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    Revenue Bond

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    Revenue Bond

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    18 views152 pages

    Newton, KS Sewer

    Uploaded by

    s88831139
    Revenue Bond

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    of 152
    New Issue Rating (Book-Entey Only) Standard & Poor's: BBB- ‘See “Description of Rating” herein. nthe spinon of more & Bel PC. Bora Come der exsting law anssiming contd cmplance teem eeneny fe ira heer Cn ea ithe mnretomihe erie 18 Bons ntudng as original sue don popet alle tan cer ire) acide om a sin oes manne in pares exces describe ere and is mate of tax pferene eup oe eee ana Tc mtcrextonte Sens HA Bonds isexempafom income ation he Stat Kans Sethe caption TAX MATTERS” Moin $16,400,000 CITY OF NEWTON, KANSAS Hospital Refunding Revenue Bonds (Newton Healthcare Corporation) Series 1998A the federal aternaise mininan ta imposed Dated May 1, 1998 Due: November 15, as shown below The Seren 198A Bons are ssble fly registered Bonds without coupon in denominations of $5.01 and ans integral multi ere nd ne tetared inthe name Cede & Co, nominee of The Desi Tras Company. New York New York ("DED Dit aa em ry othe Series 1ONNA Bons, Purchases wil e mde nly in bowok-ety form through he Participant 95 dened He a ery SVSTENT berein an nophysical diver ofthe Series 198A Bonds ile eto beneficial mney ence asdeseed TS Facer vial rest and premium any, wile made fbeneicil owners DTC though i Pancpans Soong s Coe C0 rare rb nminc of BY rettenes vein w the Bondholdero eine ner all mean Cede & Coa slncal ane Ta eee ei alonener the Series 199%A Bom See "BOOK-ENTRY SYSTEM” herein. The principal an premium, fant mice ae gk Bonds wll hepa hy INTRUST Bank NA.. Wihits, Kansan» Bond Trusts to Cee & Co. fog ay Cede § 2 a ee Doar schpay ments tothe Patipansisthe espns of DTC and dsurement fw payment he emai eee Dosa a ihe Patan sore aly described enn. ttrest wil be payable the Band Tt eo Ms, See eS anioning Novemer 1S, 998, tothe registered owner there sof the ppc Record Dates herein ened ie aE eo een sytem desried hee sn place, be made to Cue & Co. The Series 19984 Bonds are subject t9 mandatory Uptional and extraordinary optional redemption prior to maturity as described herein. SE ee wh Ihe purchase ofthe Series TO98A Bonds. For a discuosiom of cersin of theve isk, we the captin BONDHOLDERS' RISKS. MATURITY SCHEDULE ‘$4,540,000 Serial Series 1998 Bonds Maturity Principal Interest Price or Maturity Principal Interest Price or November 15 Amount —_ Rate Yield November 15 Amount Rate Yield Tos $280,000 390% 100% 2H Sa5.000 s00% TOW 199 510.000 420 100 dons 405.000 508) 5.0 20001 32000) ais 44s aus 25.000 sis 5320 vor 335.008 468 470 aor 445.000 520 538 don 350.40) 475 480 doox 470.000 525 530 dos 70.000 3x0 490 am 495.000 535 535 $5:915,000 570% Term Bonds due November 13 ‘$5945.00. 5.78% Term Bonds due November 1 2018 at 100.0% to Vield 8.700% ‘224 at 99.5% to Vield 5.7869% IHIE SERIES 199KA BONDS ARE SPECIAL AND LIMITED OBLIGATIONS OF THE CITY OF NEWTON. KANSAS THESES Fa ee ey EROM RENTAL PAYMENTS DERIVED BY THE ISSUER UNDER A LEASE AGREEMENT W111! SUITS Hae ee ORPORATION ITHE “CORPORATION’). A NOTE OF THE CORPORATION ISSUED PURSUANT TQ DHE NACE BAHAR ASTER INDENTURE, AND A GUARANTY BY THE CORPORATION OF AMOUNTS ONED ON THE BONDS. AND ATE Fee Ee [SSUER OR THE STATE OF KANSAS AND NEITHER THE ISSUER NOR THE STATE OF KANSAS WILL BE ao IMEREON, THE SOURCE OF PAYMENT FOR THE SERIES 198A BONDS IS MORE FULLY DESCRIBED HERTS Fo eR Bondvarflerawhon avandifisueand ecevedhy th Underriter-xabject toprol, tothdrva or wae Fe eee tnd ahe approval of legality the Series 198A Bonds by Gilmore & Bell PC Bonk Couns Corsini) sean forth: Ir ye cul Robert B. Myers xg. Newton, Kant and forthe Corporation eae A in Pankratz NS ga mates wl e pase ypon forthe Underiter by ts coun, Gardner, Caron & Doug: sae ree hatin Sercs ISNA Bord define fom wil be aaa fo iver to he Undress ia DTC 8 New Yorks Noe York or ‘orabout May 29. 1998 This ever security tesco Patel investors must ea thisentir Official Statement including the Appendices tobi ne Farmed invest econ AG ra ntains cenain information for ease of reference only. It es no constitute a summary ofthe Series IWR Bands o he mation essential tothe making May 14, 1998 sell or the solicitation of an offer to buy, and there shall not be any sale of the Series 1998 Bonds by any Person in any jurisdiction in which itis unlawful for such person to make such offer, solicitation or sale [The information contained inthis Official Statement has been fummished by the Corporation, DTC and other sources which are believed to be reliable, but such information is not guaranteed oo we, accuracy Tra mpleteness by, and is not to be construed as a representation of, cither the Underwriter or the Isvney ‘The information and expressions of opinion herein ate subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstance, ena any jmlication that there has been no change in the affairs of the parties referred to above since the duc. hereof. THE SERIES 1998A BONDS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE BOND INDENTURE AND THE MASTER INDENTURE HAVE NOT BEEN QUALIFIED UNDER THE TRUST INDENTURE ACT OF 1939, AS AMENDED. IN RELIANCE UPON EXEMPTIONS CONTAINED IN SUCH ACTS. THE REGISTRATION OR TABLE OF CONTENTS INTRODUCTION ‘THE SERIES 1998A BONDS PLAN OF FINANCING BOOK-ENTRY SYSTEM. ESTIMATED SOURCES AND USES OF FUNDS... ESTIMATED ANNUAL DEBT SERVICE REQUIREMENTS, ESTIMATED DEBT SERVICE COVERAGE BONDHOLDERS'’ RISKS...... LITIGATION. LEGAL MATTERS. TAX MATTERS CONTINUING DISCLOSURE REQUIREMENTS. DESCRIPTION OF RATING... FINANCIAL STATEMENTS... . VERIFICATION OF MATHEMATICAL COMPUTATIONS. UNDERWRITING MISCELLANEOUS APPENDICES Appendix A - Information Relating to Newton Healthcare Corporation Al Appendix B - Audited and Unaudited Financial Statements of Newton Healthcare Corporation —_B-1 Appendix C - Definitions and Summary of Certain Principal Documents Cl Appendix D - Form of Opinion of Bond Counsel Dl (This Page Intentionally Left Blank) OFFICIAL STATEMENT relating to $16,400,000 City of Newton, Kansas Hospital Refunding Revenue Bonds (Newton Healthcare Corporation) Series 198A INTRODUCTION General ‘The purpose of this Official Statement, including the cover page and the Appendices hereto, is to set forth information in connection with the offering by the City of Newton, Kansas (the “Issuer”) of {$16,400,000 aggregate principal amount of its Hospital Refunding Revenue Bonds (Newton Healthcare Comporation) Series 1998A (the “Series 1998A Bonds”). See APPEND: C for definitions of certain ‘capitalized words and terms used herein. The Series 1998A Bonds The Series 1998A Bonds will be issued by the Issuer under a Bond Trust Indenture dated as of May 1, 1998, as it may be amended or supplemented from time to time by various supplemental indentures (the “Bond Indenture”), between the Issuer and INTRUST Bank N.A., Wichita, Kansas, as bond trustee (the “Bond Trustee"). The proceeds received by the Issuer from the sale of the Series 198A Bonds, together with other funds provided by the hereinafter defined Corporation, will be used to provide the funds necessary to (i) advance refund the outstanding portion of the Issuer’s $15,000,000 Hospital Revenue Bonds (Newton Healthcare Corporation) Series 194A, $14,815,000 of which will be outstanding when the Series 1998A Bonds are issued (the “Prior Bonds”), (i) fund the Debt Service Reserve Fund, and (ii) pay certain costs related to the sale, issuance and delivery of the Series 198A Bonds and refunding of the Prior Bonds. ‘The Issuer will own the land and facilities which constitute the Hospital. The Issuer will lease the facilities financed with the proceeds