-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BBJPOxaPKPbljrXTP0Hsxl89mN8O5+6ht4q8V15ukwZpTZIbkiX8XS9zAow4Njam mL6OOMIiaJwuMib6SbHsEg== 0000950129-96-000531.txt : 19960402 0000950129-96-000531.hdr.sgml : 19960402 ACCESSION NUMBER: 0000950129-96-000531 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHAMPION HEALTHCARE CORP /TX/ CENTRAL INDEX KEY: 0000721601 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-GENERAL MEDICAL & SURGICAL HOSPITALS, NEC [8062] IRS NUMBER: 592283872 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-11851 FILM NUMBER: 96542616 BUSINESS ADDRESS: STREET 1: 14340 TORREY CHASE STE 320 CITY: HOUSTON STATE: TX ZIP: 77014 BUSINESS PHONE: 7135835491 MAIL ADDRESS: STREET 1: 14340 TORREY CHASE STREET 2: SUITE 320 CITY: HOUSTON STATE: TX ZIP: 77014 FORMER COMPANY: FORMER CONFORMED NAME: AMERIHEALTH INC DATE OF NAME CHANGE: 19920703 10-K 1 CHAMPION HEALTHCARE CORPORATION - 12/31/95 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM __________TO __________ COMMISSION FILE NO. 0-11851 CHAMPION HEALTHCARE CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 59-2283872 (STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.) 515 W. GREENS ROAD, SUITE 800, HOUSTON, TEXAS 77067 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
14340 TORREY CHASE, SUITE 320, HOUSTON, TEXAS, 77014 (FORMER ADDRESS) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 583-5491 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: COMMON STOCK, $.01 PAR VALUE AMERICAN STOCK EXCHANGE (TITLE OF CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO --- --- INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [ ] THE AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT BASED ON THE LAST REPORTED SALES PRICE ON MARCH 25, 1996, IS APPROXIMATELY $46,918,000. THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK, $0.01 PAR VALUE, AS OF MARCH 25, 1996: 11,963,366 SHARES. DOCUMENTS INCORPORATED BY REFERENCE PART III OF THIS REPORT IS INCORPORATED BY REFERENCE FROM THE COMPANY'S DEFINITIVE PROXY STATEMENT RELATING TO ITS ANNUAL MEETING OF STOCKHOLDERS, WHICH WILL BE FILED WITH THE COMMISSION NO LATER THAN APRIL 29, 1996. 1 2 PART I ITEM 1. BUSINESS GENERAL Champion Healthcare Corporation (the "Company," including, where appropriate, its wholly owned and majority-owned subsidiaries and controlled partnerships), is engaged in the ownership and management of general acute care and specialty hospitals and related health care facilities. As of March 25, 1996, the Company owns and operates five general acute care hospitals with a total of 722 licensed beds in Texas, Utah and Virginia, and two psychiatric hospitals with a total of 219 licensed beds in Missouri and Louisiana. The Company also owns a 50% interest in a partnership that owns and operates two general acute care hospitals with a total of 341 beds in North Dakota, which it accounts for under the equity method of accounting. The Company's principal executive offices are located at 515 W. Greens Rd., Suite 800, Houston, TX 77067, and its telephone number is 713-583-5491. RECAPITALIZATION Effective December 31, 1995, the Company and its preferred shareholders entered into the 1995 Recapitalization Agreement for the principal purpose of enhancing the value of common stock by reducing the complexity of the Company's capital structure and eliminating the accrual of future dividends on its outstanding preferred stock and the resulting impact on earnings per share. As a result of the Recapitalization Agreement, common shares outstanding at December 31, 1995, increased from 4,262,386 to 11,868,230, and preferred shares outstanding decreased from 10,452,370 to 2,605,714. The transactions comprising the 1995 Recapitalization Agreement are herein collectively referred to as the "Recapitalization." RECENT ACQUISITIONS On April 13, 1995, the Company acquired Salt Lake Regional Medical Center ("SLRMC") from Columbia/HCA Healthcare Corporation ("Columbia") for approximately $61,042,000, which included approximately $11,783,000 for certain working capital components, resulting in a net purchase price of approximately $49,259,000. SLRMC is comprised of a 200 bed tertiary care hospital and five clinics and is located in Salt Lake City, Utah. On March 1, 1996, the Company acquired Jordan Valley Hospital ("Jordan") from Columbia. Jordan is a 50 bed acute care hospital located in West Jordan, Utah, a suburb of Salt Lake City. The Company acquired Jordan in exchange for Autauga Medical Center, an 85 bed acute care hospital, and Autauga Health Care Center, a 72 bed skilled nursing facility, both in Prattville, Alabama, plus preliminary cash consideration paid to the seller of approximately $10,750,000. Cash consideration included approximately $3,750,000 for certain net working capital components, which are subject to adjustment, and reimbursement of certain capital expenditures made previously by the seller. The transaction did not result in a gain or loss. The Alabama facilities were acquired as part of the Company's acquisition of AmeriHealth, Inc. on December 6, 1994. PENDING ACQUISITIONS The Company is actively negotiating to acquire additional health care facilities, principally general acute care hospitals. Due to the nature of various contingencies that are normally associated with proceeding to consummation of an acquisition, such as satisfactory due diligence investigations and regulatory and governing body approvals, whether or not the Company executes either a non-binding or binding letter of intent or even a definitive agreement is no assurance that an acquisition will occur. Whether or not and to what extent the Company discloses the status of any pending acquisition is dependent upon a number of factors, including the nature and status of the contractual relationship, any unique need for confidentiality, the nature and type of governing body approvals, the nature of and concern for regulatory approvals, financing contingencies, specific operational and due diligence concerns, and whether other potential purchasers are competing for the facility. The Company is presently unable to conclude whether any potential acquisition currently under consideration is more likely than not to occur. 2 3 On January 31, 1996, the Company entered into a non-binding letter of intent to sell the 149 bed Lakeland Regional Hospital in Springfield, MO, to Columbia in exchange for the 100 bed Poplar Springs Hospital in Petersburg, VA. Both facilities are psychiatric hospitals. The Company anticipates receiving additional cash consideration as a result of the sale, net of certain working capital components and the respective facilities' long term debt. This transaction is subject to many of the contingencies referred to above, and the Company is presently unable to conclude whether consummation of this transaction is more likely than not to occur. THE HEALTH CARE INDUSTRY Hospitals continue to represent the largest segment of total health care expenditures. Expectations are that spending on health care in the United States will continue to grow at a faster rate than the overall economy, and that total health care expenditures will continue to consume an increasing share of the Gross Domestic Product. These estimates assume that continued cost containment measures will be more than offset by demands resulting from current demographic trends such as the aging of the population, growth in income, general inflation and new technology. Over the past decade, many hospitals have closed due to cost containment pressures, changing technology, changes in regulations and reimbursement, changes in physician practice patterns and other factors. One result of these changes has been a significant shift from inpatient to outpatient care. Outpatient utilization as reflected in outpatient gross revenue, adjusted patient days and adjusted admissions, has increased significantly industry-wide in recent years. During the past several years, the major third-party payors of hospital services (Medicare, Medicaid and private health care insurance companies) have undertaken substantial revisions in their payment methodologies and monitoring of health care expenditures in order to contain health care costs and to reward hospitals for efficient treatment of patients. Instead of reimbursing health care providers for retrospectively determined actual costs, Medicare reimburses for inpatient services based on fixed, prospectively determined payments keyed to regional and national rates under a system of specific diagnosis related groups ("DRGs") of services determined by a patient's principal diagnosis. Consequently, hospitals increasingly bear the risk of not being fully reimbursed for their actual costs. The introduction of these Medicare cost containment incentives, combined with closer monitoring of health care expenditures by both private health insurers and employers, has resulted in increased contractual adjustments and policy discounts to hospitals' standard charges for services performed, as well as significant declines in inpatient utilization and increases in outpatient utilization. The Company believes that as a result of these initiatives, managed care organizations such as health maintenance organizations ("HMOs") and preferred provider organizations ("PPOs") will continue to represent an increasing segment of health care payors. For a more complete discussion see "Reimbursement." BUSINESS STRATEGY The Company believes that hospitals possess inherent characteristics which, if properly leveraged upon, can establish hospitals as the focal point for a comprehensive health care delivery system within their individual markets, including services such as home health care, long-term care, outpatient ambulatory surgery centers, and satellite clinics. Value-Driven Provider. The Company's strategy is to become the premier health care provider in each of its markets by offering a broad array of health care services of measurably higher quality at a lower cost than its competition. The Company believes that a low cost provider is better able to succeed in the current health care environment by: (i) underpricing its competition for managed care contracts and, (ii) developing the competitive endurance to outperform and outlast less efficient providers, thereby gaining additional market share by either engineering a merger or consolidation with a weaker competitor or as marginal competitors exit the marketplace. In an industry increasingly characterized by rigorous efforts to contain health care spending, the Company believes this strategy will reduce its vulnerability to pricing pressures, competition, regulatory constraints and periods of market adversity. Historically, hospitals have had significant pricing flexibility and have been able to pass cost increases through to payors. The Company believes that as purchasers of health care seek to reduce their spending, public and private sector payors will increasingly gain control of pricing and will favor fixed payment systems. This will place 3 4 further pressure on hospital margins and may jeopardize the financial stability and competitive vitality of less efficient providers. However, the Company believes that hospitals with the management expertise and discipline to control costs while improving quality will gain market share and compete more effectively. The Company believes that buyers of health care services are quickly becoming more sophisticated in their purchasing decisions and will increasingly require providers to demonstrate the value of their services in terms of the quality of such services as compared to cost. In the Company's opinion, hospitals which can provide payors with quantitative data regarding quality and cost comparisons will have a competitive advantage and will be able to obtain market share from market providers who are either unable to provide this information, or whose quality and cost data are not equal to the Company's. Acquisition Strategy. The Company will continue to pursue opportunities to grow through the acquisition of, and partnerships with, hospitals in existing and new markets that meet the Company's long-term objective of establishing each of its hospitals as the premier, low cost provider of quality health care services in each of its markets. In general, the Company focuses its acquisition efforts on markets with populations ranging from 50,000 to 500,000, and secondarily, on larger markets where the target hospital has established itself as a preeminent provider of health care services with strong networking potential. The Company believes that the primary source of acquisitions will be stand- alone, not-for-profit hospitals which have attractive market share and significant profit potential, but lack the necessary capital or management resources to compete in the current environment. Hospitals being divested by hospital companies for strategic, regulatory or performance reasons will be a secondary source of acquisitions. Developing a Quality Advantage. The Company has implemented programs designed to prove to payors that its hospitals provide safe, high quality care. By providing payors with quantifiable evidence of monitoring and improving quality of care, the Company believes it can gain market share from competitors who cannot provide such information or whose results are not equal to the Company's. The Company has spent three years developing a program called ChampionPride in conjunction with an outside firm that tracks and monitors 225 separate categories of clinical indicators which measure the incidence of adverse events that may occur during a patient's period of treatment. These events are termed "rework" because they can result in an extended length of stay, unplanned returns to surgery or other occasions of service which would not otherwise have been required as part of the patient's normal treatment regimen. Based on research by organizations such as Harvard University, it has been estimated that up to 10% of all patients admitted to hospitals experience some form of adverse event such as medication errors, falls and unanticipated problems in surgery which add unnecessarily to the cost of care. On a national basis, the cost of rework has been estimated at between $25 and $30 billion per year. With the increase in patients covered by fixed payment plans, such as Medicare, Medicaid and capitation, hospitals are increasingly at risk for not being reimbursed for the cost of rework. Consequently, by focusing on eliminating adverse events, the Company improves the quality of care and seeks to reduce excess cost. Further, because the ChampionPride program tracks the incidence of rework and can quantify the level of improvement, the Company believes that the ability to provide this data to payors, such as employers and managed care plans, has the potential to retain existing market share and obtain new market share for its hospitals. Additionally, the Company also believes that over a period of time the success of its quality improvement program will significantly reduce the Company's liability risk and may result in lower costs. Operating Strategy. The Company's operating strategy is designed to increase market share for its hospitals by creating value for consumers of health care services through better delivery of these services in a more cost effective manner than its competitors. The Company believes that when industry consolidation activity inevitably diminishes, the successful hospital companies will not necessarily be those which are the largest but those which can demonstrate value to payors. Consequently, following each acquisition, the Company seeks to establish and maintain each of its hospitals as market leaders in delivering quantifiably higher quality of care and superior customer service at lower prices than their market competitors. Although the Company's management has successfully employed a number of the operating strategies and programs at several of its hospitals, and at other hospital management companies prior to the Company's formation in 1990, there 4 5 can be no assurance that the Company will be able to quickly and effectively implement such strategies and programs with respect to hospitals acquired in the future, or that such strategies and programs, when fully implemented, will improve the Company's financial results. OPERATIONS General. At December 31, 1995, the Company owned and operated five general acute care hospitals with a total of 757 licensed beds in Alabama, Texas, Utah and Virginia, two psychiatric hospitals with a total of 219 licensed beds in Missouri and Louisiana and one skilled nursing facility with a total of 72 licensed beds in Alabama. The Company also owns a 50% interest in and operates Dakota Heartland Health System ("DHHS"), a partnership comprised of two general acute care hospitals with a total of 341 licensed beds in Fargo, North Dakota. The Company operates DHHS pursuant to an operating agreement and accounts for its investment in DHHS under the equity method. Accordingly, sources of revenue, payment mix, and bed utilization and occupancy with respect to DHHS are presented separately. DHHS began operations on December 31, 1994. On March 1, 1996, the Company acquired Jordan Valley Hospital, a 50 bed acute care hospital located in West Jordan, Utah in exchange for Autauga Medical Center, an 85 bed acute care hospital, and Autauga Health Care Center, a 72 bed skilled nursing facility, both in Prattville, Alabama, plus cash consideration paid to the seller of $10,750,000. The Alabama facilities were acquired as part of the Company's acquisition of AmeriHealth, Inc. on December 6, 1994. The general acute care hospitals owned and/or operated by the Company provide a range of medical and surgical services typically available in general acute care hospitals. These services generally include inpatient care such as intensive and cardiac care, diagnostic services, radiological services and emergency services. All of the hospitals provide an extensive range of outpatient services, including ambulatory surgery, laboratory and radiology. The Company's psychiatric hospitals provide child, adolescent and adult comprehensive psychiatric and chemical dependency treatment programs, with inpatient, day hospital, outpatient and other ambulatory care. Each hospital is managed on a day-to-day basis by its chief executive officer. The data for the periods presented below are not strictly comparable due to the significant impact of acquisitions and the formation of DHHS. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Sources of Revenue. The Company's revenues depend on the level of inpatient census at its hospitals, the volume of outpatient services at its hospitals and outpatient facilities, the acuity of patients' conditions and charges for services. The increase in gross inpatient revenue in 1995 compared to 1994 is due primarily to the Company's acquisition of two psychiatric hospitals in the fourth quarter of 1994, which derive a greater percentage of their gross patient revenue from inpatient services than do acute care hospitals. The approximate percentages of gross patient revenue for inpatient and outpatient services for the Company's last three years and DHHS for 1995 were as follows:
Year Ended December 31, ------------------------------------------------------ Consolidated Hospitals DHHS ----------------------------------- ---- 1995 1994 1993 1995 ---- ---- ---- ---- Inpatient Services 66% 62% 58% 65% Outpatient Services 34% 38% 42% 35%
5 6 Payment Mix. The Company receives payment for services rendered to patients from the Federal government under the Medicare program, state governments under their respective Medicaid programs, PPOs, HMOs, other private insurers and directly from patients. See "Reimbursement." The approximate percentages of the Company's gross patient revenue from these sources for the last three years and DHHS for 1995 were as follows:
Year Ended December 31, -------------------------------------------------- Consolidated Hospitals DHHS ---------------------------------- ---- 1995 1994 1993 1995 ---- ---- ---- ---- Medicare 42% 39% 39% 46% Medicaid 19% 18% 12% 9% All Other Payors 39% 43% 49% 45%
Bed Utilization and Occupancy Rates. The following table summarizes selected operating statistics for the hospitals owned by the Company and DHHS during the periods indicated.
Year Ended December 31, ----------------------------------------------------------- Consolidated Hospitals DHHS ---------------------------------------- -------- 1995 1994(1) 1993(1) 1995 ---------- --------- --------- -------- Hospital-Licensed Beds (at year end) 976 877 359 341 Admissions 17,530 10,556 9,026 10,096 Patient Days 123,525 65,693 50,309 55,476 Outpatient Visits 189,790 95,979 81,221 126,211 Surgery Cases 10,981 9,990 9,911 9,769 Deliveries 2,112 1,262 1,233 1,449 Average Length of Stay (days): All Beds 7.0 6.2 5.6 5.5 Medical - Surgical 4.4 4.2 4.2 4.4 Psychiatric 13.5 13.8 11.1 9.6 Occupancy Rate 38% 38% 40% 45%
(1)Includes 142 licensed beds at Heartland Medical Center, which the Company contributed to DHHS effective December 31, 1994. The Company accounts for its investment in DHHS under the equity method. Prior to contribution, Heartland Medical Center was wholly owned by the Company and consolidated in the Company's Consolidated Statement of Operations. The Company owns a 72-bed skilled nursing facility which had annual occupancy rates of 99% for the years ended 1995, 1994 and 1993, respectively. COMPETITION The competition for patients among hospitals and other health care providers has intensified in recent years as hospital occupancy rates have declined. This decline is attributable to several factors, including cost containment pressures, changing technology, changing governmental regulations and third-party payor mechanisms and the related medical practice patterns. Such factors have led to new competitive strategies by hospitals and other health care providers. Among these strategies is an increasing emphasis on outpatient health care delivery procedures (e.g. outpatient surgery, urgent care, diagnostic centers and home health care) which tend to eliminate or reduce the use of inpatient services. In addition, consolidation of hospital chains and affiliations among hospitals have increased with the result that payors are increasingly contracting with these entities to provide exclusive health care services to its members within a geographic area. Such contracts, with the resulting greater number of possible patients, often permit more competitive pricing and other services relative to hospitals that are not a part of such group. 6 7 The Company competes with one or more hospitals and other alternative health care providers in each of the markets it serves. Certain of the Company's competitors have greater financial resources, are better equipped and offer a broader range of services than the Company's hospitals. Additionally, governmental and tax exempt hospitals benefit from endowments, charitable contributions and tax exempt financing, all of which are not available to the Company. In the Company's opinion, one of the most significant factors in the competitive position of a hospital is the number and quality of physicians affiliated with that hospital since physicians still determine the majority of hospital admissions. The Company believes that physicians refer patients to a hospital primarily on the basis of the quality of services it renders, the quality of the other physicians on the medical staff, the location of the hospital and the quality of the hospital's facilities, equipment and employees. The Company strives to maintain high ethical and professional standards and high quality facilities, equipment, employees and services for physicians and their patients. The competitive position of a hospital is increasingly affected by its ability to negotiate provider contracts with purchasers of group health care services. Such purchasers include PPOs, HMOs, self-insured employers and government organizations. PPOs and HMOs attempt to direct and control the use of hospital services through "managed care" programs and to obtain discounts from hospitals' established charges. In return, hospitals acquire access to increased numbers of potential patients. In addition, employees and traditional health insurers are increasingly interested in containing costs through negotiations with hospitals for managed care programs and discounts from established charges. In geographic areas where these organizations have established themselves as a significant presence in their markets, the failure of a hospital to obtain managed care provider contracts could negatively impact that hospital's volume of patients and revenues and therefore could have an adverse impact on the Company's results of operations and cash flow. The Company attempts to mitigate this risk by seeking to position each of its facilities as a low cost provider of high quality services in the market it serves and by ensuring that its acute care facilities, when practical, offer obstetrical services. The Company believes that both of these factors are important in attracting managed care provider contracts. The aforementioned trends have resulted in significant consolidation in the health care industry over the past decade and many hospitals have closed. The Company believes that continuing cost containment pressures will lead to a continued increase in managed care and further consolidation in the hospital industry. REGULATION AND OTHER FACTORS Health care operations are subject to federal, state and local government regulations regarding condition and adequacy of the facility, its equipment, personnel and standards of medical care. Health care facilities must also comply with the licensing requirements of the federal, state and local health agencies as well as the requirements of building codes, health codes and local fire codes. The Company's facilities are properly licensed under appropriate state laws and are certified under the Medicare Program. The Company believes that its facilities are in substantial compliance with all current applicable laws and regulations governing its health care operations. The existing laws and regulations covering the Company's health care facilities are subject to change and, in order to remain in compliance, the Company may be required to effect changes in its facilities, equipment, personnel and services. Although the Company intends to continue its licensing and qualifications, there is no assurance that its hospitals will be able to comply in the future. Utilization Review. Federal regulations provide that admissions to and utilization of facilities by Medicare and Medicaid patients must be reviewed in order to ensure efficient utilization of facilities and services. Such reviews are performed by federally funded agencies known as Peer Review Organizations ("PROs"). Federal law requires a PRO to review the need for hospitalization and utilization of hospital services and to set standards for patient care. A PRO may conduct such review either prospectively or retrospectively and may, as appropriate, deny admission of a patient or payment for services provided to a patient. In addition to PRO reviews, the Company's own quality assurance programs in each of its hospitals provide for utilization review and retrospective patient care evaluation. 7 8 Certificates of Need. The construction of new facilities, the acquisition of existing facilities, and the addition of new beds or services may be reviewable by state regulatory agencies under a Certificate of Need ("CON") program. The Company operates hospitals in some states that require approval under a CON program. Such laws generally require appropriate state agency determination of public need and approval prior to beds or services being added, or a related capital amount being spent. Failure to obtain necessary state approval can result in the inability to complete an acquisition or change of ownership, the imposition of civil or, in some cases, criminal sanctions, the inability to receive Medicare or Medicaid reimbursement or the revocation of a facility's license. The Company has not experienced, and does not expect to experience, any material adverse effects from state CON requirements or from the imposition, elimination or relaxation of such requirements. Currently, the Company's hospitals in North Dakota, Texas, and Utah are not subject to CON laws. HEALTH CARE REFORM Health care, as one of the largest industries in the United States, continues to attract much legislative interest and public attention. Federal and state legislators continue to consider legislation that could significantly impact Medicare, Medicaid and other government funding of health care costs. Initiatives currently before Congress, if enacted, would significantly reduce payments under various government programs, including, among others, payments to disproportionate share and teaching hospitals. A reduction in these payments would adversely affect net revenue and operating margins at certain of the Company's hospitals. The Company is unable to predict what legislation, if any, will be enacted at the federal and state level in the future or what effect such legislation might have on the Company's financial position, results of operations, or liquidity. REIMBURSEMENT General. A significant portion of the Company's revenues are derived from patients covered by government-sponsored and other contractual programs. Payments under these programs are based on cost, a negotiated rate, or a predetermined rate based upon the diagnosis of the patient's condition, plus, in some programs, capital costs and/or certain other adjustments. Revenues from such programs are presented based on established billing rates less allowances and estimated adjustments for patients covered by such programs. Revenues from such programs are subject to audit and final settlement. The principal sources of the Company's contractual payments are Medicare, Medicaid, Blue Cross and private insurance programs (including PPOs and HMOs). All of the Company's hospitals are certified as providers of Medicare and Medicaid and participate to varying degrees in other reimbursement programs. Amounts received from Medicare, Medicaid, Blue Cross, HMOs and PPOs are generally less than the hospital's established charges for the services covered. Patients are generally not responsible for any difference between established hospital charges and amounts paid under these programs for such services, except to the extent of any exclusions or deductible and co-payment features of their coverage. Medicare - Eligibility. The Social Security Act of 1965 enacted the Medicare program designed to provide health services to the aged. Medicare Part A provides health insurance benefits for covered hospital and related health care services to most persons who are 65 years old and are entitled to monthly Social Security retirement or survivor benefits; the disabled; and persons with end-stage renal disease. Medicare Part B provides voluntary supplemental medical benefits covering primarily outpatient and physician care costs for covered persons. Medicare - Operating Cost Reimbursement. Pursuant to the Social Security Amendments of 1983 and subsequent budget reconciliation act modifications, Congress adopted a prospective payment system ("PPS") to cover the routine and ancillary operating costs of most Medicare inpatient hospital services. Under PPS, the Secretary of the Department of Health and Human Services has established fixed payment amounts per discharge for categories of hospital treatment, commonly known as diagnosis related groups, or DRGs. Separate DRG rates have been established for each individual hospital participating in the Medicare program. As a general rule under PPS, if a facility's costs of providing care for the patient are less than the predetermined DRG rate, the facility retains the difference. Conversely, if the facility's costs of providing the necessary service are more than the predetermined rate, the facility must absorb the 8 9 loss. Because DRG rates are based upon a statistically normal distribution of severity, patients falling outside the normal distribution are afforded additional payments and defined as "outliers." All of the Company's general acute care hospitals are reimbursed through the PPS system. The Company's two psychiatric hospitals are reimbursed at the lower of their Medicare allowable costs or their TEFRA target rate plus capital costs. Medicare - Capital Related Cost Reimbursement. For cost reporting periods prior to October 1, 1991, payments under the Medicare program for capital related costs were made on a reasonable cost basis. Reasonable capital costs generally include depreciation, rent and lease expense, capital interest, property taxes, insurance related to the physical plant, fixed equipment and movable equipment. Effective with the cost reporting period that began on October 1, 1991, hospitals paid under PPS for operating costs were required to be reimbursed for capital costs on a prospective basis. A ten year transition period was established for the phasing-in of the capital PPS. Under the transition period rules, hospitals are paid on a fully prospective methodology, a hold-harmless method or at the federal standard rate, dependent upon certain criteria. Beginning with cost reporting periods on or after October 1, 2001, at the end of the transition period, all hospitals are to be paid at the federal rate. Four of the Company's hospitals are paid based on the hold- harmless method. The Company believes that the change in capital cost reimbursement from a reasonable cost basis to a PPS basis will not have a material impact on the Company's financial condition or results of operations. Medicare - Outpatient Services Reimbursement. Medicare payments for certain outpatient surgery services are based upon the lower of (i) a percentage of hospital costs, (ii) a percentage of customary charges, or (iii) a prospective payment rate based upon the hospital's historical costs and the rates paid by Medicare for similar procedures performed in freestanding surgical centers. Outpatient radiology and imaging services are paid at the lower of (i) reasonable costs, (ii) customary charges or (iii) a blend of costs and adjusted physician charges. The Company's level of reimbursement for outpatient services has decreased as a result of these changes, and the Company expects its percentage of reimbursed cost for such services to decrease further. The extent of such decrease will be dependent upon rate changes and the volume of such outpatient services rendered to Medicare program patients. Medicaid. Medicaid is a federal-state medical assistance program administered by the states that provides hospital assistance to certain individuals defined as "medically indigent." A number of states also utilize a prospective payment system or have established a program to negotiate payment levels at individual hospitals for their state Medicaid programs. Medicare and Medicaid - Common Issues. The Medicare and Medicaid programs are subject to statutory and regulatory changes. Also, significant portions of the programs are subject to administrative rulings, interpretations, governmental funding restrictions and requirements for utilization and quality review. Such matters may significantly reduce payments made under either or both programs to the Company's hospitals. Any of these actions could have a material adverse impact on the Company's financial condition and results of operations. Because the requirements for certification under Medicare, Medicaid and similar reimbursement programs are subject to change, it may be necessary for the Company to make changes in its services, equipment, facilities and personnel to remain qualified for such programs. Annual cost reports required under these programs are subject to audit which may result in adjustments to the amounts originally estimated to be due the Company under these reimbursement programs. (Since the inception of the DRG form of payments, however, the amount of reimbursement potentially affected by audit has substantially decreased). Such audits are conducted or overseen by the Health Care Finance Administration. These audits often require several years to reach the final determination of amounts earned under the programs. The Company believes that adequate provision has been made for any material retroactive adjustments that might result from such audits. The Social Security Act provides criminal penalties for individuals or entities that knowingly and willfully offer, pay, solicit or receive remuneration in order to induce business reimbursed under the Medicare or Medicaid programs. The statute on its face is very broad, covering kickbacks, bribes and rebates made directly or indirectly, overtly or covertly, in cash or in kind. In addition, prohibited conduct includes remuneration intended to induce the purchasing, leasing, ordering or arranging for any good, facility, service or item paid for by Medicare or Medicaid programs. Violation of the statute can lead to exclusion from participation in the Medicare and Medicaid programs. 9 10 Because of concerns by health care providers that many relatively innocuous, or even beneficial, commercial arrangements are technically covered by this statute (and are, therefore, subject to potential criminal prosecution), Congress directed that regulations be promulgated to specify those payment practices that will not violate the statute. The final regulations include safe harbor criteria for leasing, purchasing and ordering arrangements. Such arrangements do not constitute illegal remuneration so long as all of the criteria set forth in the safe harbors are met. The fact that the specifics of a leasing, purchasing or ordering arrangement do not squarely fall within all of the applicable safe harbor criteria does not mean, however, that the practice is per se illegal. Various "anti-kickback" and "self-referral" federal and state legislative and regulatory programs have been enacted, and others are currently under consideration. Although the Company believes it is in compliance with each of these programs that have been enacted, it is unable to predict the interpretation of the existing program, the enactment of new programs or the form in which such new programs may be enacted, and accordingly it is unable to assess their effect on its business. Blue Cross, Private Insurance Carriers, HMOs and PPOs. Blue Cross is a health care financing program that provides its subscribers with hospital benefits through numerous independent organizations that vary from state to state. Pursuant to contracts, local Blue Cross organizations pay the Company's hospitals directly on a basis agreed to by each hospital and Blue Cross. Other private insurance carriers reimburse their policy holders or make direct payments to the Company's hospitals on the basis of the particular hospital's established charges and the coverage provided for within the insurance policies. HMOs provide prepaid physician, hospital, and other health care services either directly or through contracts with providers. A PPO is an organization which arranges favorable terms and discounts for services from health care providers on behalf of insurance companies, self-insured employers and other third-party payors. PROFESSIONAL LIABILITY As is typical in the health care industry, the Company is subject to claims and legal actions by patients and others in the ordinary course of business. The Company maintains a program of insurance it believes is adequate to cover such liability. In the opinion of management, the ultimate resolution of any currently pending claims or legal actions will not have a material adverse effect on the Company's consolidated balance sheet, results of operations or liquidity. ACCREDITATION AND REVIEWS All of the Company's hospitals are accredited by the Joint Commission on Accreditation of Healthcare Organizations ("JCAHO"), including the Company's newly constructed hospital in Midland, Texas, which received its provisional accreditation in the first quarter of 1996. JCAHO regularly conducts an on-site review and inspection of every hospital seeking to obtain or maintain its accreditation. Hospitals accredited by the Joint Commission are deemed to be in compliance with the standards for participation in the Medicare program, although Medicare can conduct its own compliance reviews. MEDICAL STAFF AND EMPLOYEES As of December 31, 1995, the Company had approximately 1,846 full-time employees and 756 part-time employees at its majority owned hospitals. In addition, approximately 739 physicians were active members of the medical staffs of the Company's hospitals, many of whom also serve on the staffs of competing hospitals. Approximately 78 physicians were under contract with the Company's hospitals, primarily to staff emergency rooms and serve in support capacities. As of December 31, 1995, DHHS had approximately 896 full-time employees and 582 part-time employees. Approximately 170 physicians were active members of the medical staff, many of whom also serve on the staffs of competing hospitals, and approximately 48 physicians were under contract to staff the emergency room and serve in support capacities. The Company has a decentralized management structure. Each hospital is run by its own chief executive officer and chief financial officer who are responsible for day-to-day operations. Incentive compensation programs have been 10 11 implemented to reward such managers for accomplishing established goals. The Company employs corporate staff to provide services such as human resource management, reimbursement, finance, technical accounting support, purchasing, legal and tax services. Financial control is maintained through fiscal and accounting policies which are established at the corporate level for use at the hospitals. The Company is subject to the federal minimum wage and hour laws and maintains various employee benefit plans. Labor relations at the Company's facilities have been satisfactory. Although the Company currently is not experiencing a shortage of nursing personnel, the availability of nursing personnel fluctuates from year to year, and the Company cannot predict the degree to which it will be affected by the future availability and cost of nursing personnel. ENVIRONMENTAL MATTERS The Company believes that its hospitals are currently in compliance in all material respects with applicable federal, state and local statutes and ordinances regulating the discharge of materials into the environment. Prior to the acquisition of its existing hospitals, the Company obtains or reviews environmental reports. The Company does not believe that it will be required to expend any material amounts to remain in compliance with these laws and regulations or that compliance will materially affect its capital expenditure programs, earnings prospects or competitive position. 11 12 ITEM IA. EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the names, ages, positions and certain other information as of March 25, 1996, concerning the executive officers of Champion.
