995.

5(d)(1)(C)
A statement of all of the reasons the board of directors of applicant believes that the proposed
agreement or transaction is either necessary or desirable.
Background of the Decision to Seek a New Operator. In 2013, after careful study and
discernment, the DCHS Board concluded that continuing sponsorship by the Daughters of
Charity of DCHS and the Health Facilities was no longer tenable and that it was in the best
interests of DCHS to seek new resources under new control that would preserve health care
services in the local communities and fulfill DCHSs commitments to associates, physicians,
bondholders and retirees. Cash flow projections throughout 2014 and 2015 consistently showed
that the combination of the uncertain future of DCHSs operations coupled with declines in
volume, inadequate reimbursement rates from payors and high costs of salaries, wages and
benefits would inevitably deplete DCHSs cash on hand for paying the Health Systems ongoing
expenses.
Cash Position and the 2014 Bonds. In order to address the projected depletion of cash
and bridge the Health Systems cash needs for a period long enough to allow the closing of a
transaction, DCHS obtained a $125 million of short-term financing in July and August 2014
from the issuance of the 2014 Bonds. 1 Based on DCHSs internal cash flow projections, DCHS
believes that this bridge facility will provide sufficient cash to support normal hospital operations
through the end of calendar year 2015; however, repayment of the 2014 Bonds is due on
December 15, 2015, meaning that without repayment DCHS will be at risk of default on the
2014 Bonds, which in turn will cause the 2005 Bonds to be in default. At that point, DCHSs
operations could likely not continue without the protection of a bankruptcy proceeding or
additional short-term financial support. (See Exhibit A for current information regarding cash
projections.) Therefore, DCHS requires a transaction with the ability to close by or before
December 15, 2015.
Transaction Process. The process of seeking a buyer or buyers is detailed in the sections
of this application responding to 999.5(d)(2). The DCHS Board engaged an investment
banking firm, Houlihan Lokey Capital, Inc. (Houlihan Lokey), experienced in situations
involving complex, distressed hospital systems, to conduct a comprehensive offering of the
Health Facilities and other elements of the Health System. Early in the process, it was
determined that a transaction involving the Health System as a whole presented the strongest
possibility for best satisfying the objectives of the DCHS Board. 2 The transaction process began
1

The funds were provided by the issuance of the 2014 Bonds by California Statewide Communities Development
Authority in July and August 2014. The funds are held by the 2014 Bond trustee and are released to DCHS on
approval of the bondholders and bond trustee and the satisfaction of various conditions.
2
Any transaction involving the DCHS Health Facilities would need to address the fact that many of DCHSs
liabilities notably pension funding and bond obligations are binding on all of the Hospital Corporations.
Multiple transactions carry the risk that if even one of several failed to close, the remaining Hospital Corporations
(or their successors) could become subject to untenable liabilities for the shared obligations. As a specific example,
the Retirement Plan for Hospital Employees (RPHE) is an ERISA plan for which all of the Hospital Corporations
would have joint and several liability as members of a controlled group for ERISA purposes. The withdrawal of
one Hospital Corporation that is a participating employer triggers joint and several liability on the part of all
members of the controlled group. This withdrawal liability amount is estimated to be approximately $234 million as
of December 31, 2014. A combination of sales (in contrast to an assumption of the RPHE plan by a single buyer)