of the Series 1998A Bonds to Newton Healthcare Corporation d/b/a ‘Newton Medical Center (the “Corporation”) under a Lease Agreement between the Corporation and the Issuer dated May 1, 1998 (the “Lease Agreement”) in consideration of rental payments to be made by the Corporation which are intended to be sufficient to pay the principal of, redemption premium, if any, and the interest on the Series 198A Bonds. See “PLAN OF FINANCING” and “ESTIMATED SOURCES AND USES OF FUNDS.” The Corporation The Corporation is a Kansas not-for-profit corporation incorporated in 1987. The Corporation ‘owns and operates an acute care and long term care hospital facility located in Newton, Kansas, licensed for 55 acute care beds and 11 skilled care beds (the “Hospital”). Contemporaneously with the issuance of the Series 1998 Bonds, the Corporation will convey the Hospital to the Issuer. The Issuer will lease the Hospital to the Corporation pursuant to the Lease Agreement. See “PLAN OF FINANCING.” APPENDIX A contains information about the history, organization, operations and financial performance of the Corporation. APPENDIX B contains certain audited and unaudited financial statements of the Corporation. The Issuer ‘The Issuer, an incorporated municipality, a city of the first class, duly organized and existing under the laws of the State of Kansas, is authorized to provide for issuance of the Series 198A Bonds as hereinafter described. The Issuer has a Commission-Manager form of government. The City Commission consists of five commissioners, three of whom are elected in each odd-numbered year, two for four-year terms each and one for a two-year term. The Mayor, a regular voting member of the Commission, presides ‘at Commission meetings but does not have veto power over Commission action, The City Commission is charged with legislative and policy-making duties of the Issuer, and with administrative oversight. The City Manager is appointed by the Commission and is charged with the efficient and effective administration of the Issuer. The five Commissioners and their terms are as follows: Commissioner Title ‘Term Expires Todd Loescher Mayor April 2001 Kathryn Gaeddert Vice Mayor April 2001 Tony Graber Commissioner ‘April 1999) Carl Harris Commissioner April 1999 Tim Richards ‘Commissioner April 1999 Limited Obligation ‘The Series 1998A Bonds are limited obligations of the Issuer and are payable solely from payments received by the Bond Trustee under the Bond Indenture and, under certain circumstances, from other amounts on deposit with the Bond Trustee pursuant to the Bond Indenture. To secure the amounts owed by the Issuer on the Series 1998A Bonds, the Corporation will issue and deliver to the Issuer its Master Indenture Note (Newton Healthcare Corporation), Series 1998A, dated May 1, 1998 in a principal amount equal to the aggregate principal amount of the Series 1998A Bonds (the “Series 1998A. Note”). The Issuer will pledge and assign the Series 1998A Note and certain of its rights under the Lease ‘Agreement to the Bond Trustee as security for the Series 1998A Bonds. Under the terms of the Series 1998A Note and the Lease Agreement, the Corporation will be required to make payments which, together with other moneys available therefor (and interest earned thereon), will be sufficient to provide for the payment of the principal of, premium, if any, and interest on the Series 1998A Bonds. The Corporation will also guaranty the payment of the principal of, premium, if any, and interest on the Series 1998A Bonds pursuant to a Guaranty Agreement dated as of May 1, 1998 (the “Guaranty Agreement’) Bondholders’ Risks ‘There are risks associated with the purchase of the Series 1998 Bonds. See “BONDHOLDERS’ RISKS” herein for a discussion of some of these risks. ‘Substitution of Security Under certain circumstances the Series 198A Note pledged under the Bond Indenture is required to be exchanged for the obligations of a different obligated group of which the Corporation, if'a member of the then-current obligated group, would be a member. This could, under certain circumstances, lead to the substitution of different security in the form of a note backed by an obligated group which is financially and operationally different than the then-existing obligated group. That obligated group could have substantial debt outstanding which would rank on a parity with the substitute note. See “THE SERIES 1998A BONDS - Security for the Series 1998A Bonds” herein. 2° Summary of Documents For additional information regarding the principal documents relating to the Series 1998A Bonds, see APPENDIX C - “DEFINITIONS AND SUMMARY OF CERTAIN PRINCIPAL DOCUMENTS.” APPENDIX C is only a summary of the principal documents and does not purport to be complete. Copies of these documents are on file at the offices of the Underwriter, and following delivery of the Series 1998A Bonds, will be on file at the office of the Bond Trustee. THE SERIES 1998A BONDS General ‘The Series 198A. Bonds will be issued only in fully registered form in denominations of $5,000 and any integral multiple thereof. The Series 198A Bonds will bear interest at the respective rates per annum and mature in the amounts and on the dates set forth on the cover page hereof. Each Series 1998A Bond will bear interest from its date, or from the most recent interest payment date to which interest has been paid or duly provided for, payable on May 15 and November 15 of each year, beginning ‘November 15, 1998. The Series 1998 Bonds will be dated May 1, 1998. For a description of the method of payment of the principal of, premium, if any, and interest on the Series 198A Bonds and matters pertaining to transfers and exchanges, see “BOOK-ENTRY SYSTEM” herein. In the event that the Book- Entry System is discontinued, the following provisions would apply. ‘The principal of and premium, if any, ‘on the Series 1998A Bonds will be payable at the principal corporate trust office of the Bond Trustee upon presentment of the Series 1998A Bonds. Payment of interest on the Series 1998 Bonds shall be made to the registered owners thereof as of the last day (whether or not a Business Day) of the calendar month immediately preceding each interest payment date (the respective Record Dates for such payments) (i) by check or draft mailed to such owners at their addresses as they appear on the Bond Register or at such other addresses as are furnished to the Bond Trustee by such owners in writing or (ii) as to any owner of {$1,000,000 or more in aggregate principal amount of Series 198A Bonds who so elects in writing to the Bond Trustee, by electronic transfer to the bank for credit to the ABA routing number and account number filed with the Bond Trustee not later than the Business Day preceding the Record Date. As long as the Book-Entry System is in place, such payments shall be made to DTC. In the event that the Book-Entry System is discontinued, the following provisions would also apply. ‘The Series 1998A Bonds would be transferable by the registered owner thereof or by such owner’s attomey duly authorized in writing upon presentation thereof at the principal corporate trust office of the Bond Trustee. Any Series 1998A Bond could be exchanged at the principal corporate trust office of the Bond Trustee for a like aggregate principal amount of Series 1998A Bonds of the same maturities of other authorized denominations. The Bond Trustee and the Issuer may charge a fee sufficient to cover any tax, fee or other governmental charge that may be imposed in connection with any exchange or transfer of any Series 1998A Bond, except in the case of the issuance of a Series 1998A Bond or Bonds for the ‘unredeemed portion of a Series 1998 Bond surrendered for redemption. Security for the Series 1998A Bonds The Series 198A Bonds are limited obligations of