city of san buenaventura, california · the city of san buenaventura revenue bonds (community...

NEW ISSUE - BOOK-ENTRY ONLY Ratings: Moody’s: Ba2 (stable outlook) S&P: BB (stable outlook) See “RATINGS” herein

In the opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the City, based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representation and compliance with certain covenants, interest on the Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 and is exempt from State of California personal income taxes. In the further opinion of Bond Counsel, interest on the Bonds is not a specific preference item for purposes of the federal individual 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. Bond Counsel expresses no opinion regarding any other tax consequences relating to the ownership or disposition of, or the accrual or receipt of interest on, the Bonds. See “TAX MATTERS” herein.

$350,000,000CITY OF SAN BUENAVENTURA

REVENUE BONDS(COMMUNITY MEMORIAL HEALTH SYSTEM)

SERIES 2011

Dated: Date of Delivery Due: December 1, as set forth on page (i) hereof

The City of San Buenaventura Revenue Bonds (Community Memorial Health System) Series 2011 (the “Bonds”), are special obligations of the City of San Buenaventura, California (the “City”), secured under the provisions of a Bond Indenture, dated as of August 1, 2011 (the “Bond Indenture”), between the City and The Bank of New York Mellon Trust Company, N.A., as bond trustee (the “Bond Trustee”), and a Loan Agreement, dated as of August 1, 2011 (the “Loan Agreement”), between the City and

(“CMHS”), as described herein, and will be payable from Revenues, which consist primarily of Loan Repayments made by CMHS under the Loan Agreement. The obligation of CMHS to make such Loan Repayments will also be secured by the issuance of Obligation No. 1 under the Master Trust Indenture, dated as of August 1, 2011 (the “Master Indenture”), as supplemented, between CMHS and The Bank of New York Mellon Trust Company, N.A., as master trustee (the “Master Trustee”), pursuant to which CMHS and any future Members of the Obligated Group (collectively, the “Obligated Group”), jointly and severally, are obligated to make payments on Obligation No. 1 in an amount sufficient to pay principal of and premium, if any, and interest on the Bonds when due. The obligation of CMHS to make payments under the Master Indenture will be secured by a Construction and Permanent Deed of Trust with Fixture Filing and Security Agreement, dated as of August 1, 2011 (the “Deed of Trust”) from CMHS to the Master Trustee, granting an interest in certain property and related health care facilities and equipment owned by CMHS in Ventura County, California. See “SECURITY AND SOURCE OF PAYMENT FOR THE BONDS” herein. As of the date hereof, CMHS is the only Member of the Obligated Group.

The Bonds will mature and bear interest at the rates set forth on the inside cover payable on December 1, 2011, and semiannually thereafter on each June 1 and December 1 until maturity or earlier redemption. The proceeds of the Bonds, together with other available funds, will be applied by CMHS to (i) finance or refinance the acquisition, construction, equipping and improvement of certain health care facilities, including a new hospital tower (the “Project”) for CMHS located in Ventura, California, (ii) pay a portion of the capitalized interest on the Bonds during the period of construction of the Project, and (iii) fund a debt service reserve account as described herein. See “ESTIMATED SOURCES AND USES OF BOND PROCEEDS” herein.

The Bonds will be issued in fully registered form in the name of Cede & Co., as nominee of The Depository Trust Company (“DTC”) under the book-entry only system maintained by DTC. So long as Cede & Co. is the registered owner of the Bonds, the principal of and premium, if any, and interest on the Bonds will be payable by the Bond Trustee to DTC, which will in turn remit such payments to its participants for subsequent disbursement to Beneficial Owners of the Bonds, as described herein. See APPENDIX G - “BOOK-ENTRY SYSTEM.” Investment in the Bonds will be available in denominations of $100,000 and any integral multiple of $5,000 in excess thereof.

The Bonds are subject to optional, mandatory and extraordinary redemption prior to maturity as described herein under the caption “THE BONDS - Redemption.”

SEE MATURITY SCHEDULE ON PAGE (i) HEREOF

THE BONDS ARE SPECIAL OBLIGATIONS OF THE CITY, PAYABLE SOLELY FROM REVENUES, WHICH CONSIST PRIMARILY OF THE LOAN REPAYMENTS REQUIRED TO BE PAID BY CMHS PURSUANT TO THE LOAN AGREEMENT. THE BONDS SHALL NOT BE OR BE DEEMED TO CONSTITUTE A DEBT OR LIABILITY OF THE CITY OR A PLEDGE OF THE FAITH AND CREDIT OF THE CITY. NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE CITY OR THE STATE OF CALIFORNIA OR ANY POLITICAL SUBDIVISION THEREOF IS PLEDGED TO THE PAYMENT OF PRINCIPAL OF, PREMIUM, IF ANY, OR INTEREST ON THE BONDS. THE ISSUANCE OF THE BONDS SHALL NOT DIRECTLY OR INDIRECTLY OR CONTINGENTLY OBLIGATE THE CITY TO LEVY OR PLEDGE ANY FORM OF TAXATION OR TO MAKE ANY APPROPRIATION FOR THEIR PAYMENT.

This cover page contains information for general reference only. It is not intended as a summary of this transaction. Investors are instructed to read the entire Official Statement to obtain information essential to making an informed investment decision. An investment in the Bonds involves certain risks. See “BONDHOLDERS’ RISKS” herein.

The Bonds are offered when, as and if received by the Underwriter, subject to prior sale, to withdrawal or modification of the offer without notice, and to the approval of the validity of the Bonds and certain other legal matters by Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the City, and the approval of certain matters for CMHS by its counsel, Arent Fox LLP and Alston & Bird LLP. Certain legal matters will be passed upon for the Underwriter by its counsel, King & Spalding LLP. It is expected that the Bonds in book-entry form will be available for delivery through the facilities of DTC on or about August 17, 2011.

BofA MERRILL LYNCHDate: August 4, 2011

Artist’s Rendering of Future Community Memorial Hospital

Artist’s Renderings of Future Community Memorial Hospital

[THIS PAGE INTENTIONALLY LEFT BLANK]

$350,000,000 City of San Buenaventura Revenue Bonds

(Community Memorial Health System) Series 2011

MATURITY SCHEDULE

$42,050,000 Serial Bonds

Maturity Dates

(December 1) Principal Amount Interest Rate Yield CUSIP(1)

2016 $5,080,000 5.00% 5.11% 797049AA1 2017 5,330,000 5.25 5.47 797049AB9 2018 5,610,000 5.75 5.85 797049AC7 2019 5,935,000 6.00 6.18 797049AD5 2020 6,290,000 6.25 6.44 797049AE3 2021 6,685,000 6.50 6.62 797049AF0 2022 7,120,000 6.50 6.75 797049AK9

$29,085,000 8.00% Term Bonds due December 1, 2026 Yield 7.20% CUSIP 797049AG8

$5,000,000 7.00% Term Bonds due December 1, 2026 Yield 7.20% CUSIP 797049AL7

$60,275,000 8.00% Term Bonds due December 1, 2031 Yield 7.40% CUSIP 797049AH6

$213,590,000 7.50% Term Bonds due December 1, 2041 Yield 7.65% CUSIP 797049AJ2

(1) Copyright 2011, American Bankers Association. CUSIP® is a registered trademark of the American Bankers Association. CUSIP data herein is provided by CUSIP Global Services, managed by Standard & Poor’s Financial Services LLC on behalf of the American Bankers Association. CUSIP numbers have been assigned by an independent company not affiliated with the City or CMHS and are included solely for the convenience of the holders of the Bonds. Neither the City nor CMHS is responsible for the selection or uses of these CUSIP numbers, and no representation is made as to their correctness on the Bonds or as indicated above. The CUSIP number for a specific maturity is subject to being changed after the execution and delivery of the Bonds as a result of various subsequent actions including, but not limited to, a refunding in whole or in part of such maturity or as a result of the procurement of secondary market portfolio insurance or other similar enhancement by investors that is applicable to all or a portion of certain maturities of the Bonds.

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This Official Statement does not constitute an offer to sell the Bonds or the solicitation of an offer to buy the Bonds, 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, broker, salesperson 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 Underwriter have provided the following sentence for inclusion in this Official Statement: The Underwriter has reviewed the information in this Official Statement in accordance with and as part of its responsibility to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information.

The information relating to the City set forth herein under the captions “THE CITY OF SAN BUENAVENTURA” and “ABSENCE OF MATERIAL LITIGATION - The City” has been furnished by the City and the information relating to DTC and the book-entry system set forth in APPENDIX G - “BOOK-ENTRY ONLY SYSTEM” has been furnished by DTC. Such information is believed to be reliable but is not guaranteed as to accuracy or completeness and is not to be construed as a representation by the Underwriter or CMHS. All other information set forth herein has been obtained from CMHS and other sources (other than the City) that are believed to be reliable, but the accuracy or completeness of such information is not guaranteed by and is not to be construed as a representation by the City or the Underwriter. 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 Bonds made hereunder, shall under any circumstances create any implication that there has been no change in the affairs of the City, CMHS or DTC since the date hereof. The City makes no representations or warranties whatsoever with respect to any information contained herein except for the information under the captions entitled “THE CITY” and “ABSENCE OF MATERIAL LITIGATION - The City.”

IN CONNECTION WITH THE OFFERING OF THE BONDS, THE UNDERWRITER MAY OVERALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE BONDS OFFERED HEREBY AT LEVELS ABOVE THOSE THAT MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

THE BONDS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE BOND INDENTURE HAS NOT BEEN QUALIFIED UNDER THE TRUST INDENTURE ACT OF 1939, AS AMENDED, IN RELIANCE UPON EXEMPTIONS CONTAINED IN SUCH ACTS. THE REGISTRATION OR QUALIFICATION OF THE BONDS IN ACCORDANCE WITH APPLICABLE PROVISIONS OF LAWS OF THE STATES IN WHICH BONDS HAVE BEEN REGISTERED OR QUALIFIED AND THE EXEMPTION FROM REGISTRATION OR QUALIFICATION IN OTHER STATES CANNOT BE REGARDED AS A RECOMMENDATION THEREOF. NEITHER THESE STATES NOR ANY OF THEIR AGENCIES HAVE PASSED UPON THE MERITS OF THE BONDS OR THE ACCURACY OR COMPLETENESS OF THIS OFFICIAL STATEMENT.

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS IN THIS OFFICIAL STATEMENT

Certain statements included or incorporated by reference in this Official Statement constitute “forward-

looking statements.” Such statements generally are identifiable by the terminology used, such as “plan,” “expect,” “estimate,” “budget” or other similar words. Such forward-looking statements include but are not limited to certain statements contained in the information under the captions “INTRODUCTION - Plan of Financing” and “THE PROJECT - Plan of Financing of the Project” in the forepart of this Official Statement and the statements contained in APPENDIX A - “COMMUNITY MEMORIAL HEALTH SYSTEM, INC - SUMMARY OF OPERATIONS and FINANCIAL POSITION.”

The achievement of certain results or other expectations contained in such forward-looking statements involves known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements described to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. CMHS does not plan to issue any updates or revisions to those forward-looking statements if or when its expectations or events, conditions or circumstances on which such statements are based occur.

TABLE OF CONTENTS

INTRODUCTION .......................................................................................................................... 1

Purpose of this Official Statement .......................................................................................1 CMHS and the Obligated Group ..........................................................................................1 Security ................................................................................................................................1 Limited Obligation of the City .............................................................................................2 Plan of Financing .................................................................................................................2 Continuing Disclosure .........................................................................................................2 Bondholders’ Risks ..............................................................................................................3

THE CITY ...................................................................................................................................... 3

THE BONDS .................................................................................................................................. 3

General .................................................................................................................................3 Description of Terms of Bonds ............................................................................................3 Redemption ..........................................................................................................................4

SECURITY AND SOURCE OF PAYMENT FOR THE BONDS ................................................ 7

General .................................................................................................................................7 The Master Indenture ...........................................................................................................7 Accounts and Allocation of Revenues under Bond Indenture .............................................9 The Deed of Trust; Property Subject to Negative Pledge; Excluded Property ..................10

THE PROJECT ............................................................................................................................. 11

Current and Future Bed Complement ................................................................................13 Replacement Hospital Design Concepts/Principles ...........................................................13 Design/Build Contract .......................................................................................................14 Estimated Plan of Financing of the Project........................................................................15 Selected Illustrations of Current and Future Hospital Facilities ........................................16

ESTIMATED SOURCES AND USES OF BOND PROCEEDS................................................. 20

ANNUAL DEBT SERVICE REQUIREMENTS ......................................................................... 21

FEASIBILITY STUDY ................................................................................................................ 22

BONDHOLDERS’ RISKS ........................................................................................................... 22

General ...............................................................................................................................22 Significant Risk Areas Summarized ..................................................................................23 Construction Risks .............................................................................................................25 Nonprofit Health Care Environment ..................................................................................26 Patient Service Revenues ...................................................................................................27 Health Care Reform ...........................................................................................................31 Government Regulation of Relationships between Hospitals and Physicians...................34 Business Relationships and Other Business Matters .........................................................38 Tax-Exempt Status and Other Tax Matters .......................................................................42

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Enforcement of Remedies; Risks of Bankruptcy ...............................................................44 Risks Related to Obligated Group Financings ...................................................................45 Certain Matters Relating to Enforceability of Security Interest in Gross Receivables ......46 Limitations on Remedies under the Deed of Trust ............................................................47 Risk Factors Affecting Value of the Mortgaged Facilities; Release of Mortgaged

Facilities and Creation of Liens ...................................................................................48 Other Risk Factors .............................................................................................................49

RELATIONSHIPS AMONG PARTIES ...................................................................................... 50

ABSENCE OF MATERIAL LITIGATION ................................................................................. 50

The City .............................................................................................................................50 CMHS ................................................................................................................................51

CONTINUING DISCLOSURE .................................................................................................... 51

TAX MATTERS ........................................................................................................................... 51

RATINGS ..................................................................................................................................... 53

LEGAL MATTERS ...................................................................................................................... 54

INDEPENDENT AUDITORS...................................................................................................... 54

FINANCIAL ADVISOR .............................................................................................................. 54

UNDERWRITING ....................................................................................................................... 54

MISCELLANEOUS ..................................................................................................................... 54

APPENDIX A - COMMUNITY MEMORIAL HEALTH SYSTEM, INC. APPENDIX B-1 - AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF CMHS

AS OF AND FOR THE FISCAL YEARS ENDED DECEMBER 31, 2010 AND 2009

APPENDIX B-2 - UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF CMHS AS OF JUNE 30, 2011 AND FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2011 AND 2010

APPENDIX C - STUDY OF MARKET NEED AND FINANCIAL FEASIBILITY - COMMUNITY MEMORIAL HEALTH SYSTEM

APPENDIX D - SUMMARY OF PRINCIPAL DOCUMENTS APPENDIX E - PROPOSED FORM OF OPINION OF BOND COUNSEL APPENDIX F - FORM OF CONTINUING DISCLOSURE AGREEMENT APPENDIX G - BOOK-ENTRY SYSTEM

OFFICIAL STATEMENT

$350,000,000 CITY OF SAN BUENAVENTURA

REVENUE BONDS (COMMUNITY MEMORIAL HEALTH SYSTEM)

SERIES 2011

INTRODUCTION

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 or in APPENDIX D have the same meaning as in the Master Indenture or the Bond Indenture (each as defined below).

Purpose of this Official Statement

This Official Statement is provided to furnish information in connection with the offering of the $350,000,000 City of San Buenaventura Revenue Bonds (Community Memorial Health System) Series 2011 (the “Bonds”). The Bonds will be issued and delivered pursuant to and secured by the Bond Indenture, dated as of August 1, 2011 (the “Bond Indenture”), between the City of San Buenaventura, California (the “City”) and The Bank of New York Mellon Trust Company, N.A., as bond trustee (the “Bond Trustee”). The proceeds of the sale of the Bonds will be loaned to Community Memorial Health System, Inc. (“CMHS”) pursuant to a Loan Agreement, dated as of August 1, 2011 (the “Loan Agreement”), between the City and CMHS.

CMHS and the Obligated Group

CMHS is a California nonprofit public benefit corporation based in Ventura, California, and is exempt from federal income taxation under section 501(a) of the Internal Revenue Code of 1986 (the “Code”), as an organization described in section 501(c)(3) of the Code. See APPENDIX A - “COMMUNITY MEMORIAL HEALTH SYSTEM, INC.” for additional information about CMHS.

CMHS is currently the only Member of the Obligated Group created under the Master Indenture (as defined herein). Additional Members may join the Obligated Group and Members may withdraw from the Obligated Group, upon compliance with the terms of the Master Indenture. CMHS and any future Members of the Obligated Group are collectively referred to herein as the “Obligated Group,” “Members” or “Members of the Obligated Group.”

Security

The Bonds are special obligations of the City and are payable solely from Revenues (as defined in the Bond Indenture), which consist primarily of payments by CMHS received by the Bond Trustee as Loan Repayments (as defined herein) under the Loan Agreement. Pursuant to the Loan Agreement, CMHS agrees to make the Loan Repayments to the Bond Trustee in an amount sufficient to pay the principal of, premium, if any and interest on the Bonds, when due, and to pay certain other fees and expenses.

Under the Bond Indenture, a portion of the proceeds of the sale of the Bonds in an amount equal to the “Bond Reserve Account Requirement,” which is defined as the maximum debt service requirements on all Bonds then outstanding, will be deposited into the Bond Reserve Account. CMHS has covenanted in the Loan Agreement to maintain amounts in the Bond Reserve Account at the Bond Reserve Account Requirement. Amounts in the Bond Reserve Account are available to pay principal and interest on the Bonds on any payment date to the extent that the moneys in the principal and interest accounts are insufficient to make the requirement payments therefrom.

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See “SECURITY AND SOURCE OF PAYMENT FOR THE BONDS - Accounts and Allocation of Revenues under Bond Indenture - Bond Reserve Account.”

CMHS’ obligations under the Loan Agreement will be secured by Obligation No. 1 issued under and pursuant to the Master Trust Indenture, dated as of August 1, 2011 (the “Master Indenture”), between The Bank of New York Mellon Trust Company, N.A., as master trustee (the “Master Trustee”) and CMHS, including as supplemented by the Supplemental Master Indenture for Master Indenture Obligation No. 1, dated as of August 1, 2011 (“Supplement No. 1”), between CMHS and the Master Trustee. CMHS and any future Members of the Obligated Group are jointly and severally obligated to make payments on Obligation No. 1, when due.

Under the Master Indenture, CMHS may execute and deliver obligations (each, an “Obligation” and collectively, the “Obligations”) to evidence or secure Indebtedness or for other purposes. All Obligations issued under the Master Indenture, including Obligation No. 1, are the joint and several obligations of CMHS and any future Members of the Obligated Group and are secured by a security interest in the Gross Receivables of the Obligated Group. For additional information regarding the Master Indenture, Supplement No. 1 and Obligation No. 1, see “SECURITY AND SOURCE OF PAYMENT FOR THE BONDS - The Master Indenture” herein and APPENDIX D - “SUMMARY OF PRINCIPAL DOCUMENTS - MASTER INDENTURE.”

As additional security for the Obligated Group’s obligations under the Master Indenture, CMHS is executing and delivering to the Master Trustee a Construction and Permanent Deed of Trust With Fixture Filing and Security Agreement, dated as of August 1, 2011 (the “Deed of Trust”), mortgaging the interest of CMHS in certain real property and related health care facilities and equipment. The property mortgaged pursuant to the Deed of Trust (the “Mortgaged Facilities”) include (i) the main hospital campuses of CMH and OVCH, (ii) all buildings, structures and appurtenances located on such campuses, (iii) the leasehold interest of CMHS in a parcel of property located adjacent to the campus of CMH, which is owned by the City and the parking structure located thereon (subject to certain rights of the City), and (iv) certain apparatus, fittings, machinery, equipment, chattels and articles of personal property. See “SECURITY AND SOURCE OF PAYMENT FOR THE BONDS - The Deed of Trust,” “BONDHOLDERS’ RISKS – Limitations on Remedies under the Deed of Trust” and “- Risk Factors Affecting Value of the Mortgaged Facilities; Release of Mortgaged Facilities and Creation of Liens.” See also APPENDIX D - “SUMMARY OF PRINCIPAL DOCUMENTS - DEED OF TRUST.” The Mortgaged Facilities do not include certain real and personal property of CMHS. See “SECURITY AND SOURCE OF PAYMENT FOR THE BONDS - The Deed of Trust.”

Limited Obligation of the City


Plan of Financing

The proceeds of the Bonds, together with other available funds, will be applied by CMHS to (i) finance or refinance the acquisition, construction, equipping and improvement of certain health care facilities for CMHS located in Ventura, California including a new hospital tower with 250 beds (the “Project”), (ii) pay a portion of the capitalized interest on the Bonds during construction of the Project, and (iii) fund a bond reserve account in an amount equal to the Bond Reserve Account Requirement. See “THE PROJECT - Plan of Financing” herein for a more complete description of the plan of finance.

Continuing Disclosure

Pursuant to Rule 15c2-12 promulgated by the Securities and Exchange Commission (the “Rule”), CMHS will enter into a Continuing Disclosure Agreement, dated the date of delivery of the Bonds (the “Continuing

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Disclosure Agreement”) for the benefit of the holders of the Bonds to provide certain information annually and quarterly and to provide notice of certain events to the Municipal Securities Rulemaking Board (“MSRB”) pursuant to the requirements of the Rule. See “CONTINUING DISCLOSURE” herein. A form of the Continuing Disclosure Agreement is set forth in APPENDIX F hereto.

Bondholders’ Risks

There are a number of risks associated with an investment in the Bonds which should be considered by investors considering a purchase of the Bonds. See “BONDHOLDERS’ RISKS” herein for a discussion of certain of these risks.

This Official Statement speaks only as of its date, and the information herein is subject to change, completion or amendment without notice. Brief descriptions of the City, the Project, the Sources and Uses of the Bond Proceeds, the Bonds and certain other documents relating to the Bonds are included in this Official Statement. Such information and descriptions do not purport to be comprehensive or definitive. All references herein to specified documents are qualified in their entirety by reference to each such document, copies of which are available from CMHS and the Underwriter during the initial offering period and thereafter from the Bond Trustee, and all references to the Bonds are qualified in their entirety by reference to the definitive forms thereof and the information with respect thereto included in the aforementioned documents. See APPENDIX D – “SUMMARY OF PRINCIPAL DOCUMENTS.”

The foregoing Introduction contains only a brief summary of certain information contained in this Official Statement. It is not intended to be complete and is qualified by the more detailed information contained elsewhere in this Official Statement.

THE CITY

The City is a municipal corporation and charter city duly organized and existing under a freeholders’ charter pursuant to which the City has the right and power to make and enforce all laws and regulations with respect to municipal affairs and certain other matters in accordance with and as more particularly provided in Sections 3, 5 and 7 of Article XI of the Constitution of the State of California and the charter of the City. The City, acting under and pursuant to the powers reserved to the City under Sections 3, 5 and 7 of Article XI of the Constitution of the State of California and the City of San Buenaventura Economic Development Bond Law (Chapter 4.730 of Division 4 of the City’s Code of Ordinances), has the power to provide financial assistance to health care facilities located within the geographic boundaries of the City for the purposes and subject to the conditions described therein.

THE BONDS

General

The Bonds will mature on December 1 in the years and in the aggregate principal amounts set forth on the inside cover page of this Official Statement. The Bonds will be issued in fully registered form and, when issued, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York (“DTC”). DTC will act as securities depository for the Bonds.

Description of Terms of Bonds

The Bonds will be dated the date of initial delivery, and will bear interest at the respective annual interest rates shown on the inside cover page of this Official Statement. Interest on the Bonds will be payable on December 1, 2011 and semiannually thereafter on June 1 and December 1 of each year until maturity or redemption, to the persons whose names appear on the registration books of the Bond Trustee as of the 15th day of the month immediately preceding such interest payment date (each, a “Record Date”) (except with respect to interest in default, for which a special record date shall be established). Investments in the Bonds are available in denominations of $100,000 and any integral multiple of $5,000 in excess thereof. Interest on the Bonds will be calculated on the basis of a 360-day year with twelve months of 30 days each.

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So long as Cede & Co. is the registered owner of the Bonds, the principal of and premium, if any and interest on the Bonds is payable by wire transfer by the Bond Trustee to Cede & Co., as nominee for DTC, which, in turn, will remit such amounts to Participants for subsequent delivery to the Beneficial Owners. See APPENDIX G - “BOOK-ENTRY SYSTEM.” If the book-entry system for the Bonds is ever discontinued, payment of interest on the Bonds will be made by check mailed on each interest payment date to each Holder at its address as it appears on the bond registration books, or at the written request of any Holder of at least $1,000,000 in aggregate principal amount of Bonds received prior to the Record Date for such interest payment date, by wire transfer to a bank account or number located within the United States of America designated by the Holder to the Bond Trustee for such purpose. Payment of the principal of and premium, if any, on the Bonds will then be payable upon presentation and surrender thereof at the principal corporate trust office of the Bond Trustee.

Redemption

Optional Redemption. The Bonds maturing on or after December 1, 2022 are subject to redemption prior to their respective stated maturities, at the option of the City (which shall be exercised upon the written request of CMHS), from any source of available funds, as a whole or in part on any date (in such amounts and maturities as may be specified by CMHS, or, if CMHS fails to specify such maturities, in inverse order of maturities, and by lot within each maturity) on or after December 1, 2021 at a redemption price equal to the principal amount thereof, together with interest accrued thereon to the date fixed for redemption, without premium.

Mandatory Sinking Account Redemption. The Bonds maturing on December 1, 2026 and bearing interest at a rate of 8.00% per annum are subject to redemption prior to their stated maturity in part (by lot) from the Mandatory Sinking Account Payments set forth below and on the dates set forth below at the principal amount thereof together with interest accrued thereon to the date fixed for redemption, without premium:

Mandatory Sinking Account Payment Dates

Sinking Account

Payments

December 1, 2023 $6,470,000 December 1, 2024 6,975,000 December 1, 2025 7,530,000

December 1, 2026* 8,110,000 * Maturity

The Bonds maturing on December 1, 2026 and bearing interest at a rate of 7.00% per annum are subject to

redemption prior to their stated maturity in part (by lot) from the Mandatory Sinking Account Payments set forth below and on the dates set forth below at the principal amount thereof together with interest accrued thereon to the date fixed for redemption, without premium:


Sinking Account

Payments

December 1, 2023 $1,110,000 December 1, 2024 1,200,000 December 1, 2025 1,290,000


The Bonds maturing on December 1, 2031 are subject to redemption prior to their stated maturity in part

(by lot) from the Mandatory Sinking Account Payments set forth below and on the dates set forth below at the principal amount thereof together with interest accrued thereon to the date fixed for redemption, without premium:

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Sinking Account

Payments

December 1, 2027 $10,270,000 December 1, 2028 11,095,000 December 1, 2029 11,985,000 December 1, 2030 12,945,000


The Bonds maturing on December 1, 2041 are subject to redemption prior to their stated maturity in part

(by lot) from the Mandatory Sinking Account Payments set forth below and on the dates set forth below at the principal amount thereof together with interest accrued thereon to the date fixed for redemption, without premium:


Sinking Account

Payments

December 1, 2032 $15,100,000 December 1, 2033 16,230,000 December 1, 2034 17,450,000 December 1, 2035 18,755,000 December 1, 2036 20,165,000 December 1, 2037 21,675,000 December 1, 2038 23,300,000 December 1, 2039 25,050,000 December 1, 2040 26,925,000


Extraordinary Redemption. The Bonds are also subject to redemption prior to their respective stated maturities, at the option of the City (which shall be exercised upon the written request of CMHS), as a whole or in part on any date (in such amounts and maturities as may be specified by CMHS, or, if CMHS fails to specify such maturities, in inverse order of maturities, and by lot within each maturity) from the Net Proceeds of hazard insurance or the Net Proceeds of condemnation proceeds received with respect to the facilities of any of the Members and deposited in the Redemption Fund, at the principal amount thereof together with interest accrued thereon to the date fixed for redemption, without premium.

Purchase in Lieu of Redemption. Each Holder or beneficial owner, by purchase and acceptance of any Bond, irrevocably grants to CMHS the option to purchase such Bond at any time such Bond is subject to optional redemption. Such Bond is to be purchased at a purchase price equal to the then applicable Redemption Price of such Bond, plus accrued interest. CMHS may only exercise such option, after CMHS has delivered a Favorable Opinion of Bond Counsel to the Bond Trustee, and has directed the Bond Trustee to provide notice of mandatory purchase, such notice to be provided, as and to the extent applicable, in the same manner as notice of redemption. On the date fixed for purchase of any Bond in lieu of redemption, CMHS shall pay the purchase price of such Bond to the Bond Trustee in immediately available funds, and the Bond Trustee shall pay the same to the Holders of the Bonds being purchased against delivery thereof. No purchase of any Bond in lieu of redemption shall operate to extinguish the indebtedness of the City and CMHS evidenced by such Bond. No Holder or beneficial owner may elect to retain a Bond subject to mandatory purchase in lieu of redemption.

Notice of Redemption or Purchase in Lieu of Redemption. Notice of redemption or purchase in lieu of redemption will be mailed by first class mail, postage prepaid, by the Bond Trustee not less than 20 days and not

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more than 60 days prior to the redemption or purchase date to the respective Holders of any Bonds designated for redemption or purchase at their addresses appearing on the bond registration books of the Bond Trustee. No notice of optional redemption or notice of purchase in lieu of redemption shall be given prior to (a) receipt by the Bond Trustee of sufficient funds (together with investment earnings thereon from the date of deposit to the date fixed for redemption) to redeem all Bonds subject to such notice and (b) defeasance pursuant to the Bond Indenture of all Bonds subject to such notice. Each notice of redemption shall state the date of such notice, any condition of redemption or purchase established by CMHS by written notice to the Bond Trustee, the date of issue of the Bonds, the redemption or purchase date, the redemption or purchase price, the place or places of redemption or purchase (including the name and appropriate address or addresses of the Bond Trustee), the CUSIP number (if any) of the maturity or maturities, and, if less than all of any such maturity, the distinctive certificate numbers of the Bonds of such maturity, to be redeemed or purchased and, in the case of Bonds to be redeemed or purchased in part only, the respective portions of the principal amount thereof to be redeemed or purchased. Each such notice shall also state that on such date there will become due and payable on each of such Bonds the redemption or purchase price thereof or of such specified portion of the principal amount thereof in the case of a Bond to be redeemed or purchased in part only, together with interest accrued thereon to the redemption or purchase date, and that from and after such redemption or purchase date interest thereon shall cease to accrue and be payable, and shall require that such Bonds be then surrendered at the address or addresses of the Bond Trustee specified in the redemption or purchase notice.

Any notice of optional redemption or purchase in lieu of redemption given pursuant to the Bond Indenture may be rescinded by written notice given to the Bond Trustee by CMHS no later than five Business Days prior to the date specified for redemption or purchase. The Bond Trustee will give notice of such rescission as soon thereafter as practicable in the same manner, and to the same Persons, as notice of such redemption or purchase was given.

Any notice of optional redemption or purchase in lieu of redemption may be made conditional on receipt by the Bond Trustee of sufficient funds for the payment of the redemption price or purchase price of Bonds on or before the date fixed for redemption or purchase or any other condition specifically set forth in such notice. If any such condition is not satisfied on or prior to the date set for redemption or purchase, such notice will be of no force and effect and the Bonds specified in such notice will not be redeemed or purchased in lieu of redemption. No Event of Default will exist as a result of the failure to satisfy any condition specified in any such redemption or purchase notice or the failure to redeem or purchase Bonds pursuant to such notice. The Bond Trustee will give notice of failure to satisfy any such condition as soon thereafter as practicable in the same manner, and to the same Persons, as notice of such redemption or purchase was given.

Failure by the Bond Trustee to give notice of redemption or purchase in lieu of redemption pursuant to the Bond Indenture to any one or more of the respective Holders of any Bonds designated for redemption or purchase or any defect therein shall not affect the sufficiency of the proceedings for redemption or purchase in lieu of redemption with respect to the Holder or Holders to whom proper notice was given.

Selection of Bonds for Redemption or Purchase in Lieu of Redemption. Whenever provision is made in the Bond Indenture for the redemption of, or purchase in lieu of redemption of, less than all of the Bonds or any given portion thereof, the Bond Trustee shall select the Bonds to be redeemed or purchased, from all Bonds subject to redemption or purchase or such given portion thereof not previously called for redemption or purchase, by lot in any manner which the Bond Trustee in its sole discretion shall deem appropriate and fair; provided however that in such instances as provided for herein where CMHS is to specify the amount or maturities of Bonds to be redeemed or purchased the Bond Trustee shall redeem Bonds in accordance with any such specification.

Effect of Redemption. Notice of redemption having been duly given as provided in the Bond Indenture, and moneys for payment of the redemption price of, together with interest accrued to the redemption date on, the Bonds (or portions thereof) so called for redemption being held by the Bond Trustee, on the redemption date designated in such notice and any stated conditions to the redemption of such Bonds having been satisfied, the Bonds (or portions thereof) so called for redemption shall become due and payable at the redemption price specified in such notice and interest accrued thereon to the redemption date, interest on the Bonds so called for redemption shall cease to accrue, such Bonds (or portions thereof) shall cease to be entitled to any benefit or security under this Bond Indenture, and the Holders of such Bonds shall have no rights in respect thereof except to receive payment of

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such redemption price and accrued interest to the date fixed for redemption from funds held by the Bond Trustee for such payment.

SECURITY AND SOURCE OF PAYMENT FOR THE BONDS

General

The Bonds are special obligations of the City, payable solely from Revenues (as defined in the Bond Indenture), which consist primarily of payments required to be paid by CMHS to the City under the Loan Agreement (the “Loan Repayments”). In the Loan Agreement, CMHS agrees to make Loan Repayments to the City which, in the aggregate, are required to be in an amount sufficient for the payment of the principal of and premium, if any, and interest on the Bonds, when due. Under the Bond Indenture, the City will assign its right, title and interest in the Revenues (except for the right to receive payment of any administrative fees and reimbursement of certain expenses) to the Bond Trustee to secure the repayment of the Bonds. The obligation of CMHS to make Loan Repayments is evidenced and secured by Obligation No. 1 issued under the Master Indenture as described below.


The Master Indenture

General. Obligation No. 1 will constitute an obligation secured under the Master Indenture and is a joint and several obligation of CMHS and any future Members of the Obligated Group. The Master Indenture imposes certain covenants and restrictions on the Members of the Obligated Group for the benefit of the holders of all Obligations, including the Bond Trustee as holder of Obligation No. 1 securing the Bonds. See APPENDIX D - “SUMMARY OF PRINCIPAL DOCUMENTS - MASTER INDENTURE.” These covenants include, among others, the following:

Joint and Several Obligations. Obligation No. 1 will be issued at the time of delivery of the Bonds pursuant to the Master Indenture and will be secured under the Master Indenture on a parity with any additional Obligations subsequently issued thereunder by any Member of the Obligated Group. All Members of the Obligated Group are required to make payments on Obligation No. 1 in an amount sufficient to pay the principal of and premium, if any, and interest on the Bonds. Under the Master Indenture, CMHS, as the Obligated Group Representative and acting on behalf of the Obligated Group, may execute and deliver additional Obligations to evidence or secure additional Indebtedness or for other purposes.

Under the Master Indenture, each Member of the Obligated Group is jointly and severally liable to pay all Obligations, including Obligation No. 1 and any additional Obligations issued under the Master Indenture in the future. There may be limitations on enforceability of the joint and several obligations of Members of the Obligated Group to pay Obligations, as discussed under “BONDHOLDERS’ RISKS - Limitations on Enforceability of the Master Indenture and the Bond Indenture” herein. For a discussion of conditions to admission to or withdrawal from the Obligated Group, see APPENDIX D - “SUMMARY OF PRINCIPAL DOCUMENTS - MASTER INDENTURE - Particular Covenants of the Members - Membership in Obligated Group” and “- Withdrawal from Obligated Group.” Currently CMHS is the only Member of the Obligated Group.

Security Interest in Gross Receivables. To secure its obligation to make Required Payments (as defined in the Master Indenture) under the Master Indenture, CMHS has granted (and any additional Members of the Obligated Group will grant) to the Master Trustee a security interest in its Gross Receivables to the extent the same may be pledged and a security interest granted therein under the Uniform Commercial Code of California (the “UCC”). “Gross Receivables” means all of the accounts, chattel paper, instruments and general intangibles (all as defined in the UCC) of each Obligated Group Member, as are now in existence or as may be hereafter acquired, and the

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proceeds thereof; excluding, however, all “Restricted Moneys” which is defined in the Master Indenture as the proceeds of any grant, gift, bequest, contribution or other donation (and, to the extent subject to the applicable restrictions, the investment income derived from the investment of such proceeds) specifically restricted by the donor or grantor to an object or purpose inconsistent with their use for the payment of Required Payments. The enforceability, priority and perfection of the security interest in Gross Receivables may be limited by a number of factors, or may be subordinated to Permitted Liens and to the interests and claims of others in certain circumstances, as discussed under “BONDHOLDERS RISKS - Limitations on Enforceability of the Master Indenture and the Bond Indenture.” The Master Indenture shall be deemed a “security agreement” for purposes of the UCC. The Master Trustee’s security interest in the Gross Receivables shall be perfected, to the extent that such security interests may be so perfected, by the filing of financing statements which comply with the requirements of the UCC. Each Member is required to execute and cause to be filed, in accordance with the requirements of the UCC, financing statements; and, from time to time thereafter, is required to execute and deliver such other documents (including, but not limited to, continuation statements as required by the UCC) as may be necessary or reasonably requested by the Master Trustee in order to perfect or maintain perfected such security interests or give public notice thereof.

Upon written request from the Obligated Group Representative, the Master Trustee shall take all procedural steps necessary to effect the subordination of its security interest in the Gross Receivables granted under the Master Indenture to security interests constituting Permitted Liens.

If an Event of Default occurs under the Master Indenture, it is uncertain whether the Bond Trustee could obtain a remedy under the Bond Indenture or the Master Indenture on behalf of the Holders of the Obligations adequate to provide full and timely payment of the Bonds. See “BONDHOLDERS RISKS - Certain Matters Relating to Enforceability of Security Interest in Gross Receivables.”

Additional Indebtedness and Obligations. Additional Obligations on a parity with Obligation No. 1 may be issued by the Members of the Obligated Group for the purposes, upon the terms and subject to the conditions, all as provided in the Master Indenture. Subject to the conditions contained therein, the Master Indenture also permits the Members of the Obligated Group to incur additional secured and unsecured indebtedness in addition to any Obligations issued thereunder and to enter into Guaranties. The Obligated Group may (but need not) secure Indebtedness and other obligations by additional Obligations issued under the Master Indenture. See APPENDIX D - “SUMMARY OF PRINCIPAL DOCUMENTS - MASTER INDENTURE - Limitations on Indebtedness.” See also APPENDIX D - “SUMMARY OF PRINCIPAL DOCUMENTS - MASTER INDENTURE - Authorization and Issuance of Obligations.”

Covenant Against Encumbrances. Pursuant to the Master Indenture, each Member of the Obligated Group agrees that it will not create, assume or suffer to exist, any Lien upon its Property, including its Gross Receivables, other than Permitted Liens. See APPENDIX D - “SUMMARY OF PRINCIPAL DOCUMENTS - MASTER INDENTURE - Definitions” and “- Deed of Trust; Against Encumbrances.” As described under “SECURITY AND SOURCE OF PAYMENT FOR THE BONDS - The Deed of Trust; Property Subject to Negative Pledge; Excluded Property,” certain property of CMHS is excluded from this covenant.

Consolidation, Merger, Sale or Conveyance. Under the Master Indenture, a Member of the Obligated Group may merge or consolidate with, or sell or convey all or substantially all of its assets to, any Person who is not a Member of the Obligated Group upon compliance with the provisions of the Master Indenture summarized under APPENDIX D - “SUMMARY OF PRINCIPAL DOCUMENTS - MASTER INDENTURE - Particular Covenants of the Members - Merger, Consolidation, Sale or Conveyance.”

Sale, Lease or Other Disposition of Property. The Master Indenture also imposes certain limits upon the sale or other disposition by any Member of the Obligated Group of its Property, as described in APPENDIX D - “SUMMARY OF PRINCIPAL DOCUMENTS - MASTER INDENTURE - Particular Covenants of the Members - Limitation on Disposition of Assets.” As discussed under “SECURITY AND SOURCE OF PAYMENT FOR THE BONDS - The Deed of Trust,” certain property of CMHS is excluded from this covenant.

Amendments to Master Indenture. Certain amendments may be made to the Master Indenture without obtaining consent of any Holders of Obligations and certain other amendments to the Master Indenture require, subject to the nature of the amendment(s), the consent of the Holders of not less than a majority in aggregate

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principal amount of the Outstanding Obligations, the consent of the Holder of the Obligation affected by such amendment(s) or the consent of all Holders of Obligations. Such amendments that are subject to consent of Holders may adversely affect the security for the Bonds. See APPENDIX D — “SUMMARY OF PRINCIPAL DOCUMENTS — MASTER INDENTURE — Supplements and Amendments.” With respect to amendments to the Master Indenture, the Holders of the requisite percentage of Outstanding Obligations may be composed wholly or partially of the Holders of Obligations other than Obligation No. 1, if additional Obligations are issued under the Master Indenture.

Certain Other Covenants under Master Indenture. The Obligated Group Members have also further agreed to certain other covenants in the Master Indenture, including without limitation, maintaining a certain debt service coverage ratio and certain levels of days cash on hand. For a description of these covenants see APPENDIX D — “SUMMARY OF PRINCIPAL DOCUMENTS - MASTER INDENTURE.”

Accounts and Allocation of Revenues under Bond Indenture

The Bond Trustee shall deposit all Revenues into a fund established under the Bond Indenture and designated as the “Revenue Fund.” The Bond Trustee is directed in the Bond Indenture to transfer from the Revenue Fund and deposit into the following respective accounts the following amounts, in the following order of priority, on the following dates, the requirements of each such account (including the making up of any deficiencies in any such account resulting from lack of Revenues sufficient to make any earlier required deposit) at the time of deposit to be satisfied before any transfer is made to any account subsequent in priority:

First: on June 1 and December 1 in each year, to the Interest Account, the aggregate amount of interest becoming due and payable on such date on the Bonds then Outstanding until, after taking account the amount to be transferred to the Interest Account from the Capitalized Interest Account for the purpose of paying interest on such date, the balance in the Interest Account is equal to such aggregate amount of interest;

Second: on December 1 in each year, to the Principal Account, the aggregate amount of principal becoming due and payable on such date on the Outstanding Bonds plus to the Sinking Account the aggregate amount of Mandatory Sinking Account Payments required to be paid into the Sinking Account on such date for Outstanding Bonds, until the balance in such account is equal to such aggregate amount of principal and Mandatory Sinking Account Payments;

Third: on the first day of each month, to the Bond Reserve Account, (i) one-twelfth of the aggregate amount of each prior withdrawal from the Bond Reserve Account for the purpose of making up a deficiency in the Interest Account or Principal Account (until deposits on account of such withdrawal are sufficient to fully restore the amount withdrawn), provided that no deposit need be made into the Bond Reserve Account if the balance in such account is at least equal to the Bond Reserve Account Requirement as hereinafter described, and (ii) in the event the balance in such account is less than the Bond Reserve Account Requirement due to valuation of the Investment Securities deposited therein, the amount necessary to increase the balance in such account to an amount at least equal to the Bond Reserve Account Requirement (until deposits on account of such valuation deficiency are sufficient to increase the balance in such account to such amount).

Any moneys remaining in the Revenue Fund after the foregoing transfers shall be transferred to or upon the order of CMHS.

All amounts in the Interest Account shall be used and withdrawn by the Bond Trustee solely for the purpose of paying interest on the Bonds as it shall become due and payable (including accrued interest on any Bonds purchased or redeemed prior to maturity). Bond proceeds deposited in the Capitalized Interest Account shall be transferred to the Interest Account for the purpose of paying a portion of interest due on the Bonds that accrued through April 30, 2015. All amounts in the Principal Account shall be used and withdrawn by the Bond Trustee

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solely for the purpose of paying the principal of the Bonds when due and payable, except that all amounts in the Sinking Account shall be used and withdrawn by the Bond Trustee solely to purchase or redeem or pay at maturity Term Bonds, as provided in the Bond Indenture.

Use of Sinking Account Funds. On each Mandatory Sinking Account Payment date, the Bond Trustee shall apply the Mandatory Sinking Account Payment required on that date to the redemption (or payment at maturity, as the case may be) of Term Bonds of the applicable maturity; provided that, at any time prior to selection of Bonds for redemption, the Bond Trustee may apply moneys in the Sinking Account to the purchase of Bonds of such maturity at public or private sale, as and when and at such prices (including brokerage and other charges, but excluding accrued interest, which is payable from the Interest Account) as the Bond Trustee may be directed by CMHS, except that the purchase price (excluding accrued interest) shall not exceed the par amount of such Bonds. If, during the 12 month period immediately preceding such Mandatory Sinking Account Payment date, the Bond Trustee has purchased Bonds of the applicable maturity with moneys in the Sinking Account, or, during such period and prior to selection of Bonds, CMHS has deposited Bonds of the applicable maturity with the Bond Trustee, or Bonds of the applicable maturity were at any time purchased or redeemed by the Bond Trustee from the Redemption Fund and allocable to such Mandatory Sinking Account Payment, such Bonds so purchased or deposited or redeemed shall be applied, to the extent of the full principal amount thereof, to reduce the Mandatory Sinking Account Payment. All Bonds purchased or deposited pursuant to this subsection shall be canceled and delivered by the Bond Trustee to or upon the Order of the City at the direction of CMHS. All Bonds purchased from a Sinking Account or deposited by CMHS with the Bond Trustee shall be allocated first to the next succeeding Mandatory Sinking Account Payment for such maturity of Bonds, then to the remaining Mandatory Sinking Account Payments for such maturity of Bonds as are specified by CMHS.

Bond Reserve Account. Under the Bond Indenture, a Bond Reserve Account is established which will be funded upon the issuance of the Bonds in an amount equal to the “Bond Reserve Account Requirement” which is defined to mean, as of any date of calculation, an amount equal to the maximum annual debt service on the Bonds then outstanding. All amounts in the Bond Reserve Account shall be used and withdrawn by the Bond Trustee solely for the purpose of making up any deficiency in the Interest Account or Principal Account created under the Bond Indenture or (together with any other moneys available therefor) for the payment or redemption of all Bonds then Outstanding.

Funds in the Bond Reserve Account may be invested from time to time as provided in the Bond Indenture. See APPENDIX D − SUMMARY OF PRINCIPAL DOCUMENTS - BOND INDENTURE - Investment of Moneys in Funds and Accounts” and “- Funding and Application of Bond Reserve Account.” All Investment Securities in the Bond Reserve Account shall be valued at their fair market value by the Bond Trustee annually on December 1, commencing December 1, 2011 (or more frequently if requested in writing by CMHS, but not more frequently than quarterly). If the amount on deposit in the Bond Reserve Account on any day following such valuation is more than the Bond Reserve Account Requirement, the amount in excess of the Bond Reserve Account Requirement shall be withdrawn by the Bond Trustee from the Bond Reserve Account and transferred at the written request of CMHS to the Redemption Fund.

The Deed of Trust; Property Subject to Negative Pledge; Excluded Property

Pursuant to the Deed of Trust, CMHS will grant to the Master Trustee a first lien on and security interest in the Mortgaged Facilities, subject to Permitted Liens and subject to the right of CMHS to remove property from the lien of the Deed of Trust or create additional liens thereon. The Mortgaged Facilities include (i) the main hospital campuses of CMH and OVCH, (ii) all buildings, structures and appurtenances located on such campuses, (iii) the leasehold interest of CMHS in a parcel of property located adjacent to the campus of CMH, which is owned by the City and the parking structure located thereon (subject to certain rights of the City), and (iv) certain apparatus, fittings, machinery, equipment, chattels and articles of personal property. See APPENDIX D – “SUMMARY OF PRINCIPAL DOCUMENTS - DEED OF TRUST - General.” The CMH campus includes the existing CMH hospital tower, as well as the site of the Project. The Mortgaged Facilities do not include a lien on, or interest in, (i) the three Centers for Family Health clinics owned by CMHS (the “CFH Clinics”) (see APPENDIX A - “COMMUNITY MEMORIAL HEALTH SYSTEM, INC. - Description Hospitals and Ambulatory Care Clinics Owned by CMHS - Centers for Family Health”), (ii) a cancer center and ancillary parking located near the CMH campus, which is expected to be mortgaged to secure certain other indebtedness of CMHS (the “Cancer Center”)

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(see APPENDIX A - “FINANCIAL INFORMATION AND UTILIZATION STATISTICS - Existing Indebtedness of CMHS”), (iii) a medical office building which houses certain outpatient operations of CMHS, physician offices and certain other facilities, which is located near the CMH campus in which CMHS owns a 58.5% interest (the “Buenavista Building”) (see APPENDIX A - “COMMUNITY MEMORIAL HEALTH SYSTEM, INC. - Description of Affiliated Organizations - Buenavista Medical Properties, Inc.”), or (iv) any of the four freestanding imaging facilities owned by Grossman Imaging Centers of CMH, of which CMH is a 51% owner (the “Grossman Facilities”) (see APPENDIX A - “COMMUNITY MEMORIAL HEALTH SYSTEM, INC. - Description of Affiliated Organizations - Grossman Imaging Centers of CMH”). An ALTA title insurance policy on the Mortgaged Facilities in an amount not less than the aggregate principal amount of the Bonds will be delivered at the time of issuance of the Bonds. For a discussion of certain limitations on the exercise of remedies under the Deed of Trust, see “BONDHOLDER RISKS − Limitations on Remedies under the Deed of Trust.” In addition, for a discussion of certain risks relating to the ability to realize amounts sufficient from the exercise of remedies under the Deed of Trust and the Master Indenture to pay amounts due on Obligations issued under the Master Indenture, see “BONDHOLDERS RISKS - Risk Factors Affecting Value of the Mortgaged Facilities; Release of Mortgaged Facilities and Creation of Liens.”

Pursuant to the Master Indenture, CMHS has covenanted, subject to Permitted Liens, that certain property owned by CMHS, including the CFH Clinics, CMHS’ interest in the Buenavista Building, CMHS’ interest in the Grossman Facilities and certain other properties owned by CMHS and identified in the Master Indenture will remain unencumbered by deeds of trust securing indebtedness or other obligations of CMHS (“Negative Pledge”).

In addition to the Mortgaged Facilities and the properties that are subject to the Negative Pledge, CMHS owns certain additional properties that are neither Mortgaged Facilities nor subject to the Negative Pledge (referred to in the Master Indenture as “Excluded Property”), including the Cancer Center, which properties are permitted to be sold by CMHS, or encumbered by liens, including, if applicable, deeds of trust to secure indebtedness or other obligations of CMHS in accordance with, and subject to, the limitations contained in the Master Indenture. See APPENDIX D - “SUMMARY OF PRINCIPAL DOCUMENTS - MASTER INDENTURE - Particular Covenants of the Members - Deed of Trust; Against Encumbrances” and - “Limitation on Disposition of Assets.” CMHS obtains the majority of its revenues from the Mortgaged Facilities and the properties that are subject to the Negative Pledge.

THE PROJECT

CMHS has undertaken to build the Project to meet both strategic and regulatory needs. The strategic need is to modernize the facilities to boost CMHS’ competitive advantage. Most of the current CMH campus was built in the 1960’s. A large number of the patient rooms (67 out of 242) are semi-private (two patients per room), rather than single-bed rooms, and the treatment rooms are antiquated. The regulatory need for building the Project is to meet the requirements of California Senate Bill 1953 (“SB 1953”), the Hospital Facilities Seismic Safety Act, which requires acute care hospitals to retrofit or replace their facilities to meet stringent seismic safety requirements. This is an unfunded state mandate. CMHS considered, but ruled out, retrofitting its existing facility due to the disruption it would create in the existing building, and the fact that retrofitted buildings must be replaced before 2030 under SB 1953.

CMHS’ decision to construct the Project was spurred by the requirements of Senate Bill 1953, but also took into account several key factors including: (i) the growing demand for health care due to the increasing and aging population in CMHS’ service area, (ii) the increasing need to improve accessibility and availability by attracting specialists and providing services that otherwise would not be available to residents, (iii) the inability of the existing facilities to accommodate upgraded technologies, new services and advances in patient safety, and (iv) the opportunity to gain greater operational efficiencies.

The Project consists of the construction and equipping of a replacement hospital and related facilities on the existing hospital campus consisting of approximately seven acres in the Midtown portion of Ventura, bounded by Main Street to the west, Loma Vista Road to the north, and Brent Street to the east. The existing hospital operations are in buildings separate from the Project and the existing hospital is expected to be able to operate during the construction of the Project. The existing hospital building is expected to be converted to use for support services and medical offices after the completion of the Project.

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The Project includes a building which will be six stories in height, plus a basement, and will have approximately 356,000 gross square feet of floor area. A more detailed description of the Project is as follows:

(a) an acute care hospital building, consisting of six floors above grade and a below-grade basement level with:

(i) support functions in the below-grade basement level including mechanical space, central sterile processing, materials management/stores, pharmacy, storage, and kitchen;

(ii) the first floor initially housing the Emergency Department, Diagnostic Imaging, Admitting, the main entry and lobby waiting area, the cafeteria and dining area, and links to the Administrative building of Community Memorial Hospital at 147 North Brent Street;

(iii) the second floor initially housing operating rooms, post-anesthesia recovery, pre-op and post-op holding, and the cardiac catheterization suite;

(iv) the third floor initially housing the maternal-child program which consists of labor and delivery, neonatal intensive care, perinatal, post-partum mother/baby rooms, and pediatrics;

(v) the fourth floor initially housing ICU/CCU, and telemetry/pulmonary rehabilitation beds;

(vi) the fifth and sixth floors initially housing general medical/surgical suites, with specializations for oncology, orthopedics, general surgery, medicine, and dialysis services; and

(vi) additional major mechanical support space initially located on the roof; and (b) the purchase of equipment and furnishings, together with other property, real and personal,

functionally related and subordinate thereto. The Project is being designed with all single-bed rooms. These rooms will be family-centered, enabling a

loved one to spend the night in the patient room if desired. The operating rooms, imaging suites, and treatment areas will be equipped with modern technologies, and have been designed with space expected to be adequate to respond to future advances in medical treatments. The building has been designed with energy conservation and the environment in mind. The campus will be surrounded by green space including healing gardens, outdoor eating areas and a public park.

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Current and Future Bed Complement

The following table shows the change in licensed bed count upon completion of the Project from the existing hospital building:

Bed Classification Existing Hospital Replacement Hospital Increase/Decrease Medical / Surgical Beds 190 180 (10) Intensive Care Beds 10 14 4 Coronary Care Beds 11 14 3 Neonatal Intensive Care Beds 16 23 7

Pediatric Beds 5 8 3 Perinatal Beds 10 11 1 Total 242 250 8

The following table shows the change in ancillary capacity upon completion of the Project:

Ancillary Capacity Existing Hospital Replacement Hospital Increase

Emergency Room Beds 21 35 14 Surgery Suites 8 10 2 Cath Labs 3 5 2

Replacement Hospital Design Concepts/Principles

Concepts such as “patient-centered care” (care provided with a focus on the needs of the patient rather than the operational needs of the institution) and “evidenced-based design” (an approach to health care design guided by research linking the physical environment of hospitals to patient and staff outcomes) have been taken into consideration in the planning and design initiatives. CMHS has also been guided by several design principles that were identified in a series of focus groups and community presentations. The design principles include the following:

• Create a “Campus Feel”— In addition to constructing the Project, CMHS will preserve areas within the approximately seven-acre campus for future uses such as physician offices, ambulatory care, etc.

• Preserve Green Space— CMHS intends to preserve open space to maintain a natural setting for the facility and to minimize the environmental impact of the Project.

• Focus the Project on Inpatient Programs— The Project is being designed with inpatient care as the primary focus. The Project is designed to specifically address the needs of a more highly acute inpatient population. Ambulatory patients will be directed to one of CMHS’ satellite facilities.

• Provide Private Rooms— The Project is designed to provide all patients with a private room as part of a patient-centered philosophy and effort to improve the quality of their stay. The primary benefit of private rooms is enhanced patient safety. Research indicates that private rooms reduce patient infection rates, result in fewer patient transfers and associated medical errors, reduce excess noise, increase privacy and confidentiality, improve communication, provide superior accommodation of family members and promote consistently higher satisfaction with overall quality of care. Moreover, private rooms also translate into operational efficiencies due to the reduced incidence of patient falls and patient transfers, as well as the avoidance of gender and age issues that arise when placing patients in semi-private rooms.

• Create Efficient Bed Units— The Project is designed with efficient, 30-bed inpatient units to maximize staff efficiencies. The design equips each unit with its own nursing station and support functions.

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• Ensure Patient/Public Separation—To the extent possible, the design of the Project separates patient and public circulation spaces. Also, the behavioral health unit is separated from the general acute population.

• Create Adjacencies for Similar Functions— To maximize operational efficiencies, staffing and patient flow, the Project’s design groups related clinical functions and spaces. For example, an invasive center includes all surgical suites, invasive cardiology, and interventional radiology.

Design/Build Contract

CMHS is using a “design/build” approach in which one firm is retained to handle both the design and construction of the Project. Proponents of the design/build approach claim that design/build offers significant savings in project costs due to a single contract that eliminates redundant functions and helps reduce fees while ensuring standardization of the overall planning and building processes. The cost savings was a significant factor to CMHS in selecting the design/build approach. Risks associated with design/build include a high cost of customization and little chance of the owner influencing design and making changes without increased costs and delays.

CMHS entered into a design/build agreement with Hospital Building and Equipment Corporation (“HBE”) to design and construct the Project. HBE is headquartered in St. Louis, Missouri and is the largest health care design/build company in the United States. HBE has approximately 40 years of experience in the design and construction of hospitals and other health care structures. CMHS contracted with HBE to design and construct the Project for a lump sum guaranteed price of $185,077,600. This fixed price, lump sum was established after completion of schematic design and design development, based upon design documents and detailed specifications enumerated in the agreement, but prior to the issuance of final construction documents. The agreement requires a 100% code compliant facility designed under the most recent American Institute of Architects (AIA) Guidelines for Design and Construction of Health Care Facilities (2006), Title 24, Part 22 California Code of Regulations, the Office of Statewide Health Planning and Development (“OSHPD”), Department of Health requirements and other codes and regulations. In the event of errors or omissions, HBE bears the full responsibility to correct the deficiency at its cost. The contract requires that HBE and its subcontractors obtain various specified insurance coverage, including an excess umbrella liability coverage of $10 million. The Project is also supported by a performance bond for the full amount of the contract price. The construction schedule set forth in the agreement holds HBE accountable to achieve substantial completion of the installation and completion of the Project by April 2015. The contract contains a “time is of the essence” clause, and provides that HBE is liable to CMHS for its actual damages arising from HBE’s failure to meet the substantial completion date in an amount based on the applicable per diem rate. The per diem liquidated damages amount for late substantial completion of work is $10,000 per day.

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Estimated Plan of Financing of the Project

The proceeds of the sale of the Bonds together with other funds available to CMHS will be applied by CMHS to (1) pay costs of the Project, (2) pay capitalized interest on the Bonds during the period of construction of the Project, (3) fund the Bond Reserve Account for the Bonds, (4) pay costs of issuance of the Bonds, as shown below. The table below shows the estimated sources and uses of funds in connection with the Bonds and the Project.

Sources of Funds Bond Par Amount $ 350,000,000 Net Original Issue Discount (134,452) Estimated Investment Earnings on Bond Proceeds 3,530,631 CMHS Equity Contributions

Project Costs 30,290,943 Non-Capitalized Interest on Bonds Payable During Construction 17,720,706 Costs of Issuance of the Bonds 10,296,250

Total Sources $411,704,078

Uses of Funds Project Construction, Architectural and Engineering Costs $ 185,096,696 Project Equipment and Furnishings 31,449,600 Project Contingency 13,400,000 Other Project Costs and Fees 27,472,955 Project Land Acquisition 16,446,220 Bond Interest Payable During Project Construction Funded by Bond Proceeds

Capitalized Interest Fund 78,701,555 Bond Interest Payable During Project Construction Funded by CMHS Equity 17,720,706 Debt Service Reserve Fund 31,119,500 Costs of Issuance of the Bonds and Bond Denomination Rounding 10,296,846

Total Uses $411,704,078


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Selected Illustrations of Current and Future Hospital Facilities

Comparison of Current Semi-Private Patient Rooms and Planned Private Patient Rooms

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Comparison of Existing and Planned Hospital Unit Floor Plans

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Comparison of Existing and Planned Operating Rooms

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Comparison of Existing and Planned Intensive Care Unit / Critical Care Unit

Existing ICU/CCU - 28 Beds New ICU/CCU - 21 Beds

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ESTIMATED SOURCES AND USES OF BOND PROCEEDS

The proceeds of the sale of the Bonds will be applied by CMHS to (1) finance or refinance the cost of the Project, (2) pay approximately 82% of the capitalized interest on the Bonds during the period of construction of the Project, and (3) fund the Bond Reserve Account in an amount equal to the Bond Reserve Account Requirement.

Sources of Proceeds Principal Amount $350,000,000 Original Issue Discount (134,452)

Total Sources $349,865,548

Uses of Proceeds Deposit to Project Fund $227,696,032 Reimbursement to CMHS for Existing Project Expenditures 13,614,083 Deposit to Capitalized Interest 77,435,336 Deposit to Bond Reserve Account 31,119,500 Bond Denomination Rounding 597

Total Uses $349,865,548

The amount of Bond proceeds expected to be allocated to the payment of capitalized interest represents 82% of the expected total amount of interest payable on the Bonds prior to the completion of the Project. The remaining portion of such interest is expected to be paid from revenues generated by CMHS. All of the costs of issuance of the Bonds (currently estimated at approximately $10,296,250, including legal and accounting fees, Underwriter’s fee, printing costs, rating agency fees and miscellaneous other costs of issuance) are expected to be paid by CMHS from its available funds.


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ANNUAL DEBT SERVICE REQUIREMENTS

The following table sets forth the amounts to be required in each Fiscal Year ending December 31 for the payment of interest when due and of principal at maturity or upon mandatory sinking fund redemption for the Bonds.

Fiscal Year Ended

December 31,

Principal(1)

Interest

Total

2011 - $7,517,178 $7,517,178 2012 - 26,021,000 26,021,000 2013 - 26,021,000 26,021,000 2014 - 26,021,000 26,021,000 2015 - 26,021,000 26,021,000 2016 $5,080,000 26,021,000 31,101,000 2017 5,330,000 25,767,000 31,097,000 2018 5,610,000 25,487,175 31,097,175 2019 5,935,000 25,164,600 31,099,600 2020 6,290,000 24,808,500 31,098,500 2021 6,685,000 24,415,375 31,100,375 2022 7,120,000 23,980,850 31,100,850 2023 7,580,000 23,518,050 31,098,050 2024 8,175,000 22,922,750 31,097,750 2025 8,820,000 22,280,750 31,100,750 2026 9,510,000 21,588,050 31,098,050 2027 10,270,000 20,841,250 31,111,250 2028 11,095,000 20,019,650 31,114,650 2029 11,985,000 19,132,050 31,117,050 2030 12,945,000 18,173,250 31,118,250 2031 13,980,000 17,137,650 31,117,650 2032 15,100,000 16,019,250 31,119,250 2033 16,230,000 14,886,750 31,116,750 2034 17,450,000 13,669,500 31,119,500 2035 18,755,000 12,360,750 31,115,750 2036 20,165,000 10,954,125 31,119,125 2037 21,675,000 9,441,750 31,116,750 2038 23,300,000 7,816,125 31,116,125 2039 25,050,000 6,068,625 31,118,625 2040 26,925,000 4,189,875 31,114,875 2041 28,940,000 2,170,500 31,110,500

TOTAL $350,000,000 $570,436,378 $920,436,378 ______________ (1) Includes mandatory sinking fund redemptions.

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FEASIBILITY STUDY

HFS Consultants (the “Feasibility Consultant”), has completed a financial feasibility study of the proposed financing plan entitled “Community Memorial Health System Study of Market Need and Financial Feasibility,” dated July 7, 2011 (the “Feasibility Study”). See APPENDIX C — “STUDY OF MARKET NEED AND FINANCIAL FEASIBILITY - COMMUNITY MEMORIAL HEALTH SYSTEM.” The Feasibility Study contains a review and analysis of the Project, financial aspects of CMHS, as well as related matters. The forecasted financial results for CMHS for the seven-year period ending December 31, 2017 are also included in the Feasibility Study. Certain information concerning the Project and CMHS contained in this Official Statement has been excerpted from the Feasibility Study. The estimates, opinions and conclusions expressed in the Feasibility Study are based upon certain assumptions, calculations and qualifications set forth therein, and the Feasibility Study should be read in its entirety for a complete understanding of the projections set forth therein. Among those assumptions were: with respect to the Bonds, (1) an aggregate issue size of $345,900,000, (2) an average coupon of 7.75% and an 8.00% bond yield and (3) an amortization over 30 years (providing Maximum Annual Bond Service of approximately $31,318,000). In addition, other assumptions contained in the Feasibility Study may vary significantly from actual future conditions due to unanticipated events and circumstances, and there can be no assurance that the assumed conditions will, in fact, occur. To the extent that actual future conditions vary from those assumed in the Feasibility Study, the actual results will vary from those contained in the Feasibility Study. The forecasted results cannot be assured. CMHS and the Feasibility Consultant have not undertaken to provide any updates with respect to the forecasted results.

THE FEASIBILITY STUDY IS CONTAINED IN APPENDIX C HERETO AND SHOULD BE READ IN ITS ENTIRETY FOR A FULL UNDERSTANDING OF THE ASSUMPTIONS AND RATIONALE UNDERLYING THE FORECASTS AND CONCLUSIONS CONTAINED THEREIN.

BONDHOLDERS’ RISKS

The purchase of the Bonds involves investment risks that are discussed throughout this Official Statement. Prospective purchasers of the Bonds should evaluate all of the information presented in this Official Statement. This section on Bondholders’ Risks focuses primarily on the general risks associated with hospital or health system operations, whereas APPENDIX A sets forth certain information relating to CMHS specifically. These sections should be read together. These descriptions of certain risks are not intended to be a complete description of all risks associated with an investment in the Bonds.

General

The Bonds are payable solely from Revenues, which consist primarily of Loan Repayments made pursuant to the Loan Agreement. No representation or assurance can be made that revenues will be realized by CMHS in amounts sufficient to pay the Loan Repayments.

CMHS is subject to a wide variety of federal and state regulatory actions and legislative and policy changes by those governmental and private agencies that administer Medicare, Medicaid, and other payors and are subject to actions by, among others, the National Labor Relations Board, The Joint Commission, the Centers for Medicare and Medicaid Services (“CMS”) of the U.S. Department of Health and Human Services (“DHHS”), the Attorney General of the State of California, and other federal, state, and local government agencies. The future financial condition of CMHS could be adversely affected by, among other things, changes in the method and amount of payments to CMHS by governmental and nongovernmental payors, the financial viability of these payors, increased competition from other health care entities, the costs associated with responding to governmental inquiries and investigations, demand for health care, other forms of care or treatment, changes in the methods by which employers purchase health care for employees, capability of management, changes in the structure of how health care is delivered and paid for, future changes in the economy, demographic changes, availability of physicians, nurses, and other health care professionals, and malpractice claims and other litigation. These factors and others may adversely affect the ability of CMHS to make payments required under the Loan Agreement and, consequently, may adversely affect the ability of the City to make payments due on the Bonds. In addition, the tax-exempt status of CMHS and,

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therefore, of the Bonds, could be adversely affected by, among other things, an adverse determination by a governmental entity, noncompliance with governmental regulations or legislative changes.

Significant Risk Areas Summarized

Certain of the primary risks associated with the operations of CMHS are briefly summarized in general terms below and are explained in greater detail in subsequent sections. The occurrence of one or more of these risks could have a material adverse effect on the financial conditions and results of operations of CMHS and, in turn, the ability of CMHS to make payments under the Loan Agreement.

Disruption in the Credit Markets and Economic Factors. Domestic and international financial crises over the past few years have adversely affected the U.S. and international economies, undermined confidence in the financial sector, reduced the availability of credit and contributed to great volatility in the financial markets, reduced business activity and employment, business failures and decreases in personal income and increases in the incidence of poverty. There has been a particularly acute impact upon the financial sector causing many banks and other financial institutions to seek additional capital, to merge, and in some cases, to fail.

CMHS has significant holdings in a broad range of investments, and market fluctuations have affected and will continue to affect materially the value of those investments. More stringent credit requirements could adversely affect the ability of CMHS to obtain credit or otherwise access credit markets.

Reliance on Medicare. Inpatient hospitals rely to a high degree on payment from the federal Medicare program, which is undergoing significant changes and payment pressures as a result of the Health Care Reform. See “BONDHOLDERS’ RISKS - Health Care Reform” herein. These changes create uncertainty and could have a material adverse impact on hospitals’ payment stream from Medicare.

Construction Risks. The development, construction and renovation of hospital facilities generally are susceptible to various risks and uncertainties including delays, cost increases and permitting issues. See “BONDHOLDERS’ RISKS - Construction Risks” herein.

Non-Compliance with Conditions of Participation. CMHS’ continued participation in the Medicare and Medi-Cal programs is dependent upon satisfactory compliance with Conditions of Participation (“COPs”) in the Medicare program. COPs are the standards that a health care provider must meet in order to be accredited by CMS to participate in the Medicare and Medicaid programs. See “BONDHOLDERS’ RISKS - Government Regulation of Relationships between Hospitals and Physicians - Compliance with Conditions of Participation” herein.

Managed Care Exposure. Certain health care markets, including many communities in California, are strongly impacted by managed care. In those areas, managed care companies have significant influence over the rates, utilization and competition of hospitals and other health care providers. Rate pressure imposed by managed care payors may have a material adverse impact on health care providers, particularly if major purchasers or governmental authorities put increasing pressure on payors to restrain rate increases. Business failures by managed care companies also could have a material adverse impact on contracted hospitals and other health care providers in the form of payment shortfalls or delay, and/or continuing obligations to care for managed care patients without receiving payment. In addition, disputes with non-contracted payors are increasing and may result in an inability to collect billed charges from these payors.

Capital Needs vs. Capital Capacity. Hospital and other health care operations are capital intensive. Regulation, technology, and physician/patient expectations require constant and often significant capital investment. In California, seismic requirements mandated by the State of California may require that many hospital facilities be substantially modified, replaced, or closed. Nearly all hospitals in California are affected. Estimated construction costs are substantial and actual costs of compliance may exceed estimates. Total capital needs may outstrip capital capacity. Furthermore, capital capacity of hospitals and health systems may be reduced as a result of recent credit market dislocations, and it is uncertain how long those conditions may persist.

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Government Fraud Enforcement. Fraud in government funded health care programs is a significant concern of DHHS, CMS and many states and is one of the federal government’s prime law enforcement priorities. The federal government and, to a lesser degree, state governments impose a wide variety of extraordinarily complex and technical requirements intended to prevent over-utilization based on economic inducements, misallocation of expenses, overcharging and other forms of fraud in the Medicare and Medicaid programs, as well as other state and federally-funded health care programs. This body of regulation impacts a broad spectrum of hospital and other health care provider commercial activity, including billing, accounting, recordkeeping, medical staff oversight, physician contracting and recruiting, cost allocation, clinical trials, discounts and other functions and transactions.

Violations and alleged violations may be deliberate, but also frequently occur in circumstances where management is unaware of the conduct in question, as a result of mistake, or where the individual participants do not know that their conduct is in violation of law. Violations may occur and be prosecuted in circumstances that do not have the traditional elements of fraud, and enforcement actions may extend to conduct that occurred in the past. The government periodically conducts widespread investigations covering categories of services or certain accounting or billing practices. In addition, as described herein under “BONDHOLDERS’ RISKS - Health Care Reform,” ACA (as defined herein) will result in provider enrollment screening, enhanced oversight periods for new providers and suppliers, and enrollment moratoria in areas identified as being at elevated risk of fraud in all public programs, and by requiring Medicare and Medicaid program providers and suppliers to establish compliance programs.

Violations and Sanctions. The government and/or private “whistleblowers” often pursue aggressive investigative and enforcement actions. The government has a wide array of civil, criminal and monetary penalties, including withholding essential hospital and other health care provider payments from the Medicare or Medicaid programs, or exclusion from those programs. Aggressive investigation tactics, negative publicity, and threatened penalties can be, and often are, used to force settlements, payment of fines, and prospective restrictions that may have a materially adverse impact on hospital and other health care provider operations, financial condition and reputation. Multi-million dollar fines and settlements are common. These risks are generally uninsured. Government enforcement and private whistleblower suits may increase in the hospital sector. Most large hospital and other health care provider systems are likely to be adversely impacted.

Shortage of Clinical Professionals. From time to time, a shortage of physicians (including specialists) and nursing and other technical personnel occur which may have its primary impact on hospitals. Various studies have predicted that physician and nursing shortages will become more acute over time and grow to significant proportions. In California, state regulation of nurse staff ratios intensifies the shortage of nursing personnel. In addition, shortages of other professional and technical staff such as pharmacists, therapists, laboratory technicians and others may occur or worsen. Hospital operations, patient and physician satisfaction, financial condition and future growth could be negatively affected by physician and nursing and other technical personnel shortages, resulting in material adverse impact to hospitals.

Technical and Clinical Developments. New clinical techniques and technology, as well as new pharmaceutical and genetic developments and products, may alter the course of medical diagnosis and treatment in ways that are currently unanticipated, and that may dramatically change medical and hospital care. These could result in higher hospital costs, reductions in patient populations, lower utilization of hospital service and/or new sources of competition for hospitals.

Costs and Restrictions from Governmental Regulation. Nearly every aspect of hospital operation and health care delivery is regulated, in some cases by multiple agencies of government. The level and complexity of regulation appears to be increasing, bringing with it operational limitations, enforcement and liability risks, and significant and sometimes unanticipated cost increases.

Proliferation of Competition. Hospitals increasingly face competition from specialty providers of care and ambulatory care facilities. This may cause hospitals to lose essential inpatient or outpatient market share. Competition may be focused on services or payor classifications where hospitals realize their highest margins, thus negatively affecting programs that are economically important to hospitals. These new sources of competition may

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have material adverse impact on hospitals, particularly where a group of a hospital’s principal physician admitters may curtail their use of a hospital service in favor of competitive facilities.

Increasing Consumer Choice. Hospitals and other health care providers face increased pressure to be transparent and provide information about cost and quality of services, which may lead to a loss of business as consumers and others make choices about where to receive health care services based upon cost and quality.

Labor Costs and Disruption. Hospitals are labor intensive. Labor costs, including salary, benefits and other liabilities associated with the workforce, are a significant component of hospital expenses and therefore have significant impact on hospital operations and financial condition. Hospital employees are increasingly organized in collective bargaining units and may be involved in work actions of various kinds, including work stoppages and strikes. Overall costs of the hospital workforce are high, and turnover is high. Pressure to recruit, train and retain qualified employees is expected to accelerate.

These factors may materially increase hospital costs of operation. Workforce disruption may negatively impact hospital revenues and reputation.

General Economic Conditions; Bad Debt and Indigent Care. Hospitals and health care providers are economically influenced by the environment in which they are located. To the extent that state, county or city governments are unable to provide a safety net of medical services, pressure is applied to local hospital and providers to increase free care. Economic downturns and lower funding of state Medicaid programs may increase the number of patients treated by hospitals who are uninsured, underinsured or otherwise unable to pay for some or all of their care. These conditions may give rise to increased bad debt and higher indigent care utilization. At the same time, nonoperating revenue from investments may be reduced or eliminated. These factors may have a material adverse impact on hospitals.

Pension and Benefit Funds. As large employers, hospitals may incur significant expenses to fund pension and benefit plans for employees and former employees, and to fund required workers’ compensation benefits. Funding obligations in some cases may be erratic or unanticipated and may require significant commitments of available cash needed for other purposes.

Medical Liability Litigation and Insurance. Medical liability litigation is subject to public policy determinations and legal and procedural rules that may be altered from time to time, with the result that the frequency and cost of such litigation, and resultant liabilities, may increase in the future. Hospitals may be affected by negative financial and liability impacts on physicians. Costs of insurance, including self-insurance, may increase dramatically.

Facility Damage. Hospitals are highly dependent on the condition and functionality of their physical facilities. Damage from earthquake, other natural causes, fire, deliberate acts of destruction, or various facilities system failures may have a material adverse impact on hospital operations and financial status.

Construction Risks

The development, construction and renovation of hospital facilities generally are susceptible to various risks and uncertainties, such as: inflation of construction costs; general construction risks, including cost overruns, change orders and plan or specification modification, shortages of equipment, materials or skilled labor, labor disputes, unforeseen environmental, engineering or geological problems, work stoppages, fire and other natural disasters, construction scheduling problems and weather interferences; changes and concessions required by governmental or regulatory authorities; delays in obtaining, or inability to obtain, all licenses, permits and authorizations required to complete and/or operate the project; and disruption of existing operations and facilities. In order to limit these risks with respect to the construction of the Project, CMHS has entered into a design/build, fixed price construction contract for the Project with HBE as described under “THE PROJECT.”

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While CMHS has obtained all approvals required as of the date of this Official Statement for the construction of the Project, certain permits, licenses and approvals required to be obtained in the future for the construction and occupancy of the Project have not yet been obtained. For example, while CMHS has obtained the approval of OSHPD for an alternate method of compliance to improve the liquefiable soils beneath the Project to mitigate the liquefaction hazard and density and improve the site foundation soils, such approval is contingent upon continuous field confirmation testing by independent engineers during actual construction to assure that OSHPD requirements are met. This risk is assumed by HBE under the construction contract. Unexpected changes or concessions required by local, state or federal regulatory authorities could involve significant additional costs and delay the scheduled opening of the Project. CMHS may not receive the necessary permits, licenses and approvals or obtain the necessary permits, licenses and approvals within the anticipated time frame. While many of these risks are assumed by HBE as a part of the design/build contract for the Project, the liability of HBE under the contract is limited by liquidated damages provisions in the contract at the sum of $10,000 per day of delay beyond a specified date, and certain limited risks remain as risks assumed by CMHS. The failure to complete the Project as planned, on schedule, could have an adverse effect on CMHS’ business, financial condition and results of operations.

In addition, although construction of the Project is generally planned to have minimal impact on ongoing operations, no assurances can be given that the construction of the Project will not disrupt the ongoing operations of its existing hospital. Therefore, the construction of the Project may adversely impact the business, operations and revenues of CMHS during the period of construction.

Nonprofit Health Care Environment

As a nonprofit tax-exempt organization, CMHS is subject to federal, state and local laws, regulations, rulings and court decisions relating to its organization and operation, including its operation for charitable purposes. At the same time, CMHS conducts large-scale complex business transactions and is a major employer in its geographic area. There can often be a tension between the rules designed to regulate a wide range of charitable organizations and the day-to-day operations of a complex health care organization.

Recently, an increasing number of the operations or practices of health care providers have been challenged or questioned to determine if they are consistent with the regulatory requirements for nonprofit tax-exempt organizations. These challenges are broader than concerns about compliance with federal and state statutes and regulations, such as Medicare and Medicaid compliance, and instead in many cases are examinations of core business practices of the health care organizations. Areas that have come under examination have included pricing practices, billing and collection practices, charitable care, methods of providing and reporting community benefit, executive compensation, exemption of property from real property taxation, private use of facilities financed with tax-exempt bonds and others. These challenges and questions have come from a variety of sources, including state attorneys general, the Internal Revenue Service (the “IRS”), labor unions, Congress, state legislatures and patients, and in a variety of forums, including hearings, audits, and litigation.

California Attorney General. California nonprofit public benefit corporations, including CMHS, are subject at all times to examination by the California Attorney General (the “AG”) to ensure that their charitable purposes are being carried out, that their fund raising and investment activities comply with state law and that the terms of charitable gifts are followed.

Charity Care. California law requires hospitals to maintain written policies about discount payment and charity care and provide copies of such policies to patients and OSHPD. California hospitals are also required to follow specific billing and collection procedures that limit the amount charged or collected from uninsured individuals with low income. CMHS has adopted and maintains such policies.

Action by Purchasers of Hospital Services and Consumers. Major purchasers of hospital services also could take action to restrain hospital charges or charge increases. In California, the California Public Employees’ Retirement System, the nation’s third largest purchaser of employee health benefits, has pledged to take action to restrain the rate of growth of hospital charges and has excluded certain California hospitals from serving its covered members. Additionally and as a result of increased public scrutiny, it is also possible that the pricing strategies of hospitals may be perceived negatively by consumers, and hospitals may be forced to reduce fees for their services.

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Decreased utilization could result, and hospitals’ revenues may be negatively impacted. In addition, consumers and groups on behalf of consumers are increasing pressure for hospitals and other health care providers to be transparent and provide information about cost and quality of services that may affect future consumer choices about where to receive health care services.

Challenges to Real Property Tax Exemptions. Recently, the real property tax exemptions afforded to certain nonprofit health care providers by state and local taxing authorities have been challenged on the grounds that the health care providers were not engaged in charitable activities. These challenges have been based on a variety of grounds, including allegations of aggressive billing and collection practices and excessive financial margins. The real property tax exemptions of CMHS have not been placed under review by state or local authorities.

The foregoing are some examples of the challenges and examinations facing nonprofit health care organizations. They are indicative of a greater scrutiny of the billing, collection and other business practices of these organizations and may indicate an increasingly more difficult operating environment for health care organizations, including CMHS. The challenges and examinations, and any resulting legislation, regulations, judgments, or penalties, could have a material adverse effect on hospitals.

Patient Service Revenues

The Medicare Program. Medicare. Medicare is a federal program that 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. The Medicare Advantage Program, also known as Medicare Part C, enables Medicare beneficiaries who are entitled to Part A and are enrolled in Part B to choose to obtain their benefits through a variety of risk-based plans. Medicare Part D is the prescription drug benefit.

Medicare is administered by CMS, an agency of the U.S. Department of Health and Human Services (“DHHS”), which delegates to the states the process for certifying those organizations to which CMS will make payment. The rule-making authority of DHHS is substantial and the rules are extensive and complex. Substantial deference is given by courts to rules promulgated by DHHS.

Medicare claims are processed by non-government organizations or agencies that contract to serve as the fiscal agent between providers and the federal government to locally process Medicare’s institutional and provider claims. These claims processors are known as “intermediaries” and “carriers.” They apply the Medicare coverage rules to determine the appropriateness of claims. CMS selects organizations (generally insurance companies) to act as intermediaries and carriers in various states or regions and enters into a “prime contract” with each. Medicare is in the process of transitioning intermediary and carrier contracts to newly designated Medicare Administrative Contractors. Most Medicare services are paid for on a fee-for-service basis under the reimbursement methods described below. Some Medicare recipients, however, enroll in Medicare Advantage managed care plans, which principally, but not exclusively, reimburse providers on a capitated basis. For additional information on the revenues which CMHS derives from Medicare, see APPENDIX A - “FINANCIAL INFORMATION AND UTILIZATION STATISTICS - Gross Patient Charges.”

Hospital Inpatient Payments. Hospitals are generally paid a pre-determined payment amount for inpatient services provided to Medicare beneficiaries under the Inpatient Prospective Payment System (“IPPS”). IPPS is based on established categories of treatments or conditions known as Medicare Severity Diagnosis Related Groups (“MS-DRGs”). The MS-DRG rate covers all care provided to a beneficiary during an inpatient stay. Separate payments are made for inpatient operating costs and inpatient capital-related costs. The actual cost of care, including capital costs, may be more or less than the MS-DRG rate. MS-DRG rates are subject to adjustment by CMS and are subject to federal budget considerations. As a consequence, any adverse development or change in Medicare reimbursement for acute care services could have a material adverse effect on the financial condition and results of operations of CMHS. As noted in the section entitled “- Health Care Reform,” Medicare is moving toward a system of paying based on quality and efficiency outcomes and away from traditional fee for service. There is no

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guarantee that rates, as they change from time to time, will cover actual costs of providing services to Medicare patients.

Hospital Outpatient Payments. Hospitals are also paid a predetermined payment amount for most outpatient services based upon ambulatory payment classification (“APC”) groups. An APC group includes various services and procedures determined to be similar. There can be no assurance that the hospital APC payment, which bases payment on APC groups rather than on individual services, will be sufficient to cover the actual costs of the services.

Payment for Hospital Capital Costs. Hospital capital costs apportioned to Medicare patient use (including depreciation and interest) are paid by Medicare exclusively on the basis of a standard federal rate adjusted for geographic location. There can be no assurance that future capital-related payments will be sufficient to cover the actual capital-related costs of CMHS’ facilities applicable to Medicare patient stays or will provide flexibility for hospitals to meet changing capital needs.

California Hospital Provider Fee. In 2009, the California Legislature enacted the Medi-Cal Hospital Provider Rate Stabilization Act and the Quality Assurance Fee Act (together, the “Provider Fee Law”). As implemented, the Provider Fee Law imposed a one-time quality assurance fee on California’s general acute care hospitals for the period from April 1, 2009 through and including December 31, 2010, except for public hospitals and certain other exempt hospitals. The quality assurance fee for each hospital was calculated on an annual basis by multiplying a fee for managed care, fee-for-service and Medi-Cal total patient days by the number of each of these types of inpatient days as reported on each hospital’s publicly available Annual Financial Disclosure Report for the fiscal year ending in 2007. California hospitals paid the quality assurance fee in installments during the last three months of 2010.

The fee proceeds were used to earn federal matching funds for Medi-Cal, including increases in Medi-Cal payments to hospitals, supplemental payments to managed care plans dedicated to increased payments to hospitals, health care coverage for children and certain costs of administering the quality assurance fee program. These increased Medi-Cal fee-for-service payments to hospitals were made pursuant to a fixed methodology based on the number of inpatient days paid by the department to a hospital in the 2008 calendar year. The related supplemental Medi-Cal payments were made between October 2010 and March 2011. Under the fixed methodology, some California hospitals, like CMHS, received more money in increased Medi-Cal reimbursement than they paid in quality assurance fees, while other California hospitals received less money in Medi-Cal payments than the fees paid. Discontinuation or change in this program could adversely affect the revenues of CMHS.

On April 13, 2011, California’s governor approved legislation extending the quality assurance fee from January 1, 2011 to June 30, 2011. The six-month fee program under this legislation closely resembles the fee program under the Provider Fee Law. California’s implementation of the extension is contingent on approval from CMS. The California legislature is also currently considering legislation that would extend the quality assurance fee program or enact a new quality assurance fee program for periods subsequent to June 30, 2011. No assurances can be given as to whether California will receive CMS’s approval for the six-month fee extension or the State legislature will take action to extend the quality assurance fee program beyond June 30, 2011.

Medicare Outlier Payments. The Medicare program analyzes high cost cases to determine whether an additional or “outlier” payment should be made. This amount is paid for unusually high cost inpatient cases in addition to the MS-DRG payment. Medicare outlier payments may also be made for high cost outpatient cases. No assurances can be given that outlier payments by Medicare made to CMHS will be adequate to compensate CMHS for the cost of the patient services provided to Medicare recipients.

Medicare Payment for Preventable Medical Errors. The Deficit Reduction Acts of 2005 and 2007 (collectively, the “DRA”) required the Secretary of DHHS to select at least two conditions that are: (1) high cost, high volume, or both; (2) identified through coding as a complicating condition or major complicating condition that, when present as a secondary diagnosis at discharge, results in payment at a higher MS-DRG; and (3) reasonably preventable through application of evidence-based guidelines. Such conditions are referred to as “hospital-acquired conditions.” The DRA further required hospitals to begin reporting on claims for discharges, beginning October 1, 2007, whether the selected conditions were present on admission. In its 2008 Inpatient

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Prospective Payment System Final Rule, CMS selected eight conditions in furtherance of this mandate. These included seven conditions identified by the National Quality Forum as “never events.” In the 2009 Inpatient Prospective Payment System Final Rule, CMS finalized several more conditions, within three categories. All of the conditions will have payment implications when acquired during an inpatient stay beginning with discharges on or after October 1, 2008. Specifically, if one of the conditions is not present on admission, but a patient experiences that condition during an inpatient stay, Medicare will not pay the hospital for the additional cost of treating the condition. ACA and the final implementing rule expanded these nonpayment policies to apply to all State Medicaid programs. While the statutory effective date is July 1, 2011, CMS has indicated that it will delay compliance actions until July 1, 2012.

Other Medicare Service Payments. Medicare payment for skilled nursing services, psychiatric services, inpatient rehabilitation services, and home health services are based on regulatory formulas or pre-determined rates. There can be no assurance that these rates, as they may change from time to time, will be adequate to cover the actual cost of providing these services to Medicare patients.

Medicare Audits and Withholdings. Hospitals participating in Medicare and Medicaid are subject to audits and retroactive audit adjustments with respect to reimbursement claimed under those programs, and the representations upon which such reimbursements are claimed. There can be no assurance any such future adjustments will not be material or that CMHS’ reserves for such purpose will be adequate to cover any such adjustments. Both Medicare and Medicaid regulations also provide for withholding payments in certain circumstances. Any such withholding with respect to CMHS could have a material adverse effect on the financial condition and results of operations of CMHS. In addition, contracts between hospitals and third-party payors often have contractual audit, setoff and withhold provisions that may cause substantial, retroactive adjustments. Such contractual adjustments also could have a material adverse effect on the financial condition and results of operations of CMHS. No assurance can be given that in the future a Medicare payment or other payment will not be withheld that would materially and adversely affect the financial condition or results of operations of CMHS.

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 established the Medicare Recovery Audit Contract (“RAC”) program initially as a demonstration program to identify improper Medicare payments. RACs are paid on a contingency fee basis, receiving a percentage of the improper overpayments and underpayments they collect from providers. RACs can review the last four years of provider claims for the following types of services: hospital inpatient and outpatient, skilled nursing facility, physician, ambulance and laboratory, as well as durable medical equipment. The RACs use automated software programs to identify potential payment errors in such areas as duplicate payments, fiscal intermediaries’ mistakes, medical necessity and coding, and identified significant overpayments for collection in the demonstration states. The Tax Relief and Healthcare Act of 2006 expanded the RAC program to all 50 states. ACA extended RACs to Medicaid.

In light of the complexity of the regulations relating to the Medicare program, and the nature of ongoing audits and compliance activities as described above, there can be no assurance that CMHS will not be the subject of any such activities.

Medicaid Program. Medicaid is a program of medical assistance, funded jointly by the federal government and the states, for certain needy individuals and their dependants. Under Medicaid, the federal government provides limited funding to states that have medical assistance programs that meet federal standards. Attempts to balance or reduce federal and state budgets will likely negatively impact Medicaid spending. This reduction in federal funding, and any reduction in state funding, will likely negatively impact provider reimbursement under the various programs.

California Medi-Cal. Medi-Cal is the California Medicaid program. While Medi-Cal is rarely as important to hospital and other health care provider financial results as Medicare, it nevertheless constitutes an important payor source to many hospitals and other health care providers. This program often pays hospitals and other health care providers at levels that are substantially below the actual cost of the care provided. As Medi-Cal is partially funded by the State of California, the financial condition of the State of California is likely to affect funding levels and/or cause payment delays. This could have a material adverse impact on hospitals and other health care providers.

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The State of California selectively contracts with general acute care hospitals through the Selective Provider Contracting Program (“SPCP”) to provide inpatient services to Medi-Cal patients. The State is obligated to make contractual payments only to the extent the legislature appropriates adequate funding. Under certain circumstances, the State may terminate an SPCP contract without notice. No assurances can be made that hospitals will be awarded or retain Medi-Cal contracts or that any such contracts will reimburse hospitals for the cots of delivering services.

Hospitals may elect not to participate in the SPCP, in which case they are considered non-contracting hospitals. Except in areas of the State that have been designated “open” health facility planning areas, Medi-Cal generally will not approve inpatient admissions or non-emergency treatment of Medi-Cal beneficiaries at a non-contracting hospital. In the past, the State Legislature has enacted laws requiring reductions in payments for services provided by non-contracting hospitals, although such reductions have typically been suspended by federal courts pending resolution of litigation challenging the reductions. No assurances can be provided that previously enacted payment reductions to non-contracting hospitals will be repealed or not go into effect or that additional payment reductions will not occur.

The Federal Medical Assistance Percentages (“FMAP”) were adjusted fro 2010 and 2011. The American Recovery and Reinvestment Act authorized adjustment of the federal contribution ratio for Medi-Cal, which augmented revenue to hospitals that treat Medi-Cal patients. FMAP had a sunset date of June 2011, and may result in lower reimbursement under Medi-Cal.

For the fiscal years ended December 31, 2008, 2009 and 2010, CMHS received approximately 9.0%, 9.9% and 10.4%, respectively, of gross patient service revenues from the Medi-Cal program. See APPENDIX A - “FINANCIAL INFORMATION AND UTILIZATION STATISTICS - Gross Patient Charges.”

California State Budget. California faces severe financial challenges, including erosion of general fund tax revenues, falling real estate values, slower economic growth and higher unemployment, which may continue or worsen over the coming years. Shortfalls between state revenues and spending have in the past and may in the future result in cutbacks to government health care programs. Failure by the California legislature to approve budgets prior to the start of a new fiscal year can also result in a temporary hold on or delay of Medi-Cal reimbursement.

The financial challenges facing the State may negatively affect hospitals in a number of ways, including elimination or reduction of health care safety net programs (causing a greater number of indigent, uninsured or underinsured patients) and reductions in Medi-Cal reimbursement rates. The financial challenges may also resulting a greater number of indigent, uninsured or underinsured patients who are unable to pay for their care or access primary care facilities, a greater number of individuals who qualify for Medi-Cal and reductions in Medi-Cal reimbursement rates.

The State of California’s financial difficulties have resulted in recent years in cuts to funding for health and human services programs, including Medi-Cal. California’s governor signed the 2011-12 budget on June 30, 2011. In order to close a budget deficit, the 2011-12 budget includes a reduction of approximately $2.0 billion (two-year total) in State support for the Medi-Cal program. The budget also assumes receipt of certain federal funds that have not yet been approved by Congress, as well as increases in State revenue and relies on one-time loans and transfers to address a portion of the deficit. Consequently, there may be unforeseen future deficits, notwithstanding the current balancing of the budget. It is not possible to predict the outcome of future budget negotiations or the actions that may be taken in the future to address California’s significant financial problems.

Health Plans and Managed Care. Most private health insurance coverage is provided by various types of “managed care” plans, including health maintenance organizations (“HMOs”) and preferred provider organizations (“PPOs”) that generally use discounts and other economic incentives to reduce or limit the cost and utilization of health care services. Medicare and Medicaid also purchase hospital care using managed care options. Payments to hospitals from managed care plans typically are lower than those received from traditional indemnity or commercial insurers.

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In California, managed care plans have replaced indemnity insurance as the prime source of non-governmental payment for hospital services, and hospitals must be capable of attracting and maintaining managed care business, often on a regional basis. Regional coverage and aggressive pricing may be required. However, it is also essential that contracting hospitals be able to provide the contracted services without significant operating losses, which may require multiple forms of cost containment.

For the fiscal years ended December 31, 2008, 2009 and 2010, CMHS received approximately 37.9%, 37.6% and 37.4%, respectively, of gross patient service revenues from managed care and commercial plans. See APPENDIX A - “FINANCIAL INFORMATION AND UTILIZATION STATISTICS - Gross Patient Charges.”

Many HMOs and PPOs currently pay providers on a negotiated fee-for-service basis or, for institutional care, on a fixed rate per day of care, which, in each case, usually is discounted from the usual and customary charges for the care provided. Currently, CMHS has no managed care capitated contracts for its facilities (inpatient and outpatient services). However, as of July 1, 2011, CMHS has entered into a capitated contract on behalf of its contracted primary care physicians (family practice, internal medicine and pediatrics) who practice under contract to its Centers for Family Health clinics (see APPENDIX A - “COMMUNITY MEMORIAL HEALTH SYSTEM, INC. - Description of Hospitals and Ambulatory Care Clinics Owned by CMHS” for a description of the Centers for Family Health). This capitated contract is with the county-wide MediCal HMC known as Gold Coast Health Plan. The volume of patients directed to a provider may vary significantly from projections, and/or changes in the utilization may be dramatic and unexpected, thus jeopardizing the provider’s ability to manage this component of revenue and cost.