NAME AGE POSITION ---- --- -------- Charles R. Miller 57 Chairman of the Board, President and Chief Executive Officer James G. VanDevender 48 Executive Vice President, Chief Financial Officer, Secretary and Director Ronald R. Patterson 53 Executive Vice President and Chief Operating Officer Michael M. Brooks 47 Senior Vice President - Development Lawrence A. Humphrey 40 Senior Vice President - Corporate Finance W. Warren Wilkey 51 Senior Vice President - Market Operations Marilyn R. Anderson 48 Vice President - Quality and Service Improvement Gary L. Chandler 50 Vice President - Managed Care/Strategic Development Arthur M. Doloresco 46 Vice President - Operations Deborah H. Frankovich 48 Vice President and Treasurer Kenneth D. Hawkins 46 Vice President - Development Rapheal Luccasen, Jr. 48 Vice President - Operations Suzanne S. Miskin 50 Vice President - Legal Services Tod B. Mitchell 35 Vice President - Reimbursement Robert M. Starling 36 Vice President and Controller Steven R. Stone 45 Vice President - Administration Ronald L. Watson 43 Vice President - Operations Finance
Officers are elected by the Board of Directors and serve until their successors are elected. Biographical information with respect to the officers of the Company is set forth below. Charles R. Miller. Chairman, President and Chief Executive Officer of the Company since its formation in February 1990. Mr. Miller has 36 years of experience in the hospital industry. In 1981, he co-founded and served as President and Director of Republic Health Corporation ("Republic"). In less than three years, Republic had revenues of $540 million and was the fifth largest publicly-held hospital management company owning 23 acute hospitals, 20 psychiatric and substance abuse facilities and managing 18 hospitals and 3 specialty units. In 1986, Republic was acquired in a leveraged buy-out for $800 million. Mr. Miller declined to participate in the buy-out and resigned as an officer and director of Republic in 1986. After leaving Republic, Mr. Miller and Mr. Brooks acquired in 1987 a general acute care hospital in El Paso, Texas and subsequently sold that facility to Columbia/HCA Healthcare Corporation in late 1988. During 1989, Mr. Miller did limited health care consulting and developed the business plan for founding the Company. Prior to co-founding Republic, Mr. Miller was employed for seven years by Hospital Affiliates International ("HAI"), a publicly held hospital ownership and management company. Mr. Miller received a BBA in Personnel Management from Texas Tech University in 1968 and a Masters degree in Public Health Administration from the University of Texas in 1974. James G. VanDevender. Executive Vice President, Chief Financial Officer, Secretary and Director of the Company since its formation in February 1990. Mr. VanDevender has 24 years of experience in the hospital industry, including management positions in accounting and finance at the hospital level, and senior executive positions in accounting, finance, acquisitions and development, and operations at the corporate level of multi-hospital companies. Mr. VanDevender was employed with Republic from 1981 until 1987 and was Senior Vice President in charge of Republic's acquisition and development function and its management contract division in 1987. Before joining Republic, Mr. VanDevender was employed for four years by HAI. From 1987 until 1990, Mr. VanDevender pursued private investments. He received his undergraduate degree in Accounting from Mississippi State University in 1970. 12 13 Ronald R. Patterson. Executive Vice President and Chief Operating Officer of the Company since 1994 after joining the Company in 1992 as Senior Vice President-Operations. Mr. Patterson has 26 years of experience in the health care industry. His operational responsibilities have included community hospitals, large university teaching hospitals, psychiatric hospitals, contract management of hospitals and specialty units, and mobile diagnostic services. Prior to joining the Company, he was a Senior Vice President with Harris Methodist Health System, a Fort Worth, Texas not-for- profit health care system from 1990 until 1991. From 1988 until 1990, Mr. Patterson did private turnaround management consulting in the health care industry. From 1982 to 1988, Mr. Patterson was employed by Republic, serving initially as an Operations Vice President and subsequently as Senior Vice President with responsibility for a major operating division. From 1975 to 1981, Mr. Patterson was employed in various management positions by HAI. Mr. Patterson is a Fellow in the American College of Health Care Executives. He received his undergraduate degree from the University of Houston in 1965 and a Masters degree in Health Care Administration from Trinity University in 1973. Michael M. Brooks. Senior Vice President - Development since February 1996, and Senior Vice President - Operations Controller/Administration from January 1, 1992 to December 31, 1994. From January 1, 1995 to January 31, 1996, Mr. Brooks served in various corporate capacities with Champion reporting directly to Mr. VanDevender before accepting his current position. Mr. Brooks has over 20 years of experience as a financial executive. He was employed at Republic from 1983 until 1986, serving first as Vice President and Corporate Controller. He later served as Assistant to the President and was then promoted to Regional Vice President with responsibility for five hospitals. Mr. Brooks left Republic in 1986, at the time serving as Vice President - Development. Prior to joining Republic, Mr. Brooks was Vice President and Chief Financial Officer of Pengo Industries, then a NYSE corporation providing oil field products and services. Before joining Pengo, he was employed for over five years by KPMG Peat Marwick. From 1989 until 1992, Mr. Brooks did private consulting within the health care industry and was associated with the Company in this capacity from February 1, 1991 to December 31, 1991. During 1987 and 1988, Mr. Brooks and Mr. Miller owned a hospital in El Paso, Texas. He received his BBA in Accounting from the University of Texas in 1973, and is a Certified Public Accountant. Lawrence A. Humphrey. Senior Vice President - Corporate Finance of the Company since February 1996. Mr. Humphrey served as Vice President of Operations - Finance from November 1994 to January 1996. Mr. Humphrey has over 15 years of experience in health care finance and operations. Prior to joining the Company in September 1993, Mr. Humphrey worked for National Medical Enterprises, Inc. for 12 years, a publicly held hospital ownership and management company; 10 years as a facility CFO with the last seven years at a 325 bed hospital. He received a BS degree from Cornell University in 1980, a Masters degree in Business Administration from the University of Dallas in 1991. Mr. Humphrey is a Certified Public Accountant. W. Warren Wilkey. Senior Vice President - Market Operations of the Company since February 1996. From January 1995 to January 1996, Mr. Wilkey served as Vice President - Operations. Mr. Wilkey has approximately 26 years of experience in the health care industry, including group hospital operations, hospital administration and ancillary services management. For the six years prior to joining the Company, Mr. Wilkey was a Vice President and Director of Group Operations for EPIC Healthcare Group, a publicly held hospital ownership and management company. He received a BS degree in Management from Mississippi State University in 1967. Marilyn R. Anderson. Vice President - Quality and Service Improvement of the Company since February 1996. From January 1993 to January 1996, Ms. Anderson served as Director of Quality/Risk Management for the Company. Ms. Anderson has approximately 18 years of experience in the health care industry. For the five years prior to joining the Company, Ms. Anderson worked for Harris Methodist Health System in Fort Worth, Texas, last serving as Regional Quality Assurance Director for the System. She received an Applied Science in Nursing degree from Texarkana College in 1978. Ms. Anderson is a Registered Nurse and a Certified Professional in Healthcare Quality. Gary L. Chandler. Vice President - Managed Care/Strategic Development of the Company since June 1995. Mr. Chandler has approximately 26 years experience in the health care industry. From June 1994 to June 1995, Mr. Chandler served as Vice President of Austin Operations for New York Life/Sanus in Austin, Texas, a Health Maintenance Organization based in Houston, Texas. From 1987 to 1994, he served as the development officer for The 13 14 Austin Diagnostic Clinic, a multi-specialty clinic, where he also functioned concurrently as Chief Operating Officer of an affiliated Individual Practice Association/Management Services Organization. Previously, he served as Executive Vice President and Chief Operating Officer of a large HMO. In addition to his medical group practice and managed care experience, Mr. Chandler has worked in various positions in large hospitals, as a health care manager in Arthur Young's consulting practice, and Chief Executive Officer of a health planning agency. Mr. Chandler received a BS degree in 1967 and a MS degree in 1969 with an emphasis in health planning from Florida State University. Arthur M. Doloresco. Vice President - Operations of the Company since January 1995. Mr. Doloresco has approximately 18 years of experience in the health care industry. For the five year period prior to joining the Company, Mr. Doloresco served as President and Chief Executive Officer of AmeriHealth Systems of Virginia, Inc. a wholly owned subsidiary of AmeriHealth, Inc. and Chief Executive Officer of hospitals owned by AmeriHealth, Inc. and Hospital Corporation of America, now known as Columbia/HCA Healthcare Corporation. He received a BS degree in Business from Old Dominion University in 1975 and a Masters degree in Health Administration from the Medical College of Virginia in 1979. Deborah H. Frankovich. Vice President and Treasurer of the Company since July 1994. Mrs. Frankovich has approximately 17 years of experience in health care finance. She served as Vice President and Treasurer of Healthcare International, Inc., a $400 million revenue public health care company with 26 medical/surgical, rehabilitation and psychiatric hospitals located in eight states, from 1985 until 1989, and Vice President and Treasurer of HealthVest, a $450 million asset public health care REIT which she co-founded, from 1986 until 1990. Prior to joining Healthcare International she worked for seven years in the New York health care lending group of Citibank. From 1990 until joining the Company she did independent health care financing consulting. Mrs. Frankovich received her BA degree in Economics from Hollins College in 1969. Kenneth D. Hawkins. Vice President - Development of the Company since December 1994. Mr. Hawkins has approximately 11 years of experience in the hospital industry, which has included management positions in accounting and finance. Mr. Hawkins served as Senior Vice President, Treasurer and Chief Financial Officer for AmeriHealth, Inc. from September 1991 until December 1994 and served as Secretary from February 1994 until December 1994. Prior to joining AmeriHealth, Mr. Hawkins spent five years serving as Vice President and Controller for Hallmark Healthcare, Inc., a publicly held hospital ownership and management company. Mr. Hawkins received a BBA degree in Accounting from James Madison University in 1977, and a Masters degree in Taxation from Virginia Commonwealth University in 1988 and is a Certified Public Accountant. Rapheal Luccasen, Jr. Vice President - Operations of the Company since October 1994. Mr. Luccasen also serves as President of CHC/Psychiatric Healthcare Corporation, a wholly-owned subsidiary of the Company. He has 26 years of experience in the health care industry which includes facility based and multi-facility management positions. For the five most recent years prior to joining the Company, he served as Founder, President and CEO of Psychiatric Healthcare Corporation. Mr. Luccasen has a BS degree in Economics from Louisiana State University, a Masters degree in Social Work from Louisiana State University, a Masters degree in Public Health from University of Alabama at Birmingham and a Masters degree in Business Administration from Stamford University. Tod B. Mitchell. Vice President of Reimbursement since February 1996. From April 1994 to January 1996, Mr. Mitchell served as Director of Reimbursement for the Company. Mr. Mitchell has approximately 13 years of reimbursement experience in the health care industry. Prior to joining the Company, he worked in various reimbursement positions for both non-profit and publicly held health care companies. From November 1991 until April 1994, Mr. Mitchell served as Reimbursement Coordinator for the Sisters of Charity of the Incarnate Word, and from March 1986 until November 1991, Mr. Mitchell served as Reimbursement Manager at Healthcare International, a publicly held hospital ownership and management company. Prior to this, he worked for Republic Health Corporation and Blue Cross and Blue Shield of Texas. He received his BS degree in Business Administration from the University of Texas at Dallas in 1982 and is a Certified Public Accountant. Suzanne S. Miskin. Vice President - Legal Services since February 1995. Ms. Miskin has been an attorney for more than 16 years, and has approximately 11 years experience in the area of corporate and securities law. She spent from 14 15 September 1992 until February 1995 with the firm of Michener, Larimore, Swindle, Whitaker, Flowers, Sawyer, Reynolds & Chalk, L.L.P. in the Litigation section. She was retired from the practice of law for the period from June 1990 through September 1992, which she devoted to personal and family matters. From April 1984 through June 1990, Ms. Miskin was with Fulbright & Jaworski, L.L.P., in the Corporate/Securities section of its Dallas office, and from 1979 to 1984 she worked at the Securities and Exchange Commission in the Fort Worth Regional Office. Ms. Miskin received her undergraduate degree from Wayne State University in 1972 and her law degree from Detroit College of Law in 1979. Robert M. Starling. Vice President and Controller of the Company since January 1995. Mr. Starling has over 14 years of experience in accounting with an emphasis in the health care industry. From July 1994 to December 1994, he was Director of Finance for Columbia/HCA Healthcare Corporation in Louisville, Kentucky. From 1986 to 1994, Mr. Starling was an Audit Manager with Coopers and Lybrand L.L.P., serving in that firm's Houston, New York and Louisville offices. He received a BBA degree in Accounting from the University of Texas at Austin in 1981 and is a Certified Public Accountant. Steven R. Stone. Vice President - Administration of the Company since November 1994. Mr. Stone has over 14 years experience in the hospital industry. From 1990 to 1994, Mr. Stone was with Witt/Kieffer, the ninth largest executive search firm in America, leading and conducting searches throughout the United States. Witt/Kieffer specialized in health care and related industries. From 1980 to 1990, Mr. Stone was with the Harris Methodist Health System in Fort Worth, Texas, directing the human resources activities. Mr. Stone received his BA degree in 1973 from Texas Christian University. Ronald L. Watson. Vice President of Operations - Finance of the Company since February 1996. From March 1995 to January 1996, Mr. Watson served as a Regional Controller for the Company. Mr. Watson has approximately 22 years of accounting experience with 12 of those years in the health care industry. For five years prior to joining the Company, Mr. Watson was a Director of Operations - Finance for Health Management Associates, Inc., a publicly held hospital ownership and management company. Mr. Watson has ten years of public accounting experience. From 1985 to 1990, Mr. Watson was a Senior Audit Manager with Arthur Young (Ernst & Young), serving that firm's health care clients in the Atlanta office. He received his undergraduate degree in Accounting from Columbus College in 1974. Mr. Watson is a Certified Public Accountant. 15 16 ITEM 2. PROPERTIES The Company leases approximately 32,500 square feet for its principal executive office space at 515 W. Greens Road, Suite 800, Houston, TX 77067 pursuant to a lease agreement that expires in 2003. Location of Facilities. The following table sets forth the name, location and number of licensed beds of hospitals that the Company owns or has a partnership interest in as of December 31, 1995. The number of licensed beds represents the maximum number of beds permitted in the facility under its state license; accordingly, available beds may be less than licensed beds.
Licensed State Name Type of Facility Location Beds ------------ ------------------------------ ---------------- -------------- -------- Alabama Autauga Medical Center(1) Acute Care Prattville 85 Alabama Autauga Health Care Center(1) Skilled Nursing Prattville 72 Louisiana Crossroads Regional Hospital Psychiatric Alexandria 70 Missouri Lakeland Regional Hospital Psychiatric Springfield 149 North Dakota Dakota Heartland Health System(2) Acute Care Fargo 341 Texas BayCoast Medical Center Acute Care Baytown 191 Texas Westwood Medical Center(3) Acute Care Midland 101 Virginia Metropolitan Hospital(4) Acute Care Richmond 180 Utah Salt Lake Regional Medical Center Acute Care Salt Lake City 200
(1) On March 1, 1996, the Company acquired Jordan Valley Hospital, a 50 bed general acute care hospital located in West Jordan, Utah, in exchange for Autauga Medical Center and Autauga Health Care Center, plus preliminary additional cash consideration paid to the seller of $10,750,000. (2) The Company owns a 50% interest in Dakota Heartland Health System, a partnership that owns two hospitals. (3) This newly constructed facility replaced the 60 bed Physicians & Surgeons Hospital in the fourth quarter of 1995. (4) The Company owns a 88.3% general partnership interest in a limited partnership that owns the hospital. Some of these facilities are subject to mortgages, and substantially all of the Company's assets are pledged as collateral for long term debt. The Company owns or leases medical office buildings and clinics adjoining or near certain of its hospitals. The Company believes that all of these properties are suitable for their intended purposes. 16 17 ITEM 3. LEGAL PROCEEDINGS Given the nature and kind of business in which the Company is engaged, it is not unusual for the Company to be subject to various claims, charges or litigation relating to professional services, contractual relations, property ownership, or employee relations. Amounts initially claimed in such litigation may be substantial but may not bear any reasonable relationship to the merits of the claim or the true financial exposure of the Company. In the opinion of management, the ultimate resolution of such pending legal proceedings will not have a material adverse effect on the Company's consolidated balance sheet, results of operations or liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1995; however, on February 12, 1996, pursuant to a special meeting held in connection with the Recapitalization, shareholders approved amendments to the Company's Certificate of Incorporation. Voting on this issue was as follows:
STOCK TYPE FOR AGAINST ABSTAIN ---------- --- ------- ------- Common and Preferred voting as a class 13,104,914 3,181 5,028 Series C Preferred 855,874 -- -- Series D Preferred 3,984,828 -- --
17 18 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company acquired AmeriHealth, Inc. ("AHH") on December 6, 1994, through a merger accounted for as a reverse acquisition and thereby became a publicly listed company on the American Stock Exchange ("AMEX"). The price of the common stock is regularly quoted on the American Stock Exchange Composite Transaction Listing under the ticker symbol "CHC." Prior to the reverse merger on December 6, 1994, the Company's common stock had no existing trading market. The shares of AHH were previously listed on the AMEX and traded under the symbol "AHH." For purposes of reporting stock information, AHH is considered the predecessor of the Company; accordingly, the following table sets forth the high and low sales prices for the common stock of AHH through December 6, 1994, the date of the merger, and the Company thereafter. The sales prices have been adjusted to reflect a 5.70358 to 1 reverse stock split effective December 6, 1994.