in February 2014 and resulted with the DCHS Board choosing a transaction proposed by Prime
Healthcare Services, Inc. and Prime Healthcare Foundation, Inc. (collectively, Prime). On
March 9, 2015, Prime terminated its transaction agreement with DCHS.
DCHSs Board renewed the search for a successor immediately, and Houlihan Lokey
contacted a number of health systems and other potential buyers who might have an interest in
acquiring DCHS in its entirety or individual (or groups of) hospitals or other assets. Seventysix
(76) potential buyers signed confidentiality agreements, received confidential information about
the Health System and were afforded the opportunity to conduct due diligence. Fourteen
potential buyers submitted first-round bids by the deadline of April 13, 2015. Four potential
buyers submitted bids in the final round of the transaction process. In a series of meetings ended
on July 14 and 15, 2015, the DCHS boards considered these four proposals. A summary of the
four final proposals is found in Houlihan Lokeys presentation to the Board dated July 14 and
July 15, 2015 under 999.5(d)(2)(D).
The DCHS Board used eleven factors to evaluate the final proposals. The factors reflected
objectives of the DCHS Board and were used to guide but not prescribe a particular selection
outcome. The factors consisted of the following:
1. Post-Closing Health Care Services: Ability to sustain health care services in the
communities served by the Health Facilities after the transaction closes;
2. Treatment of Pension Obligations: Treatment of the Health Systems pension
obligations (including the RPHE and Church Plan);
3. Treatment of Collective Bargaining Agreements: Continuation of existing
collective bargaining agreements;
4. Operational and Transactional Experience: Experience and success in turning
around distressed hospitals and breadth of experience with acute care hospitals (with
particular experience in California);
5. Historical Service Quality: Given that only two finalist bidders in this round
currently operate hospitals, the Board considered historical service quality of the
hospitals with which proposed management team members had historically worked;
6. Financial Wherewithal: Financial strength measured in terms of its cash and other
assets and its potential access to additional capital sources for the Health Systems
needs;
7. Capital Commitment: Willingness to commit at-risk capital;
8. Need for Bankruptcy: Whether a bankruptcy court process to reduce liabilities was
a condition of closing;
9. Valuation: The financial value of the offer measured in terms of liabilities of the
Health System paid and assumed;
10. Closing Risk: The risk of a failed closing because of financing contingencies,
regulatory issues or other impediments to closing (consideration of the bidder funding
a meaningful good-faith deposit being an important criterion); and
would need to generate sufficient sale proceeds to pay that liability, as well as all other obligations of the Health
System, including full repayment of the 2005 and 2014 Bonds secured by all Health System assets. Otherwise, a
risk would arise that individual transactions would not in aggregate satisfy all of DCHSs obligations (which parties
interested in the full Health System were prepared to satisfy or assume).