Some HMOs employ a “capitation” payment method under which hospitals are paid a predetermined periodic rate for each enrollee in the HMO who is “assigned” or otherwise directed to receive care at a particular hospital. The hospital may assume financial risk for the cost and scope of institutional care given. If payment is insufficient to meet the hospital’s actual costs of care, or if utilization by such enrollees materially exceeds projections, the financial condition of the hospital could erode rapidly and significantly.

Often, managed care contracts are enforceable for a stated term, regardless of hospital losses and may require hospitals to care for enrollees for a certain time period, regardless of whether the HMO is able to pay the hospital. Hospitals from time to time have disputes with managed care payors concerning payment and contract interpretation issues.

Failure to maintain contracts could have the effect of reducing CMHS’ market share and net patient service revenue. Conversely, participation may result in lower net income if participating hospitals are unable to adequately contain their costs. Thus, managed care poses one of the most significant business risks (and opportunities) the hospitals face.

Negative Rankings Based on Clinical Outcomes, Cost, Quality, Patient Satisfaction and Other Performance Measures. Health plans, Medicare, Medicaid, employers, trade groups and other purchasers of health services, private standard-setting organizations and accrediting agencies increasingly are using statistical and other measures in efforts to characterize, publicize, compare, rank and change the quality, safety and cost of health care services provided by hospitals and physicians. Published rankings such as “score cards,” tiered hospital networks with higher co-payments and deductibles for non-emergent use of lower-ranked providers, “pay for performance” and other financial and non-financial incentive programs are being introduced to affect the reputation and revenue of hospitals and the members of their medical staffs and to influence the behavior of consumers and providers such as CMHS. Measures of quality based on clinical outcomes of patient care, reduction in costs, patient satisfaction, and investment in health information technology are prevalent. Measures of performance set by others that characterize a hospital negatively may adversely affect its reputation and financial condition.

Health Care Reform

On March 23, 2010, the U.S. Patient Protection and Affordable Care Act (“ACA”) was enacted. Some of the provisions of ACA took effect immediately or within a few months of final approval, while others have been and

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will continue to be phased in over time, ranging from one year to ten years. Because of the complexity of ACA generally, additional legislation is likely to be considered and enacted over time. ACA also requires the promulgation of substantial regulations with significant effects on the health care industry. The federal government and individual state governments must also interpret and implement the new regulatory requirements, the vast majority of which have yet to be considered. Additionally, ACA remains subject to significant legislative debate, including possible repeal and/or amendment and there are substantial legal challenges to various aspects of ACA that have been made on constitutional grounds. Thus, the health care industry will be subjected to significant new statutory and regulatory requirements and consequently to structural and operational changes and challenges for a substantial period of time.

Management of CMHS will continue to analyze ACA in order to assess the effects of the legislation on current and projected operations, financial performance and financial condition. However, management cannot predict with any reasonable degree of certainty or reliability any interim or ultimate effects of the legislation.

A significant component of ACA is reformation of the sources and methods by which consumers will pay for health care for themselves and their families and by which employers will procure health insurance for their employees and dependents and, as a consequence, expansion of the base of consumers of health care services. One of the primary objectives of ACA is to provide or make available, or subsidize the premium costs of, health care insurance for some of the millions of currently uninsured (or underinsured) consumers who fall below certain income levels. ACA proposes to accomplish that objective through various provisions, summarized as follows: (i) the creation of active markets (referred to as exchanges) in which individuals and small employers can purchase health care insurance for themselves and their families or their employees and dependents, (ii) providing subsidies for premium costs to individuals and families based upon their income relative to federal poverty levels, (iii) mandating that individual consumers obtain and certain employers provide a minimum level of health care insurance, and providing for penalties or taxes on consumers and employers that do not comply with these mandates, (iv) establishment of insurance reforms that expand coverage generally through such provisions as prohibitions on denials of coverage for pre-existing conditions and elimination of lifetime or annual cost caps, and (v) expansion of existing public programs, including Medicaid for individuals and families. To the extent all or any of those provisions produce the intended result, an increase in utilization of health care services by those who are currently avoiding or rationing their health care can be expected and bad debt expenses may be reduced. Associated with increased utilization will be increased variable and fixed costs of providing health care services, which may or may not be offset by increased revenues.

Some of the specific provisions of ACA that may affect hospital operations, financial performance or the financial condition are described below. This listing is not, is not intended to be, nor should be considered by the reader as, comprehensive. ACA is complex and comprehensive, and includes myriad new programs and initiatives and changes to existing programs, policies, practices and laws.

• With varying effective dates, the annual Medicare market basket updates for many providers, including hospitals, would be reduced, and adjustments to payment for expected productivity gains would be implemented.

• Commencing October 1, 2010 through September 30, 2019, payments under the “Medicare Advantage” programs (Medicare managed care) will be reduced, which may result in increased premiums or out-of-pocket costs to Medicare beneficiaries enrolled in Medicare Advantage plans. Those beneficiaries may terminate their participation in those plans and opt for the traditional Medicare fee-for-service program. The reduction in payments to Medicare Advantage programs may also lead to decreased payments to providers by managed care companies operating Medicare Advantage programs. All or any of these outcomes will have a disproportionately negative effect upon those providers with relatively high dependence upon Medicare managed care revenues.

• Commencing October 1, 2011, health care insurers will be required to include quality improvement covenants in their contracts with hospital providers, and will be required to report their progress on such actions to the Secretary of Health and Human Services (“HHS”).

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Commencing January 1, 2015, health care insurers participating in the health insurance exchanges will be allowed to contract only with hospitals that have implemented programs designed to ensure patient safety and enhance quality of care. The effect of these provisions upon the process of negotiating contracts with insurers or the costs of implementing such programs cannot be predicted.

• Commencing in federal fiscal year 2014, Medicare disproportionate share hospital (DSH) payments will be reduced initially by 75% and increased thereafter to account for the national rate of consumers who do not have health care insurance and are provided uncompensated care. Commencing in 2014, a state’s Medicaid DSH allotment from federal funds will also be reduced.

• Expansion of Medicaid programs to a broader population with incomes up to 133% of federal poverty levels.

• Commencing in federal fiscal year 2012, Medicare payments that would otherwise be made to hospitals would be reduced by specified percentages to account for excess and “preventable” hospital readmissions.

• Commencing in federal fiscal year 2015, Medicare payments to certain hospitals for hospital-acquired conditions will be reduced by 1%. Commencing in federal fiscal year 2011, federal payments to states for Medicaid services related to health care-acquired conditions will be prohibited.

• Effective in 2012, a value-based purchasing program will be established under the Medicare program designed to pay hospitals based on performance on quality measures.

• With varying effective dates, a mandated reduction of waste, fraud, and abuse in public programs by allowing provider enrollment screening, enhanced oversight periods for new providers and suppliers, and enrollment moratoria in areas identified as being at elevated risk of fraud in all public programs, and by requiring Medicare and Medicaid program providers and suppliers to establish compliance programs. ACA requires the development of a database to capture and share health care provider data across federal health care programs and provides for increased penalties for fraud and abuse violations, and increased funding for anti-fraud activities.

• Effective for tax years commencing immediately after approval, additional requirements for tax-exemption will be imposed upon tax-exempt hospitals, including obligations to conduct a community needs assessment every three years; adopt an implementation strategy to meet those identified needs; adopt and publicize a financial assistance policy; limit charges to patients who qualify for financial assistance to the lowest amount charged to insured patients; and control the billing and collection processes. Failure to satisfy these conditions may result in the imposition of fines and loss of tax-exempt status.

• The establishment of an Independent Payment Advisory Board to develop proposals to improve the quality of care and limitations on cost increases. Those proposals would be automatically implemented if Congress does not act to invalidate them.

ACA also provides for the implementation of various demonstration programs and pilot projects to test, evaluate, encourage and expand new payment structures and methodologies to reduce health care expenditures while maintaining or improving quality of care, including bundled payments under Medicare and Medicaid, and comparative effectiveness research programs that compare the clinical effectiveness of medical treatments and develop recommendations concerning practice guidelines and coverage determinations. Other provisions encourage the creation of new health care delivery programs, such as accountable care organizations, or combinations of provider organizations, that voluntarily meet quality thresholds to share in the cost savings they achieve for the Medicare program. The outcomes of these projects and programs, including their effect on payments to providers and financial performance, cannot be predicted.

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Several States Attorneys General and other parties have filed challenges to the constitutionality of certain provisions of ACA. It is not clear whether these challenges will be successful. If successful, it is not clear whether a Court would strike down the entire ACA or just the constitutionally infirm portions. As a result, the outcome of the challenges on the providers and their financial performance cannot be predicted.

Government Regulation of Relationships between Hospitals and Physicians

Numerous laws and regulations have been adopted by both the federal and state governments seeking to address certain perceived abuses resulting from business and referral practices between physicians and hospitals. These statutes and regulations apply to many common business activities between physicians and hospitals, such as joint ventures, physician recruitment, leases of space, and payment for services rendered by a physician to a hospital. Many such relations are not prohibited per se, but, if improperly structured, may lead to significant penalties, fines and/or exclusion from government health care programs, including Medicare and Medicaid. Management of CMHS does not believe that it is or will be involved in any such prohibited activity. However, because of the lack of comprehensive judicial or regulatory guidance and the complexity of the existing regulations, there can be no assurance that challenges and investigations will not occur in the future. CMHS could suffer materially adverse effects on its operations based on the expenses and/or liabilities and other sanctions arising from such an investigation. Examples of applicable laws and regulations are described below.

False Claims Act. The False Claims Act (the “FCA”) makes it illegal to submit or present a false, fictitious or fraudulent claim to the federal government, and may include claims that are simply erroneous (if such claims were submitted with reckless disregard). FCA investigations and cases have become common in the health care field and may cover a range of activity from intentionally inflated billings, to highly technical billing infractions, to allegations of inadequate care. FCA sanctions include treble damages and civil fines ranging from $5,500 to $11,000 per violation. The FCA also permits individuals to initiate civil actions on behalf of the government in lawsuits called “qui tam” actions. Qui tam plaintiffs, or “whistleblowers,” can share in the damages recovered by the government or recover independently if the government does not participate.

On May 20, 2009, President Obama signed into law the Fraud Enforcement Recovery Act of 2009 (the “FERA”), which modified and clarifies certain provisions of the False Claims Act. In part, the FERA amends the False Claims Act such that the False Claims Act penalties may now apply to any person, including an organization that does not contract directly with the government, who knowingly makes, uses or causes to be made or used, a false record or statement material to a false or fraudulent claim paid in part by the federal government. As discussed above under “- Health Care Reform,” ACA will result in increased regulation and enforcement of fraud and abuse. ACA expands the scope of the False Claims Act, and therefore may lead to an increase in False Claims Act lawsuits.

In addition to prohibiting “traditional” false claims based on improper claim amounts or claims for services that were not provided properly or at all, the FCA also is being used increasingly to enforce other fraud and abuse laws, based on so-called “certification” theories. In a certification case, an FCA action is based on the premise that when submitting government program claims, health care providers expressly or impliedly certify compliance with all applicable laws and regulations, such that failure to comply with such laws or regulations transforms an otherwise valid claim into a false claim. Certification approaches have been used successfully to support FCA actions based on alleged violations of, among other laws, the Anti-Kickback Law and the Stark law. The FCA has become one of the government’s primary weapons against health care fraud. FCA violations or alleged violations could lead to multi-million dollar settlements, government program exclusion and reputation damage that could have a material adverse impact on a hospital or other health care provider.

Federal Fraud and Abuse Provisions. The federal “Anti-Kickback Law” is a felony criminal statute that prohibits anyone from knowingly and willfully soliciting, receiving, offering or paying any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, in return for, among other things, a referral (or to induce a referral) for any item or service that may be paid by any federal or state health care program. The Anti-Kickback Law potentially may apply to many common health care transactions between persons and entities with which a hospital or health care system does business, including hospital-physician joint ventures, hospital-physician integration vehicles (such as a medical foundation), medical director agreements, physician recruitment agreements, physician office leases, purchases from vendors, and other transactions. As noted in “BONDHOLDERS’ RISKS - Health

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Care Reform,” ACA contains provisions intended to increase regulation and enforcement of fraud and abuse. Included in ACA is a requirement that a Medicare self-referral disclosure protocol (“SRDP”) is established, which will require providers to self-report potential violations of the Anti-Kickback Law.

The Anti-Kickback Law can be prosecuted either criminally or civilly. Each violation is subject to a fine of up to $25,000 for each act (which may be each item or each bill sent to a federal program), imprisonment for up to five years and/or exclusion from the Medicare and Medicaid programs. In addition, civil monetary penalties of $10,000 per item or service in noncompliance (which may be each item or each bill sent to a federal program) or an “assessment” of three times the amount claimed may be imposed. Violation or alleged violation of the Anti-Kickback Law can result in settlements that require multi-million dollar payments and compliance agreements and potentially also exclusion from participation in federal or state health care programs.

Restrictions on Self-Referrals. The federal Ethics in Patient Referrals Act, the so-called “Stark” statute, prohibits the referral by a physician of Medicare and Medicaid patients for certain designated health services (including inpatient and outpatient hospital services, clinical laboratory services, and various diagnostic imaging services) to entities with which the referring physician has a financial relationship, unless the arrangement is structured to meet each element of an applicable exception set forth in the statute or in regulations promulgated by CMS. It also prohibits a hospital or other health care provider from furnishing the designated services from billing Medicare, or any other payor or individual, for services performed pursuant to a prohibited referral. The government does not need to prove that the entity knew that the referral was prohibited to establish a Stark violation. Many ordinary business practices and economically desirable arrangements between physicians and hospitals or other health care providers constitute “financial relationships” within the meaning of the Stark statute.

Medicare may deny payment for all services related to a prohibited referral, and a hospital or other health care provider that has billed for prohibited services may be obligated to refund the amounts collected from the Medicare program. For example, if an office lease between a hospital and a large group of heart surgeons is found to violate Stark, a hospital could be obligated to repay CMS for the payments received from Medicare for all of the heart surgeries performed at the hospital by all of the physicians in the group for the duration of the lease; a potentially significant amount. The government may also seek substantial civil monetary penalties, and in some cases, a hospital or other health care provider may be liable for fines up to three times the amount of any monetary penalty, and/or be excluded from the Medicare and Medicaid programs.

The Stark law is very detailed and complex. In addition, CMS has been very active in recent years in revising existing regulations and promulgating new regulations to close perceived loopholes and otherwise to impose new restrictions that have caused hospitals and other health care providers to completely revise the nature of certain common transactions with physicians. Government enforcement authorities have become increasingly active in bringing Stark enforcement actions. In addition, given its complexity and potential to generate very large financial damages and penalties, whistleblowers are bringing Stark-based FCA actions with increasing frequency. Potential repayments to CMS, settlements, fines or exclusion for a Stark violation or alleged violation could have a material adverse impact on a hospital or other health care provider.

Health Information Privacy. The Health Insurance Portability and Accountability Act of 1996 (“HIPPA”) adds additional criminal sanctions for health care fraud and applies to all health care benefit programs, whether public or private. HIPAA also provides for punishment of a health care provider for knowingly and willfully embezzling, stealing, converting or intentionally misapplying any money, funds or other assets of a health care benefit program. A health care provider convicted of health care fraud could be excluded from Medicare.

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HIPAA directed that the Secretary of DHHS promulgate regulations establishing protections for the privacy and security of health information. DHHS has issued several sets of regulations under HIPAA that apply directly to health care providers that conduct certain health claims transactions electronically and that apply also to health plans. CMHS and their employee health plan are covered entities subject to the HIPAA regulations. The HIPAA privacy regulations establish comprehensive requirements relating to the use and disclosure of protected health information. The HIPAA security regulations establish minimum standards for the protection of individual health information that is stored or transmitted electronically. Violations of the privacy and security regulations are punishable by civil and criminal penalties. Recently, CMS began a nationwide audit initiative to monitor compliance with the HIPAA security standards.

Provisions in the Health Information Technology for Economic and Clinical Health Act (the “HITECH Act”), enacted as part of the American Recovery and Reinvestment Act of 2009 (“ARRA”) contains significant changes to the privacy and security provisions of HIPAA, including major changes to the enforcement provisions. For violations in which it is established that the person did not know and by the exercise of reasonable diligence would not have known of the violation, penalties now start at $100 per violation. For violations that are knowing violations but that are deemed to be due to reasonable cause and not willful neglect, per-violation penalties now start at $1,000. For violations attributable to willful neglect, but that have been corrected within 30 days (or such longer period as may be reasonable under the circumstances), penalties are now a minimum of $10,000 per violation. Finally, for violations due to willful neglect that have not been corrected in a timely fashion, penalties start at $50,000 per violation. The calendar year maximum for all violations of an identical requirement or prohibition has been increased to $1.5 million. ARRA also authorizes state attorneys general to bring civil enforcement actions under HIPAA. These enhanced penalties and enforcement provisions are effective immediately. ARRA also amended HIPAA to include new data breach notification requirements on health care providers and certain other types of organizations who handle unsecured protected health information. The new provisions require health care providers to notify individuals of a breach of their unsecured protected health information and specify the timing, method and content of the notification. The HITECH Act also established programs under Medicare and Medicaid to provide incentive payments for the “meaningful use” of certified electronic health record (“EHR”) technology. Beginning in 2011, the Medicare and Medicaid EHR incentive programs will provide incentive payments to eligible professionals and eligible hospitals for demonstrating meaningful use of certified EHR technology. Health care providers demonstrate their meaningful use of EHR technology by meeting objectives specified by the Centers for Medicare and Medicaid Services for using health information technology and by reporting on specified clinical quality measures. Beginning in 2015, hospitals and physicians who have not satisfied the performance and reporting criteria for demonstrating meaningful use will have their Medicare payments significantly reduced. ARRA’s numerous other changes to HIPAA have delayed effective dates and require the issuance of implementing regulations by DHHS. The changes to HIPAA enacted as part of ARRA reflect Congressional intent that HIPAA’s privacy and security provisions be more strictly enforced. It is likely that these changes will stimulate increased enforcement activity and enhance the potential that health care providers will be subject to financial penalties for violations of HIPAA.

On November 9, 2007, six federal agencies, including the Federal Trade Commission (“FTC”), published what has come to be known as the “Red Flags Rule.” This rule, promulgated pursuant to the Fair and Accurate Credit Transactions Act of 2003, requires financial institutions and creditors to develop and implement written identity theft prevention programs. The programs must be developed for the identification, detection and response to patterns, practices, or specific activities – known as “red flags” – that could indicate identity theft. The FTC has interpreted the definition of “creditors” to include health care providers. Failure to comply with the rule could result in penalties of $2,500 per violation under the Fair Credit Reporting Act.

Exclusions from Medicare or Medicaid Participation. The government may exclude a hospital from Medicare/Medicaid program participation that is convicted of a criminal offense relating to the delivery of any item or service reimbursed under Medicare or a state health care program, any criminal offense relating to patient neglect or abuse in connection with the delivery of health care, fraud against any federal, state or locally financed health care program or an offense relating to the illegal manufacture, distribution, prescription, or dispensing of a controlled substance. The government also may exclude individuals or entities under certain other circumstances,

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such as an unrelated conviction of fraud, or other financial misconduct relating either to the delivery of health care in general or to participation in a federal, state or local government program. Exclusion from the Medicare/Medicaid program means that a hospital would be terminated from participation and no program payments can be made. Any hospital exclusion could be a materially adverse event. In addition, exclusion of hospital employees may be another source of potential liability for hospitals or health systems.

Administrative Enforcement. Administrative regulations may require less proof of a violation than do criminal laws, and, thus, health care providers may have a higher risk of imposition of monetary penalties as a result of an administrative enforcement actions.

Compliance with Conditions of Participation. CMS, in its role of monitoring participating providers’ compliance with conditions of participation in the Medicare program, may determine that a provider is not in compliance with its conditions of participation. In that event, a notice of termination of participation may be issued or other sanctions potentially could be imposed.

Enforcement Activity. Enforcement activity against health care providers has increased, and enforcement authorities have adopted aggressive approaches. In the current regulatory climate, it is anticipated that many hospitals and physician groups will be subject to an audit, investigation, or other enforcement action regarding the health care fraud laws mentioned above. In addition, enforcement agencies increasingly pursue sanctions for violations of health care fraud and abuse laws through administrative actions. Administrative regulations may require less proof of a violation than do criminal laws, and, thus, health care providers may have a higher risk of imposition of monetary penalties as a result of administrative enforcement actions.

Enforcement authorities are often in a position to compel settlements by providers charged with or being investigated for false claims violations by withholding or threatening to withhold Medicare, Medicaid and/or similar payments and/or by instituting criminal action. In addition, the cost of defending such an action, the time and management attention consumed, and the facts of a case may dictate settlement. Therefore, regardless of the merits of a particular case, a hospital could experience materially adverse settlement costs, as well as materially adverse costs associated with implementation of any settlement agreement. Prolonged and publicized investigations could be damaging to the reputation and business of a hospital, regardless of outcome.

Certain acts or transactions may result in violation or alleged violation of a number of the federal health care fraud laws described above, and therefore penalties or settlement amounts often are compounded. Generally these risks are not covered by insurance. Enforcement actions may involve multiple hospitals in a health system, as the government often extends enforcement actions regarding health care fraud to other hospitals in the same organization. Therefore, Medicare fraud related risks identified as being materially adverse as to a hospital could have materially adverse consequences to a health system taken as a whole.

Liability Under State “Fraud” and “False Claims” Laws. Hospital providers in California also are subject to a variety of State laws related to false claims (similar to the FCA or that are generally applicable false claims laws), anti-kickback (similar to the federal Anti-Kickback Law or that are generally applicable anti-kickback or fraud laws), and physician referral (similar to Stark). These prohibitions while similar in public policy and scope to the federal laws have not in all instances been avidly enforced to date. However, in the future they could pose the possibility of material adverse impact for the same reasons as the federal statutes.

Privacy Requirements. State and federal laws, including the California Confidentiality of Medical Information Act (“CMIA”) and HIPAA, address the confidentiality of individuals’ health information. Disclosure of certain broadly defined protected health information is prohibited unless expressly permitted under the provisions of CMIA the and HIPAA statute and regulations or authorized by the patient. HIPAA’ s confidentiality provisions extend not only to patient medical records, but also to a wide variety of health care clinical and financial settings where patient privacy restrictions often impose new communication, operational, accounting and billing restrictions. These add costs and create potentially unanticipated sources of legal liability.

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EMTALA. The Emergency Medical Treatment and Active Labor Act (“EMTALA”) is a federal civil statute that requires hospitals to treat or conduct a medical screening for emergency conditions and to stabilize a patient’s emergency medical condition before releasing, discharging or transferring the patient. A hospital that violates EMTALA is subject to civil penalties of up to $50,000 per offense and exclusion from the Medicare and Medicaid programs. In addition, a hospital may be liable for any claim by an individual who has suffered harm as a result of a violation of EMTALA.

Licensing, Surveys, Investigations and Audits. Health facilities are subject to numerous legal, regulatory, professional and private licensing, certification and accreditation requirements. These include, but are not limited to, requirements of state licensing agencies and accrediting bodies such as the Joint Commission. Renewal and continuation of certain of these licenses, certifications and accreditations are based on inspections or other reviews generally conducted in the normal course of business of health facilities. Loss of, or limitations imposed on, hospital licenses or accreditations could reduce hospital utilization or revenues, or a hospital’s ability to operate all or a portion of its facilities.

Environmental Laws and Regulations. Hospitals are subject to a wide variety of federal, state and local environmental and occupational health and safety laws and regulations. These include but are not limited to: air and water quality control requirements; waste management requirements; specific regulatory requirements applicable to asbestos and radioactive substances; requirements for providing notice to employees and members of the public about hazardous materials handled by or located at the hospital; and requirements for training employees in the proper handling and management of hazardous materials and wastes.

Hospitals may be subject to requirements related to investigating and remedying hazardous substances located on their property, including such substances that may have migrated off the property. Typical hospital operations include the handling, use, storage, transportation, disposal and/or discharge of hazardous, infectious, toxic, radioactive, flammable and other hazardous materials, wastes, pollutants and contaminants. As such, hospital operations are particularly susceptible to the practical, financial and legal risks associated with the environmental laws and regulations. Such risks may result in damage to individuals, property or the environment; may interrupt operations and/or increase their cost; may result in legal liability, damages, injunctions or fines; and may result in investigations, administrative proceedings, civil litigation, criminal prosecution, penalties or other governmental agency actions; and may not be covered by insurance.

Business Relationships and Other Business Matters

Integrated Physician Groups. Hospitals and hospital systems often own, control or have affiliations with relatively large physician groups. Generally, the sponsoring hospital or health system will be the capital and funding source for such alliances and may have an ongoing financial commitment to provide growth capital and support operating deficits.

These types of alliances are generally designed to respond to trends in the delivery of medicine to better integrate hospital and physician care, to increase physician availability to the community and/or to enhance the managed care capability of the affiliated hospitals and physicians. However, these goals may not be achieved, and an unsuccessful alliance may be costly and counterproductive to all of the above-stated goals.

In California, physicians or medical groups of physicians cannot be employed or controlled by hospitals or other non-physician organizations under the State’s prohibition against the corporate practice of medicine.

Integrated delivery systems therefore carry with them the potential for legal or regulatory risks in varying degrees. The ability of hospitals or health systems to conduct integrated physician operations may be altered or eliminated in the future by legal or regulatory interpretation or changes, or by health care fraud enforcement. In addition, participating physicians may seek their independence for a variety of reasons, thus putting the hospital or health system’s investment at risk, and potentially reducing its managed care leverage and/or overall utilization. Growth of integrated delivery systems may be resisted by local communities and physician groups.

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Indigent Care. Tax-exempt hospitals often treat large numbers of indigent patients who are unable to pay in full for their medical care. General economic conditions that affect the number of employed individuals who have health coverage affects the ability of patients to pay for their care. Similarly, changes in governmental policy, which may result in coverage exclusions under local, state and federal health care programs (including Medicare and Medicaid) may increase the frequency and severity of indigent treatment by such hospitals and other providers. It also is possible that future legislation could require that tax-exempt hospitals and other providers maintain minimum levels of indigent care as a condition to federal income tax exemption or exemption from certain state or local taxes.

Physician Medical Staff. The primary relationship between a hospital and physicians who practice in it is through the hospital’s organized medical staff. Medical staff bylaws, rules and policies establish the criteria and procedures by which a physician may have his or her privileges or membership curtailed, denied or revoked. Physicians who are denied medical staff membership or certain clinical privileges or who have such membership or privileges curtailed or revoked often file legal actions against hospitals and medical staffs. Such actions may include a wide variety of claims, some of which could result in substantial uninsured damages to a hospital. In addition, failure of the hospital governing body to adequately oversee the conduct of its medical staff may result in hospital liability to third parties.

Physician Supply. Sufficient community-based physician supply is important to hospitals. CMS annually reviews overall physician reimbursement formulas. Changes to physician compensation formulas could lead to physicians locating their practices in communities with lower Medicare populations. Hospitals may be required to invest additional resources in recruiting and retaining physicians, or may be required to increase the percentage of employed physicians in order to continue serving the growing population base and maintain market share.

Competition Among Health Care Providers. Increased competition from a wide variety of sources, including specialty hospitals, other hospitals and health care systems, health maintenance organizations, inpatient and outpatient health care facilities, long-term care and skilled nursing services facilities, clinics, physicians and others, may adversely affect the utilization and/or revenues of hospitals. Existing and potential competitors may not be subject to various restrictions applicable to hospitals, and competition, in the future, may arise from new sources not currently anticipated or prevalent.

Specialty hospital developments that attract away an important segment of an existing hospital’s admitting specialists and/or services that generate a significant source of revenue may be particularly damaging. For example, some large hospitals may have significant dependence on heart surgery programs, as revenue streams from those programs may cover significant fixed overhead costs. If a significant component of such a hospital’s heart surgeons develop their own specialty heart hospital (alone or in conjunction with a growing number of specialty hospital operators and promoters), taking with them their patient base, the hospital could experience a rapid and dramatic decline in net revenues that is not proportionate to the number of patient admissions or patient days lost. It is also possible that the competing specialty hospital, as a for-profit venture, would not accept indigent patients or other payors and government programs, leaving low-pay patient populations in the full-service hospital. In certain cases, such an event could be materially adverse to the hospital. A variety of proposals have been advanced recently to permanently prohibit such investments. Nonetheless, specialty hospitals continue to represent a significant competitive challenge for full-service hospitals.

Likewise, freestanding ambulatory surgery centers may attract away significant commercial outpatient services traditionally performed at hospitals. Commercial outpatient services, currently among the most profitable for hospitals, may be lost to competitors who can provide these services in an alternative, less costly setting. Full-service hospitals rely upon the revenues generated from commercial outpatient services to fund other less profitable services, and the decline of such business may result in the significant reduction of profitable income. Competing ambulatory surgery centers, more likely a for-profit business, may not accept indigent patients or low paying programs and would leave these populations to receive services in the hospital setting. Consequently, hospitals are vulnerable to competition from ambulatory surgery centers.

Additionally, scientific and technological advances, new procedures, drugs and appliances, preventive medicine and outpatient health care delivery may reduce utilization and revenues of the hospitals in the future or

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otherwise lead the way to new avenues of competition. In some cases, hospital investment in facilities and equipment for capital-intensive services may be lost as a result of rapid changes in diagnosis, treatment or clinical practice brought about by new technology or new pharmacology.

Alternative and Integrated Delivery Systems. CMHS faces increased competition from other hospital facilities and integrated health care delivery systems in their service areas, from HMOs and from other entities providing health care services to the population which CMHS presently serves. CMHS does, and in the future will, face increased competition from other hospitals and skilled nursing facilities and from other health care providers that offer comparable health care services to the population which each of the members presently serves. This competition could include the establishment, construction or renovation of hospitals, skilled nursing facilities, HMOs, ambulatory surgical centers, private laboratories and radiological services.

Increased competition also has resulted from: (i) the development of alternative health care delivery systems (such as HMOs and PPOs) in the service areas of CMHS, competition with other hospitals to provide health care services to enrollees of HMOs and PPOs, and competition for patients with delivery systems of HMOs and PPOs providing services at their own or other facilities; (ii) competition for enrollees between traditional insurers, whose patients generally have a free choice of hospitals, and HMOs and PPOs, which may own their own hospitals or substantially restrict the hospitals and physicians from which their enrollees can receive services; (iii) competition for patients between physicians, who generally use hospitals, and non-physician practitioners such as nurse-midwives, nurse practitioners, chiropractors, physical and occupational therapists and others, who may not generally use hospitals; and (iv) competition from nursing homes, home health agencies, ambulatory care facilities, ambulatory surgical centers, rehabilitation and therapy centers, physician group practices, and other nonhospital providers which provide services for which patients currently rely on hospitals.

Antitrust. While enforcement of the antitrust laws against hospitals has been less intense in recent years, antitrust liability may arise in a wide variety of circumstances, including medical staff privilege disputes, payor contracting, physician relations, joint ventures, merger, affiliation and acquisition activities, certain pricing or salary setting activities, as well as other areas of activity. The application of the federal and state antitrust laws to health care is evolving, and therefore not always clear. Currently, the most common areas of potential liability are joint action among providers with respect to payor contracting and medical staff credentialing disputes.

Violation of the antitrust laws could result in criminal and/or civil enforcement proceedings by federal and state agencies, as well as actions by private litigants. In certain actions, private litigants may be entitled to treble damages, and in others, governmental entities may be able to assess substantial monetary fines.

Labor Relations and Collective Bargaining. Hospitals are large employers with a wide diversity of employees. Increasingly, employees of hospitals are becoming unionized, and many hospitals have collective bargaining agreements with one or more labor organizations. Employees subject to collective bargaining agreements may include essential nursing and technical personnel, as well as food service, maintenance and other trade personnel. Renegotiation of such agreements upon expiration may result in significant cost increases to hospitals. Employee strikes or other adverse labor actions may have an adverse impact on operations, revenue and hospital reputation.

Health Care Worker Classification. Health care providers, like all businesses, are required to withhold income taxes from amounts paid to employees. If the employer fails to withhold the tax, the employer becomes liable for payment of the tax imposed on the employee. On the other hand, businesses are not required to withhold federal taxes from amounts paid to a worker classified as an independent contractor. The IRS has established criteria for determining whether a worker is an employee or an independent contractor for tax purposes. If the IRS were to reclassify a significant number of hospital independent contractors (e.g., physician medical directors) as employees, back taxes and penalties could be material.

Staffing. From time to time, the health care industry has suffered from a scarcity of nursing personnel, respiratory therapists, pharmacists and other trained health care technicians. In addition, aging medical staffs and difficulties in recruiting physicians are leading to physician shortages. A significant factor underlying this trend

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includes a decrease in the number of persons entering such professions. This is expected to intensify in the future, aggravating the general shortage and increasing the likelihood of hospital-specific shortages. Competition for physicians and employees, coupled with increased recruiting and retention costs will increase hospital operating costs, possibly significantly. This trend could have a material adverse impact on hospitals.

Professional Liability Claims and General Liability Insurance. In recent years, the number of professional and general liability suits and the dollar amounts of damage recoveries have increased in health care nationwide, resulting in substantial increases in malpractice insurance premiums, higher deductibles and generally less coverage. Professional liability and other actions alleging wrongful conduct and seeking punitive damages are often filed against health care providers. Insurance does not provide coverage for judgments for punitive damages.

Litigation also arises from the corporate and business activities of hospitals, from a hospital’s status as an employer or as a result of medical staff or provider network peer review or the denial of medical staff or provider network privileges. As with professional liability, many of these risks are covered by insurance, but some are not. For example, some antitrust claims or business disputes are not covered by insurance or other sources and may, in whole or in part, be a liability of CMHS if determined or settled adversely.

There is no assurance that hospitals will be able to maintain coverage amounts currently in place in the future, that the coverage will be sufficient to cover malpractice judgments rendered against a hospital or that such coverage will be available at a reasonable cost in the future.

Wage and Hour Class Actions and Litigation. Federal law and many states, including notably California, impose standards related to worker classification, eligibility and payment for overtime, liability for providing rest periods and similar requirements. Large employers with complex workforces, such as hospitals, are susceptible to actual and alleged violations of these standards. In recent years there has been a proliferation of lawsuits over these “wage and hour” issues, often in the form of large, sometimes multi-state, class actions. For large employers such as hospitals, such class actions can involve multi-million dollar claims, judgments and/or settlements. A major class action decided or settled adversely to CMHS could have a material adverse impact on its financial condition and results of operations.

Other Class Actions. Hospitals have long been subject to a wide variety of litigation risks, including liability for care outcomes, employer liability, property and premises liability, and peer review litigation with physicians, among others. In recent years, consumer class action litigation has emerged as a potentially significant source of litigation liability for hospitals and health systems. These class action suits have most recently focused on hospital billing and collections practices, and they may be used for a variety of currently unanticipated causes of action. Since the subject matter of class action suits may involve uninsured risks, and since such actions often involve alleged large classes of plaintiffs, they may have material adverse consequences on hospitals and health systems in the future.

Information Systems. The ability to adequately price and bill health care services and to accurately report financial results depends on the integrity of the data stored within information systems, as well as the operability of such systems. An ongoing commitment of significant resources is required to maintain, protect and enhance existing information systems and develop new systems to keep pace with continuing changes in information processing technology, evolving systems and regulatory standards. There can be no assurance that efforts to upgrade and expand information systems capabilities, protect and enhance these systems, and develop new systems to keep pace with continuing changes in information processing technology will be successful or that additional systems issues will not arise in the future.

Electronic media are also increasingly being used in clinical operations, including the conversion from paper to electronic medical records, computerization of order entry functions and the implementation of clinical decision-support software. The reliance on information technology for these purposes imposes new expectations on physicians and other workforce members to be adept in using and managing electronic systems. It also introduces risks related to patient safety, and to the privacy, accessibility and preservation of health information. See “BONDHOLDERS RISKS - Government Regulation of Relationships between Hospitals and Physicians - Health

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Information Privacy” above. Technology malfunctions or failure to understand and use information systems properly could result in the dissemination of or reliance on inaccurate information, as well as in disputes with patients, physicians and other health care professionals. Health information systems may also be subject to different or higher standards or greater regulation than other information technology or the paper-based systems previously used by health care providers, which may increase the cost, complexity and risks of operations. All of these risks may have adverse consequences on hospitals and other health care providers.

Beginning in 2013, providers such as CMHS will have to use a new coding system, the International Classification of Diseases, 10th Edition (“ICD-10”). The ICD-10 contains many more new codes than its predecessor ICD-9. The cost of training needed to implement ICD-10 and the impact on revenues from the new codes cannot be predicted at this time, but it may materially impact the operations of CMHS.

Tax-Exempt Status and Other Tax Matters

Maintenance of the Tax-Exempt Status of CMHS. The tax-exempt status of the Bonds presently depends upon maintenance by CMHS of its status as an organization described in section 501(c)(3) of the Code. The maintenance of such status is contingent on compliance with general rules promulgated in the Code and related regulations regarding the organization and operation of tax-exempt entities, including their operation for charitable and other permissible purposes and their avoidance of transactions that may cause their earnings or assets to inure to the benefit of private individuals. As these general principles were developed primarily for public charities that do not conduct large-scale technical operations and business activities, they often do not adequately address the myriad of operations and transactions entered into by a modern health care organization. Although traditional activities of health care providers, such as medical office building leases, have been the subject of interpretations by the IRS in the form of Private Letter Rulings, many activities or categories of activities have not been fully addressed in any official opinion, interpretation or policy of the IRS.

CMHS participates in a variety of transactions with physicians either directly or indirectly. Management believes that the transactions to which CMHS are a party are consistent with the requirements of the Code as to tax-exempt status, but, as noted above, there is uncertainty as to the state of the law.

The IRS has periodically conducted audit and other enforcement activity regarding tax-exempt health care organizations. The IRS conducts special audits of large tax-exempt health care organizations with at least $500 million in assets or $1 billion in gross receipts. Such audits are conducted by teams of revenue agents, often take years to complete and require the expenditure of significant staff time by both the IRS and taxpayors. These audits examine a wide range of possible issues, including tax-exempt bond financings, participation in partnerships and joint ventures, retirement plans and employee benefits, employment taxes, political contributions and other matters.

Also, ACA imposed additional requirements for tax-exempt hospitals. See BONDHOLDERS’ RISKS - “Health Care Reform” herein.

If the IRS were to find that CMHS has participated in activities in violation of certain regulations or rulings, the tax-exempt status of such entity could be in jeopardy. Although the IRS has not frequently revoked the 501(c)(3) tax-exempt status of nonprofit health care corporations, it could do so in the future. Loss of tax-exempt status by CMHS potentially could result in loss of tax exemption of the Bonds and of other tax-exempt debt of CMHS and defaults in covenants regarding the Bonds and other related tax-exempt debt and obligations likely would be triggered. Loss of tax-exempt status also could result in substantial tax liabilities on the income of CMHS. For these reasons, loss of tax-exempt status of CMHS could have a material adverse effect on the financial condition of CMHS.

In some cases, the IRS has imposed substantial monetary penalties on tax-exempt hospitals in lieu of revoking their tax-exempt status. In those cases, the IRS and exempt hospitals entered into settlement agreements requiring the hospital to make substantial payments to the IRS. Given the range of transactions entered into by CMHS, and potential exemption risks, CMHS could be at risk for incurring monetary and other liabilities imposed by the IRS.

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In lieu of revocation of exempt status, the IRS may impose penalty excise taxes on certain “excess benefit transactions” involving 501(c)(3) organizations and “disqualified persons.” An excess benefit transaction is one in which a disqualified person or entity receives more than fair market value from the exempt organization or pays the exempt organization less than fair market value for property or services, or shares the net revenues of the tax-exempt entity. A disqualified person is a person (or an entity) who is in a position to exercise substantial influence over the affairs of the exempt organization during the five years preceding an excess benefit transaction. The statute imposes excise taxes on the disqualified person and any “organization manager” who knowingly participates in an excess benefit transaction. These rules do not penalize the exempt organization itself, so there would be no direct impact on CMHS or the tax status of the Bonds if an excess benefit transaction were subject to IRS enforcement, pursuant to these “intermediate sanctions” rules.

State and Local Tax Exemption. The State of California is increasingly scrutinizing the income tax exemption of health care organizations. In California, legislation may be proposed to strengthen the role of the California Franchise Tax Board and the Attorney General in supervising nonprofit health systems. It is likely that the loss by CMHS of federal tax exemption would also trigger a challenge to its respective state tax-exemption. Depending on the circumstances, such event could be material and adverse.

State, county and local taxing authorities undertake audits and reviews of the operations of tax-exempt health care providers with respect to their real property tax exemptions. In some cases, particularly where authorities are dissatisfied with the amount of services provided to indigents, the real property tax-exempt status of the health care providers has been questioned. The majority of the real property of CMHS is currently treated as exempt from real property taxation. Although the real property tax exemptions of CMHS with respect to its core hospital facilities, are not, to the knowledge of management, under challenge or investigation, an audit could lead to a challenge that could adversely affect the real property tax exemptions of CMHS.

It is not possible to predict the scope or effect of future legislative or regulatory actions with respect to taxation of nonprofit corporations. There can be no assurance that future changes in the laws and regulations of state or local governments will not materially adversely affect the financial condition of CMHS by requiring payment of income, local property or other taxes.

Maintenance of Tax-Exempt Status of Interest on the Bonds. The Code imposes a number of requirements that must be satisfied for interest on state and local obligations, such as the Bonds, to be excludable from gross income for federal income tax purposes. These requirements include limitations on the use of bond proceeds, limitations on the investment earnings of bond proceeds prior to expenditure, a requirement that certain investment earnings on bond proceeds be paid periodically to the United States Treasury, and a requirement that the City file an information report with the IRS. CMHS has covenanted in the Loan Agreement that it will comply with such requirements. Future failure by CMHS to comply with the requirements stated in the Code and related regulations, rulings and policies may result in the treatment of interest on the Bonds as taxable, retroactively to the date of issuance. The City has covenanted in the Bond Indenture that it will not take any action or refrain from taking any action that would cause interest on the Bonds to be included in gross income for federal income tax purposes.

IRS officials have recently indicated that more resources will be invested in audits of tax-exempt bonds, including the use of bond proceeds, in the charitable organization sector, with specific review of private use. In addition, under its compliance check program initiated in 2007, the IRS has from time to time sent post-issuance compliance questionnaires to several hundred nonprofit corporations that have borrowed on a tax-exempt basis regarding their post-issuance compliance with various requirements for maintaining the federal tax exemption of interest on their bonds. The questionnaire includes questions relating to the borrower’s (i) record retention, which the IRS has particularly emphasized, (ii) qualified use of bond-financed property, (iii) arbitrage yield restriction and rebate requirements, (iv) debt management policies, and (v) voluntary compliance and education. IRS representatives indicate that more questionnaires will be sent to additional nonprofit organizations.

In 2007 the IRS released a redesigned Form 990. The Form 990 is the annual information return filed by tax-exempt organizations, including nonprofit exempt healthcare organizations. The new Form 990 applies to tax years beginning on or after January 1, 2008. As a result of this new Form 990, healthcare organizations now have

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significantly increased compliance and reporting obligations, particularly relating to community benefit, executive, physician and officer compensation, joint ventures, collection and billing practices and charity care. According to the IRS, the redesign of Form 990 was based on three guiding principles: (1) enhancing transparency to provide the IRS and the public with a realistic picture of the organization; (2) promoting compliance by accurately reflecting the organization’s operations so the IRS may efficiently assess the risk of noncompliance; and (3) minimizing the burden on filing organizations

The hospital-specific reporting obligations generally are set forth in a new schedule to the Form 990 (Schedule H) and apply for tax years beginning on or after January 1, 2009. On Schedule H, hospitals and health systems must report how they provide community benefit, community building activities, specify certain billing and collection practices, identify charity care and bad debt practices, describe certain joint venture activities, including percentage ownership and/or control by the tax-exempt entity, certain interested persons and physicians and provide a description of affiliated operated health care facilities. Schedule K requires detailed information related to all outstanding bond issues of tax-exempt borrowers, including information regarding operating, management and research contracts as well as private use compliance. Tax-exempt organizations must also complete Schedule J, which requires reporting of compensation information for the organizations’ officers, directors, trustees, key employees, and other highly compensated employees

There can be no assurance that responses by CMHS to a questionnaire or Form 990 will not lead to an IRS review that could adversely affect the market value of the Bonds or of other outstanding tax-exempt indebtedness of CMHS. Additionally, the Bonds or other tax-exempt obligations issued for the benefit of CMHS may be, from time to time, subject to examinations or audits by the IRS.

CMHS believes that the Bonds properly comply with the tax laws. In addition, on the date of issuance of the Bonds, Bond Counsel will render an opinion with respect to the tax-exempt status of the Bonds, as described under the caption “TAX MATTERS.” No ruling with respect to the Bonds has been or will be sought from the IRS, however, and opinions of counsel are not binding on the IRS or the courts. There can be no assurance that an examination of the Bonds will not adversely affect the Bonds or the market value of the Bonds. See “TAX MATTERS” herein.

Limitations on Contractual and Other Arrangements Imposed by the Internal Revenue Code. As a tax-exempt organization, CMHS is limited with respect to its use of practice income guarantees, reduced rent on medical office space, low interest loans, joint venture programs and other means of recruiting and retaining physicians. Uncertainty in this area has been reduced somewhat by the issuance by the IRS of guidelines on permissible physician recruitment practices. The IRS scrutinizes a broad variety of contractual relationships commonly entered into by hospitals and has issued a detailed audit guide suggesting that field agents scrutinize numerous activities of hospitals in an effort to determine whether any action should be taken with respect to limitations on or revocation of their tax-exempt status or assessment of additional tax. Any suspension, limitation, or revocation of CMHS’ tax-exempt status or assessment of significant tax liability would have a materially adverse effect on CMHS and might lead to loss of tax exemption of interest on the Bonds.

Enforcement of Remedies; Risks of Bankruptcy

The obligations of the Members of the Obligated Group under the Master Indenture and Obligation No. 1 are general obligations of the Members of the Obligated Group and are secured by the security interest granted to the Master Trustee in the Gross Receivables of the Members of the Obligated Group and the Deed of Trust, but not by any other assets of the Obligated Group. Enforcement of the remedies mentioned under APPENDIX D - “SUMMARY OF PRINCIPAL DOCUMENTS - MASTER INDENTURE” and the related summaries of the Bond Indenture and Loan Agreement may be limited or delayed in the event of application of federal bankruptcy laws or other laws affecting creditors’ rights and may be substantially delayed and subject to judicial discretion in the event of litigation or the required use of statutory remedial procedures.

If a member of the Obligated Group were to file a petition for relief under Title 11 of the United States Code (the “Bankruptcy Code”), the filing would operate as an automatic stay of the commencement or continuation of any judicial or other proceeding against such member of the Obligated Group, and any interest it has in property.

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If the bankruptcy court so ordered, the member’s property, including its accounts receivable and proceeds thereof, could be used, at least temporarily, for the benefit of such member of the Obligated Group’s bankruptcy estate despite the claims of its creditors.

In a case under the current Bankruptcy Code, a member of the Obligated Group could file a plan of reorganization. The plan is the vehicle for satisfying, and provides for the comprehensive treatment of, all claims against such a member of the Obligated Group and could result in the modification of rights of any class of creditors, secured or unsecured. To confirm a plan of reorganization, with one exception discussed below, it must be approved by the vote of each class of impaired creditors. A class approves a plan if, of those who vote, those holding more than one-half in number and two-thirds in amount vote in favor of a plan. Approval by classes of interests requires a vote in favor of the plan by two-thirds in amount. If these levels of votes are attained, those voting against the plan or not voting at all are nonetheless bound by the terms thereof. Other than as provided in the confirmed plan, all claims and interests are discharged and extinguished. If fewer than all of the impaired classes accept the plan, the plan may nevertheless be confirmed by the bankruptcy court, and the dissenting claims and interests would be bound thereby. For this to occur, one of the impaired classes must vote to accept the plan and the bankruptcy court must determine that the plan does not “discriminate unfairly” and is “fair and equitable” with respect to the nonconsenting class. A plan is fair and equitable if each class is treated in accordance with its credit priority and no class receives a distribution until senior classes are paid in full. The Bankruptcy Code establishes different fair and equitable tests for secured claims and interest holders. To be confirmed, the bankruptcy court must also determine that a plan, among other requirements, provides creditors with more than would be received in the event of liquidation, is proposed in good faith, and that the debtor’s performance is feasible.

Risks Related to Obligated Group Financings

The obligations of the Members of the Obligated Group under Obligation No. 1 and the Master Indenture are limited to the same extent as the obligations of debtors typically affected by bankruptcy, insolvency and the application of general principles of creditors’ rights and as additionally described below. The Master Indenture permits the addition of other Members of the Obligated Group if certain conditions are met. See APPENDIX D - “SUMMARY OF PRINCIPAL DOCUMENTS - MASTER INDENTURE — Particular Covenants of the Members - Membership in Obligated Group” and “- Withdrawal From Obligated Group.”

The joint and several obligations described herein of the members of the Obligated Group to make payments of debt service on the Obligations issued pursuant to the Master Indenture may not be enforceable to the extent (1) enforceability may be limited by applicable bankruptcy, moratorium, reorganization, fraudulent conveyance or similar laws affecting the enforcement of creditors’ rights and by general equitable principles or (2) such payments (a) are requested to be made with respect to payments on any Obligation (other than Obligation No. 1) that is issued for a purpose that is not consistent with the charitable purposes of the member of the Obligated Group from which such payment is requested or that is issued for the benefit of any entity other than a tax-exempt organization; (b) are requested to be made from any money or assets that are donor restricted or which are subject to a direct or express trust which does not permit the use of such money or assets for such payment; (c) would result in the cessation or discontinuation of any material portion of the health-care or related services previously provided by the member of the Obligated Group from which such payment is requested; or (d) are requested to be made pursuant to any loan violating applicable usury laws. The extent to which the money or assets of any present or future member of the Obligated Group falls within the categories referred to above cannot be determined and could be substantial. The foregoing notwithstanding, the accounts of the members of the Obligated Group (if future Members are added) 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 issuance of Additional Indebtedness) are satisfied.

A member of the Obligated Group may not be required to make any payment of any Obligation, or portion thereof, or the recipient of such payment may be compelled to return such payment, the proceeds of which were not lent or otherwise disbursed to such member of the Obligated Group to the extent that such payment would conflict with, or would be prohibited or avoidable under applicable laws.

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The application of the law relating to the enforceability of guaranties or obligations of a Member of the Obligated Group to make debt service payments on behalf of another member of the Obligated Group is not amenable to an unqualified declaration of whether a transfer would be prohibited or subject to avoidance.

As a general matter, in addition to a transfer of property made with the actual intent to hinder, defraud or delay creditors, a transfer of an interest in property by an entity may be avoided if the transfer is made for less than “reasonably equivalent value” or “fair consideration” and the transferor (i) is insolvent (e.g., is unable to pay its debts as they become due), (ii) rendered insolvent by the transaction, (iii) is undercapitalized (i.e., operating or about to operate without property constituting reasonably sufficient capital given its business operations), or (iv) intended or expected to incur debts that it could not pay as they became due.

The lack of certainty in the treatment of transfers is attributable to several factors. First, there is no true uniform law governing fraudulent transfers. Such transfers may be avoided under the Bankruptcy Code, state law variants of the Uniform Fraudulent Transfer Act and its predecessor, the Uniform Fraudulent Conveyance Act, or other non-uniform statutes or common law principles. Second and more importantly, the standards for determining the reasonable equivalence of value, or the fairness of consideration, and the measure for determining insolvency are subjective standards resolved in the exercise of judicial discretion after engaging in a fact intensive analysis. This subjectivity has resulted in a conflicting body of case law and a lack of certainty as to whether a given transfer would be subject to avoidance.

In addition, the Bankruptcy Code provides a means to avoid transfers of a debtor’s interests in property made on account of an antecedent debt within 90 days of the debtor filing for relief, or one year if the transferee is an “insider,” if, as a result of that transfer, the transferee receives more than it would have received in a liquidation of the debtor under Chapter 7 of the Bankruptcy Code. Whether the creation of a lien, or a payment, made by a member of the Obligated Group would be determined to be avoidable would be dependent on the particular circumstances surrounding the transfer.

There exists, in addition to the foregoing, common law authority and authority under various state statutes pursuant to which courts may terminate the existence of a nonprofit corporation or undertake supervision of its affairs on various grounds, including a finding that a corporation has insufficient assets to carry out its stated charitable purposes or has taken some action that renders it unable to carry out its purposes. Such court action may arise on the court’s own motion or pursuant to a petition of the attorney general of a particular state or other persons who have interests different from those of the general public, pursuant to the common law and statutory power to enforce charitable trusts and to see to the application of their funds to their intended charitable uses.

Certain Matters Relating to Enforceability of Security Interest in Gross Receivables

The enforceability, priority and perfection of the security interest in Gross Receivables created under the Master Indenture and the ability to receive and realize on the same may be limited by a number of factors, including, without limitation: (i) provisions prohibiting the direct payment of amounts due to health care providers from Medicaid and Medicare programs to persons other than such providers; (ii) the absence of an express provision permitting assignment of receivables due under the contracts between the Members of the Obligated Group and third-party payors, and present or future legal prohibitions against assignment; (iii) certain judicial decisions which cast doubt upon the right of the Master Trustee, in the event of the bankruptcy of a Member of the Obligated Group, to collect and retain accounts receivable from Medicare, Medicaid, General Assistance and other governmental programs; (iv) commingling of proceeds of accounts receivable with other moneys of the Members of the Obligated Group not so pledged under the Master Indenture; (v) statutory liens; (vi) rights arising in favor of the United States of America or any agency thereof; (vii) constructive trusts or equitable or other rights impressed or conferred thereon by a federal or state court in the exercise of its equitable jurisdiction; (viii) federal and state laws governing fraudulent transfers as discussed above; (ix) federal bankruptcy laws that may affect the enforceability of the Master Indenture or the security interest in the Gross Receivables; (x) rights of third parties in Gross Receivables converted to cash and not in the possession of the Master Trustee; and (xi) claims that might arise if appropriate financing or continuation statements or amendments of financing statements are not filed in accordance with the Uniform Commercial Code of the applicable state, as from time to time in effect.

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Accounts receivable of the Members of the Obligated Group which constitute Gross Receivables and are pledged as security under the Master Indenture may be sold if such sale is in accordance with the provisions of the Master Indenture. Any lien created under the Master Indenture on such accounts receivable would terminate and be immediately released upon any such sale with respect to any such accounts receivable so sold.

Limitations on Remedies under the Deed of Trust

CMHS’ obligations under the Master Indenture are secured by the lien and security interest granted under the Deed of Trust. The practical realization of value from the real property subject to the Deed of Trust upon any default will depend on the exercise of the remedies specified under the Deed of Trust, principally, foreclosure. Under California law, however, the remedies specified in the Deed of Trust may not be readily available or may be limited.

First, California law imposes certain procedural hurdles and time requirements on foreclosure. California permits foreclosure under a Deed of Trust either nonjudicially by exercise of a power of sale provision in the Deed of Trust or by judicial sale. Prior to a nonjudicial foreclosure, the trustee under the Deed of Trust must record a notice of default and election to sell, and send copies of the notice to various persons. The trustee then must wait at least three months before establishing the proposed sale date or noticing the same in the form mandated by California statute. The notice of sale must be posted in a public place and published once a week for three consecutive calendar weeks, with the first such publication preceding the proposed sale date by at least 20 days. In addition, the notice of sale must be recorded with the county recorder at least 14 days prior to the date of sale. Further, throughout the period prior to a foreclosure sale, the debtor under the Deed of Trust, any successor in interest and any person having a junior lien or encumbrance of record may cure any monetary default by paying the amount then due (exclusive of principal due by virtue of acceleration upon default) plus costs and expenses incurred (including certain statutorily limited attorney’s and trustee’s fees). Following a nonjudicial sale, however, neither the debtor nor any junior lienholder has any right of redemption, but the creditors who benefit from the foreclosure sale are ordinarily prohibited from obtaining a deficiency judgment against the debtor.

Judicial foreclosure proceedings are generally subject to the delays and expenses typical of other lawsuits, and may require several years to complete. The primary advantage of a judicial foreclosure is that the creditor is entitled, subject to other limitations, to obtain a deficiency judgment against the debtor to the extent that the amount of the debt exceeds the fair market value of the property. Following a judicial foreclosure sale, however, the debtor and its successors in interest have a right to “redeem” the property for a period of one year from the date of sale (or a period of only three months if the proceeds of sale are sufficient to satisfy the debt, plus interest and costs).

Further, California’s so-called “one form of action” rule generally requires a creditor either to exhaust what rights it has under a Deed of Trust before pursuing other rights of collection (including set-off), or to forego resort to the Deed of Trust altogether.

Other statutory provisions (such as the federal bankruptcy laws) also may have the effect of delaying enforcement of the lien and security interest under the Deed of Trust in the event of a default by CMHS.

The real property subject to the Deed of Trust consists primarily of hospital and related facilities having limited potential uses. If the Master Trustee takes possession of the property subject to the Deed of Trust pursuant to exercise of its remedies under the Deed of Trust, the number of persons who would be interested in purchasing the property likely would be limited. As a result, the ability of the Master Trustee to realize value from such property would be limited. Accordingly, upon an event of default and foreclosure or similar remedy under the Deed of Trust, the Master Trustee may not be able to realize an amount sufficient to satisfy all obligations secured by the Deed of Trust.

The Mortgaged Facilities also include the interest of CMHS in a parking structure located on a parcel of property adjacent to the CMH campus, which real property is owned by the City. Such real property is leased to CMHS by the City under a lease entered into in 1985 for a 50-year term, which term may be extended at the option of CMHS for an additional 50-year term. The lease permits CMHS to mortgage its leasehold interest as security for

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loans or other obligations of CMHS provided that the mortgage and all rights acquired thereunder are subject to the covenants and conditions of the lease, and that the City shall have the right to purchase the interest of CMHS under the mortgage without the payment of any penalty if CMHS defaults under such mortgage. Should the City choose to exercise such right upon a default by CMHS, the interest of CMHS in the lease and the parking structure would terminate, which would adversely impact the availability of parking near CMH and result in the loss by CMH of the site presently used by CMH as a helicopter landing area for access to CMH. The lease also restricts the ability of CMHS to assign its interest in the lease, and requires approval by the City of any assignment to an entity that is not a non-profit affiliate of CMHS.

Risk Factors Affecting Value of the Mortgaged Facilities; Release of Mortgaged Facilities and Creation of Liens

Maintenance of Value. The Mortgaged Facilities subject to the Deed of Trust are located in a region, like many regions of the State, that has experienced significant real property market volatility over the past several years.

No representation is made regarding the current value of the Mortgaged Facilities. No appraisal or other estimation of value from a person qualified to render the same has been obtained with respect to the Mortgaged Facilities. There can be no assurance that, should CMHS default in making the Loan Repayments required under the Loan Agreement for the Bonds and required by the Obligated Group under the Master Indenture, (i) any part or all of the Mortgaged Facilities could be foreclosed upon and sold for the amounts owed with respect to the Bonds (and any other Obligations issued under the Master Indenture and payable on a parity with Obligation No. 1 or (ii) any bid would be received for such property and, if received, that such bid would be sufficient to pay such amounts.

No diligence has been undertaken as to whether the Mortgaged Facilities are in compliance with state and federal statutes, local ordinances, regulations or orders promulgated under any of the foregoing governing the real property encumbered by the Deed of Trust, the physical improvements thereon, and/or the use thereof (including, without limitation, the Americans with Disabilities Act of 1994, zoning and land use laws, building codes, and any permits and/or entitlements required for the operation of a hospital in Ventura County, California).

The insurance maintained with respect to the Mortgaged Facilities may not be sufficient to repair any damage incurred in a casualty. Further, earthquake insurance has not been procured for the Mortgaged Facilities.

In addition, the Deed of Trust contains provisions permitting the release of portions of the Mortgaged Facilities from the Deed of Trust and the creation of “Permitted Liens” under certain circumstances, subject to the provisions of the Master Indenture. See APPENDIX D - “SUMMARY OF PRINCIPAL DOCUMENTS - DEED OF TRUST” and “- MASTER INDENTURE- Deed of Trust; Encumbrances.”

As discussed under “SECURITY AND SOURCE OF PAYMENT FOR THE BONDS - The Deed of Trust,” certain properties owned or operated by CMHS, including the CFH Clinics, the Cancer Center, the Buenavista Building and the Grossman Facilities are excluded from the Mortgaged Facilities. The interest of CMHS in the CFH Clinics, the Buenavista Building and the Grossman Facilities is subject to the provisions of the Master Indenture which restrict the ability of CMHS to sell or transfer such interest or create liens thereon other than Permitted Liens. The interest of CMHS in the Oak View CFH Clinic, the Buenavista Building and the Grossman Facilities are all currently encumbered by deeds of trust securing other indebtedness of CMHS and/or its affiliates. The ownership interests of CMHS in the Cancer Center, however, are not part of the Mortgaged Facilities nor are they subject to the covenants of the Master Indenture. CMHS expects to create a lien on the Cancer Center to secure certain other indebtedness of CMHS. See APPENDIX A - “FINANCIAL INFORMATION AND UTILIZATION STATISTICS - Existing Indebtedness of CMHS.”

Hazardous Substances. While governmental taxes, assessments and charges are common claims against the value of property, other less common claims may be relevant. In particular, any claim with regard to hazardous substances, if determined adversely to CMHS, could have a material adverse impact on the value of the Mortgaged Facilities. Moreover, CMHS may be required by law to remedy conditions on the Mortgaged Facilities relating to release of hazardous substances. The federal Comprehensive Environmental Response, Compensation and Liability

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Act of 1980, sometimes referred to as “CERCLA” or the “Superfund Act”, is the most well-known and widely applicable of these laws. California laws with regard to hazardous substances are stringent and similar to certain federal requirements. Under many of these laws, the owner (or operator), and/or certain other parties holding an interest in the property, may be obligated to remedy a hazardous substance condition of property, whether or not the owner, operator or such other party had or has anything to do with the creation or handling of the hazardous substance. Further, such liabilities may arise not simply from the existence of a hazardous substance but from the method of handling the hazardous substance. No environmental studies of the Mortgaged Facilities have been performed in connection with the execution of the Deed of Trust, and no copies of any existing environmental studies have been requested in connection with the execution of the Deed of Trust. If adverse environmental conditions exist at the property, regardless of whether originated thereon or elsewhere, CMHS, any transferee by deed in lieu of foreclosure, any purchaser at a foreclosure sale, or any party holding a security interest in the Mortgaged Facilities could be liable for the remediation thereof, fines and penalties assessed in connection therewith, or damages suffered by any party injured by such condition. A further effect, should the Mortgaged Facilities be affected by a hazardous substance, is generally to reduce the marketability and the value of the parcel, possibly to the extent that the Mortgaged Facilities have a negative value. Any of these circumstances could significantly affect the value of the Mortgaged Facilities and the improvements thereon that would be realized upon a default and foreclosure or deed in lieu thereof.

Other statutory provisions (such as the federal bankruptcy laws) may have the effect of delaying enforcement of the lien of the Deed of Trust in the event of a default by CMHS.

Other Risk Factors

Earthquakes. CMHS’ facilities are in close proximity to active earthquake faults and no CMHS facilities are covered by earthquake insurance, including the Project. A significant earthquake in California could have a material adverse effect on one or more CMHS facility and could result in material damage and temporary or permanent cessation of operations at affected facilities.

California’s Hospital Seismic Safety Act (the “Seismic Safety Act”) requires each acute care hospital facility in the state either to comply with new hospital seismic safety standards on or before a deadline specified by the state or to cease acute care operations. The deadline for compliance varies depending on a hospital facility’s classification within one of five categories established by the state. Classification is a factor of the earthquake risk in the facility’s geographic area and the structural attributes of a hospital facility. The Seismic Safety Act requires hospital facilities in the highest category of risk (those that are considered hazardous and at risk of collapse or significant loss of life in the event of an earthquake) to be replaced or retrofitted to higher seismic safety standards by 2013, or later if the OSHPD has approved an extension.

Extensions to the 2013 deadline for up to two years to January 1, 2015 may be obtained if the following qualifications are met: a hospital must have (i) begun construction when the extension is requested; (ii) submitted construction plans to OSHPD before January 1, 2010; (iii) obtained a building permit for construction by January 1, 2011; (iv) submitted to state officials a timetable for construction; and (v) made reasonable progress in meeting this timetable.

Effective January 1, 2011, the Seismic Safety Act was amended to authorize OSHPD to provide for an alternative extension from 2013 to January 1, 2016 for eligible hospitals that apply for the extension due to local planning delays. Other legislation allows OSHPD to grant two additional one-year extensions, until January 1, 2018, to facilities that meet certain criteria. In April 2011, the Seismic Safety Act was further amended to authorize OSHPD to provide for an additional extension, which allows an acute care hospital that has obtained a compliance extension to 2013 to extend its compliance deadline to 2020. To qualify for this extension, the hospital must (i) certify that it lacks financial capacity to comply with applicable seismic safety standards by 2013 using statutory criteria; (ii) show that it serves otherwise underserved communities; (iii) submit its facility master plan to OSHPD before January 1, 2010; (iv) comply with statutory construction planning timeline; and (v) document its progress on the project.

CMHS reviewed the seismic safety of their facilities and is undertaking the Project to comply with the Seismic Safety Act as described in “THE PROJECT” above.

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Investments. CMHS has significant holdings in a broad range of investments. Market fluctuations may affect the value of those investments and those fluctuations may be material. For a discussion of CMHS’ investment policy, see APPENDIX A - “INVESTMENT POLICY.”

Other Future Risks. In the future, the following factors, among others, may adversely affect the operations of health care providers, including CMHS, or the market value of the Bonds, to an extent that cannot be determined at this time.

(a) Adoption of legislation that would establish a national or statewide single-payor health program or other health care system or that would establish national, statewide or otherwise regulated rates applicable to hospitals and other health care providers.

(b) Reduced demand for the services of CMHS that might result from decreases in population or loss of market share to competitors.

(c) Consolidation of managed care plans or other payors.

(d) Bankruptcy of an indemnity/commercial insurer, managed care plan or other payor.

(e) Efforts by insurers and governmental agencies to limit the cost of hospital services, to reduce the number of beds and to reduce the utilization of hospital facilities by such means as preventive medicine, improved occupational health and safety and outpatient care, or comparable regulations or attempts by third-party payors to control or restrict the operations of certain health care facilities.

(f) Efforts by employers to shifts costs of medical care to employees through increased deductibles and restrictions on covered services.

(g) The occurrence of a pandemic or natural or man-made disaster that could damage CMHS’ facilities, interrupt utility service to the facilities, result in an abnormally high demand for health care services or otherwise impair CMHS’ operations and the generation of revenues from the facilities.

(h) Limitations on the availability of, and increased compensation necessary to secure and retain, nursing, technical and other professional personnel.

(i) Cost and availability of any insurance, such as professional liability, fire, automobile and general comprehensive liability coverages, which health care facilities of a similar size and type generally carry.

RELATIONSHIPS AMONG PARTIES

The Bank of New York Mellon Trust Company, N.A. is acting in the dual role of Bond Trustee and Master Trustee. The Master Trustee is required under the Master Indenture to act for the benefit of the holders of all Obligations issued thereunder, and the Bond Trustee is the holder of Obligation No. 1 issued to secure the Bonds. A conflict of interest might arise with the same entity serving in such dual capacities in the event that additional Obligations are issued under the Master Indenture.

The Assistant City Manager of the City is also a member of the Board of Trustees of CMHS.

ABSENCE OF MATERIAL LITIGATION

The City

There is no controversy or litigation of any nature now pending or, to the knowledge of its officers, threatened against the City restraining or enjoining the execution, sale or delivery of the Bonds or in any way

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contesting or affecting the validity of the Bonds, any proceedings of the City taken concerning the execution, sale or delivery thereof, the pledge or application of any moneys or security provided for the payment of the Bonds, or existence or powers of the City relating to the execution or delivery of the Bonds.

CMHS

Although CMHS is involved in litigation arising in the ordinary course of business, there is no action, suit, proceeding, inquiry or investigation at law or before or by any court, public board or body known to CMHS to be pending, or threatened, against CMHS nor, to its knowledge, is there any basis therefor, wherein an unfavorable decision, ruling or finding would adversely affect the validity of the Bonds, the Loan Agreement, the Master Indenture, the Deed of Trust or the Bond Indenture. For a discussion of certain litigation concern CMHS’ operations, see APPENDIX A - “LITIGATION.”

CONTINUING DISCLOSURE

In order to assist the Underwriter in complying with the Rule, CMHS has agreed to provide certain quarterly and annual financial information and notification of listed events by posting such information in accordance with the provisions of the Rule. The form of the Continuing Disclosure Agreement containing the covenants made by CMHS thereunder for the benefit of the Beneficial Owners of the Bonds is attached in APPENDIX F — “FORM OF CONTINUING DISCLOSURE AGREEMENT.” CMHS has not previously entered into any similar undertaking and therefore has never failed to comply in any material respect with any undertaking entered into pursuant to the Rule.

Failure by CMHS to comply with the Continuing Disclosure Agreement will not constitute an event of default under the Bond Indenture or the Master Indenture. The holders of the Bonds are limited to the remedies described in the Continuing Disclosure Agreement. Failure by CMHS to comply with the Continuing Disclosure Agreement must be reported in accordance with the Rule and must be considered by any broker, dealer or municipal securities dealer before recommending the purchase or sale of the Bonds in the secondary market. Consequently, any such failure may adversely affect the transferability and liquidity of the Bonds and their market price.

TAX MATTERS

In the opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the City (“Bond Counsel”), based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Bonds is excluded from gross income for federal income tax purposes under section 103 of the Code and is exempt from state of California personal income taxes. Bond Counsel is of the further opinion that interest on the Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Bond Counsel observes that such interest is included in adjusted current earnings in calculating corporate alternative minimum taxable income. A complete copy of the proposed form of opinion of Bond Counsel is set forth in APPENDIX E hereto.

To the extent the issue price of any maturity of the Bonds is less than the amount to be paid at maturity of such Bonds (excluding amounts stated to be interest and payable at least annually over the term of such Bonds), the difference constitutes “original issue discount,” the accrual of which, to the extent properly allocable to each Beneficial Owner thereof, is treated as interest on the Bonds which is excluded from gross income for federal income tax purposes and State of California personal income taxes. For this purpose, the issue price of a particular maturity of the Bonds is the first price at which a substantial amount of such maturity of the Bonds is sold to the public (excluding bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers). The original issue discount with respect to any maturity of the Bonds accrues daily over the term to maturity of such Bonds on the basis of a constant interest rate compounded semiannually (with straight-line interpolations between compounding dates). The accruing original issue discount is added to the adjusted basis of such Bonds to determine taxable gain or loss upon disposition (including sale, redemption, or payment on maturity) of such Bonds. Beneficial Owners of the Bonds should consult their own tax advisors with respect to the tax consequences of ownership of Bonds with original issue discount, including the treatment of

52

Beneficial Owners who do not purchase such Bonds in the original offering to the public at the first price at which a substantial amount of such Bonds is sold to the public.

Bonds purchased, whether at original issuance or otherwise, for an amount higher than their principal amount payable at maturity (or, in some cases, at their earlier call date) (“Premium Bonds”) will be treated as having amortizable bond premium. No deduction is allowable for the amortizable bond premium in the case of bonds, like the Premium Bonds, the interest on which is excluded from gross income for federal income tax purposes. However, the amount of tax-exempt interest received, and a Beneficial Owner’s basis in a Premium Bond, will be reduced by the amount of amortizable bond premium properly allocable to such Beneficial Owner. Beneficial Owners of Premium Bonds should consult their own tax advisors with respect to the proper treatment of amortizable bond premium in their particular circumstances.

The Code imposes various restrictions, conditions and requirements relating to the exclusion from gross income for federal income tax purposes of interest on obligations such as the Bonds. The City and CMHS have made certain representations and have covenanted to comply with certain restrictions, conditions and requirements designed to ensure that interest on the Bonds will not be included in federal gross income. Inaccuracy of these representations or failure to comply with these covenants may result in interest on the Bonds being included in gross income for federal income tax purposes, possibly from the date of original issuance of the Bonds. The opinion of Bond Counsel assumes the accuracy of these representations and compliance with these covenants. Bond Counsel has not undertaken to determine (or to inform any person) whether any actions taken (or not taken) or events occurring (or not occurring), or any other matters coming to Bond Counsel’s attention after the date of issuance of the Bonds may adversely affect the value of, or the tax status of interest on, the Bonds.

In addition, Bond Counsel has relied, among other things, on the opinion of Arent Fox LLP, counsel to CMHS, regarding the current qualification of CMHS as an organization described in Section 501(c)(3) of the Code. Such opinion is subject to a number of qualifications and limitations. Bond Counsel has also relied upon representations of CMHS concerning CMHS’ “unrelated trade or business” activities as defined in Section 513(a) of the Code. Neither Bond Counsel nor counsel to CMHS has given any opinion or assurance concerning Section 513(a) of the Code and neither Bond Counsel nor counsel to CMHS can give or has given any opinion or assurance about the future activities of CMHS, or about the effect of future changes in the Code, the applicable regulations, the interpretation thereof or the resulting changes in enforcement thereof by the IRS. Failure of CMHS to be organized and operated in accordance with the IRS’s requirements for the maintenance of its status as an organization described in section 501(c)(3) of the Code, or to operate the facilities financed by the Bonds in a manner that is substantially related to CMHS’ charitable purposes under Section 513(a) of the Code, may result in interest payable with respect to the Bonds being included in federal gross income, possibly from the date of the original issuance of the Bonds.

Although Bond Counsel is of the opinion that interest on the Bonds is excluded from gross income for federal income tax purposes and is exempt from State of California personal income taxes, the ownership or disposition of, or the accrual or receipt of interest on, the Bonds may otherwise affect a Beneficial Owner’s federal, state or local tax liability. The nature and extent of these other tax consequences depends upon the particular tax status of the Beneficial Owner or the Beneficial Owner’s other items of income or deduction. Bond Counsel expresses no opinion regarding any such other tax consequences.

Future legislative proposals, if enacted into law, or clarification of the Code, or court decisions, may cause interest on the Bonds to be subject, directly or indirectly, to federal income taxation or to be subject to or exempted from state income taxation, or otherwise prevent Beneficial Owners from realizing the full current benefit of the tax status of such interest. The introduction or enactment of any such future legislative proposals, clarification of the Code or court decision may also affect the market price for, or marketability of, the Bonds. Prospective purchasers of the Bonds should consult their own tax advisers regarding any pending or proposed federal or state tax legislation, regulations or litigation, as to which Bond Counsel expresses no opinion.

The opinion of Bond Counsel is based on current legal authority, covers certain matters not directly addressed by such authorities, and represents Bond Counsel’s judgment as to the proper treatment of the Bonds for

53

federal income tax purposes. It is not binding on the IRS or the courts. Furthermore, Bond Counsel cannot give and has not given any opinion or assurance about the future activities of the City or CMHS, or about the effect of future changes in the Code, the applicable regulations, the interpretation thereof or the enforcement thereof by the IRS. The City and CMHS have covenanted, however, to comply with the requirements of the Code.

Bond Counsel’s engagement with respect to the Bonds ends with the issuance of the Bonds, and, unless separately engaged, Bond Counsel is not obligated to defend the City, CMHS or the Beneficial Owners regarding the tax-exempt status of the Bonds in the event of an audit examination by the IRS. Under current procedures, parties other than the City, CMHS and their appointed counsel, including the Beneficial Owners, would have little, if any, right to participate in the audit examination process. Moreover, because achieving judicial review in connection with an audit examination of tax-exempt bonds is difficult, obtaining an independent review of IRS positions with which the City or CMHS legitimately disagree, may not be practicable. Any action of the IRS, including but not limited to selection of the Bonds for audit, or the course or result of such audit, or an audit of bonds presenting similar tax issues may affect the market price for, or the marketability of, the Bonds, and may cause the City, CMHS or the Beneficial Owners to incur significant expense.

RATINGS

The Bonds have received ratings of “Ba2 (stable outlook)” and “BB (stable outlook)” by Moody’s Investors Service (“Moody’s”) and by Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc. (“S&P”), respectively.

The ratings reflect only the views of the respective ratings agency, and any explanation of the significance of such ratings should be obtained from Moody’s and S&P at the following addresses: Moody’s Investor Service, 99 Church Street, New York, NY 10007; and Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc., Public Finance Department, 55 Water Street, New York, NY 10041. In order to obtain such ratings, CMHS furnished to the rating agencies certain information and materials, some of which has not been included in this Official Statement. Generally, rating agencies base their ratings on such information and materials and their own investigation, studies and assumptions. There is no assurance that the ratings will be maintained for any given period of time or that they will not be revised downward or withdrawn entirely by a rating agency, if, in its judgment, circumstances so warrant. CMHS undertakes no responsibility to oppose any such revision or withdrawal. Any such downward revision or withdrawal of the ratings obtained may have an adverse effect on the market price of the Bonds.

CMHS expects to furnish to each rating agency such information and materials as it may request. CMHS, however, assumes no obligation to furnish requested information and materials, and may issue debt for which a rating in not requested. The failure to furnish requested information and materials, or the issuance of debt for which a rating is not requested, may result in the suspension or withdrawal of a rating on the Bonds.

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LEGAL MATTERS

The validity of the Bonds and certain other legal matters are subject to the approving opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the City. Bond Counsel undertakes no responsibility for the accuracy, completeness or fairness of this Official Statement.

Certain legal matters will be passed upon for CMHS by its counsel, Arent Fox LLP and Alston & Bird LLP, and for the Underwriter by King & Spalding LLP. These law firms undertake no responsibility for the accuracy, completeness or fairness of this Official Statement, except as otherwise stated in their respective opinions delivered upon the delivery of the Bonds, and none of such opinions is addressed to or may be relied upon by purchasers of the Bonds.

INDEPENDENT AUDITORS

The consolidated financial statements of CMHS as of and for the years ended December 31, 2010 and 2009 included in APPENDIX B-1 to this Official Statement have been audited by Ernst & Young LLP, as stated in the report appearing therein. The unaudited condensed consolidated financial statements of CMHS as of June 30, 2011 and 2010 included in APPENDIX B-2 to this Official Statement have not been audited by Ernst & Young LLP.

FINANCIAL ADVISOR

CMHS has retained Kaufman, Hall & Associates, Inc., Skokie, Illinois, as financial advisor in connection with the issuance of the Bonds. Although Kaufman, Hall & Associates, Inc. has assisted in the preparation of this Official Statement, Kaufman, Hall & Associates, Inc. is not obligated to undertake, and has not undertaken to make, an independent verification or to assume responsibility for the accuracy, completeness or fairness of the information contained in this Official Statement.

UNDERWRITING

The Bonds are being purchased by Merrill Lynch, Pierce, Fenner & Smith Incorporated (the “Underwriter”). The Underwriter has agreed to purchase such Bonds at a purchase price of $349,865,548 (representing the principal amount thereof, less original issue discount of $134,452. CMHS has agreed to pay the Underwriter the sum of $7,896,250 in return for the Underwriter purchasing the Bonds in accordance with the purchase contract. The purchase contract provides that the Underwriter will be obligated to purchase all of the Bonds, if any are purchased, and the obligation to make such purchase is subject to certain terms and conditions to be satisfied by the City and CMHS. Under the purchase contract, CMHS agrees to indemnify the Underwriter and the City against certain liabilities to the extent permitted by law. The Underwriter may offer and sell the Bonds to certain dealers and others at prices lower than the offering prices stated on the cover page. The offering prices may be changed from time to time by the Underwriter.

MISCELLANEOUS

The references to and the descriptions of the Bonds, the Master Indenture, Supplemental Indenture No. 1, the Deed of Trust, the Loan Agreement, the Bond Indenture, and Obligation No. 1 contained herein and in APPENDIX D hereto are brief descriptions of certain provisions thereof. Such descriptions do not purport to be complete. For full and complete statements of such provisions, reference is made to such documents. Copies of such documents are on file in the office of the Underwriter and following delivery of the Bonds will be on file at the principal corporate trust office of the Bond Trustee in Los Angeles, California.

The attached APPENDICES are integral parts of this Official Statement and should be read together with the balance of this Official Statement. All estimates and other statements in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. The use and distribution of this Official Statement have been approved by the City. The City makes no representations or warranties whatsoever with respect to any information contained herein except for the information under the captions entitled “THE CITY” and “ABSENCE OF MATERIAL LITIGATION - The City.”

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This Official Statement and its use and distribution have been duly approved by CMHS. This Official Statement is not to be construed as a contract or agreement between the City or CMHS and the purchasers or Holders of any of the Bonds.

CITY OF SAN BUENAVENTURA By: /s/ Rick Cole COMMUNITY MEMORIAL HEALTH SYSTEM, INC. By: /s/ Gary Wilde

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Ernst & Young LLP

C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S A N D O T H E R F I N A N C I A L I N F O R M A T I O N

Community Memorial Health System Years Ended December 31, 2010 and 2009 With Report of Independent Auditors

1101-1218108

Community Memorial Health System

Consolidated Financial Statements and Other Financial Information

Years Ended December 31, 2010 and 2009

Contents

Report of Independent Auditors.......................................................................................................1

Consolidated Financial Statements

Consolidated Balance Sheets ...........................................................................................................3Consolidated Statements of Operations ...........................................................................................5Consolidated Statements of Changes in Net Assets ........................................................................6 Consolidated Statements of Cash Flows ..........................................................................................7Notes to Consolidated Financial Statements ....................................................................................8

Other Financial Information

Consolidating Balance Sheets ........................................................................................................34Consolidating Statements of Operations ........................................................................................38Consolidating Statements of Changes in Net Assets .....................................................................40

A member firm of Ernst & Young Global Limited

Ernst & Young LLP 725 South Figueroa Street Los Angeles, California 90017

Tel: +1 213 977 3200 www.ey.com

1101-1218108 1

Report of Independent Auditors

The Board of Directors of Community Memorial Health System

We have audited the accompanying consolidated balance sheets of Community Memorial Health System (the System) as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in net assets, and cash flows for the years then ended. These financial statements are the responsibility of the System’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the System’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing auditing procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the System’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Community Memorial Health System at December 31, 2010 and 2009, and the consolidated results of its operations, changes in net assets, and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States.

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for goodwill and its method of accounting and reporting of non controlling interests as a result of the adoption of the amendments to the FASB Accounting Standards Codification resulting from Accounting Standards Update No, 2010-07, Not-for-Profit Entities: Mergers and Acquisitions, effective January 1, 2010.

A member firm of Ernst & Young Global Limited

1101-1218108 2

Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The accompanying consolidating balance sheets as of December 31, 2010 and 2009, and the consolidating statements of operations and changes in net assets for the years then ended, are presented for purposes of additional analysis and are not a required part of the consolidated financial statements. Such information has been subjected to the auditing procedures applied in our audits of the basic consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic consolidated financial statements taken as a whole.

��April 26, 2011

2010 2009AssetsCurrent assets:

Cash and cash equivalents 10,081,928$ 2,993,596$Investments 52,071,637 45,514,661Patient accounts receivable, net of bad debt allowances

of $50,275,000 and $40,889,000 at December 31, 2010 and 2009, respectively 50,212,656 55,010,055

Due from third-party payors 4,054,826 3,739,567Inventories 5,777,742 6,076,536Current portion of assets limited as to use 2,366,029 1,427,242Prepaid expenses and other 7,490,254 7,516,436

Total current assets 132,055,072 122,278,093

Assets limited as to use, less current portion:For self-insurance program 5,395,939 4,392,623For deferred compensation plans 3,019,925 2,408,671Annuity trust 223,449 216,417

8,639,313 7,017,711

Property, plant and equipment, net 116,824,738 105,343,057

Other assets: Investment in affiliate 91,000 – Goodwill – 2,760,297 Property held for future use 15,426,354 10,620,026 Other assets 133,162 143,805Total assets 273,169,639$ 248,162,989$

December 31


Consolidated Balance Sheets

3 1101-1218108

2010 2009Liabilities and net assetsCurrent liabilities:

Accounts payable and accrued expenses 16,410,322$ 16,975,400$Accrued compensation and related benefits 12,454,152 13,775,518Current maturities of long-term debt and

capital lease obligations 1,559,627 2,228,502Total current liabilities 30,424,101 32,979,420

Accrued pension cost, less current portion 3,392,419 3,216,532Self-insurance liabilities, less current portion 8,134,636 7,524,235Long-term debt and capital lease obligations,

net of current maturities 5,714,532 5,741,747Annuity trust liability 129,569 134,585Total liabilities 47,795,257 49,596,519

Net assets:Unrestricted: System 225,918,671 199,448,756 Noncontrolling interests in subsidiaries (2,039,243) (1,851,730)Temporarily restricted – System 1,494,954 969,444

Total net assets 225,374,382 198,566,470Total liabilities and net assets 273,169,639$ 248,162,989$

See accompanying notes.

December 31

1101-1218108 4

2010 2009

Unrestricted revenue, gains and other support:Net patient service revenue 287,302,737$ 285,792,776$Hospital Medi-Cal supplemental payment 25,413,960 –Other operating revenue 4,087,620 4,099,046Net assets released from restrictions 375,179 234,357

Total unrestricted revenues, gains and other support 317,179,496 290,126,179

Expenses:Payroll and related expenses 142,211,923 139,403,980Other operating expenses 113,975,420 104,011,641Hospital quality assurance fee 11,648,314 –Depreciation and amortization 12,317,826 13,736,183Provision for bad debts 14,733,129 23,784,219Interest 410,074 460,030

Total expenses 295,296,686 281,396,053Operating income before asset impairment 21,882,810 8,730,126

Asset impairment (139,787) (326,798)

Operating income 21,743,023 8,403,328

Other income and expense:Investment income 6,045,329 8,832,711Donations 314,429 145,427

Total other income and expense 6,359,758 8,978,138

Excess of unrestricted revenues, gains andother support over expenses 28,102,781 17,381,466

Add: excess of expenses over unrestricted revenues, gains, and other support attributable to noncontrolling interests 141,573 247,008

Excess of unrestricted revenues, gains and other support over expenses attributable to the System 28,244,354$ 17,628,474$


Year Ended December 31


Consolidated Statements of Operations

1101-1218108 5

2010 2009

Net assets at beginning of year 198,566,470$ 180,399,593$

Unrestricted net assets:Excess of expenses over unrestricted revenues, gains,

and other support attributable to the System 28,244,354 17,628,474Excess of unrestricted revenues, gains and other support

over expenses attributable to noncontrolling interest (141,573) (247,008)Change in pension liability 235,180 (265,127)Effect of adoption of new accounting principal (2,760,297) –Distributions to noncontrolling interests (45,943) (71,594)Net assets released from restrictions for the acquisition

of property, plant and equipment 750,681 932,016Increase in unrestricted net assets 26,282,402 17,976,761

Temporarily restricted net assets:Contributions 1,651,370 1,356,490Net assets released from restrictions (1,125,860) (1,166,374)

Increase in temporarily restricted net assets 525,510 190,116Increase in net assets 26,807,912 18,166,877Net assets at end of year 225,374,382$ 198,566,470$




Consolidated Statements of Changes in Net Assets

1101-1218108 6

2010 2009

Operating activitiesIncrease in net assets 26,807,912$ 18,166,877$Adjustments to reconcile increase in net assets to

net cash provided by operating activities:Depreciation and amortization 12,317,826 13,736,183Net unrealized (gains) losses on trading investments (3,820,626) (9,748,981)Net sales on trading investments (2,736,350) 7,243,762Provision for bad debts 14,733,129 23,784,219Adoption of new accounting principle 2,760,297 –Noncontrolling interests (187,513) (318,602)Changes in operating assets and liabilities:

Patient accounts receivable (9,935,730) (34,766,303)Inventories 298,794 (1,027,355)Prepaid expenses and other 26,182 (3,128,616)Other assets (7,252,529) (1,402,533)Annuity trust liability (7,032) (19,314)Accounts payable and accrued expenses (1,886,444) (1,664,785)Due from/to third-party payors (315,259) (2,123,070)Accrued pension cost and other liabilities 781,272 114,896

Net cash provided by operating activities 31,583,929 8,846,378

Investing activitiesPurchase of property, plant and equipment (23,799,507) (22,596,582)Net cash used in investing activities (23,799,507) (22,596,582)

Financing activitiesProceeds from new borrowings 1,026,410 2,588,945Repayments of long-term debt and capital lease obligations (1,722,500) (252,198)Net cash (used in) provided by financing activities (696,090) 2,336,747

Net increase (decrease) in cash and cash equivalents 7,088,332 (11,413,457)Cash and cash equivalents at beginning of year 2,993,596 14,407,053Cash and cash equivalents at end of year 10,081,928$ 2,993,596$

Supplemental cash flow informationInterest paid 410,074$ 460,030$Non-cash capital lease transaction –$ 1,727,775$




Consolidated Statements of Cash Flows

1101-1218108 7

Community Memorial Health Systems

Notes to Consolidated Financial Statements

December 31, 2010

1101-1218108 8

1. Organization and Operations

Community Memorial Health System (the System or CMHS), a California nonprofit public benefit corporation, headquartered in Ventura, California, was organized to provide multi-hospital multi-discipline health care services to patients in Ventura, California, and the surrounding areas.

The accounts of the System include the following significant affiliate/subsidiary organizations:

Community Memorial Hospital (CMH), a division of CMHS, operates a 242-bed acute care hospital in Ventura, California.

Ojai Valley Community Hospital (OVCH), a division of CMHS, operates a 103-bed hospital located in Ojai, California, consisting of 37 acute beds and a 66-bed distinct part skilled nursing facility.

Community Memorial Healthcare Foundation (the Foundation) is a tax-exempt corporation whose purpose is to raise funds for the future support of CMH. The Foundation regularly provides funds to CMH for research, education and the purchase of equipment. The System is the sole corporate member of the Foundation.

Buenavista Medical Properties, Inc. (BVM, Inc.), a California for-profit corporation owned by CMHS, is a general partner and 58.50% owner of Buenavista Medical Properties, Ltd. (BVM, Ltd.). BVM, Ltd. owns two floors of a medical office building adjacent to CMH.

California Heart Institute, Inc. (CHI), a California for-profit corporation owned by CMHS, provides billing and other services to physicians.

Grossman Imaging Center of CMH (Grossman) is a limited liability corporation that owns three free-standing imaging centers. CMHS formed a subsidiary effective June 1, 2005, which acquired a 51% interest in Grossman.


Notes to Consolidated Financial Statements (continued)

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2. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the System and its affiliate/subsidiary organizations listed in Note 1. Where the System has a majority voting interest but less than 100% ownership interest, the System consolidates the subsidiary or partnership’s results and reflects the noncontrolling interests in the net income (loss) of the System. For Grossman, CMHS has recorded the noncontrolling owner’s losses, including those that reduced the noncontrolling interest below zero since the noncontrolling owner has personally guaranteed his pro rata share of certain debt obligations and he has the ability to satisfy the guarantee (see Note 5).

All significant intercompany balances and transactions have been eliminated in the accompanying consolidated financial statements.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Cash and Cash Equivalents

The System considers all cash and highly liquid debt instruments with maturities, on acquisition date, of three months or less to be cash equivalents.

Charity Care

The System provides care without charge to patients who meet certain criteria under its charity care policy. Because the System does not pursue collection of amounts determined to qualify as charity care, they are not reported as revenue. The amount of charges forgone for services and supplies furnished under the System’s charity care policy aggregated approximately $5,429,600 and $7,142,500 in 2010 and 2009, respectively.



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2. Summary of Significant Accounting Policies (continued)

Net Patient Service Revenue

The System has agreements with third-party payors that provide for payments to the System at amounts different from its established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges, and per diem payments. Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Contractual adjustments include differences between established billing rates and amounts estimated by management as reimbursable under various cost reimbursement formulas and contracts in effect.

The System changed its practice relating to the write-off of patient accounts when sent to an outside agency for collection. Previously, when accounts were sent to an agency, the accounts were written-off to bad debt at the time of transfer. Beginning in March 2009, patient accounts were no longer written-off to bad debt when sent to an agency. Accounts are now only written-off to bad debt when a determination has been made by either the agency or the System that the entire account is no longer collectible. The System’s allowance for bad debt was $50,275,000 and $40,889,000 at December 31, 2010 and 2009, respectively.

The System changed its uninsured discount policy during 2010 to discount self-pay patient charges by 40%. This change in policy resulted in an increase in policy and administrative discounts (included as a reduction to net patient service revenue) and a decrease in provision for bad debts of $9,799,000 in 2010 over 2009. The System's bad debt expense was $14,733,129 and $23,784,219 for the years ended December 31, 2010 and 2009, respectively.

The administrative procedures related to the cost reimbursement programs in effect generally preclude final determination of amounts due to or payable by the System until cost reports are audited or otherwise reviewed and settled upon by the applicable administrative agencies. Normal estimation differences between final settlements and amounts accrued in previous years are reported as adjustments of net patient service revenue in the current year. In 2010 and 2009, the System settled several previously filed Medicare and Medicaid cost reports and recorded changes in estimates totaling $(1,128,300) decrease in revenue and $880,000 increase in revenue, respectively. In the opinion of management, adequate provision has been made for adjustments, if any, that might result from subsequent review.



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The System is reimbursed for services provided to patients under certain programs administered by governmental agencies. The following table displays the approximate percentages of the System’s net revenues from the Medicare and Medicaid programs (includes both traditional and managed care Medicare and Medicaid programs) for the years ended December 31:

2010 2009 Medicare 41.7% 39.7%Medicaid 9.6% 9.5%

Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. The System believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing. While no regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medicaid programs.

To address the growing concerns regarding the impact of payment errors occurring under current administrative procedures, and to ensure that payments made to providers are accurate, the Medicare Modernization Act of 2003 authorized the implementation of demonstration projects that use revenue recovery audit contractors (RACs) to identify overpayments and underpayments and, at least initially, recoup overpayments for payments made under Part A and Part B of Medicare. In 2005, the Centers for Medicare and Medicaid Services engaged several firms to perform claim reviews, piloted in New York, California, and Florida in a demonstration project. During the demonstration project, the RACs verified billing errors and began collections on these accounts. The RACs were paid on a contingency fee basis, receiving a percentage of the improper overpayments they collected from providers. Providers had a right to appeal the decisions made by the RACs.

The System experienced minimal recoupments by RACs. The end date of the demonstration project was March 27, 2008, and the last day for a RAC to request medical records from the System was December 1, 2007. In the Tax Relief and Health Care Act of 2006, Congress authorized the expansion of the RAC program to all 50 states by 2010 and in this nationwide rollout program, RACs are not allowed to audit claims paid earlier than October 1, 2007. In



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November 2010, the System began receiving requests from RAC auditors to review provider claims. Thus far, there have been no findings under the RAC program. The System currently has claims under audit review and receives new claim requests on a monthly basis. Management cannot anticipate the amount or volume of its past Medicare claims that will be reviewed by the RACs or what the results of any such audits will be. However, management believes any ultimate liability which could arise from the RAC audits would not materiality affect the System’s consolidated financial position, results of operations or cash flows.

Hospital Med-Cal Supplemental Payment and Quality Assurance Fee

The California Hospital Fee Program (the Program) was signed into law by the Governor of California and became effective on January 1, 2010. Amending legislation, to conform to changes requested by the Centers for Medicare & Medicaid Services (CMS) during the approval process, was signed into law by the Governor of California and became effective September 8, 2010. The primary legislation (AB 1383) and amending legislation (AB 1653) contain two components. The Quality Assurance Fee Act governs the “Hospital Fee” or “Quality Assurance Fee” (QA Fee) paid by participating hospitals. The Medi-Cal Hospital Provider Stabilization Act governs supplemental Medi-Cal payments (Supplemental Payments) made to providers from the fund. Hospital participation is mandatory with limited exceptions.

The Program was approved by CMS in December 2010. The amended legislation allowed California Department of Health Care Services (DHCS) to begin assessing fees and making supplemental payments in September 2010. DHCS began assessing fees in October 2010.