JANUARY 1, 1996, TO MARCH 25, 1996 1995 1994 ------------------- ------------------ ------------------ HIGH LOW HIGH LOW HIGH LOW ------ ----- ----- ----- ----- ----- 1st quarter $10.50 $5.31 $9.13 $7.00 $4.63 $3.21 2nd quarter 8.63 6.25 5.70 3.21 3rd quarter 7.88 6.63 6.42 3.21 4th quarter 7.13 4.75 10.00 6.42
The approximate number of holders of record of the common stock at March 25, 1996, was 732, and the last reported sales price on March 25, 1996 was $9.75 share. The declaration and payment of dividends by the Company is determined by its Board of Directors. The Company's Certificate of Incorporation, as amended, certain preferred stock purchase agreements, and its Senior and other debt agreements prohibit or place limitations on the payment of cash dividends to holders of preferred and common stock. The Company does not anticipate the declaration or payment of dividends on common stock for the foreseeable future. Effective December 31, 1995, the Company and its preferred shareholders entered into the 1995 Recapitalization Agreement for the principal purpose of enhancing the value of common stock by reducing the complexity of the Company's capital structure and eliminating the accrual of future dividends on its outstanding preferred stock and the resulting impact on earnings per share. As a result of the Recapitalization, common shares outstanding increased from 4,262,386 to 11,868,230, and preferred shares outstanding decreased from 10,452,370 to 2,605,714. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of the terms of the Recapitalization. 18 19 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with the Company's consolidated financial statements and related notes included elsewhere in this report and "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
YEAR ENDED DECEMBER 31, 1995 1994 1993 1992 1991 ----------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) FINANCIAL RESULTS NET REVENUE $ 167,520 $ 104,193 $ 89,832 $ 45,073 $ 24,307 Operating expenses 172,819 101,450 84,290 45,302 23,475 Equity in the earnings of DHHS 8,881 -- -- -- -- Other charges(1)(2)(3) -- 300 15,456 1,300 -- INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS 3,582 2,443 (9,914) (1,529) 832 Provision for income taxes 150 200 1,009 63 326 INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS 3,432 2,243 (10,923) (1,592) 506 Extraordinary items, net of tax(4) (1,118) -- (1,230) -- 200 NET INCOME (LOSS) 2,314 2,243 (12,153) (1,592) 706 (LOSS) INCOME APPLICABLE TO COMMON STOCK (9,017) (2,467) (13,805) (2,451) 343 (LOSS) INCOME PER SHARE: (Loss) income before extraordinary items (1.86) (1.69) (11.21) (2.23) .12 Extraordinary items, net of tax (0.26) -- (1.10) -- .17 (LOSS) INCOME PER COMMON SHARE (2.12) (1.69) (12.31) (2.23) .29 Cash dividend on common stock -- -- -- -- -- Weighted average shares outstanding 4,254,907 1,457,076 1,121,549 1,100,000 1,170,981 BALANCE SHEET DATA: Cash and cash equivalents 7,583 48,424 66,686 6,204 919 Working capital 9,841 51,275 69,138 9,420 1,665 Total assets 291,260 216,553 118,947 57,574 15,444 Long-term debt and capital lease obligations 162,447 105,284 59,761 24,977 6,804 Redeemable preferred stock(5) 46,029 76,294 56,861 21,746 3,726 Stockholders' (deficit) equity 31,869 (2,167) (16,157) (2,352) 293
19 20
YEAR ENDED DECEMBER 31, 1995 1994 1993 1992 1991 --------------------------------------------------------------- OPERATING DATA: Consolidated hospitals 7 7(6) 3(6) 3(2)(6) 1 Total licensed beds(6) 976 877 359 380 170 Admissions 17,530 10,556 9,026 4,839 2,827 Average length of stay 7.0 6.2 5.6 5.7 8.4 Hospital occupancy(7) 38% 38% 40% 38% 38% Surgery cases 10,981 9,990 9,911 5,049 2,628 Deliveries 2,112 1,262 1,233 635 250 Patient days 123,525 65,693 50,309 29,896 23,774 Outpatient visits 189,790 95,979 81,221 35,660 19,087 Outpatient revenue as a % of gross patient revenue 34% 38% 42% 37% 28%
(1) In 1994, the Company incurred approximately $300,000 in fees and other costs related to its efforts to acquire Methodist Medical Center ("MMC") in Jacksonville, Florida. On March 6, 1995, the Company notified MMC's management that it would cease all actions related to this transaction; accordingly, such amounts were charged to expense in the fourth quarter of 1994. (2) On September 1, 1992, the Company acquired Gulf Coast Hospital, a competing hospital located approximately 3 miles from the Company's Baytown, Texas facility. Subsequent to the purchase, the Company consolidated the operations of GCH onto the campus of its existing Baytown hospital, and in June 1994, sold the former GCH property with restrictions limiting its use to non-competitive activities without the Company's permission. As a result of the consolidation, the Company incurred a charge of approximately $15,456,000 against earnings in 1993. (3) In 1992, the Company expensed approximately $1,300,000 in fees and other costs related to its unsuccessful attempt to acquire 12 hospitals from Humana, Inc. (4) The Company recognized extraordinary losses of $1,118,000 and $1,230,000 in 1995 and 1993, respectively, on early extinguishment of debt. The extraordinary loss for 1993 was net of a tax benefit of $634,000, and no tax benefit was allocated to the extraordinary loss in 1995. The extraordinary gain in 1991 relates to the utilization of net income tax benefits arising from the carryforward of operating losses. (5) At December 31, 1995, 1994, 1993, 1992 and 1991, the Company had outstanding 2,605,714, 10,400,725, 9,564,611, 7,556,706 and 3,769,109 shares of preferred stock that were redeemable and convertible into 5,211,428, 9,905,306, 8,233,078, 4,217,268 and 1,017,074 shares of common stock, respectively. (6) Operating statistics include 142 beds at Heartland Medical Center through December 31, 1994, which the Company contributed to DHHS in exchange for 50% ownership of DHHS. The Company accounts for its investment in DHHS under the equity method. DHHS began operations on December 31, 1994. (7) Weighted average daily census for the period divided by the licensed beds for the period. 20 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SIGNIFICANT ACQUISITIONS The Company was formed on February 1, 1990, to acquire and operate general acute care and specialty hospitals. At December 31, 1995, the Company owned seven hospitals and one skilled nursing facility and owned a 50% interest in Dakota Heartland Health System ("DHHS"), a partnership comprised of two hospitals. Because of the financial impact of the Company's recent acquisitions and the formation of DHHS, it is difficult to make meaningful comparisons between the Company's financial statements for the fiscal periods presented. Furthermore, each additional hospital acquisition can have a significant impact on the Company's overall financial performance. After acquiring a hospital, the Company attempts to implement various operating efficiencies and cost cutting strategies, including staffing adjustments. The Company may also incur significant additional costs to expand the hospital's services and improve its market position. The Company can give no assurance that these investments and other activities will result in increases in net revenue or reductions in costs at the acquired facility. Consequently, the financial performance of an acquired hospital may adversely affect the Company's operating results in the near-term. The Company believes this effect will be mitigated as more hospitals are acquired. RECAPITALIZATION Effective December 31, 1995, the Company, pursuant to the 1995 Recapitalization Agreement, entered into several transactions for the principal purpose of enhancing the value of common stock by reducing the complexity of the Company's capital structure and eliminating the accrual of future dividends on its outstanding preferred stock and the resulting impact on earnings per share. As a part of these transactions (i) three series of the Company's outstanding preferred stock, pursuant to their terms, converted into common stock, (ii) accrued dividends totaling approximately $12,614,000 on all classes of the Company's outstanding preferred stock were paid by issuing common stock at an agreed upon price of $7.00 per share, and (iii) the holders of the remaining two series of outstanding preferred stock agreed to waive the future accrual of preferential dividends. As a further part of these transactions, the Company issued additional shares of common stock to all holders of its then outstanding preferred stock as consideration for the actions taken and agreed to reduce the exercise prices of one series of 680,104 warrants from $5.90 to $5.25 per share and two series totaling 2,447,670 warrants from $9.00 to $7.00 per share until May 13, 1996, after which the exercise prices revert to their prior amounts. Warrant holders have the right to tender subordinated debt in lieu of cash, where applicable. As a result of the Recapitalization, common shares outstanding at December 31, 1995, increased from 4,262,386 to 11,868,230, and preferred shares outstanding decreased from 10,452,370 to 2,605,714. Other than for fractional shares, no cash consideration was paid under the terms of the Recapitalization (See Notes to the Consolidated Financial Statements - Note 8 "Stockholders' Equity"). EFFECT OF PROPOSED LEGISLATION Federal and state legislators continue to consider legislation that could significantly impact Medicare, Medicaid and other government funding of health care costs. Initiatives currently before Congress, if enacted, would significantly reduce payments under various government programs, including, among others, payments to disproportionate share and teaching hospitals. A reduction in these payments would adversely affect net revenue and operating margins at certain of the Company's hospitals. The Company is unable to predict what legislation, if any, will be enacted at the federal and state level in the future or what effect such legislation might have on the Company's financial position, results of operations, or liquidity. 21 22 RESULTS OF OPERATIONS 1995 Compared to 1994 The Company reported net income of $2,314,000 for the year ended December 31, 1995, compared to net income of $2,243,000 for the comparable period in 1994. On a per share basis, after deducting non-cash preferred stock dividend requirements and other adjustments of $11,331,000 and $4,710,000 in 1995 and 1994, respectively, the Company reported a net loss of $2.12 per common share for 1995 compared to a net loss of $1.69 per common share for 1994. The deduction to net income for 1995 included a dividend paid in common stock to preferred shareholders of approximately $5,349,0000 as part of the Recapitalization. Additionally, net income for 1995 included an extraordinary loss of approximately $1,118,000, or $0.26 per share, on the early extinguishment of debt. Fully diluted earnings per share was not presented for 1995 and 1994 due to the anti-dilutive effect of such calculation. On a pro forma basis, assuming the Recapitalization had occurred on January 1, 1995, primary and fully diluted earnings per share would have been $0.27 and $0.19, respectively, for the year ended December 31, 1995. Operating income for 1995 included approximately $8,881,000 attributable to the Company's equity in the earnings of DHHS. The Company contributed Heartland Medical Center ("Heartland") to DHHS effective December 31, 1994, and accounts for its investment in DHHS under the equity method. Previously, the Company had consolidated Heartland for financial reporting purposes. Operating income for 1994 included approximately $6,201,000 attributable to Heartland. The Company's net revenue was $167,520,000 for the year ended December 31, 1995, compared to $104,193,000 for 1994, an increase of $63,327,000 or 60.8%. The increase was due primarily to hospital acquisitions in the fourth quarter of 1994 and the second quarter of 1995 (collectively, the "Acquisitions"), and was offset, in part, by the contribution of Heartland to DHHS. Net revenue for 1994 included approximately $40,061,000 attributable to Heartland. The occupancy rate of the Company's consolidated hospitals was substantially unchanged at 38% in 1995 and 1994, due primarily to the acquisition of two psychiatric hospitals in the fourth quarter of 1994. In general, psychiatric hospitals derive a greater percentage of their revenue from inpatient services than do acute care hospitals. The occupancy rate at the Company's general acute care hospitals declined to 33% in 1995 compared to 35% in 1994, due primarily to the Company's contribution of Heartland to DHHS effective December 31, 1994, and due to an industry wide trend of decreased inpatient utilization at acute care hospitals. The Company expects this trend to continue as Medicare, Medicaid, health maintenance organizations ("HMOs"), preferred provider organizations ("PPOs") and other third party payors continue to exert pressure on health care providers to reduce hospital stays and to provide services, when appropriate, on a less expensive outpatient basis. Heartland had an occupancy rate of 41% in 1994. Gross outpatient revenue increased 45.8% from $63,387,000 in 1994 to $92,392,000 in 1995. Outpatient revenue as a percent of gross patient service revenue declined from 38.1% in 1994 to 33.9% in 1995, once again due to the Company's acquisition of two psychiatric hospitals in the fourth quarter of 1994. Excluding these facilities, outpatient revenue comprised 39.5% of gross patient revenue in 1995. Gross patient revenue attributable to Medicare increased to 42% in 1995 compared to 39% in 1994, due to the inclusion of certain of the Company's Acquisitions for the full twelve month period ended December 31, 1995. These facilities generally derived a greater portion of their gross patient revenue from the Medicare program than did the hospitals owned and consolidated by the Company for the twelve months ended December 31, 1994. Gross revenue attributable to Medicaid increased to 19% in 1995 compared to 18% in 1994, due primarily to the Company's acquisition of two psychiatric hospitals in the fourth quarter of 1994. Approximately 50% of gross patient revenue at these facilities is attributable to the Medicaid program. Net patient service revenue is presented in the Consolidated Statement of Operations net of the provision for contractual allowances. Such provision was 40% in 1995 and 1994. The provision for contractual allowances as a 22 23 percentage of gross patient service revenue is likely to increase in the future (i) as rate increases at the Company's hospitals exceed increases, if any, in fixed reimbursement rates, (ii) from increased discounts on standard rates due to pressure from third-party payors, such as health maintenance organizations, preferred provider organizations and private insurance companies and (iii) from increased inpatient utilization by Medicare and Medicaid patients. Payments received under these programs are generally less than established billing rates. The trend toward managed care may affect hospitals' ability to maintain their current rate of net revenue growth and operating margins. Net revenue for 1995 and 1994 included approximately $744,000 and $2,196,000 in interest income earned on cash balances during the year. The Company's operations are labor intensive with salaries and benefits comprising the single largest item in operating expenses. Salaries and benefits increased 75.9% to $72,188,000 in 1995, compared to $41,042,000 in 1994, primarily as a result of the Company's Acquisitions. As a percent of net revenue, salary and benefits increased to 43.1% in 1995 compared to 39.4% in 1994. This trend is a result of the Company's strategy of acquiring underperforming hospitals that often incur labor and other operating costs in excess of what the Company believes is necessary for the efficient operation of a facility. The Company attempts to reduce these costs over time by implementing various operating efficiencies and cost cutting strategies. However, the Company can give no assurance that its efforts will ultimately result in significant cost reductions at these facilities. The major components of other operating expenses were professional fees, taxes (other than income), insurance, utilities and other services. Other operating and supplies expense increased by 54.6% to $65,707,000 in 1995 compared to $42,511,000 in 1994, once again as a result of the Company's Acquisitions. As a percent of net revenue, other operating and supplies expense declined to 39.2% in 1995 compared to 40.8% in 1994. Provision for bad debts was $12,016,000 in 1995, or 7.3% of net patient service revenue, compared to $7,812,000, or 7.8% in 1994. The prior year included approximately $700,000 in charges due to problems resulting from the installation of an information management system at one facility. Excluding this charge, provision for bad debts was approximately 7.1% of net patient service revenue in 1994. Interest expense increased from $6,375,000 in 1994 to $13,618,000 in 1995, due principally to (i) the increase in amounts outstanding under the Company's senior bank credit facility as a result of its acquisition of SLRMC and funding of ongoing construction projects, (ii) the issuance of $19,133,000 and $35,000,000 of 11% Senior Subordinated Notes on December 30, 1994 and June 12, 1995, respectively, and (iii) debt assumed and/or issued in connection with the acquisitions of AmeriHealth, Inc. ("AHH") and Psychiatric Healthcare Corporation ("PHC") in the fourth quarter of 1994 (See "Liquidity and Capital Resources"). Interest expense also increased due to an increase in the interest rate applicable to its senior bank credit facility (a weighted average of approximately 9.3% and 7.7% for the years ended December 31, 1995 and 1994, respectively). Depreciation and amortization expense was $9,290,000 in 1995 compared to $4,010,000 in 1994, an increase of $5,280,000, or 131.7%. This increase is due primarily to the Company's Acquisitions, the completion of a hospital and medical office building in Midland, Texas, and an ambulatory care center in Baytown, Texas, as well as the Company's ongoing capital improvement programs at its existing hospitals. The Company capitalized approximately $1,462,000 and $294,000 in interest costs associated with the construction of a hospital and other medical related facilities at December 31, 1995 and 1994, respectively. With the completion of a hospital and medical office building in Midland, Texas, and an ambulatory care center in Baytown, Texas, the Company expects capitalized interest to be minimal in 1996. 1994 Compared to 1993 The Company reported net income of $2,243,000 for the year ended December 31, 1994, compared to a net loss of $12,153,000 in 1993. On a per share basis, after deducting non-cash preferred stock dividend requirements and other 23 24 adjustments of $4,710,000 and $1,652,000 in 1994 and 1993, respectively, the Company reported a net loss of $1.69 per common share for 1994 compared to a net loss of $12.31 per common share for 1993. The net loss for the year ended December 31, 1993, included an extraordinary loss of approximately $1,230,000 (net of income tax effect of $634,000), or $1.10 per share, from the early extinguishment of debt. The net loss for 1993 also included an asset write down of approximately $15,456,000 pursuant to the Company's decision in December 1993 to consolidate the operations of Gulf Coast Hospital ("GCH") onto the campus of BayCoast Medical Center ("BMC"). The Company acquired GCH on September 1, 1992. The write down was recorded in 1993 to recognize the limited alternative uses of the GCH campus. In June 1994, the Company sold the former GCH property with restrictions prohibiting its use to non-competing activities without the Company's consent. The Company's net revenue was $104,193,000 for the year ended December 31, 1994, compared to $89,832,000 for 1993, an increase of $14,361,000 or 16.0%. This increase was due primarily to the inclusion of Physicians & Surgeons Hospital ("P&S") for a full year in 1994, compared to eight months in 1993, the year the facility was acquired, and the Company's acquisition of PHC and AHH in the fourth quarter of 1994. On a same hospital basis, net revenue decreased approximately $2,550,000, or 3.2%, in 1994 due to the elimination of a psychiatric program at BMC and a decline in outpatient surgery cases due to capacity constraints following the consolidation of GCH's operations onto the BMC campus in December 1993. The average occupancy rates of the Company's hospitals declined from 40.1% in 1993 to 38.3% in 1994. This decline is consistent with the industry trend of decreased inpatient utilization at acute care hospitals and is due primarily to increased pressure from Medicare, Medicaid, HMOs, PPOs and other third party payors to reduce hospital stays and to provide services, where possible, on a less expensive outpatient basis. Gross outpatient revenue increased 6.1% from $59,738,000 in 1993 to $63,387,000 in 1994. Outpatient revenue as a percent of gross patient service revenue declined from 41.9% in 1993 to 38.1% in 1994, due primarily to the Company's acquisition of PHC effective October 1, 1994. In general, psychiatric hospitals derive a greater percentage of their gross revenue from inpatient services than do acute care hospitals. Exclusive of acquisitions, outpatient revenue comprised 41.3% of gross patient revenue in 1994. Provision for contractual allowances was 40.2% of gross patient service revenue for 1994 compared to 39.2% in 1993, which is consistent with industry trends. Approximately 39% of gross patient revenue was attributable to Medicare in 1994 and 1993. Gross revenue attributable to Medicaid increased to 18% in 1994 compared to 12% in 1993, due primarily to the Company's acquisition of PHC effective October 1, 1994, which derives approximately 53% of its gross patient revenue from the Medicaid program, and due to a decline in revenue attributable to private and other payor sources at hospitals owned by the Company for the twelve month period ended December 31, 1994. Salaries and benefits increased 11.8% to $41,042,000 in 1994 compared to $36,698,000 in 1993, due primarily to the inclusion of P&S for a full year in 1994 and the Company's acquisition of PHC and AHH in the fourth quarter of 1994. As a percent of net revenue, salary and benefits decreased to 39.4% in 1994 compared to 40.9% in 1993 as a result of the Company's ongoing efforts to improve staffing efficiencies in its acquired hospitals. For hospitals owned for the twelve month period ended December 31, 1994, salary and benefits were 37.7% of net revenues in 1994 compared to 39.4% in 1993. The major components of other operating expenses were professional fees, taxes (other than income), insurance, utilities and other services. Other operating and supplies expense increased by 19.2% to $42,511,000 in 1994 compared to $35,674,000 in 1993. Other operating and supplies expense increased to 40.8% of net revenue in 1994 compared to 39.7% in 1993. The increase in the percentage of net revenue is due primarily to non-capitalizable costs associated with the Company's acquisition activity. Provision for bad debts was $7,812,000 in 1994, or 7.8% of net patient service revenue, compared to $5,669,000, or 6.5% in 1993. This 37.8% increase is due in part to the installation of a new computer system at one of the Company's hospitals that disrupted the hospital's billing procedures and accounts receivable detail. The hospital determined that 24 25 approximately $700,000 in accounts receivable produced by the new system should have been charged to allowance for uncollectable accounts. Excluding this charge, provision for bad debts was approximately 7.1% of net patient service revenue in 1994. Depreciation and amortization expense was $4,010,000 in 1994 compared to $3,524,000 in 1993, an increase of $486,000 or 13.8%. The increase in depreciation and amortization expense was due primarily to the Company's acquisitions in 1994, the Company's ongoing capital improvement programs at its existing hospitals and the amortization of costs associated with the Company's issuance of 11% Senior Subordinated Notes effective December 31, 1993. Interest expense increased from $2,725,000 in 1993 to $6,375,000 in 1994, principally due to the Company's issuance of $37,833,000 of 11% Senior Subordinated Notes effective December 31, 1993 and its incurrence of a $20,000,000 senior bank credit facility on November 3, 1993, as well as interest expense associated with debt assumed and/or issued in the AHH and PHC acquisitions (See "Liquidity and Capital Resources"). Interest expense also increased due to an increase in the interest rate applicable to its senior bank credit facility (a weighted average of approximately 7.7% and 6.5% at December 31, 1994 and 1993, respectively.) LIQUIDITY AND CAPITAL RESOURCES The Company had cash and cash equivalents of $7,583,000 at December 31, 1995. The Company also had $51,651,000 available under its senior bank credit facility, subject to certain limitations, which it refinanced and expanded from $50,000,000 to $100,000,000 effective May 31, 1995. The Company had cash flows from operations of $12,892,000 for the year ended December 31, 1995. Cash flows from operations have not contributed significantly to the Company's liquidity in the past, due principally to its strategy of acquiring underperforming hospitals with the goal of improving performance over time. Capital expenditures vary by hospital and from year to year, depending upon the nature of the improvements undertaken at each facility. Excluding acquisitions, capital expenditures for the year ended December 31, 1995, were $42,822,000, which included approximately $31,780,000 in expenditures related to the construction of a hospital and medical office building in Midland, Texas, and approximately $6,267,000 related to the construction of an ambulatory care center at the Company's Baytown, Texas facility. The Baytown and Midland facilities began operations in July and October of 1995, respectively. The Company expended approximately $94,715,000 for principal payments on long-term debt and capitalized lease obligations for the year ended December 31, 1995. Such payments included an $850,000 debt reduction concurrent with the sale of a former PHC facility that was closed and held for sale at the time of its acquisition, the defeasance of approximately $1,200,000 principal amount of bonds outstanding at a former AHH facility, and a $31,500,000 payment on amounts outstanding under the Company's senior bank credit facility concurrent with the issuance of Senior Subordinated Notes on June 12, 1995. In connection with the Company's refinancing of the senior bank credit facility on May 31, 1995, the Company paid approximately $48,000,000 outstanding under a prior senior bank credit facility and approximately $9,533,000 principal amount of debt held by Wilmington Savings Fund Society. The Company anticipates that existing capital sources and internally generated cash flows will be sufficient to fund capital expenditures, debt service and working capital requirements through the foreseeable future. The Company intends to acquire additional acute care and specialty facilities and is actively pursuing several such acquisitions. However, depending upon the individual circumstances, the Company will likely require additional debt or equity financing as it pursues its acquisition strategy. Acquisitions and Other Investments On April 13, 1995, the Company acquired Salt Lake Regional Medical Center ("SLRMC") from Columbia/HCA Healthcare Corporation for approximately $61,042,000, which included approximately $11,783,000 for certain 25 26 working capital components, resulting in a net purchase price of approximately $49,259,000. The Company funded the asset purchase from available cash and approximately $30,000,000 in borrowings under its senior bank credit facility. SLRMC is comprised of a 200 bed tertiary care hospital and five clinics and is located in Salt Lake City, Utah. On December 21, 1994, a wholly owned subsidiary of the Company that owned Heartland entered into a partnership with Dakota Hospital ("Dakota"), a not-for-profit corporation that owned a 199 bed general acute care hospital, also in Fargo, North Dakota. The Company and Dakota contributed their respective hospitals debt and lien free (except for capitalized lease obligations), including certain working capital components, and the Company contributed an additional $20,000,000 in cash, each in exchange for 50% ownership in the partnership. The Company will receive 55% of the net income and distributable cash flow ("DCF") of the partnership until such time as it has recovered on a cumulative basis an additional $10,000,000 of DCF in the form of an "excess" distribution. Because the partners through the partnership agreement and an operating agreement have delegated substantially all management of DHHS to the Company, the authority of the partnership's governing board is limited. Under the terms of the partnership agreement, the Company is obligated to advance funds to the partnership to cover any and all operating deficits of the partnership. Beginning July 1996, Dakota has the right to require the Company to purchase its partnership interest free of debt or liens for a cash purchase price equal to 5.5 times Dakota's pro rata share of earnings before depreciation, interest, income taxes and amortization, as defined in the partnership agreement, less Dakota's pro-rata share of the partnership's long-term debt. DHHS had earnings before depreciation, interest, income taxes and amortization of approximately $19,000,000 for the year ended December 31, 1995. Beginning January 1998, the purchase price for Dakota's partnership interest shall not be less than $50,000,000. Should Dakota elect to exercise its option, the Company would likely finance the purchase through bank or other borrowings. As of December 31, 1995, the Company has received $825,000 in cash distributions from DHHS. On December 6, 1994, the Company merged with AmeriHealth, Inc., a Delaware corporation. The merger was accounted for as a recapitalization of the Company with the Company as the acquiror (a reverse acquisition). The common shareholders of AHH received 1 share of Company common stock for every 5.70358 shares of common stock of AHH and a cash distribution of $0.085 per AHH common share. Additionally, the Company assumed approximately $17,700,000 in debt, resulting in a net purchase price of approximately $38,876,000. AHH owned and managed two acute care hospitals with a combined total of 265 licensed beds: Metropolitan Hospital in Richmond, Virginia with 180 beds and Autauga Medical Center in Prattville, Alabama with 85 beds. AHH also owned a 72 bed skilled nursing facility, Autauga Health Care Center in Prattville, Alabama. As part of the AHH merger, the Company assumed and extended approximately $10,000,000 principal amount of debt held by Wilmington Savings Fund Society (the "WSFS Loan") and paid approximately $7,665,000 in cash to retire $8,049,000 principal amount of AHH debt held by the Resolution Trust Corporation. On October 21, 1994, the Company acquired Psychiatric Healthcare Corporation, which owned two free-standing psychiatric hospitals with a combined total of 219 beds in Springfield, Missouri, and Alexandria, Louisiana. The net purchase price, including contingent consideration of $2,000,000 paid in 1995 and the assumption of approximately $14,880,000 in long-term debt, was approximately $24,600,000. The Company paid no cash to the PHC shareholders, instead issuing a combination of Series D Preferred Stock and 11% Senior Subordinated Notes with detachable warrants. The Company acquired Physicians and Surgeons Hospital in Midland, Texas on May 1, 1993, for approximately $5,800,000 in cash and the assumption of $1,200,000 in debt. The Company replaced P&S in the fourth quarter of 1995 with the newly constructed 101 bed Westwood Medical Center. Total construction cost for the new facility was approximately $39,017,000. Debt On June 12, 1995, the Company issued $35,000,000 face amount (less a discount of approximately $668,000) of Senior Subordinated Notes (the "Notes") maturing on December 31, 2003. The Notes bear interest at an annual effective rate of 11.35% (11% stated rate). Interest is payable quarterly, and the stated rate increases from 11% to 11.5% on March 31, 1996. The Notes include detachable warrants for the purchase of 525,000 shares of common 26 27 stock. The Notes are subject to redemption on or after December 31, 1995, at the Company's option at prices declining from 112.5% of principal amount at December 31, 1995 to par at December 31, 2002. Additionally, there is a requirement to repurchase all outstanding Notes in the event of a change in control of the Company, at the holder's option, based on a declining redemption premium ranging from 112.5% to 103% of principal. Proceeds from the issuance of Notes were used to paydown approximately $31,500,000 principal amount outstanding under the Company's revolving senior bank debt with the remainder retained for general corporate purposes. The Notes are uncollateralized obligations and are subordinated in right of payment to certain senior indebtedness of the Company. On May 31, 1995, the Company refinanced and paid a $50,000,000 senior bank credit facility obtained in November 1993 with a $100,000,000 senior bank credit facility (the "Revolving Loan") with Banque Paribas, as agent, AmSouth Bank of Alabama, Bank One of Texas, N.A., CoreStates Bank, N.A., and NationsBank of Texas, N.A. Amounts available under the Revolving Loan are subject to certain limitations, and the total amount available under the Revolving Loan declines to $80,000,000 on the third anniversary date. The Revolving Loan matures no later than March 31, 1999, and bears interest at a lender defined incremental rate plus, at the Company's option, the LIBOR or Prime rate. The incremental rate ranges from 2.5% to 3.0% with respect to the LIBOR rate option and from 1.0% to 1.5% with respect to the Prime rate option. The interest rates on the Revolving Loan and prior senior bank credit facility were 8.85% and 9.12%, respectively, at December 31, 1995 and 1994. Proceeds from the refinancing were used to pay approximately $48,000,000 principal amount outstanding under the Company's prior senior bank credit facility and approximately $9,533,000 principal amount of debt held by Wilmington Savings Fund Society ("WSFS"). The interest rate on the WSFS Loan was 11.5% and 10.5% at May 31, 1995 (the date of payment) and December 31, 1994, respectively. With the exception of certain assets collateralizing debt assumed in the Company's 1994 acquisition of PHC, the Revolving Loan is collateralized by substantially all of the Company's assets. The Company's future acquisitions and divestitures may require, in certain circumstances, consent by lenders under this agreement. On December 31, 1993, the Company issued $37,833,000 of 11% Senior Subordinated Notes with detachable warrants for the purchase of 1,134,990 shares of common stock. On December 30, 1994, pursuant to commitments obtained from the original purchasers of the 11% Senior Subordinated Notes issued on December 31, 1993, the Company issued an additional $19,133,000 of Notes with detachable warrants for the purchase of 573,990 shares of common stock. No value was allocated to the warrants at the time of issuance because the interest rate on the Notes was considered a market rate and the exercise price was greater than the estimated fair value of the common stock. The Notes bear interest at an effective annual rate of 11%. All other terms of the Notes are substantially the same as those discussed above. The Revolving Loan, Notes and Mortgages referenced above contain restrictive covenants which include, among others, restrictions on additional indebtedness, the payment of dividends and other distributions, the repurchase of common stock and related securities under certain circumstances, and the requirement to maintain certain financial ratios. The Company was in compliance with or has obtained permanent waivers for all loan covenants to which it was subject as of December 31, 1995 and 1994. Redeemable Preferred Stock On December 31, 1993, the Company issued 1,269,144 shares of Series D Cumulative Convertible Redeemable Preferred Stock ("Series D") for net proceeds of approximately $22,008,000. On December 30, 1994, pursuant to commitments obtained from the initial purchasers of Series D preferred stock, the Company issued an additional 623,453 shares of Series D preferred stock for net proceeds of $11,222,000. The Company also issued Series D preferred stock in connection with the PHC acquisition. See Note 7 to the Company's consolidated financial statements for a discussion of the rights and preferences of Series D preferred stock. On December 2, 1993, the Company issued 448,811 shares of Series C Cumulative Convertible Redeemable Preferred Stock ("Series C") for net proceeds of $8,033,000. See Note 7 to the Company's consolidated financial statements for a discussion of the rights and preferences of Series C preferred stock. 27 28 On December 2, 1993, the Company issued 289,950 shares of Series BB preferred stock, resulting in net proceeds of $3,422,000. On December 31, 1995, all outstanding shares of Series BB were converted into common stock as part of to the Recapitalization. The Company is subject to certain credit agreements that restrict its right to pay cash dividends on its common stock and Series C and D preferred stock. Furthermore, the Company can not pay cash dividends on its common stock without paying dividends on its Series C and D preferred stock. Pursuant to the Recapitalization, all accrued preferred dividends at December 31, 1995 (approximately $12,614,000), were paid by the issuance of common stock at an agreed price of $7.00 per share, and Series C and D preferred stock do not accrue dividends. SUBSEQUENT EVENTS On March 1, 1996, the Company acquired Jordan Valley Hospital ("Jordan") from Columbia/HCA Healthcare Corporation. Jordan is a 50 bed acute care hospital located in West Jordan, Utah, a suburb of Salt Lake City. The Company acquired Jordan in exchange for Autauga Medical Center, an 85 bed acute care hospital, and Autauga Health Care Center, a 72 bed skilled nursing facility, both in Prattville, Alabama, plus preliminary cash consideration paid to the seller of approximately $10,750,000. Cash consideration included approximately $3,750,000 for certain net working capital components, which are subject to adjustment, and reimbursement of certain capital expenditures made previously by the seller. The transaction did not result in a gain or loss. The Alabama facilities were acquired as part of the Company's acquisition of AmeriHealth, Inc. on December 6, 1994. INFLATION The health care industry is labor intensive. Wages and other expenses are subject to rapid escalation, especially during periods of inflation and when shortages occur in the marketplace. In addition, suppliers attempt to pass along increases in their costs by charging the Company higher prices. In general, the Company's revenue increases through price increases or changes in reimbursement levels have not kept up with cost increases. In light of cost containment measures imposed by government agencies, private insurance companies and managed-care plans, the Company is likely to experience continued pressure on operating margins in the future. RECENT PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 121, which is effective for fiscal years beginning after December 15, 1995, requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. It is anticipated that the impact of adopting this statement will not have a material effect on the financial statements. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," which is effective for fiscal years beginning after December 15, 1995. SFAS 123 establishes new financial accounting and reporting standards for stock-based compensation plans. Entities will be allowed to measure compensation expense for stock-based compensation under SFAS 123 or APB Opinion No. 25, "Accounting for Stock Issued to Employees." Entities electing to account for such compensation under APB Opinion No. 25 will be required to make pro forma disclosures of net income and earnings per share as if SFAS 123 had been applied. The Company is presently evaluating which alternative it will adopt under SFAS 123 and has not yet quantified the potential impact on the Company of adopting this new standard. 28 29 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this Item is submitted at the end of this Form 10-K Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 29 30 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT See "ELECTION OF DIRECTORS" and "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT--Compliance with Section 16(a) of the Securities and Exchange Act of 1934" in the definitive Proxy Statement for the Company's 1996 Annual Meeting of Stockholders, incorporated herein by reference. See also "ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT" contained in PART I of this Form 10-K Annual Report. ITEM 11. EXECUTIVE COMPENSATION See "EXECUTIVE COMPENSATION" in the definitive Proxy Statement for the Company's 1996 Annual Meeting of Stockholders, incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" in the definitive Proxy Statement for the Company's 1996 Annual Meeting of Stockholders, incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" in the definitive Proxy Statement for the Company's 1996 Annual Meeting of the Stockholders, incorporated herein by reference. 30 31 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this Report: 1. Financial Statements Champion Healthcare Corporation Consolidated Financial Statements: Consolidated Balance Sheet - December 31, 1995 and 1994 Consolidated Statement of Operations - For the Years Ended December 31, 1995, 1994 and 1993 Consolidated Statement of Stockholders' Equity - For the Years Ended December 31, 1995, 1994 and 1993 Consolidated Statement of Cash Flows - For the Years Ended December 31, 1995, 1994 and 1993 Notes to Consolidated Financial Statements Dakota Heartland Health System Financial Statements: Balance Sheet - December 31, 1995 and 1994 Statement of Income - For the Year Ended December 31, 1995 Statement of Partners' Equity - For the Year Ended December 31, 1995 Statement of Cash Flows - For the Year Ended December 31, 1995 Notes to Financial Statements 2. Financial Statement Schedules Schedule I - Condensed Financial Information of Registrant Schedule II - Valuation and Qualifying Accounts 3. Exhibits 3.01(a)* Restated Certificate of Incorporation dated February 12, 1996 (Incorporated by reference to the registrant's Schedule 14A Definitive Proxy Statement dated January 22, 1996). 3.01(b)* Bylaws of Champion Healthcare Corporation (Incorporated by reference to Exhibit 4.2 of the registrant's Form S-8 filed with the SEC on or about August 3, 1995). 4.01(a)** Agreement Pursuant to Regulation S-K 601(4)(iii) by the registrant dated March 30, 1995 to furnish instruments defining the rights of holders of certain long-term debt.