the Issuer and are payable solely from () payments or prepayments to be made on the Series 198A Note; (ii) Rental Payments and other amounts payable under the Lease Agreement (but excluding the Issuer's rights to payment of its fees and expenses and to indemnification as set forth in the Lease Agreement and as otherwise expressly set forth therein and 3+ excluding any amounts held by the Bond Trustee to meet the rebate requirements of Section 148(f) of the Code, “Unassigned Rights”); (ii) certain moneys, investments or other property, if any, held by the Bond ‘Trustee under the Bond Indenture; and (jv) in certain circumstances, proceeds from certain insurance and condemnation awards, Certain investment earings on moneys held by the Bond Trustee may be transferred to a Rebate Fund established pursuant to the Tax Compliance Agreement dated as of May 1, 1998 among the Issuer, the Corporation and the Bond Trustee. Amounts held in the Rebate Fund are not part of the “trust estate” pledged to secure the Series 1998A Bonds and consequently will not be available to make payments on the Series 1998A Bonds. Pursuant to the Guaranty Agreement, the Corporation will guaranty the repayment of the principal of, premium, if any, and interest on the Series 1998A Bonds. ‘The Series 198A Note will be issued pursuant to Supplemental Master Trust Indenture No. 2 dated as of May 1, 1998 (the “Supplemental Indenture") by and between the Corporation and INTRUST Bank N.A., as trustee (the “Master Trustee”), which supplements the Master Trust Indenture, dated as of October 1, 1994 (together with the Supplemental Indenture and as the same has previously been and is further amended and supplemented from time to time, is herein referred to as the “Master Indenture”). The Series 198A Note will entitle the holder thereof to the protection and benefit of the covenants, restrictions and other obligations imposed upon the Corporation and other Members, if any, of the Obligated Group by the Master Indenture. ‘The Corporation is currently the only Member of the Obligated Group. ‘The Master Indenture permits the Corporation and any other future Member of the Obligated Group to issue additional Notes and secure all Notes on a parity with the Series 1998A Note. The Corporation and any other future Member of the Obligated Group are obligated with respect to the payment of each Note issued under the Master Indenture. In addition, all Notes are equally and ratably secured by a security interest in all Unrestricted Receivables of the Corporation and any other future Member of the Obligated Group, subject to Permitted Encumbrances. Pursuant to the Master Indenture, the Corporation has granted and any other future Member of the Obligated Group will grant to the Master Trustee, for so long as such Members remain Members of the Obligated Group, a security interest in all of their Unrestricted Receivables, which consist of their income, revenues, receipts and other moneys received by or on behalf of any Member of the Obligated Group from any source and all rights to receive the same whether in the form of accounts, contract rights, chattel paper, instruments, general intangibles or other rights now owned or hereafter acquired by any Member of the Obligated Group, and all proceeds therefrom whether cash or noncash, all as defined in Article 9 of the Uniform Commercial Code of the State where a Member is located; excluding, however, gifts, grants, bequests, donations and contributions to any Member of the Obligated Group heretofore or hereafter made, and the income and gains derived therefrom, which are specifically restricted by the donor, testator or {grantor to a particular purpose which is inconsistent with their use for payments required under the Master Indenture or on the Notes. Payments on the Series 1998A Note and any additional Notes issued under the Master Indenture shall be joint and several obligations of each Member of the Obligated Group. The Corporation is currently the only Member of the Obligated Group. Notwithstanding uncertainties as to enforceability of the covenant in the Master Indenture of each Member of the Obligated Group to be jointly and severally liable for each Note, the accounts of the Corporation and future Members of the Obligated Group, if any, will be combined for financial reporting purposes and will be used in determining whether various covenants and tests contained in the Master Indenture (including tests relating to the incurrence of additional Indebtedness) are met. See “BONDHOLDERS” RISKS - Certain Matters Relating to Enforceability of the Master Indenture.” ‘The Lease Agreement provides that the Corporation is required to make designated payments to the Bond Trustee for deposit into the Debt Service Fund in amounts sufficient to pay the principal of, redemption premium, if any, and interest on the Series 1998A Bonds when due. The Obligated Group’s obligation to make payments on the Series 198A Note will be satisfied to the extent that payments are ‘made by the Corporation under the Lease Agrecment, and the Corporation will receive similar credit under the Lease Agreement for payments made by any Member of the Obligated Group on the Series 1998A Note, In addition, the Corporation has granted to the Master Trustee pursuant to the Assignment of Lease dated as of May 1, 1998 by and between the Corporation and the Master Trustee (the “Assignment of Lease”) all of the rights, title and interest of the Corporation in its leasehold interest in the Hospital ‘The rights of the Issuer in and to the Series 1998A Note, and the Lease Agreement, including the amounts payable thereon (other than the Unassigned Rights) and the rights and interest of the Issuer to the Land, as defined in the Bond Indenture, and all improvements thereon, have been assigned to the Bond Trustee to provide for and to secure the payment of the principal of, redemption premium, if any, and interest on the Series 1998A Bonds. The Corporation agrees under the Lease Agreement to make its payments on the Series 1998A Note directly to the Bond Trustee. ‘The Series 1998A Note is a general obligation of the Corporation and any future Member of the Obligated Group. The obligations of the Corporation and any future Member of the Obligated Group under the Master Indenture are secured by a security interest in the Unrestricted Receivables of the Corporation and any future Member of the Obligated Group, subject to Permitted Encumbrances, as further described in and limited by the Master Indenture. See “BONDHOLDERS’ RISKS - Matters Relating to Security for the Series 1998A Bonds.” The Master Indenture permits each Member of the Obligated Group to (i) incur other secured or unsecured indebtedness, (i) enter into guaranties and (ji) sell, lease or otherwise dispose of property, all upon the terms and conditions specified therein. See APPENDIX C under the captions “DEFINITIONS AND SUMMARY OF CERTAIN PRINCIPAL DOCUMENTS ~ Summary of the Master Indenture — Permitted Indebtedness,” and ‘-- Sale, Lease or Other Disposition of Property.” Debt Service Reserve Fund ‘The Bond Indenture establishes a Debt Service Reserve Fund to be used to pay the principal of and redemption premium, if any, and interest on the Series 198A Bonds if sufficient money is not available in the Debt Service Fund. The Debt Service Reserve Requirement means initially, the sum of $1,203,507.50 and thereafter, at the option of the Corporation, shall at all computation dates be maintained at a sum equal to the least of (1) 10% of the original aggregate principal amount of the Series 198A Bonds, (2) the Maximum Annual Debt Service Requirement on the Series 1998A Bonds in any future Fiscal Year following such date, or (3) 125% of the average future annual debt service on the Series 1998A Bonds. For a complete description