The Corporation made payments to DHCS for the QA Fee in the amount of $11,648,314 in 2010 and recorded the QA Fee in operating expenses within the accompanying consolidated statements of operations. The Corporation received Supplemental Payments of approximately $25,413,960 over the course of the Program in 2010, which pertains to the period from April 1, 2009 to December 31, 2010 and recorded the Supplemental Payments as revenue within the accompanying consolidated statements of operations.

Inventories

Inventories are recorded at cost (by the first-in, first-out method) which is not in excess of market.



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Investments

Investments in equity securities with readily determinable fair values and all investments in debt securities are measured at fair value in the consolidated balance sheets. Fair value is established based on quoted prices from recognized security exchanges. Management determines the appropriate classification as trading or other-than-trading of all equity and debt securities at the date of purchase and reevaluates such designations at each balance sheet date. The System determined that all investments held at December 31, 2010 and 2009, are designated as trading securities as the investments are externally managed without restrictions within the guidelines of the System’s investment policy. Accordingly, the change in unrealized gains and losses on investments is reported above the performance indicator in the consolidated statements of operations.

Investment income or loss (including realized and unrealized gains and losses on trading investments and interest and dividends) is included in the excess (deficiency) of unrestricted revenues, gains and other support over expenses. Realized gains and losses with respect to disposition of investments are based on the specific-identification method.

Investment income or loss on investments included in temporarily restricted net assets (including realized gains and losses on investments and interest and dividends) is reported in excess (deficiency) of unrestricted revenues, gains and other support over expenses unless the income or loss is restricted by donor or by law.

Alternative Investments

The System’s classification of alternative investments includes a commingled fund that seeks to outperform the S&P 500/Citigroup Growth Index when evaluated over a rolling three- to five-year period. These entities employ a range of investment strategies including, but not limited to, long/short equity positions, derivatives, and forward and futures contracts. The System accounts for its ownership interest in alternative investments under the equity method of accounting. The gain or loss from alternative investments is included in investment income in the consolidated statements of operations. At December 31, 2010 and 2009, these alternative investments comprised approximately 2% of the System’s total assets.



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Fair Value Measurement

The System has adopted Accounting Standards Codification (ASC) No. 820, Fair Value Measurements and Disclosures (ASC 820), which establishes a framework for measuring fair value in accounting principles generally accepted in the United States, and expands disclosures about fair value measurements. As defined in ASC 820, fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

The level in the fair value hierarchy within which the fair value is classified is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Assets and liabilities measured at fair value are based on one or more of three valuation techniques as identified in the tables below. Where more than one technique is noted, individual assets or liabilities were valued using one or more of the noted techniques. The valuation techniques are as follows:

(a) Market Approach. Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

(b) Cost Approach. Amount that would be required to replace the service capacity of an asset (replacement cost).



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(c) Income Approach. Techniques to convert future amounts to a single present amount based on market expectations (including present value techniques, option-pricing and excess earnings models).

In determining fair value, the System utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value.

Financial assets and liabilities carried at fair value as of December 31, 2010, are classified in the table below in one of the three categories described above:

Valuation Equity Technique

Total Level 1 Level 2 Level 3 Method (a,b,c) Assets:

Marketable equity securities $ 2,601,633 $ 2,601,633 $ – $ – $ – a Mutual funds 42,589,846 42,589,846 – – – a Alternative investments* 6,880,158 – – – 6,880,158

$ 52,071,637 $ 45,191,479 $ – $ – $ 6,880,158

Financial assets and liabilities carried at fair value as of December 31, 2009, are classified in the table below in one of the three categories described above:

Valuation Equity Technique

Total Level 1 Level 2 Level 3 Method (a,b,c) Assets:

Marketable equity securities $ 1,676,742 $ 1,676,742 $ – $ – $ – a Mutual funds 37,457,120 37,457,120 – – – a Alternative investments* 6,380,799 – – – 6,380,799

$ 45,514,661 $ 39,133,862 $ – $ – $ 6,380,799

* Alternative investments are accounted for on the equity method; however, the carrying amount approximates fair value of these investments.

Assets limited as to use, consisting of cash and cash equivalents, deposits, mutual funds and an annuity trust (Note 4), are Level 1 financial assets that are valued using the market approach.



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Concentration of Credit Risk

Financial instruments that potentially subject the System to concentrations of credit risk consist primarily of cash and cash equivalents, investments and patient accounts receivable. The investment portfolio is managed within the guidelines established by the board of directors which, as a matter of policy, limit the amounts that may be invested in any one issue. Concentration of credit risk with respect to patient accounts receivable is limited due to the large number of payors comprising the System’s patient base.

Goodwill

In 2010, the System adopted Accounting Standards Codification (ASC) No. 350, Intangibles: Goodwill and Other, which establishes how not-for-profit health care organizations account for goodwill and other intangible assets. Prior to 2010, goodwill was amortized utilizing the straight line method over a 15 year period. Under ASC No. 350, goodwill is evaluated at least annually for impairment and is no longer amortized. The System chose October 1, 2010 as its annual goodwill impairment assessment date and wrote down the value of its goodwill in the amount of $2,760,297. The impairment loss resulting from the transitional impairment test was recognized as the effect of adoption of a new accounting principle below the performance indicator.

Fair Value of Financial Instruments

The System’s consolidated balance sheets include the following financial instruments: cash and cash equivalents, investments, other receivables, accounts payable and accrued liabilities, estimated third-party payor settlements and long-term debt. The System considers the carrying amounts of current assets and liabilities in the consolidated balance sheets to approximate the fair value of these financial instruments because of the relatively short period of time between origination of the instruments and their expected realization. Long-term debt approximates fair value based upon rates currently available from the bank for debt with similar terms and maturities.



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Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of

The System reviews long-lived assets for impairment when events or changes in business conditions indicate that their carrying value may not be recoverable. The System considers assets to be impaired and writes them down to fair value if expected associated cash flows are less than the carrying amounts. Fair value is the present value of the associated cash flows. No long-lived asset impairment indicators were present and no impairment was recognized for the years ended December 31, 2010 and 2009, except as indicated below.

During 2010 and 2009, the System wrote down building improvements and equipment that were no longer in use for a charge of $140,000 and $327,000, respectively, representing the undepreciated cost of the assets at the date of the write-down.

Temporarily Restricted Net Assets

Temporarily restricted net assets are those whose use by the System has been limited by donors to a specific time period or purpose.

Unconditional promises to give cash and other assets are reported at fair value at the date the promise is received. The gifts are reported as temporarily restricted net assets if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the consolidated statements of operations as net assets released from restrictions. Donor-restricted contributions whose restrictions are met within the same year as received are reported as unrestricted contributions in the consolidated statements of operations.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is provided over the estimated useful life of each class of depreciable asset and is computed using the straight-line method. Interest cost incurred on borrowed funds during the period of construction of capital assets is capitalized as a component of the cost of acquiring those assets. Amortization expense related to capital



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leases is included in depreciation and amortization expense. The System provides for depreciation using the straight-line method over the following estimated useful lives:

Buildings and improvements 3 to 40 yearsEquipment 3 to 15 years

Gifts of long-lived assets such as buildings or equipment are recorded at fair value at the donation date and are reported as unrestricted support, and excluded from the excess of unrestricted revenue, gains and other support over expenses, unless explicit donor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as restricted support. Absent explicit donor stipulations about how long those long-lived assets must be maintained, expirations of donor restrictions are reported when the donated or acquired long-lived assets are placed in service.

Assets Limited as to Use

Assets limited as to use include assets held by the insurer for payment of workers’ compensation claims, amounts held to fund an annuity trust, and amounts designated by the Board ($3,019,925 and $2,183,583 for Supplemental Executive Retirement Plan (SERP); and $0 and $225,088 for Key Employee Share Option Plan (KESOP) at December 31, 2010 and 2009, respectively – see Note 6) for payment of accrued pension obligations. The current portion of assets limited as to use includes amounts which will be used to pay the current portion of workers’ compensation claims.

Accrued Self-Insurance Claims

The System is self-insured for certain employee health care claims. Employee health care claims, including an estimate for incurred but not reported claims, are estimated by management based on historical experience. Amounts accrued totaled $1,385,700 and $1,832,800 at December 31, 2010 and 2009, respectively, and are included in accrued compensation and related benefits.



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The System has various levels of workers’ compensation self-insured risks that vary by year, as follows:

Policy Period Annual

Deductible

Annual AggregateRetention

4/9/2001– 4/8/2002 $ 250,000 $ 3,155,120 4/9/2002 – 4/8/2003 $ 350,000 $ 4,351,652 4/9/2003 – 4/8/2004 $ 350,000 None 4/9/2004 – 4/8/2005 $ 350,000 None 4/9/2005 – 4/8/2006 $ 350,000 None 4/9/2006 – 4/8/2007 $ 350,000 $ 3,905,000 4/9/2007 – 4/8/2008 $ 350,000 $ 4,080,000 4/9/2008 – 4/8/2009 $ 350,000 $ 4,052,160 4/9/2009 – 4/8/2010 $ 350,000 $ 5,550,000 4/9/2010 – 4/8/2011 $ 350,000 $ 6,000,000

The accrual for the self-insurance portion of workers’ compensation claim liabilities, including an estimate for claims incurred but not reported, is estimated by an actuary based on the System’s claims experience. Amounts accrued at December 31, 2010 and 2009, totaled $7,967,400 and $6,735,400, respectively. The System also deposits funds into an account held by the insurer from which the insurer pays claims subject to the annual deductible. The amount held by the insurer at December 31, 2010 and 2009, totaled $7,762,000 and $5,819,900, respectively, and is included in assets limited as to use (see Note 4).



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The System has various levels of general and professional liability self-insured risks that vary by year, as follows:

Policy Period Annual

DeductibleInsuranceCoverage

11/13/1958 – 4/30/2003 $ 1,000 Claims made excess coverage

5/1/2003 – 4/30/2004 $ 25,000 Claims made excess coverage 5/1/2004 – 12/31/2005 $ 100,000 Claims made excess coverage 1/1/2006 – 12/31/2006 $ 100,000 Claims made excess coverage 1/1/2007 – 12/31/2007 $ 100,000 Claims made excess coverage 1/1/2008 – 6/30/2008 $ 100,000 Claims made excess coverage 7/1/2008 – 12/31/2008 $ 250,000 Claims made excess coverage 1/1/2009 – 12/31/2009 $ 250,000 Claims made excess coverage 1/1/2010 – 12/31/2010 $ 250,000 Claims made excess coverage

The accrual for the self-insured portion of claims liabilities, including an estimate for claims incurred but not reported, is estimated by an actuary based upon the System’s claims experience. Amounts accrued at December 31, 2010 and 2009, totaled $3,500,200 and $3,080,700, respectively.

The current portion of self-insured liabilities, representing the cost expected to be paid in the following year, is included in accounts payable and accrued expenses. Amounts expected to be paid beyond one year are included in self-insurance liabilities.

Income Taxes

Community Memorial Hospital and Ojai Valley Community Hospital are divisions of Community Memorial Health System, a nonprofit corporation recognized as tax exempt under Internal Revenue Code Section 501(a) as an organization described in Sections 501(c)(3) and 170(b)(1)(A)(iii) and corresponding sections of the California Revenue and Taxation Code. Grossman Imaging Center (Grossman) is a limited liability corporation. CMHS’ ratable share of Grossman’s earnings is recorded by CMHS and as it furthers CMHS’ mission, is exempt from federal and state income taxes.



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The System accounts for income taxes under the provisions of FASB ASC 740, Income Taxes, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Under FASB ASC 740, the tax benefit from uncertain tax positions may be recognized only if it is more likely than not the tax position will be sustained, based solely on its technical merits, with the taxing authority having full knowledge of all relevant information. The System records a liability for unrecognized tax benefits from uncertain tax positions as discrete tax adjustments in the first interim period that the more likely than not threshold is not met. The System recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of its assets and liabilities along with net operating loss and tax credit carryovers for tax positions that meet the more likely than not recognition criteria. No significant tax liability for tax benefits, interest or penalties was accrued at December 31, 2010 or 2009.

Conditional Asset Retirement Obligations

The System accounts for asset retirement obligations under ASC No. 410, Asset Retirement and Environmental Obligations (ASC 410). ASC 410 requires an entity to recognize a liability for the fair value of conditional asset retirement obligations if the fair value of the liability can be reasonably estimated. The fair value of a liability for conditional asset retirement obligations must be recognized when incurred, generally upon acquisition, construction, or development and/or through the normal operation of the asset.

The System is currently evaluating its renovation and replacement needs for existing acute care hospital facilities in order to comply with California’s seismic safety standards (see Note 9). Because the System’s plans for renovation are not complete and the date and amounts for which the ARO would be settled are unknown, the System concluded it could not reasonably estimate the fair value of a liability, and no amounts have been recorded in the consolidated balance sheets. Instead, the System will record a liability in a future period in which the fair value can be reasonably estimated.



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Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-07, Not-for-Profit Entities: Mergers and Acquisitions (ASU 2010-07), which codified FASB Statement of Financial Accounting Standards (SFAS) 164. The key provisions of ASU 2010-07 are as follows:

Provides new guidance on the recognition and measurement of mergers and acquisitions of not-for-profit entities and requires more extensive disclosures to enable users to evaluate the nature and financial effect of the merger or acquisition. This guidance is effective for mergers and acquisitions that occur on or after January 1, 2010.

Requires a not-for-profit entity to adopt the accounting provisions for goodwill and indefinite-lived intangible assets in the Intangibles – Goodwill and Other Topic of the Accounting Standards Codification (ASC) (ASC 350). As such, effective January 1, 2010, the System no longer amortizes goodwill and indefinite-lived intangible assets; rather they are evaluated annually for potential impairment, as is the case with for-profit entities. During the fourth quarter, the System completed its transitional impairment test required by ASC 350, which resulted in a goodwill impairment charge of $2,760,297.

The ASU 2010-07 requires not-for-profit entities to adopt SFAS 160, Noncontrollinginterest in Consolidated Financial Statements – an amendment of ARB No. 51 (SFAS 160). SFAS 160 was codified in the Consolidation Topic of the ASC (ASC 810) and established new guidance governing the accounting for and reporting of noncontrolling interests in partially owned consolidated subsidiaries. The Not-for-Profit Entities Consolidation Topic (ASC 958-810) requires that noncontrolling interests (previously referred to as minority interests) be reported as a separate component of the appropriate class of net assets. Previously, the System reported noncontrolling interests in other assets. The System adopted ASC 958-810 effective January 1, 2010, and its provisions were applied retrospectively to all periods presented with respect to noncontrolling interests. As a result, upon adoption, the System reclassified the noncontrolling interests from other assets to net assets. ASC 958-810 also requires a schedule of total changes in consolidated net assets, including excess of revenue and gains over expenses, attributable to the System and the noncontrolling interests (see note 7). Previously, the System reported the excess of revenue and gains over expenses attributable to noncontrolling interests as nonoperating gain or loss from minority interests.



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In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements, which amended ASC 820, Fair Value Measurements and Disclosures, to require new disclosures related to transfers in and out of Level 1 and Level 2 fair value measurements, including reasons for the transfers, and to require new disclosures related to activity in Level 3 fair value measurements. In addition, ASU 2010-06 clarifies existing disclosure requirements related to the level of disaggregation of classes of assets and liabilities, and provides further detail about inputs and valuation techniques used for fair value measurement. The System adopted ASU 2010-06 effective in 2010, and the adoption did not have a material impact on the System’s consolidated financial statements.

In August 2010, the FASB issued ASU 2010-23, Healthcare Entities (Topic 954) Measuring Charity Care for Disclosures, which requires that cost be used as a measurement for charity care disclosure purposes and that cost can be identified as the direct and indirect costs of providing the charity care. It also requires disclosure of the method used to identify or determine such costs. The adoption of ASU 2010-23 on January 1, 2011, is not expected to have a material impact on the System’s consolidated financial statements.

In August 2010, the FASB issued ASU 2010-24, Healthcare Entities (Topic 954), Presentation of Insurance Claims and Related Insurance Recoveries, which clarifies that a health care entity should not net insurance recoveries against a related claim liability. Additionally, the amount of the claim liability should be determined without consideration of insurance recoveries. The adoption of ASU 2010-24 is effective for the System beginning January 1, 2011, and the System is currently evaluating the effect of this guidance on its consolidated financial statements.

Performance Indicator

Management considers excess of unrestricted revenues, gains and other support over expenses to be the System’s performance indicator. Changes in unrestricted net assets which are excluded from (deficiency) excess of revenues over expenses, consistent with industry practice, include contributions of long-lived assets (including assets acquired using contributions which by donor restriction were to be used for the purposes of acquiring such assets).



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Reclassifications

Certain reclassifications were made to the 2009 consolidated financial statements to conform to the statements in 2010. These reclassifications had no impact on the consolidated change in net assets previously reported.

Subsequent Events

The System has evaluated subsequent events occurring through April 26, 2011, the date the financial statements were available for issuance.

3. Property, Plant and Equipment

Property, plant and equipment consist of the following at December 31:

2010 2009

Land and improvements $ 9,257,720 $ 8,831,847 Buildings 109,272,849 99,937,657Leasehold improvements 4,148,297 4,026,557Equipment 93,938,161 93,729,413

216,617,027 206,525,474Less accumulated depreciation and amortization (133,104,008) (127,123,276)

83,513,019 79,402,198Construction in progress 33,311,719 25,940,859Total property, plant and equipment, net $ 116,824,738 $ 105,343,057



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4. Investments and Assets Limited as to Use

Investments, stated at fair value, consist of the following at December 31:

2010 2009

Mutual funds $ 42,589,846 $ 37,457,120 Alternative investments * 6,880,158 6,380,799Common and preferred stock 2,601,633 1,676,742Total investments $ 52,071,637 $ 45,514,661


Assets limited as to use, stated at fair value, consist of the following at December 31:

2010 2009 Cash and cash equivalents $ 79,390 $ 54,655 Deposits with insurance company 7,761,968 5,819,866Mutual funds 2,940,535 2,354,015Annuity trust 223,449 216,417

11,005,342 8,444,953Less current portion (2,366,029) (1,427,242)

$ 8,639,313 $ 7,017,711

Investment income (loss) consists of the following for the years ended December 31:

2010 2009

Interest and dividends $ 1,433,745 $ 1,494,176 Realized gains (losses) (including equity interest in

earnings and losses of alternative investments) 790,958 (2,410,936)Unrealized gains (losses) 3,820,626 9,748,981

$ 6,045,329 $ 8,832,221



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5. Long-Term Debt and Capital Lease Obligations

Long-term debt consists of the following at December 31:

2010 2009 Term notes payable to bank, with interest from 3.75% to

7.625%, principal payable monthly in installments ranging from $1,651 to $29,036 secured by equipment, due through 2021 $ 1,129,721 $ 2,068,640

Term note payable to bank, with interest at 5.42% secured by real property – refinanced 3,418,557 3,398,834

Bank line of credit 600,000 775,000Capital lease obligations for medical equipment, net of

imputed interest ranging from $638 to $28,609 including interest at various rates per annum. The leases expire at various dates through 2016 2,125,881 1,727,775

7,274,159 7,970,249Less current maturities (1,559,627) (2,228,502)

$ 5,714,532 $ 5,741,747

Grossman had a line of credit agreement with a bank in the amount of $1,500,000 with interest at the bank’s prime rate plus 0.50%. The line of credit was renewed through June 15, 2011, for $1,500,000 and at prime plus 0.50% (3.75% at December 31, 2010). Grossman had $600,000 drawn and outstanding at December 31, 2010. Management is in the process of renewing the line of credit for another year term through June 15, 2012.

On March 6, 2009, the System obtained a revolving line of credit from a bank in the amount of $10,000,000 with interest at the bank’s prime rate less 0.5% with a minimum interest rate of 4%. In 2010, the line of credit was renewed through June 15, 2011, for $20,000,000 and at LIBOR plus 2.00% (2.26% at December 31, 2010). The line of credit is secured by certain of the System’s investments. The System did not have any amount drawn and outstanding at December 31, 2010.



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5. Long-Term Debt and Capital Lease Obligations (continued)

On April 13, 2009, the System refinanced the term note payable to a bank with a balance outstanding at December 31, 2008, of $3,239,000, with a new term note payable secured by real estate in the amount of $3,500,000. Interest on the loan is at the one-month London Interbank Offered Rate (LIBOR) plus 1.95%. Principal and interest payments are due monthly with a balloon payment of $2,637,000 due April 1, 2019. On April 1, 2009, the System entered into an interest rate swap transaction with the lender. Under the terms of the swap agreement, the System has agreed to pay the lender a fixed interest rate of 5.42%, and the lender has agreed to pay the System one-month LIBOR, based on an aggregate notional amount of $3,500,000, which is equal to the principal amount of the term note payable to bank. Management did not designate the swap as a cash flow hedge as permitted by ASC 814, Derivatives and Hedging, and, accordingly, changes in the fair value of the swap totaling $(151,900) and $7,800 was recognized in interest (income) expense within the performance indicator for the years ended December 31, 2010 and 2009, respectively.

Effective October 1, 2007, CMHS made an intercompany loan to Grossman of $8,500,000, the proceeds of which were used to immediately pay term notes payable to a bank and capital lease obligations to lessors that were outstanding at that date of $1,535,000 and $3,480,000, respectively, and to provide additional working capital for Grossman. In addition, effective October 1, 2007, Irwin Grossman M.D., the minority shareholder, made an irrevocable and personal guarantee to CMHS for his pro rata share (49%) of the payments owing to CMHS by Grossman on the intercompany loan. The balance outstanding on the intercompany loan, which eliminates in consolidation, is $4,524,336 and $5,391,905 at December 31, 2010 and 2009, respectively. On June 22, 2010, the Board of Trustees of CMHS agreed to refinance the intercompany loan to Grossman. Since that time, Grossman has made interest only payments on the loan in anticipation of the refinance transaction in 2011. The terms of the new loan will amortize the outstanding balance of the existing loan over five (5) years.



1101-1218108 28

5. Long-Term Debt and Capital Lease Obligations (continued)

Principal maturities on all long-term debt and capital lease obligations at December 31, 2010, are as follows:

Gross CapitalLease

Obligations

Less: ImputedInterest

Net Capital Lease

Obligations

Notes Payable and Line of

Credit Total Long-Term Debt

2011 $ 660,707 $ 142,836 $ 517,871 $ 1,041,756 $ 1,559,627 2012 655,603 93,595 562,008 461,788 1,023,796 2013 609,256 55,667 553,589 480,519 1,034,108 2014 286,705 27,274 259,431 147,477 406,908 2015 225,384 9,838 215,546 148,039 363,585 Thereafter 17,544 107 17,437 2,868,698 2,886,135 $ 2,455,199 $ 329,317 $ 2,125,882 $ 5,148,277 $ 7,274,159

6. Retirement Plans

CMHS has a defined contribution plan covering substantially all employees except those at Grossman. The Plan allows employees to contribute an amount of compensation up to the Internal Revenue Service elective deferral limit, as defined, with CMHS matching 50% of the employees’ contributions up to a maximum of 6% of each employee’s annual compensation. In addition, CMHS contributes 1% and 2% in 2010 and 2009 of all covered employees’ compensation. Amounts charged to expense applicable to this defined contribution plan totaled $2,914,000 and $3,838,400 in 2010 and 2009, respectively.

Effective July 1, 2001, CMH established the KEYSOP. The remaining two participants in the program withdrew their investments in 2010 thus terminating the KESOP. The KESOP was a nonqualified deferred compensation plan that allowed eligible participants to defer a portion of their compensation with options to purchase shares of selected mutual funds. The KEYSOP Plan became inactive as of April 1, 2002, when the 2002 SERP became effective. No options were granted after April 1, 2002, and all options have been granted under the KEYSOP Plan as of December 31, 2010.



1101-1218108 29

6. Retirement Plans (continued)

At December 31, 2010 and 2009, CMH held KESOP investments totaling $0 and $225,100 (assets limited as to use for deferred compensation plans), respectively, and a related liability of $0 and $168,800 (accrued pension cost), respectively.

The SERPs are funded based on an annual valuation of the liability performed by an independent actuary. The Board of Directors has designated assets to be segregated to fund the KEYSOP and SERPs. However, the assets are not held in trust or otherwise legally restricted to fund the plans.

Effective January 1, 1990, CMH established a Supplemental Executive Retirement Plan (the 1990 SERP) to cover senior staff members of CMH. The 1990 SERP, which was frozen effective December 1, 1999, calls for benefits to be paid to eligible employees at retirement based on the number of years of service with CMH and the five highest years of earned compensation. Service and salary after 1999 are not counted under the frozen plan. On April 1, 2002, a second Supplemental Executive Retirement Plan (the 2002 SERP) became effective. For the 2002 SERP, the monthly benefit at normal retirement date (age 65) is equal to the average monthly compensation for the three-year period during which compensation was the highest including periods before April 1, 2002, at the following rates: (i) 4% for the CEO and 2% for other participants through April 4, 2004, and (ii) 5% for the CEO and 2% for other participants after April 4, 2004. Participants vest after ten years of service, including service prior to the effective date, or attainment of age 65. Together, the 1990 SERP and the 2002 SERP are referred to as SERPs.

The following tables set forth the changes in benefit obligations, components of net periodic benefit cost, and other benefit information for the SERPs at December 31:

2010 2009 Change in projected benefit obligation:

Projected benefit obligation at beginning of year $ 3,047,716 $ 2,185,451 Service cost 616,812 616,465Interest cost 178,343 174,495Actuarial (gain) loss (267,520) 232,787Benefits paid (182,932) (161,482)

Projected benefit obligation at end of year and funded status $ 3,392,419 $ 3,047,716



1101-1218108 30

6. Retirement Plans (continued)

Net pension cost includes the following components for the years ended December 31:

2010 2009 Service cost $ 616,812 $ 616,465 Interest cost 178,343 174,495Recognition of past service credits (32,340) (32,340)Recognition of prior experience (gains) losses – –Net periodic pension cost $ 762,815 $ 758,620

Weighted-average assumptions used to determine the pension benefit obligation are as follows at December 31:

2010 2009 Discount rate 5.2% 5.7%Rate of compensation increase 5.0% 5.0%

Weighted-average assumptions to determine net periodic pension cost are as follows for the year ended December 31:

2010 2009 Discount rate 5.2% 5.7%Rate of compensation increase 5.0% 5.0%

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:

2011 $ 288,100 2012 –2013 –2014 –2015 2,044,178 Years 2016-2020 6,342,181



1101-1218108 31

7. Changes in Consolidated Unrestricted Net Assets

Changes in consolidated unrestricted net assets that are attributable to the System and the noncontrolling interests in subsidiaries are as follows:

NoncontrollingTotal System Interest

Balance January 1, 2009 $ 179,620,265 $ 181,153,393 $ (1,533,128)Excess of revenue and gains over

expenses 17,381,466 17,628,474 (247,008)Contributions 932,016 932,016 – Distributions (71,594) – (71,594)Other activity (265,127) (265,127) – Change in net assets 17,976,761 18,295,363 (318,602)

Balance January 1, 2010 197,597,026 199,448,756 (1,851,730)Excess of revenue and gains over

expenses 28,102,781 28,244,354 (141,573)Contributions 750,681 750,681 – Distributions (45,943) – (45,943)Other activity (2,525,117) (2,525,120) 3 Change in net assets 26,282,402 26,469,915 (187,513)

Balance December 31, 2010 $ 223,879,428 $ 225,918,671 $ (2,039,243)

8. Temporarily Restricted Net Assets

Temporarily restricted net assets are available for the following purposes at December 31:

2010 2009 Educational and clinical programs $ 707,777 $ 790,707 Medical equipment and buildings 787,177 178,737

$ 1,494,954 $ 969,444

During 2010, net assets were released from restrictions by satisfying the restricted purpose of purchasing equipment and providing patient care services in the amount of $1,125,860.



1101-1218108 32

8. Temporarily Restricted Net Assets (continued)

During 2009, net assets were released from restrictions by satisfying the restricted purpose of purchasing equipment and providing patient care services in the amount of $1,166,374.

9. Commitments and Contingencies

Leases

The System leases office space and certain medical and office equipment under operating leases. The following is a summary of minimum noncancelable lease commitments for the years ending December 31:

2011 $ 3,424,7092012 3,316,7202013 2,289,1802014 1,411,9822015 869,397Thereafter 2,755,522 $ 14,067,510

Rent and lease expense under the operating leases totaled approximately $3,246,227 and $2,771,200 for the years ended December 31, 2010 and 2009, respectively.

The System is involved in legal actions in the normal course of business, some of which seek substantial monetary damages, including claims for punitive damages, which are not covered by insurance. These actions, when finally concluded and determined, will not, in the opinion of management, have a material adverse effect on the System’s financial position, results of operations, or cash flows.

The System is required to comply with the Hospital Seismic Safety Act (SB1953), which regulates the seismic performance of all aspects of hospital facilities in California. SB1953 imposes near-term and long-term compliance deadlines for seismic safety assessments, submission of corrective plans, and the retrofitting or replacement of the Hospital’s facilities to comply with current seismic standards. These requirements are expected to result in significant operational changes and capital outlays. Based on preliminary estimates, total costs are estimated to be $281 million (unaudited). Actual amounts could differ from these estimates.



1101-1218108 33

9. Commitments and Contingencies

SB1661 allows hospitals with active mitigation projects under construction to extend the 2013 deadline under SB1953 to 2015. The System was granted the two-year extension due to the plans in place to bring its facilities to current seismic standards. Construction entitlements have been approved by the City of Ventura and full approval from the Office of Statewide Health Planning and Development (OSHPD) is expected by June 2011. Management is currently in the process of obtaining financing for its construction projects.

10. Functional Expenses

The System provides general health care services to residents within its geographic location. Expenses related to providing these services are as follows for the years ended December 31:

2010 2009

Health care services $ 190,689,411 $ 194,006,697 General and administrative 104,569,069 87,352,262Fundraising 38,206 37,094

$ 295,296,686 $ 281,396,053

1101-1218108


Consolidated CommunityCommunity Ojai Valley Grossman Buenavista Memorial CaliforniaMemorial Community Imaging Medical Healthcare HeartHospital Hospital of CMH Properties, Inc. Foundation Institute, Inc. Totals Eliminations Consolidated

AssetsCurrent assets:

Cash and cash equivalents 7,758,876$ –$ 27,003$ 329,352$ 552,329$ 20,950$ 8,688,510$ 1,393,418$ 10,081,928$ Investments 52,887,360 – – – 577,695 – 53,465,055 (1,393,418) 52,071,637 Patient accounts receivable 43,012,659 5,055,172 2,144,825 – – – 50,212,656 – 50,212,656 Due from third-party payor 3,959,207 95,619 – – – 4,054,826 – 4,054,826 Inventories 5,234,652 543,090 – – – – 5,777,742 – 5,777,742 Current portion of assets limited as to use 1,964,267 401,762 – – – – 2,366,029 – 2,366,029 Prepaid expenses and other 7,036,537 261,643 32,399 152,108 7,567 – 7,490,254 – 7,490,254

Total current assets 121,853,558 6,357,286 2,204,227 481,460 1,137,591 20,950 132,055,072 – 132,055,072

Assets limited as to use, less current portion:For self-insurance programs 4,443,339 952,600 – – – – 5,395,939 – 5,395,939 For deferred compensation plan assets 3,019,925 – – – – – 3,019,925 – 3,019,925 Annuity trust – – – – 223,449 – 223,449 – 223,449

Property, plant and equipment, net 100,527,172 8,330,078 4,868,135 3,099,353 – – 116,824,738 – 116,824,738

Other assets:Related-party receivables 13,471,363 – – – – 2,231 13,473,594 (13,473,594) – Investment in affiliates 7,144,275 – – – – – 7,144,275 (7,053,275) 91,000 Goodwill – – – – – – – – – Property held for future use 15,426,354 – – – – – 15,426,354 – 15,426,354 Other assets – 97,000 36,162 – – – 133,162 – 133,162

Total assets 265,885,986$ 15,736,964$ 7,108,524$ 3,580,813$ 1,361,040$ 23,181$ 293,696,508$ (20,526,869)$ 273,169,639$


Consolidating Balance Sheet

December 31, 2010

34 1101-1218108

Consolidated Community CaliforniaCommunity Ojai Valley Grossman Buenavista Memorial HeartMemorial Community Imaging Medical Healthcare Institute,Hospital Hospital of CMH Properties, Inc. Foundation Inc. Totals Eliminations Consolidated

Liabilities and net assetsCurrent liabilities:

Accounts payable and accrued expenses 14,363,216$ 1,399,541$ 647,565$ –$ –$ –$ 16,410,322$ –$ 16,410,322$ Accrued compensation and related benefits 11,538,894 915,258 – – – – 12,454,152 – 12,454,152 Current maturities of long-term debt and

capital lease obligations 640,512 5,935 773,180 140,000 – – 1,559,627 – 1,559,627 Total current liabilities 26,542,622 2,320,734 1,420,745 140,000 – – 30,424,101 – 30,424,101

Related-party payables – 7,046,404 5,050,399 1,313,520 63,271 – 13,473,594 (13,473,594) – Accrued pension cost, less current portion 3,392,419 – – – – – 3,392,419 – 3,392,419 Self-insurance liabilities, less current portion 6,863,924 1,270,712 – – – – 8,134,636 – 8,134,636 Long-term debt and capital lease obligations,

net of current maturities 1,398,681 179,182 858,112 3,278,557 – – 5,714,532 – 5,714,532 Annuity trust liability – – – – 129,569 – 129,569 – 129,569 Total liabilities 38,197,646 10,817,032 7,329,256 4,732,077 192,840 – 61,268,851 (13,473,594) 47,795,257

Net assets:Unrestricted: System 227,057,980 4,779,351 1,556,221 (888,974) 444,187 23,181 232,971,946 (7,053,275) 225,918,671 Noncontrolling interests in subsidiaries – – (1,776,953) (262,290) – – (2,039,243) – (2,039,243) Temporarily restricted 630,360 140,581 – – 724,013 – 1,494,954 – 1,494,954

Total net assets 227,688,340 4,919,932 (220,732) (1,151,264) 1,168,200 23,181 232,427,657 (7,053,275) 225,374,382 Total liabilities and net assets 265,885,986$ 15,736,964$ 7,108,524$ 3,580,813$ 1,361,040$ 23,181$ 293,696,508$ (20,526,869)$ 273,169,639$


Consolidating Balance Sheet (continued)

December 31, 2010

35 1101-1218108



Cash and cash equivalents 1,200,774$ 134,236$ 175,309$ 768,558$ 453,313$ 7,628$ 2,739,818$ 253,778$ 2,993,596$ Investments 47,042,747 – – – 752,726 – 47,795,473 (2,280,812) 45,514,661 Patient accounts receivable 47,012,455 5,862,406 2,135,194 – – – 55,010,055 – 55,010,055 Due from third-party payor 3,660,164 79,403 – – – – 3,739,567 – 3,739,567 Inventories 5,669,425 407,111 – – – – 6,076,536 – 6,076,536 Current portion of assets limited as to use 1,284,768 142,474 – – – – 1,427,242 – 1,427,242 Prepaid expenses and other 6,994,476 264,780 38,106 138,534 26,757 53,783 7,516,436 – 7,516,436

Total current assets 112,864,809 6,890,410 2,348,609 907,092 1,232,796 61,411 124,305,127 (2,027,034) 122,278,093

Assets limited as to use, less current portion:For self-insurance programs 3,948,559 444,064 – – – – 4,392,623 – 4,392,623 For deferred compensation plan assets 2,408,671 – – – – – 2,408,671 – 2,408,671

Annuity trust – – – – 216,417 – 216,417 – 216,417


Other assets:Related-party receivables 17,174,594 – – – – 36,567 17,211,161 (17,211,161) – Investment in affiliates 7,053,275 – – – – – 7,053,275 (7,053,275) – Goodwill – – 2,760,297 – – – 2,760,297 – 2,760,297 Property held for future use 10,620,026 – – – – – 10,620,026 – 10,620,026 Other assets – 107,643 36,162 – – – 143,805 – 143,805

Total assets 243,171,227$ 15,092,094$ 10,462,706$ 4,181,241$ 1,449,213$ 97,978$ 274,454,459$ (26,291,470)$ 248,162,989$



December 31, 2009

36 1101-1218108

Consolidated Community CaliforniaCommunity Ojai Valley Grossman Buenavista Memorial HeartMemorial Community Imaging Medical Healthcare Institute,Hospital Hospital of CMH Properties, Inc. Foundation Inc. Totals Eliminations Consolidated


Accounts payable and accrued expenses 14,718,352$ 1,265,008$ 982,378$ 9,662$ –$ –$ 16,975,400$ –$ 16,975,400$ Accrued compensation and related benefits 14,502,303 1,300,249 – – – – 15,802,552 (2,027,034) 13,775,518 Current maturities of long-term debt and

capital lease obligations 1,289,130 5,500 793,872 140,000 – – 2,228,502 – 2,228,502 Total current liabilities 30,509,785 2,570,757 1,776,250 149,662 – – 35,006,454 (2,027,034) 32,979,420

Related-party payables – 9,498,507 5,836,025 1,801,184 75,445 – 17,211,161 (17,211,161) – Accrued pension cost, less current portion 3,216,532 – – – – – 3,216,532 – 3,216,532 Self-insurance liabilities, less current portion 6,592,321 931,914 – – – – 7,524,235 – 7,524,235 Long-term debt and capital lease obligations,


Net assets:Unrestricted: System 200,516,747 1,859,805 4,441,129 (833,931) 420,303 97,978 206,502,031 (7,053,275) 199,448,756 Noncontrolling interests in subsidiaries – – (1,657,222) (194,508) – – (1,851,730) – (1,851,730) Temporarily restricted 104,538 46,026 – – 818,880 – 969,444 – 969,444

Total net assets 200,621,285 1,905,831 2,783,907 (1,028,439) 1,239,183 97,978 205,619,745 (7,053,275) 198,566,470 Total liabilities and net assets 243,171,227$ 15,092,094$ 10,462,706$ 4,181,241$ 1,449,213$ 97,978$ 274,454,459$ (26,291,470)$ 248,162,989$



December 31, 2009

37 1101-1218108


Unrestricted revenue, gains and other support:Net patient service revenue 249,132,404$ 26,785,985$ 11,384,348$ –$ –$ –$ 287,302,737$ –$ 287,302,737$Hospital Med-Cal supplemental payment 24,779,615$ 634,345$ 25,413,960 –$ 25,413,960 Other operating revenue 4,141,563 324,900 – 924,123 – 53,665 5,444,251 (1,356,631) 4,087,620 Net assets released from restrictions 204,699 170,480 – – – – 375,179 – 375,179

Total unrestricted revenue, gains and other support 278,258,281 27,915,710 11,384,348 924,123 – 53,665 318,536,127 (1,356,631) 317,179,496

Expenses:Payroll and related expenses 124,985,733 14,454,785 2,771,405 – – – 142,211,923 – 142,211,923 Other operating expenses 99,523,164 7,985,462 6,881,491 600,117 38,206 128,462 115,156,902 (1,181,482) 113,975,420 Hospital quality assurance fee 11,645,008 3,306 11,648,314 – 11,648,314 Depreciation and amortization 9,738,130 768,575 1,593,908 217,213 – – 12,317,826 – 12,317,826 Provision for bad debts 12,741,420 1,991,709 – – – – 14,733,129 – 14,733,129 Interest 173,079 15,263 381,886 183,675 – – 753,903 (343,829) 410,074

Total expenses 258,806,534 25,219,100 11,628,690 1,001,005 38,206 128,462 296,821,997 (1,525,311) 295,296,686 Operating income before asset impairment 19,451,747 2,696,610 (244,342) (76,882) (38,206) (74,797) 21,714,130 168,680 21,882,810

Asset impairment (139,787) – – – – – (139,787) – (139,787)

Operating income (loss) 19,311,960 2,696,610 (244,342) (76,882) (38,206) (74,797) 21,574,343 168,680 21,743,023

Other income and expense:Investment income (loss) 6,184,366 – – – 29,643 – 6,214,009 (168,680) 6,045,329 Donations 153,409 24,185 – – 136,835 – 314,429 314,429

Total other income and expense 6,337,775 24,185 – – 166,478 – 6,528,438 (168,680) 6,359,758

Excess (deficiency) of unrestricted revenues, gainsand other support over expenses 25,649,735 2,720,795 (244,342) (76,882) 128,272 (74,797) 28,102,781 – 28,102,781

Add: excess of expenses over unrestricted revenues, gains and other support attributable to noncontrolling interests – – 119,732 21,841 – – 141,573 – 141,573

Excess of unrestricted revenues, gains and other support over expenses attributable to the System 25,649,735$ 2,720,795$ (124,610)$ (55,041)$ 128,272$ (74,797)$ 28,244,354$ –$ 28,244,354$

Year Ended December 31, 2010


Consolidating Statement of Operations

38 1101-1218108


Unrestricted revenue, gains and other support:Net patient service revenue 248,887,357$ 25,292,170$ 11,613,249$ –$ –$ –$ 285,792,776$ –$ 285,792,776$Other operating revenue 4,333,861 221,161 55,069 923,740 – 47,010 5,580,841 (1,481,795) 4,099,046 Net assets released from restrictions 73,565 160,792 – – – – 234,357 – 234,357

Total unrestricted revenue, gains and other support 253,294,783 25,674,123 11,668,318 923,740 – 47,010 291,607,974 (1,481,795) 290,126,179

Expenses:Payroll and related expenses 122,575,625 14,084,239 2,744,116 – – – 139,403,980 – 139,403,980 Other operating expenses 89,807,284 7,579,914 7,191,349 454,880 37,094 45,320 105,115,841 (1,104,200) 104,011,641 Depreciation and amortization 11,023,663 673,887 1,822,469 216,164 – – 13,736,183 – 13,736,183 Provision for bad debts 20,421,258 3,362,961 – – – – 23,784,219 – 23,784,219 Interest 236,888 14,800 500,325 180,275 – – 932,288 (472,258) 460,030

Total expenses 244,064,718 25,715,801 12,258,259 851,319 37,094 45,320 282,972,511 (1,576,458) 281,396,053 Operating income before asset impairment 9,230,065 (41,678) (589,941) 72,421 (37,094) 1,690 8,635,463 94,663 8,730,126

Asset impairment (326,798) – – – – – (326,798) – (326,798)

Operating income (loss) 8,903,267 (41,678) (589,941) 72,421 (37,094) 1,690 8,308,665 94,663 8,403,328

Other income and expense:Investment income (loss) 8,854,202 – – – 73,172 – 8,927,374 (94,663) 8,832,711 Donations 17,489 51,602 – – 76,336 – 145,427 – 145,427

Total other income and expense 8,871,691 51,602 – – 149,508 – 9,072,801 (94,663) 8,978,138

Excess (deficiency) of unrestricted revenues, gains and other support over expenses 17,774,958 9,924 (589,941) 72,421 112,414 1,690 17,381,466 0 17,381,466

Add: excess of expenses over unrestricted revenues, gains and other support attributable to noncontrolling interests – – 289,068 (42,060) – – 247,008 – 247,008Excess of unrestricted revenues, gains and other support over expenses attributable to the System 17,774,958$ 9,924$ (300,873)$ 30,361$ 112,414$ 1,690$ 17,628,474$ –$ 17,628,474$




39 1101-1218108


Net assets at beginning of year 200,621,285$ 1,905,831$ 2,783,907$ (1,028,439)$ 1,239,183$ 97,978$ 205,619,745$ (7,053,275)$ 198,566,470$

Unrestricted net assets:Excess (deficiency) of unrestricted revenues, gains

and other support over expensesattributable to the System 25,649,735 2,720,795 (124,610) (55,041) 128,272 (74,797) 28,244,354 – 28,244,354

Excess of expenses over unrestricted revenues, gains and other support attributable to noncontrolling interests – – (119,732) (21,841) – – (141,573) – (141,573)

Change in pension liability 235,180 – – – – – 235,180 – 235,180Effect of adoption of new accounting principle – – (2,760,297) – – – (2,760,297) – (2,760,297)Distributions to noncontrolling interests – – – (45,943) – – (45,943) (45,943)Intercompany transfers 104,384 – – – (104,384) – – – –Net assets released from restriction for the

acquisition of property and equipment 551,929 198,752 – – – – 750,681 – 750,681Increase (decrease) in unrestricted net assets 26,541,228 2,919,547 (3,004,639) (122,825) 23,888 (74,797) 26,282,402 – 26,282,402

Temporarily restricted net assets:Contributions 1,000,668 463,787 – – 186,915 – 1,651,370 – 1,651,370Intercompany transfers 281,786 – – – (281,786) – – – –Net assets released from restriction (756,627) (369,233) – – – – (1,125,860) – (1,125,860)

Increase (decrease) in temporarily restricted net assets 525,827 94,554 – – (94,871) – 525,510 – 525,510

Increase (decrease) in net assets 27,067,055 3,014,101 (3,004,639) (122,825) (70,983) (74,797) 26,807,912 – 26,807,912Net assets at end of year 227,688,340$ 4,919,932$ (220,732)$ (1,151,264)$ 1,168,200$ 23,181$ 232,427,657$ (7,053,275)$ 225,374,382$



Consolidating Statement of Changes in Net Assets

40 1101-1218108


Net assets at beginning of year 182,807,171$ 957,629$ 3,373,848$ (1,029,266)$ 1,247,198$ 96,288$ 187,452,868$ (7,053,275)$ 180,399,593$

Excess (deficiency) of unrestricted revenues, gains and other support over expenses attributable to the System 17,774,958 9,924 (300,873) 30,361 112,414 1,690 17,628,474$ – 17,628,474$ Excess of expenses over unrestricted revenues, gains and other support attributable to noncontrolling interests – – (289,068) 42,060 – – (247,008) – (247,008) Change in pension liability (265,127) – – – – – (265,127) – (265,127)Distributions to noncontrolling interests – – – (71,594) – – (71,594) – (71,594)Intercompany transfers 258,551 – – – (258,551) – – – – Net assets released from restriction for the

acquisition of property and equipment – 932,016 – – – – 932,016 – 932,016 Increase (decrease) in unrestricted net assets 17,768,382 941,940 (589,941) 827 (146,137) 1,690 17,976,761 – 17,976,761

Temporarily restricted net assets:Contributions 14,931 1,099,070 – – 242,489 – 1,356,490 – 1,356,490 Intercompany transfers 104,367 – – – (104,367) – – – – Net assets released from restriction (73,566) (1,092,808) – – – – (1,166,374) – (1,166,374)

Increase (decrease) in temporarily restricted net assets 45,732 6,262 – – 138,122 – 190,116 – 190,116

Increase (decrease) in net assets 17,814,114 948,202 (589,941) 827 (8,015) 1,690 18,166,877 – 18,166,877 Net assets at end of year 200,621,285$ 1,905,831$ 2,783,907$ (1,028,439)$ 1,239,183$ 97,978$ 205,619,745$ (7,053,275)$ 198,566,470$




41 1101-1218108

Ernst & Young LLP

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C O N D E N S E D C O N S O L I D A T E D I N T E R I M F I N A N C I A L S T A T E M E N T S A N D O T H E R F I N A N C I A L I N F O R M A T I O N ( U N A U D I T E D )

Community Memorial Health System Six Months Ended June 30, 2011 and 2010


Condensed Consolidated Interim Financial Statements and Other Financial Information

For the Six Months Ended June 30, 2011 and 2010

(Unaudited)

Contents

Unaudited Condensed Consolidated Interim Financial Statements

Consolidated Balance Sheets ...........................................................................................................1Consolidated Statements of Operations ...........................................................................................3Consolidated Statements of Changes in Net Assets ........................................................................4 Consolidated Statements of Cash Flows ..........................................................................................5Notes to Condensed Consolidated Financial Statements .................................................................6


Consolidating Balance Sheets ........................................................................................................16Consolidating Statements of Operations ........................................................................................20Consolidating Statements of Changes in Net Assets .....................................................................22

June 30 December 312011 2010


Cash and cash equivalents 15,991,427$ 10,081,928$Investments 63,336,743 52,071,637Patient accounts receivable, net of bad debt allowances

of $46,280,000 and $50,275,000 at June 30, 2011, and December 31, 2010, respectively 53,838,101 50,212,656

Due from third-party payors 4,450,078 4,054,826Inventories 6,236,424 5,777,742Current portion of assets limited as to use 2,318,219 2,366,029Current portion of insurance receivable for self-insuranceprogram 4,294,138 3,791,364Prepaid expenses and other 12,485,143 7,490,254

Total current assets 162,950,273 135,846,436

Assets limited as to use, less current portion:For self-insurance company 5,286,902 5,395,939For deferred compensation plans 3,506,608 3,019,925Annuity trust 225,627 223,449

9,019,137 8,639,313

Property, plant and equipment, net 119,315,410 116,824,738

Other assets:Insurance receivable for self-insurance program 10,292,754 9,209,234Investment in affiliate 57,040 91,000

Property held for future use 15,505,973 15,426,354 Other assets 133,162 133,162Total assets 317,273,749$ 286,170,237$


Consolidated Balance Sheets(Unaudited)

1

June 30 December 312011 2010


Accounts payable and accrued expenses 14,153,058$ 17,364,473$Accrued compensation and related benefits 18,532,219 15,291,365Deferred revenue 11,754,976 –Current maturities of long-term debt and

capital lease obligations 4,986,572 1,559,627Total current liabilities 49,426,825 34,215,465

Accrued pension cost, less current portion 3,774,019 3,392,419Self-insurance liabilities, less current portion 22,385,347 17,343,870Long-term debt and capital lease obligations,

net of current maturities 6,071,228 5,714,532Annuity trust liability 131,749 129,569Total liabilities 81,789,168 60,795,855

Net assets:Unrestricted: System 235,424,706 225,918,671 Noncontrolling interests in subsidiaries (2,230,829) (2,039,243)Temporarily restricted – System 2,290,704 1,494,954

Total net assets 235,484,581 225,374,382Total liabilities and net assets 317,273,749$ 286,170,237$


2


Consolidated Statements of Operations

2011 2010Unrestricted revenue, gains and other support:

Net patient service revenue 147,496,630$ 141,536,701$Other operating revenue 3,215,100 1,925,248Net assets released from restrictions 193,195 80,230

Total unrestricted revenues, gains and other support 150,904,925 143,542,179

Expenses:Payroll and related expenses 74,641,846 72,055,292Other operating expenses 55,392,124 54,145,157Depreciation and amortization 6,504,120 6,410,046Provision for bad debts 6,891,730 5,780,401Interest 250,066 206,479

Total expenses 143,679,886 138,597,375Operating income 7,225,039 4,944,804

Other income:Investment income 1,979,310 657,936Donations 18,772 167,461

Total other income 1,998,082 825,397

Excess of unrestricted revenues, gains andother support over expenses 9,223,121 5,770,201

Add: excess of expenses over unrestricted revenues, gains, and other support attributable to noncontrolling interests 156,096 77,804Excess of unrestricted revenues, gains and other support over expenses attributable to the System 9,379,217$ 5,848,005$


Six Months Ended June 30

(Unaudited)

3

2011 2010

Net assets at beginning of period 225,374,382$ 198,566,470$

Unrestricted net assets:Excess of unrestricted revenues, gains, and other support over expenses attributable to the System 9,379,217 5,848,005Excess of expenses over unrestricted revenues, gains, and other support attributable to noncontrolling interests (156,096) (77,804)Distributions to noncontrolling interests (35,490) (28,962)Net assets released from restrictions for the acquisition

of property, plant and equipment 126,818 23,878Increase in unrestricted net assets 9,314,449 5,765,117

Temporarily restricted net assets:Contributions 1,115,762 1,651,491Net assets released from restrictions (320,012) (104,108)

Increase in temporarily restricted net assets 795,750 1,547,383Increase in net assets 10,110,199 7,312,500Net assets at end of period 235,484,581$ 205,878,970$




Consolidated Statements of Changes in Net Assets(Unaudited)

4

2011 2010Operating activitiesIncrease in net assets 10,110,199$ 7,312,500$Adjustments to reconcile increase in net assets to

net cash provided by operating activities:Depreciation and amortization 6,504,120 6,278,603Net unrealized losses (gains) on trading investments 572,565 (241,177)Net purchases of trading investments (11,837,671) (1,580,897)Provision for bad debts 6,891,730 5,780,401Noncontrolling interests (191,586) (87,742)Changes in operating assets and liabilities:

Patient accounts receivable (10,517,175) (5,628,563)Inventories (458,682) (521,379)Prepaid expenses and other (4,994,889) (669,919)Other assets (1,770,203) (59,992)Annuity trust (2,178) 6,282Accounts payable and accrued expenses 29,439 3,849,899Due from/to third-party payors (395,252) 330,416Deferred revenue 11,754,976 –Accrued pension cost and other liabilities 5,425,257 394,022

Net cash provided by operating activities 11,120,650 15,162,454

Investing activitiesPurchase of property, plant and equipment (8,994,792) (10,144,572)Net cash used in investing activities (8,994,792) (10,144,572)

Financing activitiesProceeds from new borrowings 4,297,410 –Repayments of long-term debt and capital lease obligations (513,769) (1,045,695)Net cash provided by (used in) financing activities 3,783,641 (1,045,695)

Net increase in cash and cash equivalents 5,909,499 3,972,187Cash and cash equivalents at beginning of period 10,081,928 2,993,596Cash and cash equivalents at end of period 15,991,427$ 6,965,783$

Supplemental cash flow informationInterest paid 250,066$ 206,479$




Consolidated Statements of Cash Flows(Unaudited)

5


Notes to Condensed Consolidated Interim Financial Statements (Unaudited)

June 30, 2011

6

1. Organization and Operations

Community Memorial Health System (the System, or CMHS), a California nonprofit public benefit corporation, headquartered in Ventura, California, was organized to provide multi-hospital multi-discipline health care services to patients in Ventura, California, and the surrounding areas.

The accounts of the System include the following significant affiliate/subsidiary organizations:

Community Memorial Hospital (CMH), a division of CMHS, operates a 242-bed acute care hospital in Ventura, California.

Ojai Valley Community Hospital (OVCH), a division of CMHS, operates a 103-bed hospital located in Ojai, California, consisting of 37 acute beds and a 66-bed distinct part skilled nursing facility.

Community Memorial Healthcare Foundation (the Foundation) is a tax-exempt corporation whose purpose is to raise funds for the future support of CMH. The Foundation regularly provides funds to CMH for research, education and the purchase of equipment. The System is the sole corporate member of the Foundation.

Buenavista Medical Properties, Inc. (BVM, Inc.), a California for-profit corporation owned by CMHS, is a general partner and 58.50% owner of Buenavista Medical Properties, Ltd. (BVM, Ltd.). BVM, Ltd. owns two floors of a medical office building adjacent to CMH.

California Heart Institute, Inc. (CHI), a California for-profit corporation owned by CMHS, provides billing and other services to physicians.

Grossman Imaging Center of CMH (Grossman) is a limited liability corporation that owns three free-standing imaging centers. CMHS formed a subsidiary effective June 1, 2005, which acquired a 51% interest in Grossman.


Notes to Condensed Consolidated Interim Financial Statements (continued) (Unaudited)

7

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated interim financial statements do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with U.S. generally accepted accounting principles for complete financial statements; however, in the opinion of our management, all adjustments consisting of normal recurring adjustments necessary for a fair presentation of the financial position, results of operations and cash flows as of June 30, 2011, and for the six-month periods ended June 30, 2011 and 2010, have been made. The results of operations for any interim period are not necessarily indicative of the results for a full year. These unaudited condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and related notes thereto contained in our audited financial statements for the year ended December 31, 2010.


The consolidated financial statements include the accounts of the System and its affiliate/subsidiary organizations listed in Note 1. Where the System has a majority voting interest but less than 100% ownership interest, the System consolidates the subsidiary or partnership’s results and reflects the noncontrolling interests in the excess of unrestricted revenues, gains and other support over expenses of the System. All significant intercompany balances and transactions have been eliminated in the accompanying consolidated financial statements. For Grossman, CMHS has recorded the noncontrolling owner’s losses, including those that reduced the noncontrolling interest below zero since the noncontrolling owner has personally guaranteed his pro-rata share of certain debt obligations and he has the ability to satisfy the guarantee.

All significant intercompany balances and transactions have been eliminated in the accompanying consolidated financial statements.



8


Investments

Investments in equity securities with readily determinable fair values and all investments in debt securities are measured at fair value in the consolidated balance sheets. Fair value is established based on quoted prices from recognized security exchanges. Management determines the appropriate classification as trading or other-than-trading of all equity and debt securities at the date of purchase and reevaluates such designations at each balance sheet date. The System determined that all investments held at June 30, 2011, and December 31, 2010, are designated as trading securities as the investments are externally managed without restrictions within the guidelines of the System’s investment policy. Accordingly, the change in unrealized gains and losses on investments is reported above the performance indicator in the consolidated statements of operations.

Investment income or loss (including realized and unrealized gains and losses on trading investments and interest and dividends) is included in the excess (deficiency) of unrestricted revenues, gains and other support over expenses. Realized gains and losses with respect to disposition of investments are based on the specific-identification method.

Investment income or loss on investments included in temporarily restricted net assets (including realized gains and losses on investments and interest and dividends) is reported in excess of unrestricted revenues, gains and other support over expenses unless the income or loss is restricted by donor or by law.

Alternative Investments

The System’s classification of alternative investments includes a commingled fund that seeks to outperform the S&P 500/Citigroup Growth Index when evaluated over a rolling three- to five-year period. These entities employ a range of investment strategies including, but not limited to, long/short equity positions, derivatives, and forward and futures contracts. The System accounts for its ownership interest in alternative investments under the equity method of accounting. The gain or loss from alternative investments is included in investment income in the consolidated statements of operations. At June 30, 2011, and December 31, 2010, these alternative investments comprised approximately 2.5% of the System’s total assets.



9


Fair Value Measurement

The System has adopted Accounting Standards Codification (ASC) No. 820, Fair Value Measurements and Disclosures (ASC 820), which establishes a framework for measuring fair value in accounting principles generally accepted in the United States, and disclosures about fair value measurements. As defined in ASC 820, fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

The level in the fair value hierarchy within which the fair value is classified is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Assets and liabilities measured at fair value are based on one or more of three valuation techniques identified in the tables below. Where more than one technique is noted, individual assets or liabilities were valued using one or more of the noted techniques. The valuation techniques are as follows:

(a) Market approach. Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

(b) Cost approach. Amount that would be required to replace the service capacity of an asset (replacement cost).



10


(c) Income approach. Techniques to convert future amounts to a single present amount based on market expectations (including present value techniques, option-pricing and excess earnings models).

In determining fair value, the System utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value.

Financial assets carried at fair value as of June 30, 2011, are classified in the table below in one of the three categories described above:

Total Level 1 Level 2 Level 3 Equity Method

ValuationTechnique

(a,b,c) Assets:

Marketable equity securities $ 3,291,686 $ 3,291,686 $ – $ – $ – a Mutual funds 51,636,672 51,636,672 – – – a Alternative investment* 8,408,385 – – – 8,408,385

$ 63,336,743 $ 54,928,358 $ – $ – $ 8,408,385

Financial assets carried at fair value as of December 31, 2010, are classified in the table below in one of the three categories described above:

Total Level 1 Level 2 Level 3 Equity Method

ValuationTechnique

(a,b,c) Assets:

Marketable equity securities $ 2,601,633 $ 2,601,633 $ – $ – $ – a Mutual funds 42,589,846 42,589,846 – – – a Alternative investment* 6,880,158 – – – 6,880,158

$ 52,071,637 $ 45,191,479 $ – $ – $ 6,880,158


Assets limited as to use, consisting of cash and cash equivalents, deposits, mutual funds and an annuity trust (Note 3), are Level 1 financial assets that are valued using the market approach.



11


Fair Value of Financial Instruments

The System’s consolidated balance sheets include the following financial instruments: cash and cash equivalents, investments, other receivables, accounts payable and accrued liabilities, estimated third-party payor settlements and long-term debt. The System considers the carrying amounts of current assets and liabilities in the consolidated balance sheets to approximate the fair value of these financial instruments because of the relatively short period of time between origination of the instruments and their expected realization. Long-term debt approximates fair value based upon rates currently available from the bank for debt with similar terms and maturities.


Assets limited as to use include assets held by the insurer for payment of workers’ compensation claims, malpractice and workers’ compensation insurance recoveries, amounts held to fund an annuity trust, and amounts designated by the Board for the Supplemental Executive Retirement Plan (SERP). The current portion of assets limited as to use includes amounts which will be used to pay the current portion of workers’ compensation claims and the current portion of malpractice and workers’ compensation insurance recoveries.

Recently Adopted Accounting Principles

In August 2010, the FASB issued revised accounting standards on the presentation of insurance claims and related insurance recoveries. The revised accounting standards require a health care entity to present medical malpractice claims and similar liabilities without consideration of insurance recoveries. Related insurance recoveries are to be presented as a receivable net of a valuation allowance for uncollectible amounts. On January 1, 2011, the System adopted the revised accounting standards to separately present reserves for known malpractice claims and receivables for the related estimated insurance recoveries on an undiscounted basis based upon actuarial loss projections using our historical loss experience. The System also elected to retroactively apply the revised accounting standards to 2010 for comparability. The retroactive application of this revised accounting standards changed the consolidated balance sheet as of December 31, 2010, but had no impact on the net assets and on the consolidated statements of operations and cash flows for the six months ended June 30, 2011.



12


The following table summarizes the increases in assets and liabilities related to our self-insurance program as a result of the adoption of the revised standards as of:

June 30 2011

December 312010

Asset:Current portion of insurance receivable for self-

insurance program $ 4,294,138 $ 3,791,364 Insurance receivable, for self-insurance program

less current portion 10,292,754 9,209,234Total $ 14,586,892 $ 13,000,598 Liabilities:

Accounts payable and accrued expenses $ 847,156 $ 954,151 Self-insurance liabilities, less current portion 10,292,754 9,209,234Workers’ compensation claims reserve, current

portion 3,446,982 2,837,213Total $ 14,586,892 $ 13,000,598

Charity Care

The System provides care without charge to patients who meet certain criteria under its charity care policy. Because the System does not pursue collection of amounts determined to qualify as charity care, they are not reported as revenue. In August 2010, the FASB issued ASU 2010-23, Healthcare Entities (Topic 954): Measuring Charity Care for Disclosure, which requires that cost be used as a measurement for charity care disclosure purposes and that cost can be identified as the direct and indirect costs of providing the charity care. The System uses a patient cost of care to patient charge ratio to approximate its direct and indirect costs of providing charity care. This ratio is applied to the specific charges forgone for services and supplies furnished under the System’s charity care policy. The System determined that its direct and indirect costs of providing charity care were approximately $477,000 and $445,000 for the six months ended June 30, 2011 and 2010, respectively.



13


Subsequent Events

The System has evaluated subsequent events occurring between the end of the most recent fiscal year and July 27, 2011, the date the financial statements were available for issuance.

3. Investments and Assets Limited as to Use

Investments, stated at fair value, consist of the following at:

June 30 2011

December 312010

Mutual funds $ 51,636,672 $ 42,589,846 Alternative investments * 8,408,385 6,880,158Common and preferred stock 3,291,686 2,601,633Total investments $ 63,336,743 $ 52,071,637


Assets limited as to use, stated at fair value, consist of the following at:

June 30 2011

December 312010

Cash and cash equivalents $ 72,605 $ 79,390 Deposits with insurance company 7,605,120 7,761,968Mutual funds 3,434,004 2,940,535Annuity trust 225,627 223,449

11,337,356 11,005,342Less current portion (2,318,219) (2,366,029)

$ 9,019,137 $ 8,639,313



14

4. Retirement Plans

CMHS has a defined contribution plan covering substantially all employees except those at Grossman. The Plan allows employees to contribute an amount of compensation up to the Internal Revenue Service elective deferral limit, as defined, with CMHS matching 50% of the employees’ contributions up to a maximum of 6% of each employee’s annual compensation. In addition, CMHS contributes 1% of all covered employees’ compensation.

Effective July 1, 2001, CMH established the KEYSOP. The remaining two participants in the program withdrew their investments in 2010 thus terminating the KEYSOP. The KESOP was a nonqualified deferred compensation plan that allowed eligible participants to defer a portion of their compensation with options to purchase shares of selected mutual funds. The KEYSOP became inactive as of April 1, 2002, when the 2002 SERP became effective. No options were granted after April 1, 2002. The KEYSOP was terminated in December 2010 and all plan assets were distributed to the participants.

Effective January 1, 1990, CMH established a Supplemental Executive Retirement Plan (the 1990 SERP) to cover senior staff members of CMH. The 1990 SERP, which was frozen effective December 1, 1999, calls for benefits to be paid to eligible employees at retirement based on the number of years of service with CMH and the five highest years of earned compensation. Service and salary after 1999 are not counted under the frozen plan. On April 1, 2002, a second Supplemental Executive Retirement Plan (the 2002 SERP) became effective. For the 2002 SERP, the monthly benefit at normal retirement date (age 65) is equal to the average monthly compensation for the three-year period during which compensation was the highest including periods before April 1, 2002, at the following rates: (i) 4% for the CEO and 2% for other participants through April 4, 2004, and (ii) 5% for the CEO and 2% for other participants after April 4, 2004. Participants vest after ten years of service, including service prior to the effective date, or attainment of age 65. Together, the 1990 SERP and the 2002 SERP are referred to as SERPs.

5. Long-Term Debt and Capital Lease Obligations

As of June 30, 2011, the System has existing indebtedness in the amount of $11,058,000, a net increase of $3,784,000 over its December 31, 2010, balance of $7,274,000. The increase in indebtedness, gross of principal repayments, is attributable to a $3,654,000 draw on the System’s $20 million secured line of credit with Rabobank and a new equipment loan obtained by Grossman in the amount of $644,000. The System’s line of credit was paid in full and terminated on July 11, 2011.



15

6. Hospital Medi-Cal Supplemental Payment and Quality Assurance Fee

The California Hospital Fee Program (the Program) was signed into law by the Governor of California and became effective on January 1, 2010. Amending legislation, to conform to changes requested by the Centers for Medicare & Medicaid Services (CMS) during the approval process, was signed into law by the Governor of California and became effective September 8, 2010. The primary legislation (AB 1383) and amending legislation (AB 1653) contain two components. The Quality Assurance Fee Act governs the “Hospital Fee” or “Quality Assurance Fee” (QA Fee) paid by participating hospitals. The Medi-Cal Hospital Provider Stabilization Act governs supplemental Medi-Cal payments (Supplemental Payments) made to providers from the fund. Hospital participation is mandatory with limited exceptions.

The Program was approved by CMS in December 2010. The amended legislation allowed California Department of Health Care Services (DHCS) to begin assessing fees and making supplemental payments in September 2010. DHCS began assessing fees in October 2010.

The Corporation made payments to DHCS for the QA Fee in the amount of $3,642,448 during the six months ended June 30, 2011, and recorded the QA Fee in prepaid expenses within the accompanying consolidated balance sheets. The Corporation received Supplemental Payments of $11,754,977 during the same six-month period in 2011, and recorded the Supplemental Payments as deferred revenue within the accompanying consolidated balance sheets.



Cash and cash equivalents 13,959,698$ –$ 100,449$ 317,325$ 461,333$ 85,801$ 14,924,606$ 1,066,821$ 15,991,427$ Investments 63,814,299 – – – 589,265 – 64,403,564 (1,066,821) 63,336,743 Patient accounts receivable 46,990,314 4,597,931 2,249,856 – – – 53,838,101 – 53,838,101 Due from third-party payors 4,365,990 84,088 – – – – 4,450,078 – 4,450,078 Inventories 5,686,521 549,903 – – – – 6,236,424 – 6,236,424 Current portion of assets limited as to use 1,924,587 393,632 – – – – 2,318,219 – 2,318,219 Current portion of insurance receivable for self-insurance program 3,662,739 631,399 – – – – 4,294,138 – 4,294,138 Prepaid expenses and other 12,229,676 125,391 2,400 117,114 10,562 – 12,485,143 – 12,485,143


Assets limited as to use, less current portion:For self-insurance program 4,353,580 933,322 – – – – 5,286,902 – 5,286,902 For deferred compensation plans 3,506,608 – – – – – 3,506,608 – 3,506,608 Annuity trust – – – – 225,627 – 225,627 – 225,627


Other assets:Insurance receivable for self-insurance program 8,630,600 1,662,154 – – – – 10,292,754 – 10,292,754 Related-party receivables 13,009,598 – – – – 23,606 13,033,204 (13,033,204) – Investment in affiliates 7,110,315 – – – – – 7,110,315 (7,053,275) 57,040 Property held for future use 15,505,973 – – – – – 15,505,973 – 15,505,973 Other assets – 97,000 36,162 – – – 133,162 – 133,162

Total assets 307,905,346$ 17,477,318$ 7,093,376$ 3,487,994$ 1,286,787$ 109,407$ 337,360,228$ (20,086,479)$ 317,273,749$



June 30, 2011

16

Consolidated CommunityCommunity Ojai Valley Grossman Buenavista Memorial CaliforniaMemorial Community Imaging Medical Healthcare HeartHospital Hospital of CMH Properties, Inc. Foundation Institute, Inc. Totals Eliminating Consolidated


Accounts payable and accrued expenses 11,100,914$ 2,420,878$ 631,266$ –$ –$ –$ 14,153,058$ –$ 14,153,058$ Accrued compensation and related benefits 17,126,264 1,405,955 – – – – 18,532,219 – 18,532,219 Deferred revenue 11,455,066 299,910 – – – – 11,754,976 – 11,754,976 Current maturities of long-term debt and

capital lease obligations 4,315,120 6,452 525,000 140,000 – – 4,986,572 – 4,986,572 Total current liabilities 43,997,364 4,133,195 1,156,266 140,000 – – 49,426,825 – 49,426,825

Related-party payables – 6,685,541 4,906,815 1,268,433 87,122 85,293 13,033,204 (13,033,204) – Accrued pension cost, less current portion 3,774,019 – – – – – 3,774,019 – 3,774,019 Self-insurance liabilities, less current portion 18,991,410 3,393,937 – – – – 22,385,347 – 22,385,347 Long-term debt and capital lease obligations,

net of current maturities 1,063,389 175,700 1,594,846 3,237,293 – – 6,071,228 – 6,071,228 Annuity trust liability – – – – 131,749 – 131,749 – 131,749 Total liabilities 67,826,182 14,388,373 7,657,927 4,645,726 218,871 85,293 94,822,372 (13,033,204) 81,789,168

Net assets:Unrestricted: System 238,451,697 3,044,457 1,380,873 (872,327) 449,167 24,114 242,477,981 (7,053,275) 235,424,706 Noncontrolling interests in subsidiaries – – (1,945,424) (285,405) – – (2,230,829) – (2,230,829) Temporarily restricted – System 1,627,467 44,488 – – 618,749 – 2,290,704 – 2,290,704

Total net assets 240,079,164 3,088,945 (564,551) (1,157,732) 1,067,916 24,114 242,537,856 (7,053,275) 235,484,581 Total liabilities and net assets 307,905,346$ 17,477,318$ 7,093,376$ 3,487,994$ 1,286,787$ 109,407$ 337,360,228$ (20,086,479)$ 317,273,749$



June 30, 2011

17



Cash and cash equivalents 7,758,876$ –$ 27,003$ 329,352$ 552,329$ 20,950$ 8,688,510$ 1,393,418$ 10,081,928$ Investments 52,887,360 – – – 577,695 – 53,465,055 (1,393,418) 52,071,637 Patient accounts receivable 43,012,659 5,055,172 2,144,825 – – – 50,212,656 – 50,212,656 Due from third-party payors 3,959,207 95,619 – – – – 4,054,826 – 4,054,826 Inventories 5,234,652 543,090 – – – – 5,777,742 – 5,777,742 Current portion of assets limited as to use 1,964,267 401,762 – – – – 2,366,029 – 2,366,029 Current portion of insurance receivable

for self-insurance program 3,257,680 533,684 – – – – 3,791,364 – 3,791,364 Prepaid expenses and other 7,036,537 261,643 32,399 152,108 7,567 – 7,490,254 – 7,490,254


Assets limited as to use, less current portion:For self-insurance program 4,443,339 952,600 – – – – 5,395,939 – 5,395,939 For deferred compensation plans 3,019,925 – – – – – 3,019,925 – 3,019,925 Annuity trust – – – – 223,449 – 223,449 – 223,449


Other assets:Insurance receivable for self-insurance program 7,757,917 1,451,317 – – – – 9,209,234 – 9,209,234 Related-party receivables 13,471,363 – – – – 2,231 13,473,594 (13,473,594) – Investment in affiliates 7,144,275 – – – – – 7,144,275 (7,053,275) 91,000 Property held for future use 15,426,354 – – – – – 15,426,354 – 15,426,354 Other assets – 97,000 36,162 – – – 133,162 – 133,162

Total assets 276,901,583$ 17,721,965$ 7,108,524$ 3,580,813$ 1,361,040$ 23,181$ 306,697,106$ (20,526,869)$ 286,170,237$



December 31, 2010

18



Accounts payable and accrued expenses 15,265,438$ 1,451,470$ 647,565$ –$ –$ –$ 17,364,473$ –$ 17,364,473$ Accrued compensation and related benefits 13,894,352 1,397,013 – – – – 15,291,365 – 15,291,365 Current maturities of long-term debt and

capital lease obligations 640,512 5,935 773,180 140,000 – – 1,559,627 – 1,559,627 Total current liabilities 29,800,302 2,854,418 1,420,745 140,000 – – 34,215,465 – 34,215,465

Related-party payables – 7,046,404 5,050,399 1,313,520 63,271 – 13,473,594 (13,473,594) – Accrued pension cost, less current portion 3,392,419 – – – – – 3,392,419 – 3,392,419 Self-insurance liabilities, less current portion 14,621,841 2,722,029 – – – – 17,343,870 – 17,343,870 Long-term debt and capital lease obligations,


Net assets:Unrestricted:

System 227,057,980 4,779,351 1,556,221 (888,974) 444,187 23,181 232,971,946 (7,053,275) 225,918,671 Noncontrolling interests in subsidiaries – – (1,776,953) (262,290) – – (2,039,243) – (2,039,243)

Temporarily restricted – System 630,360 140,581 – – 724,013 – 1,494,954 – 1,494,954 Total net assets 227,688,340 4,919,932 (220,732) (1,151,264) 1,168,200 23,181 232,427,657 (7,053,275) 225,374,382 Total liabilities and net assets 276,901,583$ 17,721,965$ 7,108,524$ 3,580,813$ 1,361,040$ 23,181$ 306,697,106$ (20,526,869)$ 286,170,237$



December 31, 2010

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Unrestricted revenue, gains and other support:Net patient service revenue 129,840,025$ 13,453,472$ 4,203,133$ –$ –$ –$ 147,496,630$ –$ 147,496,630$Other operating revenue 2,817,757 151,787 – 472,538 – 40,137 3,482,219 (267,119) 3,215,100Net assets released from restrictions 132,387 60,808 – – – – 193,195 – 193,195

Total unrestricted revenue, gains and other support 132,790,169 13,666,067 4,203,133 472,538 – 40,137 151,172,044 (267,119) 150,904,925

Expenses:Payroll and related expenses 65,049,326 8,090,918 1,501,602 – – – 74,641,846 – 74,641,846Other operating expenses 48,832,324 4,496,088 1,927,451 243,348 16,958 39,204 55,555,373 (163,249) 55,392,124Depreciation and amortization 4,893,817 611,384 887,461 111,458 – – 6,504,120 – 6,504,120Provision for bad debts 6,118,555 773,175 – – – – 6,891,730 – 6,891,730Interest 87,273 6,704 230,438 88,710 – – 413,125 (163,059) 250,066

Total expenses 124,981,295 13,978,269 4,546,952 443,516 16,958 39,204 144,006,194 (326,308) 143,679,886Operating income 7,808,874 (312,202) (343,819) 29,022 (16,958) 933 7,165,850 59,189 7,225,039

Other income:Investment income 2,025,704 – – – 12,795 – 2,038,499 (59,189) 1,979,310Donations – 9,629 – – 9,143 – 18,772 – 18,772

Total other income 2,025,704 9,629 – – 21,938 – 2,057,271 (59,189) 1,998,082

Excess (deficiency) of unrestricted revenues, gains and other support over expenses 9,834,578 (302,573) (343,819) 29,022 4,980 933 9,223,121 – 9,223,121

Add: excess (deficiency) of expenses over unrestricted revenues, gains and other supportattributable to noncontrolling interests – – 168,472 (12,376) – – 156,096 – 156,096

Excess (deficiency) of unrestricted revenues, gains and other support over expensesattributable to the System 9,834,578$ (302,573)$ (175,347)$ 16,646$ 4,980$ 933$ 9,379,217$ –$ 9,379,217$

Six Months Ended June 30, 2011

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Unrestricted revenue, gains and other support:Net patient service revenue 122,716,816$ 13,198,205$ 5,621,680$ –$ –$ –$ 141,536,701$ –$ 141,536,701$Other operating revenue 1,555,564 142,059 – 462,985 485 22,463 2,183,556 (258,308) 1,925,248Net assets released from restrictions 6,208 74,022 – – – – 80,230 – 80,230

Total unrestricted revenue, gains and other support 124,278,588 13,414,286 5,621,680 462,985 485 22,463 143,800,487 (258,308) 143,542,179

Expenses:Payroll and related expenses 62,887,477 7,814,180 1,353,635 – – – 72,055,292 – 72,055,292Other operating expenses 46,262,711 4,069,124 3,447,738 441,488 20,441 21,200 54,262,702 (117,545) 54,145,157Depreciation and amortization 4,873,775 510,940 916,955 108,376 – – 6,410,046 – 6,410,046Provision for bad debts 4,926,212 854,189 – – – – 5,780,401 – 5,780,401Interest 86,257 8,104 197,708 92,547 – – 384,616 (178,137) 206,479

Total expenses 119,036,432 13,256,537 5,916,036 642,411 20,441 21,200 138,893,057 (295,682) 138,597,375Operating income 5,242,156 157,749 (294,356) (179,426) (19,956) 1,263 4,907,430 37,374 4,944,804

Other income:Investment income 678,900 – – – 16,410 – 695,310 (37,374) 657,936Donations 49,025 11,934 – – 106,502 – 167,461 – 167,461

Total other income 727,925 11,934 – – 122,912 – 862,771 (37,374) 825,397

Excess (deficiency) of unrestricted revenues, gains and other support over expenses 5,970,081 169,683 (294,356) (179,426) 102,956 1,263 5,770,201 – 5,770,201

Add: excess (deficiency) of expenses over unrestricted revenues, gains and other supportattributable to noncontrolling interests – – 144,238 (66,434) – – 77,804 – 77,804

Excess (deficiency) of unrestricted revenues, gains and other support over expensesattributable to the System 5,970,081$ 169,683$ (150,118)$ (245,860)$ 102,956$ 1,263$ 5,848,005$ –$ 5,848,005$


21




Net assets at beginning of period 229,247,485$ 3,360,787$ (220,732)$ (1,151,264)$ 1,168,200$ 23,181$ 232,427,657$ (7,053,275)$ 225,374,382$

Unrestricted net assets:Excess (deficiency) of unrestricted revenues,

gains and other support over expensesattributable to the System 9,834,578 (302,573) (175,347) 16,646 4,980 933 9,379,217 – 9,379,217

Excess (deficiency) of expenses over unrestricted revenues, gains and other support attributable to noncontrolling interests – – (168,472) 12,376 – – (156,096) – (156,096)

Distributions to noncontrolling interests – – – (35,490) – – (35,490) – (35,490) Net assets released from restrictions for the

acquisition of property and equipment – 126,818 – – – – 126,818 – 126,818 Increase (decrease) in unrestricted net assets 9,834,578 (175,755) (343,819) (6,468) 4,980 933 9,314,449 – 9,314,449

Temporarily restricted net assets:Contributions 957,838 91,538 – – 66,386 – 1,115,762 – 1,115,762 Intercompany transfers 171,650 – – – (171,650) – – – – Net assets released from restrictions (132,387) (187,625) – – – – (320,012) – (320,012)

Increase (decrease) in temporarily restricted net assets 997,101 (96,087) – – (105,264) – 795,750 – 795,750

Increase (decrease) in net assets 10,831,679 (271,842) (343,819) (6,468) (100,284) 933 10,110,199 – 10,110,199 Net assets at end of period 240,079,164$ 3,088,945$ (564,551)$ (1,157,732)$ 1,067,916$ 24,114$ 242,537,856$ (7,053,275)$ 235,484,581$


22

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Community Memorial Health SystemStudy of Market Need and Financial Feasibility

July 7, 2011

Market and Financial Feasibility Study Community Memorial Health System

Table of Contents Section 1: Accountant’s Report ............................................................................ 1

A. Independent Accountant’s Report .................................................................... 1

Section 2: Historical and Forecasted Financial Statements ................................ 4

A. Forecasted Statements of Operations ................................................................ 4

B. Forecasted Statements of Changes in Net Assets .............................................. 5

C. Forecasted Balance Sheet................................................................................... 6

D. Forecasted Statements of Cash Flows ............................................................... 8

E. Forecasted Supplemental Schedule of Financial Ratios ................................... 9

Section 3: General Information .......................................................................... 10

A. Hospital History, Service and Governance ..................................................... 10 1. History ........................................................................................................ 10 2. Description of Organization and Health System Governance ................. 11 3. Overview of Services .................................................................................. 14 4. Community Memorial Health System Leadership ................................... 15

B. The Project Description ................................................................................... 17

C. Plan of Financing ............................................................................................. 21

D. Organizational Relationships .......................................................................... 23

E. Service Area Definition and Patient Origin .................................................... 24

F. Socioeconomic Characteristics of the Service Area ........................................ 27

Section 4. Summary of Significant Demand Assumptions ............................. 35

A. General Methodology ....................................................................................... 35

B. Competitive Environment in the Service Area ............................................... 35

C. Service Area Demand Analysis ........................................................................ 39

D. Community Memorial Health System Historical Utilization ......................... 48

E. Community Memorial Health System Projected Utilization .......................... 53

F. Medical Staff .................................................................................................... 72

G. Physician Survey Results ................................................................................. 77

Section 5: Demonstration of Market Need ....................................................... 91

A. Project Impact on Bed Need for the Community ........................................... 91

Section 6. Summary of Significant Accounting Policies and Financial Assumptions ........................................................................................................ 95

A. Summary of Significant Accounting Policies .................................................. 95

B. Net Patient Service Revenue ............................................................................ 97

C. Historical and Forecast Payor Mix – Revenues from Inpatient Services....... 98

D. Historical and Forecast Payor Mix – Revenues from Outpatient Services .. 100

E. Historical and Forecast Reimbursement Methodologies .............................. 102

F. Project Initiatives ........................................................................................... 112

G. Other Operating Revenue .............................................................................. 112

H. Non-Operating Revenue ................................................................................ 112

I. Operating Expenses ....................................................................................... 113 1. Salaries and Wages .................................................................................. 113 2. Fringe Benefits ......................................................................................... 115 3. Registry/Professional Fees ....................................................................... 115 4. Purchased Services .................................................................................. 115 5. Supplies and Other Expenses .................................................................. 116 6. Insurance Expense ................................................................................... 117 7. Interest Expense....................................................................................... 118 8. Depreciation and Amortization Expense ................................................ 118 9. Bad Debt Expense .................................................................................... 119

J. Balance Sheet Assumptions ........................................................................... 120

K. Changes in Net Assets .................................................................................... 123

L. Cash Flow Assumptions ................................................................................. 124

M. Appendix A Consolidating Financial Statements ......................................... 128

1

Section 1: Accountant’s Report A. Independent Accountant’s Report

Board of DirectorsCommunity Memorial Health System147 North Brent StreetVentura, CA 93003

HFS Consultants (HFS) has prepared the following market and financial feasibility analysis for Community Memorial Health System (CMHS or The System). This analysis is intended to review the Hospital’s ability to meet financial and other requirements, including debt service requirements, associated with the “Project” as described in the following paragraph.

For the purposes of this study, the Project is defined to include the construction and associated equipment purchases for the replacement hospital.

The utilization and financial projections included in this report (Report) were undertaken in order to assess the ability of the Hospital to meet its on-going operating expenses and debt requirements associated with the above-described Project. Based on current estimates, the proposed $345,900,000 bond issue will cover all future Project costs following the delivery of the bonds, plus a specified amount of reimbursement to CMHS for prior Project expenditures. Following the delivery date of the bonds, no future equity from CMHS is estimated to be required to complete the Project.

Financial statements for Community Memorial Health System are presented in Section Two.

Our procedures for Community Memorial Health System include the following:

• Analysis of historical System utilization and financial data;

• Definition of the System’s Primary and Secondary Service Areas;

• Collection and analysis of historical Service Area-wide discharge data;

• Discussions with System management (Management) and others,

2

• Assessment of factors and trends affecting future System utilization;

• Preparation of System utilization estimates;

• Collection of historical and estimated construction and equipment costs, debt service requirements, and estimated financing costs;

• Review of historical revenue and expense trends including utilization and seasonal fluctuation in discharges;

• Assessment of historical reimbursement trends;

• Analysis of the relationship between historical and projected utilization, revenues, and expenses; and,

• Analysis of other anticipated uses of cash during the seven-year projection period;

We also participated in gathering other information, assisting Management in identifying and formulating its assumptions, and in assembling the accompanying market and financial projections.

The accompanying financial projection is based upon assumptions that were provided by or reviewed and approved by Management.

The financial projection includes:

• Forecasted Statement of Operations;

• Forecasted Statement of Changes in Net Assets;

• Forecasted Balance Sheet;

• Forecasted Statement of Cash Flows;

• Forecasted Supplemental Schedule of Financial Ratios.

Individual Forecasted Statements of Operation for each consolidating entity can be found in appendix A of this study.

The financial projection presents Management’s estimates of the most probable financial position, results of its operations, and cash flows for the projection period. The projection reflects Management’s judgment, based on present circumstances, of the most likely set of conditions and Management’s most likely course of action.

We have compiled the accompanying seven-year financial projection for the years 2011 through 2017 based primarily upon a review of the System’s audited financial statements for the years

3

ended December 31, 2005 through 2010. Our compilation was made in accordance with standards for a compilation of a financial projection established by the American Institute of Certified Public Accountants (AICPA) and, accordingly, included such procedures as we considered necessary to evaluate both the assumptions of Management and the preparation and presentation of the projection.

Although standards established by the AICPA were utilized to compile Management’s projections, HFS is not a Certified Public Accounting Firm.

Legislation and regulations at all levels of government have affected, and may continue to affect, the revenues and expenses of health care providers. The financial projection is based uponlegislation and regulations currently in effect. Healthcare reform is currently being proposed at both the Federal and State levels although it is unknown how healthcare providers will ultimately be affected by these proposals. If future legislation or regulations related to health care providers and reimbursement are enacted, such legislation or regulations could have a material effect on future operations. There is no assurance, should legislation or regulations be enacted, or, if such enactments were adverse, that the System could make changes to the facility’s revenue and cost structure and that the changes would be sufficient to meet operating requirements.

Our conclusions are presented below:

• In our opinion, the accompanying market and financial projection, which is based on legislation and regulations currently in effect, is presented in conformity with guidelines for presentation of a financial projection established by the AICPA.

• In our opinion, the underlying assumptions provide a reasonable basis for Management’s projection. However, there will usually be differences between the projected and actual results, due to the fact that events and circumstances frequently do not occur as expected, and those differences may be material.

• The accompanying financial projection indicates that sufficient funds could be generated to meet the System’s operating expenses and other financial requirements during the projection period. However, the achievement of any financial projection is dependent upon future events, the occurrence of which cannot be assured.

We have no responsibility to update this Report for events, circumstances, and regulatory changes occurring after the date of this Report.