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11. Timeline: The ability to meet the time frame of DCHS for closing in light of
working capital erosion.
In the DCHS Boards view, BlueMountains proposal satisfied the applicable criteria in clear
and substantive ways, notwithstanding that it was not a proposal for a sale of assets. The DCHS
Board studied the final options carefully, and weighed the strengths and weaknesses of all of the
proposals. In its deliberations, the DCHS Board and the boards of the Hospital Corporations each
followed a tradition of St. Vincent de Paul of active discernment, a decision-making process
rooted in reflection on scripture, prayer and evaluation of the choices to be made in light of the
Vincentian Values of the Daughters of Charity. Arising out of this discernment process, the
DCHS Board concluded that implementation of BlueMountains proposal would be in the best
interests of the Health System, not only in light of the likelihood of achieving a closing of a
transaction, but also BlueMountains exceptional means to meet the demand for new stewardship
capable of supporting the Health System well into the future. Among other considerations, the
DCHS Board found the BlueMountain Restructuring to be in accord with the eleven evaluation
guidelines:
1. Post-Closing Health Care Services: The System Agreement committed to preserve the
Health Facilities as general acute care hospitals with open emergency rooms. [System
Agreement, 7.6(b)]
2. Treatment of Pension Obligations:
a. The Church Plan: Under the System Agreement, Manager and the Renamed
Health System are committed to take all steps legally required to convert the
Church Plans to employee pension benefit plans, to modify employee benefit
plans to satisfy the requirements of ERISA and the Tax Code, to apply for
Pension Benefit Guaranty Corporation (PBGC) insurance coverage and to make
all contributions necessary to satisfy the funding and PBGC premium
requirements. [System Agreement, 7.3(a)] As a matter of law, the conversion of
the Church Plans to employee pension benefit plans subject to ERISAs
requirements and protections will be automatic upon Closing.
b. RPHE: Under the System Agreement, the Health System, after the Change in
Governance, shall take all legally required actions to continue fulfilling DCHSs
obligations under the RPHE and provide funding in accordance with the
requirements of ERISA. [System Agreement, 7.3(c)]
3. Treatment of CBAs: The Health Systems CBAs will continue in force for the
remainder of their existing terms.
4. Operational and Transactional Experience: The two senior executives of Manager,
Mitch Creem and Mark Meyers, both have decades of operational experience within
California and nationwide at major medical centers under financially-distressed
conditions.
5. Historical Service Quality: Summaries based on publicly-available health department
citations, federal and state health law enforcement sanctions and checks of all officers
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and directors against state and federal registers of sanctioned individuals confirmed the
absence of material health care-related regulatory or other sanctions against either
individuals or entities associated with BlueMountain and Integrity.
6. Financial Wherewithal: BlueMountain currently has approximately $21 billion in
assets under management. While $100 million funding commitment, and at least $150
million of debt facility were pledged as part of the current transaction, the Board felt that,
if more funding was needed to facilitate the turnaround of the Health System after
Closing, BlueMountain has the wherewithal and ability to access additional capital.
7. Valuation: BlueMountains offer satisfies all of DCHSs liabilities and expenses
(through either repayment or continuation as an obligation of the continuing Health
System) and will allow for the Health System to have approximately $180 million of
estimated operational liquidity immediately after Closing. The DCHS Board measured
the value of the offers not only in terms of the dollar amount on paper of liabilities paid
and assumed, but also the level of confidence in the bidders balance sheet and access to
capital.
8. Funding Commitment: The System Agreement commits the Health System to fund
capital needs in the amount of $180 million over five years following Closing (with a
provision for pro-rata reductions if one or more of the Health Facilities is sold) and the
Management Agreement contains a fee deferral mechanism to enhance the potential for
successful turnaround.
9. Need for Bankruptcy: The BlueMountain proposal did not require or contemplate a
bankruptcy proceeding for DCHS either before or after Closing.
10. Closing Risk:
a. Uncertainties Created by Elements of Offers: BlueMountains closing conditions
did not pose direct obstacles or indirect risks of third parties failing to perform
roles essential to successful closing.
b. Protection for DCHS from Breach: In order to create a material disincentive for a
counterparty to breach its agreement by failing to close, DCHS required each
bidder to put at risk a substantial deposit upon signing a definitive agreement.
BlueMountain committed to a $40 million cash deposit.
11. Timeline: Each final proposal presented comparable commitments to proceed
expeditiously to closing.
The DCHS Board concluded that the BlueMountain proposal was in the best interests of the
Health System because it met many fundamental objectives, including:

By continuing the overall structure of the Health System with additional capital
resources provided by BlueMountain and with experienced management and
leadership provided by Manager, the Health System will be in a stronger position,

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financially and strategically, to continue providing health care services to the

communities served by the Health Facilities;
Current salaries, wages and benefits of DCHS employees at the Health Facilities will
be continued for a set period;
Current and future DCHS retirees will have their pensions achieve a much greater
degree of protection through the conversion of the Church Plan to an ERISA plan;
By retaining the Health System intact, shared liabilities, including RPHE pension
liabilities, would not be accelerated;
The interests of bondholders were protected by repayment of the 2014 Bonds at
Closing and by preservation and potential for repayment of the 2005 Bonds through
the assurance of ongoing tax-exempt status of both the Health System and the 2005
Bonds;
The preservation the Health System as a system of nonprofit, public benefit
corporations preserves charitable assets following Closing and maintains AG
jurisdiction over the corporations; and
The structure permits continuation of the charitable foundations in their historical role
of philanthropy for the benefit of the Health Facilities.

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