of the funding of the Debt Service Fund and the Debt Service Reserve Fund, see “DEFINITIONS AND SUMMARY OF CERTAIN PRINCIPAL DOCUMENTS - Summary of the Bond Indenture -- Creation of Funds and Accounts ~ Debt Service Fund ~Debt Service Reserve Fund” and “Summary of Certain Provisions of the Lease Agreement ~ Rental Payments” in APPENDIX C. Additional Indebtedness In certain circumstances, Members of the Obligated Group may issue additional Notes that will not bbe pledged under the Bond Indenture, but will be equally and ratably secured by the Master Indenture with the Series 1998A Note. The Members of the Obligated Group may also issue other secured or unsecured Indebtedness in addition to additional Notes and may enter into guaranties. See APPENDIX C under the 5+ captions “DEFINITIONS AND SUMMARY OF CERTAIN PRINCIPAL DOCUMENTS — Summary of the Master Indenture — Permitted Indebtedness” and “- Sale, Lease or Other Disposition of Property.” Redemption of the Series 1998A Bonds ‘The Series 1998A Bonds are subject to redemption prior to maturity in accordance with the following terms and provisions: ‘Mandatory Sinking Fund Redemption. The Series 1998A Bonds maturing on November 15, 2018, and November 15, 2024 are subject to mandatory redemption pursuant to the mandatory sinking fund redemption requirements provided in the Bond Indenture, on November 15, in each of the years set forth below, at a redemption price of 100% of the principal amount thereof, plus accrued interest thereon to the redemption date, without premium: $5,915,000 Term Bonds Maturing November 15, 2018 Year Principal Amount Year Principal Amount 2010 $520,000 2015, $690,000 2011 550,000 2016 730,000 2012 580,000 2017 770,000 2013 615,000 2018* 810,000 2014 650,000 ‘$5,945,000 Term Bonds Maturing November 15, 2024 Year Principal Amount Year Principal Amount 2019 $860,000 2022 $1,015,000 2020 905,000 2023 1,070,000 2021 960,000 2024* 1,135,000 Final Maturity Under the Bond Indenture, the Bond Trustee, upon instruction from the Corporation, will be authorized to use moneys in the Debt Service Fund at any time to purchase Term Bonds in the open market at a price not in excess of their principal amount. The Corporation may receive a credit against the mandatory sinking fund redemption obligation described above, for Series 1998A Bonds delivered to the Bond Trustee for cancellation, purchased in the open market by the Bond Trustee on behalf of the Corporation or previously redeemed (other than by mandatory redemption) and not previously applied as a credit against such mandatory redemption obligation, such credit to be at 100% of the principal amount thereof. Optional Redemption. ‘The Series 198A Bonds which mature on November 15, 2009, or thereafter, are subject to redemption and payment prior to the stated maturity thereof by the Issuer at the ‘option and at the request of the Corporation, on and after November 15, 2008, in whole or in part at any time, in any order of maturity and by lot within a maturity, at the principal amount of the Series 1998A Bonds to be redeemed plus accrued interest thereon to the date of redemption. Extraordinary Optional Redemption. The Series 1998 Bonds shall be subject to redemption and payment prior to the stated maturity thereof, in whole or in part (but only in whole with respect to (2) -6- below), at the option of the Issuer, which shall be exercised upon instructions from the Corporation, at a redemption price equal to 100% of the principal amount thereof plus accrued interest thereon to the redemption date, without premium, upon the occurrence of any of the following events: (1) All ora substantial portion of the Facilities shall have been damaged or destroyed by fire or other casualty, or title to, or the temporary use of, all or a substantial portion of the Facilities shall have been condemned or taken for any public or quasi-public use by any authority exercising the power of eminent domain or title thereto shall have been found to be deficient, to such extent that in the determination of the Corporation (A) such Facilities cannot be reasonably restored or replaced within a period of six months to the condition thereof immediately preceding such event, or (B) the Corporation is thereby prevented from carrying on its normal operations of such Facilities for a period of six months, or (C) the cost of restoration or replacement thereof ‘would exceed the Net Proceeds of insurance carried thereon, plus the amounts for which the Corporation is self-insured with respect to deductible amounts; or (2) _as a result of any changes in the Constitution of the State of Kansas or the Constitution of the United States of America or of legislative or administrative action (whether state or federal) or by final direction, judgment or order of any court or administrative body (whether state or federal) entered after the contest thereof by the Corporation in good faith, the Series 198A Note, the Master Indenture, the Lease Agreement, the Assignment of Lease, the Guaranty Agreement or the Bond Indenture shall have become void or unenforceable or impossible of performance in accordance with the intent and purposes of the parties as expressed in the Series 1998A Note, the Master Indenture, the Lease Agreement, the Assignment of Lease, the Guaranty Agreement or the Bond Indenture. Selection of Series 198A Bonds for Redemption. The Series 1998A Bonds shall be redeemed only in the principal amount of $5,000 or any integral multiple thereof. When less than all of the outstanding Series 1998 Bonds are to be redeemed and paid prior to maturity, such Series 1998A Bonds shall be redeemed from such maturities as shall be selected by the Corporation and Series 1998A. Bonds of less than full maturity to be selected by the Bond Trustee either by lot on in such other equitable manner as it may determine in $5,000 units of principal amount. Notice and Effect of Call for Redemption. Notice of any redemption is to be given to the registered owners of the Series 1998A Bonds to be redeemed not more than 60 nor less than 30 days prior to the redemption date by first-class, registered or certified mail, as determined by the Bond Trustee. Such notices are to be mailed to the registered owner or owners at their addresses shown on the registration ‘books maintained by the Bond Trustee as of the fifth Business Day prior to such mailing. Published notice of the call for redemption need not be given. Failure to give such notice or any defect therein as to any articular Series 1998A Bond shall not affect the validity of the proceedings for the redemption of any other Series 1998A Bonds. If notice of redemption has been given and sufficient funds deposited with the Bond Trustee to be used to redeem such Series 1998A Bonds, then on the redemption date such Series 1998A Bonds will cease to bear interest and will no longer be secured by or be deemed to be Outstanding ‘under the Bond Indenture. So long as DTC is effecting book-entry transfers of the Series 1998A Bonds, the Bond Trustee shall provide the notices specified above to DTC. It is expected that DTC will, in tum, notify the DTC Participants and that the DTC Participants, in turn, will notify or cause to be notified the Beneficial Owners. Any failure on the part of DTC or a DTC Participant, or failure on the part of a nominee of a Beneficial Owner of a Series 1998A Bond (having been mailed notice from the Bond Trustee, a DTC Participant or otherwise) to notify the Beneficial Owner of the Series 198A Bond so affected, shall not affect the validity of the redemption of such Series 1998A Bond. See “BOOK-ENTRY SYSTEM” herein. Registration, Transfer and Exchange ‘The Series 1998A Bonds will be issued in fully registered form in denominations of $5,000 and any integral multiple thereof, and each Series 1998A Bond will be