31 32 4.01(b)* Series D Note and Stock Purchase Agreement dated December 31, 1993, as amended, between the registrant and the parties listed therein (filed as Exhibit 10.5 to registrant's Form 8-K dated December 6, 1994 and incorporated herein by reference). 4.01(c) Amended and Restated Loan Agreement dated as of May 31, 1995, among the registrant, Banque Paribas as agent and the banks named therein. 4.01(d) Series E Note Purchase Agreement dated May 1, 1995, as amended, between the registrant and the parties listed therein. 10.01* Amended and Restated 1988 Non-Qualified Stock Option Plan (Incorporated by reference to Exhibit 10.06 of the registrant's Form 10-K for the fiscal year ended December 31, 1992). 10.01(b)* Statement Pursuant to Rule 12b-32(b) regarding modification dated May 27, 1993 to Amended and Restated 1988 Non-Qualified Stock Option Plan referenced as Exhibit 10.01 (Incorporated by reference to Exhibit 10.06(b) of the registrant's Form 10-K for the fiscal year ended December 31, 1993). 10.02* Agreement and Plan of Merger between Champion Healthcare Corporation and AmeriHealth, Inc., dated August 17, 1994 (filed as Exhibit 10 to registrant's Form 8-K dated August 17, 1994, and incorporated herein by reference). 10.03* Amendment No. 1 to Agreement and Plan of Merger, dated October 20, 1994 (filed as Exhibit 10.1 to registrant's Form 8-K dated December 6, 1994 and incorporated herein by reference). 10.04* Consulting Agreement dated December 6, 1994 between the Registrant and William G. White (filed as Exhibit 10.2 to registrant's Form 8-K dated December 6, 1994 and incorporated herein by reference). 10.05* Voting Agreement dated December 6, 1994 between the Registrant and William G. White (filed as Exhibit 10.3 to registrant's Form 8-K dated December 6, 1994 and incorporated herein by reference). 10.07* D Stockholders Agreement, dated December 31, 1993, among the Registrant and the Parties listed therein, as amended (filed as Exhibit 10.6 to registrant's Form 8-K dated December 6, 1994 and incorporated herein by reference). 10.08 Employment Agreement between Charles R. Miller and the registrant dated August 4, 1995. 10.09 Employment Agreement between James G. VanDevender and the registrant dated August 4, 1995. 10.10 Employment Agreement between Ronald R. Patterson and the registrant dated August 4, 1995. 10.11** Founders' Stock Option Agreement between Charles R. Miller and the registrant dated December 31, 1990.
32 33 10.12** Founders' Stock Option Agreement between James G. VanDevender and the registrant dated December 31, 1990. 10.13** Subscription Agreement dated February 10, 1990, between James G. VanDevender and the registrant, as amended. 10.14** Employee Stock Option Plan, dated December 31, 1991, as amended. 10.15** Employee Stock Option Plan No. 2, dated May 27, 1992, as amended. 10.16** Employee Stock Option Plan No. 3, dated September 1992, as amended. 10.17** Senior Executive Stock Option Plan No. 4, dated January 5, 1994, as amended. 10.18** Director's Stock Option Plan, dated 1992. 10.19(a)** Agreement between Management Prescriptives, Inc., a company owned by David S. Spencer, and the registrant dated April 19, 1993. 10.19(b)** Agreement between Master Services, a company owned by David S. Spencer, and the registrant dated October 1,1994. 10.20** Preferred Stock Purchase Agreement dated as of December 31, 1990, as amended, among Charles R. Miller, James G. VanDevender, Equus Investments II, L.P., Sprout Growth. L.P., Sprout Capital VI, L.P., DLJ Venture Capital Fund II, L.P. and the registrant. 10.21** Note and Stock Purchase Agreement dated May 27, 1992, as amended, among the registrant and the parties listed therein. 10.22** Series C Preferred Stock Purchase Agreement dated December 2, 1993, between the registrant and the parties listed therein. 10.23(a)** Warrant Purchase Agreement dated December 31, 1990, between Charles R. Miller, Equus Investments II, L.P. and the registrant, as amended. 10.23(b)** Warrant Purchase Agreement dated December 31, 1990, between Equus Investments II, L.P., Sprout Growth, L.P. and the registrant, as amended. 10.23(c)** Agreement to Exchange and Amend Warrants dated April 29, 1993, by the registrant and holders of warrants issued pursuant to the Note and Stock Purchase Agreement dated May 27, 1993, with attached Form of Warrant. 10.23(d)** Form of Warrant issued pursuant to Bridge Loan Agreement dated April 29, 1993. 10.23(e)** Form of Warrant issued December 2, 1993 to Virginia Retirement System, pursuant to Fifth Amendment to Note and Stock Purchase Agreement dated May 27, 1992. 10.23(f)** Form of Warrant issued pursuant to Series D Note and Stock Purchase Agreement, dated December 31, 1993, as amended.
33 34 10.23(g) Form of Warrant issued pursuant to Series E Note Purchase Agreement, dated May 1, 1995, as amended. 10.24(a)** Stock Registration Agreement dated December 31, 1990, as amended, entered into by the registrant in connection with the Stock Purchase Agreement dated December 31, 1990. 10.24(b)** Series B and Series C Stock Registration Agreement dated December 2, 1993, entered into by the registrant in connection with the Fifth Amendment to Note and Stock Purchase Agreement dated May 27, 1992, and the Series C Stock Purchase Agreement. 10.24(c)** Series D Stock Registration Agreement dated December 31, 1993, as amended, entered into by the registrant in connection with the Series D Note and Stock Purchase Agreement. 10.25** Agreement and Plan of Merger dated October 21, 1994, among Psychiatric Healthcare Corporation, CHC/Psychiatric Healthcare Corporation and the registrant. 10.26* Amended and Restated Partnership Agreement of Dakota/Champion Partnership dated December 21, 1994 (filed as Exhibit 10 to registrant's Form 8-K dated December 21, 1994 and incorporated herein by reference). 10.27* Operating Agreement between Dakota/Champion Partnership and the Registrant, dated December 21, 1994 (filed as Exhibit 10.1 to registrant's Form 8-K dated December 21, 1994 and incorporated herein by reference). 10.28* Asset Purchase Agreement, dated January 25, 1995, as amended, among Medical Services of Salt Lake City, Inc., HealthTrust, Inc.-The Hospital Company, CHC - Salt Lake City, Inc. and Champion Healthcare Corporation (filed as Exhibit 10.1 to registrant's Form 8-K dated April 13, 1995 and incorporated herein by reference). 10.29* Utah Provider Agreement, dated April 13, 1995, by and between Champion Healthcare Corporation and HealthTrust Inc. - The Hospital Company (filed as Exhibit 10.2 to registrant's Form 8-K dated April 13, 1995 and incorporated herein by reference). 10.30* Champion Healthcare Corporation Selected Executive Stock Option Plan No. 5 (Incorporated by reference to Exhibit 4.12 of the registrant's Form S-8 filed with the SEC on or about August 3, 1995) 10.31* 1995 Recapitalization Agreement dated as of December 31, 1995 among the registrant and the parties listed therein (filed as Exhibit 10.1 to registrant's Form 8-K dated December 31, 1995 and incorporated herein by reference). 10.32* Asset Exchange Agreement dated November 9, 1995, by and between Champion Healthcare Holdings, CHC-Prattville, Inc. and CHC-Nursing Center, Inc. and West Jordan Hospital Corporation (filed as Exhibit 10.1 to registrant's Form 8-K dated March 1, 1996 and incorporated herein by reference).
34 35 10.33* AmeriHealth, Inc. 1984 Non-Qualified Plan (Incorporated by reference to Exhibit 4.11 of the registrant's Form S-8 filed with the SEC on or about August 25, 1995). 10.34* AmeriHealth, Inc. Special Stock Option between the registrant and William G. White dated May 31, 1988 (Incorporated by reference to Exhibit 4.12 of the registrant's Form S-8 filed with the SEC on or about August 25, 1995). 11 Statement re: computation of per share earnings 21 Subsidiaries of the registrant 23 Consent of Coopers & Lybrand L.L.P. 27 Financial Data Schedule
* Incorporated by reference as indicated. ** Previously included in the registrant's Form 10-K for the year ended December 31, 1994, filed March 31, 1995. (b) Reports on Form 8-K: On January 4, 1996, the Company filed one report on Form 8-K dated December 31, 1995, which reported under "Item 5. Other Events" the 1995 Recapitalization Agreement between the registrant and its preferred shareholders. 35 36 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 26, 1996 Champion Healthcare Corporation -------------- (Registrant) By: /s/ James G. VanDevender -------------------------------- James G. VanDevender Executive Vice President, Chief Financial Officer and Director (Principal Financial Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Charles R. Miller President, Chief Executive Officer, March 26, 1996 - --------------------- Chairman of the Board of Directors -------------- Charles R. Miller /s/ James G. VanDevender Executive Vice President, Chief March 26, 1996 - ----------------------- Financial Officer, Director (Principal -------------- James G. VanDevender Financial Officer) /s/ Robert M. Starling Vice President and Controller March 26, 1996 - ---------------------- (Principal Accounting Officer) -------------- Robert M. Starling /s/ James A. Conroy Director March 26, 1996 - ------------------- -------------- James A. Conroy /s/ Manuel M. Ferris Director March 26, 1996 - -------------------- -------------- Manuel M. Ferris /s/ Janet A. Hickey - ------------------- Director March 26, 1996 Janet A. Hickey /s/ Nolan Lehmann Director March 26, 1996 - ----------------- -------------- Nolan Lehmann /s/ Richard D. Sage Director March 26, 1996 - ------------------- -------------- Richard D. Sage /s/ David S. Spencer Director March 26, 1996 - -------------------- -------------- David S. Spencer /s/ William G. White Director March 26, 1996 - -------------------- -------------- William G. White
36 37 ANNUAL REPORT ON FORM 10-K ITEM 14(a)(1) and (2), (c) and (d) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES CERTAIN EXHIBITS YEAR ENDED DECEMBER 31, 1995 CHAMPION HEALTHCARE CORPORATION HOUSTON, TEXAS 38 CHAMPION HEALTHCARE CORPORATION AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The following consolidated financial statements of Champion Healthcare Corporation and subsidiaries and financial statements of Dakota Heartland Health System are included in Item 8: Champion Healthcare Corporation: Report of Coopers & Lybrand L.L.P. Independent Accountants .................................................................... F-3 Consolidated Balance Sheet - December 31, 1995 and 1994 ........................................................................................... F-4 Consolidated Statement of Operations - For the Years Ended December 31, 1995, 1994 and 1993 ..................................................................................... F-5 Consolidated Statement of Stockholders' Equity - For the Years Ended December 31, 1995, 1994 and 1993 ........................................................................................................... F-6 Consolidated Statement of Cash Flows - For the Years Ended December 31, 1995, 1994 and 1993 ..................................................................................... F-7 Notes to Consolidated Financial Statements .................................................................................... F-8 Dakota Heartland Health System: Report of Coopers & Lybrand L.L.P. Independent Accountants ................................................................... F-32 Balance Sheet - December 31, 1995 and 1994 .......................................................................................... F-33 Statement of Income - For the year ended December 31, 1995 ................................................................................ F-34 Statement of Partners' Equity - For the year ended December 31, 1995 ................................................................................ F-35 Statement of Cash Flows - For the year ended December 31, 1995 ................................................................................ F-36 Notes to Financial Statements ................................................................................................ F-37
The following consolidated financial statement schedules of Champion Healthcare Corporation and subsidiaries are included in Item 14(d): Report of Coopers & Lybrand L.L.P. Independent Accountants on Financial Statement Schedules ................................... S-1 Schedule I -- Condensed Financial Information of the Registrant ............................................................... S-2 Schedule II -- Valuation and Qualifying Accounts .............................................................................. S-6
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. F-2 39 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Champion Healthcare Corporation We have audited the accompanying consolidated balance sheet of Champion Healthcare Corporation as of December 31, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Champion Healthcare Corporation as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. Houston, Texas February 27, 1996 F-3 40 CHAMPION HEALTHCARE CORPORATION CONSOLIDATED BALANCE SHEET
December 31, 1995 1994 ---------------------------------- (Dollars in thousands, except share data) ASSETS Current assets: Cash and cash equivalents $ 7,583 $ 48,424 Restricted cash -- 5,000 Accounts receivable, less allowance for doubtful accounts of $10,116 and $4,959 in 1995 and 1994, respectively 33,262 17,115 Supplies inventory 3,470 1,942 Prepaid expenses and other current assets 6,264 4,899 --------- ---------- Total current assets 50,579 77,380 Property and equipment: Land 6,418 4,510 Buildings and improvements 115,688 48,888 Equipment 42,343 25,016 Construction in progress 4,666 8,839 --------- ---------- Total property and equipment 169,115 87,253 Less allowances for depreciation and amortization 10,733 5,340 --------- ---------- Total property and equipment, net 158,382 81,913 Investment in Dakota Heartland Health System 48,145 40,088 Goodwill, net of accumulated amortization of $1,051 and $37 in 1995 and 1994, respectively 20,933 5,947 Intangible assets, net of accumulated amortization of $2,052 and $1,647 in 1995 and 1994, respectively 7,438 5,718 Other assets 5,783 5,507 --------- ---------- Total assets $ 291,260 $ 216,553 ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 1,166 $ 4,221 Current portion of capital lease obligations 1,301 560 Accounts payable 13,952 10,637 Due to third parties 8,829 2,241 Accrued and other liabilities 15,490 8,446 --------- ---------- Total current liabilities 40,738 26,105 Long-term debt 159,670 102,626 Capital lease obligations 2,777 2,658 Other long-term liabilities 10,177 11,037 Commitments and contingencies (Notes 3 and 13) Redeemable preferred stock 46,029 76,294 Common stock, $.01 par value: Authorized - 25,000,000 shares, 11,868,230 and 4,223,975 shares issued and outstanding in 1995 and 1994, respectively 119 42 Common stock subscribed, 80,000 and 100,000 in 1995 and 1994, respectively 40 50 Common stock subscription receivable (40) (50) Paid in capital 47,643 15,998 Accumulated deficit (15,893) (18,207) --------- ---------- Total liabilities and stockholders' equity $ 291,260 $ 216,553 ======== ==========
See notes to consolidated financial statements. F-4 41 CHAMPION HEALTHCARE CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31, 1995 1994 1993 -------------------------------------------------- (Dollars in thousands, except per share data) Net patient service revenue $ 163,500 $ 99,613 $ 86,728 Other revenue 4,020 4,580 3,104 ---------- ---------- ---------- Net revenue 167,520 104,193 89,832 Expenses: Salaries and benefits 72,188 41,042 36,698 Supplies 21,113 12,744 11,641 Other operating expenses 44,594 29,767 24,033 Provision for bad debts 12,016 7,812 5,669 Interest 13,618 6,375 2,725 Depreciation and amortization 9,290 4,010 3,524 Equity in earnings of Dakota Heartland Health System (8,881) -- -- Asset write-down -- -- 15,456 ---------- ---------- ---------- Total expenses 163,938 101,750 99,746 ---------- ---------- ---------- Income (loss) before income taxes and extraordinary items 3,582 2,443 (9,914) Provision for income taxes 150 200 1,009 ---------- ---------- ---------- Income (loss) before extraordinary items 3,432 2,243 (10,923) Extraordinary items: Loss on early extinguishment of debt, net of tax a tax benefit of $634 for 1993 (1,118) -- (1,230) ---------- ---------- ---------- Net income (loss) $ 2,314 $ 2,243 $ (12,153) ========== ========= ========= Loss applicable to common stock $ (9,017) $ (2,467) $ (13,805) ========== ========== ========= Loss per common share: Loss before extraordinary items $ (1.86) $ (1.69) $ (11.21) Extraordinary items (0.26) -- (1.10) ---------- ---------- ---------- Loss per common share $ (2.12) $ (1.69) $ (12.31) ========== ========= ==========
See notes to consolidated financial statements. F-5 42 CHAMPION HEALTHCARE CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Dollars in thousands, except share data)
Additional Common Stock Common Stock Paid-In Accumulated Shares Amount Subscribed Receivable Capital Deficit --------- ------- ---------- ---------- --------- ----------- BALANCES AT JANUARY 1, 1993 1,100,000 $ 11 $ 50 $ (50) $ (2,363) Preferred stock dividends accrued, including accretion of issuance costs (1,652) Exercise of bridge loan warrants 26,250 Net loss (12,153) -------- ------- ------- ------ -------- -------- BALANCES AT DECEMBER 31, 1993 1,126,250 11 50 (50) (16,168) Exercise of bridge loan warrants 83,044 1 Shares issued in AmeriHealth acquisition 3,014,681 30 $ 16,426 Preferred stock dividends accrued, including accretion of issuance costs (428) (4,282) Net income 2,243 --------- ------- ------- ------ -------- -------- BALANCES AT DECEMBER 31, 1994 4,223,975 42 50 (50) 15,998 (18,207) Preferred stock dividends accrued, including accretion of issuance costs (5,982) Dividends declared pursuant to the Recapitalization (5,349) Issuance of warrants 668 Exercise of options/stock subscriptions 38,411 1 (10) 10 108 Shares issued pursuant to the Recapitalization, net of issuance costs 7,605,844 76 42,200 Net income 2,314 ---------- ------- ------- ------ -------- -------- BALANCES AT DECEMBER 31, 1995 11,868,230 $ 119 $ 40 $ (40) $ 47,643 $(15,893) ========== ======= ======= ====== ======== ========
See notes to consolidated financial statements. F-6 43 CHAMPION HEALTHCARE CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31, 1995 1994 1993 ------------------------------------------------------- (Dollars in thousands) Operating activities: Net income (loss) $ 2,314 $ 2,243 $ (12,153) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Extraordinary loss, net 1,118 1,230 Equity in earnings of Dakota Heartland Health System, net of distributions (8,056) Depreciation and amortization 9,290 4,010 3,524 Deferred income taxes -- 1,600 (1,171) Provision for bad debts 12,016 7,812 5,669 Asset write-down 15,456 Changes in operating assets and liabilities, excluding acquisitions: Accounts receivable (14,864) (9,088) (6,842) Supplies inventory 144 (264) (446) Prepaid expenses and other current assets 2,103 (4,154) (169) Other assets (3,210) (908) (1,654) Accounts payable, income taxes payable and other accrued liabilities 12,037 (1,968) 1,935 ----------- --------- --------- Net cash provided by (used in) operating activities 12,892 (717) 5,379 ----------- --------- --------- Investing activities: Purchase of facilities (59,810) (5,813) Net payment for investment in partnership (2,000) (20,000) Cash acquired in acquisitions 361 4,341 Additions to property and equipment (42,822) (12,561) (4,726) Proceeds from sales of property and equipment 1,704 Investment in notes receivable (2,524) (757) ----------- --------- --------- Net cash used in investing activities (105,091) (28,977) (10,539) ----------- --------- --------- Financing activities: Proceeds from issuance of long-term obligations 143,532 19,133 63,091 Payments related to issuance of long-term debt obligations and other financing costs (3,927) (2,396) Payments on long-term obligations (94,715) (2,300) (28,516) Payments on obligations assumed through acquisitions (10,911) Proceeds from issuance of redeemable preferred stock and stock warrants 793 11,223 34,345 Payments related to preferred and common stock issuance (38) (882) Cash restricted under collateral agreement (5,713) Cash released under collateral agreement 5,713 ----------- --------- --------- Net cash provided by financing activities 51,358 11,432 65,642 ----------- --------- --------- (Decrease) increase in cash and cash equivalents (40,841) (18,262) 60,482 Cash and cash equivalents at beginning of year 48,424 66,686 6,204 ----------- --------- --------- Cash and cash equivalents at end of year $ 7,583 $ 48,424 $ 66,686 =========== ========= =========
See notes to consolidated financial statements. F-7 44 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. ORGANIZATIONAL BACKGROUND Champion Healthcare Corporation (the "Company"), a Delaware corporation, is engaged in the ownership and management of general acute care and specialty hospitals and related health care facilities. At December 31, 1995, including hospital partnerships, the Company owns and/or operates seven acute care hospitals, two psychiatric hospitals and a skilled nursing facility. See Note 16 "Subsequent Events" for a discussion of recent acquisition activity. Including hospital partnerships, the seven general acute care hospitals owned and/or operated by the Company provide a range of medical and surgical services typically available in general acute care hospitals. These services include inpatient care such as intensive and cardiac care, diagnostic services, radiological services and emergency services. All of the hospitals provide an extensive range of outpatient services, including ambulatory surgery, laboratory and radiology. The Company's two psychiatric hospitals provide child, adolescent and adult comprehensive psychiatric and chemical dependency treatment programs, with inpatient, day hospital, outpatient and other ambulatory care. Effective December 31, 1995, the Company and its preferred shareholders entered into the 1995 Recapitalization Agreement to reduce the complexity of the Company's capital structure and eliminate the accrual of future dividends on its outstanding preferred stock and the resulting impact on earnings per share. As a result of the Recapitalization Agreement, common shares outstanding increased from 4,262,386 to 11,868,230 and preferred shares outstanding decreased from 10,452,370 to 2,605,714. The transactions comprising the 1995 Recapitalization Agreement are herein collectively referred to as the "Recapitalization." See Note 8 "Stockholders' Equity" for a discussion of the terms of the Recapitalization. NOTE 2. SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Company, all wholly-owned and majority-owned subsidiaries and majority-owned partnerships. The Company uses the equity method of accounting when it has a 20% to 50% interest in other companies and partnerships. Under the equity method, the Company records its original investment at cost and adjusts its investment for its undistributed share of the earnings or losses of the equity investee. All significant intercompany transactions and accounts have been eliminated in consolidation. Use of Estimates The preparation of 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, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of net revenue and expenses during the period. Actual results could differ from those estimates. The most significant areas which require the use of management's estimates relate to the determination of estimated third-party payor settlements, allowance for uncollectable accounts receivable, income tax valuation allowance and reserves for professional liability risk. Net Patient Service Revenue The Company's facilities have entered into agreements with third-party payors, including US government programs and managed care health plans, under which the Company is paid based upon established charges, cost of services provided, predetermined rates by diagnosis, fixed per diem rates or discounts from established charges. F-8 45 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Net patient service revenues are recorded at estimated amounts due from patients and third party payors for health care services provided, including anticipated settlements under reimbursement agreements with third party payors. Payments for services rendered to patients covered by the Medicare and Medicaid programs are generally less than billed charges. Provisions for contractual adjustments are made to reduce charges to these patients to estimated receipts based upon each program's principle of payment/reimbursement (either prospectively determined or retrospectively determined costs). Settlements for retrospectively determined rates are estimated in the period the related services are rendered and are adjusted in future periods as final settlements are determined. In management's opinion, adequate allowance has been provided for possible adjustments that might result from final settlements under these programs. Allowance for contractual adjustments under these programs are deducted from accounts receivable in the accompanying consolidated balance sheet. Other Revenue Other revenue includes income from non-patient hospital activities such as cafeteria sales and interest income, among others. Cash and Cash Equivalents Cash and cash equivalents include all highly liquid debt instruments, primarily US government backed securities and certificates of deposit, purchased with an original maturity of three months or less. The Company maintains its cash in bank deposits which, at times, may exceed federally insured limits. The Company adopted Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115") on January 1, 1995. All investments accounted for under SFAS No. 115 are classified as available-for-sale, and the implementation of this statement had no impact on net income. Accounts Receivable Accounts receivable consist primarily of amounts due from the Medicare and Medicaid programs, other government programs, managed care health plans, commercial insurance companies and individual patients. Current earnings are charged with an allowance for doubtful accounts based on experience and other circumstances that may affect the ability of patients to meet their obligations. Accounts deemed uncollectable are charged against that allowance. Supplies Inventory Inventory consists primarily of pharmaceuticals and supplies and is stated at the lower of cost (first-in, first-out) or market. Property and Equipment Property and equipment are recorded at cost. Expenditures for new facilities and equipment and those that substantially increase the useful life of existing property and equipment are capitalized. Ordinary maintenance and repairs are charged to expense when incurred. Upon disposition, the assets and related accumulated depreciation are removed from the accounts, and the resulting gain or loss is included in the statement of operations. Depreciation is computed using the straight-line method at rates calculated to amortize the cost of assets over their estimated useful lives ranging from 3 to 40 years. F-9 46 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Goodwill and Other Intangible Assets Goodwill represents costs in excess of net assets acquired and is amortized on a straight line basis over a period of 20 years. Intangible assets consist of deferred financing costs, non-compete agreements and various other intangible assets. Deferred financing costs are amortized on a straight-line basis over the term of the applicable debt. Costs related to non-compete agreements and other intangibles are amortized on a straight-line basis over two to five years. Amortization expense for 1995, 1994 and 1993 was approximately $2,724,000, $1,000,000, and $1,209,000, of which approximately $845,000, $395,000, and $139,000 relate to deferred financing costs. Cumulative Convertible Redeemable Preferred Stock Through December 31, 1995, the Company reflected accumulated unpaid and undeclared dividends on its cumulative redeemable preferred stock as an increase in the related issue with corresponding charges to additional paid-in capital, to the extent available, and accumulated deficit. Pursuant to the Recapitalization, all accrued preferred dividends at December 31, 1995 (approximately $12,614,000) were paid by the issuance of common stock at an agreed price of $7.00 per share. Additionally, the holders of Series C and D preferred stock have waived all dividends accruing after December 31, 1995. See Note 8 "Stockholders' Equity" for a discussion of the terms of the Recapitalization. Income Taxes The Company uses the liability method of accounting for income taxes. Under this method, deferred income taxes are recorded to reflect the tax consequence on future years of temporary differences between the tax basis of the assets and liabilities and their financial amounts at year-end. Loss Per Share Loss per common and common equivalent share amounts are calculated by dividing loss applicable to common stock by the weighted average number of common shares outstanding during each period, as restated for the two-for-one stock split on July 7, 1993, and assuming the exercise, when dilutive, of all stock options and warrants having an exercise price less than the average stock market price of the common stock using the treasury stock method. Common stock equivalents and other potentially dilutive securities have not been considered because their effect was antidilutive in all years. Weighted average shares outstanding used to determine earnings per common and common equivalent share were 4,255,000, 1,457,000, and 1,122,000 in 1995, 1994 and 1993, respectively. Reclassifications Certain reclassifications have been made in prior year financial statements to conform to the 1995 presentation. These reclassifications had no effect on the results of operations previously reported. Recent Pronouncements