegotiation status]. SRMAHS' contract with its registered nurses was successfully renegotiated for a
two-year term ending on April 30, 1999. Management of the Obligated Group Members believe that their
respective employee relations are satisfactory.
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