registered in the name of the owner thereof on the registration books maintained by the Bond Trustee. The Series 198A Bonds are transferable by the registered holder thereof or by such holder's attomey duly authorized in writing upon presentation thereof at the principal corporate trust office of the Bond Trustee. Any Series 1998A Bond ‘may be exchanged at the principal corporate trust office of the Bond Trustee for a like aggregate principal amount of Series 1998A Bonds of the same maturity of other authorized denominations. The Bond Trustee and the Issuer may charge a fee covering taxes and other governmental charges in connection with any exchange, change in registration or transfer of any Series 1998A Bond, ‘The Bond Trustee shall not be required to register the transfer of or exchange any Series 1998A Bond that has been called or selected for call for redemption or during the period of fifteen days next preceding the first mailing of notice of redemption, CUSIP Numbers Itis anticipated that CUSIP identification numbers will be printed on the Series 198A Bonds, but neither the failure to print such numbers on any Series 1998A Bonds, nor any error in the printing of such ‘numbers, shall constitute cause for a failure or refusal by the purchaser thereof to accept delivery of and pay for any Series 198A Bonds. PLAN OF FINANCING Use of Bond Proceeds ‘The proceeds received by the Issuer from the sale of the Series 198A Bonds, together with certain other funds provided by the Corporation, (including amounts held under the indenture relating to the Prior Bonds (the “Prior Bonds Indenture”)) will be used to provide the funds necessary to (i) advance refund the outstanding Prior Bonds, (i) fund the Debt Service Reserve Fund, and (iii) pay certain costs related to the sale, issuance and delivery of the Series 1998A Bonds and refunding the Prior Bonds. The Refunding ‘A substantial portion of the proceeds to be received by the Issuer from the issuance and sale of the Series 1998A Bonds will be used to refund the outstanding Prior Bonds, which were used to finance the ‘costs of purchasing, acquiring, constructing, equipping and furnishing the Hospital. The portion of the Series 1998A Bond proceeds to be used to refund the Prior Bonds will be deposited, along with certain funds held under the Prior Bonds Indenture, into an escrow fund established pursuant to the Escrow Deposit Agreement dated as of May 1, 1998 (the “Escrow Agreement”) between the Corporation and INTRUST Bank N.A., as escrow agent, in an amount sufficient (i) to pay the principal of and interest on the Prior Bonds as the same become due and payable until and including November 15, 2004 and (ji) to redeem the Prior Bonds maturing after November 15, 2004 on November 15, 2004 at a redemption price of 102% of the principal amount thereof, plus accrued interest thereon to the redemption date. The moneys on deposit in such escrow fund will be used to purchase certain Government Securities (as defined in the Prior Bonds Indenture). The Series 1998 Bondholders will have no rights with respect to the escrowed funds; such funds will be held for the sole benefit of the holders of the Prior Bonds. “8. BOOK-ENTRY SYSTEM Information conceming DTC and the Book-Entry System, other than the second paragraph under “Purchase of Ownership Interests” below, has been obtained from DTC and is not guaranteed as to accuracy or completeness by, and is not to be construed as a representation by, the Issuer, the Underwriter, the Bond Trustee or the Corporation. ‘The Depository Trust Company (“DTC”), New York, New York, will act as securities depository for the Series 198A Bonds, The Scries 1998A Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC’s partnership nominee). One fully-registered Series 198A Bond certificate will be issued for each maturity of the Series 198A Bonds each in the aggregate principal amount of such maturity, and will be deposited with DTC. DTC and its Participants DTC is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, “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 (“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 Participant’s accounts, thereby climinating 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 Ownership Interests Purchases of Series 198A Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Series 1998A Bonds on DTC’s records. The ownership interest of each actual purchaser of each Series 1998A Bond (“Beneficial Owner”) is in tum 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 interests in the Series 1998 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 Series 1998A Bonds except in the event that use of the book-entry system for the Series 198A Bonds is discontinued. ‘The Bond Indenture provides that as long as Cede & Co. or its registered assignees is the registered ‘owner of the Series 1998A Bonds, the Issuer and the Bond Trustee shall be entitled to treat the person in whose name any Series 198A Bond is registered as the absolute owner thereof for all purposes of the Bond Indenture and any applicable laws, notwithstanding any notice to the contrary received by the Issuer or the Bond Trustee, and such parties shall have no responsibility for transmitting payments to, ‘communicating with, notifying, or otherwise dealing with any Beneficial Owners of the Series 19984 Bonds. Payments of Principal and Interest Principal and interest payments on the Series 1998A Bonds will be made to DTC. DTC’s practice is to credit Direct Participants’ accounts on the interest payment 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 interest payment date. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC, the Bond Trustee, or the Issuer, 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 Bond Trustee (from amounts paid by the Corporation), disbursement of such payments to Direct Participants shall be the responsibility of DTC, and disbursement of such payments to the Beneficial ‘Owners shall be the responsibility of Direct and Indirect Participants. Notices and Voting 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 Series 1998A 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 maturity to be redeemed. Neither DTC nor Cede & Co. will consent or vote with respect to the Series 1998A Bonds. Under its usual procedures, DTC mails 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 Series 198A Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). ‘Transfers of Series 1998A Bonds To facilitate subsequent transfers, all Series 1998A Bonds deposited with DTC are registered in the name of DTC’s partnership nominee, Cede & Co. The deposit of Series 198A 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 Series 1998A Bonds; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Series 198A 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. Discontinuance of DTC DTC may discontinue providing its services as securities depository with respect to the Series 1998A Bonds at any time by giving reasonable notice to the Issuer or the Bond Trustee. Under such circumstances, in the event that a successor securities depository is not obtained, Series 1998A Bond certificates are required to be printed and delivered. ‘The Issuer may decide to discontinue use of the system -10- of book-entry transfers through DTC (or a successor securities depository). In that event, certificates will be printed and delivered In the event that such book-entry only system is discontinued, the following provisions will apply: principal of the Series 1998A Bonds and redemption premium, if any, thereon will be payable in lawful ‘money of the United States of America at the principal corporate trust office of the Bond Trustee, in its capacity as Paying Agent, in Wichita, Kansas. Interest on the Series 1998A. Bonds will be payable on each May 15 and November 15, commencing November 15, 1998, by check mailed to the respective addresses of the registered owners thereof as shown on the registration books of the Issuer maintained by the Bond Trustee as of the close of business on the record date therefor as set forth in the Bond Indenture. The transfer of Series 1998A Bonds will be registrable and Series 198A Bonds may be exchanged at the Principal corporate trust office of the Bond Trustee in Wichita, Kansas upon the payment of any taxes or other governmental charges required to be paid with respect to such transfer or exchange. “le ESTIMATED SOURCES AND USES OF FUNDS ‘The estimated sources and uses of funds in connection with the issuance of the Series 198A. Bonds, exclusive of accrued interest, are as follows: Sources of Funds: Principal of the Series 1998A Bonds '$16,400,000.00 Funds Held Under the Prior Bonds Indenture 1,598,135.00 Total Sources of Funds $17.998,135.00 Uses of Funds: Defease Prior Bonds $16,479,488.00 Issuance Expenses(!) 