In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 121, which is effective for fiscal years beginning after December 15, 1995, requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company does not believe that the adoption of this statement will have a material effect on its financial statements. F-10 47 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," which is effective for fiscal years beginning after December 15, 1995. SFAS 123 establishes new financial accounting and reporting standards for stock-based compensation plans. Entities will be allowed to measure compensation expense for stock-based compensation under SFAS 123 or APB Opinion No. 25, "Accounting for Stock Issued to Employees." Entities electing to account for such compensation under APB Opinion No. 25 will be required to make pro forma disclosures of net income and earnings per share as if SFAS 123 had been applied. The Company is presently evaluating which alternative it will adopt under SFAS 123 and has not yet quantified the potential impact on the Company of adopting this new standard. NOTE 3. ACQUISITIONS AND OTHER INVESTMENTS Physicians and Surgeons Hospital The Company acquired Physicians and Surgeons Hospital in Midland, Texas on May 1, 1993 for approximately $5,800,000 in cash and the assumption of $1,200,000 in debt. The acquisition was accounted for as a purchase transaction with operations reflected in the consolidated financial statements beginning May 1, 1993. The Company replaced P&S in the fourth quarter of 1995 with the newly constructed 101 bed Westwood Medical Center. Total construction cost for the new facility was approximately $39,017,000. Psychiatric Healthcare Corporation On October 21, 1994, the Company acquired Psychiatric Healthcare Corporation ("PHC"), a privately held corporation headquartered in Birmingham, Alabama, by the merger of PHC with and into a wholly-owned subsidiary of the Company. PHC owned and operated two free-standing psychiatric hospitals with a combined total of 219 beds located in Springfield, Missouri and Alexandria, Louisiana, and owned a third free-standing psychiatric hospital located in Sherman, Texas, that was closed and held for sale at the date of acquisition. The net purchase price, including contingent consideration of $2,000,000 paid in 1995 and the assumption of long term debt, was approximately $24,600,000. The Company paid no cash to PHC shareholders. Total consideration paid by the Company consisted of the assumption of approximately $14,880,000 in long-term debt and the issuance of the following securities to PHC shareholders: (i) 264,306 shares of Series D preferred stock, (ii) $7,123,000 of 11% Senior Subordinated Notes with 213,690 detachable warrants to acquire common stock and (iii) options, which were subsequently exercised, to acquire an additional 7,561 shares of Series D Preferred Stock and $202,000 principal amount of 11% Senior Subordinated Notes with 6,060 detachable warrants. The payment of contingent consideration had been subject to the Company's receipt of up to $2,000,000 from a combination of the sale of the Sherman, Texas facility, a recovery from a lawsuit and certain specified Medicaid payments. All conditions for the payment of contingent consideration were substantially met in 1995, including the sale of Sherman Hospital for approximately $1,300,000 in March 1995. The acquisition was accounted for as a purchase transaction with operations reflected in the consolidated financial statements effective October 1, 1994. The Company has completed its analysis of the assets acquired and liabilities assumed and has allocated approximately $8,800,000 in excess purchase price to goodwill, which is currently being amortized over a 20 year period. AmeriHealth, Inc. On December 6, 1994, the Company merged with AmeriHealth, Inc. ("AHH"), a Delaware corporation, with AHH being the surviving corporation resulting from the merger (the "Combined Company"). The merger was accounted for as a recapitalization of the Company with the Company as the acquiror (a reverse acquisition). Concurrent with the merger, the name of the Combined Company was changed to Champion Healthcare Corporation, and the Combined Company adopted the Company's certificate of incorporation provisions. F-11 48 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3. ACQUISITIONS AND OTHER INVESTMENTS (CONTINUED) Pursuant to the merger, the Combined Company: (a) paid a cash distribution of $0.085 cents per share to all common stockholders of AHH, (b) issued one share of its Combined Company common stock for each 5.70358 shares of the approximately 17.2 million outstanding shares of AHH's Common Stock, (c) issued one share of Combined Company common stock for each of the approximately 1.2 million then outstanding shares of the Company common stock, and (d) issued one share of newly authorized Combined Company preferred stock for each of the then outstanding shares of the Company's preferred stock. The terms of the new voting shares of Combined Company preferred stock are identical to those of the Company's preferred stock outstanding prior to the merger. In addition, holders of the outstanding shares of AHH's $2.125 Increasing Rate Cumulative Convertible Preferred Stock were canceled in exchange for cash equal to the redemption price of such shares plus all unpaid dividends which totaled approximately $47,000. The net purchase price, including the assumption of approximately $17,700,000 in debt, was approximately $38,876,000. The acquisition was accounted for as a purchase transaction with operations reflected in the consolidated financial statements effective December 1, 1994. The Company has completed its analysis of the assets acquired and liabilities assumed and has allocated approximately $8,946,000 in excess purchase price to goodwill, which is currently being amortized over a 20 year period. Partnership with Dakota Hospital On December 21, 1994, a wholly owned subsidiary of the Company that owned Heartland Medical Center, a 142 bed general acute care facility in Fargo, North Dakota, entered into a partnership with Dakota Hospital ("Dakota"), a not-for-profit corporation that owned a 199 bed general acute care hospital also in Fargo, North Dakota. The partnership is operated as Dakota Heartland Health System ("DHHS"). Also on December 21, 1994, the Company entered into an operating agreement with the partnership and Dakota to manage the combined operations of the two hospitals. Under the terms of the partnership agreement, the Company is obligated to advance funds to DHHS to cover any and all operating deficits of DHHS. DHHS began operations on December 31, 1994. The Company and Dakota contributed their respective hospitals debt and lien free (except for capitalized lease obligations), including certain working capital components, and the Company contributed an additional $20,000,000 in cash, each in exchange for 50% ownership in the partnership. A $20,000,000 special distribution was made to Dakota after capitalization of the partnership in accordance with the terms of the partnership agreement. The Company will receive 55% of the net income and distributable cash flow ("DCF") of the partnership until such time as it has recovered on a cumulative basis an additional $10,000,000 of DCF in the form of an "excess" distribution. As of December 31, 1995, the Company has received $825,000 in cash distributions from DHHS. The partnership is administered by a Governing Board comprised of six members appointed by Dakota, three members appointed by the Company and three members appointed by mutual consent of the Dakota members and the Company members. Certain Governing Board actions require the majority approval of each of the Company and Dakota members. Because the partners through the partnership agreement have delegated substantially all management of the partnership to the Company through the operating agreement, the authority of the Governing Board is limited. F-12 49 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3. ACQUISITIONS AND OTHER INVESTMENTS (CONTINUED) Beginning July 1996, Dakota has the right to require the Company to purchase its partnership interest free of debt or liens for a cash purchase price equal to 5.5 times Dakota's pro rata share of earnings before depreciation, interest, income taxes and amortization, as defined in the partnership agreement, less Dakota's pro-rata share of the partnership's long-term debt. DHHS had earnings before depreciation, interest, income taxes and amortization of approximately $19,000,000 for the year ended December 31, 1995. Beginning January 1998, the purchase price for Dakota's partnership interest shall not be less than $50,000,000. After receipt of written notice of Dakota's intent to sell its partnership interest, the Company would have 12 months to complete the purchase. Should the Company not complete the purchase during this period, Dakota has the right to, among others, (i) terminate the operating agreement and engage an outside party to manage the hospital, (ii) replace the Company's designees to the Governing Board and (iii) enter into a fair market value transaction to sell substantially all of the partnership's assets. The Company accounts for its investment in DHHS under the equity method. The following table summarizes certain financial information of DHHS as of December 31, 1995 and 1994, and for the year ended December 31, 1995 (dollars in thousands). DHHS began operations on December 31, 1994.
Year ended December 31, 1995 ----------------- INCOME STATEMENT DATA Net revenue $106,011 Net income 16,148 Company's equity in the earnings of DHHS 8,881
December 31, 1995 December 31,1994 ----------------- ---------------- BALANCE SHEET DATA Current assets $ 39,008 $ 28,220 Non-current assets 55,854 44,298 Current liabilities 19,980 12,212 Non-current liabilities 57 129 Partners' equity 74,825 60,177
Salt Lake Regional Medical Center On April 13, 1995, the Company acquired Salt Lake Regional Medical Center ("SLRMC") from Columbia/HCA Healthcare Corporation ("Columbia"). SLRMC is comprised of a 200 bed tertiary care hospital and five clinics and is located in Salt Lake City, Utah. Total acquisition cost for SLRMC was approximately $61,042,000, which consisted of approximately $56,816,000 in cash and additional consideration due to Columbia of approximately $1,767,000, as well as the assumption of approximately $2,459,000 in capital lease obligations. Cash consideration included approximately $11,783,000 for certain working capital components, resulting in a net purchase price of approximately $49,259,000. The Company funded the asset purchase from available cash and approximately $30,000,000 in borrowings under its then outstanding credit facility. The acquisition was accounted for as a purchase transaction with operations reflected in the consolidated financial statements beginning April 14, 1995. F-13 50 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3. ACQUISITIONS AND OTHER INVESTMENTS (CONTINUED) Jordan Valley Hospital On March 1, 1996, the Company acquired Jordan Valley Hospital ("Jordan") from Columbia. Jordan is a 50 bed acute care hospital located in West Jordan, Utah, a suburb of Salt Lake City. The Company acquired Jordan in exchange for Autauga Medical Center, an 85 bed acute care hospital, and Autauga Health Care Center, a 72 bed skilled nursing facility, both in Prattville, Alabama, plus preliminary cash consideration paid to the seller of approximately $10,750,000, which included approximately $3,750,000 for certain net working capital components, subject to adjustment, and reimbursement of certain capital expenditures made previously by the seller. The transaction did not result in a gain or loss. The Alabama facilities were acquired as part of the Company's acquisition of AmeriHealth, Inc. on December 6, 1994. Pro Forma Financial Information The following selected unaudited pro forma financial information for the years ended December 31, 1995 and 1994 assumes that the acquisition of SLRMC occurred on January 1, 1994. The selected unaudited pro forma financial information for the year ended December 31, 1994, assumes that the acquisitions of AHH and PHC, and the formation of the DHHS partnership occurred on January 1, 1994. The pro forma financial information below does not purport to be indicative of the results that actually would have been obtained had the operations been combined during the periods presented, and is not intended to be a projection of future results or trends.
1995 1994 ---- ---- (unaudited) (Dollars in thousands, except per share data) Net revenue $ 189,540 $ 195,915 ============ ============ Equity in earnings of DHHS $ 8,881 $ 5,443 ============ ============ Income (loss) before extraordinary item $ 3,999 $ (3,198) ============ ============ Net income (loss) $ 2,881 $ (3,198) ============ ============ Loss applicable to common stock $ (8,450) $ (8,196) ============ ============ Loss per common share before extraordinary item $ (1.72) $ (1.94) ============ ============ Loss per common share $ (1.99) $ (1.94) ============ ============ Weighted average number of common shares outstanding 4,255 4,224 ============ ============
F-14 51 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4. ASSET WRITE-DOWN In December 1993, the Company ceased providing medical services at Gulf Coast Hospital ("GCH"), one of two Company-owned hospitals located in Baytown, Texas, which it had acquired from HCA Health Services of Texas, Inc. on September 1, 1992. The Company intended to use GCH for limited administrative purposes only until it could arrange a sale. As a result, the Company wrote down the GCH assets by $15,456,000, which reflected the estimated fair value of the facility under limited use less ongoing operating costs and various rental concessions previously granted the tenants. The book value of GCH prior to the write-down was $16,681,000. The remaining net historical cost of $1,225,000 represented the equipment moved to the other Baytown campus. In June 1994, the Company sold the former HCA facility to a physician group for nominal consideration. The Company believes that assets associated with its other campus in Baytown have not been impaired as the result of this change in operations. NOTE 5. ACCRUED AND OTHER LIABILITIES Accrued and other liabilities consisted of the following at December 31, 1995 and 1994 (dollars in thousands):
1995 1994 -------- -------- Accrued salaries and wages $ 3,851 $ 1,303 Accrued vacation 2,516 1,148 Accrued interest 3,156 1,256 Other 5,967 4,739 -------- -------- Total accrued and other liabilities $ 15,490 $ 8,446 ======== ========
NOTE 6. LONG-TERM DEBT Long-term debt consisted of the following at December 31, 1995 and 1994 (dollars in thousands):
1995 1994 -------- -------- Revolving Loan $ 47,700 Term Loan -- $ 18,500 11% Senior Subordinated Notes (face amount of $99,089, net of a discount of $642 at December 31, 1995) 98,447 62,703 Health Care REIT, Inc. 11,120 12,770 Wilmington Savings Fund Society -- 9,766 Other notes payable 3,569 3,108 -------- -------- Total debt 160,836 106,847 Less current portion (1,166) (4,221) -------- -------- Total long-term debt $159,670 $102,626 ======== ========
On June 12, 1995, the Company issued $35,000,000 face amount (less a discount of approximately $668,000) of Senior Subordinated Notes (the "Notes") maturing on December 31, 2003. The Notes bear interest at an annual effective rate of 11.35% (11% stated rate). Interest is payable quarterly, and the stated rate increases from 11% to 11.5% on March 31, 1996. The Notes include detachable warrants for the purchase of 525,000 shares of common stock. The Notes are subject to redemption on or after December 31, 1995, at the Company's option, at prices declining from 112.5% of principal amount at December 31, 1995, to par at December 31, 2002. Additionally, there is a requirement to repurchase all outstanding Notes in the event of a change in control of the Company, at the holder's option, based on a declining redemption premium ranging from 112.5% to 103% of principal. Proceeds F-15 52 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6. LONG-TERM DEBT (CONTINUED) from the issuance of Notes were used to paydown approximately $31,500,000 principal amount outstanding under the Revolving Loan with the remainder retained for general corporate purposes. The Notes are uncollateralized obligations and are subordinated in right of payment to certain senior indebtedness of the Company. Approximately $668,000 of the proceeds from the issuance of the Notes were allocated to the warrants. On May 31, 1995, the Company refinanced and paid a $50,000,000 term and revolving credit facility ("old credit facility") obtained in November 1993 with a $100,000,000 revolving credit facility (the "Revolving Loan") with Banque Paribas, as agent, AmSouth Bank of Alabama, Bank One of Texas, N.A., CoreStates Bank, N.A., and NationsBank of Texas, N.A. Amounts available under the Revolving Loan are subject to certain limitations, and the total amount available under the Revolving Loan declines to $80,000,000 on the third anniversary date. The Revolving Loan also provides for short term letters of credit of up to $5,000,000. The Revolving Loan matures no later than March 31, 1999, and bears interest at a lender defined incremental rate plus, at the Company's option, the LIBOR or Prime rate. The incremental rate to be applied is based upon the Company meeting certain operational performance targets, as defined, and ranges from 2.5% to 3.0% with respect to the LIBOR rate option and from 1.0% to 1.5% with respect to the Prime rate option. The interest rates on the Revolving Loan and old credit facility were 8.85% and 9.12%, respectively, at December 31, 1995 and 1994. The Company currently has approximately $649,000 outstanding under letters of credit. Proceeds from the refinancing were used to pay approximately $48,000,000 principal amount outstanding under the Company's old credit facility and approximately $9,533,000 principal amount of debt held by Wilmington Savings Fund Society ("WSFS"). The interest rate on the WSFS Loan was 11.5% and 10.5% at May 31, 1995 (the date of payment) and December 31, 1994, respectively. With the exception of certain assets collateralizing debt assumed in the Company's 1994 acquisition of PHC, the Revolving Loan is collateralized by substantially all of the Company's assets. The terms of the Revolving Loan eliminated the requirement under the Company's previous bank credit facility to maintain a cash collateral account with the lender in the amount of $5,000,000. The Company's future acquisitions and divestitures may require, in certain circumstances, consent by lenders under this agreement. In connection with the Company's refinancing and payment of its old credit facility, the Company wrote off unamortized deferred financing costs of $1,118,000, which had no tax effect. This amount has been recorded as an extraordinary loss in the accompanying consolidated statement of operations. The Company also prepaid the WSFS Loan with no material financial impact. On December 30, 1994, pursuant to commitments obtained from the original purchasers of the 11% Senior Subordinated Notes issued on December 31, 1993, the Company issued an additional $19,133,000 of Notes with detachable warrants for the purchase of 573,990 shares of common stock. No value was allocated to the warrants at the time of issuance because the interest rate on the Notes was considered a market rate and the exercise price was greater than the estimated fair value of the common stock. The Notes bear interest at an effective annual rate of 11%. All other terms of the Notes are substantially the same as those discussed above. In connection with the Company's acquisition of PHC, the Company issued approximately $7,123,000 principal amount of Notes, and assumed approximately $12,970,000 of mortgage financing on the PHC facilities, $257,000 in capitalized leases, $159,000 in notes payable and a working capital credit facility with a balance of approximately $1,494,000, which was repaid from available cash of the Company and PHC. The Notes bear interest at an effective annual rate of 11%. All other terms of the Notes are substantially the same as those discussed above. The mortgage notes are payable to Health Care REIT, Inc. and bear interest at an annual rate that increases yearly from 13.44% at December 31, 1995, to 15.4% at November 1, 2001. Thereafter, the mortgage bears interest at an annual rate equal to the seven year US Treasuries rate plus 500 basis points. Approximately $10,125,000 principal balance of the mortgage matures on December 1, 2008, with principal payments on that portion commencing in F-16 53 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6. LONG-TERM DEBT (CONTINUED) December 1995, based on 25 year amortization. The remaining balance of the mortgage requires quarterly principal payments of $200,000 through 1997. The Company sold the Sherman, Texas facility for approximately $1,300,000 on March 22, 1995. In connection with the sale, the Company made a required principal payment of $850,000 on the mortgage collateralized by this facility and obtained a release of collateral from the lender. The remaining principal balance is now collateralized by the Company's hospital in Alexandria, Louisiana. Other notes payable bear interest at rates ranging from 5.1% to 11.8% and are generally collateralized by the underlying assets to which they relate. On November 5, 1993, the Company refinanced its subsidiary term and revolving credit loans obtained in August 1991, with a $50 million credit facility comprised of a $20,000,000 term loan and a $30,000,000 revolving credit facility (collectively, the "old credit facility," as referred to above). In connection with the refinancing, a prepayment premium and unamortized deferred financing costs of $1,230,000, net of an income tax benefit of $634,000, were written off and recorded as an extraordinary loss. The Company capitalized approximately $1,462,000 and $294,000 in interest costs associated with the construction of a hospital and other medical related facilities at December 31, 1995 and 1994, respectively. The Company had no capitalized interest for the year ended December 31, 1993. The Revolving Loan, Notes and Mortgages referenced above contain restrictive covenants which include, among others, restrictions on additional indebtedness, the payment of dividends and other distributions, the repurchase of common stock and related securities under certain circumstances, and the requirement to maintain certain financial ratios. The Company was in compliance with or has obtained permanent waivers for all loan covenants to which it was subject as of December 31, 1995 and 1994. Maturities of debt as of December 31, 1995, were as follows (dollars in thousands): 1996 $ 1,166 1997 2,514 1998 885 1999 47,785 2000 79 Thereafter 108,407 --------- $ 160,836 =========
F-17 54 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7. REDEEMABLE PREFERRED STOCK Redeemable preferred stock consisted of the following at December 31, 1995 and 1994 (See Note 8 "Stockholders' Equity" for a discussion of the effect of the Recapitalization on the outstanding series of preferred stock):
1995 1994 ---- ---- (Dollars in thousands) Series D - Cumulative convertible redeemable preferred stock, $.01 par, 2,200,000 shares authorized; 2,156,903 and 2,105,258 shares issued and outstanding at December 31, 1995 and 1994, respectively ($38,824 and $39,787 liquidation value in 1995 and 1994, respectively) $ 37,982 $ 38,754 Series C - Cumulative convertible redeemable preferred stock, $.01 par, 500,000 shares authorized; 448,811 shares issued and outstanding at December 31, 1995 and 1994 ($8,079 and $8,778 liquidation value in 1995 and 1994, respectively) 8,047 8,740 Series BB - Cumulative convertible redeemable preferred stock, $.01 par; 1,577,547 shares issued and outstanding at December 31, 1994 -- 21,551 Series A-1 - Cumulative convertible redeemable preferred stock, $.01 par; 2,769,109 shares issued and outstanding at December 31, 1994 -- 3,206 Series A - Cumulative convertible redeemable preferred stock, $.01 par; 3,500,000 shares issued and outstanding at December 31, 1994 -- 4,043 -------- --------- $ 46,029 $ 76,294 ======== =========
SERIES D The Series D cumulative convertible redeemable preferred stock ("Series D") is convertible, at the holder's option, into the common stock at a price of $9.00 per share until redemption date. The conversion price is subject to adjustment upon the sale or issuance of additional common stock, including stock rights, options and convertible securities, for consideration less than the conversion price in effect immediately prior to the sale or issuance in question. Redemption of Series D shares will occur only on the redemption date of June 1, 2000, at the redemption price of $18.00 per share. If all outstanding shares of Series D and Series C can not be redeemed at the same time, then redemption of such shares will be prorated with preference given to Series D, as defined. Series D shares are entitled to liquidation payments of $18.00 per share. If the Company is unable to pay fully the Series D and Series C stockholders, then liquidation of such shares will be prorated with preference given to Series D, as defined. Series D will participate in any dividends declared on common stock on an as converted basis. At December 31, 1995, the Series D shares were convertible into 4,313,806 shares of common stock. The Company issued 51,645 shares of Series D preferred stock to PHC shareholders in 1995 pursuant to the exercise of options and the issuance of contingent consideration due under the terms of the PHC purchase agreement. On October 21, 1994, the Company issued 212,661 shares of Series D preferred stock to PHC shareholders in connection with its acquisition of PHC. On December 30, 1994, the Company issued 623,453 shares of Series D preferred stock pursuant to existing commitments for the original purchasers of Series D. Cash proceeds from the December 30, 1994, issuance were $11,222,000. F-18 55 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7. REDEEMABLE PREFERRED STOCK (CONTINUED) SERIES C The Series C cumulative convertible redeemable preferred stock ("Series C") is convertible, at the holder's option, into common stock at a price of $9.00 per share until the redemption date. The conversion price is adjustable upon the same terms and conditions as Series D preferred stock. Redemption of Series C shares will occur only on the redemption date of June 1, 2000, at the redemption price of $18.00 per share. Series C will participate in any dividends declared on common stock on an as converted basis. If all outstanding shares of Series D and Series C can not be redeemed at the same time, then redemption of such shares will be prorated with preference given to Series D, as defined. Series C shares are entitled to liquidation payments of $18.00 per share. If the Company is unable to pay fully the Series D and Series C stockholders, then liquidation of such shares will be prorated with preference given to Series D, as defined. At December 31, 1995, Series C shares were convertible into 897,622 shares of common stock. The Company has the right to convert all or any shares of Series D and C into common stock upon the anticipated completion of a public offering of common stock for net proceeds of not less than $25,000,000 at a per share offering price of not less than $10.00 per share. Voting Rights for Series C and D Preferred Stock. Series C and D preferred stock have voting rights on all matters according to the number of common shares into which each Series is convertible at the time of any shareholders' vote. The issuance of a new class of stock or the increase of shares within an existing class of stock that either ranks on parity with or is superior to a given series of preferred stock as to dividends, redemption and liquidation requires the following approvals by the then outstanding class or classes: (1) 75% of Series C voting together as a class, and (2) 75% of Series D voting as a class. No amendment of voting powers, designations, preferences or rights and no amendments of Articles or Bylaws that materially adversely affect the rights of Series C and D preferred stock shall occur without the following approvals by the then outstanding class or classes: (1) 90% of Series C voting together as a class and (2) 90% of the Series D voting as a class. Upon the occurrence of an event of default, the preferred stock shareholders will have the right to enlarge the Board of Directors and elect a controlling number of directors. Pursuant to the Recapitalization, all outstanding shares Series A, A-1, and BB preferred stock, under their existing terms, were converted into common stock at December 31, 1995, along with all accrued dividends as of December 31, 1995. In total, including additional consideration for the actions taken pursuant to the Recapitalization, the holders of Series A, A-1, and BB preferred stock received 5,889,523 shares of common stock. See Note 8 "Stockholders' Equity" for a discussion of the terms of the Recapitalization. SERIES BB The Series BB cumulative convertible redeemable preferred stock ("Series BB") was convertible, at the holder's option, into common stock at a price of $5.90 per share until redemption date and were mandatorily redeemable on June 30, 2000, at $11.80 per share plus any accrued and unpaid dividends. Dividends had accrued at a rate of 8% of the stated value of $11.80 per share and were payable in cash under certain events, including, among others, a change in control or a successful secondary public offering of the Company's common stock. SERIES A-1 Series A-1 cumulative convertible redeemable preferred stock ("Series A-1") was convertible, at the holder's option, into common stock at a conversion rate of 1 share of common stock for each four shares of Series A-1 preferred stock. Series A-1 shares were mandatorily redeemable, at the holder's option, at $1.00 per share within 90 days of receipt of written notice of a change of control or a default event (as defined). Dividends on Series A-1 accrued at a rate of $.08 per share per annum. Dividends were payable in common stock and/or cash in the event of a change of control, as define, subject to the Company's existing agreement with senior secured lenders and the F-19 56 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7. REDEEMABLE PREFERRED STOCK (CONTINUED) approval of two-thirds of all outstanding Series BB, C and D preferred stock. The Series A-1 preferred stockholders were entitled to liquidation payments of $1.00 per share plus all accrued but unpaid dividends, or ratable payments among all Series A and A-1 preferred stockholders if such amounts were not available for payment by the Company. Liquidation payments were subject to the prior liquidation rights of the Series BB through D preferred stockholders. SERIES A Series A cumulative convertible redeemable preferred stock ("Series A") was convertible, at the holder's option, into common stock at a conversion rate of 1 share of common stock for each 3.685 shares of Series A Preferred Stock. All other rights and preferences that apply to Series A-1 preferred stock apply to Series A preferred stock. F-20 57 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7. REDEEMABLE PREFERRED STOCK (CONTINUED) The changes in redeemable preferred stock for the years ended December 31, 1995, 1994 and 1993 were as follows (dollars in thousands, except share data):