HFS CONSULTANTS

4

Section 2: Historical and Forecasted Financial Statements A. Forecasted Statements of Operations

Community Memorial Health SystemForecasted Statement of Operations

For the Years Ended December 31, 2011 through 2017(With Historical Amounts for the Years Ended December 31, 2005 through 2010)

(Amounts in Thousands)

Historical Forecasted2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Revenues:Net patient services revenue 206,750$ 236,054$ 257,673$ 272,392$ 285,793$ 312,717$ 317,358$ 321,423$ 327,330$ 345,298$ 368,800$ 403,809$ 436,055$ Other operating revenue 4,777 4,956 3,950 4,526 4,180 4,088 3,878 6,618 6,125 5,363 4,878 5,016 5,159 Net Assets released from restrictions 139 258 293 410 229 375 1,651 4,000 4,600 4,850 4,100 4,050 2,600

Total unrestricted revenues, gains andother support 211,666 241,269 261,916 277,328 290,202 317,179 322,887 332,041 338,056 355,511 377,778 412,875 443,814

Expenses:Salaries and wages 72,032 80,087 88,039 96,226 94,960 96,184 99,552 103,175 106,808 110,987 115,954 123,009 129,463 Employee benefits 32,771 36,814 42,042 46,458 44,444 46,028 47,437 49,173 50,911 52,922 55,321 58,755 61,885 Registry staff 3,655 3,686 4,664 3,591 1,532 2,114 2,192 2,298 2,408 2,525 2,670 2,875 3,063 Professional fees 3,671 9,533 11,729 12,056 14,249 16,161 16,898 17,582 18,260 18,983 19,748 20,548 21,366 Purchased services 10,731 12,808 14,589 15,037 19,926 22,705 23,503 24,335 25,124 26,325 27,350 28,736 30,002 Medical supplies 38,599 37,958 42,214 47,694 47,633 50,451 52,101 54,702 57,384 60,201 63,831 69,240 74,099 Supplies and other 6,886 7,680 5,914 6,210 4,176 5,707 5,875 6,057 6,245 6,438 6,671 6,998 7,288 Other expenses 9,032 10,464 10,182 12,410 12,810 13,385 13,650 14,164 14,589 15,470 15,934 16,412 16,905 Insurance 4,355 6,103 4,767 4,538 3,686 3,512 3,670 3,802 3,936 4,374 4,587 4,950 5,251 Depreciation 11,518 13,730 12,878 12,792 13,473 12,318 15,072 14,276 13,657 14,211 24,166 28,472 28,763 Amortization - - - 263 263 - - - - - 448 672 672 Interest 802 1,008 1,369 416 460 410 333 282 231 192 18,044 26,943 26,586 Hospital fee - - - - - 11,589 6,785 3,142 - - - - - Provision for bad debts 14,769 15,131 17,585 16,849 23,784 14,733 15,791 17,179 18,674 20,302 22,351 25,273 28,131

Total expenses 208,822 235,002 255,972 274,541 281,396 295,297 302,857 310,167 318,229 332,930 377,078 412,885 433,474

Operating income before asset impairment 2,844 6,267 5,944 2,787 8,806 21,883 20,030 21,874 19,827 22,581 700 (10) 10,340

Asset impairment (4,905) 2 (1,195) (777) (327) (140) - - - - - - - Operating income (2,061) 6,268 4,749 2,010 8,479 21,743 20,030 21,874 19,827 22,581 700 (10) 10,340

Nonoperating revenue and expenseInvestment income (loss) 4,035 7,144 6,193 (14,352) 8,757 6,045 1,851 1,871 1,884 1,929 2,597 2,977 2,095 Donations 318 246 463 450 145 314 171 176 181 187 192 198 204 Other expenses (28) (30) (438) - - - - - - - - - -

Total non-operating revenue and expense 4,324 7,360 6,219 (13,902) 8,902 6,360 2,023 2,048 2,066 2,116 2,790 3,175 2,300

Excess of unrestricted revenues, gains and othersupport over expenses before minority interest 2,264 13,628 10,968 (11,892) 17,381 28,103 22,053 23,922 21,893 24,698 3,490 3,165 12,639

Minority interest (161) 152 778 360 247 145 369 350 331 312 293 262 231 Excess of unrestricted revenues, gains, and other

support over expenses 2,103$ 13,780$ 11,745$ (11,533)$ 17,628$ 28,248$ 22,422$ 24,271$ 22,223$ 25,010$ 3,783$ 3,427$ 12,870$

5

B. Forecasted Statements of Changes in Net Assets

Community Memorial Health SystemForecasted Change in Net Assets




Unrestricted net assetsNet assets at beginning of year 164,092$ 166,212$ 180,198$ 192,976$ 181,933$ 200,418$ 225,374$ 250,145$ 275,016$ 297,490$ 321,749$ 325,482$ 327,459$

Excess of revenues over expenses 2,104 13,780 11,745 (11,533) 17,628 28,248 22,422 24,271 22,223 25,010 3,783 3,427 12,870 Change in pension liability - - 238 (103) (265) 235 - - - - - - -

the acquisition of plant and equipment - 172 1,068 593 932 751 - - - - - - - Increase in unrestricted net assets 2,104 13,952 13,052 (11,043) 18,295 24,431 22,422 24,271 22,223 25,010 3,783 3,427 12,870

Temporarily restricted net assetsContributions 154 462 1,088 1,002 1,356 1,651 4,000 4,600 4,850 4,100 4,050 2,600 2,600 Net assets released from restrictions (139) (429) (1,362) (1,003) (1,166) (1,126) (1,651) (4,000) (4,600) (4,850) (4,100) (4,050) (2,600) Increase in temp restricted net assets 15 33 (273) (1) 190 526 2,349 600 250 (750) (50) (1,450) -

Increase in net assets 2,119 13,984 12,779 (11,044) 18,485 24,956 24,770 24,871 22,473 24,260 3,733 1,977 12,870

Net assets at end of year 166,210$ 180,196$ 192,976$ 181,933$ 200,418$ 225,374$ 250,145$ 275,016$ 297,490$ 321,749$ 325,482$ 327,459$ 340,330$

6

C. Forecasted Balance Sheet

Community Memorial Health SystemForecasted Balance Sheets

As of December 31, 2011 through 2017(With Historical Amounts for December 31, 2005 through 2010)



Assets:Current assets:

Cash and cash equivalents 16,899$ 16,979$ 13,978$ 14,407$ 2,998$ 10,082$ 45,195$ 68,101$ 84,625$ 92,389$ 108,335$ 120,318$ 142,040$ Investments 52,841 59,670 64,490 43,009 45,515 52,072 40,935 41,955 43,046 44,938 47,024 49,956 52,638 Patient accounts receivable, net 40,280 45,178 45,982 44,028 55,064 50,213 50,958 51,611 52,559 55,444 59,218 64,839 70,017 Due from third-party payors - 3,503 2,478 1,616 3,740 4,055 4,115 4,168 4,244 4,477 4,782 5,236 5,654 Inventories 4,724 4,946 4,983 5,049 6,077 5,778 5,965 6,251 6,546 6,856 7,254 7,844 8,373 Current portion of assets limited as to use 1,248 1,970 1,416 1,235 1,427 2,366 2,366 2,366 2,366 2,366 2,366 2,366 2,366 Prepaid expenses and other 3,606 3,454 4,331 4,388 7,459 6,813 6,757 6,831 6,929 7,271 8,586 9,552 9,977

Total current assets 119,598 135,700 137,659 113,733 122,279 131,378 156,292 181,282 200,315 213,742 237,564 260,110 291,065

Assets limited as to use, less current portion:For self-insurance program 4,554 1,658 2,535 3,551 4,393 5,396 5,396 5,396 5,396 5,396 5,396 5,396 5,396 For deferred compensation plans 1,344 1,436 1,654 1,580 2,409 3,020 3,020 3,020 3,020 3,020 3,020 3,020 3,020 Annuity trust - - 255 197 216 223 223 223 223 223 223 223 223 Held by trustee:

Project fund - bond proceeds (NIG) - - - - - - 211,540 180,345 86,373 12,354 - - - Capitalized interest fund (NIG) - - - - - - 58,493 41,465 24,351 7,152 - - - Debt service reserve fund (NIG) - - - - - - 31,318 31,318 31,318 31,318 31,318 31,318 31,318

Total assets limited as to use, less current portion 5,898 3,094 4,444 5,328 7,018 8,639 309,989 261,766 150,681 59,464 39,957 39,957 39,957

Plant and equipment, net:Land and improvements 7,411 6,984 7,586 8,821 8,832 9,258 9,258 9,258 9,258 9,258 23,772 23,772 23,772 Buildings 93,678 95,551 100,171 99,026 105,371 114,530 114,530 114,530 119,530 119,530 429,718 429,718 429,718 Equipment 92,573 100,307 105,754 82,377 92,325 94,184 103,378 106,678 113,078 130,078 180,249 188,249 197,249 Accumulated depreciation (111,783) (121,849) (135,018) (114,411) (127,125) (134,458) (149,530) (163,806) (177,464) (191,675) (215,841) (244,313) (273,076) Construction in progress 2,598 3,864 4,272 20,407 25,941 33,312 62,592 121,917 239,031 339,669 7,549 7,549 7,549

Total plant and equipment, net 84,476 84,857 82,765 96,220 105,343 116,825 140,227 188,576 303,433 406,860 425,447 404,975 385,212

Other assetsGoodwill 3,943 3,549 3,286 3,023 2,760 - - - - - - - - Property held for future use - - 5,439 10,768 10,620 15,426 15,426 15,426 15,426 15,426 911 911 911 Deferred financing costs - 2011 bonds (NIG) - - - - - - 10,302 10,302 10,302 10,302 10,073 9,730 9,386 Original Issue Discount - 2011 bonds - - - - - - 9,872 9,872 9,872 9,872 9,653 9,324 8,994 Other assets 468 694 1,214 1,670 1,996 495 495 495 495 495 495 495 495

Total assets 214,383$ 227,894$ 234,806$ 230,742$ 250,015$ 272,763$ 642,602$ 667,720$ 690,524$ 716,160$ 724,100$ 725,501$ 736,021$

7

Community Memorial Health SystemForecasted Balance Sheets

As of December 31, 2011 through 2017(With Historical Amounts for December 31, 2005 through 2010)



Current liabilities:Accounts payable and accrued expenses 13,906$ 13,752$ 14,121$ 17,091$ 16,976$ 16,177$ 16,045$ 16,219$ 16,452$ 17,265$ 20,387$ 22,681$ 23,689$ Accrued compensation and related benefits 13,730 11,828 13,629 15,325 13,776 12,454 12,873 13,342 13,812 14,354 14,999 15,918 16,757 Due to third party payors 1,888 - - - - - - - - - - - - Current maturities of long-term debt 2,267 8,143 700 934 2,229 1,560 832 808 479 158 149 149 - Current maturities of 2011 bonds (NIG) - - - - - - - - - - 4,490 4,835 5,210

Total current liabilities 31,792 33,723 28,450 33,349 32,980 30,191 29,750 30,369 30,744 31,777 40,025 43,582 45,656

Accrued pension cost, less current portion 1,393 1,619 1,721 2,325 3,217 3,392 3,506 3,634 3,762 3,910 4,086 4,336 4,565 Self-insurance liabilities, less current portion 4,563 6,657 6,573 8,296 7,524 8,135 8,408 8,714 9,022 9,376 9,797 10,397 10,945 Long term debt 10,400 5,697 4,941 4,700 5,742 5,715 4,937 4,130 3,650 3,492 3,344 3,195 3,204 Long term debt - 2011 bonds (NIG) - - - - - - 345,900 345,900 345,900 345,900 341,410 336,575 331,365 Annuity trust liability - - 145 140 135 130 130 130 130 130 130 130 130 Total liabilities 48,147 47,696 41,829 48,810 49,597 47,562 392,631 392,877 393,208 394,585 398,791 398,215 395,864

Minority Interest 23 - - - - - - - - - - - -

Net AssetsUnrestricted 165,191 179,144 192,035 181,153 199,449 222,248 244,669 268,941 291,164 316,174 319,957 323,384 336,254 Temporarily restricted 1,021 1,053 941 779 969 2,953 5,302 5,902 6,152 5,402 5,352 3,902 3,902

Total Net Assets 166,212 180,198 192,976 181,933 200,418 225,201 249,971 274,843 297,316 321,576 325,309 327,286 340,156

Total liabilities and net assets 214,383$ 227,894$ 234,806$ 230,742$ 250,015$ 272,763$ 642,602$ 667,720$ 690,524$ 716,160$ 724,100$ 725,501$ 736,021$

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D. Forecasted Statements of Cash Flows Community Memorial Health SystemForecasted Statement of Cash Flows




Cash flows from operating activitiesIncrease in net assets 2,119$ 13,984$ 12,779$ (11,044)$ 18,485$ 24,956$ 24,770$ 24,871$ 22,473$ 24,260$ 3,733$ 1,977$ 12,870$Adjustments to reconcile increase in net assets to net

cash provided by operating activities:Depreciation and Amortization 11,518 13,730 12,878 12,792 13,473 12,318 15,072 14,276 13,657 14,211 24,615 29,145 29,435Net realized and unrealized losses (gains) (1,610) (5,299) (4,489) 16,818 (7,338) - - - - - - - - Sales (purchases) of trading investments, net (6,408) 553 (873) 3,903 2,970 (9,110) 11,136 (1,020) (1,090) (1,892) (2,086) (2,932) (2,682)Provision for doubtful accounts 14,769 15,131 17,585 16,849 23,784 14,733 15,791 17,179 18,674 20,302 22,351 25,273 28,131Minority interest 161 (152) (778) (360) (247) (145) - - - - - - - Cumulative effect of change in accounting principle - - (238) - - - - - - - - - - Changes in operating assets and liabilities:

Patient accounts receivable (12,846) (20,029) (18,389) (14,895) (34,820) (9,882) (16,536) (17,832) (19,623) (23,187) (26,125) (30,894) (33,309)Inventories (481) (222) (37) (66) (1,027) 299 (187) (286) (295) (310) (397) (590) (530) Prepaid expenses and other (1,732) 152 (877) (57) (3,071) 473 56 (73) (98) (342) (1,315) (966) (425) Other assets (299) (0) 521 (96) (78) 1,646 - - - - - - - Annuity trust - - (110) 53 (24) (12) - - - - - - - Accounts payable and accrued expenses 5,131 (154) 369 2,970 (115) (799) (132) 174 233 813 3,123 2,293 1,008 Accrued compensation and related benefits - (1,902) 1,801 1,697 (1,550) (1,321) 418 469 470 542 645 919 839 Due from/to third-party payors 2,544 (5,391) 1,025 862 (2,124) (315) (60) (53) (77) (233) (305) (454) (418) Accrued pension cost - 226 341 604 891 176 114 128 128 148 176 250 229 Self insurance liabilities - 2,094 (84) 1,723 (771) 610 273 307 307 354 421 600 548

Net cash provided by operating activities 12,866 12,718 21,423 31,752 8,439 33,626 50,715 38,141 34,760 34,664 24,836 24,621 35,698

Cash flows from investing activitiesPurchases in plant and equipment - ongoing needs (6,950) (13,666) (10,680) (14,903) (12,218) (18,025) (9,500) (5,000) (8,000) (17,000) (7,000) (8,000) (9,000)Purchase in new construction - building (prior to financing) (50) (106) (11,082) (10,116) (3,014) (3,114) - - - - - - Purchases in new construction - building (NIG) - - - - - - (16,448) (32,183) (94,704) (55,152) - - - Purchases in new construction - equipment (NIG) - - - - - - - - - (19,078) (12,371) - - Purchase of property held for future use - - (5,439) (5,330) 148 (4,806) - - - - - - - Cash paid for Grossman, net of cash acq/transferred (4,666) - - - - - - - - - - - - Cash received in Ojai merger 94 - - - - - - - - - - - - Project fund - bond proceeds (NIG) - - - - - - (211,540) 31,195 93,972 74,019 12,354 - - Capitalized interest fund (NIG) - - - - - - (58,493) 17,028 17,113 17,199 7,152 - - Debt service reserve fund (NIG) - - - - - - (31,318) - - - - - - Capitalized interest expense, net (NIG) - - - - - - (9,412) (25,442) (25,810) (26,408) (8,867) - -

Net cash used in investing activities (11,522) (13,716) (16,224) (31,314) (22,185) (25,845) (339,824) (14,403) (17,429) (26,421) (8,732) (8,000) (9,000)

Cash flows from financing activitiesNet payments on long-term debt (existing) (1,240) 1,174 (8,199) (8) (252) (696) (1,505) (832) (808) (479) (158) (149) (140) Proceeds from new borrowings - - - - 2,589 - - - - - - - - Distributions to minority partners (359) (96) - - - - - - - - - - - Capital contributions from minority partners 330 - - - - - - - - - - - - Proceeds on long-term debt (2011 bonds - NIG) - - - - - - 345,900 - - - - - - Payments on long-term debt (2011 mortgage - NIG) - - - - - - - - - - - (4,490) (4,835)Deferred financing costs, 2011 bonds (NIG) - - - - - - (10,302) - - - - - - Original Issue Discount, 2011 Bonds - - - - - - (9,872) - - - - - -

Net cash used in financing activities (1,269) 1,078 (8,199) (8) 2,337 (696) 324,222 (832) (808) (479) (158) (4,639) (4,975)Net cash (used in) provided by continuing operations 76 80 (3,000) 429 (11,410) 7,084 35,113 22,906 16,524 7,765 15,946 11,982 21,723Cash and cash equivalents at beginning of year 16,823 16,899 16,979 13,978 14,407 2,998 10,082 45,195 68,101 84,625 92,389 108,335 120,318Net (decrease) increase in cash and cash equivalents 16,899$ 16,979$ 13,978$ 14,407$ 2,998$ 10,082$ 45,195$ 68,101$ 84,625$ 92,389$ 108,335$ 120,318$ 142,040$

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E. Forecasted Supplemental Schedule of Financial Ratios

Community Memorial Health SystemForecasted Supplemental Schedule of Financial Ratios



Liquidity ratios:Current ratio 3.76 4.02 4.84 3.41 3.71 4.35 5.25 5.97 6.52 6.73 5.94 5.97 6.38 Quick ratio 3.61 3.88 4.66 3.26 3.52 4.16 5.05 5.76 6.30 6.51 5.75 5.79 6.19 Cash ratio 2.19 2.27 2.76 1.72 1.47 2.06 2.90 3.62 4.15 4.32 3.88 3.91 4.26 Days in receivable 71.11 69.86 65.13 59.00 70.32 58.61 58.61 58.61 58.61 58.61 58.61 58.61 58.61 Days in payables 65.30 56.25 54.01 61.19 59.31 51.59 49.54 48.04 46.85 46.85 46.85 46.85 46.85 Average payment period 63.57 59.71 46.05 49.76 49.36 41.08 39.92 39.77 39.25 38.87 44.26 44.38 44.33 Days cash on hand 129.02 126.44 117.82 80.15 66.15 80.17 109.24 135.76 153.00 157.27 160.89 161.96 175.87 Working capital/Total assets 0.41 0.45 0.47 0.35 0.36 0.37 0.20 0.23 0.25 0.25 0.27 0.30 0.33

Capital structure:Debt service coverage 17.98 28.29 18.98 4.66 69.18 22.84 3.99 2.01 1.92 2.07 1.92 1.88 2.18 Long Term Debt to Capitalization 0.09 0.07 0.07 0.08 0.08 0.07 0.60 0.57 0.55 0.53 0.53 0.52 0.51 Long Term Debt to Equity 0.10 0.08 0.07 0.08 0.08 0.08 1.45 1.32 1.22 1.13 1.10 1.08 1.03 Equity financing 0.78 0.79 0.82 0.79 0.80 0.83 0.39 0.41 0.43 0.45 0.45 0.45 0.46 Long term debt/Capital assets, net 0.12 0.07 0.06 0.05 0.05 0.05 2.50 1.86 1.15 0.86 0.81 0.84 0.87 Capital debt/Capital assets,net 0.12 0.07 0.06 0.05 0.05 0.05 2.50 1.86 1.15 0.86 0.81 0.84 0.87 Times interest earned 1.82 12.52 7.01 (29.59) 36.78 67.53 65.27 83.72 93.89 127.37 (0.81) (0.88) (0.52) Capital expense 0.07 0.07 0.06 0.06 0.06 0.05 0.06 0.05 0.05 0.05 0.14 0.17 0.16 Long term debt/Depreciation 0.90 0.41 0.38 0.37 0.43 0.46 23.28 24.52 25.59 24.59 14.27 11.93 11.63 Cash flow/Total debt (0.91) 0.01 (0.23) (5.23) 0.68 2.79 0.02 0.03 0.02 0.03 (0.06) (0.08) (0.05) Debt service as % of operating revenue 0.01 0.01 0.04 0.00 0.00 0.01 0.01 0.00 0.00 0.00 0.05 0.07 0.06

Profitability:Total margin 0.01 0.06 0.04 (0.04) 0.06 0.09 0.07 0.07 0.07 0.07 0.01 0.01 0.03 Operating margin 0.01 0.03 0.02 0.01 0.03 0.07 0.06 0.07 0.06 0.06 0.00 (0.00) 0.02 Non-Operating revenue margin 1.98 0.55 0.60 1.17 0.52 0.23 0.11 0.10 0.11 0.10 0.81 1.00 0.20 Return on assets 0.01 0.04 0.03 (0.03) 0.05 0.07 0.04 0.02 0.02 0.02 0.00 0.00 0.01 Return on equity 0.01 0.08 0.06 (0.06) 0.09 0.13 0.09 0.09 0.08 0.08 0.01 0.01 0.04

Activity ratios:Inventory turnover 9.63 9.23 9.66 10.68 8.53 9.72 9.72 9.72 9.72 9.72 9.72 9.72 9.72 Current asset turnover 1.77 1.78 1.90 2.44 2.37 2.41 2.07 1.83 1.69 1.66 1.59 1.59 1.52 Fixed asset turnover 2.51 2.84 3.16 2.88 2.75 2.72 2.30 1.76 1.11 0.87 0.89 1.02 1.15 Total asset turnover 0.99 1.06 1.12 1.20 1.16 1.16 0.50 0.50 0.49 0.50 0.52 0.57 0.60

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Section 3: General Information

A. Hospital History, Service and Governance 1. History

Community Memorial Health System (CMHS) traces its beginnings back to 1900 when Dr. Cephas Bard and his brother U.S. Senator Thomas Bard decided to build the first private hospital in Ventura County. The hospital opened in 1902 and was named Elizabeth Bard Memorial Hospital. The 24-bed facility was operated by the Bard family until January of 1922 when it was turned over to the Big Sisters’ League, a women’s organization that operated the Children’s Home in Ventura. In February of 1923, the Hospital’s name was changed to Big Sisters’Hospital and later that year a six bed annex was added.

In 1930 construction began on a new hospital that opened the following year. The new hospital was named Hospital de Buena Ventura but was renamed two years later to E.P. Foster Memorial Hospital (FMH).

Ojai Valley Community Hospital opened in 1960, providing much needed services in the Ojai area. In 1962, FMH changed its name to Community Memorial Hospital of San Buenaventura (CMH).

Community Memorial Health System “(CMHS”) was formed in 2005 through the merger of Community Memorial Hospital (currently 242 licensed beds) and Ojai Valley Community Hospital (103 licensed beds), and is highly valued as the only private, independent, not-for-profit healthcare organization in Ventura County. Since it is a community-owned, not-for-profit organization, the System is not backed by a corporate or government entity, nor does it answer to shareholders.

Significant events in the history of CMHS include:

• 1902 Elizabeth Bard Memorial Hospital opens with 24 beds.• 1922 Hospital transferred to the Big Sister’s League.• 1923 Hospital renamed Big Sisters’ Hospital and 6 bed annex added.• 1930 Construction begins on new Hospital.• 1931 New Hospital is opened and is named Hospital de Buena Ventura• 1932 Financial structure of Hospital is changed to a non-profit corporation.• 1933 Hospital is renamed E. P. Foster Memorial Hospital (FMH) after its generous

benefactor who had died just months after the Hospital opened.• 1946 Ida Philbrook Goodyear donates $131,000 to build a new maternity ward at FMH.• 1956 Maternity Ward at FMH expanded to include 24 additional beds.• 1960 Ojai Valley Community Hospital (OVCH) opens.• 1960 FMH joins with Ventura College to offer nursing training.• 1961 New medical-surgical nursing unit opens at FMH.

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• 1961 Second story is added to OVCH to accommodate medical records and business offices.

• 1962 FMH’s name is changed to Community Memorial Hospital of San Buenaventura(CMH).

• 1964 CMH opens first coronary care unit in Ventura County.• 1966 CMH opens E.P. Foster wing adding 6 operating rooms and 101 beds to the

facility.• 1968 Nuclear Medicine department is added at CMH.• 1971 Three new floors and a new wing are added to CMH. The new Huntsinger wing

includes a coronary care unit, intensive care unit, laboratories, occupational therapy and medical administration offices.

• 1973 Mammography unit is purchased for CMH and ICU is added at OVCH.• 1977 Laboratory and second wing are added to OVCH and heart surgery program

begins at CMH.• 1979 Skilled Nursing Unit built adjacent to OVCH.• 1983 Eighth floor expansion is completed at CMH.• 1984 Two new wings are added to CMH.• 1985 CMH opens its first emergency room.• 1986 Construction is begun on new parking structure at CMH.• 1989 Emergency room expansion is completed adding six beds for a total of fourteen.• 1992 CMH purchases an MRI unit.• 1993 Heart hospital opens and CMH wins Medi-Cal Contract.• 1994 First of nine family health centers is opened.• 1995 CMH acquires first mobile lithotripter.• 1996 CMH opens NICU and upgrades radiology department.• 1997 Avenue Clinic in Ventura is opened.• 1998 Cardiovascular and thoracic surgery center opens. New health center opens on

South Saviers Road. Filmore Medical Plaza Opens.• 1999 Breast Center opens, Avenue Clinic moves to new location, Cardiac Recovery

Unit opens and CMH begins PET scans.• 2001 Santa Paula Clinic and Telephone Rd. Clinic open.• 2004 CMH acquires daVinci Robotic Surgery unit.• 2005 CMH and OVCH merge. Grossman Imaging Centers are acquired. Community

Memorial Health System is formed.

2. Description of Organization and Health System Governance

CMHS is organized as a nonprofit corporation organized under the California Nonprofit Public Benefit Corporation Law for charitable purposes. Its primary purposes are the following:

1. To establish, equip and maintain one or more nonprofit hospitals, medical centers, institutions, clinics or other places for the reception and care of the sick, injured and disabled, with permanent facilities that include inpatient beds and medical services; to provide diagnosis and treatment for patients; and to provide associated services, outpatient care and home care in furtherance of this Corporation’s charitable purposes;

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2. To promote and carry on educational activities related to the care of sick, injured and disabled, to the promotion of health;

3. To promote and carry out scientific and medical research related to the care of the sick, injured and disabled; and

4. To promote or carry out such other activities as may be deemed advisable for the betterment of the general health of the communities served.

It is governed by a 25-member Board of Trustees, each of whom is a community member and at least two of the Board Members must be residents of the Ojai Valley. The Board Officers are the Chair, Vice Chair, Secretary, and Treasurer and are each elected by Board Members.

Members of the Board of Trustees are elected to the Board at its Annual Organizational Meeting and serve for four years on staggered terms of office. Board meetings are monthly with Executive Session meetings at least quarterly. Special meetings may be called at any time by the Chair.

There are nine Standing Committees: The Executive Committee, Finance Committee, Quality Assurance Committee, Joint Conference Committees, Human Resources Committee, Audit/Compliance Committee, Buildings and Grounds Committee, Governance Committee, Strategic Planning Committee. Special committees may be appointed by the Chair as needed.

The Corporate structure of CMHS is shown in the following chart which includes the two hospitals (CMH and OVCH), the Centers for family Health, and the four subsidiary corporations affiliated with CMHS.

The organizational chart for CMHS is provided below:

Borrower

501 (c) 3

Grossman Imaging

Centers of CMH, LLC

51% Owner

California Heart

Institute, Inc.For-Profit

Community Memorial

Healthcare Foundation 501 (c) 3

Buenavista Medical

Properties, LTD

60% Owner

Buenavista Medical

Properties,Inc.

For-Profit

Affiliated Organizations

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3. Overview of Services

CMHS is highly valued as the only private, independent, not-for-profit healthcare organization in Ventura County. In addition to the inpatient care offered at Community Memorial Hospital (242 licensed beds) and Ojai Valley Community Hospital (103 licensed beds), the System offers:

� A Skilled Nursing Facility� Nine Centers for Family Health in the Oxnard, Ventura, Oak View, Camarillo,

Santa Paula and Fillmore communities (three of which are designated as federal rural health clinics)

� Four urgent care centers� Three imaging centers

Community Memorial Health System provides a wide range of highly regarded services that provide patients the best in specialized care. Included in these are:

� Breast Center*� The Cancer Resource Center*� Cardiac Catheterization Lab� Cardiac Rehabilitation� Cardiovascular Surgery� Clinical Laboratory� Emergency Department� FASTRAC Fitness Center� Gastrointestinal Lab� Healthy Women’s Program*� Heart Aware Program� Imaging Services� Industrial Health� Intensive Care Unit� Laser Surgery� Lifeline� Maternal and Child Health*� Migraine Treatment� Neonatal Intensive Care Unit� Neurology� Neurosurgery� Occupational Therapy� Oncology� Orthopedics� Pain Management� Palliative Care Consult Service� Pathology Lab� Pediatrics

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� Pharmacy� Physical Therapy� Prostate Institute *� Pulmonary Rehabilitation� Robotic Surgery� Same Day Surgery� Skilled Nursing at OVCH� Social Services� Speech Therapy � Thoracic Surgery� Transfusion Free Program� Ultrasound� Vascular Surgery

*Designated as a Program of Distinction by the appropriate quality organization

4. Community Memorial Health System Leadership

Biographical sketches of the Senior Management Team and Board of Directors affiliations are presented below (Table 3A-1 and Table 3A-2 respectively):

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Table 3A-1 CMHS Senior Management

Name Current Position(s) Relevant ExperienceGary Wilde President, & CEO

7 YearsDoctor of Health Administration, FACHE29 Years of Hospital Management Experience; 3 Organizations >$500 million of Hospital Construction ExperienceBoards: Chamber of Commerce, Blood Systems, CTS, VHA, HASC

Adam Thunell

Sr. Vice President, COO4.5 Years

Master of Health Administration, FACHE14 Years of Management Experience; 2 Organizations>$350 million of Hospital Construction ExperienceBoard Vice Chair: United Way

David Glyer Vice President, Finance, CFO14 Years

Certified Public Accountant, Member HFMA34 Years of Financial Management Experience:• Healthcare Financial Auditor• CFO for 2 hospitals

John Oden Project Director3 Years

Master in Health Administration37 Years of Healthcare Design and Construction Experience:• City of Hope Replacement Project• University of California, San Diego Replacement

Project• Thornton Hospital Replacement Project• San Diego Children's Hospital Replacement

ProjectMichael Lurie

Vice President, Planning and Managed Care 29 Years

Master of Health Planning36 Years of Healthcare Planning Experience:• Formerly a Health Systems Agency PlannerBoards: Livingston Memorial Home Health Agency

Bobbie McCaffrey

Vice President, Patient Care, CNO2.5 Years

Master of Nursing Administration, RN, NEA, BC, Wharton Fellow 34 Years of Nursing Management Experience:Not-for-profit & for-profit health systems>$400 million of Hospital Construction Experience

Source: CMHS Rating Agency Presentation

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Table 3A-2 Board of Trustees 2011

B. The Project Description

The following is a description of the scope of the project and the benefits expected upon completion.

� The new physical plant will be approximately 338,000 sq. ft. It will be built in accordance with the Green Guide to Health Care and the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED) guidelines

� Increased capacities in:– Emergency department– Operating rooms– Cardiac catheterization laboratory– Intensive care units (both adult and neonatal)– Cancer care– Obstetrical services– Pediatric services– Family care space

Name AffiliationTrudy T. Arriaga, Ed.D. Educator, Superintendent of SchoolsMarc A. Beaghler, MD UrologistRalph R. Bennett Insurance, Former County SupervisorMichael D. Bradbury Attorney, Former DA, Ventura CountyMary Dial, MD Medical Staff RepresentativePhiip C. Drescher AttorneyTimothy J. Gallagher Public Relations ConsultantThomas F. Golden Medical Staff RepresentativeJohn J. Hammer Real Estate DeveloperWilliam L. Hart, MD Retired CardiologistJohn V. Hill, MD Retired OrthopedistFritz R. Huntsinger Business Executive/OwnerHarry L. Maynard Retired BankerJudy Miller Auxiliary PresidentF. Ted Muegenburg, Jr. AttorneyJeffrey D. Paul Banker, President Rabobank, CaliforniaMartin A. Pops, MD Retired Physician and Dean, UCLARichard R. Rush, PhD Educator, President CSUCIJohn W. Russell Business Executive/OwnerSamuel D. Small, DO Spinal Orthopedist, Chief of Staff CMHGregory H. Smith Business Executive/OwnerGary L. Wolfe Certified Public AccountantKay Woodburn Volunteer, Foundation President

Source: CMHS

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– Waiting rooms, chapel, healing gardens and other common areas

� All private rooms, providing significant advantages in privacy, infection control, staffing, operational efficiency and patient satisfaction. Table 3A-3 shows the bed configuration by type of service both before and after the project including the increase inprivate beds from 67 to 250.

� New entry integrated with public park

� New hospital replaces existing acute care beds and “essential services” with facilities that meet the California seismic safety mandate. CMHS and California Office of Statewide Health Planning and Development (OSHPD) have entered into a Memorandum of Understanding with specific approval milestone dates

� Strong community support - City of Ventura acclaimed CMHS’s new hospital project as an “economic engine” to revitalize a declining economic zone

The following figures are an aerial schematic and rendering of the new Hospital:

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Table 3A-3 below shows the change in licensed beds and ancillary capacity both before and after project completion.

Table 3A-3

Bed Configuration Before and After Project

Acute Care FollowingLicensed Beds Current the Project Increase

Total 242 250 8Private Beds 67 250 183General Acute 200 191 (9)Neonatal 16 23 7Coronary and ICU 21 28 7Pediatric 5 8 3

Ancillary CapacityEmergency Room Beds 21 40 19Surgery Suites 8 10 2Cath Labs 3 5 2

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C. Plan of Financing

The Hospital plans to finance the new Construction Project from the proceeds of Series 2011 tax-exempt revenue bonds (Series 2011 Bonds) in the amount of $ 345,900,000.

The Series 2011 Bonds are assumed to be issued on August 17, 2011. The construction period spans from August 2011 through April 2015 and sixty five percent of capitalized interest is funded through April 30, 2015. Interest expense incurred during the construction period will be capitalized as part of the cost of the Project. The first interest payments expensed will begin June 1, 2015 and will be for the month of May 2015. Additional interest only payments that will be expensed will be made on December 1, 2015 and June 1, 2016. The first bond payment including principal and interest that will be expensed is dated December 1, 2016.

The summary of sources and uses of funds and the amortization schedule that were used in preparing the financial forecasts are presented in Table 3C-1 and Table 3C-2 below.

Table 3C–1 Estimated Sources & Uses

The estimated sources and uses incorporates a 2011 series uninsured tax exempt financing. The Series 2011 Bonds are assumed a final maturity in 30 years and an average coupon rate of 7.75percent.

BondsSeries 2011

Sources of Funds:Bond Proceeds: 345,900$ Original Issue Discount (9,872) Equity for Project Expenditure - 2010 & Prior 30,291 Equity for Cost of Issuance 10,300

Total Sources 376,619

Used of Funds:Project Funds:

Future Project Costs Met with Bond Proceeds 227,696 Capitalized Interest 63,398 Debt Service Reserve Fund 31,318 Equity Project Expenditures Prior to Bond Closing 30,291 Project Costs Reimbursed from Bond Proceeds 13,614 Cost of Issuance and Rounding 10,302

Total Sources 376,619$

Source: Bank of America Merrill Lynch

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Table 3C–2 Bond Amortization Schedule

Debt service coverage is calculated by dividing annual income available for debt service for the consolidated entity by annual debt service requirements on the uninsured bonds and other existing debt of the consolidated entity. The forecasted debt service coverage for CMHS is presented in Table 3C - 3.

Maturity Total DebtDate Principal Interest Service

12/01/11 -$ 7,744$ 7,744$ 12/01/12 - 26,807 26,807 12/01/13 - 26,807 26,807 12/01/14 - 26,807 26,807 12/01/15 - 26,807 26,807 12/01/16 4,490 26,807 31,297 12/01/17 4,835 26,459 31,294 12/01/18 5,210 26,085 31,295 12/01/19 5,615 25,681 31,296 12/01/20 6,050 25,246 31,296 12/01/21 6,520 24,777 31,297 12/01/22 7,025 24,271 31,296 12/01/23 7,570 23,727 31,297 12/01/24 8,155 23,140 31,295 12/01/25 8,790 22,508 31,298 12/01/26 9,470 21,827 31,297 12/01/27 10,215 21,093 31,308 12/01/28 11,015 20,302 31,317 12/01/29 11,865 19,448 31,313 12/01/30 12,785 18,528 31,313 12/01/31 13,780 17,537 31,317 12/01/32 14,845 16,470 31,315 12/01/33 15,995 15,319 31,314 12/01/34 17,235 14,079 31,314 12/01/35 18,570 12,744 31,314 12/01/36 20,010 11,305 31,315 12/01/37 21,560 9,754 31,314 12/01/38 23,230 8,083 31,313 12/01/39 25,030 6,283 31,313 12/01/40 26,970 4,343 31,313 12/01/41 29,065 2,253 31,318

Total 345,900$ 583,041$ 897,623$ Source: Bank of America Merrill Lynch

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Table 3C– 3 CMHS Forecasted Debt Service Coverage

Maximum annual debt service (MADS) coverage is calculated by dividing annual income available for debt service for the obligated group by the projected maximum annual debt service requirements on the uninsured bonds and other existing debt of the obligated group. The forecasted MADS coverage for the obligated group is presented in Table 3C - 4.

Table 3C– 4 MADS Coverage for the Obligated Group

D. Organizational Relationships Organization

CMHS is the only private, independent, not-for-profit healthcare organization in Ventura County. It was formed in 2005 with the merger of CMH and OVCH. It currently consists of the two hospitals, nine Centers for Family Health (three of which are federally designated rural health clinics), four urgent care centers and three imaging centers.

Forecasted Year 2011 2012 2013 2014 2015 2016 2017Excess of Revenue Over Expenses 22,422$ 24,271$ 22,223$ 25,010$ 3,783$ 3,427$ 12,870$Less: Interest 333 282 231 192 18,044 26,943 26,586Plus: Depr & Amort 15,072 14,276 13,657 14,211 24,615 29,145 29,435Plus: Capitalized Interest Fund 6,486 17,425 17,425 17,415 5,770 - -Total Funds Available for Debt Service 44,312 56,255 53,536 56,828 52,212 59,515 68,891Existing Debt Service 1,128 1,114 1,039 672 331 314 306Bond Debt Service 9,978 26,807 26,807 26,807 26,807 31,268 31,263Annual Debt Service 11,106$ 27,922$ 27,846$ 27,479$ 27,138$ 31,582$ 31,569$Total Debt Service Coverage Ratio 3.99 2.01 1.92 2.07 1.92 1.88 2.18Note: Table excludes the repayment of the Line of Credit

Forecasted Year 2011 2012 2013 2014 2015 2016 2017Excess of Revenue Over Expenses 22,894$ 24,715$ 22,638$ 25,398$ 4,143$ 3,747$ 13,149$Less: Interest 141 98 55 24 17,883 26,789 26,439Plus: Depr & Amort 12,012 11,303 10,646 11,068 21,396 25,836 26,120Plus: Capitalized Interest Fund 6,486 17,425 17,425 17,415 5,770 - -Total Funds Available for Debt Service 41,532 53,541 50,764 53,905 49,193 56,373 65,708MADS 31,318$ 31,318$ 31,318$ 31,318$ 31,318$ 31,318$ 31,318$Total Debt Service Coverage Ratio 1.33 1.71 1.62 1.72 1.57 1.80 2.10Note: Table excludes the repayment of the Line of Credit

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Related-Parties and Affiliations CMHS has a 51 percent share in a joint venture partnership with Grossman Imaging Centers which provides diagnostic imaging services in multiple offices in Ventura and Oxnard, CA.

CMHS also has a joint venture with Buena Vista Medical Inc. which is a subsidiary of Buena Vista Medical Properties, Ltd that owns a medical office building.

CMHS also has the California Heart Institute which is a physician billing service.

Additionally, CMHS has an exclusive 10 year contract to provide acute care services to Kaiser Permanente members.

E. Service Area Definition and Patient Origin

The term “Service Area” refers to the geographic area from which a health care provider draws the majority of its patients. Defining a Service Area enables further investigation of demographic, economic, competitive, and other trends that may affect future demand for, and utilization of, the provider’s services.

The definition of a geographic Service Area generally derives from a variety of considerations including historical patient origin statistics, management and physician interviews, the location of competing hospitals and area travel patterns. Though Service Area definitions may vary considerably, a hospital’s Primary Service Area (PSA) generally represents approximately 70-75 percent of its total discharges, the Secondary Service Area (SSA) contributes another 5-15 percent, and the Total Service Area (TSA) represents approximately 80-90 percent of the hospital’s total discharges.

The Service Area definition is typically the first step in a general acute hospital demand and utilization analysis. In brief, the various steps in this analysis include:

• Definition of the Hospital’s Primary and Secondary Service Areas• Assessment of demographic and economic trends in the Total Service Area

• Assessment of the competitive hospital environment• Estimation of Total Service Area inpatient utilization based upon historical discharge

trends and the estimated growth of the Primary and Secondary Service Area population.• Estimation of Hospital inpatient utilization based on a variety of factors, including

historical utilization trends in the Total Service Area, market share trends, interview findings regarding the need for additional services and facilities, physician interview and survey results regarding physicians’ interest in, and likely admissions to, the hospital

• Estimation of emergency department and outpatient utilization

CMHS’s Primary and Secondary Service Area definitions are based on 2009 patient origin discharge data by zip code from the California Office of Statewide Health Planning and

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Development (OSHPD) reporting system that is used by the State of California, as well as geographic, competitive, and strategic factors important to the Hospital. As shown on Table 3E-1below, the CMHS’s PSA accounts for 76.5 percent of total discharges, while the SSA accounts for an additional 17.8 percent. Combined, the PSA and SSA, or the TSA, account for 94.3percent of total discharges.

The City of Ventura is the center of CMHS’s PSA. Located in Ventura County, California, the City of Ventura has a population of approximately 105,000. It is a beach town situated 60 miles north of Los Angeles and 13 miles from Port Hueneme, the only deep-water port between Los Angeles and San Francisco.

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Table 3E-1 Primary and Secondary Service Area

Source: OSHPD

A map of CMHS’s Primary and Secondary Service Areas is shown below.

Source: Service Area Map prepared by HFS Consultants

Percentage CumulativeZip Code Discharges of Total Percentage

93003 3,208 19.3% 19.3%93001 1,635 9.8% 29.1%93004 1,558 9.4% 38.5%93033 1,486 8.9% 47.4%93023 1,390 8.4% 55.8%93030 1,275 7.7% 63.5%93060 918 5.5% 69.0%93036 861 5.2% 74.2%93022 393 2.4% 76.5%Total PSA 12,724 76.5%

93035 743 4.5% 81.0%93010 686 4.1% 85.1%93041 580 3.5% 88.6%93015 543 3.3% 91.9%93012 402 2.4% 94.3%Total SSA 2,954 17.8%All Others 944 5.7%Total 16,622 100.0%

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F. Socioeconomic Characteristics of the Service Area

This Section analyzes Service Area demographic and economic trends based on the latest available population, income, age and other data from Nielsen Claritas, Inc., as well as other sources. Table 3F-1 compares historical and projected population growth for the Primary, Secondary and Total Service Area with the growth for the State of California and the entire Country.

Table 3F-1 Service Area Population

As shown above in Table 3F-1, the PSA accounts for around 70 percent of the TSA population. The PSA population is projected to grow at a slower compound annual rate of 0.92 percent from 2010 to 2017, than the SSA rate of 0.98 percent and the United States at 0.82 percent. The PSApopulation will be at a much slower rate than the State at 1.20 percent.

Table 3F-2 shows the population growth by age cohort over the same period for the Primary, Secondary and Total Service Areas as well as for the State and the Country.

2010-17 2010-17 % Share2000 2010 2017 Absolute Percent Cmpd Annual Of TSA

Area Census Estimate Projection Change Change Growth Rate GrowthPrimary Service Area 326,400 355,400 379,042 23,642 6.7% 1.0092 69.9%Secondary Service Area 132,934 144,562 154,731 10,169 7.0% 1.0098 30.1%Total Service Area 459,334 499,962 533,773 33,811 6.8% 1.0094 100.0%

California 33,871,648 37,853,430 41,140,301 3,286,871 8.7% 1.0120

United States 281,421,906 309,038,974 327,292,217 18,253,243 5.9% 1.0082

Source: Nielsen Claritas, Inc. 2010 Data

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Table 3F-2 Population by Age Cohort

The growth of the total service area population between 2010 and 2017 at 6.8 percent is projected to be less than the State of California (10.1 percent) and the Country (7.7 percent).This pattern holds true for all the age cohorts when comparing the TSA with California except

2010-17 2010-17 % ShareAbsolute Percent Cmpd Annual Of TSA

Area 2000 2010 2017 Change Change Growth Rate GrowthPrimary Service AreaAges 0-17 96,048 95,845 100,224 4,379 4.6% 1.0064 13.0%Ages 18-44 133,651 136,870 139,754 2,884 2.1% 1.0030 8.5%Ages 45-64 63,535 83,582 91,852 8,270 9.9% 1.0136 24.5%Ages 65+ 33,166 39,103 47,212 8,109 20.7% 1.0273 24.0%Total 326,400 355,400 379,042 23,642 6.7% 1.0092 69.9%Females 15-44 71,017 72,457 73,373 916 1.3% 1.0018 2.7%

Secondary Service AreaAges 0-17 35,229 35,488 37,443 1,955 5.5% 1.0077 5.8%Ages 18-44 50,656 49,836 51,364 1,528 3.1% 1.0043 4.5%Ages 45-64 28,951 37,515 40,059 2,544 6.8% 1.0094 7.5%Ages 65+ 18,098 21,723 25,865 4,142 19.1% 1.0252 12.3%Total 132,934 144,562 154,731 10,169 7.0% 1.0098 30.1%Females 15-44 27,224 27,065 27,515 450 1.7% 1.0024 1.3%

Total Service AreaAges 0-17 131,277 131,333 137,667 6,334 4.8% 1.0068 18.7%Ages 18-44 184,307 186,706 191,118 4,412 2.4% 1.0033 13.0%Ages 45-64 92,486 121,097 131,911 10,814 8.9% 1.0123 32.0%Ages 65+ 51,264 60,826 73,076 12,250 20.1% 1.0266 36.2%Total 459,334 499,962 533,773 33,811 6.8% 1.0094 100.0%Females 15-44 98,241 99,522 100,888 1,366 1.4% 1.0019 4.0%

State of CaliforniaAges 0-17 9,249,829 9,643,919 10,265,209 621,290 6.4% 1.0090 18.9%Ages 18-44 14,080,433 14,648,122 14,981,916 333,794 2.3% 1.0032 10.2%Ages 45-64 6,945,728 9,228,513 10,540,167 1,311,654 14.2% 1.0192 39.9%Ages 65+ 3,595,658 4,332,876 5,353,008 1,020,132 23.5% 1.0307 31.0%Total 33,871,648 37,853,430 41,140,301 3,286,871 8.7% 1.0120 100.0%Females 15-44 7,563,129 7,887,933 7,987,552 99,619 1.3% 1.0018 3.0%

USAAges 0-17 72,293,812 74,982,897 78,110,108 3,127,211 4.2% 1.0059 17.1%Ages 18-44 112,183,705 113,369,459 113,300,198 -69,261 -0.1% 0.9999 -0.4%Ages 45-64 61,952,636 80,007,649 86,046,740 6,039,091 7.5% 1.0104 33.1%Ages 65+ 34,991,753 40,678,969 49,835,170 9,156,201 22.5% 1.0294 50.2%Total 281,421,906 309,038,974 327,292,217 18,253,243 5.9% 1.0082 100.0%Females 15-44 61,576,997 62,026,664 61,130,231 -896,433 -1.4% 0.9979 -4.9%


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for the Ages 18–44 and females 15-44 cohorts where the TSA is growing slightly faster. When compared to the entire Country, the TSA is growing faster in the 0 to 17, the 18 to 44 and the females 15-44 age cohorts and slower in the 45-64 and the 65 and over age cohorts.

Table 3F-3 provides comparative historical income statistics for the TSA, the State and the Country, as well as projected income levels. Income levels are an important statistic to consider as it is directly related to the degree to which a population has more choices in their health care. A higher income household, as a rule, has better healthcare coverage through their employer(s) as well as having more discretionary income that can be used to purchase elective medical procedures. As shown in Table 3F-3, the 2010 median household income in the PSA is $63,683while the SSA 2010 median income is $73,574 and the State and Country median incomes are $62,401 and $52,795 respectively.

Table 3F-3 Household Income Trends

The projected income growth rate for the PSA (12.6 percent) is less than that of the SSA (13.9percent), but slightly higher than the State (12.3 percent) and the Country (11.7 percent).

With the passage of the Patient Protection and Affordable Care Act of 2010, in addition to the insurance exchanges which will result in increased inpatient and outpatient utilization, there are other income related considerations affecting utilization at CMHS. Beginning in 2014 there will be expanded Medi-Cal coverage. Eligibility for Medi-Cal in California will be increased from its current 106 percent of the Federal Poverty Level (FPL) to 133 percent. The current FPL for a family of four is $29,327 and thus eligibility is currently $31,087, and the new threshold will rise to $39,005. Using household income data obtained from Neilson Claritas, HFS calculated that by 2017 there will be 28,713 households in CMHS’s TSA with household incomes of $31,087 or less. With the new eligibility requirement of 133 percent of the FPL, there will be an additional 9,642 TSA households in 2017 which will qualify for Medi-Cal eligibility. Given the average household size of 3.23 in the TSA, this will result in an additional 31,180 Medi-Cal beneficiaries in the CMHS TSA when the thresholds are increased. Although this could result in additional volume for CMHS, no adjustments were made to the projections because of the uncertainties

2010-17Median Household Income % of % of Growth

2000 2010 2017 State USA RatePrimary Service Area 49,335 63,683 71,680 102.1% 120.6% 12.6%

Secondary Service Area 57,625 73,574 83,817 117.9% 139.4% 13.9%

Total Service Area 51,865 66,825 75,104 107.1% 126.6% 12.4%

California 47,945 62,401 70,060 100.0% 118.2% 12.3%

United States 42,729 52,795 58,969 100.0% 11.7%


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surrounding the Federal and State budgets at the time of the study and the relatively small amount of Medi-Cal patients seen at CMHS. Service Area Ethnicity Demographic variables such as race and ethnicity are meaningful to examine in a health care study because of differences in the incidence and prevalence of illnesses between these groups. It has long been established that there are significant variances in physical and behavioral health problems between groups based on ethnicity, income, and residence. This concept is important when planning for both inpatient and outpatient care in order to insure that patient care and services are sensitive to the program planning needs of the service area population. An example of this principle is the higher occurrence of diabetes seen among Hispanics compared to the Non-Hispanic population.

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Table 3F-4 Service Area Ethnicity

As shown in Table 3F-4, Hispanics or Latinos make up the largest percentage of the TSA population (50.6 percent) while in California as a whole this percentage is 37.1 as compared to 15.8 percent for the Nation. The White population accounts for a smaller percentage of the TSA (38.8 percent) than it does in either the entire State (40.9 percent) or the Country (64.7 percent). Together the Hispanics or Latinos and the Whites make up the majority of the population with no other ethnic group comprising more than 5.6 percent of the TSA population. The projected 2010-2017 growth for the Hispanic or Latino population in the TSA (14.9 percent) is expected to be less than the growth rate of that group in either California (18.4 percent) or the USA (22.1percent). However, it is also important to observe that the 2010-2017 projected growth in the TSA population for Asians is 17.1 percent, which is higher than the expected growth for any

2010 2010-17Percent Percent

2000 2010 2017 of Area ChangeTSA

White 208,837 193,807 183,443 38.8% -5.3%Hispanic or Latino 205,315 253,097 290,893 50.6% 14.9%Black or African American 10,067 10,071 10,053 2.0% -0.2%American Indian and Alaska Native 2,187 2,239 2,267 0.4% 1.3%Asian 22,124 28,229 33,063 5.6% 17.1%Native Hawaiian and Other Pacific Islander 1,042 1,161 1,209 0.2% 4.1%Some Other Race 641 551 559 0.1% 1.5%Two or More Races 9,121 10,807 12,151 2.2% 12.4%Total 459,334 499,962 533,638

CaliforniaWhite 15,816,790 15,487,385 15,152,213 40.9% -2.2%Hispanic or Latino 10,966,556 14,046,343 16,638,541 37.1% 18.5%Black or African American 2,181,926 2,230,449 2,277,654 5.9% 2.1%American Indian and Alaska Native 178,984 188,566 198,527 0.5% 5.3%Asian 3,648,860 4,569,368 5,333,826 12.1% 16.7%Native Hawaiian and Other Pacific Islander 103,736 120,349 135,419 0.3% 12.5%Some Other Race 71,681 72,330 72,532 0.2% 0.3%Two or More Races 903,115 1,138,640 1,331,589 3.0% 16.9%Total 33,871,648 37,853,430 41,140,301

USAWhite 194,552,774 199,964,369 200,907,670 64.7% 0.5%Hispanic or Latino 35,305,818 48,892,410 59,706,983 15.8% 22.1%Black or African American 33,947,837 37,328,936 39,763,850 12.1% 6.5%American Indian and Alaska Native 2,068,883 2,335,967 2,523,925 0.8% 8.0%Asian 10,123,169 13,436,901 16,025,150 4.3% 19.3%Native Hawaiian and Other Pacific Islander 353,509 421,815 485,289 0.1% 15.0%Some Other Race 467,770 472,501 480,437 0.2% 1.7%Two or More Races 4,602,146 6,186,075 7,398,912 2.0% 19.6%Total 281,421,906 309,038,974 327,292,217


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other ethnic group. This growth is somewhat comparable to the State of California (16.7 percent), but lower than that projected for the Asian population Nationwide (19.2 percent). The Black or African American population is expected to remain flat in the TSA (-0.2 percent) while increases are expected in the State (2.1 percent) and the Country (6.5 percent). Thesedemographic changes should be addressed in CMHS’s strategic planning. A graph of the ethnicity mix for the TSA, State and Nation is shown in Figure 3F-1 below:

Figure 3F-1 2010 Population by Ethnicity

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

TSA California USA

Percent of Area

Area

White Hispanic or Latino Black or African American

American Indian and Alaska Native Asian Native Hawaiian and Other Pacific Islander

Some Other Race Two or More Races

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Service Area Employment Trends

Table 3F-5 lists the top employers in the Total Service Area, based on national employee totals.

Table 3F-5 Largest employers in the CMHS Service Area

As can be seen from the list above, a significant portion of the local area employment is government-related. It should also be noted that Community Memorial Health System is one of the largest employers in the area. Unemployment Rates Unemployment statistics provide an indication of the economic status of an area, and from the perspective of a health care provider there are implications related to insurance coverage of a population as well as uncompensated care. Relative to the Nation, the State of California and County, the City of Ventura generally has a lower unemployment rate as shown in Table 3F-6.

Number of Company Employees IndustryU.S. Navy (including civilian jobs post BRAC) 19,400 U.S. Defense SupportAmgen 8,000 BiotechnicalCounty of Ventura 7,000 County GovernmentCountywide - Bank of America 5,000 Mortgage/BankingWellpoint (formerly Anthem/Blue Cross) 3,600 Health Insurance ServicesVentura Unified School District 2,400 Public SchoolVentura Community College District 2,000 Public CollegesCommunity Memorial Health System 2,000 Medical FacilitiesVerizon 1,900 TelecommunicationsBoskovich Farms 1,800 Agricultural ProductsOxnard Union High School District 1,500 Public SchoolLos Robles Regional Medical Center 1,500 Medical FacilitiesOxnard Elementary School District 1,400 Public SchoolHaas Automation 1,400 Machines & ToolsSt. John's Regional Medical Center 1,280 Medical FacilitiesSource: Ventura County Economic Development Association: Pacific Coast Times

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Table 3F-6 Unemployment Rates

Demographic and Economic Summary

Overall, the population of the TSA is expected to grow at a rate somewhat less than that of the State and at the same rate as the Country as a whole. The projected total population increasesshould not have a significant impact on the demand for healthcare services in the area. However, the overall aging of the population and the growth in the over 65 population should result in some increase demand.

On the economic side, the median household income growth in the TSA is projected to be similar to the growth of the State and higher than the Country’s growth. Given the area’s already higher than average income, this should have a negligible impact.

To the extent that CMHS can continue to adapt its services to the demographic and economic trends described in this section, it will continue to meet the health care needs of the TSA population. These demographic indicators are generally favorable with respect to increased future demand for health services in the Service Area.

City of Ventura State ofVentura County California U.S.A.

Feb 2011 9.4 10.4 12.2 9.52010 9.8 10.8 12.4 9.62009 8.9 9.9 11.3 9.32008 5.6 6.2 7.2 5.82007 4.4 4.9 5.3 4.62006 3.9 4.3 4.9 4.62005 4.3 4.8 5.4 5.1

Source: U.S. Bureau of Labor Statistics

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Section 4. Summary of Significant Demand Assumptions

A. General Methodology This Section describes Community Memorial Health System’s competitive environment, with particular focus on general acute hospitals with a five percent or greater market share in the Total Service Area.

Competitive hospital information was obtained from a number of sources, including:

• California Office of Statewide Healthcare Policy and Development (OSHPD) website• California Association of Hospitals and Health Systems information

• City Planning Departments of Cities in which competitive Hospitals are located• Hospital websites of competitive Hospitals

• Data compiled by Community Memorial Health System staff• Interviews with local physicians and local community leaders

This Section also analyzes historical general acute utilization trends in the Community MemorialHealth System Service Area (PSA, SSA and TSA). These trends, coupled with estimates of Service Area population growth, yield estimates of future Service Area utilization and current bed need in the service area.

In addition, this Section reflects historic and projected future utilization of the Hospitals. Theanalysis will combine market shares for each service with the respective Service Area utilization described here to yield utilization projections for each of the Hospitals.

B. Competitive Environment in the Service Area

General Acute Care Hospitals

Table 4B-1 provides information on key hospitals with a five percent or greater market share in the TSA. All of the competitors shown are located within the TSA. Community Memorial Hospital has the largest market share (29.7 percent) in the TSA and St. John’s Regional Medical Center (SJRMC) has the second largest share (24.7 percent). However, the Ventura County Medical Center has been steadily gaining market share for the past few years. The market shares shown below are based on total discharges (excluding normal newborns).

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Table 4B-1 Historic Market Shares of TSA GAC Hospitals

Table 4B-2

Competitive Hospital Statistical Comparison – All Licensed Bed Categories (2009)

PSAFacility 2004 2005 2006 2007 2008 2009Community Memorial Hospital 38.0% 37.0% 35.6% 34.5% 32.9% 33.6%Ojai Valley Community Hospital 3.1% 3.3% 3.4% 3.3% 2.9% 2.3%Ventura County Medical Center 20.5% 22.7% 24.2% 27.3% 28.3% 28.0%St. John's Pleasant Valley Hospital 1.4% 1.3% 1.1% 1.5% 1.4% 1.1%St. John's Regional Medical Center 27.5% 26.0% 26.1% 23.6% 24.7% 25.1%

All Other Hospitals (Mkt Share < 5%) 9.5% 9.7% 9.7% 9.8% 9.7% 9.8%

Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%SSA

Facility 2004 2005 2006 2007 2008 2009Community Memorial Hospital 23.2% 22.6% 20.4% 19.9% 19.1% 20.0%Ojai Valley Community Hospital 0.0% 0.1% 0.1% 0.1% 0.1% 0.0%Ventura County Medical Center 8.1% 9.3% 9.9% 12.0% 12.7% 12.9%St. John's Pleasant Valley Hospital 21.3% 21.1% 20.9% 20.7% 20.2% 20.9%St. John's Regional Medical Center 25.6% 25.7% 25.9% 24.4% 24.6% 23.6%


Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%TSA

Facility 2004 2005 2006 2007 2008 2009Community Memorial Hospital 33.8% 32.8% 31.2% 30.2% 28.9% 29.7%Ojai Valley Community Hospital 2.2% 2.4% 2.4% 2.4% 2.1% 1.6%Ventura County Medical Center 17.0% 18.8% 20.0% 22.9% 23.7% 23.6%St. John's Pleasant Valley Hospital 7.1% 7.0% 6.9% 7.1% 6.9% 6.9%St. John's Regional Medical Center 27.0% 25.9% 26.0% 23.8% 24.7% 24.7%


Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Source: OSHPD DataNote: Ventura County Medical Center data includes Santa Paulo Hospital

Licensed Staffed Acute DistanceName Address City Zip Code Beds Beds Beds From CMHVentura County Medical Center 3291 Loma Vista Road Ventura 93003 272 254 229 0.3 milesSt. John's Regional Medical Center 1600 Rose Avenue Oxnard 93030 265 265 242 7.8 milesSt. John's Pleasant Valley Hospital 2309 Antonio Avenue Camarillo 93010 180 127 81 17.1 miles

Source: OSHPD Data

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In addition to the summary information provided in Tables 4B-1 and 4B-2, a more detailed profile (including corporate structure, geographical relationship to CMHS, major inpatient services offered, and bed availability) of these three other hospitals in the TSA is outlined below.

Ventura County Medical Center Ventura, CA (93003), in the PSA

• County Hospital• Located 0.3 miles from Community Memorial Hospital• Provides general acute care• Total licensed beds: 272• Total staffed beds: 254

o General Acute Beds: 229o Rehab beds: 0o Psychiatric Beds: 43o Skilled Nursing Beds: 0

St. John’s Regional Medical Center Oxnard, CA (93030), in the PSA

• Non-Profit, Parent Organization: Catholic Healthcare West• Located 7.8 miles from Community Memorial Hospital• Provides general acute care• Total licensed beds: 265• Total staffed beds: 265


St. John’s Pleasant Valley Hospital Camarillo, CA (93010), in the SSA

• Non-Profit, Parent Organization: Catholic Healthcare West• Located 17.1 miles from Community Memorial Hospital• Provides general acute care• Total licensed beds: 180• Total staffed beds: 127


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Planned Hospital Projects and Additions A review of the OSHPD Facilities Development Division data base, which shows all health care facility projects seeking construction approvals, shows that there are currently no major hospital construction projects among CMHS’s principle competitors. However, St. John’s Pleasant Valley Hospital is currently seeking approval for a $24,000,000 SNF renovation and main tower replacement; Construction on this project has not begun.

Impact of Recently Closed or Sold Facilities There have been no recently closed or sold Hospitals within the CMHS service area.

Competitive Summary

As discussed above, Community Memorial Health System has three significant competitors. The competitor with the largest market share is St. John’s Regional Medical Center (SJRMC). Located approximately 7.8 miles from CMH, SJRMC has a market share of 26.4 percent. Ventura County Medical Center (VCMC) is very close behind with a market share of 24.3percent. VCMC has been gradually increasing market share for the last five years. The main VCMC campus is located just 0.3 miles from CMH. VCMC also has a satellite facility, Santa Paula Hospital, located outside the CMHS service area. In 2003, Santa Paula Hospital closed, which temporarily increased discharges at CMH, SJRMC, and St. John's Pleasant Valley. In 2005, Santa Paula Hospital reopened under VCMC's license. Since VCMC reports to OSHPD on a consolidated basis, Santa Paula Hospital data is included in the VCMC totals. The reopening of Santa Paula returned market share from CMH and the St. John's hospitals to the VCMC, and coincided with VCMC's above-noted gradual increase in market share for the last five years. The only other competitor with more than 5 percent market share is St. John’s Pleasant Valley Hospital (17.1 miles away with a 5.3 percent market share).

The following map highlights the location of all hospitals that had a five percent or greater market share within the Community Memorial Health System Total Service Area for 2009.

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Competitive Hospitals in the Service Area

Source: Map Prepared by HFS Consultants

C. Service Area Demand Analysis

Service Area demand is a function of the degree to which the Service Area population utilizes available healthcare resources. The extent to which this population has historically used hospital services is a useful proxy measure of future use. This calculation, or “use rate”, is a ratio of overall utilization to the overall population in the area. Use rates are calculated as the annual discharges per 1,000 population. However, use rates are specific to the service and population in question. While growth or decline in the population of all age groups combined represents a reasonable basis for projecting certain types of inpatient utilization (e.g. medical/surgicaldischarges, since these patients may be of any age or gender), the obstetrical use rate is calculated more appropriately as OB discharges per 1,000 females aged 15-44 years, as this age cohort for child-bearing women is the “relevant population” for this service.

For the Study, historical discharge data by service for calendar years 2004-2009 was used for the PSA, SSA and TSA. This historical data was combined with the respective population estimates (shown below in this Section) of these Service Areas to calculate discharge use rates for each service. Historical discharges by service from the PSA and SSA, regardless of hospital, were obtained from OSHPD.

Community Memorial Hospital

Ojai Valley Community Hospital

St. John’s Regional Medical Center

St. John’s Pleasant Valley Hospital

Ventura County Medical Center

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Historical Service Area Volume

Tables 4C-1 through 4C-3 provides historical use rate trends by service for the PSA, SSA and TSA for 2004 through 2009.

Table 4C-1 PSA Historical Discharges and Use Rates per Thousand by Service

2004 2005 2006 2007 2008 2009PSA Med/Surg Discharges 21,600 20,593 20,025 20,816 21,309 21,960PSA Total Population 336,914 339,757 342,692 345,720 348,846 352,071Use Rate 64.11 60.61 58.43 60.21 61.08 62.37

PSA OB Discharges 6,582 6,844 7,036 7,044 6,961 6,800PSA Females 15-44 Population 71,590 71,733 71,878 72,022 72,167 72,312Use Rate 91.94 95.41 97.89 97.80 96.46 94.04

PSA NICU Discharges 1,202 1,429 1,553 1,485 1,640 1,989PSA Females 15-44 Population 71,590 71,733 71,878 72,022 72,167 72,312Use Rate 16.79 19.92 21.61 20.62 22.73 27.51

PSA Total Discharges excl. Newborn 29,384 28,866 28,614 29,345 29,910 30,749

PSA Newborn Discharges 5,007 4,993 5,114 5,072 4,900 4,231PSA Females 15-44 Population 71,590 71,733 71,878 72,022 72,167 72,312Use Rate 69.94 69.60 71.15 70.42 67.90 58.51

PSA SNF Discharges 505 478 309 332 316 309PSA Population 65 and above 35,387 35,973 36,572 37,184 37,809 38,449Use Rate 14.27 13.29 8.45 8.93 8.36 8.04

Source: OSHPD Data, Claritas, HFS use rate calculations.

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Table 4C-2

SSA Historical Discharges and Use Rates per Thousand by Service

2004 2005 2006 2007 2008 2009SSA Med/Surg Discharges 9,330 9,349 9,139 9,455 9,731 10,029SSA Total Population 137,027 138,162 139,344 140,574 141,852 143,182Use Rate 68.09 67.67 65.59 67.26 68.60 70.04

SSA OB Discharges 2,003 2,071 2,215 2,098 2,171 1,997SSA Females 15-44 Population 27,160 27,144 27,128 27,113 27,097 27,081Use Rate 73.75 76.30 81.65 77.38 80.12 73.74

SSA NICU Discharges 353 395 450 442 532 576SSA Females 15-44 Population 27,160 27,144 27,128 27,113 27,097 27,081Use Rate 13.00 14.55 16.59 16.30 19.63 21.27

SSA Total Discharges excl. Newborn 11,686 11,420 11,354 11,553 11,902 12,026

SSA Newborn Discharges 1,491 1,539 1,632 1,553 1,526 1,259SSA Females 15-44 Population 27,160 27,144 27,128 27,113 27,097 27,081Use Rate 54.90 56.70 60.16 57.28 56.32 46.49

SSA SNF Discharges 600 547 249 71 78 57 SSA Population 65 and above 19,453 19,810 20,176 20,550 20,932 21,323 Use Rate 30.84 27.61 12.34 3.46 3.73 2.67


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Table 4C-3 TSA Historical Discharges and Use Rates per Thousand by Service

Use rates trends are a means of identifying shifts in the rate at which a population uses health care services. At TSA level, use rates for Med/Surg remained relatively flat over the historical period. The Obstetrics and NICU rates have varied somewhat over the historical period but havealso remained relatively constant while the Newborn use rate has shown a slight decline. The SNF use rate has continued to decline over the historical period. Although nationwide inpatient use rates have been declining over the last 20 years for various reasons (e.g. due to the impact of managed care, improved technology for both inpatient and outpatient services and the growth in outpatient services), shorter-term historical use rate trends in the CMHS TSA, as noted above,have generally not followed the national patterns. Projected Service Area Volume – Discharges

For the purposes of this study, use rates selected to project discharges for the market by each service are based on examining the trends in historical use rates. An estimated use rate for each service, based on these use-rate trends, was then applied to the population projections in order to calculate projected discharges for the Service Area populations in the PSA and SSA for 2010-2017. (The TSA projected demand for a service is the total of the PSA and SSA projected discharges for that service.) It is important to note that the 2010 volume for the service area is projected versus actual as the OSHPD discharge data for the service area is only available through 2009 at time of this study.

2004 2005 2006 2007 2008 2009TSA Med/Surg Discharges 30,930 29,942 29,164 30,271 31,040 31,989TSA Total Population 473,941 470,097 473,941 477,919 482,036 486,294Use Rate 65.26 63.69 61.54 63.34 64.39 65.78

TSA OB Discharges 8,585 8,915 9,251 9,142 9,132 8,797Females 15-44 Population 98,750 98,878 99,006 99,135 99,263 99,393Use Rate 86.94 90.16 93.44 92.22 92.00 88.51

TSA NICU Discharges 1,555 1,824 2,003 1,927 2,172 2,565Females 15-44 Population 98,750 98,878 99,006 99,135 99,263 99,393Use Rate 15.75 18.45 20.23 19.44 21.88 25.81

TSA Total Discharges excl. Newborn 41,070 40,681 40,418 41,340 42,344 43,351

TSA Newborn Discharges 6,498 6,532 6,746 6,625 6,426 5,490TSA Females 15-44 Population 98,750 98,878 99,006 99,135 99,263 99,393Use Rate 65.80 66.06 68.14 66.83 64.74 55.24

TSA SNF Discharges 1,105 1,025 558 403 394 366 TSA Population 65 and above 54,840 55,783 56,748 57,734 58,742 59,772Use Rate 20.15 18.37 9.83 6.98 6.71 6.12


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Selection of the use-rate projection statistic is a key part of this approach, because using a higher use-rate statistic could result in an overestimation of market demand. Conversely, using a lower use rate statistic could underestimate utilization. Usually, if use rates fluctuate and there is no clear pattern of growth, applying an average or using the last historical year for projection purposes is appropriate. If, there is evidence of some trending (either increasing or decreasing), there are a number of approaches which may be applied, among these being the average annual growth rates, a compound average growth rates (CAGR), or a linear regression statistic.

For this study, the 2009 use rates were used for a projection statistic for most categories in both the PSA and the SSA. The exception was the Skilled Nursing use rate where an average of the 2007, 2008 and 2009 rates was used because of the slight variance in the data (PSA slightly down and SSA slightly up) with no clear pattern. For subsequent years the use rate was held constant at the projected level for each service. It should be pointed out that because the Med/Surg and OB services use different population cohorts for determining use rates, when the discharges for the two services are combined and a total use rate for the area is calculated based on the area population, the total use rate varies from year to year. This is primarily due to the different sizes and growth rates of the two population cohorts.

Tables 4C-4 through 4C-6 shows the results of these calculations for the PSA, SSA and TSArespectively. The projected 2010-2017 utilization growth in the TSA for M/S is 2,187 discharges or 6.77 percent. OB is expected to grow at a much slower rate (119 discharges or 1.35 percent).

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Table 4C-4 PSA Projected Discharges by Service

2010 2011 2012 2013 2014 2015 2016 2017PSA Med/Surg Discharges 22,168 22,359 22,557 22,761 22,972 23,188 23,412 23,642PSA Total Population 355,400 358,476 361,647 364,917 368,288 371,764 375,347 379,042Use Rate 62.37 62.37 62.37 62.37 62.37 62.37 62.37 62.37

PSA OB Discharges 6,814 6,826 6,838 6,850 6,863 6,875 6,887 6,900PSA Females 15-44 Population 72,457 72,587 72,717 72,848 72,979 73,110 73,241 73,373Use Rate 94.04 94.04 94.04 94.04 94.04 94.04 94.04 94.04

PSA NICU Discharges 1,993 1,997 2,000 2,004 2,007 2,011 2,015 2,018PSA Females 15-44 Population 72,457 72,587 72,717 72,848 72,979 73,110 73,241 73,373Use Rate 27.51 27.51 27.51 27.51 27.51 27.51 27.51 27.51

PSA Total Discharges excl. Newborn 30,974 31,182 31,396 31,615 31,842 32,074 32,314 32,560

PSA Newborn Discharges 4,240 4,247 4,255 4,262 4,270 4,278 4,285 4,293PSA Females 15-44 Population 72,457 72,587 72,717 72,848 72,979 73,110 73,241 73,373Use Rate 58.51 58.51 58.51 58.51 58.51 58.51 58.51 58.51

PSA SNF Discharges 330 339 348 357 367 377 388 399 PSA Population 65 and above 39,103 40,138 41,211 42,325 43,480 44,678 45,921 47,212Use Rate 8.44 8.44 8.44 8.44 8.44 8.44 8.44 8.44

Source: Population - Neilson-Claritas, Projections by HFS

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Table 4C-5 SSA Projected Discharges by Services

2010 2011 2012 2013 2014 2015 2016 2017SSA Med/Surg Discharges 10,126 10,217 10,311 10,409 10,510 10,616 10,725 10,838SSA Total Population 144,562 145,859 147,206 148,604 150,054 151,557 153,116 154,731Use Rate 70.04 70.04 70.04 70.04 70.04 70.04 70.04 70.04

SSA OB Discharges 1,996 2,001 2,005 2,010 2,015 2,020 2,024 2,029SSA Females 15-44 Population 27,065 27,129 27,193 27,257 27,321 27,386 27,451 27,515Use Rate 73.74 73.74 73.74 73.74 73.74 73.74 73.74 73.74

SSA NICU Discharges 576 577 578 580 581 582 584 585SSA Females 15-44 Population 27,065 27,129 27,193 27,257 27,321 27,386 27,451 27,515Use Rate 21.27 21.27 21.27 21.27 21.27 21.27 21.27 21.27

SSA Total Discharges excl. Newborn 12,697 12,794 12,895 12,999 13,106 13,218 13,333 13,452

SSA Newborn Discharges 1,258 1,261 1,264 1,267 1,270 1,273 1,276 1,279SSA Females 15-44 Population 27,065 27,129 27,193 27,257 27,321 27,386 27,451 27,515Use Rate 46.49 46.49 46.49 46.49 46.49 46.49 46.49 46.49

SSA SNF Discharges 71 73 75 77 79 81 83 85SSA Population 65 and above 21,723 22,255 22,806 23,376 23,966 24,577 25,210 25,865Use Rate 3.28 3.28 3.28 3.28 3.28 3.28 3.28 3.28


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Table 4C-6 TSA Projected Discharges by Service

Projected Service Area Volume – Patient Days

In order to complete the demand projection for the Service Area, it is necessary to review historical patient days by service and then evaluate the trend in ALOS (average length of stay) statistics using historical patient days and discharges. After examining the trend in ALOS for each service, an ALOS statistic was chosen for each service and was applied to the respective projected TSA discharges in order to project patient days by service for the TSA. For this purpose, the most recently available year (2009) ALOS was used for all service lines. Historic patient days for the TSA by service were extracted from the OSHPD information. ALOS is primarily a function of clinical practice patterns and is not dependent on the area of residence of the patient. Accordingly, the TSA ALOS was used here. Additionally, for the entire Service Area, the estimate of ALOS will be more reliable as it represents a larger sample than the individual PSA or SSA.

Table 4C-7 displays the TSA historical patient days and ALOS by service from 2004 through 2009.

2010 2011 2012 2013 2014 2015 2016 2017TSA Med/Surg Discharges 32,293 32,576 32,868 33,170 33,482 33,804 34,137 34,480TSA Total Population 499,962 504,335 508,853 513,521 518,342 523,321 528,463 533,773Use Rate 64.59 64.59 64.59 64.59 64.59 64.60 64.60 64.60

TSA OB Discharges 8,809 8,826 8,843 8,860 8,877 8,895 8,912 8,929TSA Females 15-44 Population 99,522 99,716 99,910 100,105 100,300 100,496 100,692 100,888Use Rate 88.52 88.52 88.51 88.51 88.51 88.51 88.50 88.50

TSA NICU Discharges 2,569 2,574 2,579 2,584 2,588 2,593 2,598 2,603TSA Females 15-44 Population 99,522 99,716 99,910 100,105 100,300 100,496 100,692 100,888Use Rate 25.81 25.81 25.81 25.81 25.81 25.81 25.81 25.81

TSA Total Discharges excl. Newborn 43,671 43,976 44,290 44,614 44,948 45,292 45,647 46,012

TSA Newborn Discharges 5,498 5,508 5,519 5,530 5,540 5,551 5,562 5,572TSA Females 15-44 Population 99,522 99,716 99,910 100,105 100,300 100,496 100,692 100,888Use Rate 55.24 55.24 55.24 55.24 55.24 55.23 55.23 55.23

TSA SNF Discharges 401 412 423 434 446 458 470 483 TSA Population 65 and above 60,826 62,393 64,017 65,701 67,446 69,255 71,131 73,076Use Rate 6.60 6.60 6.60 6.61 6.61 6.61 6.61 6.62


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Table 4C-7 TSA Historical Patient Days, Discharges, and ALOS

Table 4C-8 provides patient day projections for the TSA calculated in the manner described above.

Table 4C-8

TSA Projected Patient Days by Service

2004 2005 2006 2007 2008 2009TSA Med/Surg Patient Days 143,834 143,059 140,939 142,724 145,302 148,008TSA Med/Surg Discharges 30,930 29,942 29,164 30,271 31,040 31,989 ALOS 4.65 4.78 4.83 4.71 4.68 4.63 TSA OB Patient Days 22,291 22,669 23,677 23,046 23,281 22,958 TSA OB Discharges 8,585 8,915 9,251 9,142 9,132 8,797 ALOS 2.60 2.54 2.56 2.52 2.55 2.61 TSA NICU Patient Days 14,911 16,047 16,466 16,926 16,843 16,890 TSA NICU Discharges 1,555 1,824 2,003 1,927 2,172 2,565 ALOS 9.59 8.80 8.22 8.78 7.75 6.58 TSA Total Patient Days (Excluding Newborn) 181,036 181,775 181,082 182,696 185,426 187,856TSA Total Discharges (Excluding Newborn) 41,070 40,681 40,418 41,340 42,344 43,351 ALOS 4.41 4.47 4.48 4.42 4.38 4.33 TSA Newborn Patient Days 13,589 13,491 13,820 13,478 13,268 11,197 TSA Newborn Discharges 6,498 6,532 6,746 6,625 6,426 5,490 ALOS 2.09 2.07 2.05 2.03 2.06 2.04 TSA SNF Patient Days 57,950 28,489 23,400 27,451 35,433 22,321 TSA SNF Discharges 1,105 1,025 558 403 394 366 ALOS 52.44 27.79 41.94 68.12 89.93 60.99

Source: OSHPD patient days and discharge statistics and HFS calculations for ALOS

2010 2011 2012 2013 2014 2015 2016 2017TSA Med/Surg Patient Days 149,416 150,724 152,076 153,472 154,915 156,406 157,945 159,534TSA Med/Surg Discharges 32,293 32,576 32,868 33,170 33,482 33,804 34,137 34,480ALOS 4.63 4.63 4.63 4.63 4.63 4.63 4.63 4.63TSA OB Patient Days 22,991 23,035 23,079 23,124 23,168 23,213 23,257 23,302TSA OB Discharges 8,809 8,826 8,843 8,860 8,877 8,895 8,912 8,929ALOS 2.61 2.61 2.61 2.61 2.61 2.61 2.61 2.61TSA NICU Patient Days 16,890 16,947 16,979 17,012 17,045 17,077 17,110 17,143TSA NICU Discharges 2,565 2,574 2,579 2,584 2,588 2,593 2,598 2,603ALOS 6.58 6.58 6.58 6.58 6.58 6.58 6.58 6.58TSA Total Patient Days (Excluding Newborn) 189,297 190,706 192,134 193,608 195,128 196,696 198,312 199,980TSA Total Discharges (Excluding Newborn) 43,668 43,976 44,290 44,614 44,948 45,292 45,647 46,012ALOS 4.33 4.34 4.34 4.34 4.34 4.34 4.34 4.35TSA Newborn Patient Days 11,197 11,234 11,256 11,278 11,299 11,321 11,343 11,365TSA Newborn Discharges 5,490 5,508 5,519 5,530 5,540 5,551 5,562 5,572ALOS 2.04 2.04 2.04 2.04 2.04 2.04 2.04 2.04TSA SNF Patient Days 24,481 25,121 25,784 26,471 27,184 27,923 28,690 29,485 TSA SNF Discharges 401 412 423 434 446 458 470 483 ALOS 60.99 60.99 60.99 60.99 60.99 60.99 60.99 60.99

Source: OSHPD patient days and discharge statistics and HFS calculations for ALOS

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Med/Surg patient days will grow by about 6.77 percent from 149,416 in 2010 to 159,534 in 2017. The OB patient days will grow at a much slower pace from 22,991 to 23,302 days or 1.35percent.

D. Community Memorial Health System Historical Utilization Market shares are the key basis for projecting future demand. The role they play and the assumptions to estimate future market shares will be discussed later in this Section. Tables 4D-1 through 4D-3 present CMHS’s historical utilization by service and the discharge market shares these represent for the PSA, SSA, and TSA, respectively. It should be noted that 2010 is a projection year for the market but an historical year for CMHS. This is because while CMHSwas able to provide a full year of data for 2010, there is a lag in the reporting and compilation of data by OSHPD and the year 2009 data is the most recently available for the market.

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Table 4D-1 PSA Historical Discharges and CMHS Market Share by Service

2004 2005 2006 2007 2008 2009 2010Community Memorial Hospital

Med/SurgCMH Discharges 8,422 7,845 7,583 7,602 7,380 7,822 7,665 Market Discharges 21,600 20,593 20,025 20,816 21,309 21,960 22,168Market Share % 38.99% 38.10% 37.87% 36.52% 34.63% 35.62% 34.58%

ObstetricsCMH Discharges 2,504 2,589 2,372 2,309 2,256 2,047 1,915 Market Discharges 6,582 6,844 7,036 7,044 6,961 6,800 6,814 Market Share % 38.04% 37.83% 33.71% 32.78% 32.41% 30.10% 28.11%

NICUCMH Discharges 233 248 235 211 217 185 166 Market Discharges 1,202 1,429 1,553 1,485 1,640 1,989 1,993 Market Share % 19.38% 17.35% 15.13% 14.21% 13.23% 9.30% 8.33%

Total Excluding NewbornCMH Discharges 11,159 10,682 10,190 10,122 9,853 10,054 9,746 Market Discharges 29,384 28,866 28,614 29,345 29,910 30,749 30,974Market Share % 37.98% 37.01% 35.61% 34.49% 32.94% 32.70% 31.46%

NewbornCMH Discharges 2,374 2,323 2,110 2,058 2,024 1,848 1,677 Market Discharges 5,007 4,993 5,114 5,072 4,900 4,231 4,240 Market Share % 47.41% 46.53% 41.26% 40.58% 41.31% 43.68% 39.56%

Ojai Valley Community HospitalMed/Surg

OVCH Discharges 917 958 969 967 882 715 806 Market Discharges 21,600 20,593 20,025 20,816 21,309 21,960 22,168Market Share % 4.25% 4.65% 4.84% 4.65% 4.14% 3.26% 3.63%

SNFOVCH Discharges 229 285 260 276 255 271 233 Market Discharges 505 478 309 332 316 309 330 Market Share % 45.35% 59.62% 84.14% 83.13% 80.70% 87.70% 70.52%

Source: OSHPD discharge data and market share calculations by HFSNote: 2010 Market Discharges are projected

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Table 4D-2 SSA Historical Discharges and CMHS Market Share by Service



ObstetricsCMH Discharges 636 677 672 647 649 581 585 Market Discharges 2,003 2,071 2,215 2,098 2,171 1,997 1,996 Market Share % 31.75% 32.69% 30.34% 30.84% 29.89% 29.09% 29.31%

NICUCMH Discharges 31 62 70 83 51 46 59 Market Discharges 353 395 450 442 532 576 576 Market Share % 8.78% 15.70% 15.56% 18.78% 9.59% 7.99% 10.25%

Total Excluding NewbornCMH Discharges 2,710 2,674 2,407 2,383 2,381 2,464 2,482 Market Discharges 11,686 11,815 11,804 11,995 12,434 12,602 12,697Market Share % 23.19% 22.63% 20.39% 19.87% 19.15% 19.55% 19.55%

NewbornCMH Discharges 564 625 601 587 597 520 540 Market Discharges 1,491 1,539 1,632 1,553 1,526 1,259 1,258 Market Share % 37.83% 40.61% 36.83% 37.80% 39.12% 41.30% 42.92%



SNFOVCH Discharges 2 5 6 9 - 10 4 Market Discharges 600 547 249 71 78 57 71 Market Share % 0.33% 0.91% 2.41% 12.68% 0.00% 17.54% 5.67%


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Table 4D-3 TSA Historical Discharges and CMHS Market Share by Service

As shown in the Tables above, CMH’s market share for Med/Surg services in the PSA for 2010is holding flat with less than one percent growth since 2007. At the same time, OB market share has been losing approximately 5.7 percent per year. OVCH’s Med/Surg market share in the PSA has also declined slightly with SNF market share dropping substantially in 2010. It should be noted, however, that the SNF average length of stay increased significantly in 2010 and as a result, the SNF occupancy remained at near capacity.

In the SSA CMH has experienced a virtually constant Med/Surg and OB market share. OVCH’s SSA market share has also remained fairly constant for Med/Surg through 2010. Its SNF market



ObstetricsCMH Discharges 3,140 3,266 3,044 2,956 2,905 2,628 2,500 Market Discharges 8,585 8,915 9,251 9,142 9,132 8,797 8,809 Market Share % 36.58% 36.63% 32.90% 32.33% 31.81% 29.87% 28.38%

NICUCMH Discharges 264 310 305 294 268 231 225 Market Discharges 1,555 1,824 2,003 1,927 2,172 2,565 2,569 Market Share % 16.98% 17.00% 15.23% 15.26% 12.34% 9.01% 8.76%

Total Excluding NewbornCMH Discharges 13,869 13,356 12,597 12,505 12,234 12,518 12,228Market Discharges 41,070 40,681 40,418 41,340 42,344 43,351 43,671Market Share % 33.77% 32.83% 31.17% 30.25% 28.89% 28.88% 28.00%

NewbornCMH Discharges 2,938 2,948 2,711 2,645 2,621 2,368 2,217 Market Discharges 6,498 6,532 6,746 6,625 6,426 5,490 5,498 Market Share % 45.21% 45.13% 40.19% 39.92% 40.79% 43.13% 40.33%



SNFOVCH Discharges 231 290 266 285 255 281 237 Market Discharges 1,105 1,025 558 403 394 366 401 Market Share % 20.90% 28.29% 47.67% 70.72% 64.72% 76.78% 58.99%


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share grew significantly in 2009, but declined again in 2010. The combined TSA market shares for CMH and OVCH are shown in Table 4D-4.

Table 4D-4 Community Memorial Health System Combined TSA Market Shares

As can be seen in Table 4D-4, CMHS Med/Surg market share has been steady at an average rate growth of approximately 0.3 percent per year between 2007 and 2010 and losing OB market share at approximately 1.8 percent per year for that same timeframe. SNF market share has increased significantly since 2004 but this is primarily due to an overall decrease in market SNF discharges while CMHS discharges have remained relatively constant.

It is important to note that in October of 2007 CMHS signed an exclusive 10-year contract with Kaiser Permanente. As a result CMHS’s gross revenue from Kaiser has increased, but it appears that the overall managed-care gross revenue has remained relatively constant. The Kaiser increase has not resulted in increased overall discharges as shown it Table 4D-4. It is merely a reflection of a shift in gross revenue from other managed care plans to Kaiser.

2004 2005 2006 2007 2008 2009 2010Med/Surg

CMHS Discharges 11,387 10,747 10,223 10,230 9,950 10,381 10,314Market Discharges 30,930 29,942 29,164 30,271 31,040 31,989 32,293Market Share % 36.82% 35.89% 35.05% 33.79% 32.06% 32.45% 31.94%

ObstetricsCMHS Discharges 3,141 3,266 3,044 2,956 2,905 2,628 2,500 Market Discharges 8,585 8,915 9,251 9,142 9,132 8,797 8,809 Market Share % 36.59% 36.63% 32.90% 32.33% 31.81% 29.87% 28.38%

NICUCMHS Discharges 264 310 305 294 268 231 225 Market Discharges 1,555 1,824 2,003 1,927 2,172 2,565 2,569 Market Share % 16.98% 17.00% 15.23% 15.26% 12.34% 9.01% 8.76%

Total Excluding NewbornCMHS Discharges 14,792 14,323 13,572 13,480 13,123 13,240 13,039Market Discharges 41,070 40,681 40,418 41,340 42,344 43,351 43,671Market Share % 36.02% 35.21% 33.58% 32.61% 30.99% 30.54% 29.86%

NewbornCMHS Discharges 2,938 2,948 2,711 2,645 2,621 2,368 2,217 Market Discharges 6,498 6,532 6,746 6,625 6,426 5,490 5,498 Market Share % 45.21% 45.13% 40.19% 39.92% 40.79% 43.13% 40.33%

SNFCMHS Discharges 231 290 266 285 255 281 237 Market Discharges 1,105 1,025 558 403 394 366 401 Market Share % 20.90% 28.29% 47.67% 70.72% 64.72% 76.78% 58.99%


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E. Community Memorial Health System Projected Utilization

The tables 4E-1 through 4E-3 summarizes the demand projections by service for CMHS. Market demand for each service in each market area (PSA and SSA) was projected based on use rates applied to population statistics as discussed previously. At the individual hospital level estimated future CMHS discharges by service for each market are calculated by applying CMHS’s respective market-share statistics to total projected discharges for each respective service within the PSA and SSA. The resulting product of each of these calculations is CMHS’s share of each market for each service. The Hospital’s TSA discharge total then equals the sum of the PSA and SSA estimates. For Community Memorial Hospital the market-share projection percentage (e.g. that market share chosen to compute future discharges for each service) used for Med/Surg for both PSA and SSA was the 2010 estimated market share. For the OB, normal newborn and other newborn categories, a linear regression based on the 2006 through 2010 market shares was used to compute the 2011 market share.

For Ojai Valley Community Hospital, the market share statistic was based on the 2010 market share. This was selected because the OVCH market shares have been relatively stable, particularly since 2008. The exception to the stability was the SNF market share in the PSAwhich decreased significantly in 2010. As noted above, this is primarily related to the length of stay as it increased considerably in 2010 and as a result, the discharges decreased. In addition, the SNF unit is very near to its operational capacity; therefore, the discharges and days were allowed to increase until they reached approximately 86 percent occupancy at which point (starting in 2011) they were held constant.

The tables 4E-1 through 4E-3 show the projected Hospital discharges and market shares based on the historical trends:

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Table 4E-1 CMHS Projected PSA Discharges by Service


Med/SurgMarket Discharges 22,359 22,557 22,761 22,972 23,188 23,412 23,642Market Share % 34.58% 34.58% 34.58% 34.58% 34.58% 34.58% 34.58%CMH Discharges 7,731 7,800 7,870 7,943 8,018 8,095 8,175

ObstetricsMarket Discharges 6,826 6,838 6,850 6,863 6,875 6,887 6,900 Market Share % 27.25% 27.25% 27.25% 27.25% 27.25% 27.25% 27.25%CMH Discharges 1,860 1,864 1,867 1,870 1,874 1,877 1,881

NICUMarket Discharges 1,997 2,000 2,004 2,007 2,011 2,015 2,018 Market Share % 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%CMH Discharges 178 178 179 179 179 180 180

Total Excluding NewbornMarket Discharges 31,182 31,396 31,615 31,842 32,074 32,314 32,560Market Share % 31.33% 31.35% 31.36% 31.38% 31.40% 31.42% 31.44%CMH Discharges 9,770 9,842 9,916 9,992 10,071 10,152 10,235

NewbornMarket Discharges 4,247 4,255 4,262 4,270 4,278 4,285 4,293 Market Share % 42.36% 42.37% 42.38% 42.36% 42.37% 42.36% 42.37%CMH Discharges 1,799 1,803 1,806 1,809 1,813 1,815 1,819


Market Discharges 22,359 22,557 22,761 22,972 23,188 23,412 23,642Market Share % 3.63% 3.63% 3.63% 3.63% 3.63% 3.63% 3.63%OVCH Discharges 813 820 827 835 843 851 859

SNFMarket Discharges 339 348 357 367 377 388 399 Market Share % 70.52% 66.91% 65.15% 63.42% 61.72% 60.05% 58.40%OVCH Discharges 233 233 233 233 233 233 233

Source: OSHPD and Nielsen Claritas. Projections by HFS.

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Table 4E-2 CMHS Projected SSA Discharges by Service



ObstetricsMarket Discharges 2,001 2,005 2,010 2,015 2,020 2,024 2,029Market Share % 29.31% 29.31% 29.31% 29.31% 29.31% 29.31% 29.31%CMH Discharges 586 588 589 591 592 593 595

NICUMarket Discharges 577 578 580 581 582 584 585Market Share % 9.11% 9.11% 9.11% 9.11% 9.11% 9.11% 9.11%CMH Discharges 59 59 59 59 60 60 60


NewbornMarket Discharges 1,261 1,264 1,267 1,270 1,273 1,276 1,279 Market Share % 42.89% 42.87% 42.93% 42.91% 42.88% 42.86% 42.92%CMH Discharges 541 542 544 545 546 547 549



SNFMarket Discharges 73 75 77 79 81 83 85 Market Share % 5.67% 5.40% 5.27% 5.14% 5.01% 4.89% 4.76%OVCH Discharges 4 4 4 4 4 4 4


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Table 4E-3 CMHS Projected TSA Discharges by Service

The last piece of the utilization for the facilities is the Out-of-TSA area factor. This factor iscomputed by taking the difference between the Hospital’s grand total projected discharges for each service and the TSA discharges for the service and dividing it by the TSA discharges for the service. Table 4E-4 shows the historical out-of-TSA factors for the various service lines for each of the hospitals.



ObstetricsMarket Discharges 8,826 8,843 8,860 8,877 8,895 8,912 8,929 Market Share % 27.72% 27.72% 27.72% 27.72% 27.72% 27.72% 27.72%CMH Discharges 2,447 2,451 2,456 2,461 2,466 2,470 2,475

NICUMarket Discharges 2,574 2,579 2,584 2,588 2,593 2,598 2,603 Market Share % 9.21% 9.21% 9.20% 9.20% 9.23% 9.22% 9.22%CMH Discharges 237 237 238 238 239 240 240


NewbornMarket Discharges 5,508 5,519 5,530 5,540 5,551 5,562 5,572 Market Share % 42.48% 42.48% 42.50% 42.49% 42.49% 42.48% 42.50%CMH Discharges 2,340 2,345 2,350 2,354 2,359 2,362 2,368



SNFMarket Discharges 412 423 434 446 458 470 483Market Share % 57.49% 56.01% 54.56% 53.13% 51.72% 50.34% 48.98%OVCH Discharges 237 237 237 237 237 237 237


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Table 4E-4 CMHS Historic Discharges Including Out-of-Service Area Factor

As can be seen in Table 4E-4, the out-of-TSA factor varies somewhat from service to service but, in most cases it is relatively stable from year to year within a particular service. For projection purposes, the average of the 2005 through 2010 YTD out-of-TSA factors was used as the projected out-of-TSA factor for all services. The projected total discharges including the out-


Med/SurgTSA Discharges 10,465 9,780 9,248 9,255 9,061 9,659 9,503Out of Area Factor 7.22% 6.83% 7.28% 6.52% 6.03% 6.86% 8.42%Out of Area Discharges 756 668 673 603 546 663 800Total Discharges 11,221 10,448 9,921 9,858 9,607 10,322 10,303

ObstetricsTSA Discharges 3,140 3,266 3,044 2,956 2,905 2,628 2,500Out of Area Factor 5.41% 4.96% 4.11% 4.23% 4.10% 4.95% 4.88%Out of Area Discharges 170 162 125 125 119 130 122Total Discharges 3,310 3,428 3,169 3,081 3,024 2,758 2,622

NICUTSA Discharges 264 310 305 294 268 231 225Out of Area Factor 5.30% 4.52% 3.61% 5.44% 3.73% 7.36% 7.11%Out of Area Discharges 14 14 11 16 10 17 16Total Discharges 278 324 316 310 278 248 241

Total Excluding NurseryTSA Discharges 13,869 13,356 12,597 12,505 12,234 12,518 12,228Out of Area Factor 6.78% 6.32% 6.42% 5.95% 5.52% 6.47% 7.67%Out of Area Discharges 940 844 809 744 675 810 938Total Discharges 14,809 14,200 13,406 13,249 12,909 13,328 13,166

NewbornTSA Discharges 2,938 2,948 2,711 2,645 2,621 2,368 2,217Out of Area Factor 5.31% 4.34% 3.80% 4.12% 3.66% 4.48% 4.29%Out of Area Discharges 156 128 103 109 96 106 95Total Discharges 3,094 3,076 2,814 2,754 2,717 2,474 2,312


TSA Discharges 922 967 975 975 889 722 811Out of Area Factor 7.70% 7.55% 7.38% 6.36% 4.61% 9.42% 5.80%Out of Area Discharges 71 73 72 62 41 68 47Total Discharges 993 1,040 1,047 1,037 930 790 858

SNFTSA Discharges 231 290 266 285 255 281 237Out of Area Factor 6.49% 5.17% 5.64% 6.32% 5.88% 5.69% 7.18%Out of Area Discharges 15 15 15 18 15 16 17Total Discharges 246 305 281 303 270 297 254

Source: OSHPD. Projections by HFS.

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of-TSA discharges are shown in Table 4E-5. In NICU the 2005 through 2010 YTD average projection statistic may be conservative because, per Table 3A-3 previously presented, there will be seven more NICU beds to serve the TSA and the out-of-TSA. Our research did not reveal any new planned NICU out-of-area expansions, which would imply that CMHS’s out-of-area factor here may actually grow instead of remain constant as shown in Table 4E-5.

Table 4E-5 CMHS Projected Total Discharges Including Out-of-TSA Factor

2011 2012 2014 2015 2016 2017Community Memorial Hospital

Med/SurgTSA Discharges 9,586 9,671 9,851 9,945 10,042 10,142Out of Area Factor 7.02% 7.02% 7.02% 7.02% 7.02% 7.02%Out of Area Discharges 673 679 692 698 705 712Total Discharges 10,259 10,350 10,542 10,643 10,747 10,854

ObstetricsTSA Discharges 2,447 2,451 2,461 2,466 2,470 2,475Out of Area Factor 4.45% 4.45% 4.45% 4.45% 4.45% 4.45%Out of Area Discharges 109 109 110 110 110 110Total Discharges 2,556 2,561 2,571 2,575 2,580 2,585

NICUTSA Discharges 237 237 238 239 240 240Out of Area Factor 5.45% 5.45% 5.45% 5.45% 5.45% 5.45%Out of Area Discharges 13 13 13 13 13 13Total Discharges 250 250 251 252 253 253

Total Excluding NewbornTSA Discharges 12,270 12,360 12,550 12,650 12,752 12,857Out of Area Factor 6.48% 6.48% 6.49% 6.49% 6.49% 6.50%Out of Area Discharges 795 801 814 821 828 835Total Discharges 13,064 13,161 13,364 13,471 13,580 13,693

NewbornTSA Discharges 2,340 2,345 2,354 2,359 2,362 2,368Out of Area Factor 4.07% 4.07% 4.07% 4.07% 4.07% 4.07%Out of Area Discharges 95 95 96 96 96 96Total Discharges 2,435 2,440 2,450 2,455 2,458 2,464


TSA Discharges 818 825 840 848 856 865Out of Area Factor 6.85% 6.85% 6.85% 6.85% 6.85% 6.85%Out of Area Discharges 56 57 58 58 59 59Total Discharges 874 882 898 906 915 924

SNFTSA Discharges 237 237 237 237 237 237Out of Area Factor 5.98% 5.98% 5.98% 5.98% 5.98% 5.98%Out of Area Discharges 14 14 14 14 14 14Total Discharges 251 251 251 251 251 251

Source: OSHPD. Projections by HFS.

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In their 2009 Community Hospital Replacement Study, Stroudwater Associates reviewed the impact of building a replacement hospital on the operations of the facilities involved. The study analyzed the results of seventy-two full service community hospitals replaced between 2000 and 2007. The study shows that on average, the adjusted discharges of the hospitals increased 3.15 percent in the year of the opening of the new facility, an additional 7.87 percent in the first year after opening, another 4.89 percent in the second year and an additional 7.25 percent in the third year after opening.

Because the new CMH facility is scheduled to open in April of 2015, the opening year percentage was applied to 2015, the first year percentage of 7.87 was applied to 2016 and the second year percentage of 4.89 was applied to 2017. The increases and the total adjusted discharges for CMH are shown in Table 4E-6.

Table 4E-6 CMH Adjusted Discharges

Table 4E-7 combined the CMH and OVCH discharges to show the total projected discharges and market shares for the Community Memorial Health System.


Med/SurgDischarges Before Additions 10,259 10,350 10,445 10,542 10,643 10,747 10,854Additions 0 0 0 0 231 982 1,447Total Discharges 10,259 10,350 10,445 10,542 10,874 11,729 12,302

ObstetricsDischarges Before Additions 2,556 2,561 2,566 2,571 2,575 2,580 2,585Additions 0 0 0 0 56 238 348Total Discharges 2,556 2,561 2,566 2,571 2,632 2,818 2,933

NICUDischarges Before Additions 250 250 251 251 252 253 253Additions 0 6 7 8 13 31 42Total Discharges 250 256 258 259 265 284 295

Total Excluding NewbornDischarges Before Additions 13,064 13,161 13,261 13,364 13,471 13,580 13,693Additions 0 6 7 8 300 1,251 1,837Total Discharges 13,065 13,167 13,268 13,372 13,771 14,831 15,530

NewbornDischarges Before Additions 2,435 2,440 2,446 2,450 2,455 2,458 2,464Additions (0) 58 68 71 128 307 414Total Discharges 2,435 2,498 2,514 2,521 2,582 2,765 2,878

Source: Projections by HFS

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Table 4E-7 Community Memorial Health System Projected Discharges and Market Shares

The next step in the demand analysis focuses on projecting patient days at each facility over the forecast period. The methodology involves a review of historical ALOS trends at the Hospital. Table 4E-8 describes historical length of stay and patient day trends at each Hospital.

2011 2012 2013 2014 2015 2016 2017Community Memorial Health System

Med/SurgTSA Discharges 10,404 10,496 10,592 10,691 11,009 11,816 12,359TSA Market Share 31.9% 31.9% 31.9% 31.9% 32.6% 34.6% 35.8%Total Discharges 11,133 11,232 11,334 11,440 11,780 12,644 13,226

ObstetricsTSA Discharges 2,447 2,451 2,456 2,461 2,520 2,698 2,808TSA Market Share 27.7% 27.7% 27.7% 27.7% 28.3% 30.3% 31.4%Total Discharges 2,556 2,561 2,566 2,571 2,632 2,818 2,933

NICUTSA Discharges 237 243 245 245 251 269 280TSA Market Share 9.2% 9.4% 9.5% 9.5% 9.7% 10.4% 10.8%Total Discharges 250 256 258 259 265 284 295

Total Excluding NewbornTSA Discharges 13,088 13,191 13,293 13,397 13,780 14,783 15,448TSA Market Share 29.8% 29.8% 29.8% 29.8% 30.4% 32.4% 33.6%Total Discharges 13,938 14,049 14,158 14,269 14,677 15,746 16,454

NewbornTSA Discharges 2,340 2,401 2,416 2,423 2,481 2,657 2,765TSA Market Share 42.5% 43.5% 43.7% 43.7% 44.7% 47.8% 49.6%Total Discharges 2,435 2,498 2,514 2,521 2,582 2,765 2,878

SNFTSA Discharges 237 237 237 237 237 237 237TSA Market Share 57.5% 56.0% 54.6% 53.1% 51.7% 50.3% 49.0%Total Discharges 251 251 251 251 251 251 251


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Table 4E-8 CMHS Historical ALOS and Patient Day Trends

For each service projected patient days are calculated by using the Hospital’s ALOS experience applied to projected discharges. The projected patient days for CMH and OVCH are shown in Table 4E-9.