269,422.00 Original Issue Discount 43,717.50 Deposit to Debt Service Reserve Fund 1,203,507.50 Total Uses of Funds 517.998.1350 (Includes Underoniter's discount and other cost of issuance. -12- ESTIMATED ANNUAL DEBT SERVICE REQUIREMENTS The following table sets forth, for each twelve month period ending November 15 (“Bond Year”), the amounts for the payment of principal of and interest on the Series 1998A Bonds. Bond Year Ending. Series 1998 Bonds Total ‘November 15 Principal Interest Debt Service 1998, '$ 230,000 $485,015.49 $715,015.49 1999 310,000 891,058.75 1,201,058.75 2000 320,000 878,038.75 1,198,038.75 2001 335,000 864,038.75 1,199,038.75 2002 350,000 848,461.25 1,198,461.25 2003 370,000 831,836.25 1,201,836.25 2004 385,000 814,076.25 1,199,076.25 2005 405,000, 794,826.25 1,199,826.25 2006 425,000 774,576.25 1,199,576.25 2007 445,000 752,795.00 1,197,795.00 2008 470,000 729,655.00 1,199,655.00 2009 495,000 704,980.00 1,199,980.00 2010 520,000 678,992.50 1,198,992.50 2011 550,000 649,352.50 1,199,352.50 2012 580,000 618,002.50 1,198,002.50 2013 615,000, 584,942.50 1,199,942.50 2014 650,000 549,887.50 1,199,887.50 2015 690,000 512,837.50 1,202,837.50 2016 730,000 473,507.50 1,203,507.50 2017 770,000 431,897.50 1,201,897.50 2018 810,000 388,007.50 1,198,007.50 2019 860,000 341,837.50 1,201,837.50 2020 905,000 292,387.50 1,197,387.50 2021 960,000 240,350.00 1,200,350.00 2022 1,015,000 185,150.00 1,200,150.00 2023, 1,070,000 126,787.50 1,196,787.50 2024 1,135,000 65,262.50 1,200,262.50 -13- ESTIMATED DEBT SERVICE COVERAGE The following table presents the historical maximum annual debt service coverage for the Corporation for the fiscal years ended June 30, 1995, 1996 and 1997, and the pro forma maximum annual debt service coverage for the Corporation for the fiscal year ended June 30, 1997. The table is computed consistent with the Master Indenture. The pro forma maximum annual debt service coverage is calculated by dividing the Corporation's total income available for debt service by the maximum annual debt service requirements on the Series 198A Bonds. The Corporation has no other long-term indebtedness outstanding, See Note9 to the audited financial statements of the Corporation in APPENDIX B. Fiscal Year Ended June 30, 1995 1996 1997 Income (loss) From Operations 665,937 830,197 (85,363) Nonoperating Gains (losses)+* 421,891 125,779 663,275 Net assets released from restrictions 361,683 1,440,191 448,138 Excess of Revenues Over Expenses 1,449,511 2,396,167 1,026,050 ‘Add Back: Depreciation, Amortization 939,111 1,100,600 2,039,559 and Interest 0 0 939,373 Total Income Available for Debt Service 2,388,622 3,496,767 4,004,982 Maximum Annual Debt Service (Prior Bonds) 1,303,206 1,303,206 1,303,206 Maximum Annual Debt Service Coverage (Prior Bonds) 1.83 2.68 3.07 Pro Forma Maximum Annual Debt Service Requirements 1,194,549 1,194,549 1,194,549 Historical Pro Forma Debt Service Coverage 2.00 293 3.35 : Fiscal Year 1997 income from operations does not include a one-time impairment loss of $1,995,395 with respect to the write down of the value of the former hospital building consistent with the definition of “Expenses” under the Master Indenture ++ Nonoperating gains are computed consistent with the Master Indenture. BONDHOLDERS’ RISKS General ‘As described under the caption “THE SERIES 1998A BONDS - Security for Series 1998 Bonds,” the principal of, premium, if any, and interest on the Series 1998A Bonds are payable solely from amounts payable by the Corporation under the Lease Agreement, the Series 198A Note and the Guaranty Agreement and from amounts on deposit in the various funds and accounts held under the Bond Indenture. No representation or assurance is given or can be made that revenues will be realized by the Corporation or the Obligated Group in amounts sufficient to pay debt service on the Series 1998A Bonds. when due and other payments necessary to meet the obligations of the Corporation. At present, the Corporation is the only Member of the Obligated Group; however, other Persons may become members 14 of the Obligated Group in the future and thereby become liable for amounts due on the Series 198A Note and any other Notes issued under the Master Indenture, ‘The risk factors discussed below should be considered in evaluating the Corporation’s ability to make payments in amounts sufficient to provide for payment of the principal of, premium, if any, and interest on the Series 198A Bonds. The receipt of future revenues by the Obligated Group will be subject to, among other factors, federal and state policies affecting the health care industry (including changes in reimbursement rates and ies), increased competition from other health care providers, the capability of the management of the Obligated Group and future economic and other conditions that are impossible to predict. The extent of the ability of the Obligated Group to generate future revenues has a direct effect upon the payment of, principal of, premium, if any, and interest on the Series 1998A Bonds. Neither the Underwriter nor the Issuer have made any independent investigation of the extent to which any such factors may have an adverse affect on the revenues of the Obligated Group. This discussion of risk factors is not, and is not intended to be, exhaustive, dispositive or comprehensive, but rather is to summarize certain matters which could affect payment of the Series 1998A Bonds. Reimbursement Policy Affecting Health Care Providers Kansas Health Care Reform. The Kansas Joint Health Care Reform Legislative Oversight ‘Committee (“Joint Committee”) is not currently considering any legislation which would affect the manner in which health care providers are reimbursed. The Joint Committee was created by an Act of the Kansas Legislature for a set term which is slated to expire on July 1, 1998. The legislature does continue to focus on improving health care coverage for Kansas. In 197, Governor Bill Graves signed into law the Patient Protection Act which sets standards for health maintenance organizations (“HMOs”) and other insurers who offer services through a health-care provider network. One standard states that HMOs and other insurers may not use “gag clauses” in contracts with doctors that restrict the doctor from discussing treatment options with their patients. The Governor also signed into law a ill which implements the Health Insurance Portability and Accountability Act (“HIPAA”) which was passed by Congress in 1996. HIPAA is designed to make it easier for people with medical conditions to maintain health insurance when they change jobs. Moreover, governmental agencies continue to study health insurance coverage deficiencies. The Kansas Department of Health and Environment assigned the University of Kansas’ Health Services Research Group the task of conducting a