Series D Series C Series BB Shares Amounts Shares Amounts Shares Amounts ------ ------- ------ ------- ------ ------- BALANCE, JANUARY 1, 1993 1,287,597 $15,272 Exercise of stock warrants 289,950 3,422 Issuance of preferred stock - Series C (net of $46 in issue costs) 448,811 $ 8,033 Issuance of preferred stock - Series D (net of $837 in issue costs) 1,269,144 $ 22,008 Preferred dividends accrued, including accretion of issuance costs 56 1,301 --------- --------- ------- ------- --------- ------ BALANCE, DECEMBER 31, 1993 1,269,144 22,008 448,811 8,089 1,577,547 19,995 Issuance of preferred stock - Series D (net of $327 in issue costs) 836,114 14,723 Preferred dividends accrued, including accretion of issuance costs 2,023 651 1,556 --------- ---------- ------- ------- --------- ------ BALANCE, DECEMBER 31, 1994 2,105,258 38,754 448,811 8,740 1,577,547 21,551 Issuance of preferred stock - Series D 51,645 930 Preferred dividends accrued, including accretion of issuance costs 3,222 653 1,559 Dividends declared pursuant to the Recapitalization 3,610 751 739 Recapitalization (8,534) (2,097) (1,577,547) (23,849) --------- --------- ------- ------- ---------- -------- BALANCE, DECEMBER 31, 1995 2,156,903 $ 37,982 448,811 $ 8,047 -- $ -- ========= ========= ======= ======= ========== ========
Series A-1 Series A Shares Amounts Shares Amounts ------ ------- ------ ------- BALANCE, JANUARY 1, 1993 2,769,109 $ 2,876 3,500,000 $ 3,598 Exercise of stock warrants Issuance of preferred stock - Series C (net of $46 in issue costs) Issuance of preferred stock - Series D (net of $837 in issue costs) Preferred dividends accrued, including accretion of issuance costs 128 167 ---------- ------- --------- --------- BALANCE, DECEMBER 31, 1993 2,769,109 3,004 3,500,000 3,765 Issuance of preferred stock - Series D (net of $327 in issue costs) Preferred dividends accrued, including accretion of issuance costs 202 278 ---------- ------- --------- --------- BALANCE, DECEMBER 31, 1994 2,769,109 3,206 3,500,000 4,043 Issuance of preferred stock - Series D Preferred dividends accrued, including accretion of issuance costs 234 314 Dividends declared pursuant to the Recapitalization 110 139 Recapitalization (2,769,109) (3,550) (3,500,000) (4,496) ---------- ------- --------- --------- BALANCE, DECEMBER 31, 1995 -- $ -- -- $ -- ========== ======= ========= =========
F-21 58 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL NOTE 8. STOCKHOLDERS' EQUITY Recapitalization Effective December 31, 1995, the Company, pursuant to the 1995 Recapitalization Agreement, entered into several transactions to reduce the complexity of the Company's capital structure and eliminate the accrual of future dividends on its outstanding preferred stock and the resulting impact on earnings per share. As a part of these transactions (i) all outstanding shares of Series A, A-1, and BB preferred stock, pursuant to their terms, converted into 4,797,161 shares of common stock, (ii) all accrued dividends at December 31, 1995, totaling approximately $12,614,000 on all classes of the Company's outstanding preferred stock were paid by issuing 1,801,900 shares of common stock at an agreed upon price of $7.00 per share, and (iii) the holders of Series C and D preferred stock agreed to waive the future accrual of preferential dividends. As a further part of these transactions, the Company issued an additional 1,006,783 shares of common stock to all holders of its then outstanding preferred stock as consideration for actions taken and agreed to reduce the exercise prices of one series of warrants totaling 680,104 from $5.90 to $5.25 per share and two series of warrants totaling 2,447,670 from $9.00 to $7.00 per share until May 13, 1996, after which the exercise prices revert to their prior amounts. Warrant holders have the right to tender subordinated debt in lieu of cash, where applicable. Shareholders approved the Recapitalization and an Amended Certificate of Incorporation at a special shareholders meeting held on February 12, 1996. As a result of the Recapitalization, common shares outstanding at December 31, 1995, increased from 4,262,386 to 11,868,230, and preferred shares outstanding decreased from 10,452,370 to 2,605,714. Other than for fractional shares, no cash consideration was paid under the terms of the Recapitalization. On a pro forma basis, assuming the Recapitalization had occurred on January 1, 1995, primary and fully diluted earnings per share would have been $0.27 and $0.19, respectively, for the year ended December 31, 1995. Under the terms of the Company's amended Certificate of Incorporation, the Company is authorized to issue 25,000,000 shares of common stock, and 2,700,000 shares of preferred stock, divided into two series as follow: (i) 500,000 shares of Series C, and (ii) 2,200,000 shares of Series D. Common Stock In connection with the Company's merger with AmeriHealth, Inc. ("AHH") on December 6, 1994, the Company issued 1 share of $0.01 par value common stock in exchange for each share of Company common stock outstanding prior to the consummation of the merger. The stockholders' equity accounts were retroactively restated to reflect the issuance of $0.01 par value common stock (See Note 3. "Acquisitions and Other Investments"). Additionally, the Company paid a cash distribution of $0.085 per share to all AHH common stockholders. Currently, payment of any cash dividends or other distributions or repurchases of any capital stock of the Company are prohibited. F-22 59 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8. STOCKHOLDERS' EQUITY (CONTINUED) Stock Option Plans The Company has six nonstatutory stock option plans in which certain officers and/or directors are eligible to participate: Employee Stock Option Plan, dated December 31, 1991 ("Plan No. 1"), Employee Stock Option Plan No. 2, dated May 27, 1992 ("Plan No. 2"), Employee Stock Option Plan No. 3, dated September 1992 ("Plan No. 3"), Senior Executive Stock Option Plan No. 4, dated January 5, 1994 ("Plan No. 4"), Selected Executive Stock Option Plan No. 5, dated May 25, 1995, and Directors' Stock Option Plan, dated 1992 (the "Directors' Plan") (collectively, the "Plans"). Additionally, the Company has options issued and outstanding to certain executive officers and key employees under other authorized plans from which additional options are not actively being issued. At the Company's annual stockholders meeting on May 25, 1995, the stockholders approved the adoption of the Selected Executive Stock Option Plan No. 5, which authorized 144,500 shares of common stock for issuance under the Plan. As a result of the Company's merger with AmeriHealth, Inc. on December 6, 1994, all AmeriHealth options then outstanding became fully vested. At December 31, 1994, 244,017 options granted to certain former AmeriHealth directors, officers and key employees were outstanding and fully vested. The Plans are presently administered by the Option and Compensation Committee (the "Committee") of the Board of Directors. Officers, other key employees and, under limited circumstances, members of the Board of Directors are eligible to participate in Plan No. 1. Officers and executive personnel of the Company are eligible to participate in Plans No. 2 through 5. The Directors' Plan is available to members of the Board of Directors who are not members of management or elected as representatives of the Company's preferred stockholders pursuant to a voting agreement. With the exception of Plan 1, options granted under the Plans can not be less than 80% of the fair market value of common stock on the date of the grant. Under Plan 1, the per share price can not be less than 100% of the fair market value of the common stock on the date of grant. The Plans provide that no stock option shall be exercisable later than 10 years and 1 day from the date of grant. The following table summarizes the activity under these stock option plans and any special grants authorized by the Board of Directors:
Number of Option Price Per Shares Share --------- --------------- STOCK OPTIONS OUTSTANDING AT JANUARY 1, 1993 690,000 $1.00 to $6.25 Granted 15,000 $5.90 to $9.00 --------- STOCK OPTIONS OUTSTANDING AT DECEMBER 31, 1993 705,000 $1.00 to $9.00 Granted 367,566 $9.00 Grants to former AmeriHealth employees 244,017 $1.07 to $35.65 --------- STOCK OPTIONS OUTSTANDING AT DECEMBER 31, 1994 1,316,583 $1.00 to $35.65 Granted 159,000 $9.00 Exercised (18,411) $5.35 Expired (4,943) $3.92 to $35.65 --------- STOCK OPTIONS OUTSTANDING AT DECEMBER 31, 1995 1,452,229 $1.00 to $25.67 =========
F-23 60 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8. STOCKHOLDERS' EQUITY (CONTINUED) At December 31, 1995, options for the purchase of 1,044,852 common shares were exercisable. Shares Reserved. Shares covered by stock options that expire or otherwise terminate unexercised become available for awards under the respective Plans. At December 31, 1995, the Company had reserved 1,811,147 shares of common stock for awards under its various stock option plans, of which 358,918 were available for new grants. Warrants As of December 31, 1995, the Company had issued and outstanding a total of 2,858,541 warrants to purchase 3,244,412 shares of common stock at exercise prices ranging from $0.01 per share to $9.00 per share. Such warrants expire December 31, 1997, through December 31, 2003. Pursuant to the Recapitalization approved by the shareholders on February 12, 1996, the exercise prices on certain of the warrants were reduced until May 13, 1996, after which the exercise prices revert to their prior amounts (see Recapitalization above). NOTE 9. INCOME TAXES The provision for income taxes consisted of the following for the years ended December 31, 1995, 1994 and 1993:
1995 1994 1993 ---- ---- ---- (Dollars in thousands) Current: Federal $ 100 $ (1,600) $ 1,310 State 50 200 236 ------ --------- -------- Total current provision (benefit) 150 (1,400) 1,546 ------ --------- -------- Deferred: Federal -- 1,600 (537) State -- -- -- ------ --------- -------- Total deferred expense (benefit) -- 1,600 (537) ------ --------- -------- Provision for income taxes $ 150 $ 200 $ 1,009 ====== ========= =======
F-24 61 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9. INCOME TAXES (CONTINUED) The reconciliation of the statutory federal income tax rate to the provision for income taxes was as follows:
1995 1994 1993 ---- ---- ---- (Dollars in thousands) Federal income tax provision (benefit) at statutory rate of 34% $ 838 $ 831 $ (4,004) State income taxes, net of federal benefit 33 132 156 Changes in valuation allowance (580) (849) 4,359 Extraordinary item (634) Net operating loss for which no benefit is recognizable 525 Other (141) 86 (27) -------- -------- -------- Provision for income taxes 150 200 375 Amount allocated to extraordinary item -- -- 634 -------- -------- -------- Total provision for income taxes $ 150 $ 200 $ 1,009 ======== ======== ========
The components of the deferred tax assets and (liabilities) at December 31, 1995 and 1994 were as follows:
1995 1994 ---- ---- (Dollars in thousands) Net operating loss carryforward $ 7,062 $ 5,894 Depreciable equipment (11,680) (12,532) Amounts expensed for book purposes not currently deductible for tax 2,779 4,237 Investments in partnerships (140) (800) Tax credits 388 441 Less valuation allowance (3,281) (2,046) ---------- --------- Net deferred tax liability (4,872) (4,806) Less current portion (2,521) (1,671) ---------- ---------- Noncurrent portion $ (7,393) $ (6,477) ========== =========
The current deferred tax asset was included in prepaid expenses and other current assets in 1995 and 1994. The noncurrent deferred tax liability in 1995 and 1994 was included in other long-term liabilities. At December 31, 1995, the Company had net operating losses and tax credit carryforwards for income tax purposes of approximately $18,587,000 and $388,000, respectively, which will expire in years 1999 through 2009. The tax credit carryforwards consist of several business credits and alternative minimum tax ("AMT") credits of approximately $68,000 and $320,000, respectively. F-25 62 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9. INCOME TAXES (CONTINUED) For federal income tax purposes, due to certain changes in ownership of AmeriHealth, Inc., its net operating loss carryforward of $7,727,000 (included in the Company's net operating loss carryforward) may be limited to approximately $1,900,000 per year under the Internal Revenue Service Code. If the available amount is not used to reduce taxes in any year, the unused amount increases the allowable limit in subsequent years. These loss carryforwards expire in years 1999 through 2008. AmeriHealth, Inc. also has General Business Credit and AMT Credit carryforwards of approximately $68,000 and $100,000, respectively, which may also be limited because of the change in ownership. NOTE 10. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
DECEMBER 31, ------------------------------------------------- 1995 1994 1993 (Dollars in thousands) Income taxes paid $ 95 $ 878 $ 478 Interest paid 12,528 5,582 2,762
NOTE 11. DEFINED CONTRIBUTION PLAN The Company sponsors a defined contribution 401(k) plan for qualified employees of the Company. For those employees of the Company electing to participate, the Company matches certain employee contributions and may make additional discretionary contributions. Total expense for employer contributions to the plan for 1995, 1994 and 1993 was $319,000, $258,000 and $84,000, respectively. NOTE 12. RELATED PARTY TRANSACTIONS Management Prescriptives, Inc. ("MPI"), a company owned by a Director of the Company, has provided specialized consulting services to certain of the Company's hospitals. MPI received approximately $421,000 and $283,000 in fees from the Company for the years ended December 31, 1995 and 1994, respectively. NOTE 13. COMMITMENTS AND CONTINGENCIES The Company has entered into various operating lease agreements related to buildings and equipment. Future annual minimum lease payments under noncancelable operating leases with initial or remaining terms of one year or more were as follows at December 31, 1995 (dollars in thousands): 1996 $ 2,649 1997 2,266 1998 1,842 1999 1,544 2000 1,230 Thereafter 2,379 -------- $ 11,910 ========
F-26 63 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 13. COMMITMENTS AND CONTINGENCIES (CONTINUED) Rent expense for 1995, 1994 and 1993 was approximately $3,530,000, $2,648,000 and $2,348,000, respectively. Litigation. The Company is from time to time subject to claims and suits arising in the ordinary course of operations. In the opinion of management, the ultimate resolution of such pending legal proceedings will not have a material effect on the Company's financial position, results of operations or liquidity. Professional Liability. The Company is self-insured up to $1,000,000 per occurrence for the payment of claims arising from professional liability risks. The Company has accrued liabilities for potential professional liability risks based on estimates for losses limited to $1,000,000 per occurrence and $4,000,000 in the aggregate. The Company is further insured by a commercial insurer for claims in excess of these limits up to an additional $10,000,000 over its self-insured retention. At December 31, 1995 and 1994, the Company had accrued approximately $3,171,000 and $2,681,000, respectively, related to such claims. In the opinion of management, any unaccrued damages awarded will not have a material adverse effect on the Company's financial position, results of operations or liquidity. F-27 64 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 14. QUARTERLY RESULTS (UNAUDITED) The following tables summarize the Company's quarterly financial data for the years ended December 31, 1995 and 1994 (dollars in thousands, except per share data).
FIRST SECOND (2) THIRD FOURTH 1995(1) QUARTER QUARTER QUARTER QUARTER - ------- -------------------------------------------- Net revenue $ 28,727 $ 43,319 $ 45,789 $ 49,685 Income before extraordinary item 177 829 791 1,635 Net income (loss) 177 (289) 791 1,635 Primary loss per common share: (3) Loss before extraordinary item per common share (0.31) (0.16) (0.17) (1.22) Loss per common share (0.31) (0.42) (0.17) (1.22)
FIRST SECOND THIRD FOURTH 1994 QUARTER QUARTER QUARTER QUARTER - ---- -------------------------------------------- Net revenue $ 24,563 $ 23,403 $ 23,331 $ 32,896 Net income (loss) 1,473 757 1,028 (1,015) Primary income (loss) per common share (3) .21 (0.31) (0.12) (1.03) Fully diluted income per common share (3) .15 -- (1) -- (1) -- (1)
(1) Fully diluted earnings per share for the period has not been presented due to the antidilutive effect of such calculation. (2) The net loss for the second quarter of 1995 included an extraordinary loss of approximately $1,118,000 from the early extinguishment of debt. Additionally, results for the quarter and six months ended June 30, 1995, and the nine months ended September 30, 1995, have been restated from amounts previously reported in Form 10Q and 10Q/A to eliminate the tax benefit associated with the extraordinary loss due to a revision in the Company's estimate of the impact of net operating loss carryforwards. (3) Earnings per share is computed independently for each quarter presented; therefore, the sum of the per share amounts does not equal the annual per share amount due to quarterly fluctuations in weighted average common and common equivalent shares outstanding. F-28 65 CHAMPION HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 15. CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS Credit Risk The Company's revenues consist primarily of amounts due from the Medicare and Medicaid programs in addition to amounts due from insurance carriers and individuals. The Company determines the adequacy of a patient's third-party payor coverage upon admission. However, it generally does not require any collateral prior to performing services. The Company maintains reserves for contractual allowances and potential credit losses based on past experience and management's current expectations. Medicare and Medicaid gross revenue accounted for approximately 42% and 19% in 1995, 39% and 18% in 1994, and 39% and 12% in 1993, respectively, of the Company's total gross revenue. Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents approximates fair value due to the short term maturities of these instruments. The carrying amounts of the Company's fixed rate long-term borrowings at December 31, 1995 and 1994, approximate their fair value. The carrying value of the Company's revolving credit agreement approximates fair value because the interest rate on such agreement is variable and based on current market rates. NOTE 16. SUBSEQUENT EVENTS On January 31, 1996, the Company entered into a letter of intent to sell the 149 bed Lakeland Regional Hospital in Springfield, MO, to Columbia in exchange for the 100 bed Poplar Springs Hospital in Petersburg, VA. Both facilities are psychiatric hospitals. The Company anticipates receiving additional cash consideration as a result of the sale, net of certain working capital components and the respective facilities' long term debt. This transaction is subject to numerous contingencies, including adequate due diligence and various regulatory approvals; accordingly, the Company is presently unable to conclude whether consummation of this transaction is more likely than not to occur. F-29 66 DAKOTA HEARTLAND HEALTH SYSTEM REPORT ON AUDITS OF FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 F-30 67 C O N T E N T S Report of Independent Accountants F-32 Financial Statements: Balance Sheet F-33 Statement of Income F-34 Statement of Partners' Equity F-35 Statement of Cash Flows F-36 Notes to Financial Statements F-37
F-31 68 REPORT OF INDEPENDENT ACCOUNTANTS To the Governing Board of Dakota Heartland Health System: We have audited the accompanying balance sheet of Dakota Heartland Health System (the Partnership) as of December 31, 1995 and 1994, and the related statements of income, partners' equity and cash flows for the year ended December 31, 1995. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as 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 financial position of Dakota Heartland Health System as of December 31, 1995 and 1994, and the results of its operations, partners' equity and cash flows for the year ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. Minneapolis, Minnesota February 16, 1996 F-32 69 Dakota Heartland Health System BALANCE SHEET December 31, 1995 and 1994
ASSETS 1995 1994 Current assets: Cash and cash equivalents $ 19,062,865 $ 397,300 Patient receivables, net of allowance for uncollectible accounts of $3,396,655 and $3,439,911 in 1995 and 1994, respectively 17,339,282 21,530,288 Due from partners 4,000,000 Supplies inventory 1,602,786 1,724,706 Prepaid expenses and other current assets 1,003,019 568,052 ------------- -------------- Total current assets 39,007,952 28,220,346 Property and equipment, at cost 52,940,547 42,333,642 Other assets: Investment in and advances to affiliates 1,835,223 1,964,073 Organizational costs, less accumulated amortization of $45,291 1,057,215 Other 20,943 ------------ ------------- Total assets $ 94,861,880 $ 72,518,061 ============ ============= LIABILITIES AND PARTNERS' EQUITY Current liabilities: Accounts payable $ 12,380,016 $ 3,788,183 Estimated third-party payor settlements 2,008,176 3,426,079 Accrued salaries, wages and employee benefits 3,548,505 4,754,690 Other current liabilities 2,043,794 242,563 ------------ -------------- Total current liabilities 19,980,491 12,211,515 Other liabilities 91,404 Minority interest 56,877 38,478 Partners' equity 74,824,512 60,176,664 ------------ ------------- Total liabilities and partners' equity $ 94,861,880 $ 72,518,061 ============ =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. F-33 70 DAKOTA HEARTLAND HEALTH SYSTEM STATEMENT OF INCOME for the year ended December 31, 1995 Net patient service revenue $ 99,098,598 Other revenue 6,912,796 ------------- Net revenue 106,011,394 ------------- Expenses: Salaries and benefits 38,796,941 Professional fees 20,446,296 Supplies 16,299,957 Depreciation and amortization 2,405,978 Repairs and maintenance 1,079,489 Utilities 1,224,450 Insurance 789,648 Rents and leases 2,003,288 Provision for uncollectible accounts 3,797,944 Property taxes 910,264 Other 2,109,291 ------------- Total expenses 89,863,546 ------------- Net income $ 16,147,848 =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. F-34 71 DAKOTA HEARTLAND HEALTH SYSTEM STATEMENT OF PARTNERS' EQUITY for the years ended December 31, 1995 and 1994
Champion Dakota Total Equity Net assets contributed $ 16,511,768 $ 39,664,896 $ 56,176,664 Cash contribution 20,000,000 20,000,000 Working capital contributions due from partners 2,000,000 2,000,000 4,000,000 Equalization of capital accounts 1,576,564 (1,576,564) -------------- -------------- --------------- Initial capital 40,088,332 40,088,332 80,176,664 Special distribution (20,000,000) (20,000,000) -------------- -------------- --------------- Partners' equity, December 31, 1994 40,088,332 20,088,332 60,176,664 Net income 8,881,316 7,266,532 16,147,848 Partners' distributions (825,000) (675,000) (1,500,000) -------------- -------------- --------------- Partners' equity, December 31, 1995 $ 48,144,648 $ 26,679,864 $ 74,824,512 ============== ============== ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. F-35 72 DAKOTA HEARTLAND HEALTH SYSTEM STATEMENT OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents for the year ended December 31, 1995 Cash flows from operating activities: Net income $ 16,147,848 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,405,978 Gain on sale of property, plant and equipment (1,388) Provision for uncollectible accounts 3,797,944 Minority interest 18,399 Changes in operating assets and liabilities: Patient receivables, net 393,062 Supplies inventory 121,920 Prepaid expenses and other current assets (434,967) Other assets (20,943) Accounts payable 8,591,833 Estimated third-party payor settlements (1,417,903) Accrued expenses (1,206,185) Other liabilities 1,709,827 -------------- Net cash provided by operating activities 30,105,425 -------------- Cash flows from investing activities: Purchase of property and equipment (12,967,592) Payment for organizational costs (1,102,506) Contribution from partners 4,000,000 Other 130,238 -------------- Net cash used in investing activities (9,939,860) -------------- Cash flows from financing activities: Partners' draws (1,500,000) -------------- Net cash used in financing activities (1,500,000) -------------- Increase in cash and cash equivalents 18,665,565 Cash and cash equivalents, beginning of year 397,300 -------------- Cash and cash equivalents, end of year $ 19,062,865 ============== Supplemental disclosure of cash flow information: Cash paid during the year for interest $ 15,236 Cash paid for taxes 447,207
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. F-36 73 DAKOTA HEARTLAND HEALTH SYSTEM NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND ACCOUNTING POLICIES: On December 21, 1994, Dakota Heartland Health System, a general partnership (the Partnership), was formed by a wholly owned subsidiary of Champion Healthcare Corporation (Champion) that owned Heartland Medical Center, a 140-bed general acute care facility in Fargo, North Dakota, and Dakota Hospital (Dakota), a not-for-profit corporation that owned Dakota Hospital, a 199-bed general acute care hospital also in Fargo, North Dakota. Champion and Dakota contributed certain assets and liabilities, excluding long-term debt except capital leases, of their respective hospitals, and Champion contributed an additional $20,000,000 in cash, each in exchange for 50% ownership in the Partnership. The Partnership then made a $20,000,000 cash distribution to Dakota. Also on December 21, 1994, Champion entered into an operating agreement with the Partnership to manage the combined operations of the two hospitals. Champion will receive 55% of the net income and distributable cash flow (DCF) of the Partnership until such time as it has recovered, on a cumulative basis, an additional $10,000,000 of DCF in the form of an "excess" distribution (see also Note 4). USE OF ESTIMATES: The preparation of 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 financial statements and the reported amounts of net income during the reporting period. Actual results could differ from those estimates. The most significant areas which require the use of management's estimates relate to the determination of the estimated third-party payor settlements, the allowance for uncollectible accounts receivable and obsolete inventory. CASH AND CASH EQUIVALENTS: The Partnership considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. PATIENT RECEIVABLES: Payments for services rendered to patients covered by third-party payor programs are generally less than billed charges. Provisions for contractual adjustments are made to reduce the charges to these patients to estimated receipts based upon the third-party payor's principles of payment/reimbursement (either prospectively determined or retrospectively determined costs). SUPPLIES INVENTORY: Supplies inventory is stated at the lower of cost or market, with cost determined substantially on the first-in, first-out basis. F-37 74 DAKOTA HEARTLAND HEALTH SYSTEM NOTES TO FINANCIAL STATEMENTS, CONTINUED 1. ORGANIZATION AND ACCOUNTING POLICIES, CONTINUED: PROPERTY AND EQUIPMENT: Property and equipment acquisitions are recorded at cost at the date of receipt. Depreciation is provided using the straight-line method over the estimated useful lives of the respective assets, ranging from 4 to 25 years. Maintenance and repairs are charged to expense as incurred while renewals and betterments are capitalized. The costs and related accumulated depreciation on asset disposals are removed from the accounts and any gain or loss is included in income. INCOME TAXES: The Partnership's income is attributed to its partners for income tax purposes. Accordingly, it has not accrued any liability for income taxes. Entities owned by the Partnership have paid income taxes during 1995 totaling $447,207. RECLASSIFICATIONS: Certain reclassifications have been made in the 1994 financial statements to conform to the 1995 presentation. 2. NET PATIENT SERVICE REVENUE: The Company's facilities have entered into agreements with third-party payors, including U.S. government programs and managed care health plans, under which the Company is paid based upon established charges, cost of services provided, predetermined rates by diagnosis, fixed per diem rates or discounts or discounts from established charges. Net patient service revenues are recorded at estimated amounts due from patients and third-party payors for health care services provided, including anticipated settlements under reimbursement agreements with third-party payors. Payments for services rendered to patients covered by the Medicare and Medicaid programs are generally less than billed charges. Provisions for contractual adjustments are made to reduce charges to these patients to estimated receipts based upon each program's principle of payment/reimbursement (either prospectively determined or retrospectively determined costs). Final settlements under these programs are subject to administrative review and audit. The Company records adjustments, if any, resulting from such review or audits during the period in which these adjustments become known. Allowance for contractual adjustments under these programs are netted in accounts receivable in the accompanying Balance Sheet. It is management's opinion that adequate allowance has been provided for possible adjustments that might result from final settlements under these programs. F-38 75 DAKOTA HEARTLAND HEALTH SYSTEM NOTES TO FINANCIAL STATEMENTS, CONTINUED 3. PROPERTY AND EQUIPMENT: A summary of property and equipment as of December 31, 1995 and 1994 is as follows:
1995 1994 Land and land improvements $ 2,360,412 $ 2,387,095 Buildings and improvements 21,624,868 20,087,268 Fixed equipment 4,899,749 4,724,125 Major movable equipment 13,863,470 12,516,205 Minor movable equipment 1,003,318 1,101,633 Construction in progress 10,638,351 606,250 Property held for expansion 911,066 911,066 -------------- -------------- 55,301,234 42,333,642 Less accumulated depreciation 2,360,687 -------------- -------------- $ 52,940,547 $ 42,333,642 ============== ==============
4. INVESTMENTS IN AND ADVANCES TO AFFILIATES: The Partnership owns portions of several entities. The investments in these entities are recorded on the equity method. The investments in and advances to affiliated companies on the accompanying balance sheet consisted of the following:
INVESTMENTS AND ADVANCES OWNERSHIP --------------------------- CORPORATION PERCENTAGE 1995 1994 Orthopro, Inc. 50% $ 203,155 Country Health, Inc. 49% $ 805,632 665,629 Health Care Incinerators, Inc./Thom Linen 33% 210,701 193,235 Dakota Outpatient Center 50% 356,016 311,604 Dakota Day Surgery 50% 462,874 590,450 ------------ ----------- $ 1,835,223 $ 1,964,073 ============ ===========
During 1995, the Partnership sold its 50% interest in Orthopro, Inc. The Partnership has a 50% interest in Dakota Outpatient Center (DOC), a general partnership which owns and operates a medical and office building. As a general partner, the Partnership is contingently liable on the outstanding debt of DOC. As of December 31, 1995, the balance of the note was $2,416,564. F-39 76 DAKOTA HEARTLAND HEALTH SYSTEM NOTES TO FINANCIAL STATEMENTS, CONTINUED 4. INVESTMENTS IN AND ADVANCES TO AFFILIATES, CONTINUED: DOC also leases its real property to Dakota Hospital, Dakota Day Surgery (DDS) and Dakota Clinic, Ltd. (an unrelated corporation), under noncancelable 10-year net operating leases. Future minimum annual lease payments to be paid by the Hospital and DDS are $1,414,500 through 1998. The Partnership also has a 50% interest in DDS, a general partnership which provides outpatient surgical services. As a general partner, the Partnership is contingently liable to cover any operating losses of DDS. DDS had operating income in 1995. 5. CREDIT RISK The Partnership's revenues consist primarily of amounts due from the Medicare and Medicaid programs in addition to amounts due from insurance carriers and individuals. The Partnership determines the adequacy of a patient's third-party payor coverage upon admission. However, it generally does not require any collateral prior to performing services. The Partnership maintains reserves for contractual allowances and potential credit losses based on past experience and management's current expectations. Medicare and Medicaid gross revenue accounted for approximately 46% and 9% of the Partnership's total gross revenue. F-40 77 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES Our report on the consolidated financial statements of Champion Healthcare Corporation is included on Page F-3 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the financial statement schedules listed on page F-2 of this Form 10-K. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. /s/ Coopers & Lybrand L.L.P. Houston, Texas February 27, 1996 S-1 78 CHAMPION HEALTHCARE CORPORATION SCHEDULE I - CONDENSED BALANCE SHEET
December 31, 1995 1994 -------------------------------- (Dollars in thousands) ASSETS Current assets: Cash and cash equivalents $ 2,822 $ 41,512 Restricted cash -- 5,000 Prepaid expenses and other current assets 146 2,635 ----------- ------------ Total current assets 2,968 49,147 Investments in and advances to subsidiaries 240,100 117,562 Property and equipment 1,298 2,874 Less allowance for depreciation (179) (376) ----------- ------------ Property and equipment, net 1,119 2,498 Intangible assets, net of accumulated amortization of $1,017 and $425 5,436 3,887 Other assets 5,595 9,333 ----------- ------------ Total assets $ 255,218 $ 182,427 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities $ 17,798 $ 12,151 Long-term debt 148,260 83,376 Other liabilities 11,262 12,773 Redeemable preferred stock 46,029 76,294 Common stock 119 42 Common stock subscribed 40 50 Common stock subscription receivable (40) (50) Paid-in capital 47,643 15,998 Accumulated deficit (15,893) (18,207) ----------- ------------ Total liabilities and stockholders' equity $ 255,218 $ 182,427 =========== ============
See notes to condensed financial statements S-2 79 CHAMPION HEALTHCARE CORPORATION SCHEDULE I - CONDENSED STATEMENT OF OPERATIONS
Year Ended December 31, 1995 1994 1993 --------------------------------------------- (Dollars in thousands) Equity in earnings (loss) of subsidiaries $ 24,682 $ 10,500 $ (5,544) Interest income 775 2,196 107 ---------- --------- ----------- Net revenue 25,457 12,696 (5,437) Costs and expenses: Salaries and benefits 4,875 1,978 1,340 Other operating and administrative expenses 4,792 2,967 1,231 Interest expense 12,258 5,508 1,906 ---------- --------- ----------- Total expenses 21,925 10,453 4,477 ---------- --------- ----------- Income (loss) before income taxes and extraordinary items 3,532 2,243 (9,914) Provision for income taxes 100 -- 1,009 ---------- --------- ----------- Income (loss) before extraordinary items 3,432 2,243 (10,923) Extraordinary items: Loss on early extinguishment of debt, net of a tax benefit of $634 in 1993 (1,118) -- (1,230) ---------- --------- ----------- Net income (loss) $ 2,314 $ 2,243 $ (12,153) ========== ========== ===========
See notes to condensed financial statements. S-3 80 CHAMPION HEALTHCARE CORPORATION SCHEDULE I - CONDENSED STATEMENT OF CASH FLOWS
Year Ended December 31, 1995 1994 1993 ---------------------------------------------- (Dollars in thousands) Net cash used in operating activities $ (23,375) $ (11,941) $ (6,338) Investing activities: Additions to property and equipment (736) (103) (207) Net payment for investment in partnership (2,000) (20,000) Cash acquired in acquisitions 4,341 Purchase of facilities (59,810) (5,813) Investment in note receivable (2,494) (757) Advances to hospitals, net (17,479) (6,791) (970) Proceeds from the sale of assets held for sale 1,534 Other (31) -- -- ----------- --------- ----------- Net cash used in investing activities (81,016) (23,310) (6,990) Financing activities: Proceeds from issuance of long-term obligations 143,532 19,133 62,833 Payments on long-term obligations (80,347) (1,505) (20,006) Payments on obligations assumed through acquisitions (10,911) Payments related to issuance of long-term debt obligations and other financing costs (3,927) (2,396) Proceeds from issuance of redeemable preferred stock and stock warrants 793 11,223 34,345 Cash restricted under collateral agreement (5,713) Cash released under collateral agreement 5,713 Other (63) -- (883) ----------- --------- ----------- Net cash provided by financing activities 65,701 12,227 73,893 ----------- --------- ----------- (Decrease) increase in cash and cash equivalents (38,690) (23,024) 60,565 Cash and cash equivalents at beginning of year 41,512 64,536 3,971 ----------- --------- ----------- Cash and cash equivalents at end of year $ 2,822 $ 41,512 $ 64,536 =========== ========= ===========
See notes to condensed financial statements. S-4 81 CHAMPION HEALTHCARE CORPORATION SCHEDULE I - NOTES TO CONDENSED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION The accompanying condensed financial statements are presented in accordance with the requirements of Regulation S-X Rule 12-04 and consequently do not include all of the disclosures normally required by generally accepted accounting principles. Accordingly, these financial statements should be read in conjunction with the annual audited consolidated financial statements included elsewhere in this document. Certain reclassifications have been made in prior year financial statements to conform to the 1995 presentation. These reclassifications had no effect on the results of operations previously reported. NOTE 2. AMOUNTS ELIMINATED IN CONSOLIDATION The following accounts, as reflected in the attached condensed financial statements, are fully eliminated when consolidated with the financial statements of the Company's wholly-owned subsidiaries: Investment in subsidiaries; Advances to subsidiaries; and Equity in earnings (loss) of subsidiaries. In addition, the following amounts are eliminated under the equity method of accounting for intercompany transactions between the Company and its subsidiaries and are therefore not included in the condensed statement of operations.
DECEMBER 31, -------------------------------------- 1995 1994 1993 ---- ---- ---- (Dollars in thousands) Management fee income $ 3,963 $ 2,283 $ 1,733 Interest income on intercompany receivable 10,847 4,680 4,310 Allocation of income taxes 50 200 236
S-5 82 CHAMPION HEALTHCARE CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS(1) DEDUCTIONS PERIOD ----------- --------- -------- -------- ---------- ------ (Dollars in thousands) FOR THE YEAR ENDED DECEMBER 31, 1993: Allowance for doubtful accounts, accounts receivable $4,723 $5,669 $ 371 $7,194 (2) $3,569 ====== ====== ====== ====== ====== FOR THE YEAR ENDED DECEMBER 31, 1994: Allowance for doubtful accounts, accounts receivable $3,569 $7,812 $2,331 $8,753 (3) $4,959 ====== ====== ====== ====== ====== FOR THE YEAR ENDED DECEMBER 31, 1995: Allowance for doubtful accounts, accounts receivable $4,959 $12,016 $2,590 $9,449 (2) $10,116 ====== ======= ====== ====== =======
(1) Relates to valuation allowance established at acquired companies on the date of acquisition. (2) Represents accounts written off as bad debt during the period. (3) Approximately $1,449,000 of deductions represent the allowance for bad debt associated with accounts receivable contributed to the DHHS partnership with the balance representing accounts written off as bad debt during the period. S-6 83 EXHIBIT INDEX 4.01(c) Amended and Restated Loan Agreement dated as of May 31, 1995, among the registrant, Banque Paribas as agent and the banks named therein. 4.01(d) Series E Note Purchase Agreement dated May 1, 1995, as amended, between the registrant and the parties listed therein. 10.08 Employment Agreement between Charles R. Miller and the registrant dated August 4, 1995. 10.09 Employment Agreement between James G. VanDevender and the registrant dated August 4, 1995. 10.10 Employment Agreement between Ronald R. Patterson and the registrant dated August 4, 1995. 10.23(g) Form of Warrant issued pursuant to Series E Note Purchase Agreement, dated May 1, 1995, as amended. 11 Statement re computation of per share earnings 21 Subsidiaries of the registrant 23 Consent of Coopers & Lybrand L.L.P. 27 Financial Data Schedule
EX-4.01.C 2 AMENDED AND RESTATED LOAN AGMT. - BANQUE PARIBAS 1 EXHIBIT 4.01(c) ================================================================================ AMENDED AND RESTATED LOAN AGREEMENT AMONG CHAMPION HEALTHCARE CORPORATION, BANQUE PARIBAS, AS AGENT AND THE BANKS NAMED HEREIN Dated as of May 31, 1995 ================================================================================ 2 TABLE OF CONTENTS
Page ---- ARTICLE I - DEFINITION OF TERMS.................................................. 1 1.1 Accounting Terms................................................... 1 ARTICLE II - THE LOANS........................................................... 38 2.1 Revolving Loan Facility ........................................ 38 2.2 Letters of Credit .............................................. 39 2.3 Determinations of EBITDA for Eligible Operating Subsidiaries ... 43 2.4 Borrowing and Related Procedures ............................... 43 2.5 Principal Payments ............................................. 45 2.6 Prepayments .................................................... 45 2.7 Interest ....................................................... 46 2.8 Fees ........................................................... 47 2.9 Eurodollar Loans: Conversion, Rollover, Etc .................... 48 2.10 Protection of Yield ............................................ 49 2.11 Manner and Application of Payment .............................. 51 2.12 Termination and Reduction of Commitments ....................... 52 2.13 Taxes .......................................................... 52 ARTICLE III - SECURITY AND GUARANTIES ........................................... 54 3.1 Security Documents .............................................. 54 3.2 De Minimis Subsidiaries ......................................... 55 3.3 New Subsidiaries; Subsequently Acquired Collateral .............. 55 3.4 Cash Collateral Account ......................................... 55 ARTICLE IV - CONDITIONS PRECEDENT .............................................. 57 4.1 Initial Advance or Letter of Credit ........................... 57 4.2 Each Acquisition Advance ...................................... 61 4.3 All Advances and Letters of Credit ............................ 61 4.4 Representation and Warranty ................................... 63 4.5 Determinations Regarding Conditions Precedent ................. 63 4.6 Waivers of Conditions Precedent ............................... 63 ARTICLE V - REPRESENTATIONS AND WARRANTIES ..................................... 63 5.1 Organization, Standing, Qualification ......................... 63 5.2 Authorization, Enforceability, etc ............................ 64 5.3 Financial Statements and Business Condition ................... 64 5.4 Filing of Tax Returns ......................................... 65 5.5 Title to Properties; Prior Liens .............................. 65 5.6 Leases ........................................................ 65 5.7 Ownership of Borrower and Subsidiaries ........................ 65
i 3 5.8 Solvency .................................................... 66 5.9 Business; Compliance ........................................ 66 5.10 Licenses, Permits, etc. ..................................... 66 5.11 Litigation, Proceedings, etc. ............................... 66 5.12 Plans ....................................................... 66 5.13 Chief Executive Office; Locations of Collateral; Trade Names. 67 5.14 Federal Reserve Regulations ................................. 67 5.15 Fiscal Year ................................................. 67 5.16 Environmental Matters ....................................... 67 5.17 Labor Disputes .............................................. 68 5.18 Subsidiaries ................................................ 68 5.19 Investment Company Act; Public Utility Holding Company Act... 68 5.20 Common Benefit............................................... 68 5.21 Burdensome Contracts; Certain Contracts with Account Debtors. 68 5.22 Intercompany Notes and Intercompany Acquisition Notes ....... 68 5.23 Health Care Proceedings ..................................... 69 5.24 Senior Debt ................................................. 69 5.25 Full Disclosure ............................................. 69 ARTICLE VI - COVENANTS ......................................................... 69 6.1 Affirmative Covenants ....................................... 69 6.2 Negative Covenants .......................................... 75 6.3 Reporting Requirements ...................................... 84 ARTICLE VII - CERTAIN RIGHTS OF AGENT AND BANKS ................................ 87 7.1 Protection of Collateral .................................... 87 7.2 Use of Equipment ............................................ 88 7.3 Collection of Receivables ................................... 88 7.4 Appointment of Agent ........................................ 88 7.5 No Liability ................................................ 89 ARTICLE VIII - EVENTS OF DEFAULT ............................................... 89 8.1 Nature of Events ............................................ 89 8.2 Concurrent Acceleration ..................................... 91 8.3 Certain Rights of Banks ..................................... 91 ARTICLE IX - THE AGENT ......................................................... 95 9.1 Appointment and Authorization; Administration; Duties ....... 95 9.2 Advances and Payments ....................................... 96 9.3 Sharing of Payments ......................................... 96 9.4 Distribution of Information ................................. 97 9.5 Notice to Banks ............................................. 97 9.6 Liability of Agent .......................................... 97 9.7 REIMBURSEMENT AND INDEMNIFICATION ........................... 98 9.8 Rights of Agent ............................................. 99
ii 4 9.9 Independent Investigation and Credit Decision by Banks ...... 99 9.10 Successor Agent.............................................. 99 ARTICLE X - MISCELLANEOUS ...................................................... 100 10.1 Notices ..................................................... 100 10.2 Survival .................................................... 100 10.3 GOVERNING LAW ............................................... 101 10.4 Maximum Interest ............................................ 101 10.5 Invalid Provisions .......................................... 102 10.6 Successors and Assigns ...................................... 102 10.7 Entirety and Amendments ..................................... 106 10.8 Counterparts; Effectiveness ................................. 107 10.9 No Duty ..................................................... 107 10.10 Banks Not Fiduciaries ....................................... 107 10.11 Article 15.10(b) ........................................... 107 10.12 NO ORAL AGREEMENTS .......................................... 107 10.13 Confidentiality ............................................ 108 10.14 Construction of Indemnity and Reimbursement Obligations ..... 108 10.15 Jurisdiction, Etc. .......................................... 109 10.16 Changes in Accounting Principles ............................ 109 10.17 References to Schedule 10 ................................... 109 10.18 Renewal, Extension, Amendment and Restatement ............... 110 10.19 WAIVER OF JURY TRIAL ........................................ 110
iii 5 EXHIBITS Exhibit A - Assignment and Acceptance Exhibit B - Borrowing Base Certificate Exhibit C - Loan Request Certificate Exhibit D - Form of Revolving Note Exhibit E - Rollover Notice Exhibit F - Corporate Certificate Exhibit G - Legal Opinions of Counsel to Borrower and Consolidated Subsidiaries Exhibit H - Closing Certificate Exhibit I - Compliance Certificate Exhibit J - L/C Request Certificate Exhibit K-1 - Form of Intercompany Note Exhibit K-2 - Form of Intercompany Note (lateral borrowing) Exhibit K-3 - Form of Intercompany Acquisition Note Exhibit L - Form of EBITDA Certificate SCHEDULES Schedule 1 - Identities of Banks; Pro Rata Shares of Banks Schedule 2 - Intentionally Omitted Schedule 3 - Guarantors Schedule 4 - Intercompany Notes and Intercompany Acquisition Notes Schedule 5 - Consolidated Subsidiaries; De Minimis Subsidiaries; Eligible Intermediate Subsidiaries; Eligible Operating Subsidiaries Schedule 6 - Permitted Indebtedness; Permitted Liens Schedule 7 - Subordinated Debt Schedule 8 - Prior Debt Schedule 9 - Assets Excluded from Collateral Schedule 10 - Article V Disclosure Schedule
iv 6 AMENDED AND RESTATED LOAN AGREEMENT This AMENDED AND RESTATED LOAN AGREEMENT is made and entered into as of May 31, 1995, by and among CHAMPION HEALTHCARE CORPORATION, a Delaware corporation, BANKS (as hereinafter defined), and BANQUE PARIBAS, a bank organized under the laws of the Republic of France, as Agent for Banks. In consideration of the mutual covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: ARTICLE I DEFINITION OF TERMS 1.1 Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP, and all financial data submitted pursuant to the Loan Papers shall be prepared in accordance with GAAP unless (a) the disclosure rules of the Securities and Exchange Commission require different treatment of financial information, or (b) otherwise specifically provided herein. 1.2 Terms Defined. Certain terms used in the Loan Papers shall have the definitions assigned to them in this Section 1.2 or in the contexts in which they appear. Such definitions shall be equally applicable to both the singular and plural forms of the terms defined, and words of any gender shall include each other gender where appropriate. Accounts, Chattel Paper, Documents of Title, Equipment, Fixtures, General Intangibles, Goods, Instruments and Inventory. Have the meanings assigned to them in the UCC. Acquisition. Means any acquisition by the Borrower or any Subsidiary of Borrower (either directly through an Asset purchase or indirectly through the acquisition of the outstanding Securities of the Person which owns such Assets) whether or not such acquisition also constitutes a Permitted Acquisition. Acquisition Advance. Means an Advance under the Revolving Loan for a Permitted Acquisition. Additional Intercompany Notes. Means all promissory notes issued after the Closing Date by a Subsidiary of the Borrower to Borrower or by a Subsidiary of Borrower to another Subsidiary of Borrower, other than Intercompany Acquisition Notes. Additional Subordinated Debt. Means Indebtedness of Borrower which shall, subsequent to the Closing Date, become Indebtedness (a) which is fully subordinated, as to right of payment, to the payment of the Obligations (including, without limitation, all Guaranties of the Obligations or any portion thereof by Subsidiaries of Borrower) and all Intercompany Notes 7 owed by the Person which incurred such indebtedness under terms satisfactory to Required Banks, including, at a minimum, that no payments whatsoever may be made on such Indebtedness except for regularly-scheduled payments of interest which may be made if no Potential Default or Event of Default exists and if the making of such interest payments will not cause a Potential Default or Event of Default to exist, (b) which is unsecured, (c) which matures after the Revolving Loan Maturity Date, (d) which does not include an agreement for the payment of any principal amount thereof on or before the Revolving Loan Maturity Date, (e) which contains an agreement of the holders of such Indebtedness that if they receive any payment with respect to such Indebtedness which is made in violation of the terms of this Agreement, any other Loan Paper or any of the subordination provisions of such Indebtedness that such payments will be held in trust for the benefit of Banks and will be paid to Agent for the benefit of Banks to be applied to the Obligations, (f) which permits the Obligations and Intercompany Notes to be renewed, extended and modified without the consent of the holders of such Indebtedness and without impairing the subordination of such Indebtedness to payment of the Obligations and Intercompany Notes, and (g) with respect to which Borrower has provided to the Banks such Financial Statements and projections of financial condition for the Borrower and its Consolidated Subsidiaries (and, if applicable, separately for each Eligible Intermediate Subsidiary and Eligible Operating Subsidiary which shall incur such Indebtedness) as the Agent shall have requested which demonstrate, to the satisfaction of the Required Banks, on a current and Pro Forma basis, that no Potential Default or Event of Default will occur at the time such Indebtedness is incurred or at any time thereafter. Adjusted Capital Expenditures. Means, for any period, total Capital Expenditures minus Capital Expenditures made to consummate Acquisitions and to complete the construction of new or expanded improvements to real property. Advance. Means any advance or disbursement of funds under any Facility. Affiliate. Means, with respect to any Person, any other Person (a) that directly or indirectly, through one or more intermediaries, controls or is controlled by or under common control with such Person, (b) that directly or indirectly, through one or more intermediaries, beneficially owns or holds ten percent or more of any class of voting stock of such Person or (c) ten percent or more of the voting stock of which is directly or indirectly, through one or more intermediaries, beneficially owned or held by such Person. For purposes of this definition "control" (including, with correlative meanings, the terms "controlled by" and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of another Person, whether through the ownership of Securities or otherwise. Agent. Means Banque Paribas, as agent for Banks pursuant to this Agreement, and its successors and assigns in such capacity. Aggregate Commitments. Means $100,000,000, subject to reduction as provided in Section 2.12 (which amount is the aggregate of the maximum Commitments of all Banks). 