Med/SurgDischarges 11,221 10,448 9,921 9,858 9,607 10,322 10,303ALOS 4.01 4.23 4.21 4.04 3.99 3.61 3.55 Patient Days 44,958 44,234 41,757 39,815 38,352 37,309 36,532

ObstetricsDischarges 3,310 3,428 3,169 3,081 3,024 2,758 2,622ALOS 2.57 2.70 2.76 2.85 2.75 3.03 2.91Patient Days 8,506 9,259 8,747 8,794 8,320 8,347 7,621

NICUDischarges 278 324 316 310 278 248 241ALOS 16.70 16.72 16.02 16.87 17.65 19.37 13.71Patient Days 4,642 5,417 5,062 5,230 4,908 4,804 3,303

Total Excluding NewbornDischarges 14,809 14,200 13,406 13,249 12,909 13,328 13,166ALOS 3.68 3.86 3.86 3.76 3.70 3.49 3.42Patient Days 58,106 58,910 55,566 53,839 51,580 50,460 47,456

NewbornDischarges 3,094 3,076 2,814 2,754 2,717 2,474 2,312ALOS 2.09 2.06 2.10 2.09 2.10 2.08 2.09Patient Days 6,474 6,341 5,912 5,764 5,705 5,149 4,824


Discharges 993 1,040 1,047 1,037 930 790 858ALOS 2.90 3.10 3.25 3.38 3.49 3.37 3.29Patient Days 2,882 3,222 3,403 3,509 3,246 2,660 2,823

SNFDischarges 246 305 281 303 270 297 254ALOS 134.28 67.78 68.90 66.76 75.14 69.39 82.43Patient Days 33,034 20,673 19,360 20,228 20,288 20,610 20,921

Source: OSHPD Data

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Table 4E-9 CMHS Projected Patient Days

The patient day projections are converted into occupancy and bed need projections over the forecast period. In order to calculate the true bed need we must add the need for observation beds to the acute bed need. The need for observation beds was based on the historical needs for these beds as a ratio of observation days to total inpatient days. As of 2010, CMH had 242 beds and an average daily census (ADC) of 136.7 (including observation) resulting in an occupancy rate of 56.5 percent. After the construction, CMH will have 250 beds and the ADC and occupancy rate will increase as shown in Table 4E-10.


Med/SurgDischarges 10,259 10,350 10,445 10,542 10,874 11,729 12,302ALOS 3.55 3.55 3.55 3.55 3.55 3.55 3.55 Patient Days 36,375 36,700 37,035 37,381 38,556 41,588 43,619

ObstetricsDischarges 2,556 2,561 2,566 2,571 2,632 2,818 2,933ALOS 2.80 2.80 2.80 2.80 2.80 2.80 2.80Patient Days 7,162 7,176 7,190 7,204 7,375 7,898 8,220

NICUDischarges 250 256 258 259 265 284 295ALOS 13.71 13.71 13.71 13.71 13.71 13.71 13.71Patient Days 3,428 3,515 3,536 3,547 3,632 3,890 4,049

Total Excluding NewbornDischarges 13,065 13,167 13,268 13,372 13,771 14,831 15,530ALOS 3.59 3.60 3.60 3.60 3.60 3.60 3.60Patient Days 46,965 47,390 47,761 48,131 49,564 53,376 55,887

NewbornDischarges 2,435 2,498 2,514 2,521 2,582 2,765 2,878ALOS 2.09 2.09 2.09 2.09 2.09 2.09 2.09Patient Days 5,081 5,213 5,245 5,260 5,387 5,770 6,005


Discharges 874 882 890 898 906 915 924ALOS 3.29 3.29 3.29 3.29 3.29 3.29 3.29Patient Days 2,876 2,901 2,928 2,955 2,983 3,011 3,041

SNFDischarges 251 251 251 251 251 251 251ALOS 82.43 82.43 82.43 82.43 82.43 82.43 82.43 Patient Days 20,687 20,687 20,687 20,687 20,687 20,687 20,687

Source: Calculations by HFS

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Table 4E-10 CMHS Current and Projected Bed Need by Service

2009 2010 2011 2012 2013 2014 2015 2016 2017Community Memorial Hospital

Med/SurgPatient Days 37,309 36,532 36,375 36,700 37,035 37,381 38,556 41,588 43,619Observation Days 2,751 2,725 2,704 2,659 2,680 2,702 2,784 2,999 3,142 Total Days 40,060 39,257 39,079 39,359 39,715 40,083 41,340 44,587 46,760ADC 109.75 107.55 107.07 107.83 108.81 109.82 113.26 122.16 119.50Available Beds 199 199 199 199 199 199 197 197 197 Occupancy Percent 55.15% 54.05% 53.80% 54.19% 54.68% 55.18% 57.49% 62.01% 60.66%Beds Needed at 70 % Occ. 157 154 153 154 155 157 162 175 171

ObstetricsPatient Days 8,347 7,348 7,162 7,176 7,190 7,204 7,375 7,898 8,220ADC 22.87 20.13 19.62 19.66 19.70 19.74 20.21 21.64 22.52Available Beds 27 27 27 27 27 27 30 30 30Occupancy Percent 84.70% 74.56% 72.68% 72.82% 72.96% 73.10% 67.35% 72.12% 75.07%Beds Needed at 70 % Occ. 33 29 28 28 28 28 29 31 32

NICUPatient Days 4,804 3,303 3,428 3,515 3,536 3,547 3,632 3,890 4,049ADC 13.16 9.05 9.39 9.63 9.69 9.72 10 11 11Available Beds 16 16 16 16 16 16 23 23 23Occupancy Percent 82.26% 56.56% 58.69% 60.19% 60.56% 60.73% 43.27% 46.34% 48.23%Beds Needed at 70 % Occ. 19 13 13 14 14 14 14 15 16

Total Excluding NewbornPatient Days 53,211 49,908 49,669 50,050 50,441 50,833 52,347 56,375 59,029ADC 145.78 136.73 136.08 137.12 138.20 139.27 143.42 154.45 161.72Available Beds 242 242 242 242 242 242 250 250 250Occupancy Percent 60.24% 56.50% 56.23% 56.66% 57.11% 57.55% 57.37% 61.78% 64.69%Beds Needed at 70 % Occ. 208 195 194 196 197 199 205 221 231

NewbornPatient Days 5,149 4,824 5,081 5,213 5,245 5,260 5,387 5,770 6,005ADC 14.11 13.22 13.92 14.28 14.37 14.41 14.76 15.81 16.45 Available Beds 25 25 25 25 30 30 30 30 30 Occupancy Percent 56.43% 52.87% 55.68% 57.13% 47.90% 48.04% 49.20% 52.69% 54.84%Beds Needed at 70 % Occ. 20 19 20 20 21 21 21 23 24


Patient Days 2,660 2,823 2,876 2,901 2,928 2,955 2,983 3,011 3,041Observation Days 158 134 137 151 153 154 155 157 158Total Days 2,818 2,957 3,012 3,053 3,080 3,109 3,138 3,168 3,199ADC 7.72 8.10 8.25 8.36 8.44 8.52 8.60 8.68 8.77 Available Beds 37 37 37 37 37 37 37 37 37 Occupancy Percent 20.87% 21.90% 22.31% 22.60% 22.81% 23.02% 23.24% 23.46% 23.69%Beds Needed at 70 % Occ. 11 12 12 12 12 12 12 12 13

SNFPatient Days 20,610 20,921 20,687 20,687 20,687 20,687 20,687 20,687 20,687ADC 56.47 57.32 56.68 56.68 56.68 56.68 56.68 56.68 56.68 Available Beds 66 66 66 66 66 66 66 66 66 Occupancy Percent 85.55% 86.85% 85.87% 85.87% 85.87% 85.87% 85.87% 85.87% 85.87%Beds Needed at 70 % Occ. 81 82 81 81 81 81 81 81 81

Source: Calculations by HFS

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Outpatient and Clinic Utilization Projections

Community Memorial Health System operates three designated Regional Health Centers and six other freestanding clinics. These facilities provide a variety of primary care and specialty services to the community. In addition to the freestanding clinics, CMHS operates three imaging centers and provides emergency and other outpatient services. The utilization of each of the outpatient services was analyzed to provide a basis for the projection of the future volume of those services. Since market data is not available for these services, provider-specific use rates were computed as a basis for projection. Table 4E-11 shows the historical utilization and use rates for those outpatient services.

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Table 4E-11 CMHS Historical Outpatient Utilization

Historical2005 2006 2007 2008 2009 2010

TSA Population 477,919 482,036 486,294 490,698 495,253 499,962Community Memorial Hospital

ER Visits 34,746 34,502 36,943 36,901 38,013 36,786Use Rate 72.7 71.6 76.0 75.2 76.8 73.6Citrus Grove 27,231 26,626 35,868 34,202 23,178 19,950Use Rate 57.0 55.2 73.8 69.7 46.8 39.9Airport Marina 9,259 12,379 15,885 17,372 16,047 14,832Use Rate 19.4 25.7 32.7 35.4 32.4 29.7Fillmore 13,896 13,728 16,359 16,014 15,208 13,806Use Rate 29.1 28.5 33.6 32.6 30.7 27.6Santa Paula 20,107 29,023 27,755 26,742 26,218 24,923Use Rate 42.1 60.2 57.1 54.5 52.9 49.8Ashwood 5,174 5,110 8,823 14,271 20,472 25,058Use Rate 10.8 10.6 18.1 29.1 41.3 50.1Main Street 26,826 25,611 29,643 27,487 25,224 25,230Use Rate 56.1 53.1 61.0 56.0 50.9 50.5Saviers 34,160 40,473 49,685 53,369 58,268 57,604Use Rate 71.5 84.0 102.2 108.8 117.7 115.2CPSP 0 8,144 8,650 8,033 7,782 8,312Use Rate 0.0 16.9 17.8 16.4 15.7 16.6Camarillo 9,148 16,214 32,299 36,791 33,396 35,466Use Rate 19.1 33.6 66.4 75.0 67.4 70.9Referred O/P 85,544 80,419 85,441 77,079 77,638 74,792Use Rate 179.0 166.8 175.7 157.1 156.8 149.6Outpatient Surgery 1,722 1,577 1,791 1,834 1,990 1,818Use Rate 3.6 3.3 3.7 3.7 4.0 3.6Same Day Surgery 5,026 5,134 4,958 5,064 4,867 4,736Use Rate 10.5 10.7 10.2 10.3 9.8 9.5

Ojai Valley Community HospitalER Visits 8,214 7,950 8,002 7,938 8,186 7,710Use Rate 17.2 16.5 16.5 16.2 16.5 15.4Oak View 7,162 7,125 7,459 8,015 8,859 7,987Use Rate 15.0 14.8 15.3 16.3 17.9 16.0Keeler Center 337 994 2,068 1,821 1,956 1,722Use Rate 0.7 2.1 4.3 3.7 3.9 3.4Referred O/P 15,409 14,836 14,023 13,670 13,563 13,176Use Rate 32.2 30.8 28.8 27.9 27.4 26.4Outpatient Surgery 575 535 432 507 405 390Use Rate 1.2 1.1 0.9 1.0 0.8 0.8

Grossman ImagingVisits 12,914 16,931 24,056 29,484 34,391 35,056Use Rate 27.0 35.1 49.5 60.1 69.4 70.1

Source: CMHS utilization and Nielsen-Claritas population data. Use rates calculated by HFS

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To project the utilization for each outpatient location, historical use rates were calculated by service based on the historical population. A projected use rate was then determined for each service and that rate was used to calculate the projected utilization based on the projected population for the service area for each year. In most cases, the projected use rate was based on the average of the 2009 and 2010 use rates, however, in a few cases, because of the overall trend of the historic data; it was felt that using the average would not accurately reflect the use rate pattern. In those cases, the 2010 use rate was selected for the projection statistic. The results of those calculations are shown in Table 4E-12.

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Table 4E-12 CMHS Projected Outpatient Utilization

2011 2012 2013 2014 2015 2016 2017TSA Population 504,335 508,853 513,521 518,342 523,321 528,463 533,773

Community Memorial HospitalER Visits - CMH 37,108 37,440 37,784 38,138 38,505 38,883 39,274Use Rate 73.6 73.6 73.6 73.6 73.6 73.6 73.6

Citrus Grove 20,124 20,305 20,491 20,683 20,882 21,087 21,299Use Rate 39.9 39.9 39.9 39.9 39.9 39.9 39.9

Airport Marina 14,962 15,096 15,234 15,377 15,525 15,678 15,835Use Rate 29.7 29.7 29.7 29.7 29.7 29.7 29.7

Fillmore 13,927 14,052 14,180 14,314 14,451 14,593 14,740Use Rate 27.6 27.6 27.6 27.6 27.6 27.6 27.6

Santa Paula 25,141 25,366 25,599 25,839 26,087 26,344 26,608Use Rate 49.8 50.3 50.8 51.2 51.7 52.2 52.8Ashwood 25,277 25,504 25,738 25,979 26,229 26,486 26,753Use Rate 50.1 50.1 50.1 50.1 50.1 50.1 50.1Main Street 25,451 25,679 25,914 26,158 26,409 26,668 26,936Use Rate 50.5 50.5 50.5 50.5 50.5 50.5 50.5Saviers 58,108 58,628 59,166 59,722 60,295 60,888 61,500Use Rate 115.2 116.2 117.3 118.4 119.6 120.7 121.9CPSP 8,385 8,460 8,537 8,618 8,700 8,786 8,874Use Rate 16.6 16.6 16.6 16.6 16.6 16.6 16.6Camarillo 35,776 36,097 36,428 36,770 37,123 37,488 37,864Use Rate 70.9 70.9 70.9 70.9 70.9 70.9 70.9CMH Referred O/P 75,446 76,122 76,820 77,542 78,286 79,056 79,850Use Rate 149.6 149.6 149.6 149.6 149.6 149.6 149.6CMH Outpatient Surgery 1,834 1,850 1,867 1,885 1,903 1,922 1,941Use Rate 3.6 3.6 3.6 3.6 3.6 3.6 3.6CMH Same Day Surgery 4,777 4,820 4,864 4,910 4,957 5,006 5,056Use Rate 9.5 9.5 9.5 9.5 9.5 9.5 9.5

Ojai Valley Community HospitalER Visits 7,777 7,847 7,919 7,993 8,070 8,150 8,231Use Rate 15.4 15.4 15.4 15.4 15.4 15.4 15.4Oak View 8,057 8,129 8,204 8,281 8,360 8,442 8,527Use Rate 16.0 16.0 16.0 16.0 16.0 16.0 16.0Keeler Center 1,737 1,753 1,769 1,785 1,802 1,820 1,838Use Rate 3.4 3.4 3.4 3.4 3.4 3.4 3.4Referred O/P 13,291 13,410 13,533 13,660 13,792 13,927 14,067Use Rate 26.4 26.4 26.4 26.4 26.4 26.4 26.4Outpatient Surgery 393 397 401 404 408 412 416Use Rate 0.8 0.8 0.8 0.8 0.8 0.8 0.8

Grossman ImagingVisits 35,363 35,679 36,007 36,345 36,694 37,054 37,427Use Rate 70.1 70.1 70.1 70.1 70.1 70.1 70.1


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Ancillary Department Utilization Projections

Inpatient and outpatient ancillary utilization is projected based on actual historical trends. Ancillary utilization projections are based on the fiscal year 2010 utilization and a per unit statistic for inpatient and outpatient services. It should be noted that there was an overall downward trend in utilization of healthcare services in 2009 and that trend appears to be continuing into 2010. However, that trend has begun to reverse, in most service lines, in 2011. The inpatient ancillary unit statistic is based on inpatient days. Outpatient ancillary utilization is based on either the number of surgeries, the number of emergency department visits or a combination of both, whichever is applicable. Tables’ 4E-13 and 4E-14 summarize Community Memorial Hospital’s historical and projected ancillary service utilization. Tables’ 4E-15 and 4E-16 summarize Ojai Valley Community Hospital’s historical and projected ancillary service utilization.

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Table 4E-13 CMH Historical Ancillary Utilization

Department Statistic 2005 2006 2007 2008 2009 2010Surgery Surgeries 5,340 5,259 4,959 5,155 5,158 5,294 Same Day Surgery Surgeries 5,985 6,035 5,503 5,624 5,420 5,245 Cardiac Surgery Surgeries 613 649 712 673 706 621 Ambulatory Services Procedures 12,183 10,283 8,862 8,325 8,794 6,552 Central Svcs - Med. Units 707,589 646,325 497,386 464,972 363,255 268,892 Clinical Lab Tests 584,029 551,898 598,274 573,644 514,853 498,702 Anatomical Lab Tests 37,796 38,997 35,251 35,283 37,210 37,935 Blook Bank Units 109,565 27,548 27,666 27,937 28,421 20,047 Cardiac Cath Procedures 1,598 1,724 4,134 5,948 6,091 5,725 EKG Tests 33,554 32,797 35,216 34,786 34,317 28,748 EMG Tests 2,747 151 114 52 73 27 EEG Tests 416 344 361 321 278 241 Cardiac Rehab. Units 2,167 2,083 2,403 2,262 1,785 2,113 X-Ray Diagnostic Tests 44,405 43,910 46,557 45,338 48,964 51,051 Prostate Institute Tests 2,580 2,871 3,132 3,694 4,147 4,908 Outpatient Radiology Tests 19,069 19,182 16,542 14,889 15,857 12,916 Ultrasound Tests 8,756 9,183 9,377 9,350 9,872 9,577 Breast Center Tests 9,546 9,792 10,288 10,374 10,457 10,263 Nuclear Medicine Tests 8,114 7,982 8,220 7,612 7,496 6,031 MRI Tests 4,089 4,169 4,570 3,679 3,704 2,937 CT Scan Tests 21,246 24,207 25,249 24,733 21,760 30,314 Pharmacy (in thous) Units 4,347 4,223 4,329 4,084 4,076 3,338 Fillmore Pharmacy Units 30,547 29,576 28,981 27,587 26,495 25,612 Respiratory Therapy Treatments 206,727 197,356 192,043 189,532 257,931 281,522 Continuous Therapy Treatments 57,318 55,734 52,223 50,934 79,557 84,478 Continuous O2 Treatments 109,088 99,698 103,318 106,090 89,921 110,157 Pulmonary Function Units 36,396 34,712 26,406 23,381 16,955 6,214 Dialysis Units 1,900 2,098 1,626 1,477 1,487 1,094 GI Lab Tests 16,077 15,115 13,518 12,187 11,434 34 Non Invasive Lab Tests 1,878 2,030 1,996 1,663 1,406 1,283 NICU Respiratory Therapy Treatments 67,189 65,866 59,342 68,987 85,643 47,690 Physical Therapy Sessions 48,314 46,542 49,093 50,615 54,971 58,344 Speech Therapy Sessions 473 496 601 608 3,734 4,878 Occ Therapy - Rehab Sessions 6,690 4,561 4,753 6,068 6,853 7,940 PT/OT NICU Sessions - 1,123 1,419 1,216 1,323 1,613 Fitness Center Units 15,040 14,998 15,769 12,681 12,599 12,465 Radiologic Procedures Units 3,065 3,164 4,217 5,448 4,976 4,764

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Table 4E-14 CMH Projected Ancillary Utilization

Department Statistic 2011 2012 2013 2014 2015 2016 2017Surgery Surgeries 4,931 4,980 5,025 5,070 5,184 5,452 5,637 Same Day Surgery Surgeries 5,377 5,425 5,475 5,526 5,590 5,682 5,761 Cardiac Surgery Surgeries 657 664 670 676 691 726 750 Ambulatory Services Procedures 6,713 6,775 6,836 6,900 6,989 7,133 7,250 Central Svcs - Med. Units 270,175 272,924 275,355 277,791 285,640 305,606 319,016 Clinical Lab Tests 506,346 511,225 515,838 520,526 530,937 554,079 570,447 Anatomical Lab Tests 38,741 39,103 39,458 39,822 40,437 41,605 42,487 Blook Bank Units 20,182 20,386 20,568 20,750 21,304 22,689 23,624 Cardiac Cath Procedures 5,788 5,845 5,898 5,951 6,090 6,420 6,647 EKG Tests 29,144 29,427 29,692 29,961 30,596 32,049 33,065 EMG Tests 27 28 28 28 29 30 31 EEG Tests 244 246 248 250 256 270 280 Cardiac Rehab. Units 2,141 2,162 2,181 2,201 2,249 2,359 2,435 X-Ray Diagnostic Tests 51,875 52,373 52,846 53,327 54,360 56,619 58,227 Prostate Institute Tests 5,050 5,095 5,142 5,190 5,240 5,292 5,345 Outpatient Radiology Tests 13,278 13,398 13,521 13,647 13,788 13,953 14,111 Ultrasound Tests 9,783 9,874 9,964 10,056 10,209 10,497 10,715 Breast Center Tests 10,560 10,655 10,752 10,853 10,958 11,065 11,177 Nuclear Medicine Tests 6,129 6,188 6,244 6,301 6,422 6,687 6,876 MRI Tests 2,989 3,017 3,045 3,072 3,128 3,247 3,332 CT Scan Tests 30,883 31,176 31,458 31,747 32,297 33,427 34,252 Pharmacy (in thous) Units 3,386 3,418 3,449 3,481 3,553 3,718 3,834 Fillmore Pharmacy Units 26,353 26,589 26,833 27,085 27,345 27,614 27,891 Respiratory Therapy Treatments 282,341 285,241 287,775 290,309 298,940 321,227 336,114 Continuous Therapy Treatments 84,650 85,523 86,282 87,040 89,688 96,571 101,158 Continuous O2 Treatments 110,398 111,536 112,526 113,515 116,955 125,885 131,839 Pulmonary Function Units 6,355 6,414 6,473 6,532 6,626 6,793 6,922 Dialysis Units 1,096 1,107 1,117 1,127 1,161 1,251 1,311 GI Lab Tests 34 35 35 35 36 38 39 Non Invasive Lab Tests 1,301 1,313 1,325 1,337 1,366 1,430 1,475 NICU Respiratory Therapy Treatments 47,764 48,257 48,686 49,113 50,626 54,573 57,201 Physical Therapy Sessions 58,887 59,472 60,005 60,542 62,037 65,671 68,154 Speech Therapy Sessions 4,942 4,990 5,035 5,080 5,191 5,446 5,624 Occ Therapy - Rehab Sessions 7,992 8,073 8,145 8,217 8,438 8,990 9,363 PT/OT NICU Sessions 1,617 1,633 1,648 1,662 1,713 1,843 1,930 Fitness Center Units 12,826 12,941 13,059 13,182 13,309 13,439 13,574 Radiologic Procedures Units 4,854 4,900 4,945 4,990 5,075 5,249 5,377

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Table 4E-15 Ojai Historical Ancillary Utilization

Department Statistic 2005 2006 2007 2008 2009 2010Surgery Surgeries 807 737 658 703 586 578 Endoscopy Procedures 550 554 484 415 301 340 Aneshtesia Units 258 704 665 676 567 566 Surgery Recovery Units 198 673 592 622 523 448 Central Svcs - Med. Units 6,241 6,119 5,833 5,843 4,364 4,474 Clinical Lab Tests 79,055 62,012 74,196 64,628 54,746 54,374 Blook Bank Units 462 1,399 1,256 1,392 1,341 1,382 EKG Tests 2,701 2,823 2,844 2,694 2,537 2,732 Cardiac Rehab. Units 3 11 3 2 15 14 X-Ray Diagnostic Tests 12,653 12,402 12,931 11,870 11,999 11,329 Ultrasound Tests 1,830 1,734 2,108 2,190 1,921 1,860 Nuclear Medicine Tests 253 239 297 223 184 124 MRI Tests 721 654 772 716 689 644 CT Scan Tests 2,269 2,264 2,354 2,335 2,491 4,344 Pharmacy (in thous) Units 101 102 119 131 210 232 Respiratory Therapy Treatments 13,815 18,274 16,180 16,420 35,132 42,327 Continuous Therapy Treatments 2,180 10,122 9,029 10,175 10,394 21,861 Continuous O2 Treatments 7,061 23,960 19,277 19,678 23,884 19,290 Pulmonary Function Units 3,769 1,091 1,048 951 858 248 Physical Therapy Sessions 21,018 17,855 18,013 19,660 18,541 20,933 Speech Therapy Sessions 646 2,523 3,092 3,862 2,624 10,269 Occ Therapy - Rehab Sessions 6,317 7,046 6,155 5,194 7,860 7,800

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Table 4E-16 Ojai Projected Ancillary Utilization

F. Medical Staff As shown in Table 4F-1 as of June 2010 there are 655 physicians and allied health professionswho are either on the Active, Courtesy, Provisional, Consulting, Allied Health or Outpatient Medical Staff status at both of the CMHS hospitals (See Table 4F-1.). Of the 655, 343 (52.4 percent) are on Active Staff Status and 45 are allied health professionals. It should also be noted that 85.0 percent the physicians practicing at CMHS are Board Certified in their specialty.

Department Statistic 2011 2012 2013 2014 2015 2016 2017Surgery Surgeries 595 600 605 611 617 623 629 Endoscopy Surgeries 351 354 358 361 361 362 362 Aneshtesia Surgeries 583 588 593 599 601 603 605 Surgery Recovery Procedures 460 464 468 472 477 482 486 Central Svcs - Med. Units 4,623 4,664 4,707 4,751 4,755 4,759 4,763 Clinical Lab Tests 55,906 56,407 56,926 57,460 57,687 57,920 58,160 Blook Bank Units 1,417 1,429 1,443 1,456 1,465 1,473 1,482 EKG Tests 2,805 2,830 2,856 2,883 2,897 2,911 2,926 Cardiac Rehab. Units 15 15 15 15 15 15 16 X-Ray Diagnostic Tests 11,692 11,797 11,905 12,017 12,035 12,055 12,074 Ultrasound Tests 1,921 1,938 1,956 1,975 1,976 1,978 1,980 Nuclear Medicine Tests 128 129 130 131 132 132 133 MRI Tests 665 671 678 684 684 685 686 CT Scan Tests 4,477 4,517 4,559 4,602 4,613 4,624 4,636 Pharmacy (in thous) Units 237 239 241 243 246 248 250 Respiratory Therapy Treatments 43,168 43,555 43,956 44,369 44,775 45,193 45,625 Continuous Therapy Treatments 22,319 22,519 22,726 22,940 23,134 23,334 23,541 Continuous O2 Treatments 19,661 19,837 20,020 20,208 20,401 20,600 20,805 Pulmonary Function Units 255 257 260 262 263 264 265 Physical Therapy Sessions 21,456 21,648 21,847 22,053 22,183 22,318 22,457 Speech Therapy Sessions 10,504 10,598 10,695 10,796 10,874 10,955 11,039 Occ Therapy - Rehab Sessions 7,950 8,021 8,095 8,171 8,249 8,330 8,413

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Table 4F-1 Number of Physicians by Medical Staff Status and Specialty

Source: Community Memorial Health System

SPECIALTY Active Courtesy Provisional ConsultAllied Health Outpatient

Subtotal Other*

Grand Total

Adult Nurse Practitioner 1 0 1Subtotal Allergy & Immunology 0 3 0 1 0 0 0 4Subtotal Anesthesiology 27 3 1 0 0 0 1 32Subtotal Cardiology 16 1 3 1 0 0 3 24Certified Nurse Midwife 4 0 4Critical Care 1 0 1Dermatology 1 1 2 0 4Subtotal Diagnostic Radiology 10 0 14 7 0 0 7 38Subtotal Electrophysiology 2 1 0 1 0 0 0 4Subtotal Emergency Medicine 13 0 1 0 0 1 4 19Endocrinology, Internal Medicine 4 0 4Subtotal Family Medicine 51 6 9 1 1 10 12 90Fertility 1 0 1Subtotal Gastroenterology 8 0 0 0 0 0 1 9Subtotal General Surgery 15 0 1 0 0 0 0 16Subtotal Geriatrics 1 0 0 1 0 0 0 2Subtotal Oncology 9 2 4 1 0 0 2 18Subtotal Infectious Diseases 3 0 0 0 0 0 0 3Subtotal Internal Medicine 32 2 9 1 0 4 17 65Subtotal Maternal and Neonatology Medicine 4 1 0 0 0 0 1 6Nephrology 6 1 7Nephrology, Internal Medicine 6 0 6Subtotal Nephrology 12 0 0 0 0 0 1 13Neurology 6 2 8Neurosurgery 1 1 1 3Neurosurgery, Neurovascular Surgery 1 0 1Subtotal Neurosurgery 2 0 1 0 0 0 1 4Subtotal Nuclear Medicine 2 1 0 0 0 0 0 3Subtotal Nurse Practitioner 1 0 0 0 15 0 1 17Subtotal Obstetrics/Gynecology 22 6 4 1 1 0 3 37Ophthalmology and Optometry 11 6 2 0 2 1 2 24Oral & Maxillofacial Surgery 1 1 1 1 1 5Subtotal Orthopedic Surgery 22 0 2 0 0 0 5 29Otolaryngology, Facial Plastic Surgery 1 0 1Subtotal Pathology 3 0 0 0 0 0 0 3Subtotal Pediatrics 28 2 1 7 1 1 7 47Physical Med. & Rehabilitation 2 1 0 3Physician Assistant 1 17 0 18Plastic & Reconstructive Surgery 4 1 1 0 0 0 1 7Subtotal Podiatry 6 4 1 0 0 1 2 14Subtotal Psychiatry/Psychology 0 4 1 1 0 0 2 8Subtotal Pulmonary Diseases 4 0 0 0 0 0 1 5Subtotal Radiation Oncology 7 5 1 0 0 1 12 26Reg. Nurse 1st Asst. 3 4 0 7Subtotal Reproductive Endocrinology 0 2 0 0 0 0 0 2Rheumatology, Internal Medicine 1 0 1Spine Surgery 1 1Thoracic Surgery, Cardiovascular Surgery 1 0 1Urology 5 2 0 7Subtotal Vascular Surgery 4 1 2 0 0 0 0 7Subtotal Specialty Not Indicated 0 0 0 0 0 0 14 14Grand Total 343 57 60 24 45 22 104 655*Includes Emeritas, Resigned, Suspended, etc.

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Table 4F-2 shows the top 30 admitters at CMHS who were active over the historical period of 2006-2009. These 30 physicians contributed, on average, 44 percent of CMHS’s 2006-2009admissions. The top 10 admitters in 2009 were responsible for 4,421 admissions, or 26.2 percentof the CMHS’s 16,887 admissions in 2009.

The average age of the total Medical Staff is relatively young, 51 years overall. It is 49 years old for the top 10 admitters, 53 years old for the next 10 highest admitters, and 48 years for the top 30 admitters combined (See Table 4F-2.). It is important to note that of the top 10 admitters, three are over 60 years of age or older. However, the highest admitter is a relatively young 41years old. This finding is very significant, because based on industry standards, if a hospital has over 20 percent of its physicians over the age of 60, recruitment efforts must focus on those specialties most impacted by physician age. Clearly, CMHS is effectively recruiting younger physicians, and is effectively monitoring the age of it physicians by specialty (See Table 4F-2.).

Table 4F-2 Profile of Top Admitters


Name (Last, First) Specialty

Medical Staff

Status Board CertificationAge In Years

FY 2006 Admits

FY 2007 Admits

FY 2008 Admits

FY 2009 Admits

Average FY 2006 -FY 2009

Davis, Gregory Internal Medicine Active Internal Medicine 41 770 941 950 702 841Green, Michael Obstetrics/Gynecology, Family Practice Active Family Medicine 46 554 502 479 483 505Cole, Terry Obstetrics/Gynecology Active Obstetrics-Gynecology 62 421 523 466 411 455Changchien, Scott Obstetrics/Gynecology Active Obstetrics-Gynecology 60 434 384 375 366 390Tarazi, Sharif Internal Medicine Active Internal Medicine 49 0 289 612 520 355Abou-Samra, Moustapha Neurosurgery, Neurovascular Surgery Active Neurological Surgery 63 311 306 321 207 286Gustafson, John Obstetrics/Gynecology Active Obstetrics-Gynecology 59 236 302 295 297 283Jehlar, Alexander Internal Medicine Active Internal Medicine 43 34 395 385 301 279Iwanczyk, Lukasz Internal Medicine, Geriatrics Active Geriatric Medicine (Int. Med.) 37 48 329 305 364 262Shuman, Alison Pediatrics Active Pediatrics 34 0 0 248 770 255Top 10 Admitters Average Age and Admits 49 2,808 3,971 4,436 4,421 3909

Coyle, Steven Obstetrics/Gynecology Active Obstetrics-Gynecology 61 244 234 301 232 253Taherpour, Rokhsan Internal Medicine Resigned Internal Medicine 46 631 335 0 0 242Samadzadeh, Kooros Internal Medicine Active Internal Medicine 38 382 270 155 158 241Lish, Benjamin Family Practice Active Family Medicine 47 324 377 248 1 238Janai, Hillel Pediatrics, Pediatrics Active Pediatrics 57 0 0 243 695 235Diesfeld, Patrick Obstetrics/Gynecology Active Obstetrics-Gynecology 55 233 215 155 149 188Schneider, Roy Obstetrics/Gynecology Active Obstetrics-Gynecology 56 226 168 159 183 184Mazurek, Robert Orthopaedic Surgery Active Orthopaedic Surgery 55 246 209 149 129 183Golden, Thomas Orthopaedic Surgery Active Orthopaedic Surgery 61 158 152 220 187 179Goodfriend, Scott Internal Medicine Active Internal Medicine 52 313 143 112 104 168Next Top 10 Admitters 53 2,757 2,103 1,742 1,838 2110

Gupta, Arpana Internal Medicine Active Internal Medicine 36 0 64 344 239 162Fischer, Kenneth Family Practice Active Family Medicine 50 90 227 113 208 160Pattamakom, Srisawai Obstetrics/Gynecology Active Obstetrics-Gynecology 45 174 142 169 151 159Ghaffari, Armand Internal Medicine Active Internal Medicine 34 0 92 248 289 157Diane Internal Medicine Active Internal Medicine 43 98 187 164 177 157Dominguez, Victor Family Practice Active Family Medicine 43 271 242 102 0 154White, Kevin Pediatrics Active Pediatrics 40 82 194 159 168 151Martin, Jeffrey Obstetrics/Gynecology Active Obstetrics-Gynecology 40 188 140 127 139 149Bengtsson, Bengt-Ola Neonatology Active Pediatrics 43 175 158 130 126 147Farfan, Olivia Obstetrics/Gynecology Active Obstetrics-Gynecology 37 89 141 160 192 146Next Top 10 Admitters 41 1167 1587 1716 1689 1,540 Top 30 48 6,732 7,661 7,894 7,948 7,559 All Other Admitters 52 10,813 9,680 8,931 8,939 9,591 Totals 17,545 17,341 16,825 16,887 17,150

Percent Admissions by Top 30 Admitters 38.4% 44.2% 46.9% 47.1% 44.1%Percent of All Physicians Who are Board Certified 85%

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Among physician specialty groups with an average number of admissions over 100 per year for the FY 2006-FY 2009 time period the most notable growth in admissions has been for pediatrics. During this time period pediatricians had 1,388 admissions in FY 2006 and this number grew to 2,594 in FY 2009 (See Table 4F-3.). While the admissions are on a smaller magnitude, admissions by Electro physiologists grew from only five in FY 2006 to 217 in FY 2009. There have also been some notable declines over this time period by some specialty groups. Family Medicine and Family Practice physicians have seen a decline in admissions during this time frame of 41.6 percent (from 3,061 to 1,789). Likewise, Cardiology with Internal Medicine admissions have declined from 461 admissions in FY 2006 to 289 admissions in FY 2009, a 37.3 percent decrease.

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Table 4F-3 Historical Changes in Admissions by Physician Specialty


SPECIALTY FY 2006 Admits

FY 2007 Admits

FY 2008 Admits

FY 2009 Admits

Average FY 2006 - FY 2009

Percent Change

FY 2006 - FY 2009

Internal Medicine Total 4,046 4,842 4,719 4,730 4,584 16.9%Obstetrics/Gynecology Total 3,533 3,204 3,223 3,154 3,279 -10.7%Family Medicine/Family Practice Total 3,061 2,909 2,177 1,789 2,484 -41.6%Pediatrics Total 1,388 1,328 1,762 2,594 1,768 86.9%General Surgery Total 1,006 1,091 1,132 1,076 1,076 7.0%Orthopaedic Surgery Total 987 849 935 852 906 -13.7%Specialty Not Provided 707 386 296 150 385 -78.8%Neurosurgery Total 340 353 374 360 357 5.9%Cardiology, Internal Medicine Total 461 361 273 289 346 -37.3%Urology Total 274 299 358 314 311 14.6%Neonatology Total 334 323 279 245 295 -26.6%Vascular Surgery Total 236 276 245 241 250 2.1%Cardiology Total 202 218 216 186 206 -7.9%Cardiothoracic Surgery Total 120 161 132 138 138 15.0%Electrophysiology Total 5 54 158 217 109 4240%Geriatrics Total 55 106 129 98 97 78.2%Hematology/Oncology Total 128 103 71 75 94 -41.4%Cardiology, Internal Medicine, Critical Care Total 105 69 65 46 71 -56.2%Gynecologic Oncology Total 51 68 77 87 71 70.6%Infectious Diseases Total 207 68 5 2 71 -99.0%Gastroenterology Total 46 61 36 28 43 -39.1%Plastic & Reconstructive Surg Total 39 16 41 28 31 -28.2%Emergency Medicine Total 44 51 7 4 27 -90.9%Nephrology Total 41 29 14 20 26 -51.2%Otolaryngology Total 27 26 18 27 25 0.0%Neurology Total 19 10 18 24 18 26.3%Pulmonary Diseases Total 17 8 18 21 16 23.5%Cardiology, Interventional Cardiology Total 10 5 5 38 15 280.0%Diagnostic Radiology Total 18 15 8 14 14 -22.2%Oral & Maxillofacial Surgery Total 7 11 9 13 10 85.7%Endocrinology Total 7 11 6 3 7 -57.1%Ophthalmology Total 5 8 7 2 6 -60.0%Podiatry Total 4 4 4 7 5 75.0%Anesthesiology Total 4 5 3 4 4 0.0%Critical Care Total - - - 8 2 Certified Nurse Midwife Total 2 3 1 - 2 -100.0%Hematology/Oncology, Internal Medicine Total - 4 - 1 1 Maternal Fetal Medicine Total 1 2 1 - 1 -100.0%Nurse Practitioner Total 2 1 1 - 1 -100.0%Thoracic Surgery, Cardiovascular Surgery Total 4 - - - 1 -100.0%Fertility Total - 1 1 - 1 Allergy & Immunology Total 1 - - - 0 -100.0%Psychology Total - - - - - Other 1 2 1 2 2 100.0%Grand Total 17,545 17,341 16,825 16,887 17,150 -3.8%

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Physician Recruitment Plans

CMHS has a very active physician recruitment process. As part of the balanced scorecard process used by CMHS, the Physician Affiliation Initiative Committee is tasked with growing the number of affiliated physicians where there are critical vacancies in specific specialties. In addition to recruitment of specialists, the Committee also monitors the number of primary care physicians in the service area to ensure adequate numbers for the healthcare needs of the community. The two key measures for this initiative are the specialty vacancy rate and the net gain or loss in primary care physicians.

The Committee determined at the end of 2009 that there were 10 specialty vacancies all of these vacancies have been filled. These specialists are replacing current vacancies so an additional impact on utilization is not expected.

With respect to primary care physicians, there have been no net gains or losses in primary care physicians and therefore, there are no current recruitment efforts for primary care physicians.

G. Physician Survey Results In order to thoroughly assess Medical Staff perspectives regarding the Hospitals and the Project, a web-based survey was made available to all of the CMHS Active, Courtesy, provisional, Consulting, Outpatient, and Allied Medical Staff in June 2010. In total there were 142 respondents, 133 of whom were physicians and nine who were Allied Staff members. Of the Physician respondents 112 were Active Staff members. Responding physicians accounted for 48.6 percent of the 16,887 FY 2009 admissions to the Hospitals (see Table 4G-1).

Table 4G-1 Physician Survey Respondents

Total Surveys Taken by Medical Staff Members 142Physician Respondents 133Active Staff Physician Respondents 112FY 2009 Admissions Represented by Physician Respondents 48.56%

Source: HFS survey of CMHS Medical staff

In addition to these surveyed physicians, 10 other Senior Management Team members, Board members, and physicians were interviewed in face-to-face interviews or via telephone for more in-depth information on specific questions related to the Project. The observations from these face-to-face physicians interviews are incorporated later in our study, but the results of the physician survey are presented in the following tables.

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Profile of Survey Respondents

Eighty of the respondents reported being a primary care physician and almost one third of these doctors are Family Practice Physicians (See Table 4G-2.). Of the 69 specialty physician respondents, 22 reported being in medical specialties, 19 in surgical specialties, and 28 reported being in other categories (the majority of which were Emergency Medicine physicians) (See Table 4G-3.).

Most of the physicians surveyed (85.7 percent) practice at Community Memorial Hospital (See Table 4G-4.) and a majority practice in a single-specialty group (See Table 4G-5.). Eight out of every 10 doctors surveyed (83.6 percent) are on Active Staff status (See Table 4G-6.) and almost all physician respondents are Board Certified (See Table 4G-7.).

Table 4G-2

Primary Care Physician Respondents by Specialty


Family Practice 25 31.3%Internal Medicine 11 13.8%OB/GYN 11 13.8%Pediatrics 9 11.3%Hospitalist 10 12.5%Other 14 17.5%

Total Physicians Answered: 80 100.0%

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Table 4G-3 Specialty Care Physician Respondents by Specialty


Table 4G-4 Where Physicians Primarily Practice


Cardiology 3 4.3%DermatologyGastroenterology 2 2.9%Nephrology 2 2.9%NeurologyOncologyOphthalmology 1 1.4%Otolaryngology 2 2.9%Physical MedicinePodiatry 2 2.9%Pulmonary Medicine 3 4.3%Urology 2 2.9%DentistryPsychiatryCardiovascular Disease 3 4.3%Pediatric CardiologyPsychologyRadiation Oncology 1 1.4%Urgent Care 1 1.4%

Medical Total: 22 31.9%General Surgery 5 7.2%Thoracic Surgery 2 2.9%Neurosurgery 1 1.4%Orthopedics 11 15.9%

Surgical Total: 19 27.5%Other 28 40.6%


Community Memorial Hospital 114 85.7%Ojai Valley Community Hospital 10 7.5%Both Campuses 9 6.8%


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Table 4G-5 Type of Practice Organization


Table 4G-6 Type of Staff Status

Source: HFS Survey of CMHS Medical Staff

Table 4G-7 Board Certification


The highest proportion of respondents indicate that they have been in practice between 21 and 35 years (39.2 percent), and on average responding physicians have been in practice for 18.6 years (See Table 4G-8.), indicating CMHS has an experienced medical staff.

Solo practice 30 22.2%Single-specialty group 72 53.3%Multi-specialty group 23 17.0%Other 10 7.4%


I have Active Staff Status 112 83.6%I have Provisional Staff Status 2 1.5%I have Courtesy Staff Status 4 3.0%

I have Allied Health Professional Status 9 6.7%

I have Outpatient Staff Status 4 3.0%I have Consulting Staff StatusOther 3 2.2%


Yes 130 96.3%No 3 2.2%No, but I'm board-eligible 2 1.5%


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Table 4G-8 Length of Years in Practice


Physician respondents believe that six of every ten patients served by CMHS reside in Ventura, and these data are consistent with patient origin information obtained for this study (See Table 4G-9.).

Table 4G-9

Residence of Most Patients


Utilization of Community Memorial Health System

A strong majority of Physicians report that CMHS hospitals are the most frequently used hospitals for inpatient, outpatient, and ancillary services (See Table 4G-10.).

1 - 10 39 30.0%11 - 20 34 26.2%21 - 35 51 39.2%36+ 6 4.6%Average 18.6Lowest 1Median 18Highest 50


Ventura 84 62.2%Oxnard 12 8.9%Camarillo 5 3.7%Santa Paula 2 1.5%Thousand OaksOjai 14 10.4%Other 18 13.3%


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Table 4G-10 Frequency of Use of CMHS Hospitals by Type of Service


Physicians believe that about four of every ten of their patients are either Medicare or Medicare Risk (27.2 percent) or Med-Cal or Medi-Cal Managed care (13.1 percent). Commercial or managed care patients make up another 39.4 percent of the payor mix of their patients (See Table 4G-11.).

Table 4G-11 Perceived Payor Mix of Patients


Seven out of 10 physicians report that between 77 and 100 percent of their admissions go to either Community Memorial Hospital or Ojai Valley Community Hospital (See Table 4G-12.), and of the 14 physicians who report that CMHS hospitals are not their primary hospital, the most frequently used hospitals are St. John’s Pleasant Valley Hospital (42.9 percent) or St. John’s Regional Medical Center (35.7 percent) (See Table 4G-13.).

a. Inpatient services 117 90.7% 12 9.3% 129 100.0%b. Outpatient services 101 80.8% 24 19.2% 125 100.0%c. Ancillary services 86 74.8% 29 25.2% 115 100.0%

Total Physicians Answered: 134

Yes No Total

0 20 40 60 80 100 120 140

a. Medicare or Medicare Risk 27.2

b. Medi-Cal or Medi-Cal Managed Care 13.1

c. Commercial or Managed Care (HMO/PPO) 39.4

d. Self Pay (Uninsured) 4.8e. Self Pay (Affluent) 7.4f. Other 8.2

Total Physicians Answered: 128

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Table 4G-12 Percentage of Admissions that Go to Either of the CMHS Hospitals


Table 4G-13 Primary Hospital Used If CMHS Hospital is Not Your Primary Hospital Used


The perceived median number of admissions per year which CMHS physician report is 45, (See Table 4G-14.), and if the responding physician is a member of a group practice, he/she believes his/her group is admitting about 200 admissions per year (See Table 4G-15.).

Table 4G-14 Perceived Number of Admissions to CMHS per Year per Physician


0 percent 6 4.4%1 - 25 percent 7 5.2%26 - 50 percent 8 5.9%51 - 75 percent 18 13.3%76 - 100 percent 96 71.1%


St. John’s Pleasant Valley Hospital 6 42.9%St. Johns Regional Medical Center 5 35.7%Santa Paula Hospital 1 7.1%

Los Robles Hospital and Medical Center

Simi Valley Hospital and Health Care Services – SycamoreThousand Oaks Surgical HospitalVentura County Medical CenterOther 2 14.3%




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Table 4G-15 Number of Admissions to CMHS per Year If a Member of a Group Practice


A slight majority of physicians (51.9 percent) believe that their use of CMHS hospitals will remain about the same over the next three years, but 44.4 percent believe that their use of CMHS hospitals will increase (See Table 4G-16.).

Table 4G-16 Perceived Use of Community Memorial Health System over the Next Three Years


Of the physician respondents who think their use of use of CMHS hospitals will increase the following reasons were most prominent:

• Our patient population is aging and need more inpatient services as they age• As the economy improves there will be a rising birth rate• Our ongoing commitment for quality and patient satisfaction• Growth in my practice• We now have inpatient pediatric services and our hospitalists are trying to admit more

pediatric patients.

Satisfaction with Community Memorial Health System and Perceived Strengths

In general, taking all things into consideration, a clear majority of physicians practicing at CMHS are either “very satisfied” (46.9 percent) or “Somewhat satisfied” (46.9 percent) with thequality of care provided at CMHS (See Table 4G-17.). Only 5.4 percent of respondents were



Increase 59 44.4%Remain about the same 69 51.9%Decrease 5 3.8%


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either “somewhat dissatisfied” (3.1 percent) or “Very Dissatisfied (2.3 percent) with the quality of care at CMHS hospitals (See Table 4G-17).

Table 4G-17 Satisfaction with the Overall Quality of Care at Community Memorial Health System

(Based on a Satisfaction Scale of 1=very satisfied to 5=very dissatisfied)


Furthermore, regardless of the type of primary care physician (See Table 4G-18.) or the type of specialty care physician (See Table 4G-19), overall satisfaction with CMHS remains high.

Table 4G-18 Satisfaction with the Overall Quality of Care at Community Memorial Health System by

Type of Primary Care Physician (Based on a Satisfaction Scale of 1=very satisfied to 5=very dissatisfied)


Table 4G-19 Satisfaction with the Overall Quality of Care at Community Memorial Health System by

Type of Specialty Care Physician (Based on a Satisfaction Scale of 1=very satisfied to 5=very dissatisfied)


As can be seen from Table 4G-20 below physicians strongly believe:

• CMHS is highly committed to Complying with JCAHO National Patient Safety Goals. Physicians believe that compliance with JCAHO patient safety goals and quality are top priorities for CMHS. As was pointed out by one physician interviewee, “quality of care

Weighted Average

61 46.9% 61 46.9% 1 0.8% 4 3.1% 3 2.3% 130 100.0% 1.7Total Physicians Answered: 130

1Very

satisfied

2Somewhat satisfied

3No

opinion

4Somewhat dissatisfied

5Very

dissatisfiedTotal

Type of Primary Care Physician:

Weighted Average

Family Practice 16 66.7% 7 29.2% 1 4.2% 24 100% 1.5Internal Medicine 5 45.5% 4 36.4% 2 18.2% 11 100% 1.9OB/GYN 4 40.0% 6 60.0% 10 100% 1.6Pediatrics 4 50.0% 4 50.0% 8 100% 1.5Hospitalist 5 50.0% 5 50.0% 10 100% 1.5Other 7 58.3% 4 33.3% 1 8.3% 12 100% 1.6Total 41 54.7% 30 40.0% 3 4.0% 1 1.3% 75 100% 1.6

1Very

satisfied

2Somewhat satisfied

3No

opinion


5Very

dissatisfiedTotal

Type of Physician

Specialist:

Weighted Average

Medical Total: 7 12 2 21 1.9Surgical Total: 7 10 2 19 1.9Other 12 44.4% 14 51.9% 1 3.7% 27 100.0% 1.6Total Physicians: 26 38.8% 36 53.7% 1 1.5% 2 3.0% 2 3.0% 67 100.0% 1.8

1Very

satisfied

2Somewhat satisfied

3No

opinion


5Very

dissatisfiedTotal

86

is our number one priority. It is our main strength; it is the first thing on the agenda to be discussed at every Board of Directors meeting”. In fact the strong physician consensus of opinion is that physicians are “very satisfied” with the overall quality of care at CMHS.

• Having a new physical plant at CMH and completing the renovations at OVCH will enhance the quality of patient care;

• Practicing medicine at CMHS is professionally satisfying, and that they would not hesitate to recommend CMHS to family and friends;

• Physicians work well together and promote collegial relationships and an appropriate work ethic;

• CMHS is committed to continuous quality improvement.

It is also notable that the lowest satisfaction score related to the current physical plant at the hospital. On an agreement scale of “Strongly Disagree to “Strongly Agree” in general, physicians disagreed that the current physical plants at CMH and OVCH are adequate to meet their needs (See Table 4G-20.). With regard to resources and tools needed to provide high quality patient care, the physicians interviewed via a face-to-face are of a consensus that the biggest constraint they face is the lack private rooms which is a key feature of this new construction. As one Obstetrician stated, “Our biggest problem is the lack of private rooms. It is a major drawback, particularly for Obstetrics because our competitors all have private rooms. Another physician, also serving on the Board of Directors, stated that “We would be doing this new replacement hospital, regardless of the seismic issues. We are a 50-year old facility and we need to build all private rooms”.

87

Figure 4G-20 Agreement with Key Aspects of Practicing at Community Memorial Health System

(Based on a scale of 1=strongly disagree to 5=strong agree)


When asked to rate patient care in a number of specific areas (See Table 4G-21), (using a rating scale of not very strong to very strong) physicians gave their three highest ratings in rank order to:

• Specialty care physicians;• Hospital-based physicians;• Emergency services.

Table 4G-21 also shows that none of the areas inquired about received an average strength rating below 3.0, once again indicating considerable physician satisfaction with various operational characteristics of CMHS.

Weighted Average

a. Inpatient floors within the Hospital are adequately staffed to meet my patient’sneeds.

11 8.5% 22 16.9% 15 11.5% 60 46.2% 22 16.9% 130 100.0% 3.5

b. CMHS has the resources and tools to provide the best care and services to my patients.

5 3.9% 19 15.0% 7 5.5% 65 51.2% 31 24.4% 127 100.0% 3.8

c. CMHS is committed to continuous quality improvement. 8 6.2% 7 5.4% 9 7.0% 52 40.3% 53 41.1% 129 100.0% 4.0

d. CMHS is highly committed to complying with the Joint Commission’sNational Patient Safety goals and consistently demonstrates concern for patient safety.

7 5.4% 1 0.8% 3 2.3% 46 35.7% 72 55.8% 129 100.0% 4.4

e. Physicians at CMHS work well together and promote a collegial and supportive work ethic with one another.

5 3.9% 11 8.5% 5 3.9% 53 41.1% 55 42.6% 129 100.0% 4.1

f. Communications to physicians by the CMHS Management Team regarding major policies and issues affecting my patients are clear and effective, and in general my opinions are taken seriously in these matters.

4 3.1% 19 14.8% 19 14.8% 51 39.8% 35 27.3% 128 100.0% 3.7

g. Communications between CMHS administrative staff and physicians are timely and clear with respect to important matters that affect the medical staff.

4 3.1% 16 12.3% 19 14.6% 65 50.0% 26 20.0% 130 100.0% 3.7

h. The trust level between nurses and the clinical staff is strong. 3 2.3% 6 4.7% 11 8.5% 74 57.4% 35 27.1% 129 100.0% 4.0

i. The current physical plants at CMH and OVCH are adequate to meet my needs.

24 18.8% 33 25.8% 18 14.1% 42 32.8% 11 8.6% 128 100.0% 2.9

j. Having a new physical plant at CMH and completing renovations at OVCH will enhance the quality of patient care.

7 5.4% 4 3.1% 11 8.5% 35 26.9% 73 56.2% 130 100.0% 4.3

k. My overall experience of practicing medicine at CMHS is professionally satisfying, and I don’t hesitate to recommend CMHS to family and friends.

7 5.4% 4 3.1% 1 0.8% 62 47.7% 56 43.1% 130 100.0% 4.2

l. I have confidence in leadership of the CMHS Senior Management team. 4 3.1% 9 6.9% 17 13.1% 53 40.8% 47 36.2% 130 100.0% 4.0

3No

opinion

4Agree

5Strongly

AgreeTotal

1Stronglydisagree

2Somewhat disagree

88

Table 4G-21 Strength of in Providing Patient Care by Area

(Based on a scale of 1=not very strong to 5=very strong)

Source: HFS Survey of CMHS Medical Staff Knowledge of the Proposed Project, Perceptions of Utilization Changes Due to the Replacement Hospital, Risks Facing CMHS, and Support for the Project

About eight out of every 10 physicians surveyed report that they are familiar with the plans to construct the new replacement hospital at the CMH campus and complete the renovations at OVCH, but they are not too familiar with the details of the project; another 14.7 percent of those surveyed report that they have been very involved with the planning of this project and that the Management Team has done a good of keeping the physicians informed (See Table 4G-22.). These results indicate that CMHS has been diligent in involving physicians in its planning process.

Table 4G-22 Knowledge of the Project


Weighted Average

a. Primary care physicians 1 0.8% 2 1.6% 27 21.8% 56 45.2% 38 30.6% 124 100.0% 4.0b. Specialty physicians 1 0.8% 8 6.3% 62 49.2% 55 43.7% 126 100.0% 4.4c. Hospital-based physicians 1 0.8% 2 1.6% 8 6.3% 65 51.6% 50 39.7% 126 100.0% 4.3d. Nursing care 3 2.4% 26 20.6% 65 51.6% 32 25.4% 126 100.0% 4.0e. Senior Management Team 1 0.8% 6 4.8% 21 16.8% 57 45.6% 40 32.0% 125 100.0% 4.0f. Medical Records/Health Information Management 1 0.8% 10 7.9% 30 23.6% 58 45.7% 28 22.0% 127 100.0% 3.8

g. Hospital Board of Directors 1 0.8% 4 3.4% 34 28.6% 53 44.5% 27 22.7% 119 100.0% 3.8h. Ancillary services (lab pharmacy, x-ray, etc.)

8 6.3% 23 18.3% 72 57.1% 23 18.3% 126 100.0% 3.9

i. Medical-Surgical services 2 1.6% 17 13.6% 69 55.2% 37 29.6% 125 100.0% 4.1j. Critical care services 1 0.8% 3 2.5% 14 11.7% 57 47.5% 45 37.5% 120 100.0% 4.2k. Obstetrics services 34 30.4% 46 41.1% 32 28.6% 112 100.0% 4.0l. Cardiac Rehabilitation services 1 0.9% 41 37.6% 40 36.7% 27 24.8% 109 100.0% 3.9m. Respiratory services 2 1.7% 23 19.8% 57 49.1% 34 29.3% 116 100.0% 4.1n. Imaging Services 4 3.2% 19 15.2% 68 54.4% 34 27.2% 125 100.0% 4.1o. Emergency services 1 0.8% 2 1.6% 13 10.5% 61 49.2% 47 37.9% 124 100.0% 4.2p. Specialized Surgical services (cardiovascular, laser, robotic) 2 1.8% 22 19.8% 49 44.1% 38 34.2% 111 100.0% 4.1

q. Ambulatory surgery 1 0.9% 22 19.5% 47 41.6% 43 38.1% 113 100.0% 4.2r. Clinics 2 1.9% 3 2.8% 39 36.1% 40 37.0% 24 22.2% 108 100.0% 3.8

1not verystrong

2not

strong

3neutral

4strong

5very

strongTotal

I have been very involved with the planning on this construction project; the Management Team has done a good job of keeping the physicians informed of these plans.

19 14.7%

I am aware of the project, but have not been too involved in the details. 103 79.8%

I really don’t know too much about this project, and I don’t think the Management Team has kept the physicians well informed or sought out our input into the project.

7 5.4%


89

Almost half (46.6 percent) of Physicians believe that after the new replacement hospital is constructed and operational utilization of the ICU and CCU will increase (See Table 4G-23.). Another 41.2 percent of respondents stated that the impact of the new hospital on utilization of the ICU and CCU is unknown. However, those physicians who believe there will be a positive utilization impact on ICU and CCU resulting from the new hospital think that the median impact will be a 10 per cent increase in ICU and CCU admissions.

Table 4G-23 Impact of the Replacement Hospital on ICU and CCU Utilization


Table 4G-24 Perceived Utilization Impact on ICU and CCU Due to New Replacement Hospital


Risks Facing CMHS

The key risk or threats that physicians see confronting CMHS is the Ventura County Medical Center. The major concern is that the County is building up its capacity in ambulatory care with its satellite clinics focusing on primary care and its campus clinics for specialty care. Furthermore, according to one of the interviewees, the County has been hiring some of the CMHS physicians; most recently an urologist and a neurosurgeon, and they are seeking to aggressively go after the commercial insurance market as well.

Yes 61 46.6%No 16 12.2%I really don't know 54 41.2%


1 - 25 percent 51 91.1%26 - 50 percent 5 8.9%51 - 75 percent76 - 100 percentAverage 15.8Lowest 5Median 10Highest 50


90

Support for the New Replacement Hospital and Remodeling Project at OVCH

Overall, all of the doctors surveyed and interviewed expressed strong support for the new hospital and the remodeling at OVCH (See Table 4G-25.). Almost nine of every 10 physicians surveyed (86.9 per cent) were either “very supportive” (66.7 percent) or “supportive” (20.2 percent) of the new replacement hospital. The key reason for this support is the need for more private rooms to be competitive and the fact that the current facility is old and out of date. Six of every 10 physicians surveyed (62.3 percent) were either “very supportive” (33.8 percent) or “supportive” (28.5 percent) of the remodeling plans for OVCH.

Figure 4G-25 Support for the Project


This support was consistent, regardless of whether physicians were primary care physicians or specialists (See Tables 4G-26 and 4G-27.).

Figure 4G-26 Support for the Project by Primary Care Physicians


Weighted Average

a. The plans for the new seven level replacement hospital facility? 86 66.7% 26 20.2% 13 10.1% 4 3.1% 129 100.0% 1.5

b. The remodeling at Ojai Valley Community Hospital? 44 33.8% 37 28.5% 46 35.4% 3 2.3% 130 100.0% 2.1

5Very

unsupportive

1Very

supportive

2Supportive

3No

opinion

4Unsupportive Total

Type of Primary Care Physician:

Family Practice 17 70.8% 3 12.5% 4 16.7% 24 100%Internal Medicine 7 63.6% 3 27.3% 1 9.1% 11 100%OB/GYN 5 50.0% 3 30.0% 2 20.0% 10 100%Pediatrics 5 62.5% 2 25.0% 1 12.5% 8 100%Hospitalist 8 80.0% 2 20.0% 10 100%Other 9 75.0% 1 8.3% 1 8.3% 1 8.3% 12 100%Total 51 68.0% 14 18.7% 8 10.7% 2 2.7% 75 100%

Family Practice 1 8.3% 5 41.7% 6 50.0% 12 100%Internal Medicine 1 12.5% 5 62.5% 2 25.0% 8 100%OB/GYN 1 10.0% 4 40.0% 4 40.0% 1 10.0% 10 100%Pediatrics 1 14.3% 3 42.9% 3 42.9% 7 100%Hospitalist 1 20.0% 3 60.0% 1 20.0% 5 100%Other 1 12.5% 4 50.0% 3 37.5% 8 100%Total 6 12.0% 24 48.0% 19 38.0% 1 2.0% 50 100%

a. The plans for the new seven level replacement hospital facility?

b. The remodeling at Ojai Valley Community Hospital?

1Very

supportive

2Supportive

3No

opinion

4Unsupportive

5Very

unsupportiveTotal

91

Figure 4G-27 Support for the Project by Specialty Care Physicians

Concluding Remarks

CMHS has a medical staff that is well established, experienced, and loyal who communicate well with the Management Team. Relevant to this project physicians are very supportive of the project because they see a real need to have a new replacement hospital with private rooms in a modern state-of-the-art facility. They are very aware of the advantages facing them from key competitors and believe these construction projects will have a positive impact on allowing them to better meet their goals of providing quality patient care.

Section 5: Demonstration of Market Need

A. Project Impact on Bed Need for the Community

Community Memorial Health System’s community is western Ventura County and specifically the area defined by its TSA. One of the key indicators of market need is the bed need in the community, and accordingly a bed need analysis for the TSA was prepared. A key step in this process is to assess the demand for inpatient services in the TSA and then calculate the gross general acute care (GAC) bed need estimate for the market, as shown in Tables 5A-1 and 5A-2. Here, patient days by service are converted to an average daily census (ADC) and then a bed need estimate based on various target occupancy standards that reflect different levels of operational efficiency. TSA bed need in any market is at best a basic estimate or “snapshot” of market demand as, over time, much is subject to change in a particular market (e.g. entry or exit of providers, new technology and unforeseen demographic changes).

Type of Physician

Specialist:

Weighted Average

Medical Total: 13 4 2 1 20 1.6Surgical Total: 13 5 1 19 1.4Other 16 59.3% 6 22.2% 3 11.1% 2 7.4% 27 100.0% 1.7Total Physicians: 42 63.6% 15 22.7% 6 9.1% 3 4.5% 66 100.0% 1.5

Medical Total: 5 4 12 21 2.3Surgical Total: 7 6 4 2 19 2.1Other 1 4.5% 8 36.4% 13 59.1% 22 100.0% 2.5Total Physicians: 13 21.0% 18 29.0% 29 46.8% 2 3.2% 62 100.0% 2.3

Total

a. The plans for the new seven level replacement hospital facility?

b. The remodeling at Ojai Valley Community Hospital?

1Very

supportive

2Supportive

3No

opinion

4Unsupportive

5Very

unsupportive

92

Table 5A-1 Historic Community ADC and Bed Need by Target Occupancy Rates

2004 2005 2006 2007 2008 2009 2010

Med/Surg Patient Days 143,834 143,059 140,939 142,724 145,302 148,008 149,416 Med/Surg ADC 394.1 391.9 386.1 391.0 398.1 405.5 409.4 Bed Need at 70% Occ. 563 560 552 559 569 579 585 Bed Need at 80% Occ. 493 490 483 489 498 507 512 Bed Need at 85% Occ. 464 461 454 460 468 477 482 OB Patient Days 22,291 22,669 23,677 23,046 23,281 22,958 22,991 OB ADC 61.1 62.1 64.9 63.1 63.8 62.9 63.0 Bed Need at 70% Occ. 87 89 93 90 91 90 90 Bed Need at 80% Occ. 76 78 81 79 80 79 79 Bed Need at 85% Occ. 72 73 76 74 75 74 74 NICU Patient Days 14,911 16,047 16,466 16,926 16,843 16,890 16,890 NICU ADC 41 44 45 46 46 46 46 Bed Need at 70% Occ. 58 63 64 66 66 66 66 Bed Need at 80% Occ. 51 55 56 58 58 58 58 Bed Need at 85% Occ. 48 52 53 55 54 54 54 Total Patient Days excl. Newborn 181,036 181,775 181,082 182,696 185,426 187,856 189,297Total excl. Newborn ADC 496 498 496 501 508 515 519Bed Need at 70% Occ. 709 711 709 715 726 735 741Bed Need at 80% Occ. 620 623 620 626 635 643 648Bed Need at 85% Occ. 584 586 584 589 598 605 610Newborn Patient Days 13,589 13,491 13,820 13,478 13,268 11,197 11,197Newborn ADC 37 37 38 37 36 31 31 Bed Need at 70% Occ. 53 53 54 53 52 44 44 Bed Need at 80% Occ. 47 46 47 46 45 38 38 Bed Need at 85% Occ. 44 43 45 43 43 36 36 SNF Patient Days 57,950 28,489 23,400 27,451 35,433 22,321 24,481SNF ADC 159 78 64 75 97 61 67 Bed Need at 70% Occ. 227 112 92 107 139 87 96 Bed Need at 80% Occ. 198 98 80 94 121 76 84 Bed Need at 85% Occ. 187 92 75 88 114 72 79

Source: Patient days from OHSPD. ADC and bed need at target occupancy rates calculated by HFS.

93

Table 5A-2 Projected Community ADC and Bed Need by Target Occupancy Rates

As can be seen above, the TSA is expected to have a slowly increasing demand for Med/Surg beds at about five beds per year, and a level demand for OB, NICU and Nursery beds. The SNF bed need is expected to increase by three beds per year.

The next step in the bed need analysis is to look at the beds available in the TSA. The projectionis based on the available beds at all hospitals located in the TSA. It does not does not take into account the beds that are now available outside the TSA. This analysis also does not include the need for non-hospital based SNF bed days or observation days (which are not reported in the OSHPD system). It is important to note however that HFS researched the question of new planned developments and determined that there are no new major additions planned for area hospitals.

2011 2012 2013 2014 2015 2016 2017Med/Surg Patient Days 150,724 152,076 153,472 154,915 156,406 157,945 159,534Med/Surg ADC 412.9 416.6 420.5 424.4 428.5 432.7 437.1Bed Need at 70% Occ. 590 595 601 606 612 618 624 Bed Need at 80% Occ. 516 521 526 531 536 541 546 Bed Need at 85% Occ. 486 490 495 499 504 509 514 OB Patient Days 23,035 23,079 23,124 23,168 23,213 23,257 23,302OB ADC 63.1 63.2 63.4 63.5 63.6 63.7 63.8 Bed Need at 70% Occ. 90 90 91 91 91 91 91 Bed Need at 80% Occ. 79 79 79 79 79 80 80 Bed Need at 85% Occ. 74 74 75 75 75 75 75 NICU Patient Days 16,947 16,979 17,012 17,045 17,077 17,110 17,143NICU ADC 46 47 47 47 47 47 47 Bed Need at 70% Occ. 66 66 67 67 67 67 67 Bed Need at 80% Occ. 58 58 58 58 58 59 59 Bed Need at 85% Occ. 55 55 55 55 55 55 55 Total Patient Days excl. Newborn 190,706 192,134 193,608 195,128 196,696 198,312 199,980Total excl. Newborn ADC 522 526 530 535 539 543 548 Bed Need at 70% Occ. 746 752 758 764 770 776 783 Bed Need at 80% Occ. 653 658 663 668 674 679 685 Bed Need at 85% Occ. 615 619 624 629 634 639 645 Newborn Patient Days 11,234 11,256 11,278 11,299 11,321 11,343 11,365Newborn ADC 31 31 31 31 31 31 31 Bed Need at 70% Occ. 44 44 44 44 44 44 44 Bed Need at 80% Occ. 38 39 39 39 39 39 39 Bed Need at 85% Occ. 36 36 36 36 36 37 37 SNF Patient Days 25,121 25,784 26,471 27,184 27,923 28,690 29,485SNF ADC 69 71 73 74 77 79 81 Bed Need at 70% Occ. 98 101 104 106 109 112 115 Bed Need at 80% Occ. 86 88 91 93 96 98 101 Bed Need at 85% Occ. 81 83 85 88 90 92 95

Source: Patient day projections by HFS based on ALOS projections applied to projected discharges; ADC and bedneed at target occupancy rates calculated by HFS

94

Table 5A-3 computes a net bed need for the TSA by comparing the needed beds from the analysis presented in Tables 5A-2 with the total 2009 currently available GAC (Med/Surg, OB, and Pediatrics) beds in the TSA.

It can be observed from Table 5A-3 that there is a current excess of beds in the TSA, using an 80 percent occupancy standard. It should be noted that this is only a gross indicator of current Service-Area bed need. Patients can and do migrate well beyond service area boundaries for their inpatient care, especially if more specialty or tertiary-level care is required. Nevertheless, for overall planning purposes, this analysis is presented below in Table 5A-3.

Table 5A-3

Net Current Bed Need for the CMHS TSA

Net Bed Need CMHS TSA Year2010 2017

General Acute Care Beds Available in CMHS TSA 837 845 General Acute Care Beds Needed at 80 % Occupancy Standard Per Demand Analysis in CMHS TSA 648 685Net General Acute Bed Need (189) (160)SNF Beds Available in CMHS TSA 102 102SNF Beds Needed at 80 % Occupancy Standard Per Demand Analysis in CMHS TSA 84 101Net SNF Bed Need (18) (1)

Source: Licensed beds from OSHPD. Bed need calculationsby HFS.

95

Section 6. Summary of Significant Accounting Policies and Financial Assumptions

A. Summary of Significant Accounting Policies


The consolidated financial statements include the accounts of the System and its affiliate/subsidiary organizations including Community Memorial Hospital (CMH), Ojai Valley Community Hospital (OVCH), Community Memorial Healthcare Foundation (Foundation), Buenavista Medical Properties, Inc. (BVM), California Heart Institute, Inc. (CHI) and Grossman Imaging Center of CMH (Grossman). Where the System has a majority voting interest but less than 100 percent ownership interest, the System consolidates the subsidiary or partnership’s results and eliminates the minority owners’ interests in the net income (loss). For Grossman, CMH has recorded the minority owner’s losses, including those that reduced the minority interest below zero since the minority owner has personally guaranteed his pro rata share of certain debt obligations and he has the ability to satisfy the guarantee.

Use of Estimates

The preparation of the forecasted financial statements in conformity with generally accepted accounting principles requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the forecasted financial statements. Estimates also affect the reported amounts of revenues and expenses during the forecasted period. Significant accounting estimates include determining and maintaining adequate allowances for contracts with third-party payors and allowances for doubtful accounts and accounts receivable; estimates for final settlements related to Medicare and Medi-Cal cost reports, accrued self insurance claims and CMHS’ participation in the Medicare and Medi-Cal programs. Actual results could differ from those estimates used by Management.


Cash and cash equivalents include cash and investments in highly liquid debt instruments with maturities, on acquisition date, of three months or less.

Investments

Investments in equity securities with readily determinable fair values and all investments in debt securities are measured at fair value in the consolidated Balance Sheets. Fair value is established based on quoted prices from recognized security exchanges. Investment income or loss including realized and unrealized gains and losses on trading investments and interest and dividends is included in the excess of unrestricted revenues, gains and other support over expenses.

96

Inventories

Inventories are recorded at cost (first-in, first-out method) which is not in excess of market.


Property and equipment acquisitions are recorded at cost. Depreciation is provided over the estimated useful life of each class of depreciable asset and is computed using the straight-line method. Interest cost incurred on borrowed funds during the period of construction of capital assets is capitalized as a component of the cost of acquiring those assets. The System depreciates assets using estimated useful lives ranging from 3 to 40 years for building and improvements, and 3 to 15 years for equipment.

Assets Limited to Use

Assets limited as to use include assets held by the insurer for payment of workers’ compensation claims, amounts held to fund an annuity trust, amounts designated by the Board of Directors for payment of accrued pension obligations, and amounts held by trustees under specified agreements. Assets limited as to use consist primarily of mutual funds, money market funds and deposits with insurance company. Substantially all of the assets limited as to use are carried at market value.

Accrued Self-Insurance Claims

The System is self-insured for certain employee health care claims including workers’compensation and general and professional liability. Employee health care claims, including an estimate for incurred but not reported claims, are estimated by management based on historical experience.

Other Assets

Other assets include capitalized financing cost of the issuance of various debt borrowings from the uninsured debt. Amortization of these issuance costs is computed by the straight-line method over the life of the repayment agreements.

Goodwill

Goodwill represents the excess of the purchase price and related cost over the fair values assigned to the net tangible and intangible assets of the business acquired. These amounts are included in non-current assets and are being amortized utilizing the straight-line method over a 15-year period.

97

Net Patient Service Revenues

The System has agreements with third-party payors that provide for payments to the System at amounts different from its established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges, and per diem payments. Net patient service revenues are reported at the estimated net realized amounts from patients, third-party payors and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party programs. Contractual allowances includedifferences between established billing rates and amounts estimated by management as reimbursable under various cost reimbursement formulas and contracts in effect.

Charity Care

The System provides care without charge to patients who meet certain criteria under its charity care policy. Because the System does not pursue collection of amounts determined to qualify as charity care, they are not reported as net patient services revenue.

Income Taxes

CMH and OVCH are not-for-profit California corporations as defined in Section 501(c)(3) of the Internal Revenue Code and is generally exempt from federal and state income taxes on related income pursuant to Section 501(a) of the same code. Grossman is a limited liability corporation. CMH’s ratable share of Grossman’s earnings is recorded by CMH and as, it furthers CMH’s mission, is exempt from federal and state income taxes. BVM and CHI are taxable subsidiaries and both have net operating loss carry forwards. Therefore, no current and future income tax provision has been recorded.

Concentration of Credit Risk

Financial instruments that potentially subject the System to concentrations of credit risk consist primarily of investments and patient accounts receivable. The investment portfolio is managed within the guidelines established by the Board of Directors which, as a matter of policy, limit to the amounts that may be invested in any one issue. Concentration of credit risk with respect to patient accounts receivable is limited due to the large number of payors comprising the System’s patient base.

B. Net Patient Service Revenue

Net Patient Revenue

The System has agreements with third-party payors that provide for payments to the System at amounts different from its established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges and per diem payments. A significant portion of the CMHS’s services are provided to Medicare, third party managed care plans and Medi-Cal patients under contractual arrangements.

98

Inpatient acute care services rendered to Medicare program beneficiaries are reimbursed at prospectively determined rates per discharge. Medicare reimburses for outpatient services rendered to Medicare beneficiaries based on prospective payment reimbursement methodologies.

Services rendered to various third party managed care plan beneficiaries are reimbursed at discounts from standard charges or per diem rates.

Services rendered to Medi-Cal program beneficiaries at CMH are reimbursed under a negotiated per diem rate between CMH and the State of California. Effective March 2010, services rendered to Medi-Cal program beneficiaries at OVCH are reimbursed under a cost reimbursement methodology. Prior to March 2010, OVCH was reimbursed under the same methodology as CMH.

The System has also entered into payment agreements with certain commercial insurance carriers, health maintenance organizations, and preferred provider organizations to provide medical services to subscribing participants.

Gross inpatient and outpatient revenue was forecasted based on a review of the historical inpatient and outpatient revenue rates from the year ended December 31, 2010. These revenues were forecasted for each revenue-producing cost center by multiplying the average inpatient and outpatient revenue rates by the appropriate cost center forecasted statistic (e.g. patient days, outpatient visits, number of lab tests, etc.). Gross patient revenue was inflated eight percent per year.

Total forecasted gross patient revenues were allocated to various payor classifications for the calculation of contractual allowances and net revenues. The payor mix percentages were derived from historical payor mix percentages.

C. Historical and Forecast Payor Mix – Revenues from Inpatient Services

Total forecasted gross patient revenues were allocated to various payor classifications for the calculation of contractual allowances and net revenues. The payor mix percentages were derived from historical payor mix percentages by department.

99

Table 6C-1 CMH Net Inpatient Revenues by Major Payor

Table 6C-2 OVCH Net Inpatient Revenues by Major Payor

Historical ($ in thousands) Forecasted ($ in thousands)2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Inpatient Net Revenue by Payor: Medicare 47,231$ 39,770$ 31,873$ 38,272$ 42,595$ 43,814$ 42,388$ 43,148$ 44,349$ 45,588$ 47,888$ 52,606$ 56,188$ Medi-Cal 3,068 5,995 7,801 7,918 9,168 26,251 24,088 16,233 9,152 9,408 9,882 10,854 11,592 Managed Care 49,673 51,566 59,353 59,656 61,114 62,249 69,226 76,403 82,445 88,950 98,037 112,935 126,540 Commercial 3,856 6,539 7,289 4,316 898 523 543 592 639 689 760 875 981 Workers Comp 1,167 1,275 1,174 1,134 1,061 1,740 1,691 1,742 1,792 1,843 1,937 2,127 2,272 Medicare Managed Care 22,702 24,110 19,980 27,800 29,769 30,146 27,902 27,454 28,117 28,867 30,382 33,422 35,761 Self Pay/Other 12,799 13,997 13,074 15,826 18,329 10,725 10,930 11,668 12,592 13,605 15,036 17,373 19,531 Sub-Total Inpatient Net Revenue 140,496 143,251 140,546 154,923 162,934 175,449 176,768 177,240 179,087 188,950 203,920 230,193 252,866 Less: Charity/Administrative Adjustments (4,988) (5,078) (5,167) (7,423) (4,893) (3,443) (5,875) (6,411) (6,983) (7,604) (8,459) (9,836) (11,123) Total Inpatient Net Revenue 135,508$ 138,174$ 135,380$ 147,501$ 158,041$ 172,005$ 170,893$ 170,829$ 172,105$ 181,347$ 195,461$ 220,358$ 241,742$

Inpatient Net Revenue % Distribution: Medicare 33.6% 27.8% 22.7% 24.7% 26.1% 25.0% 24.0% 24.3% 24.8% 24.1% 23.5% 22.9% 22.2% Medi-Cal 2.2% 4.2% 5.6% 5.1% 5.6% 15.0% 13.6% 9.2% 5.1% 5.0% 4.8% 4.7% 4.6% Managed Care 35.4% 36.0% 42.2% 38.5% 37.5% 35.5% 39.2% 43.1% 46.0% 47.1% 48.1% 49.1% 50.0% Commercial 2.7% 4.6% 5.2% 2.8% 0.6% 0.3% 0.3% 0.3% 0.4% 0.4% 0.4% 0.4% 0.4% Workers Comp 0.8% 0.9% 0.8% 0.7% 0.7% 1.0% 1.0% 1.0% 1.0% 1.0% 0.9% 0.9% 0.9% Medicare Managed Care 16.2% 16.8% 14.2% 17.9% 18.3% 17.2% 15.8% 15.5% 15.7% 15.3% 14.9% 14.5% 14.1% Self Pay/Other 9.1% 9.7% 9.3% 10.1% 11.3% 6.0% 6.1% 6.6% 7.0% 7.2% 7.5% 7.5% 7.7%Total Inpatient Net Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%


Inpatient Net Revenue by Payor: Medicare (904)$ 3,976$ 5,860$ 6,007$ 5,328$ 4,678$ 4,777$ 4,873$ 4,996$ 5,130$ 5,267$ 5,408$ 5,553$ Medi-Cal 343 4,012 572 570 3,761 6,454 6,238 6,254 6,187 6,322 6,458 6,598 6,739 Managed Care 173 1,731 2,266 2,914 3,119 2,877 3,205 3,522 3,799 4,098 4,422 4,772 5,150 Commercial 41 122 93 238 31 70 63 69 74 79 86 92 99 Workers Comp 4 74 25 73 65 64 66 67 69 71 72 74 76 Medicare Managed Care 64 2,068 2,969 3,584 2,379 2,763 2,618 2,457 2,497 2,553 2,631 2,712 2,796 Self Pay/Other 7,378 1,103 825 826 1,730 2,411 2,658 2,893 3,151 3,432 3,739 4,075 4,442 Sub-Total Inpatient Net Revenue 7,100 13,086 12,611 14,211 16,412 19,317 19,624 20,135 20,772 21,685 22,675 23,731 24,855 Less: Charity/Administrative Adjustments (232) (505) (483) (441) (944) (1,153) (896) (973) (1,057) (1,149) (1,248) (1,356) (1,474) Total Inpatient Net Revenue 6,868$ 12,581$ 12,128$ 13,770$ 15,468$ 18,164$ 18,728$ 19,162$ 19,714$ 20,536$ 21,427$ 22,375$ 23,382$

Inpatient Net Revenue % Distribution: Medicare -12.7% 30.4% 46.5% 42.3% 32.5% 24.2% 24.3% 24.2% 24.1% 23.7% 23.2% 22.8% 22.3% Medi-Cal 4.8% 30.7% 4.5% 4.0% 22.9% 33.4% 31.8% 31.1% 29.8% 29.2% 28.5% 27.8% 27.1% Managed Care 2.4% 13.2% 18.0% 20.5% 19.0% 14.9% 16.3% 17.5% 18.3% 18.9% 19.5% 20.1% 20.7% Commercial 0.6% 0.9% 0.7% 1.7% 0.2% 0.4% 0.3% 0.3% 0.4% 0.4% 0.4% 0.4% 0.4% Workers Comp 0.1% 0.6% 0.2% 0.5% 0.4% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% Medicare Managed Care 0.9% 15.8% 23.5% 25.2% 14.5% 14.3% 13.3% 12.2% 12.0% 11.8% 11.6% 11.4% 11.2% Self Pay/Other 103.8% 8.4% 6.6% 5.8% 10.5% 12.5% 13.6% 14.4% 15.1% 15.7% 16.5% 17.2% 18.0%Total Inpatient Net Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

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D. Historical and Forecast Payor Mix – Revenues from Outpatient Services

Table 6D-1 CMH Net Outpatient Revenues by Major Payor

Table 6D-2 OVCH Net Outpatient Revenues by Major Payor


Outpatient Net Revenue by Payor: Medicare (3,226)$ 9,228$ 11,684$ 13,883$ 15,059$ 15,218$ 15,435$ 15,866$ 16,331$ 16,812$ 17,307$ 17,825$ 18,362$ Medi-Cal 14,433 12,346 11,961 12,201 11,581 19,124 18,345 15,018 12,171 12,510 12,853 13,217 13,595 Managed Care 27,078 29,046 33,495 43,053 42,414 45,095 49,472 54,223 58,389 62,894 67,756 73,025 78,726 Commercial 6,308 6,447 7,222 2,453 632 1,260 1,393 1,517 1,639 1,770 1,912 2,066 2,233 Workers Comp 765 767 1,304 1,427 1,638 1,384 1,414 1,455 1,498 1,542 1,587 1,635 1,684 Medicare Managed Care 3,997 4,437 4,315 6,433 7,531 6,519 6,347 6,230 6,382 6,557 6,760 6,974 7,196 Self Pay/Other 7,983 6,638 22,156 12,908 14,370 14,957 16,098 17,161 18,401 19,758 21,240 22,862 24,631 Sub-Total Outpatient Net Revenue 57,339 68,909 92,137 92,359 93,224 103,558 108,502 111,471 114,810 121,843 129,415 137,603 146,426 Less: Charity/Administrative Adjustments (2,001) (2,055) (2,274) (3,413) (2,378) (1,651) (2,944) (3,186) (3,451) (3,740) (4,055) (4,400) (4,777) Total Outpatient Net Revenue 55,338$ 66,854$ 89,864$ 88,947$ 90,846$ 101,907$ 105,558$ 108,284$ 111,360$ 118,103$ 125,360$ 133,203$ 141,649$

Outpatient Net Revenue by Payor: Medicare -5.6% 13.4% 12.7% 15.0% 16.2% 14.7% 14.2% 14.2% 14.2% 13.8% 13.4% 13.0% 12.5% Medi-Cal 25.2% 17.9% 13.0% 13.2% 12.4% 18.5% 16.9% 13.5% 10.6% 10.3% 9.9% 9.6% 9.3% Managed Care 47.2% 42.2% 36.4% 46.6% 45.5% 43.5% 45.6% 48.6% 50.9% 51.6% 52.4% 53.1% 53.8% Commercial 11.0% 9.4% 7.8% 2.7% 0.7% 1.2% 1.3% 1.4% 1.4% 1.5% 1.5% 1.5% 1.5% Workers Comp 1.3% 1.1% 1.4% 1.5% 1.8% 1.3% 1.3% 1.3% 1.3% 1.3% 1.2% 1.2% 1.2% Medicare Managed Care 7.0% 6.4% 4.7% 7.0% 8.1% 6.3% 5.8% 5.6% 5.6% 5.4% 5.2% 5.1% 4.9% Self Pay/Other 14.0% 9.7% 24.1% 14.1% 15.4% 14.5% 14.8% 15.4% 16.0% 16.0% 16.4% 16.5% 16.9%Total Outpatient Net Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%


Outpatient Net Revenue by Payor: Medicare (1,720)$ 1,057$ 1,477$ 1,636$ 1,568$ 1,230$ 1,317$ 1,355$ 1,395$ 1,436$ 1,479$ 1,524$ 1,570$ Medi-Cal (239) 1,636 972 1,007 947 943 961 889 826 846 866 887 909 Managed Care 406 3,888 4,483 4,840 4,410 4,259 4,820 5,286 5,699 6,146 6,630 7,154 7,721 Commercial 157 435 859 709 233 98 146 163 176 190 205 221 239 Workers Comp (4) 79 73 113 103 85 90 93 95 98 101 104 107 Medicare Managed Care (8) 623 867 866 683 715 697 656 669 686 709 733 758 Self Pay/Other 6,723 1,546 2,014 2,404 2,567 2,811 3,125 3,390 3,681 3,997 4,344 4,722 5,136 Sub-Total Outpatient Net Revenue 5,315 9,264 10,745 11,575 10,512 10,140 11,155 11,832 12,540 13,399 14,334 15,346 16,441 Less: Charity/Administrative Adjustments (189) (387) (346) (317) (688) (884) (702) (762) (828) (901) (980) (1,066) (1,160) Total Outpatient Net Revenue 5,125$ 8,877$ 10,399$ 11,258$ 9,824$ 9,256$ 10,454$ 11,070$ 11,712$ 12,499$ 13,355$ 14,280$ 15,281$

Outpatient Net Revenue by Payor: Medicare -32.4% 11.4% 13.7% 14.1% 14.9% 12.1% 11.8% 11.5% 11.1% 10.7% 10.3% 9.9% 9.5% Medi-Cal -4.5% 17.7% 9.0% 8.7% 9.0% 9.3% 8.6% 7.5% 6.6% 6.3% 6.0% 5.8% 5.5% Managed Care 7.6% 42.0% 41.7% 41.8% 42.0% 42.0% 43.2% 44.7% 45.4% 45.9% 46.3% 46.6% 47.0% Commercial 2.9% 4.7% 8.0% 6.1% 2.2% 1.0% 1.3% 1.4% 1.4% 1.4% 1.4% 1.4% 1.5% Workers Comp -0.1% 0.9% 0.7% 1.0% 1.0% 0.8% 0.8% 0.8% 0.8% 0.7% 0.7% 0.7% 0.7% Medicare Managed Care -0.1% 6.7% 8.1% 7.5% 6.5% 7.0% 6.2% 5.5% 5.3% 5.1% 4.9% 4.8% 4.6% Self Pay/Other 126.5% 16.6% 18.8% 20.8% 24.4% 27.8% 28.1% 28.6% 29.3% 29.9% 30.4% 30.7% 31.3%Total Outpatient Net Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

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Table 6D-3 CMH Total Net Revenues by Major Payor

Table 6D-4 OVCH Total Net Revenues by Major Payor


Total Net Revenue: Medicare 44,005$ 48,998$ 43,557$ 52,155$ 57,653$ 59,032$ 57,823$ 59,014$ 60,680$ 62,400$ 65,195$ 70,431$ 74,550$ Medi-Cal 17,501 18,341 19,762 20,120 20,749 45,375 42,433 31,251 21,323 21,918 22,735 24,072 25,187 Managed Care 76,751 80,613 92,848 102,710 103,528 107,344 118,698 130,626 140,834 151,844 165,792 185,960 205,266 Commercial 10,164 12,986 14,512 6,769 1,530 1,783 1,935 2,110 2,278 2,459 2,672 2,941 3,213 Workers Comp 1,932 2,042 2,478 2,561 2,698 3,124 3,105 3,197 3,290 3,385 3,524 3,762 3,956 Medicare Managed Care 26,699 28,547 24,295 34,233 37,300 36,666 34,249 33,685 34,499 35,424 37,142 40,396 42,957 Self Pay/Other 20,782 20,634 35,230 28,735 32,699 25,682 27,028 28,829 30,993 33,363 36,276 40,235 44,162 Total Net Revenue 197,835 212,161 232,683 247,282 256,158 279,007 285,270 288,711 293,897 310,794 333,335 367,796 399,292 Less: Charity and Admin Write-offs 6,989 7,133 7,440 10,835 7,270 5,095 8,819 9,597 10,433 11,344 12,514 14,236 15,901 Total Net Revenue 190,846$ 205,028$ 225,243$ 236,447$ 248,887$ 273,912$ 276,451$ 279,114$ 283,464$ 299,450$ 320,821$ 353,560$ 383,391$

Total Net Revenue: Medicare 22.2% 23.1% 18.7% 21.1% 22.5% 21.2% 20.3% 20.4% 20.6% 20.1% 19.6% 19.1% 18.7% Medi-Cal 8.8% 8.6% 8.5% 8.1% 8.1% 16.3% 14.9% 10.8% 7.3% 7.1% 6.8% 6.5% 6.3% Managed Care 38.8% 38.0% 39.9% 41.5% 40.4% 38.5% 41.6% 45.2% 47.9% 48.9% 49.7% 50.6% 51.4% Commercial 5.1% 6.1% 6.2% 2.7% 0.6% 0.6% 0.7% 0.7% 0.8% 0.8% 0.8% 0.8% 0.8% Workers Comp 1.0% 1.0% 1.1% 1.0% 1.1% 1.1% 1.1% 1.1% 1.1% 1.1% 1.1% 1.0% 1.0% Medicare Managed Care 13.5% 13.5% 10.4% 13.8% 14.6% 13.1% 12.0% 11.7% 11.7% 11.4% 11.1% 11.0% 10.8% Self Pay/Other 10.7% 9.6% 15.2% 11.7% 12.9% 9.3% 9.4% 10.1% 10.6% 10.6% 10.8% 11.0% 11.0%Total Net Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%


Total Net Revenue: Medicare (2,624)$ 5,033$ 7,337$ 7,643$ 6,896$ 5,908$ 6,094$ 6,228$ 6,390$ 6,566$ 6,746$ 6,932$ 7,123$ Medi-Cal 104 5,649 1,544 1,577 4,708 7,397 7,199 7,143 7,013 7,168 7,324 7,485 7,649 Managed Care 579 5,618 6,749 7,753 7,530 7,136 8,025 8,808 9,498 10,244 11,052 11,926 12,871 Commercial 198 557 952 946 264 168 208 231 249 269 290 313 338 Workers Comp (0) 154 98 186 168 149 156 160 164 169 174 178 183 Medicare Managed Care 57 2,691 3,836 4,450 3,062 3,477 3,315 3,113 3,166 3,239 3,340 3,445 3,554 Self Pay/Other 14,101 2,649 2,840 3,230 4,298 5,222 5,783 6,284 6,831 7,429 8,083 8,797 9,578 Total Net Revenue 12,414 22,350 23,356 25,786 26,925 29,457 30,779 31,968 33,312 35,084 37,009 39,077 41,297 Less: Charity and Admin Write-offs 421 892 829 758 1,632 2,036 1,598 1,736 1,886 2,049 2,227 2,422 2,634 Total Net Revenue 11,993$ 21,458$ 22,527$ 25,028$ 25,292$ 27,420$ 29,181$ 30,232$ 31,426$ 33,035$ 34,782$ 36,655$ 38,663$

Total Net Revenue: Medicare -21.1% 22.5% 31.4% 29.6% 25.6% 20.1% 19.8% 19.5% 19.2% 18.7% 18.2% 17.7% 17.2% Medi-Cal 0.8% 25.3% 6.6% 6.1% 17.5% 25.1% 23.4% 22.3% 21.1% 20.4% 19.8% 19.2% 18.5% Managed Care 4.7% 25.1% 28.9% 30.1% 28.0% 24.2% 26.1% 27.6% 28.5% 29.2% 29.9% 30.5% 31.2% Commercial 1.6% 2.5% 4.1% 3.7% 1.0% 0.6% 0.7% 0.7% 0.7% 0.8% 0.8% 0.8% 0.8% Workers Comp 0.0% 0.7% 0.4% 0.7% 0.6% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.4% Medicare Managed Care 0.5% 12.0% 16.4% 17.3% 11.4% 11.8% 10.8% 9.7% 9.5% 9.2% 9.0% 8.8% 8.6% Self Pay/Other 113.6% 11.9% 12.3% 12.7% 16.0% 17.8% 18.8% 19.8% 20.6% 21.3% 21.9% 22.6% 23.4%Total Net Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 99.9% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

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E. Historical and Forecast Reimbursement Methodologies

Deductions from Revenue (Contractual Allowances)

Deductions from revenue (contractual allowances) include third-party allowances, free services, and other allowances which result from the System's participation in various reimbursement programs, as well as medical services provided at reduced (discounted) rates or at no charge (charity). The primary component of these contractual allowances are allowances (adjustments) resulting through participation by the hospital in various programs and contracts with third party payors such as commercial insurance carriers, Medicare and Medi-Cal. The contractual allowance (adjustment) represents the difference between full charges for services rendered to patients and the actual payment received from the third party payor. Contractual allowances were forecasted based on historical and expected payment experience by payor.

Medicare and Medi-Cal reimbursement regulations have frequently changed in the past depending on State and Federal funding priorities and legislative initiatives. It is likely that reimbursement regulations will continue to be modified from time to time in the future which could materially impact the results from operations. The estimated contractual allowances for the forecasted financial statements were computed based on interpretations of current Medicare regulations and historical payment experience of Medi-Cal and commercial insurance carriers.

The methodology used to forecast contractual allowances was to forecast total hospital reimbursement (net patient service revenue) based on gross total hospital patient revenues by payor and deduct net total hospital patient revenue from gross total hospital patient revenue to arrive at the total hospital contractual allowance.

Medicare

Medicare inpatient acute care services rendered to Medicare program beneficiaries are paid at prospectively determined rates per discharge. These amounts are determined according to the diagnosis-related group (DRG) into which the patient is classified. Each DRG provides for a certain payment amount. In most cases this DRG payment is less than standard charges, resulting in a contractual allowance (adjustment).

Medicare reimburses for inpatient capital costs under the inpatient capital prospective paymentsystem, which consists of a federal capital rate.