survey to determine the number of Kansans without health insurance in July 1997, ‘The survey reported the state’s uninsured population at 293,091 or 13.3 percent of the population. Additional Debt ‘The Master Indenture permits the issuance of additional Notes ona parity with the Series 1998A Note, and also permits incurrence of Indebtedness which may be secured by security in addition to that provided for the Series 1998 Note. See the information in APPENDIX C under the caption “DEFINITIONS AND SUMMARY OF CERTAIN PRINCIPAL DOCUMENTS - Summary of the Master Indenture - Permitted Indebtedness.” The incurrence of additional Indebtedness and the issuance of additional Notes may increase debt service requirements and may adversely affect debt service coverage on the Bonds. -15- Payment for Health Care Services ‘Most of the patient service revenues of the Obligated Group are derived from third-party payors which reimburse or pay the Obligated Group for the services and items provided to patients covered by such third parties for such services, including the federal Medicare program, state Medicaid program and private health plans and insurers, health maintenance organizations, preferred provider organizations and other managed care payors. Many of those programs make payments to the Obligated Group at rates other than the direct charges of the Obligated Group, which rates may be determined other than on the basis of the actual costs incurred in providing services and items to such patients. Accordingly, there can be no assurance that payments made under such programs will be adequate to cover the Obligated Group's actual costs of furnishing health care services and items. In addition, the financial performance of the Obligated Group could be adversely affected by the insolvency of, or other delay in receipt of payments from, third- party payors which provide coverage for services to their patients. Medicare and Medicaid Programs. Medicare and Medicaid are the commonly used names for health care reimbursement or payment programs governed by certain provisions of the federal Social Security Act. Medicare is an exclusively federal program and Medicaid is a combined federal and state program. Medicare provides certain health care benefits to beneficiaries who are 65 years of age or older, disabled or qualify for the End Stage Renal Disease Program. Medicare Part A covers inpatient services and certain other services, and Medicare Part B covers certain physicians services, medical supplies and durable medical equipment, Medicaid is designed to pay providers for care given to the medically indigent and others who receive federal aid. Medicaid is funded by federal and state appropriations and in the State is administered by the Kansas Department of Social and Rehabilitation Services (“SRS”). Kansas Blue Cross/Blue Shield handles claims for all Medicaid services. Medicare. Approximately 57.4% of the gross patient service revenues of the Obligated Group were derived from the Medicare program for the fiscal year ended June 30, 1997. As a consequence, any adverse development or change in Medicare reimbursement could have a material adverse effect on the financial condition and results of operations of the Obligated Group. Medicare Part A pays acute care hospitals for most inpatient services under a payment system known as the “Prospective Payment System” or “PPS.” Separate PPS payments are made for inpatient operating costs and inpatient capital-related costs. Some costs are also paid on the basis of “reasonable cost,” subject to certain limits. Inpatient Operating Costs. Acute care hospitals such as the Hospital are paid a specified amount towards their operating costs based on the Diagnosis Related Group (“DRG”) to which each Medicare patient is assigned, which is determined by the diagnosis and procedure and other factors for each particular inpatient stay. ‘The amount paid for each DRG is established prospectively by the Health Care Financing Administration (“HCFA”), an agency of the United States Department of Health and Human Services (“HHS”), and is not related to a hospital's actual costs. For certain Medicare beneficiaries who have unusually costly hospital stays (“outliers”), HCFA will provide additional payments above those specified for the DRG. Outlier payments cease to be available upon the exhaustion of such patient’s Medicare benefits or a determination that acute care is no longer necessary, whichever occurs first. There is no assurance that any of these payments will cover the actual costs incurred by a hospital. DRG payments are adjusted annually based on the hospital “market basket” index, or the cost of providing health care services, For every year since 1983, Congress has modified the increases and given ‘substantially less than the increase in the “market basket” index. The annual increase for federal fiscal -16- year 1996 was equal to the market basket percentage increase of 3.5% less 2% for all hospitals (for a total increase of 1.5%). There is no assurance that future increases in the DRG payments will keep pace with the increases in the cost of providing hospital services. In fact, pursuant to the Balanced Budget Act of 1997 (the “BBA”) the DRG payment increase is the market basket percentage increase minus 1.9 (-1.9) percentage points for all hospitals in all areas for fiscal year 1999. It is market basket minus 1.8 (-1.8) for fiscal year 2000 and market basket minus 1.1 (-1.1) for fiscal years 2001 and 2002, Thereafter, the ‘increase is equal to the market basket index. The Secretary of HHS is required to review annually the DRG categories to take into account any new procedures and reclassify DRGs and recalibrate the DRG relative weights which reflect the relative hospital resources used by hospitals with respect to discharges classified within a given DRG category. ‘There is no assurance that the Obligated Group will be paid amounts which will reflect adequately changes in the cost of providing health care or in the cost of health care technology being made available to patients HCFA may only adjust DRG weights on a budget-neutral basis Certain hospitals and inpatient psychiatric and rehabilitation units are exempted from PPS and are reimbursed on a “reasonable cost” basis, subject to the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA") rate of increase ceiling on inpatient costs per discharge. Under this system, if an exempt hospital or distinct unit of a hospital is operated at costs less than the established TEFRA rate, itis paid under the BBA an incentive of 15% of the difference between its operating costs and the TEFRA rate but the incentive may never exceed 2% of its operating cost. Capital Costs. Beginning on October 1, 2001, hospitals will be reimbursed on a fully prospective basis for capital costs (including depreciation and interest) related to the provision of inpatient services to Medicare beneficiaries. Thus, capital costs will be reimbursed exclusively on the basis of a standard federal rate (based on average national costs), subject to certain adjustments (such as for disproportionate share, indirect medical education and outlier cases) specific to the hospital. Prior to October 1, 2001, hospitals will be paid on the basis of a blend of hospital-specific costs and the standard federal rate. The blend of rates will change by 10% each year until a 100% federal rate is achieved in 2001. A hospital may qualify for “hold harmless” payments for its capital costs under special rules for capital projects undertaken prior to 1991. The BBA reduces the federal rate by 17.78% for all discharges after October 1, 1997 and before October 1, 2002. This reduction applies to the federal rate before the application of the adjustment factors for outliers, exceptions and budget neutrality. ‘The blend