Fitch Ratings Affs $46.3MM Good Shepherd Group, PA Bonds 'A' Und.

Business Editors

NEW YORK--(BUSINESS WIRE)--Jan. 10, 2003

Fitch Ratings affirms the underlying 'A' rating on the $14.0 million Lehigh County General Purpose Authority variable-rate revenue bonds, (The Good Shepherd Group), series 2000, and the $32.3 million fixed-rate Lehigh County General Purpose Authority revenue and refunding bonds, (The Good Shepherd Rehabilitation Hospital), series 1997. The bonds are insured by Ambac Assurance Corp., whose financial insurer strength is rated 'AAA' by Fitch. The Rating Outlook is Stable.

The 'A' rating affirmation is supported by The Good Shepherd Group's (Good Shepherd) excellent liquidity position, recent improvement in operations, positive inpatient utilization trends, and leading market share for rehabilitation services. Good Shepherd's liquidity position remains very strong with $76 million in unrestricted cash and investments, equating to 417 days cash on hand, 24.1 times (x) cushion ratio and cash to debt of 165% as of Oct. 31, 2002. From fiscal 2000-2002, Good Shepherd incurred an average $5.0 million loss from operations (negative 7.5% operating margin), but posted a $635,000 gain from operations (2.6% operating margin) through the four months ended Oct. 31, 2002. The improvement in operations was driven by an aggressive operational improvement plan implemented in fiscal 2002, increased patient activity in all service lines, and enhanced reimbursement for rehabilitation services under the Medicare prospective payment system. In September 2002, Good Shepherd's 29-bed rehabilitation hospital in Bethlehem began operations and is expected to be at full capacity by the spring of 2003. In 2001, Good Shepherd had leading inpatient and outpatient market share for rehabilitation services of 69% and 40%, respectively, in its 3-county primary service area.

Ongoing credit concerns include Good Shepherd's aggressive investment allocation, large concentration of governmental payors, and narrow focus as a specialty provider. Although Good Shepherd's liquidity position remains strong, cash and investments have declined to $75.8 million (417 days cash on hand) at Oct. 31, 2002 from $87.9 million (559 days cash on hand) at June 30, 2000. Reduced investment returns have significantly affected the bottom line through the four months ended Oct. 31, 2002, as demonstrated by a 0.2% excess margin, compared to an average 9.6% from fiscal 2000-2002. Good Shepherd is vulnerable to budgetary cutbacks at the state and federal levels as approximately 67% of its gross revenues are derived from Medicare and Medicaid payors. The organization's focus on rehabilitation services creates an inherent risk with revenue streams concentrated among a few specialized service lines.

The Rating Outlook is Stable. Fitch expects the favorable change in Medicare reimbursement to continue to support Good Shepherd's operational improvement, and believes its $1.5 million operating gain budgeted for fiscal 2003 is attainable. The maintenance of the 'A' rating is contingent upon Good Shepherd's ability to maintain its current operating profitability.

The Good Shepherd Group is headquartered in Allentown, PA and consists of three inpatient rehabilitation facilities (92 beds), two long-term care facilities (159 beds), and four outpatient rehabilitation centers. Good Shepherd also provides work services and vocational services to over 800 persons annually. Good Shepherd's disclosure to Fitch has been excellent in terms of content and timeliness. Good Shepherd covenants to provide only annual disclosure to bondholders, which is viewed negatively by Fitch.