The basis for projection of the CMHS’s inpatient Medicare reimbursement (net revenue) was forecasted based on the per-discharge amount equal to the total prospective payment system (PPS) reimbursement per Medicare PPS regulations published annually for specific periods effective on October 1, 2009 and October 1, 2010. In addition, HFS reviewed the 2009 filed Medicare cost report for reasonableness. An inflation rate of 0.06 percent for CMH and -0.04 percent for OVCH was applied to the PPS reimbursement discharge rate for fiscal year 2011based on the current Medicare PPS discharge rate that was effective on October 1, 2010. In fiscal 2012, an inflation rate of one percent was applied and from fiscal year 2013 and throughout the remaining projection period, an inflation rate of two percent, based on the past

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four years of adjusted market basket updates, was applied to the PPS reimbursement discharge rate. Historically CMHS has seen increases greater than two percent, however due to the uncertainty of Healthcare Reform a two percent inflation rate has been used throughout the projection period starting in fiscal 2013. The Medicare case mix index (CMI) for CMH and OVCH of 1.7557 and 1.2520, respectively, was assumed fixed throughout the projection period.

Medicare reimburses for skilled nursing services, which are only provided at OVCH, rendered to Medicare beneficiaries based on a per-diem amount which includes payments by RUG classification. An annual inflation rate of two percent is applied starting in fiscal 2010 to the skilled nursing per-diem rate and throughout the projection period.

Medicare reimburses for outpatient services rendered to Medicare beneficiaries based on prospective payment reimbursement methodologies. Based on the historical trends, the projected reimbursement percent was based on the actual year ended December 31, 2010 for both CMH and OVCH. Starting in fiscal 2011, an annual inflation rate of two percent was applied to projectMedicare outpatient patient revenue for the entire projection period. The annual inflation on net outpatient Medicare revenue was projected to be the same trended adjusted market basket update rate used for inpatient Medicare. However, due to the fact that gross outpatient Medicare revenues were inflated eight percent per year, the annual reimbursement percent of total charges decreases in each projected fiscal year.

The basis for projection of the Hospital's rural health clinic (the Clinic) Medicare reimbursement (net revenue) was projected based on the per-visit amount equal to the Clinic's cost per visit. In each projection year, the annual increase in the cost per visit is approximately 1.2 and 3.0 percent for CMH and OVCH, respectively.

Community Memorial Hospital’s Medicare cost reports have been audited by the Medicare fiscal intermediary through fiscal year 2008 and Ojai Valley Community Hospital’s Medicare cost reports have been audited through fiscal year 2008. Medi-Cal

Medi-Cal inpatient acute care services rendered to Medi-Cal program beneficiaries at CMH are reimbursed under a negotiated per diem rate between CMH and the State of California. CMH's Medi-Cal inpatient reimbursement (net revenue) was forecasted based on the current Medi-Cal contract with an assumed annual inflation rate of two percent in each projection year with the exception of 2011 and 2012 when rates were frozen at the 2010 level as a result of the state budget.

Medi-Cal inpatient acute care services rendered to Medi-Cal program beneficiaries at OVCH have historically been reimbursed under a negotiated per diem rate between OVCH and the State of California. Effective March 2010, OVCH was no longer contracting with the State of California and any Medi-Cal services provided were reimbursed under a cost reimbursement methodology. A cost calculation was prepared to replicate the methodology applied by Medi-Cal to determine the allowable Medi-Cal cost per day, which was multiplied by the applicable Medi-Cal patient days to compute Medi-Cal inpatient net revenue in fiscal year 2010. An

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examination was performed on the latest filed cost report to review what type of expenses weredeemed allowable by Medi-Cal and was incorporated in the allowable cost calculation. However, in fiscal year 2011 the per diem rate was returned to the contracted rate in place on January 1, 2010 as a result of the rate freeze included in the 2011 California State budget. Starting in fiscal 2012 and throughout the remainder of the forecast period, an annual cost per day was determined based on the cost reimbursement methodology noted above.

Medi-Cal reimburses for skilled nursing services, which are only provided at OVCH, rendered to Medi-Cal beneficiaries on a per-diem amount based on actual allowable costs subject to a maximum per diem rate. Historically, the actual cost per day exceeded the maximum per diem rate. This is consistent in the projection period. Therefore, the State maximum per diem rate was applied. An annual inflation rate of two percent is applied to the skilled nursing per-diem rate throughout the projection period with the exception of fiscal year 2011 when the rate was held at the 2010 State maximum due to a rate freeze.

Medi-Cal reimburses for outpatient services rendered to Medi-Cal beneficiaries based on a predetermined fee schedule. The System's Medi-Cal outpatient reimbursement (net revenue) for CMH and OVCH averaged 7.15 and 5.66 percent, respectively, of gross outpatient Medi-Cal charges during fiscal 2009. This percent was used as the basis to forecast Medi-Cal outpatient patient revenue for the entire forecast period. Inflation on net outpatient Medi-Cal revenue was forecasted to be two percent per year for each forecasted year with the exception of 2011 when rates are held at the 2010 level. Due to the fact that gross outpatient Medi-Cal revenues were inflated eight percent per year, the average reimbursement percent decreases in each projected fiscal year.

The basis for projection of the Hospital's rural health clinic Medi-Cal reimbursement (net revenue) was projected based on the per-visit amount equal to the established Prospective Payment System (PPS) rate established by Medi-Cal in 2001. The original per visit rate has been inflated annually on October 1 by the Medicare Economic Index (MEI) factor, which has been averaging approximately two to three percent over the past three years. For conservativeness, we assumed an annual inflation rate of only 1.2 percent throughout the projection period.

Supplemental Medi-Cal reimbursement was received in fiscal year 2010 for both CMH and OVCH. The supplemental payments are the result of the Hospital Fee Program that was signed into law during fiscal year 2010. The program assesses a fee on hospitals and subsequently, through federal matching funds, provide for supplemental Medi-Cal payments to the hospitals. The supplemental funds are recorded as Medi-Cal reimbursement, which is an offset to the contractual allowances shown on the Statement of Operations. The Hospital Fee program is discussed further in the New and Existing Legislation section below.

Community Memorial Hospital’s Medi-Cal cost reports have been audited by California's Department of Health Services through fiscal 2007 and Ojai Valley Community Hospital’s has been audited through fiscal year 2008.

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Managed Care

Managed Care inpatient and outpatient reimbursement is based on established rates or discounts from standard charges determined from agreements with health maintenance organizations and preferred provider organizations, which provide for various discounts from established rates.

Managed Care reimbursement (net revenue) is made up of various managed care plans and was forecasted based on percentage of net inpatient and outpatient revenue to gross inpatient and outpatient revenue from the fiscal year ended December 31, 2010. The annual reimbursement increases for fiscal 2011 and 2012 ranged from eight to ten percent and are reflected in Table 6E-1. Inflation on inpatient and outpatient gross revenue was forecasted at eight percent per year. The increase in gross revenue impacts the percent of net revenue based on the expected annual percent increases in reimbursement by payor. Starting in fiscal year 2013 the reimbursement increases were reduced to seven percent throughout the remainder of the projection period to reflect the future uncertainty in the Health Care markets due to changes proposed in the Affordable Care Act. The inflation rates projected are based on Management’s estimates based on current contracting position with the various organizations.

The only exception to this is that the physician based clinics only have an assumed annual inflation rate of four percent with no price increase implemented throughout the projection period.

Commercial Insurance

Commercial Insurance inpatient and outpatient reimbursement is based on established rates or agreements with commercial insurance companies which provide for various discounts from established rates.

Commercial Insurance reimbursement (net revenue) was forecasted based on a percentage of net inpatient and outpatient revenue to gross inpatient and outpatient revenue from the fiscal year ended December 31, 2010. Inflation on inpatient and outpatient gross revenue was forecasted ateight percent per year in fiscal 2011 and 2012. The increase in gross revenue impacts the percent of net revenue based on the expected annual percent increases in reimbursement by payor. Similar to Managed Care, starting in fiscal year 2013 the reimbursement increase was reduced to seven percent throughout the remainder of the projection period to reflect the future uncertainty in the Health Care markets due to changes proposed in the Affordable Care Act. The inflation rates projected are based on Management’s estimates based on current contracting position with the commercial insurance plans.

Workers Compensation

Workers Compensation reimbursement (net revenue) was forecasted based on a percentage of net inpatient and outpatient revenue to gross inpatient and outpatient revenue from the fiscal year ended December 31, 2010. The annual reimbursement increases of two percent are reflected in Table 6E-1. Inflation on inpatient and outpatient gross other payor classification revenue was forecasted at eight percent per year. The increase in gross revenue impacts the percent of net

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revenue based on the expected annual percent increases in reimbursement by payor. The inflation rates projected are based on Management’s estimates based on current contracting position with payors.

Medicare Managed Care

Medicare Managed Care inpatient and outpatient reimbursement is based on agreements with the managed care plan, which provide for various discounts from established rates.

Medicare Managed Care reimbursement (net revenue) was forecasted based on percentage of net inpatient and outpatient revenue to gross inpatient and outpatient revenue from the fiscal year ended December 31, 2010. The annual reimbursement increases of 0.4 to two percent arereflected in Table 6E-1. The inflation rates projected are based on Management’s estimates based on current contracting position.

Other Payors

All other payor reimbursement (net revenue) was forecasted based on percentage of net inpatient and outpatient revenue to gross inpatient and outpatient revenue from the fiscal year ended December 31, 2010. No percentage increase was factored for this payer as shown in Table 6E-1below. The inflation rates projected are based on Management’s estimates based on current contracting position with payors.

Table 6E-1 Reimbursement Inflation Rates

Self Pay, Charity and Administrative Write-offs

Reimbursement for self-pay patient revenues is assumed to be 100 percent of charges since no negotiated rates are applicable. However, in the health care industry many self pay patients do not have the financial means to pay the full amount of charges. Therefore, the projections include charity and administrative write-offs as an offset to self pay charges, which equates to a reimbursement rate for CMH and OVCH of approximately 41 and 28 percent, respectively, of gross revenues. This percentage does not incorporate bad debt expense, which is discussed later in this section.

Payor Classification 2011 2012 2013 2014 2015 2016 2017Medicare - Inpatient CMH 0.06% 1.00% 2.00% 2.00% 2.00% 2.00% 2.00%Medicare - Inpatient -0.04% 1.00% 2.00% 2.00% 2.00% 2.00% 2.00%Medicare - Outpatient 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%Medi-Cal 0.00% 0.00% 2.00% 2.00% 2.00% 2.00% 2.00%Managed Care 8.0%-10.0% 8.0%-10.0% 7.00% 7.00% 7.00% 7.00% 7.00%Commercial 8.00% 8.00% 7.00% 7.00% 7.00% 7.00% 7.00%Workers Compenstation 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%Medicare Managed Care 0.41% 1.00% 2.00% 2.00% 2.00% 2.00% 2.00%Other Payors 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

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Table 6E-2 Historical and Forecasted Gross Revenue and Contractual Allowances

Future Changes

There are a number of legislative and regulatory initiatives, both existing and proposed, that may have an impact on the reimbursement of CMHS. An example of these issues includes such areas as Medicare payment reform. It is too early to determine and quantify the impact these changes may have on Community Memorial Health System. Some of the key regulatory issues focus around continued updates and modifications to the inpatient and outpatient PPS system and updates and modifications to the Skilled Nursing Facility PPS system. The following key issues are either newly enacted or in varying stages of the legislative process.

Existing New Federal Legislation

PPS for Inpatient System Services Final Rule for FFY 2008 through 2011

In FFY 2008, Centers for Medicare and Medi-Cal Services (CMS) replaced 538 Diagnosis Related Groups (DRGs) with 745 new Medicare Severity DRGs (MS-DRGs) that reflected not just the diagnosis, but also the severity of the patient’s illness. Consistent with Medicare statute, CMS originally adopted adjustments to inpatient rates to address expected increases in spending due to documentation and coding associated with the payment classification system. Congress later reduced those amounts but required CMS to both adjust rates going forward if documentation and coding increased spending more than anticipated and also to recoup any excess spending for FFY 2008 and FFY 2009. CMS proposed to adjust FFY 2010 rates by 1.9 percent so the FFY 2008 increase in spending from documentation and coding is not carried forward. However, based on public comments, CMS decided not to make that adjustment in FFY 2010 without knowing whether FFY 2009 spending from documentation and coding is more or less than earlier projected. CMS did not propose any adjustment to FFY 2010 rates to recoup excess FFY 2008 spending.

Starting in FFY 2011, Medicare is revising the PPS for operating and capital-related costs of acute care hospitals to implement changes arising from the continued experience of PPS and to implement certain provisions of the Affordable Care Act and other legislation. The FFY 2011 final rules were published on August 16, 2010 and HFS incorporated these changes into the

Historical, ($ in Thousands)2005 2006 2007 2008 2009 2010

Gross Revenue $ 963,896 $ 1,052,368 $ 1,171,412 $ 1,307,756 $ 1,377,591 $ 1,412,133 Contractual Allowances $ 757,146 $ 816,314 $ 913,739 $ 1,035,365 $ 1,091,799 $ 1,099,416 Contractual Allowance % 78.55% 77.57% 78.00% 79.17% 79.25% 77.86%

Forecasted ($ in Thousands)2011 2012 2013 2014 2015 2016 2017

Gross Revenue $ 1,510,280 $ 1,642,587 $ 1,784,939 $ 1,939,894 $ 2,136,740 $ 2,421,252 $ 2,698,157 Contractual Allowances $ 1,192,922 $ 1,321,163 $ 1,457,608 $ 1,594,596 $ 1,767,939 $ 2,017,443 $ 2,262,102 Contractual Allowance % 78.99% 80.43% 81.66% 82.20% 82.74% 83.32% 83.84%

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Medicare per discharge rate for the appropriate projection period, which covers October 1, 2010 through September 30, 2011.

PPS for Inpatient System Services Proposed Rule for Federal Fiscal Year (FFY) 2012

The proposed rule for the FFY 2012 PPS for Inpatient system services was dated May 5, 2011. The proposed rule indicates that the Centers for Medicare and Medicaid Services for fiscal 2012would decrease average inpatient payments to acute hospitals by about $498 million or 0.5 percent--compared with fiscal 2011.

The proposed rule would be effective for discharges occurring on or after Oct. 1, 2011. It includes a hospital update of 1.5 percent and a coding adjustment of -3.15 percent to account for changes in documentation and coding following adoption of the Medicare severity diagnosis-related groups.

The proposed rule includes several quality improvement proposals promoting care quality and patient safety efforts, including the Partnership for Patients. One of the goals of the Partnership--announced by the Department of Health and Human Services--is to decrease preventable complications during a transition from one care setting to another.

As this rule is still proposed, HFS has not incorporated these changes into the Medicare per discharge rate.

The Patient Protection and Affordable Care Act of 2010

On March 23, 2010, President Obama signed into law the Affordable Care Act. The law puts into place comprehensive health insurance reforms that will hold insurance companies more accountable and will lower health care costs, guarantee more health care choices, and enhance the quality of health care for all Americans. The Act will not be implemented all at once. Portions of the law have already taken effect. Other changes will be implemented through 2014 and beyond. Based on the current status of the law, HFS did not incorporate any specific items into the financial projections for this Act. However, due to the anticipated impact of the Act we have conservatively kept Medicare reimbursement increases at two percent and have reduced Blue Cross and Kaiser increases to seven percent. Also, charity and bad debts have not been adjusted to account for increased reimbursement for a larger insured population.

Existing New State Legislation

Hospital Fee Program Governor Schwarzenegger signed the hospital fee bill, Assembly Bill (AB) 1383 (Jones-D, Sacramento/Alquist-D, Santa Clara), which was effective January 1, 2010. AB 1383 authorizedthe Department of Health Care Services (DHCS) to seek federal approval from the Centers for Medicare & Medicaid Services (CMS) for the hospital fee proposal. CMS approved the plan which began implementation on October 1, 2010.

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The plan assessed a fee on hospitals and subsequently, through federal matching funds providedfor supplemental Medi-Cal payments to hospitals. In addition, a private program operated by the California Health Foundation and Trust (CHFT) is being implemented concurrently to be used for grants to hospitals and health systems.

The initial program covered a 21 month period from April 1, 2009 through December 31, 2010. Subsequently, the State passed legislation for an additional six months of funding, which covers January 1, 2011 through June 30, 2011, final CMS approval is pending. In addition, the State is in the process of receiving approval for an additional twelve months which would extend the program through June 30, 2012. A summary of each significant component of the program is noted below:

• Quality Assurance FeeThe Quality Assurance Fee Act authorizes the fee on hospitals, except for those that are exempt from the fee (public hospitals, small and rural hospitals, most specialty hospitals and long-term-care hospitals). The fee is assessed on three historic and static categories of patient days: fee-for-service days, managed care days and Medi-Cal days.

• Federal Matching FundsThe state will use the fee revenue to serve as the non-federal share to draw down matching funds from the federal government. Part of the hospital fee money will be provided to the state to help pay for the cost of health coverage for children — $80million per quarter or $560 million over the seven quarters of the program. The designated public hospitals will receive $516.2 million in direct grants for the initial 21months of the fee program. In addition, the fees will cover the administrative and staffing costs directly attributed to implementing the law. The remaining fee revenue will be used to bring $3.2 billion in new federal funds to hospitals.

• Medi-Cal Supplemental PaymentsThe hospital fee program creates several methodologies to make supplemental Medi-Cal payments to participating hospitals. Payments are calculated for each hospital using formulas based on historic and static data, making the amount of the payments known for the duration of the program. DHCS will make increased capitation payments to health plans and the health plans will have 30 days to make increased payments to hospitals. DHCS must disburse all of the funds by December 31, 2010, in order to obtain the full enhanced federal matching funds. Hospitals should have received all payments by the end of January 2011.

The net benefit to hospitals, in the aggregate, after the fee payment is $2.65 billion over the initial 21 month period.

The California Hospital Association (CHA) has computed the estimated fees and payments that all the applicable Hospitals within the State of California should pay out and receive due to this new bill. In fiscal 2010, it has been estimated that CMH will pay $11,588,832 in hospital fees and will receive $24,710,367 in supplemental revenue for a net amount 13,121,535. OVCH is deemed a small hospital and therefore is not required to pay a hospital fee; however, it has been

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estimated they will receive $609,766 in supplemental revenue. These amounts were included on the Forecasted Statement of Operations with the fees classified as operating expenses and the supplemental revenue recorded as additional Medi-Cal reimbursement. In fiscal year 2011 and 2012, it is estimated that CMH will pay $6,784,573 and $3,142,125, respectively and receive $22,958,897 in fiscal year 2011 and $10,503,830 in fiscal year 2012 as a result of the extension of the program for an additional 18 months. It is estimated OVCH will receive $567,900 in fiscal year 2011 and $280,476 in fiscal year 2012.

While there can be no assurances of the continuation of this program, it is contemplated that CHA will introduce legislation to continue this program in the future although no future payments were projected past June 30, 2012 in our study.

California State Budget 2010-2011

The California State budget for 2010-2011 has been approved. The budget includes a number of reductions in the Medi-Cal program that would directly impact California hospitals. The key highlights in the budget include:

• Utilization Controlso Elimination of specified over-the-counter drugso Maximum annual benefit on various durable medical equipment and medical

supplieso Limit on prescriptions to six per month, excluding long-term-care residentso Limit on the number of physician or clinic visits to 10 per year, excluding long-

term-care residents

• Increased Cost Sharingo $50 co-payments on emergency room (ER) visits.o $100 per-day co-payments and $200 maximum for hospital stays. o $5 co-payments on physician/clinic/dental/pharmacy visits.

• Other Program Changeso Freeze hospital rates at the current level for both contracting and non-contracting

hospitalso Enroll seniors and people with disabilities in managed careo Reduce radiologist rates to 80 percent of Medicare rateso No longer pay Medicare Part B premiums for certain beneficiaries

These budget items may be modified through future state budgets or revisions. Based on the items above, we kept the contract rate at CMH flat for the period of July 1, 2010 through June 30, 2011 based on the current rate that is in effect at January 1, 2010. Starting on July 1, 2011, we are assuming an annual inflation increase of 2.0 percent on the contracted rate based on historical trends.

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California State Budget 2011-2012

The California State Budget covering the period of July 1, 2011 through June 30, 2012 was passed on June 30, 2011.

The budget includes, a number of reductions and eliminations that will impact California health care facilities, examples including:

• Provider Payment Reductions – Reduce provider payments by 10 percent to physicians, pharmacies, clinics, home health, family health programs, certain hospitals, nursing facilities and long-term care facilities including nursing homes. This proposal will require federal approval of a state plan amendment.

• Require beneficiaries to Share in the Cost of Services – Currently, co-payments for Medi-Cal are voluntary. State law permits co-payments of $1 for most doctor, clinic and pharmacy services and $5 for emergency room visits. Providers collect little if any co-payments and are not required to remit the payments to the state. Under the new proposed budget there will be $5 co-pays on physician, clinic, dental and pharmacy services; $50 co-pays on emergency room visits; and a $100 per day/ $200 maximum per hospital stay. These are MANDATORY co-payments and will be reduced from payments made to providers for services. This change is proposed to take place on November 1, 2011 based on the time needed to obtain federal approvals and provide necessary beneficiary and provider notification.

• Limit utilization of services – Incorporates limits on the number of doctor visits to seven per year prior to physician authorization. This change is proposed to take effect on October 1, 2011 based on the time needed to obtain federal approvals and provide necessary beneficiary and provider notification.

• Extend the Existing Hospital Fee –The Hospital fee has been extended through June 30, 2011, with a proposal for another possible one year extension through June 30, 2012 as noted above.

• Eliminate the optional Adult Day Health Care program

Proposed Senate Bill 90 (SB90) – Seismic Requirements

Existing law requires, after January 1, 2008, that any general acute care hospital building that is determined to be a potential risk of collapse or pose significant loss of life may only be used for non-acute care hospital purposes, unless granted an extension as prescribed.

This bill would authorize the Office of Statewide Health Planning and Development to grant a hospital an additional extension of up to seven years for a hospital building that it owns or operates if the hospital meets specified milestones. This bill would require a hospital that applies for this extension to pay the office an additional fee, to be determined by the office, sufficient to

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cover the additional reasonable costs incurred by the office for maintaining the additional reporting requirements established by these provisions. This bill would provide that this provision shall become operative on the date the department receives all necessary federal approvals for a 2011-2012 fiscal year hospital quality assurance fee program that includes $320 million in fee revenue to pay for health care coverage for children, as specified.

F. Project Initiatives

The project initiative in this Study is to address current capacity constraints, meet current building codes for new construction and allow for future expansion of services as deemed appropriate based on health care needs of the service area population. For this Study, current services are being realigned or expanded to meet the future needs of the System.

G. Other Operating Revenue

Other Operating Revenue

Other operating revenue includes revenues from cafeteria meals, employee drugs, medical records, gain or loss on sale of equipment and other miscellaneous income. Other operating revenue was forecasted based on the actual historical revenue rates for the fiscal year ended December 31, 2010. Inflation on other operating revenue was forecasted at three percent peryear beginning with fiscal 2011.

Net Assets Released from Restrictions

Net assets released from restrictions are temporary restricted net assets that have been removed from restriction. Temporarily restricted net assets are those whose use by the System has been limited by donors to a specific time period or purpose. When a donor restriction expires temporarily restricted net assets are reclassified as unrestricted net assets and reported in the consolidated statements of operations as net assets released from restrictions. During the forecast period net assets released from restriction are the funds available for use from CMHS’s capital campaign.

H. Non-Operating Revenue

Investment Income

Investment income exists from the cash accounts, investment accounts, Debt Service Reserve Fund (DSRF) and other accounts established through the Series 2011 bonds. Investment income on cash and investment accounts is forecasted to be three percent on prior year ending cash and investment balances. Earnings on the DSRF are projected at three percent.

Donations (including Grants)

Most of the income generated under this classification is grants with a little amount from donations. Donation revenue was forecasted based on the actual historical revenue rates for the

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fiscal year ended December 31, 2010. Inflation on other operating revenue was forecasted at three percent per year beginning with fiscal 2011.

Non-Operating Other Expenses

Nothing has been projected for Non-Operating Other Expenses since no historical activity has been reported since 2008.

Non Controlling Interest

CMHS has a non controlling interest in two subsidiary organizations. The first is a 51 percent interest in Grossman Imaging Center of CMH a limited liability corporation that owns three free-standing imaging centers. The second is Buenavista Medical Properties, Inc. (BVM, Inc.), a California for-profit corporation owned by CMHS, who is a general partner and 58.50 percentowner of Buenavista Medical Properties, Ltd. (BVM, Ltd.). BVM, Ltd. owns two floors of a medical office building adjacent to CMH. The projected amounts include CMH’s estimated profits from these investments.

I. Operating Expenses

1. Salaries and Wages

Salaries and wages were forecasted by utilizing historical staffing levels by cost center. Fixed staffing was forecasted based on the historical fixed staffing from the System’s records by cost center by job code. Variable staffing was based on average hours of care for nursing staff or an average per statistic FTE rates for other job codes for inpatient, ancillary and support cost centers.

The baseline salary expense was developed using the fiscal year ended December 31, 2010average salary expense, by job code, by cost center from CMHS’s payroll records. Based on discussion with Management an annual inflation rate of three percent is assumed throughout the remainder of the projection period.

Tables 6I1-1 and 6I1-2 reflect the projected productive staffing and Registry with the corresponding expenses by year for both CMH and Ojai.

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Table 6I1-1 CMH Historical and Forecasted Productive Staffing including Registry

Table 6I1-1 Ojai Historical and Forecasted Productive Staffing including Registry

Annual Total Average Average FTE's perSalary + FTE's Annual Adjusted Adjusted

Fiscal Registry including Salary Occupied OccupiedYear (in thous) Registry per FTE Bed Bed2005 69,423$ 1,257 55,214$ 226 5.56 2006 72,103 1,326 54,359 214 6.20 2007 80,389 1,321 60,870 212 6.22 2008 88,330 1,376 64,188 206 6.69 2009 83,537 1,276 65,460 205 6.21 2010 85,020 1,365 62,269 191 7.14 2011 88,010 1,371 64,207 194 7.08 2012 91,266 1,379 66,176 194 7.10 2013 94,526 1,386 68,183 196 7.08 2014 98,318 1,404 70,003 197 7.13 2015 102,919 1,429 72,044 201 7.10 2016 109,652 1,476 74,300 212 6.98 2017 115,746$ 1,512 76,552$ 219 6.89

Annual Total Average Average FTE's perSalary + FTE's Annual Adjusted Adjusted

Fiscal Registry including Salary Occupied OccupiedYear (in thous) Registry per FTE Bed Bed2005 5,414$ 210 25,723$ 119 1.77 2006 9,647 184 52,561 110 1.67 2007 10,046 187 53,674 112 1.68 2008 10,438 184 56,610 111 1.66 2009 10,429 178 58,487 110 1.62 2010 10,719 195 54,979 115 1.70 2011 11,098 196 56,615 115 1.70 2012 11,492 197 58,352 115 1.71 2013 11,895 198 60,138 115 1.71 2014 12,313 199 61,982 116 1.72 2015 12,738 199 63,881 116 1.72 2016 13,177 200 65,839 116 1.73 2017 13,632$ 201 67,858$ 116 1.73

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2. Fringe Benefits

Fringe benefits include payroll taxes, worker’s compensation, health and welfare insurance premiums, vacation, sick and all other “fringe benefits” associated with the System’s employees. Fringe benefits were forecasted based on the fiscal year ended December 31, 2010 fringe benefit expense percentage to total salaries and wages. The average percentage applied for CMH and OVCH was approximately 50 and 41 percent, respectively, of salaries and wage expense for fiscal 2011 and for the remainder of the projected period. 3. Registry/Professional Fees

Registry

Registry was forecasted by utilizing historical registry levels by cost center. Registry staffing was based on an average per statistic FTE rate by cost center and has an assumed inflation rate of four percent per projection year.

Professional Fees

Professional Fees consist of physician fees and other professional fees for patient care cost centers. In addition, it includes consulting, management and audit fees for supporting cost centers. A review was performed on the major physician professional fee contracts. Most of the contracts had one or two-year terms with automatic one-year renewals. Since these fees are not based on utilization and are based on a monthly per diem, all professional fees are projected based on the fiscal year ended December 31, 2010 and inflated four percent each projection year. A yearly inflation increase is incorporated due to most the physician contracts either having a one or two year term. One exception to the above is the contract for the Emergency Department (ED) physicians. Based on discussion with management a new ED physician contract was established during fiscal year 2009 resulting in higher ED physician fees in fiscal year 2010. The physician fees will remain at the 2010 level in fiscal year 2011 with an inflation rate of three percent being applied in fiscal year 2012 throughout the remainder of the projection period.

All the overhead cost centers are deemed fixed contract services. Therefore, the annual amount does not fluctuate based on changes in utilization. Overhead professional fees are projected based on the annualized fiscal year ended December 31, 2010 and inflated four percent in each projection year starting in 2011.

4. Purchased Services

Purchased services expenses consist of the purchase of outside services such as contract labor, reference lab, radiology services, management services, repairs and maintenance, other contracted services etc. An average purchased services rate per statistic, per cost center was developed based on the fiscal year ended December 31, 2010 hospital purchased services expenses. The average purchased services rate was multiplied by the forecasted cost center statistic to arrive at forecasted purchased services per year.

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All the overhead cost centers are deemed fixed purchased services. Therefore, the annual amount does not fluctuate based on changes in utilization. Overhead purchased services are projected based on the fiscal year ended December 31, 2010 and inflated three percent in eachprojection year starting in 2011.

5. Supplies and Other Expenses

Medical Supplies

Medical supplies consist of patient chargeable supplies. Patient chargeable supplies are specific, identifiable medical supplies used to treat a patient (e.g. pharmaceuticals, prosthetics).

An average supply expense rate per statistic, per cost center was developed based on a review of the System’s actual twelve months ended December 31, 2010 supply expenses. The average supply rate was multiplied by the forecasted cost center statistic to arrive at projected supplies per year. Most overhead cost centers had a fixed supply rate that did not vary with the volume projections. An inflation rate of four percent was applied to each projection year beginning in 2011.

Supplies and Other

Supplies and Other are included in this classification and consist of non-patient chargeable supplies, operational and office supplies including food costs. Non-patient chargeable supplies are miscellaneous medical supplies used in the normal course of the patient’s treatment (e.g. bandages, cotton swabs, surgical gloves). Operational and office supplies are non-medical supplies used by the System in day-to-day operations (e.g. cleaning supplies, paper, printer toner, etc). Food costs are the raw food costs associated to providing meals to patients, employees and guests.

All Supplies and Other expenses were deemed fixed with the exception of food costs. Therefore, the average food expense rate was multiplied by utilization to arrive at forecasted food expense per year. All other Supplies and Other expenses were deemed fixed and don’t vary with the volume projections. The average inflation rate of three percent per year was applied starting in 2011.

Other Expenses

Other direct expenses consist of legal, recruitment, education, dues and subscriptions, travel and other unassigned expenses. This classification also includes rentals and leases and utilities.

Other direct expenses were deemed fixed and do not vary with the volume projections. An average inflation rate of three percent per year was applied starting in 2011.

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Rentals and leases consist of building and equipment rental expenses. Rental and leases were deemed fixed and don’t vary with the volume projections. An average inflation rate of three percent per year was applied starting in 2011.

6. Insurance Expense

Insurance expense consists of professional liability insurance and general insurance. The Systemcarries professional liability insurance coverage on a claims-made basis. Under this policy,medical malpractice claims reported by the System to the insurance company during the policy period are covered; however, any medical malpractice claim that has been incurred by not yet reported to the insurance company during the policy period is not covered. Professional liability insurance expense is deemed a variable expense. An average expense per statistic was developed based on CMHS’s actual fiscal year ended December 31, 2010. The average rate was multiplied by the forecasted statistic to arrive at forecasted professional liability insurance expense per year. An average inflation rate of three percent per year was applied starting in 2011.

General insurance expense is deemed a variable expense based on square feet and is projected based on the fiscal year ended December 31, 2010 and inflated three percent each projection yearstarting in 2011.

The System records estimated liabilities for incurred but not reported (IBNR) medical malpractice claims, which, along with deductibles on reported claims are included in self insured liabilities in the accompanying balance sheet. Management believes these estimates are adequate.

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7. Interest Expense

Interest expense is forecasted based on capital leases for equipment, a Line of Credit at Grossman Imaging, a mortgage on the Buenavista Medical Properties, Inc. and the Series 2011Bonds, which are assumed, to be issued on August 11, 2011. The principal and interest payments pertaining to all the long term debt with the exception of the Series 2011 Bonds are stated for fiscal 2011 through 2017 in Table 6I7-1. The construction period of the Project spans from August 2011 through 2014. The portion of the interest payments pertaining to the New Project during the construction period will be capitalized as part of the cost of the Project. Therefore, the interest payments will begin to be expensed for that portion on May 1, 2015. The first bond payment including principal and interest will be due on December 1, 2015.

Table 6I7-1 CMHS Principal and Interest Payments

(In Thousands)

8. Depreciation and Amortization Expense

Depreciation

Depreciation expense is projected based on the existing buildings, furniture, fixtures and equipment of the System, plus the additions of the new Hospital, new equipment and other building renovations, deemed the Project. In addition, other future capital additions were projected based on management’s estimates and historical experience, with annual ongoing additions ranging from $5,000,000 to $17,000,000 in projection years 2011 through 2017..

The depreciation expense on the existing assets, acquired by December 31, 2010, was projected based on the actual remaining useful life of each asset through the forecasted period. The average lives were based on AHA Estimated Useful Lives of Depreciable System Assets. Table 6I8-1 reflects the plant and equipment, construction-in-progress, annual depreciation and average lives.

2011 2012 2013 2014 2015 2016 2017Principal Payments 795$ 832$ 808$ 479$ 158$ 149$ 140$ Interest Exp 333 282 231 192 173 165 157 Total Payments 1,128 1,114 1,039 672 331 314 297 Remaining Loan Balance 5,770$ 4,937$ 4,130$ 3,650$ 3,492$ 3,344$ 3,204$

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Table 6I8 – 1 Forecasted Property and Equipment

Amortization

Amortization expense includes two items. The first item is the financing costs associated with the Series 2011 bonds. The financing costs are amortized over the 30 year term of the bonds. The second item is the amortization of the original issue discount associated with the Series 2011 bonds, which is also being amortized over the 30 year term of the bonds.

9. Bad Debt Expense

The reserve for uncollectible accounts was based on the average bad debt percentage to gross revenue. The bad debt percentage to gross revenue for CMH and OVCH is 0.98 and 1.91percent, respectively, based on the trended historical experience for the fiscal year ended December 31, 2010. In fiscal year 2009, CMHS outsourced its revenue cycle operations and suspended its uninsured patient discount program until collection policies and procedures could be reviewed by the new vendor. The suspension of the patient discount policy resulted in an increase in bad debt reserves and related provision for bad debt expense in 2009 over 2008 of $9.8 million and a decrease in patient discounts, which net against revenue for financial statement presentation. This change in practice had no impact on the net realizable value of these accounts.

In 2010, CMHS re-instated its uninsured patient discount program by implementing a self-pay discount policy of forty percent. This change in policy resulted in an increase in policy and administrative discounts (included as reductions to net patient service revenue) and a decrease in bad debt expense from fiscal year 2009 to fiscal year 2010.

AverageLife

in Years 2011 2012 2013 2014 2015 2016 2017Building and Land Improvements 3-40 123,788$ 123,788$ 128,788$ 128,788$ 453,490$ 453,490$ 453,490$Equipment 3-15 103,378 106,678 113,078 130,078 180,249 188,249 197,249 CIP N/A 62,592 121,917 239,031 339,669 7,549 7,549 7,549 Total PPE 289,757 352,382 480,896 598,535 641,288 649,288 658,288

Less: Accum Depr (149,530) (163,806) (177,464) (191,675) (215,841) (244,313) (273,076)Net PPE 140,227 188,576 303,433 406,860 425,447 404,975 385,212 Annual Depr Exp 15,072$ 14,276$ 13,657$ 14,211$ 24,166$ 28,472$ 28,763$

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J. Balance Sheet Assumptions

ASSETS


The cash and cash equivalent balances represent the results of operations and the bond financing which will take place at the beginning of fiscal 2011.

Investments

These funds represent investments of surplus cash. The investments consist of cash and cash equivalents, marketable equity securities and debt securities (corporate and other). The annual balance is deemed fixed throughout the entire forecasted period due to the difficulty in predicting potential gains or losses on these investments.

Patient Accounts Receivable

Patient accounts receivable is shown net of all allowances and is calculated at 58.6 days of Net Patient Revenue in fiscal 2011 through 2017. The percentage being applied is equal to the actual experience in fiscal 2010.

Due from Third Party Payors

Due from third party payors are amounts due the Hospital typically from Medicare and Medi-Cal cost report settlements and other reimbursement issues. The projected balances are forecast at 1.3 percent of net patient revenue. The percentage being applied is the average percent based actual experience during the fiscal year ended December 31, 2010.

Inventories

Inventories are forecast at 10.3 percent of the medical supplies and supply and other expense. The percentage being applied is equal to the actual experience in fiscal 2010. Supplies inventory is recorded at the lower of cost (first-in, first-out method) or market.

Prepaid Expenses and Other

Prepaid expenses are forecast at 5.4 percent of non-salary expenses including benefits. The percentage being applied is the average percent based actual experience during fiscal 2010.


Includes all funds assumed to be restricted for various reasons. Included in this section is:

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• Funds for the System’s Self-Insurance Program include assets held by the insurer for payment of worker’s compensation claims. The current portion of assets limited as to use includes amounts which will be used to pay the current portion of workers’ compensation claims.

• Funds for the System’s Deferred Compensation plans include amounts designated by the Board for payment of accrued pension obligations for the Supplemental Executive Retirement Plan (SERP) and the Key Employee Share Option Plan (KESOP).

• Annuity trust is an irrevocable annuity trust agreement between CMHS and two local grantors. Amounts distributed under this agreement go one hundred percent to the Community Memorial Health Foundations building fund.

In addition the assets limited to use include various reserve accounts associated with the Series 2011 tax-exempt bonds which are detailed below.

• The Debt Service Reserve Fund for the Series 2011 Bonds, which represents maximum annual debt service.

• Capitalized Interest Fund from the Series 2011 Bonds, which represents the balance in the fund in each projection period. The balance in this account represents future construction period interest expense. The current construction period interest is included in the CIP account. The capitalized interest is amortized over the life of the building. The amortization begins when the construction is completed.

• Project Fund from the Series 2011 Bonds, which represents the balance in the fund in each projection period.


Property and equipment includes the cost of the land, furnishings, equipment and buildings for current and future use. Non-project related capital expenditures and routine equipment expenditures were forecasted based on the System’s anticipated needs.

As funds are spent on the new construction and equipment, those amounts are classified as construction in progress (CIP) until the construction is completed. These amounts are reclassified to the applicable property and equipment account upon completion of the construction.

Accumulated Depreciation

Accumulated depreciation includes the depreciation accumulated on the property, plant and equipment assets. In each forecasted year, the depreciation accumulates as the assets continue to be depreciated and new assets are added with new depreciation. The annual depreciation expense and related accumulated depreciation are reflected in Table 6I8-1.

Goodwill

Goodwill represents the excess of the purchase price and related costs over the fair values assigned to the net tangible and intangible assets. In July 2005 CMHS acquired a 51 percent

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interest in Grossman Imaging Center resulting in goodwill of $3,943,280. The goodwill is being amortized using the straight-line method over a fifteen year period.

Property Held for Future Use

In fiscal years 2007 and 2008 the System acquired several properties adjacent to the CMH Campus to be used in conjunction with the replacement hospital project. The land was recorded as property held for future use and will be classified here until the construction project is complete. Once construction is complete the land will be re-classed to property plant and equipment. Deferred Financing Costs – Series 2011 Bonds

The Deferred Financing Costs for the Series 2011 Bonds represent the unamortized portion of the cost of issuance including underwriter fees, lawyer fees, title insurance, and various other fees and is computed by deducting a portion of the amortization expense as shown on the Forecasted Statement of Operations.

Original Issue Discount

The Original Issue Discount (OID) for the Series 2011 bonds represents the unamortized portion of the OID and is amortized after construction completion through the term of the bonds. The amount is computed by deducting a portion of the amortization expense as shown on the Forecasted Statement of Operations.

Other Assets

Other assets represent other miscellaneous assets, including assets from existing rental agreements. The amount being forecasted each year is based on the fiscal year ended December 31, 2010.

LIABILITIES AND EQUITY

Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses is forecast at 48.86 days outstanding or 12.8 percent of total non-salary expenses (excluding depreciation, amortization, and bad debt expense) perforecast year. The percentage being applied is based on actual experience during fiscal year 2010.

Accrued Compensation and Related Benefits

Accrued compensation and related benefits include accrued payroll expenses. These liabilities are forecast at 31.96 days outstanding or 8.8 percent of salaries and benefits per projection year. The percentage being applied is based on actual experience during fiscal year 2010.

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Current Portion of Debt

All long-term debt is shown with the current portion (i.e. the portion expected to mature during the upcoming fiscal year) separated from the long-term portion. The amounts reported are from the applicable Debt Service Schedules for the Series 2011 bonds as well as other existing debt as noted in Table 6I7-1.

Accrued Pension Cost

Accrued pension costs are forecast at 8.71 days outstanding or 2.4 percent of salaries and benefits per projection year. The percentage being applied is based on actual experience during fiscal year 2010.

Self-Insurance Liabilities

Self-insurance liabilities relate to certain health insurance claims, workers compensation and general and professional liability. An Actuary performs an annual review to make certain that the reserve is proper to pay future liabilities. Since most of these claims related to benefits for employees, these claims are forecast at 20.88 days outstanding or 5.7 percent of salaries and benefits per projection year. The percentage being applied was computed based on actual historical experience in fiscal 2010.

Annuity Trust Liability

The Annuity Trust Liability is the corresponding liability associated with the Annuity Investments noted above.

Long-Term Portion of Debt

All long-term debt is shown with the long-term portion (i.e. the portion expected to mature after the upcoming fiscal year) separated from the current portion. The amounts reported are from the applicable debt service schedules for the Series 2011 bonds. It also includes all the other long-term debt as reported in Table 6I7-1.

K. Changes in Net Assets

Unrestricted Net Assets

During the projection period, unrestricted net assets include the excess of revenues over expenses on the Forecasted Statement of Operations. Due to uncertainty, all other items reported in the actual historical years are not being projected.

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Temporarily Restricted Net Assets Temporarily restricted net assets are those whose use by the System has been limited by donors to a specific time period or purpose. When a donor restriction expires, the assets are reclassified as unrestricted net assets and reported in the consolidated statements of operations as net assets released from restrictions. Community Memorial Health System has begun a $25,000,000 capital campaign in conjunction with the replacement hospital project. During the projection period the pledge payments are assumed to be restricted in the year they are received and then released the following fiscal year.

L. Cash Flow Assumptions

The Forecasted Statement of Cash Flows reflects the cash flow projection for the System. The assumptions and methodology used in this projected statement are described in the following paragraphs.

Sources of Cash

Cash from Operating Activities

The operations of the System provide (or consume) cash to the extent that total operating revenues exceed total expenses as shown on the Forecasted Statement of Operations and Forecasted Changes in Net Assets. Added to these net operating activities are non-cash flow items such as Provision for Doubtful Accounts, Depreciation and Amortization expenses, and non-operating items. All of these items provide additional cash flow to the Hospital's operations and need to be taken into effect when considering the net activities of the period. In addition, we add those changes in net current assets over net current liabilities as described below.

Total Increases/(Decreases) in Cash due to Changes in Assets and Liabilities

Changes in current assets and current liability balances from year to year indicate a source or use of cash. For example, an increase in an asset (e.g., inventory) is a use of cash, while an increase in a liability (such as a loan debt) is a source of cash. The converse of this statement is also true. Therefore, changes in these forecasted Balance Sheet accounts must be considered by calculating how changes in their year-end balances affect cash. The Forecasted Statement of Cash Flows shows the effect of changes in the following account balances:

1. Investments2. Patient Accounts Receivable3. Inventories4. Prepaid Expenses5. Other Current Assets6. Annuity Trust7. Accounts Payable and Other Accrued Expenses8. Accrued Compensation and Related Benefits

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9. Due to Third Party Settlements10. Accrued Pension Costs11. Self Insurance Liabilities

The combination of the net revenue and expense activities, the non-operating items, the non-cash flow items and the changes in net current forecasted Balance Sheet items becomes the sources of cash, or the net cash provided by, (used in) operations for the period.

Cash Flows from Investing Activities

These are activities covering the financial investment by Hospital Management into fixed assets and other investment vehicles (such as Bonds) that provide sources/(uses) of cash in the current and future periods. The descriptions below are for those items included in this section.

Purchases in Property, Plant and Equipment – Ongoing Needs

Ongoing Capital expenditures requirements for new property and equipment have been projected at various amounts in each projection year based on anticipated needs of the System.

Purchases in New Construction – Building/Equipment

Construction expenditures for the Project will be funded with the proceeds of the Series 2011 Bonds and CMHS’ equity contribution.

Property Held for Future Use

Property Held for Future Use is the purchase of the Land that is held until it is put into use in a future year. A significant portion of the land, $14,514,708, is associated with the New Construction project and is moved to fixed assets in fiscal year 2015.

Project Fund, Series 2011 Bonds

The Project Fund represents the Series 2011 Bond proceeds available to pay for the new Project construction.

Capitalized Interest Fund, Series 2011 Bonds

The Capitalized Interest Fund represents bond proceeds that are set aside to pay for interest on the Series 2011 Bonds during construction.

Debt Service Reserve Fund, Series 2011 Bonds

The Debt Service Reserve Fund, Series 2011 Bonds, is the amount of money that is a restricted fund to be set aside to provide a reserve for the maximum annual principal and interest payment on the Series 2011 Bonds.

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Net, Capitalized Interest, Series 2011 Bonds

Net, Capitalized Interest represents the net cash outflow to pay the interest on the construction portion on the Series 2011 Bonds during construction with an offset of interest earnings that are anticipated to be earned from those funds.

Cash Flows from Financing Activities

These are activities covering the financial investment into the Hospital by outside parties that will provide sources/(uses) of cash in the current and future periods. The descriptions below are for those items included in this section. Proceeds/Payment of Long-Term Debt, Existing Debt

These are existing debt proceeds and annual debt payments being made to retire the outstanding principal on all existing long-term debt.

Proceeds from the Bonds, Series 2011 Bonds

This represents the funds received upon the issuance of the Series 2011 Bonds as described earlier in Table 3C-1, the Estimated Sources and Uses of Proceeds.

Payment of Bonds, Series 2011 Bonds

These are the annual payments being made to retire the outstanding principal balance on the Series 2011 Bonds.

Cost of Issuance, Series 2011 Bonds

The Deferred Financing Costs for the Series 2011 Bonds represents the cost of issuance including underwriter fees, lawyer fees, title insurance, and various other fees. The financing costs are amortized over the term of the Bonds, which is 30 years.

Original Issue Discount

The Original Issue Discount (OID) represents the OID associated with the Series 2011 bonds. It is amortized after construction completion through the term of the bonds.

Net Increases/(Decreases) in Cash

This is the sum of all the changes in cash during the period. It includes the net cash provided by, (used in) operations, and the net cash from investing and financing activities combined.

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Cash - Beginning of Period

This is the starting cash balance at the beginning of each fiscal year. For the remaining fiscal years, the beginning cash balance is the same as the prior year's ending cash balance.

Cash - End of Period

This is the net cash left over at the end of each fiscal year after all cash transactions have been combined with the beginning cash balance from the prior period. It becomes the Cash -Beginning of Period for the subsequent fiscal year.

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M. Appendix A Consolidating Financial Statements

Community Memorial Health System - Community Memorial HospitalForecasted Statement of Operations




Revenues:Net patient services revenue 190,845$ 205,028$ 225,243$ 236,447$ 248,887$ 273,912$ 276,451$ 279,114$ 283,464$ 299,450$ 320,821$ 353,560$ 383,391$ Other operating revenue 3,068 3,831 4,006 4,455 4,415 4,142 4,161 6,771 6,303 5,572 5,114 5,249 5,387 Net Assets released from restrictions 35 35 53 108 68 205 1,651 4,000 4,600 4,850 4,100 4,050 2,600

Total unrestricted revenues, gains and other support 193,947 208,895 229,302 241,010 253,371 278,258 282,264 289,885 294,368 309,871 330,035 362,859 391,379

Expenses:Salaries and wages 66,456 69,278 76,162 83,939 82,294 83,407 86,329 89,503 92,678 96,381 100,865 107,423 113,361 Employee benefits 31,151 33,211 38,057 42,155 40,282 41,578 42,792 44,366 45,940 47,780 50,007 53,262 56,207 Registry staff 2,966 2,825 4,226 3,104 1,243 1,613 1,681 1,763 1,848 1,937 2,054 2,229 2,386 Professional fees 2,265 6,594 8,429 8,565 10,611 12,488 12,994 13,533 14,061 14,628 15,229 15,885 16,552 Purchased services 9,639 10,520 12,051 13,108 17,441 20,217 20,874 21,624 22,331 23,445 24,385 25,683 26,858 Medical supplies 36,984 35,546 39,476 44,918 44,660 47,162 48,624 51,068 53,586 56,230 59,683 64,905 69,569 Supplies and other 6,323 6,347 4,748 4,957 3,158 4,664 4,806 4,965 5,131 5,304 5,517 5,827 6,101 Other expenses 7,353 7,587 8,026 9,118 9,687 10,289 10,461 10,879 11,206 11,986 12,345 12,716 13,097 Insurance 3,878 5,447 4,064 3,885 3,008 3,147 3,280 3,401 3,523 3,948 4,148 4,498 4,785 Depreciation 10,510 11,283 10,302 10,407 11,024 9,738 12,012 11,303 10,646 11,068 20,948 25,164 25,447 Amortization - - - - - - - - - - 448 672 672 Interest 282 251 172 150 237 173 127 85 42 11 17,872 26,778 26,428 Hospital fee - - - - - 11,589 6,785 3,142 - - - - - Provision for bad debts 13,734 13,199 15,988 13,500 20,421 12,741 13,601 14,801 16,090 17,494 19,299 21,954 24,522

Total expenses 191,541 202,090 221,704 237,807 244,065 258,807 264,365 270,433 277,082 290,212 332,800 366,995 385,986

Operating income before asset impairment 2,406 6,805 7,598 3,203 9,306 19,452 17,899 19,452 17,286 19,659 (2,765) (4,136) 5,393

Asset impairment (4,905) 8 (1,195) (768) (327) (140) - - - - - - - Operating income (2,499) 6,813 6,403 2,435 8,979 19,312 17,899 19,452 17,286 19,659 (2,765) (4,136) 5,393

Nonoperating revenue and expenseInvestment income (loss) 4,436 7,122 6,163 (14,201) 8,778 6,184 1,933 1,955 1,970 2,018 2,689 3,071 2,192 Donations 237 44 21 92 17 153 5 5 5 6 6 6 6 Deferred revenue bond premium - - - - - - - - - - - - - Other expenses 0 - - - - - - - - - - - -

Total non-operating revenue and expense 4,674 7,167 6,184 (14,109) 8,796 6,338 1,938 1,960 1,976 2,024 2,694 3,077 2,198

Excess of unrestricted revenues, gains and othersupport over expenses before minority interest 2,174 13,979 12,587 (11,674) 17,775 25,650 19,836 21,413 19,261 21,683 (71) (1,059) 7,591

Minority interest - - - - - - - - - - - - - Excess of unrestricted revenues, gains, and other

support over expenses 2,174$ 13,979$ 12,587$ (11,674)$ 17,775$ 25,650$ 19,836$ 21,413$ 19,261$ 21,683$ (71)$ (1,059)$ 7,591$

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Community Memorial Health System - Ojai Valley Community HospitalForecasted Statement of Operations




Revenues:Net patient services revenue 11,993$ 21,458$ 22,527$ 25,028$ 25,292$ 27,420$ 29,181$ 30,232$ 31,426$ 33,035$ 34,782$ 36,655$ 38,663$ Other operating revenue 194 115 259 408 221 325 354 494 472 451 430 442 454 Net Assets released from restrictions 105 223 241 301 161 170 - - - - - - -


Expenses:Salaries and wages 4,725 8,778 9,608 9,951 10,140 10,217 10,587 10,958 11,334 11,726 12,122 12,531 12,955 Employee benefits 1,551 3,421 3,795 4,108 3,945 4,238 4,427 4,582 4,739 4,903 5,069 5,240 5,417 Registry staff 689 861 438 487 289 501 510 535 561 588 616 646 678 Professional fees 313 334 591 523 544 681 664 693 721 752 783 816 851 Purchased services 862 1,741 1,792 1,871 2,450 2,468 2,562 2,650 2,732 2,821 2,909 3,000 3,094 Medical supplies 1,353 1,810 2,081 2,129 2,208 2,597 2,764 2,899 3,042 3,192 3,346 3,508 3,679 Supplies and other 482 1,158 1,014 1,067 834 778 796 811 824 836 847 855 861 Other expenses 681 853 910 912 871 899 926 954 982 1,012 1,042 1,073 1,105 Insurance 373 424 446 405 384 64 80 82 85 87 90 93 96 Depreciation 370 704 606 633 674 769 982 894 932 1,062 1,137 1,226 1,233 Amortization - - - - - - - - - - - - - Interest 129 166 104 23 15 15 14 13 13 12 12 11 11 Hospital feeProvision for bad debts 1,035 1,932 1,597 3,349 3,363 1,992 2,190 2,378 2,584 2,808 3,052 3,319 3,609

Total expenses 12,563 22,181 22,982 25,458 25,716 25,219 26,503 27,449 28,549 29,799 31,026 32,319 33,588

Operating income before asset impairment (271) (385) 45 279 (42) 2,697 3,032 3,277 3,350 3,687 4,186 4,777 5,528

Asset impairment - (6) - (9) - - - - - - - - - Operating income (271) (392) 45 270 (42) 2,697 3,032 3,277 3,350 3,687 4,186 4,777 5,528

Nonoperating revenue and expenseInvestment income (loss) - - - - - - - - - - - - - Donations 80 202 31 66 52 24 25 26 26 27 28 29 30 Other expenses - - - - - - - - - - - - -

Total non-operating revenue and expense 80 202 31 66 52 24 25 26 26 27 28 29 30

Excess of unrestricted revenues, gains and othersupport over expenses before minority interest (191) (190) 75 336 10 2,721 3,057 3,302 3,377 3,714 4,214 4,806 5,558


support over expenses (191)$ (190)$ 75$ 336$ 10$ 2,721$ 3,057$ 3,302$ 3,377$ 3,714$ 4,214$ 4,806$ 5,558$

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Community Memorial Health System - Grossman Imaging Center of CMHForecasted Statement of Operations




Revenues:Net patient services revenue 3,912$ 9,568$ 9,903$ 10,916$ 11,613$ 11,384$ 11,726$ 12,078$ 12,440$ 12,813$ 13,198$ 13,594$ 14,001$ Other operating revenue 80 - - - 55 - - - - - - - - Net Assets released from restrictions - - - - - - - - - - - - -


Expenses:Salaries and wages 768 1,997 2,240 2,336 2,526 2,559 2,636 2,715 2,796 2,880 2,967 3,056 3,147 Employee benefits 67 164 183 195 218 212 219 225 232 239 246 254 261 Registry staff - - - - - - - - - - - - - Professional fees 1,065 2,603 2,700 2,972 3,091 2,990 3,237 3,354 3,475 3,601 3,733 3,845 3,960 Purchased services 229 538 723 842 895 873 899 926 954 982 1,012 1,042 1,074 Medical supplies 262 602 657 648 765 692 713 734 756 779 802 826 851 Supplies and other 78 174 131 176 166 259 266 274 283 291 300 309 318 Other expenses 617 1,566 2,053 1,943 2,018 1,785 1,839 1,894 1,951 2,009 2,070 2,132 2,196 Insurance 84 210 229 201 256 283 291 300 309 318 328 338 348 Depreciation 411 1,555 1,782 1,556 1,560 1,594 1,841 1,841 1,841 1,841 1,841 1,841 1,841 Amortization - - - 263 263 - - - - - - - - Interest 267 613 870 575 500 382 499 498 498 498 498 498 498 Hospital feeProvision for bad debts - - - - - - - - - - - - -

Total expenses 3,847 10,023 11,568 11,708 12,258 11,629 12,439 12,761 13,094 13,439 13,795 14,139 14,493

Operating income before asset impairment 145 (455) (1,665) (791) (590) (244) (714) (684) (654) (626) (597) (545) (491)

Asset impairment - - - - - - - - - - - - - Operating income 145 (455) (1,665) (791) (590) (244) (714) (684) (654) (626) (597) (545) (491)

Nonoperating revenue and expenseInvestment income (loss) 3 0 0 - - - - - - - - - - Donations - - - - - - - - - - - - - Other expenses - (30) 1 - - - - - - - - - -

Total non-operating revenue and expense 3 (30) 1 - - - - - - - - - -

Excess of unrestricted revenues, gains and othersupport over expenses before minority interest 149 (485) (1,664) (791) (590) (244) (714) (684) (654) (626) (597) (545) (491)


support over expenses 149$ (485)$ (1,664)$ (791)$ (590)$ (244)$ (714)$ (684)$ (654)$ (626)$ (597)$ (545)$ (491)$

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Community Memorial Health System - Buenavista Medical Properties, Inc.Forecasted Statement of Operations




Revenues:Net patient services revenue -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ Other operating revenue 1,040 900 847 912 924 924 952 980 1,010 1,040 1,071 1,103 1,137 Net Assets released from restrictions - - - - - - - - - - - - -

Total unrestricted revenues, gains and other support 1,040 900 847 912 924 924 952 980 1,010 1,040 1,071 1,103 1,137

Expenses:Salaries and wages 79 - - - - - - - - - - - - Employee benefits 2 11 - - - - - - - - - - - Registry staff - - - - - - - - - - - - - Professional fees 28 - 8 (4) - - - - - - - - - Purchased services - 9 18 32 46 46 47 49 50 52 53 55 56 Medical supplies - - - - - - - - - - - - - Supplies and other 3 0 3 1 8 1 1 1 1 1 2 2 2 Other expenses 232 247 300 376 362 535 551 567 584 602 620 638 657 Insurance 20 22 27 47 39 18 19 19 20 21 21 22 23 Depreciation 185 188 188 196 216 217 237 238 239 240 241 241 242 Amortization - - - - - - - - - - - - - Interest 244 236 224 218 180 184 165 158 151 143 136 128 121 Hospital feeProvision for bad debts - - - - - - - - - - - - -

Total expenses 793 713 769 866 851 1,001 1,021 1,033 1,045 1,058 1,072 1,086 1,101

Operating income before asset impairment 246 187 79 47 72 (77) (69) (52) (36) (18) (1) 17 35

Asset impairment - - - - - - - - - - - - - Operating income 246 187 79 47 72 (77) (69) (52) (36) (18) (1) 17 35

Nonoperating revenue and expenseInvestment income (loss) - - - - - - - - - - - - - Donations - - - - - - - - - - - - - Other expenses - - - - - - - - - - - - -

Total non-operating revenue and expense - - - - - - - - - - - - -

Excess of unrestricted revenues, gains and othersupport over expenses before minority interest 246 187 79 47 72 (77) (69) (52) (36) (18) (1) 17 35

Minority interest (88) (85) (38) (28) (42) 22 20 15 10 5 0 (5) (10) Excess of unrestricted revenues, gains, and other

support over expenses 158$ 102$ 41$ 19$ 30$ (55)$ (49)$ (38)$ (25)$ (13)$ (1)$ 12$ 25$

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Community Memorial Health System - Community Memorial Healthcare FoundationForecasted Statement of Operations




Revenues:Net patient services revenue -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ Other operating revenue 314 378 - - - - - - - - - - - Net Assets released from restrictions (0) - - - - - - - - - - - -

Total unrestricted revenues, gains and other support 313 378 - - - - - - - - - - -

Expenses:Salaries and wages - - - - - - - - - - - - - Employee benefits - - - - - - - - - - - - - Registry staff - - - - - - - - - - - - - Professional fees - - - - - - - - - - - - - Purchased services 0 (0) 4 3 26 24 25 25 26 27 28 28 29 Medical supplies - - - - - - - - - - - - - Supplies and other 0 0 19 8 10 5 5 5 5 5 5 5 6 Other expenses 140 240 101 86 1 10 10 10 11 11 11 12 12 Insurance - - - - - - - - - - - - - Depreciation - - - - - - - - - - - - - Amortization - - - - - - - - - - - - - Interest - - - - - - - - - - - - - Hospital feeProvision for bad debts - - - - - - - - - - - - -

Total expenses 140 240 125 97 37 38 39 41 42 43 44 46 47

Operating income before asset impairment 173 138 (125) (97) (37) (38) (39) (41) (42) (43) (44) (46) (47)

Asset impairment - - - - - - - - - - - - - Operating income 173 138 (125) (97) (37) (38) (39) (41) (42) (43) (44) (46) (47)

Nonoperating revenue and expenseInvestment income (loss) (286) 22 31 (11) 73 30 31 31 32 33 34 35 36 Donations 0 - 412 292 76 137 141 145 150 154 159 163 168 Other expenses (28) - (439) - - - - - - - - - -

Total non-operating revenue and expense (314) 22 4 281 150 166 171 177 182 187 193 199 205

Excess of unrestricted revenues, gains and othersupport over expenses before minority interest (141) 160 (121) 184 112 128 132 136 140 144 149 153 158


support over expenses (141)$ 160$ (121)$ 184$ 112$ 128$ 132$ 136$ 140$ 144$ 149$ 153$ 158$

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Community Memorial Health System - California Heart Institute, Inc.Forecasted Statement of Operations




Revenues:Net patient services revenue -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ Other operating revenue 17 20 48 48 47 54 50 50 51 50 50 51 50 Net Assets released from restrictions - - - - - - - - - - - - -

Total unrestricted revenues, gains and other support 17 20 48 48 47 54 50 50 51 50 50 51 50

Expenses:Salaries and wages 4 34 29 - - - - - - - - - - Employee benefits 0 6 6 - - - - - - - - - - Registry staff - - - - - - - - - - - - - Professional fees - 2 - - 4 3 3 3 3 3 3 3 3 Purchased services - - - 41 41 125 125 125 125 125 125 125 125 Medical supplies - - - - - - - - - - - - - Supplies and other - - - - - - - - - - - - - Other expenses 0 1 1 1 1 1 1 1 1 1 1 1 1 Insurance - - - - - - - - - - - - - Depreciation - - - - - - - - - - - - - Amortization - - - - - - - - - - - - - Interest - - - - - - - - - - - - - Hospital feeProvision for bad debts - - - - - - - - - - - - -

Total expenses 4 43 36 42 45 128 128 128 128 128 128 128 128

Operating income before asset impairment 13 (23) 12 6 2 (75) (79) (78) (77) (78) (78) (78) (78)

Asset impairment - - - - - - - - - - - - - Operating income 13 (23) 12 6 2 (75) (79) (78) (77) (78) (78) (78) (78)

Nonoperating revenue and expenseInvestment income (loss) - - - - - - (112) (115) (118) (122) (126) (129) (133) Donations - - - - - - - - - - - - - Other expenses - - - - - - - - - - - - -

Total non-operating revenue and expense - - - - - - (112) (115) (118) (122) (126) (129) (133)

Excess of unrestricted revenues, gains and othersupport over expenses before minority interest 13 (23) 12 6 2 (75) (191) (193) (196) (200) (204) (207) (211)


support over expenses 13$ (23)$ 12$ 6$ 2$ (75)$ (191)$ (193)$ (196)$ (200)$ (204)$ (207)$ (211)$

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Community Memorial Health System - EliminationsForecasted Statement of Operations




Revenues:Net patient services revenue -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ Other operating revenue - (288) (1,210) (1,296) (1,482) (1,357) (1,639) (1,677) (1,711) (1,749) (1,788) (1,829) (1,870) Net Assets released from restrictions - - - - - - - - - - - - -

Total unrestricted revenues, gains and other support - (288) (1,210) (1,296) (1,482) (1,357) (1,639) (1,677) (1,711) (1,749) (1,788) (1,829) (1,870)

Expenses:Salaries and wages - - - - - - - - - - - - - Employee benefits - - - - - - - - - - - - - Registry staff - - - - - - - - - - - - - Professional fees - - - - - - - - - - - - - Purchased services - - - (860) (974) (1,048) (1,030) (1,064) (1,094) (1,127) (1,162) (1,197) (1,234) Medical supplies - - - - - - - - - - - - - Supplies and other - - - - - - - - - - - - - Other expenses - (30) (1,210) (26) (131) (133) (137) (141) (146) (150) (155) (159) (164) Insurance - - - - - - - - - - - - - Depreciation - - - - - - - - - - - - - Amortization - - - - - - - - - - - - - Interest (119) (258) - (551) (472) (344) (472) (472) (472) (472) (472) (472) (472) Hospital feeProvision for bad debts - - - - - - - - - - - - -

Total expenses (119) (288) (1,210) (1,436) (1,576) (1,525) (1,639) (1,677) (1,711) (1,749) (1,788) (1,829) (1,870)

Operating income before asset impairment 119 - - 140 95 169 - - - - - - -

Asset impairment - - - - - - - - - - - - - Operating income 119 - - 140 95 169 - - - - - - -

Nonoperating revenue and expenseInvestment income (loss) (119) - - (140) (95) (169) - - - - - - - Donations - - - - - - - - - - - - - Other expenses - - - - - - - - - - - - -

Total non-operating revenue and expense (119) - - (140) (95) (169) - - - - - - -

Excess of unrestricted revenues, gains and othersupport over expenses before minority interest - - - 0 - 0 - - - - - - -

Minority interest (73) 238 816 388 289 124 350 335 321 307 293 267 241 Excess of unrestricted revenues, gains, and other

support over expenses (73)$ 238$ 816$ 388$ 289$ 124$ 350$ 335$ 321$ 307$ 293$ 267$ 241$

July 19, 2011

Board of Directors Community Memorial Health System 147 North Brent Street Ventura, CA 93003

Subsequent to the issuance of our Financial Feasibility Study dated July 7, 2011, HFS Consultants was requested to evaluate the impact of the following sensitivity analysis on the results of the financial projections included in our report:

Downside Sensitivity Analysis� 1% Decrease in Annual Medicare Rate Increases � 1% Decrease in Annual Commercial/Managed Care Rate Increases � 1% Decrease in Annual Inpatient Volume Growth Rates

Upside Sensitivity Analysis� .1% Annual Reduction to Bad Debts � 1% Increase in Annual Commercial/Managed Care Rate Increases � 5% Increase in the Largest Commercial Payor Inpatient Volume

Contingency Sensitivity Analysis� 1% Annual Reduction in Salary Increase � 100 FTE Reduction including Benefits in 2016

The schedule included on the following page of this letter summarizes the impact of each sensitivity analysis in fiscal year ending December 31, 2016, the first year after completion of the construction project. All other assumptions except those noted above remain the same.

The sensitivity analysis should be read and considered in conjunction with the assumptions and findings noted in the Market and Financial Feasibility Study dated July 7, 2011.

Sincerely yours,

HFS Consultants

Richard A. Gianello President

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Sensitivity ImpactBased on HFS Feasibility Study dated July 7, 2011

2016Annual

Operating Debt ServiceIncome Cash Days Coverage($000) ($000) Cash1 Ratio2

Feasiblity Study Results (10)$ 120,318$ 161.96 1.88

Downside Sensitivity Analysis1% Decrease in Annual Medicare Rate Increases Sensitivity Results (5,435)$ 105,671$ 148.03 1.71 Change (5,425)$ (14,646)$ (13.93) (0.17)

1% Decrease in Annual Commercial/Managed Care Rate Increases Sensitivity Results (9,280)$ 97,000$ 139.78 1.59 Change (9,270)$ (23,318)$ (22.18) (0.29)

1% Decrease in Annual I/P Volume Growth Rates Sensitivity Results (821)$ 116,759$ 158.97 1.86 Change (810)$ (3,559)$ (2.99) (0.03)

Upside Sensitivity Analysis0.1% Annual Reduction to Bad Debt Rate Sensitivity Results 2,034$ 129,973$ 172.06 1.95 Change 2,044$ 9,656$ 10.10 0.06

1% Increase in Annual Commercial/Managed Care Rate Increases Sensitivity Results 11,070$ 151,357$ 191.48 2.24 Change 11,080$ 31,040$ 29.52 0.35

5% Increase in the Largest Commercial Payor I/P Volume Sensitivity Results 1,500$ 127,490$ 168.78 1.93 Change 1,510$ 7,173$ 6.82 0.05

Contingency Sensitivity Analysis1% Annual Reduction in Salary Increase Sensitivity Results 10,115$ 152,970$ 196.76 2.20 Change 10,125$ 32,653$ 34.81 0.32

100 FTE Reduction including Benefits (in 2016 - year implemented) Sensitivity Results 10,411$ 130,505$ 174.90 2.21 Change 10,421$ 10,187$ 12.95 0.33

1 Compares to the days cash on hand as seen on page nine of the Market and Financial Feasiblity Study2 Compares to the Annual debt service coverage ratio as seen in Table 3C-3 on page 23 of the Market and Financial Feasibility Study

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APPENDIX D SUMMARY OF PRINCIPAL DOCUMENTS

The following is a summary of certain provisions of the Master Indenture, the Supplemental Master Indenture for Obligation No. 1, the Bond Indenture and the Loan Agreement. This summary does not purport to be complete or definitive and is qualified in its entirety by reference to the full terms of such documents.

MASTER INDENTURE General

The following is a summary of certain provisions of the Master Indenture. Other provisions of the Master Indenture are summarized in this Official Statement under the caption “SECURITY AND SOURCE OF PAYMENT FOR SERIES BONDS – The Master Indenture.” This summary does not purport to be complete or definitive and is qualified in its entirety by reference to the full terms of the Master Indenture. The Master Indenture authorizes the issuance of Master Indenture Obligations. Each Master Indenture Obligation is stated in the Master Indenture to be a joint and several obligation of each Obligated Group Member.

Definitions

The following is a summary of certain terms used in this Summary of Principal Documents. All capitalized terms not defined herein or elsewhere in this Official Statement have the meanings set forth in the Master Indenture.

Accountant means any independent certified public accountant or firm of such accountants selected by the Obligated Group Representative.

Affiliate of any specified Person shall mean any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, (i) “control” when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the power to appoint and remove its directors, the ownership of voting securities, by contract, membership or otherwise; and (ii) the terms “controlling” and “controlled” have meanings correlative to the foregoing; provided that no director, officer or employee of an entity shall be deemed to be an Affiliate of such entity merely by reason of voting power absent equity ownership of a majority of the outstanding equity in the subject entity.

Annual Debt Service means for each Fiscal Year the sum (without duplication) of the aggregate amount of principal and interest scheduled to become due and payable in such Fiscal Year on all Long-Term Indebtedness of the Obligated Group then Outstanding (by scheduled maturity, acceleration, mandatory redemption or otherwise, but not including purchase price becoming due as a result of mandatory or optional tender or put), less (1) any amounts of such principal or interest to be paid during such Fiscal Year from (a) the proceeds of Indebtedness or (b) moneys or Government Obligations subject to an Irrevocable Deposit for the purpose of paying such principal or interest and (2) any Debt Service Subsidies payable in such Fiscal Year; provided that if an Identified Financial Product Agreement has been entered into by any Member with respect to Long-Term Indebtedness and the counterparty thereto has not defaulted in the payment obligations thereunder, interest on such Long-Term Indebtedness shall be included in the calculation of Annual Debt Service by including for each Fiscal Year an amount equal to the amount of interest payable on such Long-Term Indebtedness in such Fiscal Year at the rate or rates stated in such Long-Term Indebtedness plus any Financial Product Payments under an Identified Financial Product Agreement payable in such Fiscal Year minus any Financial Product Receipts under an Identified Financial Product Agreement receivable in such Fiscal Year.

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Authorized Representative means with respect to each Obligated Group Member, its chairman or vice chairman of the board, president, chief executive officer, chief financial officer, or any other person designated as an Authorized Representative of such Obligated Group Member by a Certificate of that Obligated Group Member signed by its chairman or vice chairman of the board, president, chief executive officer, or chief financial officer and filed with the Master Trustee.

Balloon Indebtedness means Long-Term Indebtedness, twenty percent (20%) or more of the principal of which (calculated as of the date of issuance) becomes due during any period of twelve (12) consecutive months absent acceleration if such maturing principal amount is not required to be amortized below such percentage by mandatory redemption prior to such 12-month period, but not including (i) the portion of such Long-Term Indebtedness that is equal to the aggregate of the principal payments to be made on such Long-Term Indebtedness in each year in which the total principal due in such year is less than twenty percent (20%) of the initial aggregate principal amount of such Long-Term Indebtedness and (ii) payments of purchase price of indebtedness that is subject to tender by the owner thereof.

Book Value means, when used in connection with Property, Plant and Equipment or other Property of any Obligated Group Member, the value of such property, net of accumulated depreciation, as it is carried on the books of the Obligated Group Member in conformity with GAAP, and when used in connection with Property, Plant and Equipment or other Property of the Obligated Group, means the aggregate of the values so determined with respect to such Property of each Obligated Group Member determined in such a way that no portion of such value of Property of any Obligated Group Member is included more than once.

Certificate, Statement, Request, Consent or Order of any Obligated Group Member or of the Master Trustee means, respectively, a written certificate, statement, request, consent or order signed in the name of such Obligated Group Member by its Authorized Representative or in the name of the Master Trustee by its Responsible Officer. Any such instrument and supporting opinions or certificates, if any, may, but need not, be combined in a single instrument with any other instrument, opinion or certificate and the two or more so combined shall be read and construed as a single instrument. If and to the extent required by the Master Indenture, each such instrument shall include the statements provided for in the Master Indenture.

Code means the Internal Revenue Code of 1986 and the regulations promulgated thereunder.

Completion Indebtedness means any Long-Term Indebtedness incurred for the purpose of financing the completion of construction or equipping of any project for which Long-Term Indebtedness or Interim Indebtedness has theretofore been incurred in accordance with the provisions of the Master Indenture, to the extent necessary to provide a completed and fully equipped facility of the type and scope contemplated at the time said Long-Term Indebtedness or Interim Indebtedness was incurred, in accordance with the general plans and specifications for such facility as originally prepared in connection with said Long-Term Indebtedness or Interim Indebtedness as such plans and specifications may be modified to deal with exigencies (if any) not anticipated at commencement of construction (or matters encountered beyond budgeted-for contingencies) as certified by an Officer’s Certificate.

Corporate Trust Office means the office of the Master Trustee at which its corporate trust business is conducted.

Corporation means Community Memorial Health System, Inc., a nonprofit public benefit corporation duly organized and existing under the laws of the State of California, or any corporation which is the surviving, resulting or transferee corporation in any merger, consolidation or transfer of assets permitted under the Master Indenture.

Days Cash on Hand shall mean, for the period tested, the sum of unrestricted and unencumbered (i) cash, (ii) cash equivalents and (iii) marketable debt and equity securities (whether or not designated as such by a Governing Body), divided by the quotient of (x) operating expenses less depreciation and amortization divided by (y) the number of calendar days in the period. Notwithstanding any of the foregoing to the contrary, Days Cash on Hand shall not include (A) self-insurance funds, (B) proceeds of any short-term borrowings including, without

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limitation, internal affiliate loans and draws on lines of credit regardless of the maturity date of the line of credit, (C) proceeds of accounts receivable financings or factoring, (D) proceeds of put debt not supported by a liquidity facility with term-out features, (E) funds or investments subject to any donor restrictions, permanent or temporary, inconsistent with the use of such funds or investments for the payment of Required Payments or operating expenses, regardless of whether such funds or investments are considered restricted for purposes of generally accepted accounting principles or (F) any collateral required pursuant to the terms of a Financial Products Agreement that has been posted.

Debt Service Coverage Ratio means, for any period of time, the ratio determined by dividing Income Available for Debt Service by Maximum Annual Debt Service.

Deed of Trust Property means the property subject to the lien of the Deed of Trust from time to time.

Deed of Trust means the Construction and Permanent Deed of Trust with Fixture Filing and Security Agreement, dated as of August 1, 2011, from the Corporation, as grantor, to the deed of trust trustee, for the benefit of the Master Trustee, as beneficiary, as originally executed and as it may subsequently be modified, amended or restated.

Default means an event that, with the passage of time or the giving of notice or both, would become an Event of Default.

Event of Default means any of the events specified in the Master Indenture.

Excluded Property means (i) the property identified in Appendix A to the Master Indenture and (ii) such other property disposed of in accordance with the Master Indenture.

Fair Market Value, when used in connection with Property, means the fair market value of such Property as determined by either:

(a) an appraisal of the portion of such Property which is real property and the permanent improvements thereof made within five years of the date of determination by a “Member of the Appraisal Institute” and by an appraisal of any material portion of such Property which is not real property made within five years of the date of determination by any expert qualified in relation to the subject matter, provided that any such appraisal shall be performed by an Independent Consultant, adjusted for the period, not in excess of five years, from the date of the last such appraisal for changes in the implicit price deflator for the gross national product as reported by the United States Department of Commerce or its successor agency, or if such index is no longer published, such other index certified to be comparable and appropriate in an Officer’s Certificate delivered to the Master Trustee;

(b) a bona fide offer for the purchase of such Property made on an arm’s-length basis within six months of the date of determination, as established by an Officer’s Certificate; or

(c) an officer of the Obligated Group Representative (whose determination shall be made in good faith and set forth in an Officer’s Certificate filed with the Trustee) if the fair market value of such Property is less than or equal to the greater of $5,000,000 or 2.5% of cash and equivalents as shown on the Obligated Group Financial Statements.

Financial Product Agreement means any interest rate exchange agreement, hedge or similar arrangement, including, inter alia, an interest rate swap, asset swap, a constant maturity swap, a forward or futures contract, cap, collar, option, floor, forward or other hedging agreement, arrangement or security, direct funding transaction or other derivative, however denominated and whether entered into on a current or forward basis, excluding however commodity (including power) forward purchase agreements.

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Financial Product Extraordinary Payments means any payments required to be paid to a counterparty by an Obligated Group Member pursuant to a Financial Product Agreement in connection with the termination thereof, tax gross-up payments, expenses, default interest, and any other payments or indemnification obligations to be paid to a counterparty by an Obligated Group Member under a Financial Product Agreement, which payments are not Financial Product Payments.

Financial Product Payments means regularly scheduled payments required to be paid to a counterparty by an Obligated Group Member pursuant to a Financial Product Agreement and excluding Financial Product Extraordinary Payments.

Financial Product Receipts means regularly scheduled payments required to be paid to an Obligated Group Member by a counterparty pursuant to a Financial Product Agreement.

Fiscal Year means the period beginning on January 1 of each year and ending on the next succeeding December 31, or any other twelve-month period hereafter designated by the Obligated Group Representative as the fiscal year of the Obligated Group.

GAAP means accounting principles generally accepted in the United States of America, consistently applied.

Governing Body means, when used with respect to any Obligated Group Member, its board of directors, board of trustees or other board or group of individuals in which all of the powers of such Obligated Group Member are vested, except for those powers reserved to the corporate membership of such Obligated Group Member by the articles of incorporation or bylaws of such Obligated Group Member.

Government Issuer means any municipal corporation, political subdivision, state, territory or possession of the United States, or any constituted authority or agency or instrumentality of any of the foregoing empowered to issue obligations on behalf thereof, which obligations would constitute Related Bonds under the Master Indenture.

Government Obligations means: (1) direct obligations of the United States of America (including obligations issued or held in book-entry form on the books of the Department of the Treasury of the United States of America) or obligations the timely payment of the principal of and interest on which are fully and unconditionally guaranteed by the United States of America; (2) obligations issued or guaranteed by any agency, department or instrumentality of the United States of America if the obligations issued or guaranteed by such entity are rated in one of the two highest Rating Categories of a Rating Agency; (3) certificates which evidence ownership of the right to the payment of the principal of and interest on obligations described in clauses (1) and/or (2), provided that such obligations are held in the custody of a bank or trust company in a special account separate from the general assets of such custodian; and (4) obligations the interest on which is excluded from gross income for purposes of federal income taxation pursuant to Section 103 of the Internal Revenue Code of 1986, and the timely payment of the principal of and interest on which is fully provided for by the deposit in trust of cash and/or obligations described in clauses (1), (2) and/or (3).

Government Restriction means federal, state or other applicable governmental laws or regulations (including income tax limitations which must be respected to preserve the exempt status of the applicable Person or eligibility of a Person for benefits under any state, local or federal subsidy or exemption program) affecting any Obligated Group Member and its health care facilities or other licensed facilities placing restrictions and limitations on the (i) fees and charges to be fixed, charged or collected by any Obligated Group Member or (ii) the timing of the receipt of such revenues.

Gross Receivables means all of the accounts, chattel paper, instruments and general intangibles (all as defined in the UCC) of each Obligated Group Member, as are now in existence or as may be hereafter acquired and the proceeds thereof; excluding, however, all Restricted Moneys.

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Guaranty means any obligation of any Obligated Group Member guaranteeing, directly or indirectly, any obligation of any other Person which would, if such other Person were a Obligated Group Member, constitute Indebtedness.

Holder means the registered owner of any Master Indenture Obligation in registered form or the bearer of any Master Indenture Obligation in coupon form which is not registered or is registered to bearer or the party or parties to any contractual obligation designated to be an Obligation set forth in a related Supplement and identified therein as the party to whom payment is due thereunder or the “holder” thereof.

Identified Financial Product Agreement means a Financial Product Agreement identified to the Master Trustee in a Certificate of the Obligated Group Representative as having been entered into by an Obligated Group Member with a Qualified Provider with respect to Indebtedness (which is either then-Outstanding or to be issued after the date of such Certificate) identified in such Certificate, with a notional amount not in excess of the principal amount of such Indebtedness.

Immaterial Affiliates means Persons that are not Members of the Obligated Group and whose combined total unrestricted net assets, as shown on their financial statements for their most recently completed fiscal year, aggregated less than ten percent (10%) of the combined or consolidated unrestricted net assets of the Obligated Group as shown on the Obligated Group Financial Statements, plus the unrestricted net assets of such Persons as if they were Members of the Obligated Group for such period, for the most recently completed Fiscal Year of the Obligated Group.

Income Available for Debt Service means, unless the context provides otherwise, with respect to the Obligated Group as to any period of time, net income, or excess of revenues over expenses (excluding income from all Irrevocable Deposits) before depreciation, amortization, and interest expense (including Financial Product Payments and Financial Product Receipts on Identified Financial Product Agreements), as determined in accordance with GAAP and as shown on the Obligated Group Financial Statements; provided, that no determination thereof shall take into account:

(a) gifts, grants, bequests, donations or contributions, to the extent specifically restricted by the donor to a particular purpose inconsistent with their use for the payment of principal of, redemption premium and interest on Indebtedness or the payment of operating expenses;

(b) the net proceeds of insurance (other than business interruption insurance) and condemnation awards;

(c) any gain or loss resulting from the extinguishment of Indebtedness;

(d) any gain or loss resulting from the sale, exchange or other disposition of assets not in the ordinary course of business;

(e) any gain or loss resulting from any discontinued operations;

(f) any gain or loss resulting from pension terminations, settlements or curtailments;

(g) any unusual charges for employee severance;

(h) adjustments to the value of assets or liabilities resulting from changes in GAAP;

(i) unrealized gains or losses on investments, including “other than temporary” declines in Book Value;

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(j) gains or losses resulting from changes in valuation of any hedging, derivative, interest rate exchange or similar contract (including Financial Product Agreements);

(k) any Financial Product Extraordinary Payments or similar payments on any hedging, derivative, interest rate exchange or similar contract that does not constitute a Financial Product Agreement;

(l) unrealized gains or losses from the write-down, reappraisal or revaluation of assets; or

(m) other nonrecurring items of any extraordinary nature which do not involve the receipt, expenditure or transfer of assets.

Indebtedness means any Guaranty (other than any Guaranty by any Obligated Group Member of Indebtedness of any other Obligated Group Member) and any obligation of any Obligated Group Member (a) for repayment of borrowed money, (b) with respect to finance leases or (c) under installment sale agreements; provided, however, that if more than one Obligated Group Member shall have incurred or assumed a Guaranty of a Person other than a Obligated Group Member, or if more than one Obligated Group Member shall be obligated to pay any obligation, for purposes of any computations or calculations under the Master Indenture such Guaranty or obligation shall be included only one time. Financial Product Agreements and physician income guaranties shall not constitute Indebtedness.

Independent Consultant means a firm (but not an individual) which (1) is in fact independent, (2) does not have any direct financial interest or any material indirect financial interest in any Obligated Group Member (other than the agreement pursuant to which such firm is retained), (3) is not connected with any Obligated Group Member as an officer, employee, promoter, trustee, partner, director or person performing similar functions and (4) is qualified to pass upon questions relating to the financial affairs of organizations similar to the Obligated Group or facilities of the type or types operated by the Obligated Group and having the skill and experience necessary to render the particular opinion or report required by the provision of the Master Indenture in which such requirement appears.

Industry Restrictions means federal, state or other applicable governmental laws or regulations, including conditions imposed specifically on the Obligated Group Members or the Obligated Group Members’ facilities, or general industry standards or general industry conditions placing restrictions and limitations on the rates, fees and charges to be fixed, charged and collected by the Obligated Group Members.

Insurance Consultant means a Person (including the insurance broker for one or more Members of the Obligated Group), who or which is appointed by any Obligated Group Member for the purpose of reviewing and recommending insurance coverage for the facilities and operations of one or more members of the Obligated Group or the entire Obligated Group, is recognized as being skilled and experienced in performing such services in respect of facilities and operations of a comparable size and nature, and, in the good faith opinion of the member making the appointment, has a favorable reputation for skill and experience in performing such services in respect of facilities and operations of a comparable size and nature.

Interim Indebtedness means Indebtedness with an original maturity not in excess of one year, the proceeds of which are to be used to provide interim financing for capital improvements in anticipation of the issuance of Long-Term Indebtedness. Interim Indebtedness shall be considered Long-Term Indebtedness for purposes of the Master Indenture.

Investment Grade means a rating of “BBB-“ (or its equivalent) or better from Fitch, “Baa3” (or its equivalent) or better by Moody’s or “BBB-“ (or its equivalent) or better by S&P.

Irrevocable Deposit means the irrevocable deposit in trust of cash in an amount, or Government Obligations, or other securities permitted for such purpose pursuant to the terms of the documents governing the payment of or discharge of Indebtedness, the principal of and interest on which will be an amount, and under terms

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sufficient to pay all or a portion of the principal of, premium, if any, and interest on, as the same shall become due, any such Indebtedness which would otherwise be considered Outstanding. The trustee of such deposit may be the Master Trustee, a Related Bond Trustee or any other trustee or escrow agent authorized to act in such capacity.

Lien means any mortgage or pledge of, or security interest in, or lien or encumbrance on, any Property of an Obligated Group Member (i) which secures any Indebtedness or any other obligation of such Obligated Group Member or (ii) which secures any obligation of any Person other than an Obligated Group Member, and excluding liens applicable to Property in which an Obligated Group Member has only a leasehold interest unless the lien secures Indebtedness of that Obligated Group Member.

Long-Term Indebtedness means Indebtedness other than Short-Term Indebtedness.

Master Indenture Obligation means any obligation of the Obligated Group issued pursuant to the Master Indenture, as a joint and several obligation of each Obligated Group Member, which may be in any form set forth in a Related Supplement, including, but not limited to, bonds, notes, obligations, debentures, reimbursement agreements, loan agreements, Financial Product Agreements or leases. Reference to a Series of Master Indenture Obligations or to Master Indenture Obligations of a Series means Master Indenture Obligations or Series of Master Indenture Obligations issued pursuant to a single Related Supplement.

Master Trustee means The Bank of New York Mellon Trust Company, N.A., a national banking association organized under the laws of the United States of America, and, subject to the limitations contained in the Master Indenture, any other corporation or association that may be co-trustee with the Master Trustee, and any successor or successors to said trustee or co-trustee in the trusts created under the Master Indenture.

Material Obligated Group Members means the Obligated Group Members whose combined or consolidated unrestricted net assets, as shown on their financial statements for their most recently completed fiscal year, were equal to or greater than ninety percent (90%) of the combined or consolidated unrestricted net assets of the entire Obligated Group as shown on the Obligated Group Financial Statements for the most recently completed Fiscal Year of the Obligated Group.

Maximum Annual Debt Service means the greatest amount of Annual Debt Service becoming due and payable in any Fiscal Year including the Fiscal Year in which the calculation is made or any subsequent Fiscal Year; provided, however, that for the purposes of computing Maximum Annual Debt Service:

(a) with respect to a Guaranty, (i) if the Obligated Group Members have made a payment pursuant to such Guaranty, one hundred percent (100%) of the Annual Debt Service (calculated as if such Person were a Obligated Group Member) guaranteed by the Obligated Group Members under the Guaranty shall be included in the calculation of Annual Debt Service in the year in which such payment was made and for two Fiscal Years thereafter and (ii) otherwise, there shall be included in the calculation of Annual Debt Service a percentage of the Annual Debt Service (calculated as if such Person were a Obligated Group Member) guaranteed by the Obligated Group Members under the Guaranty, based on the ratio of Income Available for Debt Service of the Person whose indebtedness is guaranteed by the Obligated Group Member (calculated as if such Person were a Obligated Group Member), over the Annual Debt Service of such Person (calculated as if such Person were a Obligated Group Member) (the “Ratio”). The applicable percentage of Annual Debt Service on such indebtedness shall be included in the calculation of Annual Debt Service, as follows:

Ratio

Percentage of Annual Debt Service on such

Indebtedness to be Included

Less than 2.0 20% 2.0 or greater 0%

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(b) if interest on Long-Term Indebtedness is payable pursuant to a variable interest rate formula (or if Financial Product Payments under an Identified Financial Product Agreement or Financial Product Receipts under an Identified Financial Product Agreement are determined pursuant to a variable rate formula), the interest rate on such Long-Term Indebtedness (or the variable rate formula for such Financial Product Payments under an Identified Financial Product Agreement or Financial Product Receipts under an Identified Financial Product Agreement) for periods when the actual interest rate cannot yet be determined shall be assumed to be equal to (i) if such Long-Term Indebtedness (or Identified Financial Product Agreement) was Outstanding during the twelve (12) calendar months immediately preceding the date of calculation, an average of the interest rates per annum which were in effect, and (ii) if such Long-Term Indebtedness (or Identified Financial Product Agreement) was not Outstanding during the twelve (12) calendar months immediately preceding the date of calculation, at the election of the Obligated Group Representative, either (x) an average of the SIFMA Swap Index during the twelve (12) calendar months immediately preceding the date of calculation or (y) an average of the interest rates per annum which would have been in effect for any twelve (12) consecutive calendar months during the eighteen (18) calendar months immediately preceding the date of calculation, as specified in a Certificate of the Obligated Group Representative or, at the sole option of the Obligated Group Representative, such interest rate as shall be specified in a written statement from an investment banking or financial advisory firm selected by the Obligated Group Representative;

(c) if moneys or Government Obligations have been deposited in an Irrevocable Deposit with a trustee or escrow agent in an amount, together with earnings thereon, sufficient to pay all or a portion of the principal of or interest on Long-Term Indebtedness as it comes due, such principal or interest, as the case may be, to the extent provided for, shall not be included in computations of Maximum Annual Debt Service;

(d) debt service on Long-Term Indebtedness incurred to finance capital improvements shall be included in the calculation of Maximum Annual Debt Service only in proportion to the amount of interest on such Long-Term Indebtedness which is payable in the then current Fiscal Year from sources other than proceeds of such Long-Term Indebtedness (other than proceeds deposited in debt service reserve funds) held by a trustee or escrow agent for such purpose; and

(e) with respect to Balloon Indebtedness or Interim Indebtedness, such Balloon Indebtedness or Interim Indebtedness shall be treated, at the sole option of the Obligated Group Representative, as Long-Term Indebtedness bearing interest at an interest rate equal to either (i) a fixed rate equal to the Thirty-Year Revenue Bond Index most recently published in The Bond Buyer prior to the date of calculation or (ii) such interest rate as shall be specified in a written statement from an investment banking or financial advisory firm selected by the Obligated Group Representative, and with substantially level debt service over a period of up to thirty (30) years (which period shall be designated by the Obligated Group Representative) from the date of calculation.

Nonrecourse Indebtedness means any Indebtedness which is not a general obligation of the obligor of such Indebtedness and which is secured by a Lien on Property, Plant and Equipment acquired or constructed with the proceeds of such Indebtedness, liability for which is effectively limited to the Property, Plant and Equipment subject to such Lien with no recourse, directly or indirectly, to any other Property of any Obligated Group Member absent extraordinary events such as fraud, insolvency or waste.

Obligated Group means all Obligated Group Members.

Obligated Group Financial Statements has the meaning described under the caption “The Master Indenture – Filing of Financial Statements; Certificate of No Default and Other Information.”

Obligated Group Member or Member means each Person that is obligated under the Master Indenture from and after the date upon which such Person joins the Obligated Group, but excluding any Person which withdraws from the Obligated Group to the extent and in accordance with the provisions of the Master Indenture, from and after the date of such withdrawal.

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Obligated Group Representative means the Corporation or such other Obligated Group Member (or Obligated Group Members acting jointly) as may have been designated pursuant to written notice to the Master Trustee executed by the Corporation or a successor Obligated Group Representative.

Officer’s Certificate means a certificate signed by an Authorized Representative of the Obligated Group Representative.

Opinion of Bond Counsel means a written opinion signed by an attorney or firm of attorneys experienced in the field of public finance whose opinions are generally accepted by purchasers of bonds issued by or on behalf of a Government Issuer.

Opinion of Counsel means a written opinion signed by a reputable and qualified attorney or firm of attorneys who may be counsel for the Obligated Group Representative or any Obligated Group Member.

Outstanding, when used with reference to Indebtedness or Master Indenture Obligations, means, as of any date of determination, all Indebtedness or Master Indenture Obligations theretofore issued or incurred and not paid and discharged other than (1) Master Indenture Obligations theretofore cancelled by the Master Trustee or delivered to the Master Trustee for cancellation or otherwise deemed paid in accordance with the terms of the Master Indenture, (2) Master Indenture Obligations in lieu of which other Master Indenture Obligations have been authenticated and delivered or which have been paid pursuant to the provisions of a Related Supplement regarding mutilated, destroyed, lost or stolen Master Indenture Obligations unless proof satisfactory to the Master Trustee has been received that any such Master Indenture Obligation is held by a bona fide purchaser, (3) any Master Indenture Obligation held by any Obligated Group Member and (4) Indebtedness deemed paid and no longer outstanding pursuant to the terms thereof; provided, however, that if two or more obligations which constitute Indebtedness represent the same underlying obligation (as when a Master Indenture Obligation secures an issue of Related Bonds and another Master Indenture Obligation secures repayment obligations to a bank under a letter of credit which secures such Related Bonds) for purposes of calculating compliance with the various financial covenants contained in the Master Indenture, but only for such purposes, only one of such Master Indenture Obligations shall be deemed Outstanding and the Master Indenture Obligation so deemed to be Outstanding shall be that Master Indenture Obligation which produces the greatest amount of Annual Debt Service to be included in the calculation of such covenants.

Parity Financial Product Extraordinary Payments means Financial Product Extraordinary Payments that (1) are with respect to a Financial Product Agreement secured or evidenced by an Obligation and (2) have been specified to be payable on a parity with Financial Product Payments in the Related Supplement authorizing the issuance of such Obligation.