percentages for cost reporting periods beginning in fiscal year 1998 are 70 percent of the adjusted federal rate and 30 percent of the hospital specific rate. The BBA also rebases capital payment rates in fiscal year 1998 using fiscal year 1995 rates and further reduces the capital payment rate by 2.1 percent. The BBA also reduces capital Payments for PPS-exempt units to 85% of reasonable costs, There can be no assurance that the prospective payments for capital costs will be sufficient to cover the actual capital-related costs of the Obligated Group allocable to Medicare patient stays or to Provide adequate flexibility in meeting the Obligated Group’s future capital needs. Costs of Outpatient Services, Currently, Medicare Part B reimburses most outpatient services on the basis of a fee schedule. Medicare reimburses hospitals for some outpatient services on a reasonable cost basis, which may be less than a hospital’s actual costs for providing the services rendered. The ultimate impact on a hospital will depend upon its ability to control the costs of providing such services. With respect to covered outpatient services furnished during a year beginning with 1999, HCFA will pay ‘an amount determined under a prospective payment system to be developed by the Secretary of HHS. Such a system would cause a hospital with costs above the payment rate to incur losses on such services provided to Medicare patients. -17- Outpatient capital-related costs (including depreciation and interest) have previously been excluded from prospective payment and are reimbursed on a reasonable cost basis. For federal fiscal years ending in 1998 such reasonable cost reimbursement is to be reduced by 10 percent. The BBA extends this 10 percent reduction to apply to fiscal year 1999 and during fiscal year 2000 before January 1, 2000. Physician Payment, Certain physician services are reimbursed on the basis of a national fee schedule called the “resource based-relative value scale” (‘RB-RVS"). The RB-RVS fee schedule establishes payment amounts for all physician services, including services of provider-based physicians, ‘and is subject to annual updates. The RB-RVS fee schedule, which commenced on January 1, 1992, was phased in over four years, The fee schedules are subject to annual updates. The BBA establishes a new limit on the growth of Medicare payments for physician services. The “Sustainable Growth Rates” (“SGR”) replaces the “Volume Performance Standard” (“VPS”). The SGR is linked to changes in the U.S. Gross Domestic Product, while the VPS was linked to the growth in medical inflation. As such, the SGR is expected to result in lower Medicare expenditures for physician services over time. ‘Skilled Nursing Care. Medicare Part A covers the reasonable costs of certain post-hospital ‘extended care services furnished by skilled nursing facilities (“SNFs”). SNF services are covered only if the beneficiary spent at least three consecutive days as a hospital inpatient prior to admission at the SNF and if the beneficiary was admitted to the SNF within 30 days of discharge from the hospital. Medicare Part A covers nursing services furnished by or under the supervision of a registered professional nurse, as well as physical, occupational and speech therapy provided by the SNF. Certain “ancillary” services furnished to SNF patients are also covered under Medicare Part B. SNF services are reimbursed for up to 100 days for each spell of illness, and are subject to coinsurance and deductibles from the patient Reimbursable reasonable costs for SNF care include the direct costs of patient care, as well as the costs of depreciation, interest, owners’ salaries, education, return on equity, and other costs related to patient care, ‘The BBA phases in a prospective payment system for SNF services that will pay a federal per diem rate for covered SNF services as well as capital. Covered services will include Part A SNF benefits, as well as many services for which payment may be made under Part B during a period in which the beneficiary is provided covered SNF services. This per diem rate, however, does not cover certain costs, for which separate Part B claims must be made. The SNF PPS is effective for cost reporting periods beginning on or after July 1, 1998. Home Health Care. Medicare reimburses home health agencies for both operating and capital ‘expenses incurred in providing each of the covered home health disciplines on a reasonable cost basis, subject to certain limits. However, the BBA provides that the Secretary will develop a prospective payment system for all home health services (“Home Health PPS"), to be implemented for cost reporting periods beginning on or after October 1, 1999. The Secretary will compute a standard payment amount initially based on the most current audited cost report data available. Beginning with fiscal year 2000, total amounts payable under Home Health PPS will be equal to the total that would have been paid in the absence of such a system, but also will reflect a 15% reduction in cost limits per beneficiary in effect as of September 30, 1999. For fiscal years 2001 and beyond, the standard payment amount will be adjusted by the home health market basket in a manner to be specified by the Secretary. In anticipation of the new Home Health PPS, the BBA establishes an interim payment system for home health services. Effective for cost reporting periods beginning on or after October 1, 1997, per visit cost limits are reduced from 112% to 105% of the national median of labor-related and non-labor costs per visit for freestanding home health agencies. -18- For cost reporting periods beginning on or after October 1, 1997, home health agencies will be paid at the lowest of the following: (1) their actual costs; (2) the per visit limits (reduced, as outlined above, to 105% of the national median); or (3) ablended, agency-specific per-beneficiary limit based on 98% of 1994 costs. Seventy-five percent of the blended limit is based on 98% of an agency's reasonable costs for the 12-month cost reporting period ending in 1994, with the remaining 25% based on 98% of the standardized regional average of these costs in the agency's census region. This limit is multiplied by the agency’s Medicare population to derive the payment limit, For new providers and providers without a 12-month cost reporting period ending in 1994, the per beneficiary limit described above is equal to the median of these limits (or to the Secretary's best estimate thereof) applied to other home health agencies. Home health agencies that have altered their names or their corporate structures are not considered new providers under this provision. Finally, for beneficiaries who use more than one home health agency, the per-beneficiary limit is prorated among all agencies used. Medicare will also cover durable medical equipment when supplied by home health agencies. It reimburses these services at the lesser of the actual charge for the equipment or the allowable fee schedule amount, Provider-Based Standards. In August 1996, HCFA issued a Program Memorandum setting forth a new cight-part test to determine whether an entity qualifies as “provider-based” rather than “freestanding.” The new standards make it more difficult to qualify as “provider-based” and are aimed at stemming the proliferation of entities characterized as “provider-based.” ‘These standards may lead to the reclassification of entities now characterized as “provider-based” to “freestanding.” Such a reclassification may adversely affect the entity’s reimbursement under the Medicare program. It is not known at this time how the new standards will affect the Obligated Group. Medicaid. Approximately 5.4% of the gross patient service revenues of the Obligated Group were

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