Permitted Liens means and include:

(a) Any judgment lien or notice of pending action against any Obligated Group Member so long as the judgment or pending action is being contested and execution thereon is stayed or while the period for responsive pleading has not lapsed;

(b) (i) Rights reserved to or vested in any municipality or public authority by the terms of any right, power, franchise, grant, license, permit or provision of law, affecting any Property, to (A) terminate such right, power, franchise, grant, license or permit, provided that the exercise of such right would not materially impair the use of such Property or materially and adversely affect the Value thereof, or (B) purchase, condemn, appropriate or recapture, or designate a purchase of, such Property; (ii) any liens on any Property for taxes, assessments, levies, fees, water and sewer charges, and other governmental and similar charges and any liens of mechanics, materialmen, laborers, suppliers or vendors for work or services performed or materials furnished in connection with such Property, which are not delinquent, or the amount or validity of which are being contested and execution thereon is stayed or, with respect to liens of mechanics, materialmen and laborers, have been due and payable or which are not delinquent, or the amount or validity of which, are being contested or, with respect to liens of

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mechanics, materialmen and laborers, have been due for less than sixty (60) days, or the amount or validity of which are being contested; (iii) easements, rights-of-way, servitudes, restrictions and other minor defects, encumbrances, and irregularities in the title to any Property which do not materially impair the use of such Property or materially and adversely affect the Value thereof; (iv) easements, exceptions or reservations for the purpose of ingress and egress, parking, pipelines, telephone lines, telegraph lines, power lines and substations, roads, streets, alleys, highways, railroad purposes, drainage, sewerage, dikes, canals, laterals, ditches, removal of oil, gas, coal or other minerals, and other similar matters, including joint use agreements, which do not materially interfere with the use or operation of the subject Property for its intended purpose; and (v) rights reserved to or vested in any municipality or public authority to control or regulate any Property or to use such Property in any manner, which rights do not materially impair the use of such Property in any manner, or materially and adversely affect the Value thereof;

(c) Any Lien described in Appendix B to the Master Indenture which is existing on the date of execution of the Master Indenture or as Appendix B may be supplemented upon addition of a Obligated Group Member with respect to Liens existing on the Property of such additional Obligated Group Member, provided that no such Lien (or the amount of Indebtedness or other obligations secured thereby) may be increased, extended, renewed or modified to apply to any Property of any Obligated Group Member not subject to such Lien on such date, unless such Lien as so extended, renewed or modified otherwise qualifies as a Permitted Lien;

(d) Any Lien in favor of the Master Trustee securing all Outstanding Master Indenture Obligations equally and ratably;

(e) Liens arising by reason of good faith deposits with any Obligated Group Member in connection with leases of real estate, bids or contracts (other than contracts for the payment of money), deposits by any Obligated Group Member to secure public or statutory obligations, or to secure, or in lieu of, surety, stay or appeal bonds, and deposits as security for the payment of taxes or assessments or other similar charges;

(f) Any Lien arising by reason of deposits with, or the giving of any form of security to, any governmental agency or any body created or approved by law or governmental regulation as a condition to the transaction of any business or the exercise of any privilege or license, or to enable any Obligated Group Member to maintain self-insurance or to participate in any funds established to cover any insurance risks or in connection with workers’ compensation, unemployment insurance, pension or profit sharing plans or other similar social security plans, or to share in the privileges or benefits required for companies participating in such arrangements;

(g) Any Lien arising by reason of any escrow or reserve fund established to pay debt service or the redemption price or purchase price of Indebtedness;

(h) Any Lien in favor of a trustee on the proceeds of Indebtedness prior to the application of such proceeds;

(i) Liens on moneys deposited by patients or others with any Obligated Group Member as security for or as prepayment for the cost of patient care;

(j) Liens on Property received by any Obligated Group Member through gifts, grants, bequests or research grants, such Liens being due to restrictions or rights reserved on such gifts, grants, bequests or research grants or the income thereon, up to the Fair Market Value of such Property;

(k) Rights of the United States of America, including, without limitation, the Federal Emergency Management Agency (“FEMA”), or the State of California, including without limitation the California Emergency Management Agency, by reason of FEMA and other federal and State of California funds made available to any Obligated Group Member under federal or State of California statutes;

(l) Liens on Property securing Indebtedness incurred to refinance Indebtedness previously secured by a Lien on such Property, provided that (i) the amount of such new Indebtedness does not exceed the

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amount of such refinanced Indebtedness, (ii) the Property securing such Indebtedness is not materially increased, and (iii) the obligor with respect to such Indebtedness, whether direct or contingent, is not changed;

(m) Liens granted by a Obligated Group Member to another Obligated Group Member;

(n) Liens securing Nonrecourse Indebtedness incurred pursuant to the provisions of the Master Indenture;

(o) Liens consisting of purchase money security interests (as defined in the UCC) and lessors’ interest in capitalized leases;

(p) Liens on the Obligated Group Members’ accounts receivable securing Indebtedness in an amount not to exceed 15% of the Obligated Group Members’ net accounts receivable unless the Obligated Group receives an Investment Grade rating on its outstanding non-credit enhanced Indebtedness from at least one Rating Agency, in which case 25% of the Obligated Group Members’ net accounts receivable;

(q) Liens on revenues constituting rentals in connection with any other Lien permitted under the Master Indenture on the Property from which such rentals are derived;

(r) the lease or license of the use of a part of the Obligated Group Members’ facilities for use in performing professional or other services necessary for the proper and economical operation of such facilities in accordance with customary business practices in the industry;

(s) Liens created on amounts deposited by an Obligated Group Member pursuant to a security annex or similar document to collateralize obligations of such Member under a Financial Product Agreement;

(t) Liens junior to Liens in favor of the Master Trustee;

(u) Liens in favor of banking or other depository institutions arising as a matter of law encumbering the deposits of any Member held in the ordinary course of business by such banking institution (including any right of setoff or statutory bankers’ liens) so long as such deposit account is not established or maintained for the purpose of providing such Lien, right of setoff or bankers’ lien;

(v) Uniform Commercial Code financing statements filed with the Secretary of State of the State (or such other office maintaining such records) in connection with an operating lease entered into by any Member in the ordinary course of business so long as such financing statement does not evidence the grant of any other Lien other than a Permitted Lien;

(w) Rights of tenants under leases or rental agreements pertaining to Property, Plant and Equipment owned by any Member so long as the lease arrangement is in the ordinary course of business of the Member;

(x) deposits of Property by any Member to meet regulatory requirements for a governmental workers’ compensation, unemployment insurance or social security program, other than any Lien imposed by ERISA;

(y) deposits to secure the performance of another party with respect to a bid, trade contract, statutory obligation, surety bond, appeal bond, performance bond or lease, and other similar obligations incurred in the ordinary course of business of a Member;

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(z) Liens resulting from deposits to secure bids from or the performance of another party with respect to contracts incurred in the ordinary course of business of a Member (other than contracts creating or evidencing an extension of credit to the depositor or otherwise for the payment of Indebtedness);

(aa) present or future zoning laws, ordinances or other laws or regulations restricting the occupancy, use or enjoyment of Property, Plant and Equipment of any Member which, in the aggregate, are not substantial in amount, and which do not in any case materially impair the Fair Market Value or use of such Property, Plant and Equipment for the purposes for which it is used or could reasonably be expected to be held or used;

(bb) Any Lien on Property due to the rights of third-party payors for recoupment of amounts paid to any Obligated Group Member;

(cc) Any Lien existing for not more than 10 days after the Obligated Group Member shall have received notice thereof;

(dd) Any other Lien on Property provided that the Value of all Property encumbered by all Liens permitted as described in this clause (dd) does not exceed 15% of the sum of the Value of all Property of the Obligated Group Members, calculated at the time of creation of such Lien, unless the Obligated Group receives an Investment Grade rating on its outstanding non-credit enhanced Indebtedness from at least one Rating Agency, in which case 20% of the Value of all Property of the Obligated Group Members, calculated at the time of creation of such Lien;

(ee) Restrictions imposed in connection with the incurrence of Indebtedness permitted under the Master Indenture required to be imposed under applicable law in connection with such indebtedness such as regulatory agreements required under the Internal Revenue Code for multifamily rental bonds or required in connection with mortgage insurance provided by state or federal governmental entities;

(ff) Land to be deeded or dedicated to the City of San Buenaventura or for public use pursuant to that certain Property Exchange Agreement between the City of San Buenaventura and Corporation; and

(gg) Any easements contemplated in, and the amendment to the parking garage lease by which the Corporation has leasehold rights to the facilities located in the City of San Buenaventura, both as contemplated by a certain Memorandum of Understanding between the Corporation and the City of San Buenaventura.

Person means an individual, corporation, limited liability company, firm, association, partnership, trust or other legal entity or group of entities, including a governmental entity or any agency or political subdivision thereof.

Property means any and all rights, titles and interests in and to any and all assets of any Obligated Group Member, whether real or personal, tangible or intangible and wherever situated, other than donor restricted funds as determined in accordance with GAAP. For purposes of performing certain calculations under the Master Indenture, the Obligated Group Representative may treat “total assets” as shown on the Obligated Group’s audited financial statements as the Book Value of the Obligated Group’s Property.

Property, Plant and Equipment means all Property of any Obligated Group Member which is considered property, plant and equipment of such Obligated Group Member under GAAP.

Qualified Provider means any financial institution or insurance company or corporation which is a party to a Financial Product Agreement if (i) the unsecured long-term debt obligations of such provider (or of the parent or a subsidiary of such provider if such parent or subsidiary guarantees or otherwise assures the performance of such provider under such Financial Product Agreement), or (ii) obligations secured or supported by a letter of credit, contract, guarantee, agreement, insurance policy or surety bond issued by such provider (or such guarantor or

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assuring parent or subsidiary), are rated in one of the three highest Rating Categories of a Rating Agency at the time of the execution and delivery of the Financial Product Agreement.

Rating Agency means Fitch Inc., Moody’s Investors Service, Inc., Standard & Poor’s, a division of The McGraw-Hill Companies, and any other national rating agency then rating Master Indenture Obligations or Related Bonds.

Rating Category means a generic securities rating category, without regard to any refinement or gradation of such rating category by a numerical modifier, outlook or otherwise.

Related Bonds means the revenue bonds or other obligations (including, without limitation, installment sale or lease obligations evidenced by certificates of participation) issued by any Government Issuer, the proceeds of which are loaned or otherwise made available to a Obligated Group Member in consideration of the execution, authentication and delivery of a Master Indenture Obligation or Master Indenture Obligations to or for the order of such Government Issuer.

Related Bond Indenture means any indenture, bond resolution, trust agreement or other comparable instrument pursuant to which a series of Related Bonds are issued.

Related Bond Issuer means the Government Issuer of any issue of Related Bonds.

Related Bond Trustee means the trustee and its successors in the trusts created under any Related Bond Indenture, and if there is no such trustee, means the Related Bond Issuer.

Related Supplement means an indenture supplemental to, and authorized and executed pursuant to the terms of, the Master Indenture.

Required Payment means any payment, whether at maturity, by acceleration, upon proceeding for redemption or otherwise, including without limitation, Financial Product Payments, Financial Product Extraordinary Payments and the purchase price of Related Bonds tendered or deemed tendered for purchase pursuant to the terms of a Related Bond Indenture, required to be made by any Obligated Group Member pursuant to any Related Supplement or any Master Indenture Obligation.

Responsible Officer means, with respect to the Master Trustee, any managing director, any vice president, any assistant vice president, any assistant secretary, any assistant treasurer or any other officer of the Master Trustee customarily performing functions similar to those performed by the persons above designated or to whom any corporate trust matter is referred because of such person’s knowledge of and familiarity with the particular subject and having direct responsibility for the administration of the Master Indenture.

Restricted Moneys means the proceeds of any grant, gift, bequest, contribution or other donation (and, to the extent subject to the applicable restrictions, the investment income derived from the investment of such proceeds) specifically restricted by the donor or grantor to an object or purpose inconsistent with their use for the payment of Required Payments.

Short-Term Indebtedness means all Indebtedness (other than Interim Indebtedness) having an original maturity less than or equal to one year and not renewable at the option of a Obligated Group Member for a term greater than one year from the date of original incurrence or issuance, or Indebtedness with a maturity greater than one year or renewable at the option of a Obligated Group Member for a term greater than one year, if by the terms of such Indebtedness, for a period of at least twenty (20) consecutive days during each calendar year no Indebtedness is permitted to be Outstanding thereunder. For purposes of this definition, (i) only the stated maturity of Indebtedness (and not any tender or put right of the holder of such Indebtedness) shall be taken into account in determining if such Indebtedness constitutes Short-Term Indebtedness under the Master Indenture and (ii)

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classification of Indebtedness as current or short-term under GAAP shall not be controlling. Interim Indebtedness shall not constitute Short-Term Indebtedness for any purpose under the Master Indenture.

SIFMA Swap Index means, on any date, a rate determined on the basis of the seven-day high grade market index of tax-exempt variable rate demand obligations, as produced by Municipal Market Data and published or made available by the Securities Industry & Financial Markets Association (formerly the Bond Market Association) (“SIFMA”) or any Person acting in cooperation with or under the sponsorship of SIFMA or if such index is no longer available “SIFMA Swap Index” shall refer to an index selected by the Obligated Group Representative, with the advice of an investment banking or financial services firm knowledgeable in health care matters.

State means the State of California.

Subordinated Indebtedness means Long-Term Indebtedness specifically subordinated as to payment and security to the payment of all Required Payments and other obligations of the Obligated Group Members under the Master Indenture.

Tax Exempt Organization means a Person organized under the laws of the United States of America or any state thereof which is an organization described in Section 501(c)(3) of the Code and exempt from federal income taxes under Section 501(a) of the Code (other than the tax on unrelated business income under Section 511 of the Code), or corresponding provisions of federal income tax laws from time to time in effect.

Total Revenues means, for the period of calculation in question, the sum of operating revenue (including net patient service revenue, premium revenue and other revenue and nonoperating gains (losses)), as shown on the Obligated Group Financial Statements for the most recent Fiscal Year.

Transaction Test means, with respect to any specified transaction, that (i) no Event of Default or Default then exists and (ii) if such transaction had occurred as of the first day of the first full Fiscal Year preceding such transaction for which Obligated Group Financial Statements are available, the Obligated Group would be able to satisfy the conditions for the issuance of $1.00 of additional Long-Term Indebtedness set forth in the Master Indenture as of the date of such transaction.

UCC means the Uniform Commercial Code of the State, as amended from time to time.

Value, when used with respect to Property, means the aggregate value of all such Property, with each component of such Property valued, at the option of the Obligated Group Representative, at either its Fair Market Value or its Book Value.

Contents of Certificates and Opinions; Use of GAAP

Every Certificate or opinion provided for in the Master Indenture with respect to compliance with any provision of the Master Indenture shall include: (a) a statement that the Person making or giving such certificate or opinion has read such provision and the definitions in the Master Indenture relating thereto; (b) a brief statement as to the nature and scope of the examination or investigation upon which the certificate or opinion is based; (c) a statement that, in the opinion of such Person, such Person has made, or caused to be made, such examination or investigation as in its judgment is necessary to enable such Person to provide the certificate or express an informed opinion with respect to the subject matter referred to in the instrument to which such Person’s signature is affixed; and (d) a statement as to whether, in the opinion of such Person, such provision has been satisfied.

Any such Certificate or opinion made or given by an officer of a Obligated Group Member or the Master Trustee may be based on such officer’s knowledge and, insofar as it relates to legal, accounting or health care matters, upon a Certificate or opinion or representation of counsel, an accountant or Independent Consultant unless such officer knows, or in the exercise of reasonable care should have known, that the Certificate, opinion or

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representation with respect to the matters upon which such Certificate or opinion may be based, as aforesaid, is erroneous. Any such Certificate, opinion or representation made or given by counsel, an accountant or an Independent Consultant, may be based, insofar as it relates to factual matters (with respect to which information is in the possession of any Obligated Group Member) upon the Certificate or opinion of, or representation by an officer of any Obligated Group Member unless such counsel, accountant or Independent Consultant knows that the Certificate, opinion of or representation by such officer, with respect to the factual matters upon which such Person’s Certificate or opinion may be based, is erroneous. The same officer of any Obligated Group Member or the same counsel or accountant or Independent Consultant, as the case may be, need not certify as to all the matters required to be certified under any provision of the Master Indenture, but different officers, counsel, accountants or Independent Consultants may certify as to different matters.

Where the character or amount of any asset or liability or item of income or expense is required to be determined or any consolidation, combination or other accounting computation is required to be made for the purposes of the Master Indenture or any agreement, document or certificate executed and delivered in connection with or pursuant to the Master Indenture, such determination or computation shall be done in accordance with GAAP in effect on, at the sole option of the Obligated Group Representative, (i) the date such determination or computation is made for any purpose of the Master Indenture or (ii) the date of execution and delivery of the Master Indenture if the Obligated Group Representative delivers an Officer’s Certificate to the Master Trustee describing why then current GAAP is inconsistent with the intent of the parties on the date of execution and delivery of the Master Indenture; provided that intercompany balances and liabilities among the Obligated Group Members shall be disregarded and that the requirements set forth in the Master Indenture shall prevail if inconsistent with GAAP.

Authorization and Issuance of Obligations

Authorization of Obligations. Subject to the terms, limitations and conditions established in the Master Indenture or in a Related Supplement, the Obligated Group Representative may authorize the issuance of a Master Indenture Obligation or a Series of Master Indenture Obligations by entering into a Related Supplement. The Master Indenture Obligation or the Master Indenture Obligations of any such Series may be issued and delivered to the Master Trustee for authentication upon compliance with the provisions of the Master Indenture and of any Related Supplement.

Each Related Supplement authorizing the issuance of a Master Indenture Obligation or a Series of Master Indenture Obligations shall specify the purposes for which such Master Indenture Obligation or Series of Master Indenture Obligations are being issued; the form, title, designation, manner of numbering or denominations, if applicable, of such Master Indenture Obligations; the date or dates of maturity or other final expiration of the term of such Master Indenture Obligations; the date of issuance of such Master Indenture Obligations; and any other provisions deemed advisable or necessary by the Obligated Group Representative. Each Related Supplement authorizing the issuance of a Master Indenture Obligation shall also specify and determine the principal amount of such Master Indenture Obligation for purposes of calculating the percentage of Holders of Master Indenture Obligations required to take actions or give consents pursuant to the Master Indenture (which, if such Master Indenture Obligation does not evidence or secure Indebtedness, shall be equal to zero, except with respect to any action which requires the consent of all of the Holders of Master Indenture Obligations). The designation of zero as a principal amount of a Master Indenture Obligation shall not in any manner affect the obligation of the Members to make Required Payments with respect to such Master Indenture Obligation.

Issuance of Master Indenture Obligations. From time to time when authorized by the Master Indenture and subject to the terms, limitations and conditions established in the Master Indenture or in a Related Supplement, the Obligated Group Representative may authorize the issuance of a Master Indenture Obligation or a Series of Master Indenture Obligations by entering into a Related Supplement. The Master Indenture Obligation or the Master Indenture Obligations of any such Series may be issued and delivered to the Master Trustee for authentication upon compliance with the provisions of the Master Indenture and of any Related Supplement.

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Each Related Supplement authorizing the issuance of a Master Indenture Obligation or a Series of Master Indenture Obligations shall specify the purposes for which such Master Indenture Obligation or Series of Master Indenture Obligations are being issued; the form, title, designation, manner of numbering or denominations, if applicable, of such Master Indenture Obligations; the date or dates of maturity or other final expiration of the term of such Master Indenture Obligations; the date of issuance of such Master Indenture Obligations; and any other provisions deemed advisable or necessary by the Obligated Group Representative. Each Related Supplement authorizing the issuance of a Master Indenture Obligation shall also specify and determine the principal amount of such Master Indenture Obligation (if any) for purposes of calculating the percentage of Holders of Master Indenture Obligations required to take actions or give consents pursuant to the Master Indenture (which, if such Master Indenture Obligation does not evidence or secure Indebtedness, shall be equal to zero, except with respect to any action which requires the consent of all of the Holders of Master Indenture Obligations). The designation of zero as a principal amount of a Master Indenture Obligation shall not in any manner affect the obligation of the Members to make Required Payments with respect to such Master Indenture Obligation.

Conditions to the Issuance of Master Indenture Obligations. The issuance, authentication and delivery of any Master Indenture Obligation or Series of Master Indenture Obligations shall be subject to the following specific conditions:

(a) The Obligated Group Representative and the Master Trustee shall have entered into a Related Supplement providing for the terms and conditions of such Master Indenture Obligations and the repayment thereof; and

(b) The Master Trustee receives an Officer’s Certificate to the effect that:

(i) each Obligated Group Member is in full compliance with all warranties, covenants and agreements set forth in the Master Indenture and in any Related Supplement; and

(ii) neither an Event of Default nor any event which with the passage of time or the giving of notice or both would become an Event of Default has occurred and is continuing or would occur upon issuance of such Master Indenture Obligations under the Master Indenture or any Related Supplement; and

(iii) all requirements and conditions, if any, to the issuance of such Master Indenture Obligations set forth in the Related Supplement have been satisfied; and

(c) The Master Trustee receives an Opinion of Counsel, subject to customary qualifications and exceptions, to the effect that:

(i) such Master Indenture Obligations and Related Supplement have been duly authorized, executed and delivered by the Obligated Group Representative on behalf of the Obligated Group and constitute valid and binding obligations of the Obligated Group, enforceable in accordance with their terms; and

(ii) such Master Indenture Obligations (or the placement thereof) are not subject to registration under federal or state securities laws and such Related Supplement is not subject to registration under the Trust Indenture Act of 1939, as amended (or that such registration, if required has occurred);

(d) The Obligated Group Representative shall have delivered or caused to be delivered to the Master Trustee such opinions, certificates, proceedings, instruments and other documents as the Master Trustee may reasonably request; and

(e) If such Master Indenture Obligation constitutes or secures Indebtedness, the requirements of the Master Indenture relating to the incurrence of Indebtedness are satisfied.

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Particular Covenants of the Members

Payment of Required Payments. Each Obligated Group Member jointly and severally covenants, to promptly pay or cause to be paid all Required Payments at the place, on the dates and in the manner provided in the Master Indenture, or in any Related Supplement or Master Indenture Obligation. Each Obligated Group Member acknowledges that the time of such payment and performance is of the essence of the Master Indenture Obligations. Each Obligated Group Member further covenants to faithfully observe and perform all of the conditions, covenants and requirements of the Master Indenture, any Related Supplement and any Master Indenture Obligation.

The obligation of each Obligated Group Member with respect to Required Payments shall not be abrogated, prejudiced or affected by:

(a) the granting of any extension, waiver or other concession given to any Obligated Group Member by the Master Trustee or any Holder or by any compromise, release, abandonment, variation, relinquishment or renewal of any of the rights of the Master Trustee or any Holder or anything done or omitted or neglected to be done by the Master Trustee or any Holder in exercise of the authority, power and discretion vested in them by the Master Indenture, or by any other dealing or thing which, but for this provision, might operate to abrogate, prejudice or affect such obligation; or

(b) the liability of any other Obligated Group Member under the Master Indenture ceasing for any cause whatsoever, including the release of any other Obligated Group Member pursuant to the provisions of the Master Indenture or any Related Supplement; or

(c) any Obligated Group Member’s failing to become liable as, or losing eligibility to become, an Obligated Group Member with respect to a Master Indenture Obligation whether before or after the incurrence of a Master Indenture Obligation for the benefit of such Obligated Group Member; or

(d) the validity or sufficiency (or any contest with respect thereto) of the consideration given to support the obligations of the Obligated Group Members under the Master Indenture.

Subject to the provisions of the Master Indenture permitting withdrawal from the Obligated Group, the obligation of each Obligated Group Member to make Required Payments is a continuing one and is to remain in effect until all Required Payments have been paid or deemed paid in full in accordance with the Master Indenture. All moneys from time to time received by the Obligated Group Representative or the Master Trustee to reduce liability on Master Indenture Obligations, whether from or on account of the Obligated Group Members or otherwise, shall be regarded as payments in gross without any right on the part of any one or more of the Obligated Group Members to claim the benefit of any moneys so received until the whole of the amounts owing on Master Indenture Obligations has been paid or satisfied and so that in the event of any such Obligated Group Member’s filing bankruptcy, the Obligated Group Representative or the Master Trustee shall be entitled to prove up the total indebtedness or other liability on Master Indenture Obligations Outstanding as to which the liability of such Obligated Group Member has become fixed.

Each Master Indenture Obligation shall be a primary obligation of the Obligated Group Members and shall not be treated as ancillary to or collateral with any other obligation and shall be independent of any other security so that the covenants and agreements of each Obligated Group Member under the Master Indenture shall be enforceable without first having recourse to any such security or source of payment and without first taking any steps or proceedings against any other Person. The Obligated Group Representative and the Master Trustee are each empowered to enforce each covenant and agreement of each Obligated Group Member under the Master Indenture and to enforce the making of Required Payments. Each Obligated Group Member authorizes each of the Obligated Group Representative and the Master Trustee to enforce or refrain from enforcing any covenant or agreement of the Obligated Group Members under the Master Indenture and to make any arrangement or compromise with any Obligated Group Member or Obligated Group Members as the Obligated Group

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Representative or the Master Trustee may deem appropriate, consistent with the Master Indenture and any Related Supplement. Each Obligated Group Member waives in favor of the Obligated Group Representative and the Master Trustee all rights against the Obligated Group Representative, the Master Trustee and any other Obligated Group Member, insofar as is necessary to give effect to any of the provisions of this section.

Membership in Obligated Group. Additional Obligated Group Members may be added to the Obligated Group from time to time, provided that prior to such addition the Master Trustee receives:

(a) a copy of a resolution of the Governing Body of the proposed new Obligated Group Member which authorizes the execution and delivery of a Related Supplement and compliance with the terms of the Master Indenture; and

(b) a Related Supplement executed by the Obligated Group Representative, the new Obligated Group Member and the Master Trustee pursuant to which the proposed new Obligated Group Member:

(i) agrees to become an Obligated Group Member, and

(ii) agrees to be bound by the terms of the Master Indenture, the Related Supplements and the Master Indenture Obligations, and

(iii) irrevocably appoints the Obligated Group Representative as its agent and attorney-in-fact and grants to the Obligated Group Representative the requisite power and authority to execute Related Supplements authorizing the issuance of Master Indenture Obligations or Series of Master Indenture Obligations and to execute and deliver Master Indenture Obligations, and

(c) an Opinion of Counsel to the effect that (i) the proposed new Obligated Group Member has taken all necessary action to become an Obligated Group Member, and upon execution of the Related Supplement, such proposed new Obligated Group Member will be bound by the terms of the Master Indenture, (ii) the addition of such Obligated Group Member would not adversely affect the validity of any Master Indenture Obligation then Outstanding and (iii) the addition of such Obligated Group Member will not cause the Master Indenture or any Master Indenture Obligations then Outstanding to be subject to registration under federal or state securities laws or the Trust Indenture Act of 1939, as amended (or, that any such registration, if required, has occurred); and

(d) an Officer’s Certificate to the effect that immediately after the addition of the proposed new Obligated Group Member, the Transaction Test would be satisfied; and

(e) so long as any Related Bonds that are tax-exempt obligations are Outstanding, an Opinion of Bond Counsel to the effect that the addition of the proposed new Obligated Group Member will not, in and of itself, result in the inclusion of interest on any Related Bonds in gross income for purposes of federal income taxation.

Withdrawal from Obligated Group. Any Obligated Group Member may withdraw from the Obligated Group and be released from further liability or obligation under the provisions of the Master Indenture, provided that prior to such withdrawal the Master Trustee receives:

(a) an Officer’s Certificate to the effect that the Obligated Group Representative has approved the withdrawal of such Obligated Group Member;

(b) an Officer’s Certificate to the effect that immediately following the withdrawal of such Obligated Group Member, the Transaction Test would be satisfied; and

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(c) an Opinion of Counsel to the effect that (i) the withdrawal of such Obligated Group Member would not adversely affect the validity of any Master Indenture Obligation then Outstanding and (ii) the withdrawal of such Obligated Group Member will not cause the Master Indenture or any Master Indenture Obligations then Outstanding to be subject to registration under federal or state securities laws or the Trust Indenture Act of 1939, as amended (or, that any such registration, if required, has occurred).

Notwithstanding the foregoing, neither the Corporation nor any other Obligated Group Member that owns the acute care hospital located in the City of San Buenaventura known as “Community Memorial Hospital” may withdraw from the Obligated Group if any Obligations are then Outstanding

Covenants of Corporate Existence, Maintenance of Properties, Etc. Each Obligated Group Member agrees:

(a) Except as otherwise expressly provided in the Master Indenture, to preserve its corporate or other legal existence and all its material rights and licenses to the extent necessary or desirable in the operation of its business and affairs and to be qualified to do business in each jurisdiction where its ownership of Property or the conduct of its business requires such qualification; provided, however, that nothing in the Master Indenture shall be construed to obligate it to retain or preserve any of its material rights or licenses no longer used or useful in the conduct of its business or affairs.

(b) At all times to cause its material Property, Plant and Equipment to be maintained, preserved and kept in good repair, working order and condition, reasonable wear and tear, condemnation and casualty excepted, and all needed and proper repairs, renewals and replacements thereof to be made; provided, however, that nothing contained in this subsection shall be construed to (i) prevent it from ceasing to operate any immaterial portion of its Property, Plant and Equipment, (ii) prevent it from ceasing to operate any material portion of its Property, Plant and Equipment if in its judgment it is advisable not to operate the same, and within a reasonable time endeavors to effect disposition of such material portion of its Property, Plant and Equipment, or (iii) obligate it to retain, preserve, repair, renew or replace any Property, Plant and Equipment no longer used or useful in the conduct of its business or which has been condemned or substantially damaged by casualty, whether or not insured.

(c) To procure and maintain all necessary licenses and permits necessary, in the judgment of its Governing Body, to the operation of its health care Property and the status of its health care Property (other than that not currently having such status or not having such status on the date a Person becomes a Obligated Group Member) as providers of health care services eligible for payment under those third party payment programs which its Governing Body determines are appropriate; provided, however, that it need not comply with this subsection if and to the extent that its Governing Body shall have determined in good faith, evidenced by a resolution of the Governing Body, that such compliance is not in its best interests and that lack of such compliance would not materially impair its ability to pay its Indebtedness when due.

(d) Not take any action, including any action which would result in the alteration or loss of its status as a Tax Exempt Organization (if it is a Tax Exempt Organization), which, or fail to take any action which failure, in the Opinion of Bond Counsel, would adversely affect the exclusion of interest on any Related Bond from gross income for federal income tax purposes. The foregoing notwithstanding, any Obligated Group Member that is a Tax-Exempt Organization may take actions which could result in the alteration or loss of its status as a Tax Exempt Organization if (i) prior thereto there is delivered to the Master Trustee an Opinion of Bond Counsel to the effect that such action would not adversely affect the validity of any Related Bond, would not adversely affect the exclusion of interest on any Related Bond from gross income for federal income tax purposes and would not adversely affect the enforceability in accordance with its terms of the Master Indenture against any Obligated Group Member and (ii) prior thereto there is delivered to the Master Trustee either (A) an Opinion of Counsel for such Obligated Group Member to the effect that such actions would not subject any Related Bond or any Master Indenture Obligation then Outstanding to registration under the Securities Act of 1933, as amended, or any state securities law, or require the qualification of any Related Bond Indenture, loan document or the Master Indenture or

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any Supplement under the Trust Indenture Act of 1939, as amended, or any state securities law, or (B) an Opinion of Counsel that such Related Bond or Master Indenture Obligation has been so registered and such Related Bond Indenture, loan document or Master Indenture or Supplement has been so qualified.

Gross Receivables Pledge. To secure their obligation to make Required Payments and their other obligations, agreements and covenants to be performed and observed under the Master Indenture, each Obligated Group Member grants to the Master Trustee security interests in the Gross Receivables to the extent the same may be pledged and a security interest granted therein under the UCC. The Master Indenture shall be deemed a “security agreement” for purposes of the UCC.

The Master Trustee’s security interest in the Gross Receivables shall be perfected, to the extent that such security interest may be so perfected, by the filing of financing statements which comply with the requirements of the UCC. Each Member agrees to execute and cause to be filed, in accordance with the requirements of the UCC, financing statements; and, from time to time thereafter, shall execute and deliver such other documents (including, but not limited to, continuation statements as required by the UCC) as may be necessary or reasonably requested by the Master Trustee in order to perfect or maintain perfected such security interests or give public notice thereof.

Upon written request from the Obligated Group Representative, the Master Trustee agrees to take all procedural steps necessary to effect the subordination of its security interest in the Gross Receivables granted in the Master Indenture to security interests constituting Permitted Liens.

Each Obligated Group Member agrees to notify the Master Trustee of any change of name and change of address of its chief executive office to enable a new appropriate financing statement or an amendment to be filed in accordance with the requirements of the UCC, in order to maintain the perfected security interest granted in the Master Indenture.

Deed of Trust; Against Encumbrances. To further secure its obligation to make the Required Payments and its other obligations, agreements and covenants to be performed and observed under the Master Indenture, the Corporation shall grant to the Master Trustee, by way of the Deed of Trust, a lien on the Deed of Trust Property.

Each Obligated Group Member agrees that it will not create or suffer to be created or permit the existence of any Lien upon Property, other than Excluded Property, now owned or hereafter acquired by it other than Permitted Liens. Each Obligated Group Member, respectively, further agrees that if such a Lien (other than a Permitted Lien) is nonetheless created by someone other than an Obligated Group Member and is assumed by any Obligated Group Member, the Obligated Group Representative will make or cause to be made effective a provision whereby all Master Indenture Obligations will be secured prior to any such Indebtedness or other obligation secured by such Lien.

Upon written request of the Obligated Group Representative, the Master Trustee shall execute and deliver such releases, subordinations, requests for reconveyance, termination statements or other instruments as may be reasonably requested by the Obligated Group Representative in connection with (1) the disposition of Property in accordance with the provisions of the Master Indenture and the applicable provisions of any Related Supplement, (2) the withdrawal of a Member pursuant to the provisions of the Master Indenture and the applicable provisions of any Related Supplement, (3) the granting by a Obligated Group Member of any Lien which constitutes a Permitted Lien under the Master Indenture, as certified to the Master Trustee in writing by the Obligated Group Representative, and (4) any Lien on Excluded Property.

Debt Service Coverage. Each Obligated Group Member agrees to manage its business such that the combined or consolidated Income Available for Debt Service of the Obligated Group, calculated at the end of each Fiscal Year, commencing with the first full Fiscal Year following the execution of the Master Indenture, will not be less than 1.25 times Annual Debt Service.

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If for any Fiscal Year the Income Available for Debt Service is not sufficient to satisfy the requirements of the preceding paragraph, the Obligated Group Representative agrees to retain promptly an Independent Consultant to make recommendations to increase Income Available for Debt Service in the following Fiscal Year to the level required or, if in the opinion of the Independent Consultant the attainment of such level is impracticable, to the highest level attainable. The Obligated Group Representative shall provide notice of the proposed retention of an Independent Consultant within three business day of such retention through the Electronic Municipal Market Access System (EMMA) maintained by the Municipal Securities Rulemaking Board, which notice shall specify the identity of the Independent Consultant proposed to be retained by the Obligated Group Representative. If within ten calendar days of the posting of such notice on EMMA the beneficial holders of a majority in aggregate principal amount of Related Bonds then Outstanding notify the Master Trustee in writing that they object to the retention of such Independent Consultant, such Independent Consultant shall not be retained by the Obligated Group Representative and the Obligated Group Representative shall provide notice of the proposed retention of a different Independent Consultant in the same manner. The process shall continue until the Obligated Group Representative has proposed retention of an Independent Consultant that is not objected to by a majority in aggregate principal amount of Related Bonds then Outstanding.

The Obligated Group Representative agrees to transmit a copy of the report of the Independent Consultant to the Master Trustee within twenty (20) days of the receipt of such recommendations. Each Obligated Group Member shall, promptly upon its receipt of such recommendations, subject to applicable requirements or restrictions imposed by law and to a good faith determination by the Governing Body of the Obligated Group Representative that such recommendations are in the best interest of the Obligated Group, take such action as shall be in substantial conformity with such recommendations.

If the Obligated Group retains and substantially complies with the recommendations of the Independent Consultant, the Obligated Group will be deemed to have complied with the covenants for such Fiscal Year, notwithstanding that the ratio of Income Available for Debt Service to the Annual Debt Service shall be less than 1.25:1.0; provided, however, than an Event of Default shall exist if the ratio of Income Available for Debt Service to Annual Debt Service shall be less than 1.0:1.0 for any Fiscal Year commencing with the Fiscal Year ending December 31, 2018. Notwithstanding the foregoing, the Obligated Group Members shall not be excused from taking any action or performing any duty required under the Master Indenture and no other Event of Default shall be waived by the operation of the provisions of this paragraph.

If a report of an Independent Consultant is delivered to the Master Trustee and the Related Bond Issuers, that states that Government Restrictions or Industry Restrictions have been imposed which make it impossible for the Income Available for Debt Service to satisfy the requirement described above, then the required amount of Income Available for Debt Service shall be reduced to the maximum coverage permitted by such Government Restrictions or Industry Restrictions.

Notwithstanding the foregoing, an Obligated Group Member may permit the rendering of services or the use of its Property without charge or at reduced charges, at the discretion of the Governing Body of such Obligated Group Member, to the extent necessary for maintaining its tax-exempt status or the tax-exempt status of its Property, Plant and Equipment or its eligibility for grants, loans, subsidies or payments from governmental entities, or in compliance with any recommendation for free services that may be made by an Independent Consultant.

Merger, Consolidation, Sale or Conveyance. Each Obligated Group Member agrees that it will not merge or consolidate with any other Person that is not an Obligated Group Member or sell or convey all or substantially all of its assets to any Person that is not an Obligated Group Member (a “Merger Transaction”) unless:

(a) After giving effect to the Merger Transaction,

(i) the successor or surviving entity (hereinafter, the “Surviving Entity”) is an Obligated Group Member, or

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(ii) the Surviving Entity shall

(A) be a corporation or other entity organized and existing under the laws of the United States of America or any state thereof; and

(B) become an Obligated Group Member pursuant to the Master Indenture and, pursuant to the Related Supplement, shall expressly assume in writing the due and punctual payment of all Required Payments of the disappearing Obligated Group Member under the Master Indenture; and

(b) The Master Trustee receives an Officer’s Certificate to the effect that the Transaction Test is satisfied in connection with the Merger Transaction;

(c) So long as any Related Bonds that are tax-exempt obligations are Outstanding, the Master Trustee receives an Opinion of Bond Counsel to the effect that, under the existing law, the consummation of the Merger Transaction, in and of itself, would not result in the inclusion of interest on such Related Bonds in gross income for purposes of federal income taxation;

(d) The Master Trustee receives an Opinion of Counsel to the effect that (i) all conditions described under this caption relating to the Merger Transaction have been complied with and the Master Trustee is authorized to join in the execution of any instrument required to be executed and delivered; (ii) the Surviving Entity meets the conditions set forth under this caption and all Master Indenture Obligations then Outstanding; (iii) the Merger Transaction will not adversely affect the validity of any Master Indenture Obligations then Outstanding and such Master Indenture Obligations then Outstanding are enforceable against the Surviving Entity in accordance with their respective terms; and (iv) the Merger Transaction will not cause the Master Indenture or any Master Indenture Obligations then Outstanding to be subject to registration under federal or state securities laws or the Trust Indenture Act of 1939, as amended (or, that any such registration, if required, has occurred); and

(e) The Surviving Entity shall be substituted for its predecessor in interest in all Master Indenture Obligations and agreements then in effect which affect or relate to any Master Indenture Obligation, and the Surviving Entity shall execute and deliver to the Master Trustee appropriate documents in order to effect the substitution.

From and after the effective date of such substitution, the Surviving Entity shall be treated as an Obligated Group Member and shall thereafter have the right to participate in transactions under the Master Indenture relating to Master Indenture Obligations to the same extent as the other Obligated Group Members. All Master Indenture Obligations issued under the Master Indenture on behalf of a Surviving Entity shall have the same legal rank and benefit under the Master Indenture as Master Indenture Obligations issued on behalf of any other Obligated Group Member.

Limitation on Disposition of Assets. Each Obligated Group Member agrees that it will not sell, lease or otherwise dispose of any part of its Property in any Fiscal Year (other than (A) in the ordinary course of business or in compliance with the requirements imposed on any asset upon its acquisition (such as in the case of a split interest trust asset), or (B) as part of a disposition of all or substantially all of its assets) with a net Book Value in excess of 5% of the Value of the Property of the Obligated Group, unless prior to said disposition:

(i) there shall have been delivered to the Master Trustee an Officer’s Certificate to the effect that such Property is inadequate, obsolete, unsuitable, undesirable or unnecessary for the operation and functioning of the primary business of the Obligated Group Members; or

(ii) there shall have been delivered to the Master Trustee an Officer’s Certificate to the effect that the disposition is for Fair Market Value and such disposition will not impair the structural soundness or operational utility of the remaining Property and does not materially adversely affect the operations of the Obligated Group; or

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(iii) there shall have been delivered to the Master Trustee an Officer’s Certificate to the effect that such Property is being transferred to a Person who is not an Obligated Group Member if such Person shall become a Member pursuant to the provisions of the Master Indenture coincidental to such transfer; or

(iv) there shall have been delivered to the Master Trustee an Officer’s Certificate to the effect that such Property is being transferred to a Governmental Issuer solely to accommodate a sale or lease transaction as described in the definition of “Related Bonds;” or

(v) there shall have been delivered to the Master Trustee an Officer’s Certificate to the effect that the Transaction Test would be, taking into consideration the effect of such disposition, satisfied.

As used herein with respect to any leasehold interest included in the Deed of Trust Property, the terms “disposition” and "dispose of" include, in addition to their customary meanings, the amendment, modification or termination of the lease in question.

Notwithstanding the foregoing, nothing shall prohibit any disposition of assets among Obligated Group Members nor shall prohibit the Obligated Group Members from: (1) making loans, including, without limitation, employee relocation loans, physician recruitment loans or other credit/funding extensions, provided that such loans or other credit/funding extensions are in writing and the Master Trustee receives an Officer’s Certificate to the effect that (x) such loans are in furtherance of the exempt purposes of the Obligated Group Members or (y) the Obligated Group Members reasonably expect such loans to be repaid and such loans bear interest at a reasonable rate of interest and on commercially reasonable terms; or (2) transferring gifts restricted to a purpose inconsistent with their use for the payment of debt service on Master Indenture Obligations or operating expenses to an Affiliate which has the purpose to receive and disburse such restricted gifts.

In addition to the foregoing limitations, the Members may not sell, lease or otherwise dispose of any Deed of Trust Property unless the Master Trustee shall be furnished with an Officer’s Certificate to the effect that (i) the security of the Deed of Trust and the ability of the trustee thereunder to foreclose upon the remaining Deed of Trust Property will not be materially impaired as a result of the disposition of such Property, and (ii) the appropriate Member shall have conveyed to the trustee under the Deed of Trust such rights-of- way, easements and other rights in land as are required for ingress to and egress from the remaining Deed of Trust Property, for the utilization of the facilities located thereon and for utilities required to serve such facilities.

(d) Notwithstanding the foregoing, no Obligated Group Members shall sell, lease or otherwise dispose of substantially all the assets comprising the acute care hospital located in the City of San Buenaventura and known as “Community Memorial Hospital” if any Obligations are then Outstanding.

Limitation on Indebtedness. Each Obligated Group Member covenants that it will not incur any Indebtedness except that the Obligated Group Members may incur the following Indebtedness:

(a) Long-Term Indebtedness, if prior to the date of incurrence of the Long-Term Indebtedness there is delivered to the Master Trustee:

(i) an Officer’s Certificate to the effect that the Debt Service Coverage Ratio for the most recent Fiscal Year for which Obligated Group Financial Statements are available with respect to all Long-Term Indebtedness then Outstanding at the time of such certification and the additional Long-Term Indebtedness to be incurred, but excluding any Long-Term Indebtedness to be refunded with the proceeds of said additional Long-Term Indebtedness to be incurred, was not less than 1.2:1.0; or

(ii) (A) an Officer’s Certificate to the effect that the Debt Service Coverage Ratio for the most recent Fiscal Year (excluding the additional Long-Term Indebtedness to be incurred) was not less than 1.2:1.0 and (B) the report of an Independent Consultant (or, in lieu thereof, an Officer’s Certificate if the Debt Service Coverage Ratio is project to be not less than 1.5:1.0 for each such Fiscal Year) to the effect that the Debt

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Service Coverage Ratio for each of the two Fiscal Years beginning with the Fiscal Year commencing after the estimated completion of the facilities to be financed by the Indebtedness to be incurred with respect to all Long-Term Indebtedness projected to be outstanding (including the additional Long-Term Indebtedness to be incurred but excluding any Long-Term Indebtedness to be refunded with the proceeds of said additional Long-Term Indebtedness to be incurred), is projected to be not less than 1.35:1.0. Notwithstanding the foregoing, if the Master Trustee receives a report of an Independent Consultant to the effect that Government Restrictions or Industry Restrictions prevent the Obligated Group Members from generating the required levels of Income Available for Debt Service sufficient to result in Debt Service Coverage Ratios at least equal to those required by this subsection, the ratio requirements described in this subsection (a)(ii) shall be reduced to the highest ratios that, in the opinion of the Independent Consultant, are obtainable under such Government Restrictions or Industry Restrictions, but in no event less than a ratio of 1.0:1.0.

(b) Completion Indebtedness without limitation provided that an Officer’s Certificate is delivered to the Master Trustee stating that the Obligated Group Representative reasonably expected the aggregate principal amount of Long-Term or Interim Indebtedness originally issued to finance the construction or equipping of the project for which such Completion Indebtedness is being incurred, together with other funds reasonably anticipated to be available for such purposes, to be fully sufficient to provide a completed and fully equipped facility of the type and scope contemplated at the time said Long-Term Indebtedness or Interim Indebtedness was originally incurred, and in accordance with the general plans and specifications for such facility as originally prepared and approved in connection with the related financing, modified or amended only in conformance with the provisions of the documents pursuant to which the related financing was undertaken.

(c) Short-term Indebtedness provided that the provisions described in subsection (a) above are satisfied calculated as if such Short-term Indebtedness was Long-Term Indebtedness or an Officer’s Certificate is delivered to the Master Trustee stating that:

(i) the total amount of such Short-term Indebtedness, together with the aggregate principal amount of Indebtedness incurred pursuant to subsection (g), shall not exceed 20% of Total Revenues; and

(ii) In every Fiscal Year, there shall be at least a consecutive twenty (20) day period when the balances of such Short-term Indebtedness (excluding Short-Term Indebtedness consisting of commercial paper which is intended to be refinanced with additional commercial paper) is reduced to an amount which shall not exceed five percent (5%) of Total Revenues.

(d) Nonrecourse Indebtedness without limitation, provided that an Officer’s Certificate is delivered to the Master Trustee stating that the proceeds of Nonrecourse Indebtedness in the aggregate shall not be used to acquire or construct inpatient acute care hospital facilities.

(e) Long-Term Indebtedness, if such Long-Term Indebtedness is issued or incurred to refund Long-Term Indebtedness and the Master Trustee receive an Officer’s Certificate to the effect that the issuance of such Long-Term Indebtedness would not increase Maximum Annual Debt Service by more than ten percent (10%).

(f) Subordinated Indebtedness, without limitation.

(g) Any other Indebtedness, provided that an Officer’s Certificate is delivered to the Master Trustee stating that the aggregate principal amount of such Indebtedness, together with the aggregate principal amount of Indebtedness incurred pursuant to the provisions of subsection (c), does not, as of the date of incurrence, exceed 20% of Total Revenues.

(h) Reimbursement or other repayment obligations under reimbursement agreements or similar agreements relating to credit facilities and/or liquidity facilities which provide credit support and/or liquidity for Indebtedness or Financial Products Agreements.

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Filing of Financial Statements, Certificate of No Default and Other Information.

(a) Each Member agrees that it will keep adequate records and books of accounts in which complete and correct entries shall be made (said books shall be subject to the inspection of the Master Trustee during regular business hours after reasonable notice and under reasonable circumstances); provided the Master Trustee shall have no duty to so inspect.

(b) The Obligated Group Representative agrees that it will furnish to the Master Trustee and any Related Bond Issuer that shall request the same in writing:

(i) As soon as practicable, but in no event more than 150 days after the last day of each Fiscal Year beginning with the Fiscal Year ending December 31, 2011, one or more financial statements which, in the aggregate, shall include the Material Obligated Group Members. Such financial statements:

(A) may consist of (1) consolidated or combined financial results including one or more Obligated Group Members and one or more other Persons required to be consolidated or combined with such Obligated Group Member(s) under GAAP or (2) special purpose financial statements including only Obligated Group Members;

(B) shall be audited by an Accountant as having been prepared in accordance with GAAP (except, in the case of special purpose financial statements, for required consolidations);

(C) shall include a consolidated or combined balance sheet, statement of operations and changes in net assets; and

(D) if more than one financial statement is delivered to the Master Trustee pursuant to this subsection (b)(i), or if a single financial statement is delivered that includes Persons other than Obligated Group Members and Immaterial Affiliates, each such financial statement shall contain, as “other financial information,” a combining or consolidating schedule from which financial information solely relating to the Obligated Group Members and Immaterial Affiliates may be derived.

(ii) (A) If a single financial statement containing information solely related to the Obligated Group Members (which may, but need not, include any Immaterial Affiliates) is delivered pursuant to clause (b)(i) above, such financial statement shall constitute the “Obligated Group Financial Statements.”

(B) If a single financial statement containing information related solely to the Obligated Group Members and, at the option of the Obligated Group Representative, any Immaterial Affiliates is not delivered pursuant to clause (b)(i) above, the Obligated Group Representative shall prepare an unaudited balance sheet and statement of operations for such Fiscal Year. The unaudited financial statements shall be prepared as soon as practicable, but in no event more than 150 days after the last day of each Fiscal Year beginning with the Fiscal Year ending December 31, 2011, and shall be based on the accompanying unaudited combining or consolidating schedules delivered with the audited financial statements described in clause (b)(i)(D) above. The unaudited financial statements prepared in accordance with this clause (ii)(B) shall be the “Obligated Group Financial Statements.”

(C) The Obligated Group Financial Statements:

(1) shall include all Material Obligated Group Members;

(2) at the option of the Obligated Group Representative, may, but need not, include one or more Immaterial Affiliates as provided in subsection (c) below;

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(3) at the option of the Obligated Group Representative, may exclude one or more Obligated Group Members that are not Material Obligated Group Members; and

(4) shall exclude all combined or consolidated entities that are neither Obligated Group Members nor Immaterial Affiliates.

(iii) At the time of the delivery of the Obligated Group Financial Statements, a certificate of the chief financial officer of the Obligated Group Representative, stating that no event which constitutes an Event of Default has occurred and is continuing as of the end of such Fiscal Year, or specifying the nature of such event and the actions taken and proposed to be taken by the Members to cure such Event of Default.

(c) Notwithstanding the foregoing, the results of operation and financial position of Immaterial Affiliates need not be excluded from financial statements delivered to the Master Trustee, and such results of operation and financial position may be considered as if they were a portion of the results of operation and financial position of the Obligated Group Members for all purposes of the Master Indenture notwithstanding the inclusion of the results of operation and financial position of such Immaterial Affiliates. The Master Trustee shall have no duty to review, verify or analyze such financial statements and shall hold such financial statements solely as a repository for the benefit of the Holders. The Master Trustee shall not be deemed to have notice of any information contained in such financial statements or event of default which may be disclosed therein in any manner.

Insurance.

Required Insurance Coverage. Each Obligated Group Member covenants that it will, except as provided in the next paragraph, maintain, or cause to be maintained, insurance covering such risks and in such amount as, in its reasonable judgment, is adequate to protect it and its Property and operations, including (to the extent that such Obligated Group Member is a health care institution) professional liability or medical malpractice insurance. The Obligated Group Representative shall retain an Insurance Consultant once every two years, commencing with Fiscal Year ending December 31, 2011 who shall prepare and file with the Master Trustee (as soon as practicable but in no event later than five months after the end of such Fiscal Year) a report on the adequacy of such insurance. Each Obligated Group Member agrees that it will follow any recommendations of the Insurance Consultant to the extent feasible in the opinion of the Obligated Group Representative.

Self-Insurance. In lieu of maintaining the insurance policies required by the paragraph above, each Obligated Group Member may self-insure any of the required coverage (or a portion thereof) other than coverage with respect to Property, Plant and Equipment provided the Master Trustee receives (as soon as practicable but in no event later than five months after the end of each Fiscal Year in which an Insurance Consultant is required to be retained under subsection (a) above) a report of an Insurance Consultant to the effect that such self-insurance is consistent with proper management and insurance practices. With respect to Property, Plant and Equipment coverage, each Obligated Group Member may maintain deductibles with respect to the coverage required in an amount not greater than the greater of (i) $5,000,000 or (ii) five percent (5%) of the value of the Property, Plant and Equipment insured.

Recovery of Insurance Proceeds. In the event of damage to or destruction of all or any part of the Property of the Obligated Group with a Value in excess of five percent (5%) of the Value of all Property of the Obligated Group, the Obligated Group Member shall exercise its commercially reasonable good faith efforts to recover any applicable insurance and cause such proceeds to be paid to the Obligated Group Representative. From such proceeds, the Obligated Group Representative shall provide for the payment or reimbursement of reasonable expenses of obtaining the recovery. The Obligated Group Representative shall then give written notice to the Master Trustee of such expenses and of the amount of the remaining proceeds (herein called the “Net Proceeds”).

Use of Net Proceeds. Subject to the provisions of any Related Bond Document pertaining to a Permitted Lien or mandating the application of Net Proceeds to the redemption of the Related Bonds, the affected

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Obligated Group Member shall apply the Net Proceeds for any lawful corporate purpose as such Obligated Group Member determines, if the Obligated Group Representative shall first have delivered to the Master Trustee an Officer’s Certificate stating that the projected Debt Service Coverage Ratio for each of the next two full succeeding Fiscal Years immediately following the date of such Officer Certificate, taking into account such damage or destruction and the proposed use of the Net Proceeds is at least 1.20. If the Obligated Group Representative is unable to deliver the foregoing Officer’s Certificate, the affected Obligated Group Member shall apply the Net Proceeds, or so much thereof as may be needed, to the repair, replacement, restoration or reconstruction of the affected Property or, at the option of the applicable Obligated Group Member, to any other capital project of equivalent value and utility, to the acquisition of any property or to the repayment in whole or in part of any Outstanding Master Indenture Obligations in such order of maturity or maturities or proportions as the Obligated Group Representative shall determine.

Balance of Net Proceeds. Any Net Proceeds remaining after compliance by the affected Obligated Group Member and the Obligated Group Representative with subsection (d) above shall be transferred by the Obligated Group Representative to the Master Trustee and applied to the redemption or defeasance of the Outstanding Obligations in such order of maturity or maturities or proportions as the Obligated Group Representative shall determine and direct in writing to the Master Trustee.

Eminent Domain. In the event of a taking by eminent domain of all or any part of the Property of the Obligated Group with a Value in excess of five percent (5%) of the Value of all Property of the Obligated Group, the affected Obligated Group Member or the Obligated Group Representative shall exercise its commercially reasonable good faith efforts to recover any applicable proceeds and cause such proceeds to be paid to the Obligated Group Representative. The Obligated Group Representative shall make appropriate deductions from such proceeds as in the case of insurance proceeds and shall give written notice to the Master Trustee of such deductions and of the amount of the remaining proceeds (also, “Net Proceeds”). The Net Proceeds shall be applied in the same manner as insurance proceeds are applied pursuant to subsections (d) and (e) of this Section.

Days Cash on Hand. Each Obligated Group Member agrees to manage its business such that Days Cash on Hand, calculated at the end of each Fiscal Year, commencing with the first full Fiscal Year following the execution of this Master Indenture, will not be less than 75 Days Cash on Hand for such Fiscal Year (the “Consultant Level”).

If at the end of any Fiscal Year Days Cash on Hand is less than the Consultant Level for such Fiscal Year, the Obligated Group Representative covenants to retain promptly an Independent Consultant to make recommendations to increase Days Cash on Hand in the following Fiscal Year to the Consultant Level for such Fiscal Year or, if in the opinion of the Independent Consultant the attainment of such level is impracticable, to the highest level attainable. The Obligated Group Representative shall provide notice of the proposed retention of an Independent Consultant within three business day of such retention through the Electronic Municipal Market Access System (EMMA) maintained by the Municipal Securities Rulemaking Board, which notice shall specify the identity of the Independent Consultant proposed to be retained by the Obligated Group Representative. If within ten calendar days of the posting of such notice on EMMA the beneficial holders of a majority in aggregate principal amount of Related Bonds then Outstanding notify the Master Trustee in writing that they object to the retention of such Independent Consultant, such Independent Consultant shall not be retained by the Obligated Group Representative and the Obligated Group Representative shall provide notice of the proposed retention of a different Independent Consultant in the same manner. The process shall continue until the Obligated Group Representative has proposed retention of an Independent Consultant that is not objected to by a majority in aggregate principal amount of Related Bonds then Outstanding.

The Obligated Group Representative agrees to transmit a copy of the report of the Independent Consultant to the Master Trustee within twenty (20) days of the receipt of such recommendations. Each Obligated Group Member shall, promptly upon its receipt of such recommendations, subject to applicable requirements or restrictions imposed by law and to a good faith determination by the Governing Body of the Obligated Group

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Representative that such recommendations are in the best interest of the Obligated Group, take such action as shall be in substantial conformity with such recommendations.

If the Obligated Group retains and substantially complies with the recommendations of the Independent Consultant, the Obligated Group will be deemed to have complied with the covenants set forth in this provision for such Fiscal Year, notwithstanding that Days Cash on Hand is less than the Consultant Level for such Fiscal Year. Notwithstanding the foregoing, (1) the Obligated Group Members shall not be excused from taking any action or performing any duty required under this Master Indenture and no other Event of Default shall be waived by the operation of the provisions of this subsection (d) and (2) in no event shall Days Cash on Hand in any Fiscal Year be less than 50 Days Cash on Hand (the “Minimum Level”).

If a report of an Independent Consultant is delivered to the Master Trustee and the Related Bond Issuers that states that Government Restrictions or Industry Restrictions have been imposed which make it impossible for Days Cash on Hand to be equal to or greater than the Consultant Level in any Fiscal Year, then the Consultant Level for such Fiscal Year shall be reduced to the maximum amount permitted by such Government Restrictions or Industry Restrictions; provided that in no event shall the Consultant Level for any Fiscal Year be less than the Minimum Level for such Fiscal Year.

Events of Default and Remedies

Events of Default. Event of Default under the Master Indenture include:

(a) Failure on the part of the Obligated Group Members to make due and punctual payment of the principal of, redemption premium, if any, interest on or any other Required Payment on any Master Indenture Obligation after applicable grace, notice and/or cure periods, if any.

(b) Failure on the part of the Obligated Group Members to have Days Cash on Hand as of the end of any Fiscal Year in an amount at least equal to the Minimum Level for such Fiscal Year.

(c) Failure on the part of the Obligated Group Members to attain a ratio of Income Available for Debt Service to Annual Debt Service of at least 1.0:1.0 for any Fiscal Year commencing with the Fiscal Year ending December 31, 2018.

(d) Any Obligated Group Member shall fail to observe or perform any other covenant or agreement under the Master Indenture (including covenants or agreements contained in any Related Supplement or Master Indenture Obligation) and shall not have cured such failure within sixty (60) days after the date on which written notice of such failure, requiring the failure to be remedied, shall have been given to the Obligated Group Representative by the Master Trustee or to the Obligated Group Representative and the Master Trustee by the Holders of 25% in aggregate principal amount of Outstanding Master Indenture Obligations (provided that if such failure can be remedied but not within such sixty (60) day period, such failure shall not become an Event of Default for so long as the Obligated Group Representative shall diligently proceed to remedy the failure).

(e) Any Obligated Group Member shall default in the payment of Indebtedness (other than (1) Subordinated Indebtedness, (2) Nonrecourse Indebtedness, and (3) Indebtedness secured by a Master Indenture Obligation, which shall be governed by subsection (a) described above) in an aggregate outstanding principal amount greater than 5% of the aggregate principal amount of Total Revenues of the Obligated Group, and any grace, notice and/or cure period for such payment shall have expired; provided, however, that such default shall not constitute an Event of Default if, within sixty (60) days or within the time allowed for service of a responsive pleading if any proceeding to enforce payment of the Indebtedness is commenced, (1) any Obligated Group Member in good faith commences proceedings to contest the existence or payment of such Indebtedness, and (2) sufficient moneys are deposited in escrow with a bank or trust company or a bond acceptable to the Master Trustee is posted for the payment of such Indebtedness.

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(f) A court having jurisdiction shall enter a decree or order for relief in respect of any Obligated Group Member in an involuntary case under any applicable federal or state bankruptcy, insolvency or other similar law, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of any Obligated Group Member or for any substantial part of the Property of any Obligated Group Member, or ordering the winding up or liquidation of its affairs, and such decree or order shall remain unstayed and in effect for a period of sixty (60) consecutive days.

(g) Any Obligated Group Member shall commence a voluntary case under any applicable federal or state bankruptcy, insolvency or other similar law, or shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or similar official) of any Obligated Group Member or for any substantial part of its Property, or shall make any general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due or shall take any corporate action in furtherance of the foregoing.

(h) An event of default shall exist under any Related Bond Indenture after applicable notice, grace and/or cure periods, if any.

The Obligated Group Representative agrees that, as soon as practicable, and in any event within ten (10) days after such event, the Obligated Group Representative shall notify the Master Trustee of any event which is an Event of Default under the Master Indenture which has occurred and is continuing, which notice shall state the nature of such event and the action which the Obligated Group Members propose to take with respect thereto.

Acceleration; Annulment of Acceleration. Upon the occurrence and during the continuation of an Event of Default, the Master Trustee may, and upon the written request of the Holders of not less than a majority in aggregate principal amount of Outstanding Master Indenture Obligations shall, by notice to the Obligated Group Representative, declare all Outstanding Master Indenture Obligations immediately due and payable. Upon such declaration of acceleration, all Outstanding Master Indenture Obligations shall be immediately due and payable. If the terms of any Related Supplement give a Person the right to consent to acceleration of the Master Indenture Obligations issued pursuant to such Related Supplement, the Master Indenture Obligations issued pursuant to such Related Supplement may not be accelerated by the Master Trustee unless such consent is properly obtained pursuant to the terms of such Related Supplement. In the event of acceleration, an amount equal to the aggregate principal amount of all Outstanding Master Indenture Obligations, plus all interest accrued thereon and, to the extent permitted by applicable law, which accrues on such principal and interest to the date of payment, and all other amounts due under the Master Indenture, shall be due and payable on the Master Indenture Obligations.

At any time after the Master Indenture Obligations have been declared to be due and payable, and before the entry of a final judgment or decree in any proceeding instituted with respect to the Event of Default that resulted in the declaration of acceleration, the Master Trustee may annul such declaration and its consequences if:

(i) the Obligated Group Members have paid (or caused to be paid or deposited with the Master Trustee moneys sufficient to pay) all payments then due on all Outstanding Master Indenture Obligations (other than payments then due only because of such declaration); and

(ii) the Obligated Group Members have paid (or caused to be paid or deposited with the Master Trustee moneys sufficient to pay) all fees and expenses of the Master Trustee then due; and

(iii) the Obligated Group Members have paid (or caused to be paid or deposited with the Master Trustee moneys sufficient to pay) all other amounts then payable by the Obligated Group under the Master Indenture; and

(iv) every Event of Default (other than a default in the payment of the principal or other payments of such Master Indenture Obligations then due only because of such declaration) has been remedied.

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No such annulment shall extend to or affect any subsequent Event of Default or impair any right with respect to any subsequent Event of Default.

Additional Remedies and Enforcement of Remedies. Upon the occurrence and continuance of any Event of Default, the Master Trustee may, and upon the written request of the Holders of not less than a majority in aggregate principal amount of the Outstanding Master Indenture Obligations (and upon indemnification of the Master Trustee to its satisfaction by the Obligated Group for any such request), shall, proceed to protect and enforce its rights and the rights of the Holders under the Master Indenture by such proceedings as the Master Trustee may deem expedient, including but not limited to:

(i) Enforcement of the right of the Holders to collect amounts due or becoming due under the Master Indenture Obligations;

(ii) Exercise any and all remedies under the Deed of Trust;

(iii) Civil action upon all or any part of the Master Indenture Obligations;

(iv) Civil action to require any Person holding moneys, documents or other property pledged to secure payment of amounts due or to become due on the Master Indenture Obligations to account as if it were the trustee of an express trust for the Holders of Master Indenture Obligations;

(v) Civil action to enjoin any acts which may be unlawful or in violation of the rights of the Holders of Master Indenture Obligations;

(vi) Civil action to obtain a writ of mandate against any Obligated Group Member or Controlling Member, or against any officer or member of the Governing Body of any Obligated Group Member or Controlling Member, to compel performance of any act specifically required by the Master Indenture or any Master Indenture Obligation; and

(vii) Enforcement of any other right or remedy of the Holders conferred by law or by the Master Indenture.

Regardless of the occurrence of an Event of Default, if requested in writing by the Holders of not less than a majority in aggregate principal amount of the Outstanding Master Indenture Obligations (and upon indemnification of the Master Trustee to its satisfaction for such request), the Master Trustee shall institute and maintain such proceedings as it may be advised shall be necessary or expedient (1) to prevent any impairment of the security under the Master Indenture by any acts which may be unlawful or in violation of the Master Indenture, or (2) to preserve or protect the interests of the Holders. However, the Master Trustee shall not comply with any such request or institute and maintain any such proceeding that is in conflict with any applicable law or the provisions of the Master Indenture or (in the sole judgment of the Master Trustee) is unduly prejudicial to the interests of the Holders not making such request. Nothing in the Master Indenture shall be deemed to authorize the Master Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment, or composition affecting the Master Indenture Obligations or the rights of any Holder thereof, or to authorize the Master Trustee to vote in respect of the claim of any Holder in any such proceeding without the approval of the Holders so affected.

Application of Moneys After Default. During the continuance of an Event of Default, all moneys received by the Master Trustee pursuant to any right given or action taken under the Master Indenture (after payment of the costs of the proceedings resulting in the collection of such moneys and payment of all fees, expenses and other amounts owed to the Master Trustee) shall be applied as follows:

(a) Unless all Outstanding Master Indenture Obligations have become or have been declared due and payable (or if any such declaration is annulled in accordance with the terms of the Master Indenture):

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First: To the payment of all Required Payments then due on the Master Indenture Obligations (including Financial Product Payments to the extent made pursuant to a Financial Product Agreement secured or evidenced by a Master Indenture Obligation and Parity Financial Product Extraordinary Payments), in the order of their due dates, and, if the amount available is not sufficient to pay in full all Required Payments due on the same date, then to the payment thereof ratably, according to the amount Required Payments due on such date, without any discrimination or preference;

Second: To the payment of all Financial Product Extraordinary Payments made pursuant to a Financial Product Agreement secured or evidenced by a Master Indenture Obligation (other than Parity Financial Product Extraordinary Payments), in the order of their due dates, and, if the amount available is not sufficient to pay in full all Financial Product Extraordinary Payments due on the same date, then to the payment thereof ratably, according to the amounts of Financial Product Extraordinary Payments due on such date, without any discrimination or preference.

(b) If all Outstanding Master Indenture Obligations have become or have been declared due and payable (and such declaration has not been annulled under the terms of the Master Indenture):

First: To the payment of all Required Payments then due on the Master Indenture Obligations (including (i) Financial Product Payments to the extent made pursuant to a Financial Product Agreement secured or evidenced by a Master Indenture Obligation and (ii) Parity Financial Product Extraordinary Payments), and, if the amount available is not sufficient to pay in full the whole amount then due and unpaid, then to the payment thereof ratably, without preference or priority, according to the amounts due respectively, without any discrimination or preference; and

Second: To the payment of all Financial Product Extraordinary Payments made pursuant to a Financial Product Agreement secured or evidenced by a Master Indenture Obligation (other than Parity Financial Product Extraordinary Payments), and, if the amount available is not sufficient to pay in full all such Financial Product Extraordinary Payments, then to the payment thereof ratably, without any discrimination or preference.

Such moneys shall be applied at such times as the Master Trustee shall determine, having due regard for the amount of moneys available and the likelihood of additional moneys becoming available in the future. Upon any date fixed by the Master Trustee for the application of such moneys to the payment of principal, interest on the amounts of principal to be paid on such date shall cease to accrue. The Master Trustee shall give such notices as it may deem appropriate of the deposit with it of such moneys or of the fixing of such dates. The Master Trustee shall not be required to make payment to the Holder of any unpaid Master Indenture Obligation until such Master Indenture Obligation (and all unmatured interest coupons, if any) is presented to the Master Trustee for appropriate endorsement of any partial payment or for cancellation if fully paid.

Whenever all Master Indenture Obligations have been paid under the terms of this provision and all fees and expenses of the Master Trustee have been paid, any balance remaining shall be paid to the Person entitled to receive such balance. If no other Person is entitled thereto, then the balance shall be paid to the Members of the Obligated Group or such Person as a court of competent jurisdiction may direct.

Remedies Vested in the Master Trustee. All rights of action (including the right to file proof of claims) under the Master Indenture or under any of the Master Indenture Obligations may be enforced by the Master Trustee without the possession of any of the Master Indenture Obligations or the production thereof in any proceeding relating thereto. Any proceeding instituted by the Master Trustee may be brought in its name as the Master Trustee without the necessity of joining any Holders as plaintiffs or defendants. Any recovery or judgment shall be for the equal benefit of the Holders of the Outstanding Master Indenture Obligations.

Master Trustee to Represent Holders. The Master Trustee is irrevocably appointed as trustee and attorney in fact for the Holders for the purpose of exercising on their behalf the rights and remedies available to

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the Holders under the provisions of the Master Indenture, the Master Indenture Obligations, any Related Supplement and applicable provisions of law, in each case subject to the Holders’ control of proceedings described in the following paragraph. The Holders, by taking and holding the Master Indenture Obligations, shall be conclusively deemed to have so appointed the Master Trustee.

Holders’ Control of Proceedings. If an Event of Default has occurred and is continuing, notwithstanding anything in the Master Indenture to the contrary, the Holders of at least a majority in aggregate principal amount of Outstanding Master Indenture Obligations shall have the right (upon the indemnification of the Master Trustee to its satisfaction) to direct the method and/or place of conducting any proceeding to be taken in connection with the enforcement of the terms of the Master Indenture. Such direction must be in writing, signed by such Holders and delivered to the Master Trustee. However, the Master Trustee shall not follow any such direction that is in conflict with any applicable law or the provisions of the Master Indenture or (in the sole judgment of the Master Trustee) is unduly prejudicial to the interests of the Holders not joining in such direction. Nothing in this provision shall impair the right of the Master Trustee to take any other action authorized by the Master Indenture which it may deem proper and which is not inconsistent with such direction by Holders.

Waiver of Event of Default. No delay or omission of the Master Trustee or of any Holder to exercise any right with respect to any Event of Default shall impair such right or shall be construed to be a waiver of or acquiescence to such Event of Default. Every right and remedy given to the Master Trustee and the Holders may be exercised from time to time and as often as may be deemed expedient by them. The Master Trustee may waive any Event of Default which in its opinion has been remedied before the entry of a final judgment or decree in any proceeding instituted by it under the provisions of the Master Indenture, or before the completion of the enforcement of any other remedy under the Master Indenture. Upon the written request of the Holders of at least a majority in aggregate principal amount of Outstanding Master Indenture Obligations, the Master Trustee shall waive any Event of Default and its consequences; provided, however, that, except under the circumstances described in the second paragraph under the heading “Acceleration; Annulment of Acceleration” above, the failure to pay the principal of, premium, if any, or interest on any Master Indenture Obligation when due may not be waived without the written consent of the Holders of all Outstanding Master Indenture Obligations.

Appointment of Receiver. Upon the occurrence and continuance of any Event of Default, the Master Trustee shall be entitled (a) without declaring the Master Indenture Obligations to be due and payable, (b) after declaring the Master Indenture Obligations to be due and payable, or (c) upon the commencement of any proceeding to enforce any right of the Master Trustee or the Holders, to the appointment of a receiver or receivers of any or all of the Property of the Obligated Group Members (without the necessity of notice to any Obligated Group Member or any other Person), with such powers as the court making such appointment shall confer. Each Obligated Group Member consents, subject to the imposition on the receiver of all applicable Industry Restrictions and Governmental Restrictions, and will if requested by the Master Trustee, consent at the time of application by the Master Trustee for appointment of a receiver, to the appointment of such receiver and agrees that such receiver may be given the right, to the extent the right may lawfully be given, to take possession of, operate and deal with such Property and the revenues, profits and proceeds therefrom, with the same effect as the Obligated Group Member could, and to borrow money and issue evidences of indebtedness as such receiver.

Supplements and Amendments

Supplements Not Requiring Consent of Holders. The Obligated Group Representative (acting for itself and as agent for each Obligated Group Member) and the Master Trustee may, without the consent of or notice to any of the Holders, enter into one or more Related Supplements for any of the following purposes:

(i) To correct any ambiguity or formal defect or omission in the Master Indenture;

(ii) To correct or supplement any provision which may be inconsistent with any other provision, or to make any other provision with respect to matters or questions arising under the Master Indenture and which does not materially and adversely affect the interests of the Holders;

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(iii) To grant or confer ratably upon all of the Holders any additional rights, remedies, powers or authority, or to add to the covenants of and restrictions on the Obligated Group Members;

(iv) To qualify the Master Indenture under the Trust Indenture Act of 1939, as amended, or corresponding provisions of federal law from time to time in effect;

(v) To create and provide for the issuance of a Master Indenture Obligation or Series of Master Indenture Obligations as permitted under the Master Indenture;

(vi) To obligate a successor to any Obligated Group Member; or

(vii) To add a new Obligated Group Member; or

(viii) To make any other change which does not materially and adversely affect the interests of the Holders.

Supplements Requiring Consent of Holders. Other than Related Supplements referred to in the preceding section, the Holders of not less than a majority in aggregate principal amount of the Outstanding Master Indenture Obligations shall have the right to consent to and approve the execution by the Obligated Group Representative (acting for itself and as agent for each Obligated Group Member) and the Master Trustee of such Related Supplements as shall be deemed necessary or desirable for the purpose of modifying, altering, amending, adding to or rescinding any of the terms contained in the Master Indenture; provided, however, that nothing shall permit or be construed as permitting a Related Supplement which would:

(i) Extend the stated maturity of or time for paying interest on any Master Indenture Obligation or reduce the principal amount of or the redemption premium or rate of interest or method of calculating interest payable on or reduce any other Required Payment on any Master Indenture Obligation without the consent of the Holder of such Master Indenture Obligation;

(ii) Modify, alter, amend, add to or rescind any of the terms or provisions of the Master Indenture so as to affect the right of the Holders of any Master Indenture Obligations in default to compel the Master Trustee to declare the principal of all Master Indenture Obligations to be due and payable, without the consent of the Holders of all Outstanding Master Indenture Obligations; or

(iii) Reduce the aggregate principal amount of Outstanding Master Indenture Obligations the consent of the Holders of which is required to authorize such Related Supplement without the consent of the Holders of all Master Indenture Obligations then Outstanding.

Satisfaction and Discharge of Master Indenture

Satisfaction and Discharge of Master Indenture. The Master Indenture shall cease to be of further effect (except for certain compensation and reimbursement provisions, which shall survive) if:

(a) all Master Indenture Obligations previously authenticated (other than any Master Indenture Obligations which have been mutilated, destroyed, lost or stolen and which have been replaced or paid as provided in any Related Supplement) and not cancelled are delivered to the Master Trustee for cancellation; or

(b) all Master Indenture Obligations not previously cancelled or delivered to the Master Trustee for cancellation are paid; or

(c) an Irrevocable Deposit is made in trust with the Master Trustee (or with one or more banks, national banking associations or trust companies acceptable to the Master Trustee pursuant to one or more agreements between an Obligated Group Member and such national banking associations or trust companies in form

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acceptable to the Master Trustee) in cash or Government Obligations or both, sufficient to pay at maturity or upon redemption all Master Indenture Obligations not previously cancelled or delivered to the Master Trustee for cancellation, including principal and interest or other payments (including Financial Product Payments and Financial Product Extraordinary Payments) due or to become due to such date of maturity, redemption date or payment date, as the case may be;

and all other sums payable under the Master Indenture by the Obligated Group Members are also paid. The Master Trustee, on demand of the Obligated Group Representative and at the cost and expense of the Obligated Group Members, shall execute proper instruments acknowledging satisfaction of and discharging the Master Indenture and authorizing the Obligated Group Representative to file such terminations and releases as may be necessary to evidence the termination of the Master Trustee’s security interest in the Gross Revenues. Unless the deposit(s) pursuant to clause (c) above is made solely with cash, the Obligated Group Representative shall cause a report to be prepared by a firm nationally recognized for providing verification services regarding the sufficiency of funds for such discharge and satisfaction provided pursuant to clause (c) above, upon which report the Master Trustee may rely.

SUPPLEMENTAL MASTER INDENTURE FOR OBLIGATION NO. 1

General The following are summaries of certain provisions of Supplement No. 1. These summaries do not purport to be complete or definitive and are qualified in their entireties by reference to the full terms of Supplemental No. 1. Payments on Obligation No. 1; Credits Principal of and interest and any applicable redemption premium on Obligation No. 1 are payable in any coin or currency of the United States of America that on the payment date is legal tender for the payment of public and private debts. Except as provided in Supplement No. 1 and described in the following paragraph with respect to credits, and the section regarding redemption, payments on the principal of and premium, if any, and interest on Obligation No. 1 shall be made at the times and in the amounts specified in Obligation No. 1 by the Corporation (i) depositing or causing to be deposited the same with or to the account of the Bond Trustee at or prior to the opening of business on the day such payments shall become due or payable (or the next succeeding business day if such date is a Saturday, Sunday or bank holiday in the city in which the principal corporate trust office of the Bond Trustee is located) and (ii) giving notice to the Master Trustee and the Bond Trustee of each payment of principal, interest or premium on Obligation No. 1, that specifies the amount paid, identifies such payment as a payment on Obligation No. 1 and identifies the Obligated Group Members on whose behalf such payment is made. Subject to receipt by the Master Trustee from the Holder of Obligation No. 1 of notice to the contrary, the Master Trustee may conclusively assume that such payment has been made when due. The Corporation shall receive credit for payment on Obligation No. 1, in addition to any credits resulting from payment or prepayment from other sources, as follows: (i) On installments of interest on Obligation No. 1 in an amount equal to moneys deposited in the Interest Account created under the Bond Indenture to the extent such amounts have not previously been credited against payments on Obligation No. 1; (ii) On installments of principal of Obligation No. 1 in an amount equal to moneys deposited in the Principal Account created under the Bond Indenture, to the extent such amounts have not previously been credited on Obligation No. 1;

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(iii) On installments of principal and interest, respectively, on Obligation No. 1 in an amount equal to the principal amount of Bonds for the payment or redemption of which sufficient amounts in cash or Investment Securities are on deposit as provided in the section of the Bond Indenture regarding deposit of money or securities to the extent such amounts have not been previously credited against payments on Obligation No. 1, and the interest on such Bonds from and after the date fixed for payment at maturity or redemption thereof. Such credits shall be made against the installments of principal of and interest on Obligation No. 1 which would have been used, but for such call for redemption, to pay principal of and interest represented by such Bonds when due at maturity; and (iv) On installments of principal and interest, respectively, on Obligation No. 1 in an amount equal to the principal amount of Bonds acquired by the Corporation and surrendered to the Bond Trustee for cancellation or purchased by the Bond Trustee and cancelled, and the interest on such Bonds from and after the date interest thereon has been paid prior to cancellation. Such credits shall be made against the installments of principal of and interest on Obligation No. 1 which would have been used, but for such cancellation, to pay principal of and interest on such Bonds when due. Redemption of Obligation No. 1 So long as all amounts which have become due under Obligation No. 1 have been paid or credits for such payments have occurred, the Members shall have the right, at any time and from time to time, to pay in advance all or part of the amounts to become due under Obligation No. 1; provided that in no event shall Obligation No. 1 be redeemed unless a corresponding amount of Bonds are also redeemed. Redemptions may be made by payments of cash or credits for such payments may occur by surrender of Bonds. All such prepayments (and the additional payment of any amount necessary to pay the applicable premium, if any, payable upon the redemption of Bonds) shall be deposited upon receipt in the Revenue Fund and, at the request of and as determined by the Corporation, credited against payments due under Obligation No. 1 or used for the redemption or purchase of Outstanding Bonds in the manner and subject to the terms and conditions set forth in the Bond Indenture. Notwithstanding any such prepayment or surrender of Bonds, as long as any Bonds remain Outstanding (as defined in the Bond Indenture) or any additional payments required to be made under the Bond Indenture remain unpaid, the Corporation shall not be relieved of obligations under the Bond Indenture. Registration, Number, Negotiability and Transfer of Obligation No. 1

Except as provided in Supplement No. 1 and as described in the following paragraph, Obligation No. 1 shall consist of a single Obligation without coupons registered as to principal and interest in the name of the Bond Trustee and no transfer of Obligation No. 1 shall be registered under the Master Indenture except for transfers to a successor Bond Trustee.

Upon the principal of all Obligations then Outstanding being declared immediately due and payable upon and during the continuance of an Event of Default, Obligation No. 1 may be transferred, if and to the extent the Bond Trustee requests that the restrictions of Supplement No. 1 described in the preceding paragraph on transfers be terminated.

BOND INDENTURE

General The Bond Indenture sets forth the terms of the Bonds, the application of the Bond proceeds, the nature and extent of the security for the Bonds, various rights of the Bondholders, rights, duties and immunities of the Bond Trustee and the rights and obligations of the City. Certain provisions of the Bond Indenture are summarized below. Other provisions are summarized in this Official Statement under the captions “THE BONDS” and “SECURITY AND SOURCE OF PAYMENT FOR THE BONDS – General” and “-- Accounts and Allocation of Revenues under Bond Indenture.” These summaries do not purport to be complete or definitive and are qualified in their entireties by reference to the full terms of the Bond Indenture.

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Definitions

The following is a summary of certain terms used in this Summary of Principal Documents. All capitalized terms not defined herein or elsewhere in this Official Statement have the meanings set forth in the Bond Indenture.

Additional Payments means the payments so designated and required to be made by the Corporation pursuant to the Loan Agreement.

Administrative Fees and Expenses means any application, commitment, financing or similar fee charged, or reimbursement for administrative or other expenses incurred, by the City or the Bond Trustee.

Authorized Representative means (1) with respect to the Corporation, its chairman, vice chairman, chief executive officer, chief financial officer or any other person designated as an Authorized Representative of the Corporation by a Certificate of the Corporation signed by its chairman, vice-chairman, chief executive officer or chief financial officer and filed with the Bond Trustee, and (2) with respect to the City, any member of the City Council, the City Manager and any other person as may be designated and authorized to sign for the City pursuant to a resolution adopted thereby.

Bonds means City of San Buenaventura Revenue Bonds (Community Memorial Health System), Series 2011, authorized by, and at any time Outstanding pursuant to, the Bond Indenture.

Bond Reserve Account means the account by that name in the Revenue Fund established pursuant to the Bond Indenture.

Bond Reserve Account Requirement means, as of any date of calculation, an amount equal to the Maximum Annual Bond Service on all Bonds then Outstanding.

Bond Trustee means The Bank of New York Mellon Trust Company, N.A., a national banking association organized and existing under the laws of the United States of America, or its successor as Bond Trustee under the Bond Indenture.

Bond Year means the period of twelve consecutive months ending on December 1 in any year in which Bonds are Outstanding, except that the first Bond Year shall commence on date of delivery of the Bonds and end on December 1, 2011.

Capitalized Interest Account means the account by that name in the Interest Account established pursuant to the Bond Indenture.

Certificate, Statement, Request, Requisition and Order of the City or any Member mean, respectively, a written certificate, statement, request, requisition or order signed in the name of the City by its Mayor, City Manager, Assistant City Manager, City Clerk or such other person as may be designated and authorized to sign for the City, or in the name of any Member by an Authorized Representative thereof. Any such instrument and supporting opinions or representations, if any, may, but need not, be combined in a single instrument with any other instrument, opinion or representation, and the two or more so combined shall be read and construed as a single instrument. If and to the extent required by the Bond Indenture, each such instrument shall include the statements provided for in the Bond Indenture.

City means the City of San Buenaventura, a charter city and municipal corporation validly organized and existing under the Constitution and laws of the State of California.

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Code means the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder, as interpreted by rulings and judicial decisions, as the same may be applicable to the Bonds.

Continuing Disclosure Agreement means that certain Continuing Disclosure Agreement between the Corporation and the Bond Trustee dated the date of issuance and delivery of the Bonds, as originally executed and as it may be amended from time to time in accordance with the terms thereof.

Corporation means Community Memorial Health System, Inc., a nonprofit public benefit corporation duly organized and existing under the laws of the State of California, or any corporation which is the surviving, resulting or transferee corporation in any merger, consolidation or transfer of assets permitted under the Master Indenture.

Event of Default means any of the events specified in the Bond Indenture.

Holder or Bondholder, whenever used herein with respect to a Bond, means the Person in whose name such Bond is registered.

Interest Account means the account by that name in the Revenue Fund established pursuant to the Bond Indenture.

Investment Securities means any of the following that at the time are legal investments under the laws of the State of California for moneys held under the Bond Indenture and then proposed to be invested therein (provided that the Bond Trustee shall be entitled to rely upon any investment directions from the Corporation as conclusive certification to the Bond Trustee that the investments described therein are so authorized under the laws of the State of California):

(1) United States Government Obligations;

(2) Obligations of any of the following federal agencies which obligations represent the full faith and credit of the United States of America (including stripped securities if the agency has stripped them itself)

(a) U.S. Export-Import Bank;

(b) Farmers Home Administration;

(c) Federal Financing Bank;

(d) Federal Housing Administration;

(e) General Services Administration;

(f) Government National Mortgage Association (“GNMA”) (including guaranteed mortgage-backed bonds and guaranteed pass-through obligations);

(g) Rural Economic Community Development Administration

(h) Small Business Administration

(i) U.S. Maritime Administration (guaranteed Title XI financing); and

(j) U.S. Department of Housing and Urban Development (including project notes, local authority bonds, new communities debentures, U.S. government guaranteed debentures, U.S. Public Housing Notes and Bonds and U.S. government guaranteed public housing notes and bonds;

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(3) Debentures, bonds, notes or other evidence of indebtedness issued or guaranteed by any of the following U.S. government agencies which obligations are not fully guaranteed by the full faith and credit of the United States of America (including stripped securities if the agency has stripped them itself):

(a) Federal Home Loan Bank System (senior debt obligations);

(b) Resolution Funding Corporation (REFCORP) obligations;

(c) Federal Home Loan Mortgage Corporation (FHLMC or “Freddie Mac”) senior debt obligations or participation certificates;

(d) Federal National Mortgage Association (FNMA or “Fannie Mae”) mortgage-backed securities and senior debt obligations;

(4) Investments in money market funds registered under the Federal Investment Company Act of 1940, whose shares are registered under the Federal Securities Act of 1933, and having a rating at the time of purchase by S&P of AAAm-G, AAAm or better (including funds for which the Bond Trustee, its parent holding company, if any, or any affiliates or subsidiaries of the Bond Trustee provide investment advisory or other management services);

(5) Pre-refunded municipal obligations defined as follows: any bonds or other obligations of any state of the United States of America or of any agency, instrumentality or local governmental unit of any such state which are not callable at the option of the obligor prior to maturity or as to which irrevocable instructions have been given by the obligor to call on the date specified in the notice; and

(a) which are rated at the time of purchase, based on an irrevocable escrow account or fund (the “Escrow”), in the highest rating category of Moody’s or S&P or any successors thereto; or

(b) (i) which are fully secured as to principal, interest and redemption premium, if any, by an Escrow consisting only of cash or obligations described in paragraph (A) above, which Escrow may be applied only to the payment of such principal of and interest and redemption premium, if any, on such bonds or other obligations on the maturity date or dates thereof or the specified redemption date or dates pursuant to such irrevocable instructions, as appropriate, and (ii) which Escrow is sufficient, as verified by a nationally recognized independent certified public accountant, to pay principal of and interest and redemption premium, if any on the bonds or other obligations described in this paragraph on the maturity date or dates specified in the irrevocable instructions referred to above, as appropriate;

(6) Investment agreements, including GICs, forward purchase agreements and reserve fund put agreements;

(7) Commercial paper which is rated at the time of purchase in the single highest classification, “P-1” by Moody’s and “A-1+” by S&P and maturing not more than 270 calendar days after the date of purchase;

(8) Municipal obligations rated at the time of purchase “Aaa/AAA” or general obligations of states with a rating at the time of purchase of “A2/A” by both Moody’s and S&P; and

(9) U.S. dollar denominated deposit accounts, federal funds or bankers acceptances with domestic commercial banks which may include the Bond Trustee and its affiliates which have a rating on their short term certificates of deposit on the date of purchase of “P-1” by Moody’s and “A-1” or “A-1+” by S&P (for purposes of rating, ratings on holding companies are not considered as the rating of the bank) and maturing not more than 360 calendar days after the date of purchase.

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Law means the City of San Buenaventura Economic Development Bond Law, constituting Chapter 4.730 of Division 4 of the City’s Code of Ordinances, as now in effect and as it may from time to time hereafter be amended or supplemented.

Loan Agreement means that certain loan agreement by and between the City and the Corporation, dated as of August 1, 2011, as originally executed and as it may from time to time be supplemented, modified or amended in accordance with the terms thereof and of the Bond Indenture.

Loan Default Event means any of the events specified in the Loan Agreement.

Loan Repayments means the payments so designated and required to be made by the Corporation pursuant to the Loan Agreement.

Mandatory Sinking Account Payment means the amount required by the Bond Indenture to be paid on any single date for the retirement of Bonds of such maturity.

Master Indenture means that certain master indenture of trust, dated as of August 1, 2011, between the Corporation and the Master Trustee, as it may from time to time be supplemented, modified or amended in accordance with the terms thereof.

Master Trustee means The Bank of New York Mellon Trust Company, N.A., a national banking association duly organized and existing under the laws of the United States of America, or its successor, as successor master trustee under the Master Indenture.

Maximum Annual Bond Service means, as of any date of calculation, the sum of (1) the interest falling due on then Outstanding Bonds (assuming that all then Outstanding Serial Bonds are retired on their respective maturity dates and that all then Outstanding Term Bonds are retired at the times and in the amounts provided for by Mandatory Sinking Account Payments), (2) the principal amount of then Outstanding Serial Bonds falling due by their terms, and (3) the aggregate amount of all Mandatory Sinking Account Payments on the Bonds required to be paid, all as computed for the Bond Year in which such sum shall be largest.

Member means each Person that is then obligated as a Member under and as defined in the Master Indenture.

Moody’s means Moody’s Investors Service, Inc., a corporation organized and existing under the laws of the State of Delaware, its successors and their assigns, or, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, any other nationally recognized securities rating agency designated by the Corporation by notice in writing to the City and the Bond Trustee.

Net Proceeds means so much of the gross proceeds as remain after payment of all expense, costs and taxes (including attorney’s fees) incurred in obtaining such gross proceeds.

Obligated Group has the meaning given that term in the Master Indenture.

Obligation No. 1 means the obligation issued under the Master Indenture and Supplement No. 1.

Opinion of Counsel means a written opinion of counsel (who may be counsel for the City) selected by the Corporation and reasonably acceptable to the Bond Trustee. If and to the extent required by the provisions of the Bond Indenture, each Opinion of Counsel shall include the statements provided for in the Bond Indenture.

Outstanding, when used as of any particular time with reference to Bonds, means (subject to the provisions of the Bond Indenture) all Bonds theretofore, or thereupon being, authenticated and delivered by the

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Bond Trustee under the Bond Indenture except (1) Bonds theretofore canceled by the Bond Trustee or surrendered to the Bond Trustee for cancellation; (2) Bonds with respect to which all liability of the City shall have been discharged in accordance with the Bond Indenture, including Bonds (or portions of Bonds) referred to in the Bond Indenture; and (3) Bonds for the transfer or exchange of or in lieu of or in substitution for which other Bonds shall have been authenticated and delivered by the Bond Trustee pursuant to the Bond Indenture.

Person means an individual, corporation, firm, association, partnership, trust, or other legal entity or group of entities, including a governmental entity or any agency or political subdivision thereof.

Principal Account means the account by that name in the Revenue Fund established pursuant to the Bond Indenture.

Principal Corporate Trust Office means the principal corporate trust office of the Bond Trustee, or such other place as designated by the Bond Trustee, except that with respect to presentation of Bonds for payment or for registration of transfer and exchange, such term shall mean the office or agency of the Bond Trustee at which, at any particular time, its corporate trust agency business shall be conducted.

Project Fund means the fund by that name established pursuant to the Bond Indenture.

Redemption Fund means the fund by that name established pursuant to the Bond Indenture.

Revenue Fund means the fund by that name established pursuant to the Bond Indenture.

Revenues means all amounts received by the City or the Bond Trustee for the account of the City pursuant or with respect to the Loan Agreement or Obligation No. 1, including, without limiting the generality of the foregoing, Loan Repayments (including both timely and delinquent payments and any late charges, and whether paid from any source), prepayments, Net Proceeds of insurance, Net Proceeds of condemnation, and all interest, profits or other income derived from the investment of amounts in any fund or account established pursuant to the Bond Indenture, but not including any Administrative Fees and Expenses.

Serial Bonds means the Bonds, falling due by their terms in specified years, for which no Mandatory Sinking Account Payments are provided.

S&P means Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc., a corporation organized and existing under the laws of the State of New York, its successors and their assigns, or, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, any other nationally recognized securities rating agency designated by the Corporation by notice in writing to the City and the Bond Trustee.

Supplement No. 1 means that certain supplemental master indenture, dated as of August 1, 2011, between the Corporation and the Master Trustee.

Tax Agreement means the Tax Certificate and Agreement delivered by the City and the Corporation at the time of issuance and delivery of the Bonds, as the same may be amended or supplemented in accordance with its terms.

Term Bonds means the Bonds payable at or before their specified maturity date or dates from Mandatory Sinking Account Payments established for that purpose and calculated to retire such Bonds on or before their specified maturity date or dates.

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Pledge and Assignment; Revenue Fund

Subject only to the provisions of the Bond Indenture permitting the application thereof for the purposes and on the terms and conditions set forth in the Bond Indenture, there are pledged to secure the payment of the principal of and interest on the Bonds in accordance with their terms and the provisions of the Bond Indenture, all of the Revenues and any other amounts held in any fund or account established pursuant to the Bond Indenture. Said pledge shall constitute a lien on and security interest in such assets and shall attach, be perfected and be valid and binding from and after delivery by the Bond Trustee of the Bonds, without any physical delivery thereof or further act.

The City transfers in trust, grants a security interest in and assigns to the Bond Trustee, for the benefit of the Holders from time to time of the Bonds, all of the Revenues and other assets pledged and all of the right, title and interest of the City in the Loan Agreement (except for the right to receive any Administrative Fees and Expenses to the extent payable to the City) and Obligation No. 1. The Bond Trustee shall be entitled to and shall collect and receive all of the Revenues, and any Revenues collected or received by the City shall be deemed to be held, and to have been collected or received, by the City as the agent of the Bond Trustee and shall forthwith be paid by the City to the Bond Trustee. The Bond Trustee also shall be entitled to and shall take all steps, actions and proceedings reasonably necessary in its judgment to enforce all of the rights of the City and all of the obligations of the Corporation under the Loan Agreement and the Members under Obligation No. 1 which have been assigned to the Bond Trustee.

Allocation of Revenues

The Bond Trustee shall transfer from the Revenue Fund and deposit into the following respective accounts (each of which the Bond Trustee shall establish and maintain within the Revenue Fund) the following amounts, in the following order of priority, on the following dates, the requirements of each such account (including the making up of any deficiencies in any such account resulting from lack of Revenues sufficient to make any earlier required deposit) at the time of deposit to be satisfied before any transfer is made to any account subsequent in priority:

First: on June 1 and December 1 in each year, to the Interest Account, the aggregate amount of interest becoming due and payable on such date on all Bonds then Outstanding until, after taking account the amount to be transferred to the Interest Account from the Capitalized Interest Account for the purpose of paying interest on such date pursuant to the Bond Indenture, the balance in the Interest Account is equal to said aggregate amount of interest;

Second: on December 1 in each year, to the Principal Account, the aggregate amount of principal becoming due and payable on such date on the Outstanding Bonds plus to the Sinking Account the aggregate amount of Mandatory Sinking Account Payments required to be paid into the Sinking Account on such date for Outstanding Bonds, until the balance in said account is equal to said aggregate amount of such principal and Mandatory Sinking Account Payments; and

Third: on the first day of each month, to the Bond Reserve Account, (i) one-twelfth of the aggregate amount of each prior withdrawal from the Bond Reserve Account for the purpose of making up a deficiency in the Interest Account or Principal Account (until deposits on account of such withdrawal are sufficient to fully restore the amount withdrawn), provided that no deposit need be made into the Bond Reserve Account if the balance in said account is at least equal to the Bond Reserve Account Requirement, and (ii) in the event the balance in said account shall be less than the Bond Reserve Account Requirement due to valuation of the Investment Securities deposited therein in accordance with the Bond Indenture, one twenty-fourth of the amount necessary to increase the balance in said account to an amount at least equal to the Bond Reserve Account Requirement (until deposits on account of such valuation deficiency are sufficient to increase the balance in said account to said amount); and

Any moneys remaining in the Revenue Fund after the foregoing transfers shall be transferred to or upon the order of the Corporation.

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Application of Interest Account

All amounts in the Interest Account shall be used and withdrawn by the Bond Trustee solely for the purpose of paying interest on the Bonds as it shall become due and payable (including accrued interest on any Bonds purchased or redeemed prior to maturity pursuant to the Bond Indenture).

The Bond Trustee shall establish and maintain within the Interest Account a separate account designated as the “Capitalized Interest Account”. Bond proceeds deposited in the Capitalized Interest Account shall be transferred to the Interest Account for the purpose of paying interest on the Bonds on the dates identified in the Bond Indenture.

Application of Principal Account

All amounts in the Principal Account shall be used and withdrawn by the Bond Trustee solely for the purpose of paying the principal of the Bonds when due and payable, except that all amounts in a Sinking Account shall be used and withdrawn by the Bond Trustee solely to purchase or redeem or pay at maturity Term Bonds, as provided in the Bond Indenture.

The Bond Trustee shall establish and maintain within the Principal Account a separate subaccount for each maturity of Term Bonds designated as the “____ Sinking Account” (inserting in such blank the year of maturity for such Term Bonds). The Bond Trustee shall apply the amount deposited pursuant to the allocation of revenues section of the Bond Indenture for the purpose of making a Mandatory Sinking Account Payment (if such deposit is required on such date) from the Principal Account to the Sinking Account. With respect to each Sinking Account, on each Mandatory Sinking Account Payment date, the Bond Trustee shall apply the Mandatory Sinking Account Payment required on that date to the redemption (or payment at maturity, as the case may be) of Term Bonds of the applicable maturity, upon the notice and in the manner provided in the Bond Indenture; provided that, at any time prior to selection of Bonds for redemption, the Bond Trustee may apply moneys in the Sinking Account to the purchase of Bonds of such maturity at public or private sale, as and when and at such prices (including brokerage and other charges, but excluding accrued interest, which is payable from the Interest Account) as the Bond Trustee may be directed by the Corporation, except that the purchase price (excluding accrued interest) shall not exceed the par amount of such Bonds. If, during the twelve-month period immediately preceding said Mandatory Sinking Account Payment date, the Bond Trustee has purchased Bonds of the applicable maturity with moneys in the Sinking Account, or, during said period and prior to selection of Bonds, the Corporation has deposited Bonds of the applicable maturity with the Bond Trustee, or Bonds of the applicable maturity were at any time purchased or redeemed by the Bond Trustee from the Redemption Fund and allocable to said Mandatory Sinking Account Payment, such Bonds so purchased or deposited or redeemed shall be applied, to the extent of the full principal amount thereof, to reduce said Mandatory Sinking Account Payment. All Bonds purchased or deposited pursuant to this subsection shall be canceled and delivered by the Bond Trustee to or upon the Order of the City at the direction of the Corporation. All Bonds purchased from a Sinking Account or deposited by the Corporation with the Bond Trustee shall be allocated first to the next succeeding Mandatory Sinking Account Payment for such maturity of Bonds, then to the remaining Mandatory Sinking Account Payments for such maturity of Bonds as are specified by the Corporation.

Funding and Application of Bond Reserve Account

All amounts in the Bond Reserve Account shall be used and withdrawn by the Bond Trustee solely for the purpose of making up any deficiency in the Interest Account or Principal Account or (together with any other moneys available therefor) for the payment or redemption of all Bonds then Outstanding.

All Investment Securities in the Bond Reserve Account shall be valued at their fair market value by the Bond Trustee annually on December 1 commencing December 1, 2011 (or more frequently if requested in writing by the Corporation, but not more frequently than quarterly), and such valuation shall be reported immediately, in the event the amount on deposit therein is less than the Bond Reserve Account Requirement and, in all other cases, shall be reported in the regular monthly statement of the Bond Trustee sent to the Corporation. The Bond Trustee may engage an

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independent consultant, at the expense of the Corporation, to make this valuation. If the amount on deposit in the Bond Reserve Account on any day following such valuation is more than the Bond Reserve Account Requirement, the amount in excess of the Bond Reserve Account Requirement shall, at the Request of the Corporation, be withdrawn by the Bond Trustee from the Bond Reserve Account and transferred to the Redemption Fund or Revenue Fund, as specified in such request.

See “Allocation of Revenues” for a description of the funding of the Bond Reserve Account following withdrawals from the Bond Reserve Account or deficiencies resulting from the valuation of Investment Securities on deposit in the Bond Reserve Account.

Application of Redemption Fund

All amounts deposited in the Redemption Fund shall be used and withdrawn by the Bond Trustee solely for the purpose of redeeming Bonds, in the manner and upon the terms and conditions specified in the Bond Indenture; provided that, at any time prior to selection of Bonds for redemption, the Bond Trustee may apply such amounts to the purchase of Bonds at public or private sale, as and when and at such prices (including brokerage and other charges, but excluding accrued interest, which is payable from the Interest Account) as may be directed by the Corporation, except that the purchase price (exclusive of accrued interest) may not exceed the principal amount of such Bonds; and provided further that in lieu of redemption at such next succeeding date of redemption, or in combination therewith, amounts in such account may be transferred to the Revenue Fund and credited against Loan Repayments in order of their due date as set forth in a Request of the Corporation. All Bonds purchased or redeemed from the Redemption Fund shall be allocated to applicable Mandatory Sinking Account Payments as specified by the Corporation.

Investment of Moneys in Funds and Accounts

All moneys in any of the funds and accounts established pursuant to the Bond Indenture shall be invested by the Bond Trustee upon Request of the Corporation solely in Investment Securities; provided, however, that moneys on deposit in the Bond Reserve Account shall not be invested in Investment Securities described in clause (6) of the definition thereof. Investment Securities may be purchased at such prices as may be directed by the Corporation. All Investment Securities shall be acquired subject to the limitations set forth in the tax covenants section of the Bond Indenture, the section in the Bond Indenture on limitations as to maturities and the section regarding investment of moneys in funds and accounts, and such additional limitations or requirements consistent with the foregoing as may be established by Request of the Corporation. No Request of the Corporation shall impose any duty on the Bond Trustee inconsistent with its responsibilities under the Bond Indenture. In the absence of directions from the Corporation, the Bond Trustee shall invest in Investment Securities specified in clause (4) of the definition thereof, provided, however, that any such investment shall be made by the Bond Trustee only if, prior to the date on which such investment is to be made, the Bond Trustee shall have received a Request of the Corporation specifying a specific money market fund and, if no such Request of the Corporation is so received, the Bond Trustee shall hold such moneys uninvested.

Moneys in all funds and accounts (other than the Bond Reserve Account) shall be invested in Investment Securities maturing not later than the date on which it is estimated that such moneys will be required for the purposes specified in the Bond Indenture. Moneys in the Bond Reserve Account shall be invested in Investment Securities maturing prior to the final maturity of the Bonds but in no event longer than five (5) years from the date of investment therein; provided, however, moneys in the Bond Reserve Account may be invested in Investment Securities with a nominal maturity date which is greater than five (5) years as long as said Investment Securities by their terms allow the Bond Trustee to obtain (at any time the Bond Trustee is required to draw on the Bond Reserve Account under the Bond Indenture) the corpus thereof at no less than the purchase price thereof without any loss in value. Investment Securities purchased under a repurchase agreement may be deemed to mature on the date or dates on which the Bond Trustee may deliver such Investment Securities for repurchase under such agreement.

All interest, profits and other income received from the investment of moneys in any fund or account established pursuant to the Bond Indenture shall be deposited when received (1) first, prior to the delivery to the Bond Trustee of the Certificate of the Corporation specified in the section relating to the Project Fund in the Bond Indenture, in

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the Project Fund, and (2) second, to the Bond Reserve Account to the extent necessary to increase the balance therein to the Bond Reserve Account Requirement and (3) third, to the Revenue Fund. An amount of interest received with respect to any Investment Security equal to the amount of accrued interest, if any, paid as part of the purchase price of such Investment Security shall be credited to the fund or account for the credit of which such Investment Security was acquired.


Pursuant to the continuing disclosure section of the Loan Agreement, the Corporation has undertaken all responsibility for compliance with continuing disclosure requirements, and the City shall have no liability to the Holders of the Bonds or any other person with respect to S.E.C. Rule 15c2-12. The Bond Trustee hereby covenants and agrees that it will comply with and carry out all of the provisions of the Continuing Disclosure Agreement and the continuing disclosure section of the Loan Agreement. Failure of the Corporation or the Bond Trustee to comply with the Continuing Disclosure Agreement shall not be considered an Event of Default under the Bond Indenture; however, the Bond Trustee may (and, at the request of any Participating Underwriter (as defined in the Continuing Disclosure Agreement) or the Holders of at least 25% aggregate principal amount of Outstanding Bonds, shall) or any Bondholder or Beneficial Owner may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the Corporation to comply with its obligations under the continuing disclosure section of the Loan Agreement or to cause the Bond Trustee to comply with its Obligations under the continuing disclosure section of the Bond Indenture. For purposes of this section, “Beneficial Owner” means any Person which has or shares the power, directly or indirectly, to make investment decisions concerning ownership of any Bonds (including Persons holding Bonds through nominees, depositories or other intermediaries).

Amendment of Loan Agreement and Master Indenture

Except as provided in the next paragraph, the City shall not amend, modify or terminate any of the terms of the Loan Agreement, or consent to any such amendment, modification or termination, unless the written consent of the Holders of a majority in principal amount of the Bonds then Outstanding and the Corporation to such amendment, modification or termination is filed with the Bond Trustee, provided that no such amendment, modification or termination shall reduce the amount of Loan Repayments to be made to the City or the Bond Trustee by the Corporation pursuant to the Loan Agreement, or extend the time for making such payments, without the written consent of all of the Holders of the Bonds then Outstanding.

Notwithstanding the provisions of the preceding paragraph, the terms of the Loan Agreement may also be modified or amended from time to time and at any time by the City without the necessity of obtaining the consent of any Bondholders, only to the extent permitted by law and only for any one or more of the following purposes:

(i) to add to the covenants and agreements of the City or the Corporation contained in the Loan Agreement other covenants and agreements thereafter to be observed, to pledge or assign additional security for the Bonds (or any portion thereof), or to surrender any right or power therein reserved to or conferred upon the City or the Corporation, provided, that no such covenant, agreement, pledge, assignment or surrender shall materially adversely affect the interests of the Holders of the Bonds; (ii) to make such provisions for the purpose of curing any ambiguity, inconsistency or omission, or of curing or correcting any defective provision, contained in the Loan Agreement, or in regard to matters or questions arising under the Loan Agreement, as the City may deem necessary or desirable and not inconsistent with the Loan Agreement or the Bond Indenture, and which shall not materially adversely affect the interests of the Holders of the Bonds; and (iii) to maintain the exclusion from gross income of interest payable with respect to the Bonds.

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In executing or consenting to any amendment to the Loan Agreement, the City, and the Bond Trustee shall receive, and shall be fully protected in relying upon, an Opinion of Bond Counsel addressed to the City and the Bond Trustee stating that the execution of such amendment is authorized or permitted by the Loan Agreement and the Bond Indenture and the applicable law, will upon the execution and delivery thereof be valid and binding obligations of the parties thereto, and that the execution and delivery thereof will not adversely affect the exclusion from federal gross income of interest on the Bonds.

The Bond Trustee, as holder of Obligation No. 1, shall not consent to any amendment, modification or termination of any of the terms of the Master Indenture unless (1) in the opinion of the Bond Trustee (which may be based on an Opinion of Counsel upon which the Bond Trustee may rely) such amendment, modification or termination will not materially adversely affect the interests of the Series 2011 Bondholders, or (2) the Bond Trustee first obtains the written consent of the Holders of a majority in principal amount of the Bonds then Outstanding to such amendment, modification or termination, provided that no such amendment, modification or termination shall reduce the amount payable by the Corporation to the Bond Trustee pursuant to Obligation No. 1, or extend the time for making such payments, without the written consent of all of the Holders of the Bonds then Outstanding.

Events of Default

Events of Default under the Bond Indenture include: (A) default in the due and punctual payment of the principal or redemption or purchase price of any Bond when and as the same shall become due and payable, whether at maturity as therein expressed, by proceedings for redemption or purchase in lieu of redemption, by declaration or otherwise, or default in the redemption from any Sinking Account of any Term Bonds in the amounts and at the times provided therefor; (B) default in the due and punctual payment of any installment of interest on any Bond when and as such interest installment shall become due and payable; (C) default by the City in the observance of any of the covenants, agreements or conditions on its part in the Bond Indenture or in the Bonds contained, other than as specified in the events of default section of the Bond Indenture, if such default shall have continued for a period of sixty (60) days after written notice thereof, specifying such default and requiring the same to be remedied, shall have been given to the City and the Corporation by the Bond Trustee, or to the City, the Corporation and the Bond Trustee by the Holders of not less than twenty-five percent (25%) in aggregate principal amount of the Bonds at the time Outstanding; or (D) a Loan Default Event.

Acceleration of Maturities

Upon the occurrence and during the continuation of an Event of Default, the Bond Trustee may, and shall, at the direction of the Holders of not less than a majority in aggregate principal amount of the Bonds then Outstanding, by written notice to the City, declare the principal of the Bonds to be immediately due and payable, whereupon that portion of the principal of the Bonds thereby coming due and the interest thereon accrued to the date of payment shall, without further action, become and be immediately due and payable, anything in the Bond Indenture or in the Bonds to the contrary notwithstanding.

Any such declaration, however, is subject to the condition that if, at any time after such declaration and before any judgment or decree for the payment of the moneys due shall have been obtained or entered, the City or the Corporation shall deposit with the Bond Trustee a sum sufficient to pay all the principal (including Mandatory Sinking Account Payments) or redemption price of and installments of interest on the Bonds payment of which is overdue, with interest on such overdue principal at the rate borne by the respective Bonds, and the reasonable charges and expenses including attorneys’ fees of the Bond Trustee, and any and all other defaults known to the Bond Trustee (other than in the payment of principal of and interest on the Bonds due and payable solely by reason of such declaration) shall have been made good or cured to the satisfaction of the Bond Trustee or provision deemed by the Bond Trustee to be adequate shall have been made therefor, then, and in every such case, the Holders of not less than a majority in aggregate principal amount of the Bonds then Outstanding, by written notice to the City, the Corporation and the Bond Trustee, or the Bond Trustee if such declaration was made by the Bond Trustee, may, on behalf of the Holders of all of the Bonds, rescind and annul such declaration and its consequences and waive such default; but no such rescission and annulment shall extend to or shall affect any subsequent default, or shall impair or exhaust any right or power consequent thereon.

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Application of Revenues and Other Funds After Default

If an Event of Default shall occur and be continuing, all Revenues and any other funds then held or thereafter received by the Bond Trustee under any of the provisions of the Bond Indenture shall be applied by the Bond Trustee as follows and in the following order:

(1) To the payment of any expenses necessary in the opinion of the Bond Trustee to protect the interests of the Holders of the Bonds and payment of reasonable fees and expenses of the Bond Trustee (including reasonable fees and disbursements of its counsel) incurred in and about the performance of its powers and duties under the Bond Indenture; and

(2) To the payment of the principal of and interest then due on the Bonds (upon presentation of the Bonds to be paid, and stamping thereon of the payment if only partially paid, or surrender thereof if fully paid) subject to the provisions of the Bond Indenture, as follows:

(i) Unless the principal of all of the Bonds shall have become or have been declared due and payable,

First: To the payment to the Persons entitled thereto of all installments of interest then due in the order of the maturity of such installments, and, if the amount available shall not be sufficient to pay in full any installment or installments maturing on the same date, then to the payment thereof ratably, according to the amounts due thereon, to the persons entitled thereto, without any discrimination or preference; and

Second: To the payment to the Persons entitled thereto of the unpaid principal (including Mandatory Sinking Account Payments) of any Bonds which shall have become due, whether at maturity or by call for redemption, in the order of their due dates, with interest on the overdue principal at the rate borne by the respective Bonds, and, if the amount available shall not be sufficient to pay in full all the Bonds due on any date, together with such interest, then to the payment thereof ratably, according to the amounts of principal due on such date to the persons entitled thereto, without any discrimination or preference.

(ii) If the principal of all of the Bonds shall have become or have been declared due and payable, to the payment of the principal and interest then due and unpaid upon the Bonds, with interest on the overdue principal at the rate borne by the respective Bonds, and, if the amount available shall not be sufficient to pay in full the whole amount so due and unpaid, then to the payment thereof ratably, without preference or priority of principal over interest, or of interest over principal, or of any installment of interest over any other installment of interest, or of any Bond over any other Bond, according to the amounts due respectively for principal and interest, to the persons entitled thereto without any discrimination or preference.

Bondholders’ Direction of Proceedings

The Holders of a majority in aggregate principal amount of the Bonds then Outstanding shall have the right, by an instrument or concurrent instruments in writing executed and delivered to the Bond Trustee, and upon indemnifying the Bond Trustee to its satisfaction therefor, to direct the method of conducting all remedial proceedings taken by the Bond Trustee under the Bond Indenture, provided that such direction shall not be otherwise than in accordance with law and the provisions of the Bond Indenture, and that the Bond Trustee shall have the right to decline to follow any such direction which in the opinion of the Bond Trustee would be unjustly prejudicial to Bondholders not parties to such direction.

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Limitation on Bondholders’ Right to Sue

No Holder of any Bond shall have the right to institute any suit, action or proceeding at law or in equity, for the protection or enforcement of any right or remedy under the Bond Indenture, the Loan Agreement, Obligation No. 1, the Law or any other applicable law with respect to such Bond, unless (1) such Holder shall have given to the Bond Trustee written notice of the occurrence of an Event of Default; (2) the Holders of not less than twenty-five percent (25%) in aggregate principal amount of the Bonds then Outstanding shall have made written request upon the Bond Trustee to exercise the powers granted in the Bond Indenture or to institute such suit, action or proceeding in its own name; (3) such Holder or said Holders shall have tendered to the Bond Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (4) the Bond Trustee shall have refused or omitted to comply with such request for a period of sixty (60) days after such written request shall have been received by, and said tender of indemnity shall have been made to, the Bond Trustee; and (5) no direction inconsistent with such written request has been given to the Bond Trustee during such sixty (60) day period by the Holders of a majority in principal amount of the Bonds then Outstanding.

The Trustee

The Bond Trustee shall, prior to an Event of Default, and after the curing of all Events of Default which may have occurred, perform such duties and only such duties as are specifically set forth in the Bond Indenture. The Bond Trustee shall, during the existence of any Event of Default (which has not been cured), exercise such of the rights and powers vested in it by the Bond Indenture, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs.

The City may, and upon written request of the Corporation shall, remove the Bond Trustee at any time unless an Event of Default shall have occurred and then be continuing, (if the Bond Trustee is in breach of its duties under the Bond Indenture), by an instrument or concurrent instruments in writing signed by the Holders of not less than a majority in aggregate principal amount of the Bonds then Outstanding (or their attorneys duly authorized in writing) or if at any time the Bond Trustee shall cease to be eligible in accordance with subsection (e) of this Section, or shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver of the Bond Trustee or its property shall be appointed, or any public officer shall take control or charge of the Bond Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, in each case by giving written notice of such removal to the Bond Trustee, and thereupon shall appoint, with the consent of the Corporation, a successor Bond Trustee by an instrument in writing.

The Bond Trustee may at any time resign by giving written notice of such resignation to the City and the Corporation and by giving the Bondholders notice of such resignation by mail at the addresses shown on the registration books maintained by the Bond Trustee. Upon receiving such notice of resignation, the City shall promptly appoint, with the consent of the Corporation, a successor Bond Trustee by an instrument in writing.

Any removal or resignation of the Bond Trustee and appointment of a successor Bond Trustee shall become effective upon acceptance of appointment by the successor Bond Trustee. If no successor Bond Trustee shall have been appointed and have accepted appointment within forty five (45) days of giving notice of removal or notice of resignation as aforesaid, the resigning Bond Trustee at the expense of the Corporation or any Bondholder (on behalf of himself and all other Bondholders) may petition any court of competent jurisdiction for the appointment of a successor Bond Trustee, and such court may thereupon, after such notice (if any) as it may deem proper, appoint such successor Bond Trustee. Any successor Bond Trustee appointed under the Bond Indenture, shall signify its acceptance of such appointment by executing and delivering to the City, the Corporation and its predecessor Bond Trustee a written acceptance thereof, and thereupon such successor Bond Trustee, without any further act, deed or conveyance, shall become vested with all the moneys, estates, properties, rights, powers, trusts, duties and obligations of such predecessor Bond Trustee, with like effect as if originally named Bond Trustee in the Bond Indenture; but, nevertheless at the request of the successor Bond Trustee, such predecessor Bond Trustee shall execute and deliver any and all instruments of conveyance or further assurance and do such other things as may reasonably be required for more fully and certainly vesting in and confirming to such successor Bond Trustee all the right, title and interest of such predecessor Bond Trustee

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in and to any property held by it under the Bond Indenture and shall pay over, transfer, assign and deliver to the successor Bond Trustee any money or other property subject to the trusts and conditions in the Bond Indenture set forth. Upon request of the successor Bond Trustee, the City and the Corporation shall execute and deliver any and all instruments as may be reasonably required for more fully and certainly vesting in and confirming to such successor Bond Trustee all such moneys, estates, properties, rights, powers, trusts, duties and obligations. Upon acceptance of appointment by a successor Bond Trustee as provided in this subsection, the City shall mail a notice of the succession of such Bond Trustee to the trusts under the Bond Indenture to the Bondholders at the addresses shown on the registration books maintained by the Bond Trustee. If the City fails to mail such notice within fifteen (15) days after acceptance of appointment by the successor Bond Trustee, the successor Bond Trustee shall cause such notice to be mailed at the expense of the City.

The Bond Trustee and any successor Bond Trustee shall be a trust company, national banking association corporation or bank having trust powers in the State of California, having a combined capital and surplus of at least fifty million dollars ($50,000,000), and subject to supervision or examination by federal or state authority. If such bank, national banking association corporation or trust company publishes a report of condition at least annually, pursuant to law or to the requirements of any supervising or examining authority above referred to, then for the purpose of this subsection the combined capital and surplus of such bank, national banking association corporation or trust company shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. In case at any time the Bond Trustee shall cease to be eligible in accordance with the provisions of this subsection (e), the Bond Trustee shall resign immediately in the manner and with the effect specified in this Section.

The permissive right of the Bond Trustee to do things enumerated in the Bond Indenture and in the Loan Agreement shall not be construed as a duty.

The immunities, exemptions, and indemnifications from liability of the Bond Trustee under the Bond Indenture and the Loan Agreement shall extend to its directors, officers, employees and agents.

Anything in the Bond Indenture to the contrary notwithstanding, whenever it is provided that the Bond Trustee shall take any action, including the giving of any notice, or refrain from taking any action upon the happening or continuation of a specified event or upon the fulfillment of any condition or upon the request of the Bondholders, the Bond Trustee shall have no liability for failure to take such action or for failure to refrain from taking such action unless and until an officer at the Bond Trustee’s corporate trust office responsible for administration of its duties under the Bond Indenture has actual knowledge of such event or continuation thereof or the fulfillment of such condition or shall have received such request. The Bond Trustee shall be deemed to have actual knowledge of the contents of the Bond Indenture and the Loan Agreement.

The Bond Trustee shall not be responsible for the recording and filing of any document relating to the Bond Indenture or any financing statements (or continuation statements in connection therewith) or of any supplemental instruments or documents of further assurance as may be required by law in order to perfect the security interests referenced in the Bond Indenture or the Loan Agreement.

The Bond Trustee shall not be required to expend or risk its own funds or otherwise incur any financial liability in the performance of its duties under the Bond Indenture, or in the exercise of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it.

Modification or Amendment of the Bond Indenture

The Bond Indenture and the rights and obligations of the City and of the Holders of the Bonds and of the Bond Trustee may be modified or amended from time to time and at any time by an indenture or indentures supplemental hereto, which the City and the Bond Trustee may enter into when the written consent of the Corporation and the Holders of a majority in aggregate principal amount of the Bonds then Outstanding shall have been filed with the Bond Trustee. No such modification or amendment shall (1) extend the fixed maturity of any Bond, or reduce the amount of principal thereof, or extend the time of payment or reduce the amount of any Mandatory Sinking Account

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Payment, or reduce the rate of interest thereon, or extend the time of payment of interest thereon, without the consent of the Holder of each Bond so affected, or (2) reduce the aforesaid percentage of Bonds the consent of the Holders of which is required to effect any such modification or amendment, or permit the creation of any lien on the Revenues and other assets pledged under the Bond Indenture prior to or on a parity with the lien created by the Bond Indenture, or deprive the Holders of the Bonds of the lien created by the Bond Indenture on such Revenues and other assets (except as expressly provided in the Bond Indenture), without the consent of the Holders of all Bonds then Outstanding. It shall not be necessary for the consent of the Bondholders to approve the particular form of any Supplemental Bond Indenture, but it shall be sufficient if such consent shall approve the substance thereof. Promptly after the execution by the City and the Bond Trustee of any Supplemental Bond Indenture pursuant to the Bond Indenture,, the Bond Trustee shall mail a notice, setting forth in general terms the substance of such Supplemental Bond Indenture to the Bondholders at the addresses shown on the registration books maintained by the Bond Trustee. Any failure to give such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such Supplemental Bond Indenture.

The Bond Indenture and the rights and obligations of the City, of the Bond Trustee and of the Holders of the Bonds may also be modified or amended from time to time and at any time by an indenture or indentures supplemental to the Bond Indenture, which the City and the Bond Trustee may enter into with the consent of the Corporation but without the necessity of obtaining the consent of any Bondholders, but only to the extent permitted by law and only for any one or more of the following purposes: (1) to add to the covenants and agreements of the City contained in the Bond Indenture other covenants and agreements thereafter to be observed, to pledge or assign additional security for the Bonds (or any portion thereof), or to surrender any right or power reserved to or conferred upon the City, provided, that no such covenant, agreement, pledge, assignment or surrender shall materially adversely affect the interests of the Holders of the Bonds; (2) to cure any ambiguity or to correct or supplement any provision contained the Bond Indenture or in any supplemental indenture which may be defective or inconsistent with any other provision contained in the Bond Indenture, or in any supplemental indenture, provided that no such amendment shall materially adversely affect the interests of the Holders of the Bonds; (3) to modify, amend or supplement the Bond Indenture in such manner as to permit the qualification under the Trust Indenture Act of 1939, as amended, or any similar federal statute hereafter in effect, and to add such other terms, conditions and provisions as may be permitted by said act or similar federal statute, and which shall not materially adversely affect the interests of the Holders of the Bonds; (4) to provide any additional procedures, covenants or agreements to maintain the exclusion from gross income for federal income tax purposes of interest on the Bonds; or (5) to effect any other change which in the judgment of the Bond Trustee (which may be based on an Opinion of Counsel) does not materially adversely affect the interests of the Holders of the Bonds.

Discharge of Bond Indenture

The Bonds may be paid by the City or the Bond Trustee on behalf of the City in any of the following ways: (a) by paying or causing to be paid the principal or redemption price of and interest on all Bonds Outstanding, as and when the same become due and payable; (b) by depositing or causing to be deposited with the Bond Trustee, in trust, at or before maturity, money or securities in the necessary amount (as provided in the section regarding deposit of money or securities with Bond Trustee) to pay when due or redeem all Bonds then Outstanding; or (c) by delivering to the Bond Trustee, for cancellation by it, all Bonds then Outstanding.

LOAN AGREEMENT General

The Loan Agreement is an agreement between the City and the Corporation whereby the City agrees to lend the proceeds of the Bonds to the Corporation and the Corporation agrees to make payments to the Bond Trustee sufficient to pay debt service on the Bonds. Such payments will be made pursuant to Obligation No. 1.

The following are summaries of certain provisions of the Loan Agreement. These summaries do not purport to be complete or definitive and are qualified in their entireties by reference to the full terms of the Loan Agreement.

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Definitions Unless otherwise required by context, all terms used in the Loan Agreement have the meanings

assigned to such terms in the Bond Indenture.

Loan of Proceeds; Payments

Loan of Proceeds; Payments of Principal, Premium and Interest. The City loans and advances to the Corporation, and the Corporation borrows and accepts from the City a loan in a principal amount equal to the aggregate principal amount of the Bonds, the net proceeds of which loan shall be equal to the net proceeds received from the sale of the Bonds, such proceeds to be applied under the terms and conditions of the Loan Agreement and the Bond Indenture. In consideration of the loan of such proceeds to the Corporation, the Corporation agrees to pay, or cause to be paid, “Loan Repayments” in an amount sufficient to enable the Bond Trustee to make the transfers and deposits required at the times and in the amounts pursuant to the Bond Indenture. Each Loan Repayment shall be made in immediately available funds. Notwithstanding the foregoing, the Corporation agrees to make payments, or cause payments to be made, not later than the times and in the amounts required to be paid as principal or redemption price of and interest on the Bonds from time to time Outstanding under the Bond Indenture and other amounts required to be paid under the Bond Indenture, as the same shall become due whether at maturity, upon redemption, by declaration of acceleration or otherwise.

Additional Payments. In addition to Loan Repayments, the Corporation shall also pay to the City or to the Bond Trustee, as the case may be, “Additional Payments,” as follows:

(a) All taxes and assessments of any type or character charged to the City or to the Bond Trustee affecting the amount available to the City or the Bond Trustee from payments to be received under the Loan Agreement or in any way arising due to the transactions contemplated hereby (including taxes and assessments assessed or levied by any public agency or governmental authority of whatsoever character having power to levy taxes or assessments) but excluding franchise taxes based upon the capital and/or income of the Bond Trustee and taxes based upon or measured by the net income of the Bond Trustee; provided, however, that the Corporation shall have the right to protest any such taxes or assessments and to require the City or the Bond Trustee, at the Corporation’s expense, to protest and contest any such taxes or assessments levied upon them and that the Corporation shall have the right to withhold payment of any such taxes or assessments pending disposition of any such protest or contest unless such withholding, protest or contest would adversely affect the rights or interests of the City or the Bond Trustee;

(b) All reasonable fees, charges, expenses and indemnities of the Bond Trustee under the Loan Agreement and the Bond Indenture, as and when the same become due and payable;

(c) The fees and expenses of such accountants, consultants, attorneys and other experts as may be engaged by the City or the Bond Trustee to prepare audits, financial statements, reports, opinions or provide such other services required under the Loan Agreement or the Bond Indenture; and

(d) All other reasonable and necessary fees and expenses attributable to the Bonds, the Loan Agreement, Obligation No. 1, or related documents, including without limitation all payments required pursuant to the Tax Agreement.

Prepayment

The Corporation shall have the right, so long as all amounts which have become due under the Loan Agreement have been paid, at any time or from time to time to prepay all or any part of the Loan Repayments and the City agrees that the Bond Trustee shall accept such prepayments when the same are tendered. Prepayments may be made by payments of cash, deposit of United States Government Obligations or surrender of Bonds, as contemplated by the Loan Agreement. All such prepayments (and the additional payment of any amount necessary to pay the applicable premium, if any, payable upon the redemption of Bonds) shall be deposited upon receipt in the Redemption Fund (or in such other Bond Trustee escrow account as may be specified by the Corporation) and, at the request of and as determined

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by the Corporation, credited against payments due under the Loan Agreement or used for the redemption or purchase of Outstanding Bonds in the manner and subject to the terms and conditions set forth in the Bond Indenture. Notwithstanding any such prepayment or surrender of Bonds, as long as any Bonds remain Outstanding or any Additional Payments required to be made under the Loan Agreement remain unpaid, the Corporation shall not be relieved of its obligations under the Loan Agreement.

Obligations Unconditional

The obligations of the Corporation under the Loan Agreement are absolute and unconditional, notwithstanding any other provision of the Loan Agreement, Supplement No. 1, Obligation No. 1, the Master Indenture or the Bond Indenture.


The Corporation covenants and agrees that it will comply with and carry out all of the provisions of the Continuing Disclosure Agreement. Notwithstanding any other provision of the Loan Agreement or the Master Indenture, failure of the Corporation to comply with the Continuing Disclosure Agreement shall not be considered a Loan Default Event or an Event of Default under the Master Indenture; however, the Bond Trustee may (and, at the request of any Participating Underwriter (as defined in the Continuing Disclosure Agreement) or the Holders of at least 25% aggregate principal amount in Outstanding Bonds, shall, upon being indemnified against all costs and expenses in a manner reasonably acceptable to the Bond Trustee), take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the Corporation to comply with its obligations under the continuing disclosure section of the Loan Agreement.

Events of Default

Each of the following events shall constitute and be referred to as a “Loan Default Event”:

(a) Failure by the Corporation to pay in full any payment required under the Loan Agreement or, of the Obligated Group to pay in full any payment required under Obligation No. 1 when due, whether on an interest payment date, at maturity, upon a date fixed for prepayment, by declaration upon tender of the Bonds for purchase pursuant to the Bond Indenture, or otherwise pursuant to the terms of the events of default sections of the Loan Agreement and the Bond Indenture;

(b) If any material representation or warranty made by the Corporation in the Loan Agreement or made by the Corporation or any Obligated Group Member in any document, instrument or certificate furnished to the Bond Trustee or the City in connection with the issuance of Obligation No. 1 or the Bonds shall at any time prove to have been incorrect in any respect as of the time made;

(c) If the Corporation shall fail to observe or perform any other covenant, condition, agreement or provision in the Loan Agreement on its part to be observed or performed, or shall breach any warranty by the Corporation contained in the Bond Indenture, for a period of sixty (60) days after written notice, specifying such failure or breach and requesting that it be remedied, has been given to the Corporation by the City or the Bond Trustee; except that, if such failure or breach can be remedied but not within such sixty-day period and if the Corporation has taken all action reasonably possible to remedy such failure or breach within such sixty-day period, such failure or breach shall not become a Loan Default Event for so long as the Corporation shall diligently proceed to remedy such failure or breach in accordance with and subject to any directions or limitations of time established by the Bond Trustee; or

(d) Any Event of Default as defined in and under the Master Indenture.

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Remedies on Default

If a Loan Default Event shall occur, then, and in each and every such case during the continuance of such Loan Default Event, the Bond Trustee on behalf of the City, but subject to the limitations in the Bond Indenture as to the enforcement of remedies, may take such action as it deems necessary or appropriate to collect amounts due under the Loan Agreement, to enforce performance and observance of any obligation or agreement of the Corporation under the Loan Agreement or to protect the interests securing the same.

Amendments and Supplements

The Loan Agreement may be amended, changed or modified only as provided in the Bond Indenture.

DEED OF TRUST

General

The following is a summary of certain provisions of the Deed of Trust. Other provisions of the Deed of Trust are summarized in the Official Statement under the caption “SECURITY AND SOURCE OF PAYMENT FOR SERIES BONDS – The Deed of Trust.” The summary does not purport to be complete or definitive and is qualified in its entirety by reference to the full terms of the Deed of Trust.

The Deed of Trust secures the Obligated Group’s obligation to make the Required Payments and its other obligations, agreements and covenants to be performed and observed under the Master Indenture. It encumbers the Mortgaged Facilities. The Mortgaged Facilities include:

(a) the main hospital campuses of CMH and OVCH;

(b) all buildings, structures and appurtenances located on such campuses;

(c) the leasehold interest of CMHS pursuant to the Buenaventura Lease (defined below) in a parcel of property located adjacent to the campus of CMH, which is owned by the City and the parking structure located thereon (subject to certain rights of the City); and

(d) certain apparatus, fittings, machinery, equipment, chattels and articles of personal property.

The CMH campus includes the existing CMH hospital tower, as well as the site of the Project.

The Mortgaged Facilities do not include a lien on, or interest in:

(a) three of the Centers for Family Health clinics owned or operated by CMHS (see APPENDIX A - “COMMUNITY MEMORIAL HEALTH SYSTEM, INC. - Description Hospitals and Ambulatory Care Clinics Owned by CMHS - Centers for Family Health”);

(b) a cancer center located near the CMH campus, which is expected to be mortgaged to secure certain other indebtedness of CMHS (see APPENDIX A - “FINANCIAL INFORMATION AND UTILIZATION STATISTICS - Existing Indebtedness of CMHS”)

(c) a medical office building which houses certain outpatient operations of CMHS, physician offices and certain other facilities, which is located near the CMH campus in which CMHS owns a 58.5% interest (the “Buenavista Building”) (see APPENDIX A - “COMMUNITY MEMORIAL HEALTH SYSTEM, INC. - Description of Affiliated Organizations - Buenavista Medical Properties, Inc.”); or

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(d) any of the four freestanding imaging facilities owned by Grossman Imaging Centers of CMH, of which CMH is a 51% owner (see APPENDIX A - “COMMUNITY MEMORIAL HEALTH SYSTEM, INC. - Description of Affiliated Organizations - Grossman Imaging Centers of CMH”).

Grant in Trust

CMHS irrevocably grants, transfers and absolutely, unconditionally and irrevocably assigns, subject to “Permitted Liens” (as that term is defined in the Master Indenture) and the Buenaventura Lease (as defined below), to Lawyers Title Company, a California corporation (the “Deed of Trust Trustee”), in trust, with power of sale and right of entry and possession, the entire right, title and interest (a) of CMHS in and to (i) that certain real property (the “Fee Land”) situated in Ventura County, State of California, and more particularly described in Exhibit A attached to and made a part of the Deed of Trust and (ii) that certain Lease (the “Buenaventura Lease”) dated April 8, 1985 between the City of San Buenaventura (the “Lessor”) and CMHS for ground and air rights as amended, supplemented or restated from time to time, and which Buenaventura Lease encumbers that certain real property situated in Ventura County, State of California, and more particularly described in Exhibit A-2 attached to the Deed of Trust and made a part thereof (the “Lease Land”) (all of CMHS’ right, title and interest in and to the Lease Land and the Buenaventura Lease being hereinafter referred to, collectively, as the “Leasehold Estate” and, together with the Fee Land, collectively, the “Land”), (b) that CMHS otherwise may hereafter acquire in the Land, and (c) that CMHS now has or may hereafter acquire in:

(a) All buildings, structures, improvements, fixtures, equipment and appurtenances now and hereafter owned, constructed, located, erected, installed or affixed by or on behalf of CMHS upon or appurtenant to the Land and all replacements and substitutions therefor (“Facilities”);

(b) All appurtenances, improvements, easements, pipes, transmission lines or wires and other rights used in connection with the Land or as a means of access thereto, whether now or hereafter owned or constructed or placed upon, or used in connection with, in the Land or Facilities (“Appurtenances”);

(c) All equipment, machinery, goods and other personal property of CMHS, whether movable or not, if the same is: (a) now owned or hereafter acquired by CMHS, (b) now or hereafter located at the Facilities, and (c) financed with the proceeds of any financed with the proceeds of any Obligations under the MTI (the “MTI Obligations”) (the equipment, machinery, goods and other personal property described in this clause (c) being referred to in the Deed of Trust as “After Acquired MTI Property”), and all improvements, restorations, replacements, repairs, additions, accessions or substitutions thereto or therefor, including, without limitation, all machinery, equipment, material, furnishings and appliances for generation or distribution of air, water, heat, electricity, light, fuel or refrigeration, for purposes of ventilation, sanitation or drainage, for exclusion of vermin or insects, for removal or disposal of dust, refuse or garbage; all elevators, awnings, window coverings, floor covering, laundry equipment, kitchen equipment, cabinets, furniture and furnishings; all fixed and moveable equipment now or hereafter installed or placed upon or in the Land or Facilities or After Acquired MTI Property for use in health care, treatment, diagnosis and services or for other health care uses; the products and proceeds from any and all such property; all the estate, interest, right, title, property or other claim or demand of every nature whatsoever, in and to such property, including specifically, but without limitation, all deposits made with or other security given to utility companies by CMHS with respect to such property and claims or demands relating to insurance or condemnation awards which CMHS now has or may hereafter acquire (“Equipment”);

(d) All leases, subleases, occupancy agreements and licenses for use with respect to any or all the Land, Facilities, Appurtenances and Equipment and, without duplication, After Acquired MTI Property;

(e) All rentals or other payments which may now or hereafter accrue or otherwise become payable under the Leases to or for the benefit of CMHS together with all other income, rents, revenues, issues, profits, reserves, and royalties produced by the Land, Facilities, Appurtenances and Equipment and, without duplication, After Acquired MTI Property or by all management or service contracts or other contracts affecting the Property, including but not limited to security deposits (collectively the “Rents”);

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(f) All earnings, products, damages, indemnifications, insurance proceeds and any other proceeds from any and all of such Land, Facilities, Appurtenances, Equipment, Leases, Rents and without duplication After Acquired MTI Property, and Accounts (as defined below) including specifically, but without limitation, all deposits made with or other security given to utility companies and claims or demands relating to insurance or condemnation awards which CMHS now has or may hereafter acquire, including all advance payments of insurance premiums made by CMHS with respect thereto (“Proceeds”);

(g) All accounts, accounts receivable and other rights to payment of money now owned or hereafter acquired by CMHS, whether due or to become due and whether or not earned by performance (“Accounts”), arising from the use or rental of the Facilities, Appurtenances, Equipment, Leases, Rents or Proceeds and without duplication After Acquired MTI Property, including without limitation:

(1) Any and all Accounts arising from any source, including without limitation operations of CMHS or its agents at the Facilities and without duplication After Acquired MTI Property; and

(2) Any and all Accounts accruing from in-patient, out-patient, day treatment, and any other programs run by and operations of CMHS or its agents in the Facilities and without duplication After Acquired MTI Property.

For purposes of the Deed of Trust, “Accounts” covered by the Deed of Trust shall include without limitation accounts, chattel paper, deposit accounts and instruments as defined by the California Commercial Code, and any amounts receivable from third party payors (including insurance companies, Medicare and Medicaid, including without limitation any Medicare and/or Medicaid losses paid on recapture, unless otherwise prohibited by law) in connection with the foregoing; and

(a) All right, title and interest of CMHS in all CMHS’s inventory, raw materials, work in process, finished goods and goods held for sale or lease or furnished under contracts of service, and all returned and repossessed goods, and all goods covered by documents of title, including warehouse receipts, bills of lading and all other documents of every type covering all or any part of the property described in the Deed of Trust, now owned or hereafter acquired, whether held by CMHS or any third party, which is located on, appurtenant to, relating to, or used by or useful in connection with the forgoing (“Inventory”); and

(b) All of the above referenced Land, Facilities, Appurtenances, Equipment, Leases, Rents, Proceeds, Accounts, After Acquired MTI Property and Inventory as conveyed to the Deed of Trust Trustee by the Deed of Trust or made subject to the security interest described in the Deed of Trust is collectively referred to in the Deed of Trust as the “Property.”

CMHS warrants and agrees that as of the date of recording of the Deed of Trust it has not entered into any sales agreement, option, assignment, sublease, pledge, mortgage, deed of trust, financing statement, security agreement or any other arrangement regarding the Property apart from the transactions referenced in or secured by the Deed of Trust and apart from Permitted Liens and has not nor will execute any document or instrument referring to or covering the Property or any part thereof apart from matters constituting Permitted Liens, and no such documents or instruments are on file, recorded or in effect in any public office, other than Permitted Liens and agrees that the Property is, and shall be, kept free from any lien, security interest, encumbrance, pledge, or any other interest other than the Permitted Liens.

For the Purpose of Securing Obligations

Payment and performance of each and every obligation of the Obligated Group Members under the Master Indenture and any Related Supplement (as defined in the Master Indenture), including, without limitation, the payment of (i) the MTI Obligations and (ii) all Required Payments (as defined in the Master Indenture). The foregoing obligations shall include any such Required Payments which become due and payable as the result of any future advances made pursuant to the Master Indenture; and

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Payment and performance of each and every obligation, covenant and agreement contained in the Master Indenture or the Deed of Trust.

The foregoing obligations are hereinafter sometimes referred to herein as the “Obligations.”

Security Agreement and Fixture Filing

The Deed of Trust also constitutes a security agreement and CMHS pledges and grants to the Master Trustee, subject to Permitted Liens, a security interest in and to all of the Property not constituting real property under the laws of the State of California (“Personal Property”), whether CMHS now has or hereafter obtains an interest in such Personal Property and all the proceeds or products of the Deed of Trust, including but not limited to all of those items listed in the Deed of Trust. Upon any default of CMHS under the Deed of Trust, the Master Trustee shall be entitled to exercise with respect to all such collateral all of the rights and remedies set forth in the Deed of Trust, in the Master Indenture or otherwise afforded to a secured party in default under the terms of Article 9 of the Uniform Commercial Code, any or all of which may be pursued and exercised concurrently, consecutively, alternatively or otherwise. CMHS will execute and or file, as appropriate, one or more supplemental security agreements and financing statements as the Master Trustee may from time to time reasonably require, covering any property now or hereafter constituting a portion of the Property and otherwise the collateral securing the Obligations secured under the Deed of Trust and such financing statements and other and further assurances as the Master Trustee may reasonably request to perfect or evidence the security interest created by the Deed of Trust (which shall cover all proceeds and products of collateral), including, but not limited to, UCC-1 Financing Statements and UCC Continuation Statements.

CMHS will pay all costs of filing any financing, continuation or termination statements with respect to the security interest created by the Deed of Trust; the Master Trustee is authorized and appointed CMHS’s attorney-in-fact to do, at the Master Trustee’s option and at CMHS’s expense, all acts and things which the Master Trustee may deem necessary to perfect and continue perfected the security interest created by the Deed of Trust and to protect the Property. The Master Trustee may execute, sign, endorse, transfer or deliver, in the name of CMHS, notes, checks, drafts or other instruments for the payment of money and receipts, certificates of origin, certificates of title, applications for certificates of title, or any other documents necessary to evidence, perfect or realize upon the security interests and Obligations created or secured by the Deed of Trust. This authority shall be considered a power coupled with an interest and shall be irrevocable until all the Obligations secured by the Deed of Trust shall have been paid in full.

The Deed of Trust constitutes a Financing Statement filed as a fixture filing in the Official Records of the County Recorder of the County in which the property is located with respect to any and all Property that may now or hereafter become or constitute Fixtures (as defined by the Uniform Commercial Code), and with respect to any goods or other Personal Property that may now be or hereafter become such Fixtures.

All references in the Deed of Trust to Uniform Commercial Code shall be to the Uniform Commercial Code, as enacted in the State of California.

Absolute Assignment; Assignment of Leases and Rents.

CMHS absolutely, unconditionally and irrevocably assigns to the Master Trustee the Leases and Rents. The Master Trustee grants a revocable license to CMHS to collect and use all such Rents as they become due and payable and to exercise all rights under the Leases if not otherwise restricted under the Master Indenture, which revocable license shall be automatically revoked without notice upon the occurrence of any default in the payment or performance of any of the Obligations. Master Trustee shall not be required to take any action whatsoever, including, without limitation, instituting legal proceedings of any kind, to terminate the revocable license granted by the Deed of Trust. The foregoing assignment shall not impose upon the Master Trustee any duty to produce Rents from the Property or cause the Master Trustee to be a “mortgagee in possession” for any purpose.

Except as otherwise permitted under the Master Indenture, CMHS agrees that it will not enter into, terminate, amend, modify, change or waive (or consent to any termination, amendment, modification, change, waiver of)

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any material term or provision of any Leases, without the prior written consent of the Master Trustee except in the ordinary course and except Permitted Liens.

CMHS agrees that it will take all steps and do all things necessary to keep and maintain the Leases in full force and effect and will enforce or cause to be enforced all provisions thereof, provided that it shall be within the reasonable discretion of CMHS whether or not to bring and prosecute or cause to be prosecuted any and all suits, actions and proceedings necessary to enforce compliance with all of the terms, provisions and covenants thereof. If, in the reasonable opinion of the Master Trustee, CMHS has failed, or is about to fail, to take reasonable action to enforce the Leases or any guaranty thereof or to first preserve any rights or remedies thereunder, the Master Trustee, after giving five (5) days’ written notice to CMHS, may, but is not required to, take such action as it shall deem appropriate, in its own name or in the name of CMHS for the use and benefit of the Master Trustee, to enforce the Leases and to preserve any rights or remedies thereunder, and all costs and expenses incurred by the Master Trustee in taking any such action shall be payable on demand and shall constitute part of the secured indebtedness under the Deed of Trust.

Representations and Warranties

CMHS represents and warrants to Master Trustee that CMHS has good, marketable and insurable fee simple or leasehold title to the real property comprising the Property, free and clear of all liens whatsoever except the Permitted Liens and the lien created by the Deed of Trust. The Deed of Trust, when properly recorded in the appropriate records, will create a valid, perfected first priority lien on the Property, subject only to the Permitted Liens.

Covenants of CMHS

For the purpose of protecting and preserving the security of the Deed of Trust, CMHS promises and agrees as follows:

(a) CMHS promises and agrees:

(1) to take all commercially reasonable action necessary to keep the Property free of dry rot, fungus, termites, beetles and all other wood-boring, wood-eating, harmful or destructive insects, and in all respects properly to care for and keep all of the Property, including all such buildings, structures and other improvements, in good condition and repair consistent with the requirements of the Master Indenture;

(2) not to remove, demolish or substantially alter (except such alterations as may be required by laws, ordinances or regulations or permitted pursuant to the Master Indenture) any of the Facilities; provided, however, that CMHS may make such proper replacements, repairs, renewals, removals and alterations as it shall in good faith reasonably determine are necessary or advisable to maintain or enhance the efficiency and value of the security created by the Deed of Trust;

(3) to complete promptly and in good and businesslike manner any building or other improvements which may be constructed on the Land, to promptly restore in like manner (to the extent permitted by law) any Facilities which may be damaged or destroyed thereon, and to pay when due and payable all claims for labor performed and materials furnished therefor, provided that CMHS shall not be required to pay any such claim if it shall in good faith contest the validity thereof and, if so contested, shall provide for the payment thereof in a manner reasonably satisfactory to the Indenture Trustee;

(4) to comply with all laws, ordinances, regulations, conditions and restrictions now or hereafter affecting the Property or any part of the Deed of Trust or requiring any alterations or improvements to be made thereon;

(5) not to commit, suffer or permit any waste, and not to permit any deterioration, of the Property; and

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(6) not to commit, suffer or permit any act to be done in or upon the Property in violation of any law or ordinance if such act might have consequences that would materially and adversely affect the financial condition, assets, properties or operation of CMHS;

(b) CMHS shall provide and maintain hazard insurance as required by the Master Indenture, and to deliver duplicate originals or certified copies of the policies of said insurance to the Deed of Trust Trustee upon its request; it being mutually agreed that the proceeds of any claim under such insurance in excess of the amount described in the Master Indenture shall be deposited and applied as provided in Master Indenture, and are assigned to said Master Trustee to be held and disbursed by the Master Trustee as provided in the Master Indenture and that any unexpired insurance and all returnable insurance premiums shall inure to the benefit of, and pass to, the purchaser of the property covered thereby at any Deed of Trust Trustee’s sale held under the Deed of Trust;

(c) CMHS shall appear in and defend any action or proceeding affecting or purporting to affect the security of the Deed of Trust, any additional or other security for any of the obligations secured by the Deed of Trust, or the interest, rights, powers, or duties of the Deed of Trust Trustee or the Master Trustee under the Deed of Trust, it being agreed, however, that in the case of an action or proceeding against the Deed of Trust Trustee or the Master Trustee said Deed of Trust Trustee or Master Trustee, at its option, may appear in and defend any such action or proceeding and, in addition, it being agreed that the Deed of Trust Trustee or Master Trustee may commence any action or proceeding deemed necessary by it to perfect, maintain or protect such interest, rights, powers or duties, all in such manner and to such extent as it may determine in its sole discretion to be appropriate, and the Deed of Trust Trustee or Master Trustee is authorized to pay, purchase or compromise on behalf of CMHS any encumbrance or claim which in its judgment appears or purports to affect the security of the Deed of Trust or to be superior thereto; to pay all costs and expenses, including costs of evidence of title and attorney’s fees in a reasonable sum, in any above described action or proceedings in which the Master Trustee or the Deed of Trust Trustee may appear;

(d) CMHS promise and agrees:

(1) to pay at least five (5) days before default or delinquency, and submit to the Master Trustee a receipt or other evidence of payment, or certified copy of thereof, evidencing payment of, all taxes and assessments affecting the Property, and any accrued interest, cost or penalty thereon, provided that CMHS shall not be required to pay any such tax or assessment if it shall in good faith contest the validity thereof and, if so contested, shall provide a bond or other security for or method of payment thereof in a manner satisfactory to the Master Trustee in its sole discretion;

(2) to pay when due and payable all encumbrances (including any debt secured by deed of trust), ground rents, liens or charges, with interest, on the Property or any part thereof which appear to be prior or superior hereto, and to pay immediately and in full all such encumbrances (excluding permitted encumbrances), rents, liens or charges, if any, which may now be due or payable; provided that CMHS shall not be required to pay any such encumbrances, rent, lien or charge if it shall in good faith contest the validity of thereof and, if so contested, shall provide a bond or other security for or method of payment thereof in manner satisfactory to the Master Trustee in its sole discretion; and

(3) to pay when due and payable all costs, fees and expenses of these trusts, including costs of evidence of title and the Deed of Trust Trustee’s fees in connection with sale, whether completed or not, which amounts shall become due upon delivery to the Deed of Trust Trustee of declaration of default and demand for sale, as hereinafter provided; and

(4) CMHS shall pay immediately and without demand all reasonable sums expended or expenses incurred by the Deed of Trust Trustee or by the Master Trustee to enforce the terms of the Trust, including reasonable attorneys’ fees, under any of the terms of the Deed of Trust, with interest from date of expenditure at the lower of ten percent (10%) per annum (compounded monthly) or the maximum rate permitted by law to be charged by Deed of Trust Trustee;

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(e) CMHS shall not, directly or indirectly (through the conveyance of ownership interests in the beneficial owners of the Property at any level), sell, convey, mortgage, grant, bargain, encumber, pledge, assign, grant options with respect to, lease or otherwise transfer or dispose of (voluntarily or involuntarily, by operation of law or otherwise, and whether or not for consideration or of record) the Property or any part thereof or any legal or beneficial interest therein other than (i) with respect to Permitted Liens, or (ii) as expressly permitted pursuant to the terms of the Master Indenture;

(f) CMHS shall promptly, upon the written request of Master Trustee, but not more frequently than once per year, to provide Master Trustee, at CMHS’s expense, with an environmental site assessment or environmental audit report prepared by an environmental engineering firm acceptable to Master Trustee and in a form acceptable to Master Trustee, assessing the presence or absence of any Hazardous Materials (as hereinafter defined) and the potential costs in connection with the abatement, cleanup or removal of any Hazardous Materials found in, on, under or about the Property. CMHS shall cooperate in the conduct of such site assessment or environmental audit;

(g) In the event of the passage after the date of the recordation of the Deed of Trust of any law of the State of California reducing the value of the Property or any part hereto for the purpose of taxation, or resulting in any lien on the Property, or changing in any way the laws now in force for the taxation of the Deed of Trust or the indebtedness secured by the Deed of Trust for state of local purposes (but not including income taxes payable on the receipt of interest due under the Master Indenture) in a manner which is adverse to Master Trustee, or the manner of the operation of any such taxes so as to adversely affect the interest of Master Trustee, then, and in such event, CMHS shall bear and pay the full amount of such taxes;

(h) CMHS shall give Master Trustee prompt (and in all events within five (5) days) notice of any default under the Buenaventura Lease or the receipt by CMHS of any notice of default under the Buenaventura Lease, together with copies of all correspondence, information and documents furnished by or to CMHS in connection with such default;

(i) Upon the occurrence of any failure to pay and perform the Obligations when due, without limitation of any of Master Trustee’s other rights or remedies hereunder, Master Trustee shall have the right, but not the obligation, to perform any obligations of CMHS under the Buenaventura Lease; and

(j) Except as otherwise permitted under the Master Indenture, the fee title in the Lease Land and the Leasehold Estate shall not merge but shall always be kept separate and distinct, notwithstanding the union of said estates either in CMHS, Master Trustee or in any third party, whether by purchasing or otherwise.

Condemnation Proceeds

All condemnation proceeds of the Property in excess of the amount described in the Master Indenture shall be deposited and applied as provided in the Master Indenture and are assigned to the Master Trustee by the Deed of Trust to be held and disbursed by said Master Trustee as provided in the Master Indenture; provided that any condemnation proceeds not so required to be deposited may be retained by CMHS and used for any lawful purpose, subject to CMHS’s obligation to repair or restore the Property following such condemnation.

Acceptance Not Waiver

By accepting payment of any sum secured by the Deed of Trust after its due date, neither the Deed of Trust Trustee nor the Master Trustee shall be deemed to have waived its right either to require prompt payment when due of all other sums so secured or to declare default as herein provided for failure so to pay.

Conveyance, Easements, Subordination, Releases

To the extent permitted under the Master Indenture, but only after satisfaction of all applicable requirements of the Master Indenture, at any time, or from time to time, without liability therefor and without notice,

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upon written request by the Master Trustee or CMHS (provided that any such request by CMHS shall be accompanied by a written certification by Master Trustee stating that all of the applicable requirements of the Master Indenture in connection with such request shall have been satisfied), upon presentation of the Deed of Trust, and without affecting the liability of any person for payment of the indebtedness secured by the Deed of Trust or the effect of the Deed of Trust upon the remainder of the Property, (i) the Deed of Trust Trustee shall reconvey any part of the Property, consent in writing to the making of any map or plat thereof, execute releases, join in granting any easement thereon, or join in any extension agreement or any agreement subordinating the lien or charge of the Deed of Trust, and (ii) CMHS, the Master Trustee and the Deed of Trust Trustee shall execute and deliver any agreements subordinating the lien or charge of the Deed of Trust to the lien of any Permitted Liens and any releases and waivers of the lien of the Deed of Trust as are reasonably necessary to accommodate the requirements of the holders of Permitted Liens.

Right of Entry for Inspection

The Deed of Trust Trustee and the Master Trustee are each authorized, by themselves or their agents or workers, in a reasonable manner such as not to interfere with CMHS’s business in a materially adverse manner and after giving notice to enter during reasonable business hours (or at any other time agreeable to CMHS) upon any part of the Property for the purpose of inspecting and performing testing upon the same.

Remedies

Upon the occurrence of any failure to pay and perform the Obligations when due, Master Trustee may take such action, without notice or demand, as it deems advisable to protect and enforce its rights against CMHS and in and to the Property, including, but not limited to, the following actions, each of which may be pursued concurrently or otherwise, at such time and in such order as Master Trustee may determine, in its sole discretion, without impairing or otherwise affecting the other rights and remedies of Master Trustee, whether at law, equity or otherwise:

Acceleration; Notice of Default. The Master Trustee shall have the option of declaring the unpaid balance owing under the MTI Obligations and any other sums secured by the Deed of Trust immediately due and payable as provided in the Master Indenture. Having so declared, the Deed of Trust Trustee shall provide and record such notices of default and of the election to cause the Property or any part of it to be sold as are required by law. The Deed of Trust Trustee, upon written request by the Master Trustee, from time to time before the Deed of Trust Trustee’s sale, may rescind any such notice of default and of election to cause to be sold the Property and may execute a written notice of such a rescission, which notice, when recorded, shall also constitute a cancellation of any prior declaration of default and demand for sale. The exercise of such right of rescission shall not constitute a waiver of any breach or default then existing or subsequently occurring or impair the right of the Master Trustee to execute and deliver to the Deed of Trust Trustee, as above provided, other requests for notices of default and of election to cause to be sold the Property to satisfy the obligations of the Deed of Trust, nor otherwise affect any provision, covenant or condition of the Deed of Trust or any of the rights, obligations or remedies of the parties under the Deed of Trust.

Foreclosure. Institute an action to foreclose the Deed of Trust, or cause the Property or any part thereof to be sold under the power of sale herein granted in any manner permitted by applicable law. In connection with any sale or sales under the Deed of Trust, Master Trustee may elect to treat any of the Property which consists of a right in action or which is property that can be severed from the real property covered by the Deed of Trust or any improvements thereon without causing structural damage thereto as if the same were personal property, and dispose of the same in accordance with applicable law, separate and apart from the sale of real property. Any sale of any personal property under the Deed of Trust shall be conducted in any manner permitted by the Uniform Commercial Code or any other applicable section of the Uniform Commercial Code. Where the Property consists of real and personal property or fixtures, whether or not such personal property is located on or within the real property, Master Trustee may elect in its discretion to exercise its rights and remedies against any or all of the real property, personal property, and fixtures in such order and manner as is now or hereafter permitted by applicable law. Without limiting the generality of the foregoing, Master Trustee may, in its discretion and without regard to the adequacy of its security, elect to proceed against any or all of the real property, personal property and fixtures in

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any manner permitted under the Uniform Commercial Code; and if Master Trustee elects to proceed in the manner permitted under the Uniform Commercial Code, the power of sale herein granted shall be exercisable with respect to all or any of the real property, personal property and fixtures covered by the Deed of Trust, as designated by Master Trustee, and Deed of Trust Trustee is by the Deed of Trust authorized and empowered to conduct any such sale of any real property, personal property and fixtures in accordance with the procedures applicable to real property. Where the Property consists of real property and personal property, any reinstatement of the obligation secured by the Deed of Trust, following default and an election by Master Trustee to accelerate the maturity of such obligation, which is made by CMHS or any other person or entity permitted to exercise the right of reinstatement under California Civil Code or any successor statute, shall, in accordance with the terms of Uniform Commercial Code, not prohibit Master Trustee from conducting a sale or other disposition of any personal property or fixtures or from otherwise proceeding against or continuing to proceed against any personal property or fixtures in any manner permitted by the Uniform Commercial Code; nor shall any such reinstatement invalidate, rescind or otherwise affect any sale, disposition or other proceeding held, conducted or instituted with respect to any personal property or fixtures prior to such reinstatement or pending at the time of such reinstatement. Any sums paid to Master Trustee in effecting any reinstatement pursuant to the California Civil Code shall be applied to the secured obligation and to Master Trustee’s and Deed of Trust Trustee’s reasonable costs and expenses in the manner required by the California Civil Code. Should Master Trustee elect to sell any portion of the Property which is real property or which is personal property or fixtures that Master Trustee has elected under the Uniform Commercial Code to sell together with real property in accordance with the laws governing a sale of real property, Master Trustee or Deed of Trust Trustee shall give such notice of default and election to sell as may then be required by law. Thereafter, upon the expiration of such time and the giving of such notice of sale as may then be required by law, and without the necessity of any demand on CMHS, Deed of Trust Trustee, at the time and place specified in the notice of sale, shall sell such real property or part of the Deed of Trust at public auction to the highest bidder for cash in lawful money of the United States. Deed of Trust Trustee may, and upon request of Master Trustee shall, from time to time, postpone any sale under the Deed of Trust by public announcement thereof at the time and place noticed therefor. If the Property consists of several lots, parcels or items of property, Master Trustee may: (i) designate the order in which such lots, parcels or items shall be offered for sale or sold, or (ii) elect to sell such lots, parcels or items through a single sale, or through two or more successive sales, or in any other manner Master Trustee deems in its best interest. Any person, including CMHS, Deed of Trust Trustee or Master Trustee, may purchase at any sale under the Deed of Trust, and Master Trustee shall have the right to purchase at any sale under the Deed of Trust by crediting upon the bid price the amount of all or any part of the indebtedness secured by the Deed of Trust. Should Master Trustee desire that more than one sale or other disposition of the Property be conducted, Master Trustee may, at its option, cause the same to be conducted simultaneously, or successively, on the same day, or at such different days or times and in such order as Master Trustee may deem to be in its best interest, and no such sale shall terminate or otherwise affect the lien of the Deed of Trust on any part of the Property not sold until all indebtedness secured by the Deed of Trust has been fully paid. In the event Master Trustee elects to dispose of the Property through more than one sale, CMHS agrees to pay the costs and expenses of each such sale and of any judicial proceedings wherein the same may be made, including reasonable compensation to Deed of Trust Trustee and Master Trustee, their agents and counsel, and to pay all expenses, liabilities and advances made or incurred by Deed of Trust Trustee in connection with such sale or sales, together with interest on all such advances made by Deed of Trust Trustee at the lower of ten percent (10%) per annum (compounded monthly) or the maximum rate permitted by law to be charged by Deed of Trust Trustee. Upon any sale under the Deed of Trust, Deed of Trust Trustee shall execute and deliver to the purchaser or purchasers a deed or deeds or a bill of sale or bills of sale conveying the property so sold, but without any covenant or warranty whatsoever, express or implied, whereupon such purchaser or purchasers shall be let into immediate possession of such property; and the recitals in any such deed or bill of sale of facts, such as default, the giving of notice of default and notice of sale, and other facts affecting the regularity or validity of such sale or disposition shall be conclusive proof of the truth of such facts, and any such deed or bill of sale shall be conclusive against all persons as to such facts recited therein.

Judicial Action. Bring an action in any court of competent jurisdiction to foreclose the Deed of Trust or to enforce any of the covenants and agreements contained therein.

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Entry. Master Trustee personally, or by its agents or attorneys, may enter all or any part of the Property, and may exclude CMHS, its agents and servants wholly therefrom without liability for trespass, damages or otherwise. CMHS shall surrender possession of the Property to Master Trustee on demand after the happening of any default of the payment or performance of the Obligations. Thereafter, Master Trustee may use, operate, manage and control the Property and conduct the business thereof, either personally or by its superintendents, managers, agents, servants, attorneys or receivers. Upon each such entry, Master Trustee, at the expense of CMHS from time to time, either by purchase, repairs or construction, may maintain and restore the Property, may complete the construction of improvements (and in the course of such completion may make such changes in the contemplated or completed improvements as Master Trustee may deem desirable), may make all necessary or desirable repairs, renewals and replacements and such alterations, additions, betterments and improvements thereto and thereon as Master Trustee may deem advisable, and may insure the Property. Master Trustee shall have the right to manage, operate, rent and lease the Property and to carry on the business thereof and exercise all rights and powers of CMHS with respect thereto, either in the name of CMHS or otherwise as Master Trustee shall deem appropriate. the Deed of Trust Trustee and the Master Trustee shall not be under any obligation to make any of the payments or do any of the acts above mentioned, but, upon election so to do, employment of an attorney is authorized and payment of such reasonable attorney’s fees and of all other necessary expenditures is secured by the Deed of Trust.

Without limitation of the foregoing, if CMHS defaults in the performance of any of the covenants or agreements contained in the Deed of Trust or under or under Master Indenture, or if any action or proceeding is commenced which affects Master Trustee’s interest in the Property or any part thereof, including, but not limited to, eminent domain, code enforcement, or proceedings of any nature whatsoever under any federal or state law, whether now existing or hereafter enacted or amended, relating to bankruptcy, insolvency, arrangement, reorganization or other form of debtor relief, then Master Trustee may, but without obligation to do so and without releasing CMHS from any obligation under the Deed of Trust, cure such defaults, make such appearances, disburse such sums and/or take such other action as Master Trustee deems necessary or appropriate to protect Master Trustee’s interest, including disbursement of attorneys’ fees, entry upon the Property to make repairs, payment of taxes or insurance premiums or otherwise cure the default in question or protect the security of the Property, and payment, purchase, contest or compromise of any encumbrance, charge or lien encumbering the Property. CMHS further agrees to pay all expenses incurred by Master Trustee (including fees and disbursements of counsel) pursuant to this paragraph, including those incident to the curing of any default and/or the protection of the rights of Master Trustee under the Deed of Trust, and enforcement or collection of payment of the Obligations, including, without limitation, any future advances, whether by judicial or nonjudicial proceedings, or in connection with any bankruptcy, insolvency, arrangement, reorganization or other debtor relief proceeding of CMHS, or otherwise. Any amounts disbursed by Master Trustee pursuant to this paragraph shall be additional indebtedness of CMHS secured by the Deed of Trust as of the date of disbursement and shall bear interest at the lower of ten percent (10%) per annum (compounded monthly) or the maximum rate permitted by law to be charged by Deed of Trust Trustee from such date until paid by CMHS in full. All such amounts shall be payable by CMHS immediately without demand. Nothing described in this paragraph shall be construed to require Master Trustee to incur any expense, make any appearance, or take any other action, and any action taken by Master Trustee pursuant to this paragraph shall be without prejudice to any other rights or remedies available to Master Trustee under the Deed of Trust, under the Master Indenture or at law or in equity.

Collection of Rents. Master Trustee may collect and receive all Rents. Master Trustee may deduct, from the monies so collected and received, all expenses of conducting the business of the Property and of all maintenance, repairs, renewals, replacements, alterations, additions, betterments and improvements and amounts necessary to pay for insurance, taxes and assessments, liens or other charges upon the Property or any part thereof, as well as reasonable compensation for the services of Master Trustee and for all attorneys, agents, clerks, servants, and other employees engaged and employed by Master Trustee. After such deductions and the establishment of all reasonable reserves, Master Trustee shall apply all such monies to the payment of the unpaid Obligations. Master Trustee shall account only for Rents actually received by Master Trustee. The collection or receipt of Rents from the Property by the Deed of Trust Trustee or the Master Trustee after declaration of default shall not affect or impair such default or declaration of default or any election to cause the Property to be sold or any sale proceedings

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predicated thereon, but such proceedings may be conducted and sale effected notwithstanding the receipt or collection of any such Rents.

Receivership. Master Trustee may have a receiver appointed to enter into possession of the Property, collect the Rents therefrom and apply the same as the court may approve. Master Trustee may have a receiver appointed, as a matter of right without notice and without the necessity of proving either the inadequacy of the security provided by the Deed of Trust or the insolvency of CMHS or any other person or entity who may be legally or equitably liable to pay the Obligations. CMHS and each such person or entity, presently and prospectively, waive such proof and consent to the appointment of such receiver. If Master Trustee or any receiver collects the Rents, the monies so collected shall not be substituted for payment of the Obligations, nor can they be used to cure any default, without the prior written consent of Master Trustee. Master Trustee shall not be liable to account for Rents not actually received by Master Trustee.

Specific Performance. Master Trustee may institute an action for specific performance of any covenant contained herein or in aid of the execution of any power herein granted.

Recovery of Sums Required to be Paid. Master Trustee may, from time to time, take action to recover any sum or sums which constitute a part of the Obligations as such sums shall become due, without regard to whether or not the remainder of the Obligations shall be due, and without prejudice to the right of Master Trustee thereafter to bring an action of foreclosure or any other action for each default existing from time to time.

Other Remedies. Exercise any and all other rights or remedies with respect to the Property or CMHS as may then be available under applicable law, including, but not limited to, the exercise of any and all rights and remedies in the manner and according to the procedures permitted under applicable law with respect to any personal property and/or real property covered by the Deed of Trust.

Application of Proceeds

Upon any sale of the Property pursuant to the Deed of Trust, the Deed of Trust Trustee shall apply the proceeds of any such sale to payment of: (1) all reasonable costs, fees, charges and expenses of the Deed of Trust Trustee and of these trusts, and fees of any attorneys employed by the Deed of Trust Trustee or the Master Trustee pursuant to the provisions of the Deed of Trust; (2) the Deed of Trust Trustee’s fees in connection with the sale, and all expenses of sale, including the cost of procuring evidence of title in connection with the sale proceedings and revenue stamps on the Deed of Trust Trustee’s deed; and (3) all other sums secured by the Deed of Trust, including interest on each of the foregoing items, all in such manner and order of priority or preference as the Master Trustee may in its sole and absolute discretion direct. The remainder, if any, of such proceeds, shall be paid to the person or persons legally entitled thereto, upon proof satisfactory to the Deed of Trust Trustee of such right.

Trustee Provisions

Duties; Appointment. Deed of Trust Trustee, by acceptance of the Deed of Trust, covenants to perform and fulfill the trusts herein created, being liable, however, only for gross negligence or willful misconduct, and waives any statutory fee and agrees to accept reasonable compensation, in lieu thereof, for any services rendered by Deed of Trust Trustee in accordance with the terms of the Deed of Trust. Deed of Trust Trustee may resign at any time upon giving thirty (30) days’ notice to CMHS and Master Trustee. Master Trustee may remove Deed of Trust Trustee at any time or from time to time and select a successor trustee. In the event of the death, removal, resignation, refusal to act, or inability to act of Deed of Trust Trustee, or in its sole discretion for any reason whatsoever Master Trustee may, without notice and without specifying any reason therefor and without applying to any court, select and appoint a successor trustee, by an instrument recorded wherever the Deed of Trust is recorded and all powers, rights, duties and authority of Deed of Trust Trustee, as aforesaid, shall thereupon become vested in such successor. Such substitute trustee shall not be required to give bond for the faithful performance of the duties of Deed of Trust Trustee under the Deed of Trust unless required by Master Trustee. The

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procedure provided for in this paragraph for substitution of Deed of Trust Trustee shall be in addition to and not in exclusion of any other provisions for substitution, by law or otherwise.

Trustee’s Fees. CMHS shall pay all costs, fees and expenses incurred by Deed of Trust Trustee and Deed of Trust Trustee’s agents and counsel in connection with the performance by Deed of Trust Trustee of Deed of Trust Trustee’s duties under the Deed of Trust and all such costs, fees and expenses shall be secured by the Deed of Trust.

Certain Rights. With the approval of Master Trustee, Deed of Trust Trustee shall have the right to take any and all of the following actions: (i) to select, employ, and advise with counsel (who may be, but need not be, counsel for Master Trustee) upon any matters arising under the Deed of Trust, including the preparation, execution, and interpretation of the Deed of Trust or the Master Indenture, and shall be fully protected in relying as to legal matters on the advice of counsel, (ii) to execute any of the trusts and powers of the Deed of Trust and to perform any duty under the Deed of Trust either directly or through his/her agents or attorneys, (iii) to select and employ, in and about the execution of his/her duties under the Deed of Trust, suitable accountants, engineers and other experts, agents and attorneys-in-fact, either corporate or individual, not regularly in the employ of Deed of Trust Trustee, and Deed of Trust Trustee shall not be answerable for any act, default, negligence, or misconduct of any such accountant, engineer or other expert, agent or attorney-in-fact, if selected with reasonable care, or for any error of judgment or act done by Deed of Trust Trustee in good faith, or be otherwise responsible or accountable under any circumstances whatsoever, except for Deed of Trust Trustee’s gross negligence or bad faith and (iv) any and all other lawful action as Master Trustee may instruct Deed of Trust Trustee to take to protect or enforce Master Trustee’s rights under the Deed of Trust. Deed of Trust Trustee shall not be personally liable in case of entry by Deed of Trust Trustee, or anyone entering by virtue of the powers herein granted to Deed of Trust Trustee, upon the Property for debts contracted for or liability or damages incurred in the management or operation of the Property. Deed of Trust Trustee shall have the right to rely on any instrument, document, or signature authorizing or supporting an action taken or proposed to be taken by Deed of Trust Trustee under the Deed of Trust, believed by Deed of Trust Trustee in good faith to be genuine. Deed of Trust Trustee shall be entitled to reimbursement for actual expenses incurred by Deed of Trust Trustee in the performance of Deed of Trust Trustee’s duties under the Deed of Trust and to reasonable compensation for such of Deed of Trust Trustee’s services under the Deed of Trust as shall be rendered.

Retention of Money. All moneys received by Deed of Trust Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received, but need not be segregated in any manner from any other moneys (except to the extent required by applicable law) and Deed of Trust Trustee shall be under no liability for interest on any moneys received by Deed of Trust Trustee under the Deed of Trust.

Perfection of Appointment. Should any deed, conveyance, or instrument of any nature be required from CMHS by any Deed of Trust Trustee or substitute trustee to more fully and certainly vest in and confirm to the Deed of Trust Trustee or substitute trustee such estates rights, powers, and duties, then, upon request by the Deed of Trust Trustee or substitute trustee, any and all such deeds, conveyances and instruments shall be made, executed, acknowledged, and delivered and shall be caused to be recorded and/or filed by CMHS.

Succession Instruments. Any substitute trustee appointed pursuant to any of the provisions of the Deed of Trust shall, without any further act, deed, or conveyance, become vested with all the estates, properties, rights, powers, and trusts of its or his/her predecessor in the rights under the Deed of Trust with like effect as if originally named as Deed of Trust Trustee herein; but nevertheless, upon the written request of Master Trustee or of the substitute trustee, the Deed of Trust Trustee ceasing to act shall execute and deliver any instrument transferring to such substitute trustee, upon the trusts herein expressed, all the estates, properties, rights, powers, and trusts of the Deed of Trust Trustee so ceasing to act, and shall duly assign, transfer and deliver any of the property and moneys held by such Deed of Trust Trustee to the substitute trustee so appointed in the Deed of Trust Trustee’s place.

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Notice of Actions. The Deed of Trust Trustee shall be under no obligation to notify any party hereto of any action or proceeding of any kind in which CMHS, the Master Trustee or the Deed of Trust Trustee shall be a party, unless brought by the Deed of Trust Trustee, or of any pending sale under any other deed of trust.

Satisfaction and Reconveyance. Upon written request of the Master Trustee stating that all sums secured by the Deed of Trust have been paid, and upon surrender to the Deed of Trust Trustee of the Deed of Trust and upon payment of its fees, the Deed of Trust Trustee shall reconvey and release, without warranty, the Property, it being further agreed that the recitals in such reconveyance and release of any matters or facts shall be conclusive proof of the truthfulness thereof and that the grantee in any reconveyance may be described as “the person or persons legally entitled thereto.”

Additional Security

The Deed of Trust Trustee shall be entitled to enforce payment and performance of any indebtedness or obligations secured by the Deed of Trust and to exercise all rights and powers under the Deed of Trust or under any other agreement or any laws now or hereafter in force, notwithstanding that some or all of the indebtedness and obligations secured by the Deed of Trust are now or shall hereafter be otherwise secured, whether by mortgage, deed of trust, pledge, lien, assignment or otherwise; and neither the acceptance of the Deed of Trust nor its enforcement, whether by court action or pursuant to the power of sale or other powers herein contained, shall prejudice or in any manner affect the Deed of Trust Trustee’s or the Master Trustee’s right to realize upon or enforce any other security now or hereafter held by the Deed of Trust Trustee or the Master Trustee, it being agreed either that the Deed of Trust Trustee or the Master Trustee shall be entitled to enforce the Deed of Trust and any other security now or hereafter held by the Master Trustee or the Deed of Trust Trustee in such order and manner as it may in its uncontrolled discretion determine.

Environmental Indemnity

CMHS unconditionally and irrevocably agrees to indemnify, reimburse, defend, exonerate, pay and hold harmless the Indemnified Parties from and against any and all Losses arising out of, related to, or in connection with:

(a) The presence of Hazardous Materials in, on, under or about or the Release (as defined below) or threatened Release of any Hazardous Materials to or from the Property, regardless of whether or not the presence of such Hazardous Materials arose prior to the present ownership or operation of the property in question or as a result of the acts or omissions of CMHS or any other person or entity;

(b) The violation or alleged violation of any Environmental Requirement (as defined below) affecting or applicable to the Property or any activities thereon, regardless of whether or not the violation of such Environmental Requirement (as defined below) arose prior to the present ownership or operation of the property in question or as a result of the acts or omissions of CMHS or any other person or entity;

(c) The transport, treatment, recycling, storage or disposal or arrangement therefor, of any Hazardous Material to, at or from the Property; and/or

(d) The enforcement or attempted enforcement of the indemnity set forth in the Deed of Trust.

CMHS’s obligations pursuant to the foregoing indemnity shall include the burden and expense of (x) defending against all claims comprised within the Losses, even if such claims are groundless, false or fraudulent, (y) conducting all negotiations of any description with respect to such claims, and (z) paying and discharging any and all such claims, when and as the same become due, against or from any Indemnified Party. CMHS’s obligations under the Deed of Trust shall survive (i) the repayment of all sums due under the Deed of Trust and the Master Indenture; (ii) the release of the Property or any portion thereof from the lien of the Deed of Trust; (iii) the

D-65

reconveyance of or foreclosure under the Deed of Trust (notwithstanding that all or a portion of the obligations secured by the Deed of Trust shall have been discharged thereby); (iv) the acquisition of the Property by Master Trustee; and/or (v) the transfer of all of Master Trustee’s rights in and to the Master Indenture and/or the Property. For as long as the Deed of Trust shall be and remain in effect, the indemnity obligations under the Deed of Trust shall be secured by the Deed of Trust, and thereafter the provisions of the Deed of Trust shall be deemed to be unsecured obligations of CMHS and shall be enforceable to the fullest extent permitted by applicable law. Any of the Indemnified Parties may, in their sole discretion, elect to enforce the obligations under the Deed of Trust pursuant to and as limited by applicable law, in order to prevent any such enforcement from being deemed an “action” within the meaning of applicable law. In any such case, the Indemnified Parties may elect to limit the obligations of CMHS and all other provisions under the Deed of Trust to the extent necessary to conform to applicable law.

As used herein, (A) the term “Indemnified Parties” means Master Trustee, any Holder (as such term is defined in the Master Indenture), any person or entity in whose name the encumbrance created by the Deed of Trust is or will have been recorded, together with the respective directors, officers, shareholders, partners, employees, agents, servants, representatives, contractors, subcontractors, affiliates, subsidiaries, participants, successors (including any successor to Master Trustee’s interest in the chain of title to the Property) and assigns of any and all of the foregoing, (B) the term “Losses” means any and all claims, suits, liabilities (including, without limitation, strict liabilities), actions, proceedings, obligations, debts, damages, losses, costs, expenses, diminutions in value, fines, penalties, charges, fees, expenses, judgments, awards, amounts paid in settlement, punitive damages, foreseeable and unforeseeable consequential damages, of whatever kind or nature (including, but not limited, to attorneys’ fees and other costs of defense), (C) the term “Hazardous Materials” means any substance (I) the presence of which requires notification, investigation or remediation under any Environmental Requirement, (II) which is or becomes designated, defined, classified or regulated as “hazardous”, “toxic”, “noxious”, “waste”, “pollutant”, “contaminant” or other similar term, or which requires remediation or is regulated under any present or future Environmental Requirement, including the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. Section 9601 et seq.), Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.), Federal Clean Air Act (42 U.S.C. Section 7401 et seq.), Federal Hazardous Materials Transportation Act (49 U.S.C. Section 5101 et seq.), Federal Clean Water Act (33 U.S.C. Section 1251 et seq.), Federal Environmental Pesticide Control Act (7 U.S.C. Section 136 et seq.), Federal Toxic Substances Control Act (15 U.S.C. Section 2601 et seq.), Federal Safe Drinking Water Act (42 U.S.C. Sections 300(f), et seq.), and California Health & Safety Code Sections 25117 and 25316, (III) which is toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic or otherwise hazardous and is or becomes regulated by any governmental or quasi-governmental agency, (IV) the presence of which on the Property causes or threatens to cause a nuisance relating to the Property or adjacent properties or poses or threatens to pose a hazard relating to the Property or adjacent properties or to the health or safety of any person on or about the Property or adjacent properties, (V) which contains asbestos, gasoline, diesel fuel or other petroleum hydrocarbons, volatile organic compounds, polychlorinated biphenyls (PCBs) or urea formaldehyde foam insulation, (VI) which contains or emits radioactive particles, waves or material, including radon gas, and/or (VII) which is or constitutes a part of an underground storage tank, (D) the term “Release” means any release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration into the environment, and (E) the term “Environmental Requirement” means shall mean any and all present or future laws, statutes, permits, approvals, plans, authorizations, guidelines, franchises, ordinances, restrictions, orders, rules, codes, regulations, judgments, decrees, injunctions or requirements of all governmental or quasi-governmental agencies or any officers of the Deed of Trust relating to the protection of the environment, health or safety, including, without limitation, those pertaining to (1) reporting, licensing, permitting, investigation, remediation or removal of, or pertaining to Releases or threatened Releases of, chemical substances, pollutants, contaminants or hazardous or toxic substances, materials or wastes, whether solid, liquid or gaseous in nature, including Releases or threatened Releases into the air, soil, surface water, ground water or land, (2) the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of chemical substances, pollutants, contaminants or hazardous or toxic substances, materials or wastes, whether solid, liquid or gaseous in nature, and (3) industrial hygiene or the protection of the health and safety of employees or the public.

D-66

General Indemnification

CMHS shall, at its sole cost and expense, protect, defend, indemnify, release and hold harmless the Indemnified Parties from and against any and all Losses imposed upon or incurred by or asserted against any Indemnified Parties and directly or indirectly arising out of or in any way relating to any one or more of the following: (a) any and all lawful action that may be taken by Master Trustee in connection with the enforcement of the provisions of the Deed of Trust or the Master Indenture, whether or not suit is filed in connection with same, or in connection with CMHS becoming a party to a voluntary or involuntary federal or state bankruptcy, insolvency or similar proceeding; (b) any accident, injury to, or death of, persons or loss of or damage to property occurring in, on or about the Property or any part thereof or on the adjoining sidewalks, curbs, adjacent property or adjacent parking areas, streets or ways; (c) any use, nonuse or condition in, on or about the Property or any part of the Deed of Trust or on the adjoining sidewalks, curbs, adjacent property or adjacent parking areas, streets or ways; (d) any failure on the part of CMHS to perform or be in compliance with any of the terms of the Deed of Trust or the Master Indenture; (e) performance of any labor or services or the furnishing of any materials or other property in respect of the Property or any part thereof; (f) the failure of any person or entity to file timely with the Internal Revenue Service an accurate Form 1099-B, Statement for Recipients of Proceeds from Real Estate, Broker and Barter Exchange Transactions, which may be required in connection with the Deed of Trust, or to supply a copy of the Deed of Trust in a timely fashion to the recipient of the proceeds of the transaction in connection with which the Deed of Trust is made; (g) any failure of the Property to be in compliance with any legal requirements; (h) the enforcement by any Indemnified Party of the provisions of this section; (i) any and all claims and demands whatsoever which may be asserted against Master Trustee by reason of any alleged obligations or undertakings on its part to perform or discharge any of the terms, covenants, or agreements contained in any Lease; (j) the payment of any commission, charge or brokerage fee to anyone claiming through CMHS which may be payable in connection with the funding under the Master Indenture; or (k) any misrepresentation made by Borrower in the Deed of Trust or the Master Indenture. Any amounts payable to Master Trustee by reason of the application of this section shall become immediately due and payable and shall bear interest at the lower of ten percent (10%) per annum (compounded monthly) or the maximum rate permitted by law to be charged by Deed of Trust Trustee from the date loss or damage is sustained by Master Trustee until paid.

Waiver of Statute of Limitations

The right to plead any and all statutes of limitations as a defense to any demand secured by the Deed of Trust is waived by CMHS.

Irrevocable by CMHS

The trust created by the Deed of Trust is irrevocable by CMHS.

Successors Bound

The Deed of Trust shall bind, and the benefits shall inure to, the respective parties hereto, the Master Trustee, their legal representatives, successors in office or interest, and permitted assigns.

Severability of Invalid Provisions

If any provision of the Deed of Trust should be held unenforceable or void, in whole or in part, then such unenforceable or void provision or part shall be deemed separable from the remaining provisions and shall in no way affect the validity of the remainder of the Deed of Trust.

D-67

Amendments; Releases or Reconveyances

The Deed of Trust may be amended, changed, modified or terminated at any time by the written consent of the Master Trustee and CMHS, without the necessity of obtaining the consent of the holders of any MTI Obligation.

Without affecting the liability of any other Person liable for the payment of any obligation herein mentioned, and without affecting the lien or charge of the Deed of Trust upon any property not then or theretofore released as security for the full amount of all unpaid obligations, the Deed of Trust Trustee may, upon written request by the Master Trustee in accordance with the Master Indenture, from time to time, and without notice to CMHS, release any person other than CMHS so liable, extend the maturity or alter any of the terms of any such obligation, or grant other indulgences, release or reconvey, or cause to be released or reconveyed, any portion or all of the Property, release any other or additional security for any obligation herein mentioned, or make compositions or other arrangements with debtors in relation thereto; and if the Deed of Trust Trustee at any time holds any additional security for any obligations secured by the Deed of Trust, it may enforce the sale thereof or otherwise realize upon the same at its option, either before or concurrently herewith or after a sale is made under the Deed of Trust.

Governing Law; Venue

The laws of the State of California (but without regard to the principles of conflicts of laws of such State) shall govern the Deed of Trust, the interpretation of the Deed of Trust and any right or liability arising under the Deed of Trust. Any action or proceeding to enforce or interpret any provision of the Deed of Trust shall be brought, commenced or prosecuted in Ventura County Superior Court, Ventura County, California, except as may otherwise be required to provide jurisdiction.

Buenaventura Lease

Should CMHS fail or refuse to make any payment or do any act which it is obligated hereunder to make or do, at the time and in the manner herein provided, then the Lessor shall have the right to purchase TCMHS’ obligation under the Deed of Trust to the extent pertaining to the Land that is leased by CMHS under the Buenaventura Lease and all Facilities, Appurtenances and Equipment attached to such portion of the Land (collectively, the “Leased Property”), without the payment of any prepayment penalties or other penalties, upon which purchase the Leased Property shall be released from the lien of the Deed of Trust.

Further Assurances

General; Appointment of Attorney-in-Fact. Upon request by Master Trustee, from time to time, CMHS shall prepare, execute and deliver, or cause to be prepared, executed and delivered, to Master Trustee, all instruments, certificates and other documents which may, in the opinion of Master Trustee, be necessary or desirable in order to effectuate, complete, perfect or continue and preserve the Obligations and the lien of the Deed of Trust. CMHS shall reimburse Master Trustee for all sums expended by Master Trustee in preparing, executing and recording such instruments, certificates and documents and such sums shall be secured by the Deed of Trust.

Statement Regarding Obligations. CMHS shall, within ten (10) days after request by Master Trustee, furnish Master Trustee with a written statement, duly acknowledged, setting forth (1) that the Deed of Trust is in full, force and effect and has not been modified (or, if modified, setting forth the particulars thereof), and (2) whether or not any setoffs or defenses exist against the payment of the Obligations secured by the Deed of Trust (and, if such setoffs or defenses exist, the particulars thereof).

Additional Security Instruments. CMHS, from time to time and within fifteen (15) days after request by Master Trustee, shall execute, acknowledge and deliver to Master Trustee such chattel mortgages, security agreements, control agreements or other similar security instruments, in form and substance satisfactory to

D-68

Master Trustee, covering all property of any kind whatsoever owned by CMHS or in which CMHS may have any interest which, in the opinion of Master Trustee, is necessary to the operation and maintenance of the Property or is otherwise a part of the Property. CMHS, from time to time and within fifteen (15) days after request by Master Trustee, shall also execute, acknowledge and deliver any financing statement, renewal, affidavit, certificate, continuation statement, supplementary mortgage or other document as Master Trustee may request in order to perfect, preserve, continue, extend or maintain the security interest under, and the priority of, the Deed of Trust or such chattel mortgage or other security instrument, as a first lien. CMHS shall pay to Master Trustee on demand all costs and expenses incurred by Master Trustee in connection with the preparation, execution, recording, filing and refiling of any such instrument or document, including charges for examining title and attorneys’ fees and expenses for rendering an opinion as to the priority of the Deed of Trust and of each such chattel mortgage or other security agreement or instrument as a valid and subsisting first lien on such property. Neither a request so made by Master Trustee, nor the failure of Master Trustee to make such a request, shall be construed as a release of such property, or any part thereof, from the lien of the Deed of Trust. This covenant and each such mortgage, chattel or other security agreement or instrument delivered to Master Trustee are cumulative and given as additional security. CMHS shall pay all premiums and related costs in connection with any title insurance policy or policies in full or partial replacement of the title insurance policy now insuring or which will insure the lien of the Deed of Trust.

Preservation of CMHS’s Existence. CMHS shall do all things necessary to preserve and keep in full force and effect its existence, franchises, rights and privileges under the laws of the state of its formation, and shall comply with all applicable legal requirements in connection therewith.

Absence of Insurance. The obligations of CMHS under the Deed of Trust and the Master Indenture shall not in any way be affected by (1) the absence, in any case, of adequate insurance, (2) the amount of the insurance or (3) the failure or refusal of any insurer to perform any obligation required to be performed by it pursuant to any insurance policy affecting the Property. If any claim, action or proceeding is made or brought against Master Trustee by reason of any event as to which CMHS is obligated to indemnify Master Trustee, then, upon demand by Master Trustee, CMHS, at CMHS’s sole cost and expense, shall resist or defend such claim, action or proceeding in Master Trustee’s name, if necessary, by such attorneys as Master Trustee shall approve. Notwithstanding the foregoing, Master Trustee may engage its own attorneys, in its discretion, to defend it or to assist in its defense, and CMHS shall pay the fees and disbursements of such attorneys and, until so paid, such amounts shall bear interest at the lower of ten percent (10%) per annum (compounded monthly) or the maximum rate permitted by law to be charged by Deed of Trust Trustee, and shall be secured by the Deed of Trust.

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APPENDIX G BOOK-ENTRY SYSTEM

General

DTC will act as securities depository for the Bonds. The Bonds will be issued as fully registered bonds registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered bond certificate will be issued for each maturity of the Bonds, in the aggregate principal amount of each such maturity, and will be deposited with DTC.

DTC, the world’s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934, as amended. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments from over 100 countries that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and Non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com and www.dtc.org.

Purchases of the Bonds under the DTC system must be made by or through Direct Participants which will receive a credit for the Bonds on DTC’s records. The ownership interest of each actual purchaser of each Bond (“Beneficial Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase, 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 Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Bonds, except in the event that use of the book-entry system for the Bonds is discontinued.

To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of the Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, defaults, and proposed amendments to the bond documents. For example, Beneficial Owners of the Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial

G-2

Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them.

Redemption notices shall be sent to DTC. If less than all of the Bonds 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. (nor any other DTC nominee) will consent or vote with respect to the Bonds unless authorized by a Direct Participant in accordance with DTC’s procedures. Under its usual procedures, DTC mails an omnibus proxy (the “Omnibus Proxy”) to the Bond Trustee 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).

Redemption proceeds, principal and interest payments on the Bonds will be made to Cede & Co. or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from the City or the Bond Trustee on the payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC, the Bond Trustee, the Obligated Group or the City, subject to any statutory or regulatory requirements as may be in effect from time to time. Payments of principal and interest to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Bond Trustee, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct Participants and, if applicable, the relevant Indirect Participants.

Discontinuance of DTC Services

DTC may discontinue providing its services as depository with respect to the Bonds at any time by giving reasonable notice to the City and the Bond Trustee. Under such circumstances, in the event that a successor depository is not obtained, bond certificates are required to be authenticated and delivered.

The City may, as provided in the Bond Indenture, decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In the event that a Participant utilizes DTC’s withdrawal process, Bond certificates will be authenticated and delivered for the Bonds.

Use of Certain Terms in Other Sections of the Official Statement

In reviewing this Official Statement it should be understood that while the Bonds are in the Book-Entry System, reference in other sections of this Official Statement to owners of such Bonds should be read to include any person for whom a Participant acquires an interest in Bonds, but (i) all rights of ownership, as described herein, must be exercised through DTC and the Book-Entry System and (ii) notices that are to be given to registered owners by the Bond Trustee will be given only to DTC. DTC is required to forward (or cause to be forwarded) the notices to the Participants by its usual procedures so that such Participants may forward (or cause to be forwarded) such notices to the Beneficial Owners.

Disclaimer

The City, the Bond Trustee and the Obligated Group have no responsibility or obligation to any Direct Participants or Indirect Participants or the Persons for whom they act with respect to (1) the accuracy of any records maintained by DTC or any Direct or Indirect Participant; (2) the payment by any relevant Participant of any amount due to any relevant Beneficial Owner in respect of the principal of or interest or premium, if any, on the Bonds; (3) the delivery by any relevant Direct Participant or relevant Indirect Participant of any notice to any relevant Beneficial Owner that is required or permitted under the terms of the Bond Indenture to be given to the holders of the Bonds; (4) the selection of the relevant Beneficial Owners to receive payment in the event of any partial redemption of the Bonds; or (5) any consent given or other action taken by DTC as holder of the Bonds.

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