2 8 Aggregate Revolving Loan Commitment. Means $100,000,000, subject to reduction as provided in Section 2.12 (which amount is the aggregate of the maximum Revolving Loan Commitments of all Banks). Agreement. Means this Loan Agreement, as it may be amended, renewed, extended, restated, replaced, substituted, supplemented or otherwise modified from time to time. Applicable Base Rate Percentage. Means the percentage to be added to the Prime Rate for purposes of calculating the applicable Revolving Credit Contract Rate which shall be determined as follows: (a) At all times prior to the first anniversary of the Closing Date and at all times thereafter, except during the periods described in clauses (b) and (c) below, the Applicable Base Rate Percentage shall be one and one-half percent (1.5%). (b) The Applicable Base Rate Percentage shall be one and one-fourth percent (1.25%) during any quarter of Borrower's Fiscal Year if, not less than forty-five (45) days following the end of the immediately preceding quarter of Borrower's Fiscal Year, the Borrower delivered to the Agent its quarterly Financial Statements or, with respect to the fourth quarter of Borrower's Fiscal Year, its annual Financial Statements, accompanied by a Compliance Certificate prepared as of the same date as the Financial Statements, which demonstrate that, as of the last day of the immediately preceding quarter of the Borrower's Fiscal Year, two (2) or more of the following conditions were satisfied: (i) the ratio of Consolidated Total Debt to EBITDA for the Borrower and its Consolidated Subsidiaries, determined for such quarter of Borrower's Fiscal Year in accordance with Section 6.2(i) of this Agreement, was less than 3.25 to 1.00 but equal to or greater than 2.75 to 1.00; or (ii) the ratio of EBITDA to Interest Expense for the Borrower and its Consolidated Subsidiaries, determined for such quarter of Borrower's Fiscal Year in accordance with Section 6.2(e) of this Agreement, was greater than 2.75 to 1.00 but equal to or less than 3.00 to 1.00; or (iii) the ratio of Consolidated Total Debt to Capital for the Borrower and its Consolidated Subsidiaries, determined for such quarter of Borrower's Fiscal Year in accordance with Section 6.2(h) of this Agreement, was less than .60 to 1.00 but greater than or equal to .50 to 1.00. (c) The Applicable Base Rate Percentage shall be one percent (1%) during any quarter of Borrower's Fiscal Year if, not less than forty-five (45) days following the end of the immediately preceding quarter of Borrower's Fiscal Year, the Borrower delivered to the Agent its quarterly Financial Statements or, with respect to the fourth quarter of Borrower's Fiscal Year, its annual Financial Statements, accompanied by a Compliance 3 9 Certificate prepared as of the same date as the Financial Statements, which demonstrate that, as of the last day of the immediately preceding quarter of the Borrower's Fiscal Year, two (2) or more of the following conditions were satisfied: (i) the ratio of Consolidated Total Debt to EBITDA for the Borrower and its Consolidated Subsidiaries, determined for such quarter of Borrower's Fiscal Year in accordance with Section 6.2(i) of this Agreement, was less than 2.75 to 1.00; or (ii) the ratio of EBITDA to Interest Expense for the Borrower and its Consolidated Subsidiaries, determined for such quarter of Borrower's Fiscal Year in accordance with Section 6.2(e) of this Agreement, was greater than 3.00 to 1.00; or (iii) the ratio of Consolidated Total Debt to Capital for the Borrower and its Consolidated Subsidiaries, determined for such quarter of Borrower's Fiscal Year in accordance with Section 6.2(h) of this Agreement, was less than .50 to 1.00. Applicable Commitment Fee Percentage. Means the percentage to be used for purposes of calculating the Commitment Fee which shall be determined as follows: (a) At all times prior to the first anniversary of the Closing Date and at all times thereafter, except as otherwise provided by clauses (b) and (c) below, the Applicable Commitment Fee Percentage shall be one-half of one percent (.5%). (b) The Applicable Commitment Fee Percentage shall be .4375% for the quarter of the calendar year for which the Commitment Fee is calculated if, not less than forty-five (45) days following the end of the immediately preceding quarter of Borrower's Fiscal Year, the Borrower delivered to the Agent its quarterly Financial Statements or, with respect to the fourth quarter of Borrower's Fiscal Year, its annual Financial Statements, accompanied by a Compliance Certificate prepared as of the same date as the Financial Statements, which demonstrate that, as of the last day of the immediately preceding quarter of the Borrower's Fiscal Year, two (2) or more of the following conditions were satisfied: (i) the ratio of Consolidated Total Debt to EBITDA for the Borrower and its Consolidated Subsidiaries, determined for such quarter of Borrower's Fiscal Year in accordance with Section 6.2(i) of this Agreement, was less than 3.25 to 1.00 but equal to or greater than 2.75 to 1.00; or (ii) the ratio of EBITDA to Interest Expense for the Borrower and its Consolidated Subsidiaries, determined for such quarter of Borrower's Fiscal Year in accordance with Section 6.2(e) of this Agreement, was greater than 2.75 to 1.00 but equal to or less than 3.00 to 1.00; or 4 10 (iii) the ratio of Consolidated Total Debt to Capital for the Borrower and its Consolidated Subsidiaries, determined for such quarter of Borrower's Fiscal Year in accordance with Section 6.2(h) of this Agreement, was less than .60 to 1.00 but greater than or equal to .50 to 1.00. (c) The Applicable Commitment Fee Percentage shall be .375% for the quarter of the calendar year for which the Commitment Fee is calculated if, not less than forty-five (45) days following the end of the immediately preceding quarter of Borrower's Fiscal Year, the Borrower delivered to the Agent its quarterly Financial Statements or, with respect to the fourth quarter of Borrower's Fiscal Year, its annual Financial Statements, accompanied by a Compliance Certificate prepared as of the same date as the Financial Statements, which demonstrate that, as of the last day of the immediately preceding quarter of the Borrower's Fiscal Year, two (2) or more of the following conditions were satisfied: (i) the ratio of Consolidated Total Debt to EBITDA for the Borrower and its Consolidated Subsidiaries, determined for such quarter of Borrower's Fiscal Year in accordance with Section 6.2(i) of this Agreement, was less than 2.75 to 1.00; or (ii) the ratio of EBITDA to Interest Expense for the Borrower and its Consolidated Subsidiaries, determined for such quarter of Borrower's Fiscal Year in accordance with Section 6.2(e) of this Agreement, was greater than 3.00 to 1.00; or (iii) the ratio of Consolidated Total Debt to Capital for the Borrower and its Consolidated Subsidiaries, determined for such quarter of Borrower's Fiscal Year in accordance with Section 6.2(h) of this Agreement, was less than .50 to 1.00. Applicable Eurodollar Rate Percentage. Means the percentage to be added to the Eurodollar Rate for purposes of calculating the applicable Revolving Credit Contract Rate which shall be determined as follows: (a) At all times prior to the first anniversary of the Closing Date and at all times thereafter, except during the periods described in clauses (b) and (c) below, the Applicable Eurodollar Rate Percentage shall be three percent (3%). (b) The Applicable Eurodollar Rate Percentage shall be two and three-fourths percent (2.75%) during each quarter of Borrower's Fiscal Year if, not less than forty-five (45) days following the end of the immediately preceding quarter of Borrower's Fiscal Year, the Borrower delivered to the Agent its quarterly Financial Statements or, with respect to the fourth quarter of Borrower's Fiscal Year, its annual Financial Statements, accompanied by a Compliance Certificate prepared as of the same date as the Financial Statements, which demonstrate that, as of the last day of the immediately preceding 5 11 quarter of Borrower's Fiscal Year, two (2) or more of the following conditions were satisfied: (i) the ratio of Consolidated Total Debt to EBITDA for the Borrower and its Consolidated Subsidiaries, determined for such quarter of Borrower's Fiscal Year in accordance with Section 6.2(i) of this Agreement, was less than 3.25 to 1.00 but equal to or greater than 2.75 to 1.00; or (ii) the ratio of EBITDA to Interest Expense for the Borrower and its Consolidated Subsidiaries, determined for such quarter of Borrower's Fiscal Year in accordance with Section 6.2(e) of this Agreement, was greater than 2.75 to 1.00 but equal to or less than 3.00 to 1.00; or (iii) the ratio of Consolidated Total Debt to Capital for the Borrower and its Consolidated Subsidiaries, determined for such quarter of Borrower's Fiscal Year in accordance with Section 6.2(h) of this Agreement, was less than .60 to 1.00 but greater than or equal to .50 to 1.00. (c) The Applicable Eurodollar Rate Percentage shall be two and one-half percent (2.5%) during each quarter of Borrower's Fiscal Year if, not less than forty-five (45) days following the end of the immediately preceding quarter of Borrower's Fiscal Year, the Borrower delivered to the Agent its quarterly Financial Statements or, with respect to the fourth quarter of Borrower's Fiscal Year, its annual Financial Statements accompanied by a Compliance Certificate prepared as of the same date as the Financial Statements, which demonstrate that, as of the last day of the immediately preceding quarter of Borrower's Fiscal Year, two (2) or more of the following conditions were satisfied: (i) the ratio of Consolidated Total Debt to EBITDA for the Borrower and its Consolidated Subsidiaries, determined for such quarter of Borrower's Fiscal Year in accordance with Section 6.2(i) of this Agreement, was less than 2.75 to 1.00; or (ii) the ratio of EBITDA to Interest Expense for the Borrower and its Consolidated Subsidiaries, determined for such quarter of Borrower's Fiscal Year in accordance with Section 6.2(e) of this Agreement, was greater than 3.00 to 1.00; or (iii) the ratio of Consolidated Total Debt to Capital for the Borrower and its Consolidated Subsidiaries, determined for such quarter of Borrower's Fiscal Year in accordance with Section 6.2(h) of this Agreement, was less than .50 to 1.00. Applicable Letter of Credit Fee Percentage. Means the percentage to be used for purposes of calculating the Letter of Credit Fee which shall be determined as follows: 6 12 (a) At all times prior to the first anniversary of the Closing Date and at all times thereafter, except during the periods described in clauses (b), (c) and (d) below, the Applicable Letter of Credit Fee Percentage shall be three percent (3.0%). (b) The Applicable Letter of Credit Fee Percentage shall be two and three-fourths percent (2.75%) for the quarter of the calendar year for which the Letter of Credit Fee is calculated if, not less than forty-five (45) days following the end of the immediately preceding quarter of Borrower's Fiscal Year, the Borrower delivered to the Agent its quarterly Financial Statements or, with respect to the fourth quarter of Borrower's Fiscal Year, its annual Financial Statements, accompanied by a Compliance Certificate prepared as of the same date as the Financial Statements which demonstrate that, as of the last day of the immediately preceding quarter of the Borrower's Fiscal Year, two (2) or more of the following conditions were satisfied: (i) the ratio of Consolidated Total Debt to EBITDA for the Borrower and its Consolidated Subsidiaries, determined for such quarter of Borrower's Fiscal Year in accordance with Section 6.2(i) of this Agreement, was less than 3.25 to 1.00 but equal to or greater than 2.75 to 1.00; or (ii) the ratio of EBITDA to Interest Expense for the Borrower and its Consolidated Subsidiaries, determined for such quarter of Borrower's Fiscal Year in accordance with Section 6.2(e) of this Agreement, was greater than 2.75 to 1.00 but equal to or less than 3.00 to 1.00; or (iii) the ratio of Consolidated Total Debt to Capital for the Borrower and its Consolidated Subsidiaries, determined for such quarter of Borrower's Fiscal Year in accordance with Section 6.2(h) of this Agreement, was less than .60 to 1.00 but greater than or equal to .50 to 1.00. (c) The Applicable Letter of Credit Fee Percentage shall be two and one-half percent (2.5%) for the quarter of the calendar year for which the Letter of Credit Fee is calculated if, not less than forty-five (45) days following the end of the immediately preceding quarter of Borrower's Fiscal Year, the Borrower delivered to the Agent its quarterly Financial Statements or, with respect to the fourth quarter of Borrower's Fiscal Year, its annual Financial Statements, accompanied by a Compliance Certificate prepared as of the same date as the Financial Statements, which demonstrate that, as of the last day of the immediately preceding quarter of the Borrower's Fiscal Year, two (2) or more of the following conditions were satisfied: (i) the ratio of Consolidated Total Debt to EBITDA for the Borrower and its Consolidated Subsidiaries, determined for such quarter of Borrower's Fiscal Year in accordance with Section 6.2(i) of this Agreement, was less than 2.75 to 1.00; or 7 13 (ii) the ratio of EBITDA to Interest Expense for the Borrower and its Consolidated Subsidiaries, determined for such quarter of Borrower's Fiscal Year in accordance with Section 6.2(e) of this Agreement, was greater than 3.00 to 1.00; or (iii) the ratio of Consolidated Total Debt to Capital for the Borrower and its Consolidated Subsidiaries, determined for such quarter of Borrower's Fiscal Year in accordance with Section 6.2(h) of this Agreement, was less than .50 to 1.00. (d) Following the occurrence of an Event of Default and during the continuance thereof, the Applicable Letter of Credit Fee Percentage shall be the percentage which would otherwise be determined pursuant to clause (a), (b) or (c) above plus two percent (2%). Asset. Means any interest of any kind in any kind of property or asset, whether real, personal or mixed, tangible or intangible, whether owned or acquired now or after the Closing Date, and includes, without limitation, Securities. Assignment and Acceptance. Means an Assignment and Acceptance now or hereafter entered into by a Bank and an Eligible Assignee and now or hereafter accepted by Agent, substantially in the form of Exhibit A hereto. Bank. Means each bank and other financial institution identified on Schedule 1 hereto and each Eligible Assignee of a Bank which becomes a Bank in accordance with Section 10.6 of this Agreement. Bankruptcy Code. Means Title 11 of the United States Code, as amended, and all rules issued pursuant thereto. Banque Paribas. Means Banque Paribas, a bank organized under the laws of the Republic of France. Base Financial Statements. Means the Financial Statements of Borrower and its Consolidated Subsidiaries as of and for the Fiscal Year ended December 31, 1994 and the quarter of Borrower's Fiscal Year ended March 31, 1995. Base Rate. Means the rate of interest per annum specified in subpart (a) of the definition of Revolving Credit Contract Rate. Base Rate Loan. Means any portion of any Loan which bears interest at a rate determined by reference to the Base Rate. Board of Governors. Means the Board of Governors of the Federal Reserve System and each successor thereto. 8 14 Borrower. Means Champion Healthcare Corporation, a Delaware corporation and its successors and assigns. Borrowing Base Certificate. Means a certificate substantially in the form of Exhibit B hereto, appropriately completed and executed by a Financial Officer of the Borrower and the applicable Subsidiary of Borrower. Business Day. Means a day (other than Saturday or Sunday) on which commercial banks are open for business in Houston, Texas, and in New York City, New York. Capital. Means, as of any date of determination, the Consolidated Total Debt of Borrower and its Consolidated Subsidiaries plus the Net Worth of Borrower and its Consolidated Subsidiaries plus minority interests in Subsidiaries. Capital Expenditures. Means, as of any date of determination, any expenditure by a Person for an Asset which will be used in a year or years subsequent to the year in which such expenditure is made and which Asset is properly classified, in relevant Financial Statements of such Person and in accordance with GAAP, as equipment, real property or improvements, fixed Assets or a similar type of capitalized Asset. Capital Lease. Means, as of the date of any determination, any lease of an Asset which is (or should be) capitalized on a balance sheet of the lessee in accordance with GAAP. CERCLA. Means the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. Section 9601 et seq.), as amended and in effect from time to time, and all rules and regulations issued pursuant thereto. Champion-Fargo. Means Champion Healthcare Corporation of North Dakota, Inc., a North Dakota corporation, which is a wholly-owned Subsidiary of Borrower. Change of Control. Means, with respect to any Person which is not a natural Person (herein referred to as the "Subject Entity"), the occurrence of any of the following: (a) any Person or all Persons that constitute a "group" (within the meaning of Subsection 13(d)(3) or Subsection 14(d)(2) of the Securities Exchange Act of 1934, as amended, hereafter referred to as the "Exchange Act") or an Affiliate thereof, other than the present "beneficial owner" (as defined in Rule 13(d)(3) of the Exchange Act) shall acquire direct or indirect beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of 50% or more of the then outstanding Securities of the Subject Entity which are generally entitled to vote in the election of the directors of the Subject Entity (or have comparable authority to select the Persons who are vested with comparable authority), (b) either of Charles R. Miller or James G. VanDevender shall no longer serve as the senior executives of Borrower (but a Change in Control shall not be deemed to occur if either or both of Charles R. Miller or James G. VanDevender is no longer serving as a senior executive of Borrower or an Eligible Intermediate Subsidiary because he has died or become physically impaired if he has been replaced by another executive approved in good faith by the Required Banks); or (c) in the case of Subsidiaries of 9 15 the Borrower, if neither the Borrower nor an Eligible Intermediate Subsidiary has the authority to appoint or elect a majority of the directors of the Subject Entity (or Persons who are vested with comparable authority) or do not otherwise control the business or affairs of the Subject Entity pursuant to the terms of a written agreement approved by the Required Banks which has not been (and will not be) modified or amended to dilute, impair or otherwise adversely affect such control without the prior written consent of the Required Banks. CHC Corporate Overhead. Means all operating costs and expenses associated with corporate functions of the Borrower and its Consolidated Subsidiaries including salaries, benefits, supplies, utilities and similar items but excluding depreciation, amortization and interest expense. Clean Air Act. Means the Clean Air Act (42 U.S.C. Section 7401 et seg.), as amended and in effect from time to time, and all rules and regulations issued pursuant thereto. Clean Water Act. Means the Clean Water Act (33 U.S.C. Section 1251 et seg.), as amended and in effect from time to time, and all rules and regulations issued pursuant thereto. Closing Date. Means the date of this Agreement. Code. Means the Internal Revenue Code of 1986, as amended and in effect from time to time, and all regulations issued pursuant thereto. Collateral. Means (a) any Asset of the Borrower or any Subsidiary of the Borrower in the possession or control of the Agent or an agent, bailee or trustee for the Agent or the Banks, (b) any Asset of the Borrower, any Subsidiary of the Borrower, or any other Loan Party that is subject to a Lien (or is purported to be subject to a Lien) to secure all or any portion of the Obligations, (c) any amount in any Deposit Account of the Borrower or any Subsidiary of the Borrower with the Agent or an agent, bailee or trustee for the Agent or the Banks, and (d) in addition to the foregoing, to the extent the same is not already described in clause (a), (b) or (c) above, all of Borrower's and each of Borrower's Subsidiaries' Assets including, without limitation, the Accounts, Chattel Paper, Documents of Title, Equipment, Fixtures, General Intangibles, Goods, Instruments (including Intercompany Acquisition Notes and Intercompany Notes), Inventory and real property (including any interests therein) of each such Person, wherever any of the Assets described in any of clauses (a), (b), (c) or (d) above may be located and whether now owned or hereafter acquired, together with all replacements or substitutions therefor, accessions thereto and all proceeds and products thereof excepting only from such Collateral, (i) the Assets described on Schedule 9, (ii) those Assets which are hereafter expressly agreed to in writing by the Required Banks, and (iii) subject to the conditions specified therein, those Assets described in Sections 3.2 and 3.3. Commitment. Means, with respect to each Bank, such Bank's Revolving Loan Commitment. The recital of a Commitment does not mean that any Bank is obligated to advance such amount. 10 16 Commitment Fee. Means an amount payable to the Banks based on the unused portion of the Aggregate Revolving Loan Commitment which shall be calculated as of the last day of each March, June, September and December of each calendar year, beginning with the first of such dates occurring after the Closing Date, and which shall equal the amount determined by multiplying (a) the Aggregate Revolving Loan Commitment (giving substantive effect to any Commitment reduction which may occur during the applicable period of determination pursuant to Section 2.12) minus the combined average daily principal balances outstanding on the Revolving Notes during the quarter of the calendar year then ending, times (b) the product (expressed as a decimal) determined by multiplying the Applicable Commitment Fee Percentage by a fraction, the numerator of which is the number of days contained in the quarter of the calendar year ending on the date as of which such calculation is made (excluding, in the case of the first calendar year quarter, the days occurring prior to the Closing Date and, in the case of the quarter of the calendar year during which the Revolving Loan Maturity Date occurs, the days following such date), and the denominator of which is the number of days contained in the applicable calendar year (e.g. 365 or 366). Commitment Fee Payment Date. Means (a) each date as of which the Commitment Fee is determined (e.g. the last day of each March, June, September and December of each calendar year), and (b) the Revolving Loan Maturity Date (or, if such date is not a Business Day), the first Business Day thereafter, beginning on the first of such dates to follow the Closing Date. Compliance Certificate. Means a certificate in the form of Exhibit I attached to this Agreement, completed in all appropriate respects and executed by the chief executive officer or a Financial Officer of the Borrower. Consolidated Subsidiary. Means any Subsidiary of Borrower included (or which should be included in accordance with GAAP), as of the applicable date of determination, in the consolidated Financial Statements of Borrower. Notwithstanding the foregoing, unless otherwise expressly provided in this Agreement, the DHHS Partnership shall for all purposes of this Agreement be deemed to be a Consolidated Subsidiary. Consolidated Total Debt. Means all Indebtedness of Borrower and its Consolidated Subsidiaries (other than minority interests, determined in accordance with GAAP, which would otherwise be included within the definition of Indebtedness, as such term is defined in this Agreement), including any Indebtedness under any Capital Lease, the Obligations, the Subordinated Debt and any Additional Subordinated Debt, less the amount by which the cash and Permitted Investments of Borrower and its Consolidated Subsidiaries exceeds $5,000,000. Current Date. Means a date no more than forty-five (45) days prior to (a) the Closing Date, or (b) with respect to matters occurring after the Closing Date, the applicable reference date. Dakota. Means Dakota Hospital, a North Dakota non-profit corporation. 11 17 Debtor Relief Law. Means any liquidation, conservatorship, bankruptcy, moratorium, rearrangement, insolvency, reorganization or similar law providing for the relief of debtors or generally affecting the rights of creditors, as amended and in effect from time to time. Default Rate. Means a fluctuating per annum interest rate at all times equal to the lesser of (a) the Maximum Lawful Rate (such interest rate to be adjusted simultaneously with any change in the Maximum Lawful Rate) or (b) the sum of the otherwise applicable Revolving Credit Contract Rate plus two percent (2%) or, if no Revolving Credit Contract Rate is otherwise applicable, the Revolving Credit Contract Rate applicable to Base Rate Loans plus two percent (2%); provided, however, subject to all provisions of Section 10.4, if at any time the Default Rate shall be computed on the basis of the Maximum Lawful Rate, any subsequent reduction in the Default Rate shall not reduce such interest rate thereafter payable below the Maximum Lawful Rate until the aggregate amount of such interest that is accrued and payable equals the total amount of interest that would have accrued if interest had at all times been computed solely on the basis of the rate specified in subpart (b) above. Except as otherwise provided in Section 2.7(d) with respect to Eurodollar Loans, interest computed at the Default Rate shall be computed on the basis of a year of 365 or 366 days, as the case may be, actual days elapsed, including the first day but excluding the last day of the period for which interest is payable. De Minimis Subsidiary. Means a Subsidiary of the Borrower or an Eligible Intermediate Subsidiary (the "Parent") if at all times (a) the book value of the total Assets of such Subsidiary is less than five percent (5%) of the book value of the total Assets of the Parent (determined on a consolidated basis with respect to such Parent and its Subsidiaries) and such Subsidiary's EBITDA does not exceed five percent (5%) of the EBITDA of the Parent (determined on a consolidated basis for such Parent and all of its Subsidiaries), and (b) the aggregate book value of the total Assets of all De Minimis Subsidiaries of the Parent and the aggregate EBITDA for all De Minimis Subsidiaries of the Parent at no time exceeds five percent (5%) of the book value of the total Assets of the Parent (determined on a consolidated basis for the Parent and all of its Subsidiaries) or five percent (5%) of the EBITDA of the Parent (determined on a consolidated basis for the Parent and all of its Subsidiaries). Deposit Account. Means a demand, time, savings, passbook or like account (including, without limitation, any account evidenced by a certificate of deposit) whether interest bearing or not and, if interest bearing, then all interest accrued and paid or payable thereon, now or hereafter established or maintained from time to time by Borrower or a Subsidiary of Borrower and all monies from time to time in any such account (including all earnings or profits therefrom in the form of interest or otherwise) and investments made with respect thereto and the proceeds thereof and all insurance and insurance proceeds existing or payable with respect thereto. DHHS Note. Means the revolving credit note in the maximum principal amount of $25,000,000 made by DHHS Partnership payable to the order of Champion-Fargo, pursuant to which Champion-Fargo may make revolving loans for working capital and other capital purposes to DHHS Partnership in an amount not to exceed $25,000,000 outstanding at any time, subject to the restrictions contained in Section 6.2(x) 12 18 DHHS Operating Agreement. Means that certain Operating Agreement dated December 21, 1994 entered into, by and among Dakota, DHHS Partnership, Borrower and Champion-Fargo, as the same may be amended or otherwise modified from time-to-time. DHHS Partnership. Means a North Dakota partnership owned by Champion-Fargo and Dakota pursuant to the DHHS Partnership Agreement. DHHS Partnership Agreement. Means that certain Amended and Restated Partnership Agreement of Dakota/Champion Partnership dated as of December 21, 1994 entered into by and between Dakota and Champion-Fargo, as the same may be amended or otherwise modified from time-to-time. EBITDA. Means, as to each Person with respect to which such calculation is made, for the twelve (12) consecutive calendar month period which ends on the date as of which the calculation of EBITDA is made, the sum of (determined without duplication on a consolidated basis in accordance with GAAP): (a) net income (or net loss) of such Person, calculated before extraordinary items and income attributable to minority interests in Affiliates of such Person which has not been remitted in cash to such Person; plus (b) Interest Expense which was deducted under clause (a) for purposes of determining net income (or net loss); plus (c) depreciation and amortization expense; plus (d) other non-cash items to the extent the same were deducted under clause (a) for purposes of determining net income (or net loss); minus (e) other non-cash items to the extent the same were added to earnings under clause (a) for purposes of determining net income; plus (f) all taxes accrued for such period on or measured by income to the extent the same were deducted under clause (a) for purposes of determining net income (or net loss). Notwithstanding the foregoing, calculations of EBITDA which are made separately for any Eligible Intermediate Subsidiary or any Eligible Operating Subsidiary shall be determined in accordance with the above stated formula, but there shall be deducted from any such calculation of EBITDA an amount equal to that portion of such Person's EBITDA which is allocable to a Subsidiary of such Person which does not constitute an Eligible Intermediate Subsidiary or an Eligible Operating Subsidiary. Furthermore, with respect to calculations of EBITDA which are made separately for any Subsidiary of the Borrower (specifically including, without limitation, those calculations made with respect to Eligible Intermediate Subsidiaries and Eligible Operating Subsidiaries), there shall be deducted from any such calculation of EBITDA an amount equal to the CHC Corporate Overhead multiplied by a fraction, the numerator of which is the net operating revenue of such Subsidiary and the denominator of which is the net operating revenue of the Borrower, determined on a consolidated basis for the Borrower and its Consolidated Subsidiaries. As a point of clarification, it is understood and agreed that, with respect to any calculation of EBITDA made with respect to the Borrower and its Consolidated Subsidiaries, neither the DHHS Partnership, Metropolitan Hospital, L.P. nor any other Person which is hereafter classified as an Eligible Operating Subsidiary notwithstanding the fact that it is not wholly-owned by the Borrower and/or an Eligible Intermediate Subsidiary and/or Eligible Operating Subsidiary shall be treated as one of the Consolidated Subsidiaries, but with respect to calculations of EBITDA for the Borrower and its Consolidated Subsidiaries, (i) that portion of the EBITDA of DHHS Partnership, calculated in accordance with the foregoing criteria, which is attributable to Champion-Fargo's EBITDA distribution percentage under the DHHS 13 19 Partnership Agreement; plus (ii) that portion of the EBITDA of Metropolitan Hospital, L.P., calculated in accordance with the foregoing criteria which is attributable to CHC of Virginia, Inc.'s EBITDA distribution percentage under the MHLP Agreement, plus (iii) with respect to other Persons, if any, which may hereafter be classified as Eligible Operating Subsidiaries notwithstanding the fact that any such Person is not wholly-owned by the Borrower and/or an Eligible Intermediate Subsidiary and/or Eligible Operating Subsidiary, that portion of the EBITDA of such Person, calculated in accordance with the foregoing criteria, which the Required Banks determine to be attributable to the ownership interests of the Borrower and/or Eligible Intermediate Subsidiaries and/or Eligible Operating Subsidiaries which are owners of such Person, shall be added to the EBITDA calculation made for the Borrower and the other Consolidated Subsidiaries pursuant to the formula first set forth above. EBITDA Certificate. Means a certificate in the form of Exhibit "L" to this Agreement completed in all respects and executed by a Financial Officer of Borrower. EBITDA Overadvance. Means, as of the date of the applicable determination, the amount, if any, by which the aggregate principal amounts then outstanding on the Revolving Notes plus the aggregate undrawn face amounts of all Letters of Credit which are then outstanding, exceeds the product obtained by multiplying three (3) times the sum calculated by adding the EBITDA determined separately on a Pro Forma basis as of such date for each of the Eligible Operating Subsidiaries. Eligible Assignee. Means (a) any Bank or any banking Affiliate of any such Bank, (b) a commercial bank having total Assets in excess of $7,500,000,000, (c) an insurance company or a financial institution having total Assets in excess of $1,000,000,000, or (d) a bank loan fund having total Assets in excess of $250,000,000; provided, however, unless Required Banks shall otherwise agree in writing, no commercial bank referred to in clause (b) preceding that is organized under the laws of a country other than the U.S. shall be an Eligible Assignee unless it acts, for purposes of this Agreement, through a branch or agency of such bank located in the U.S. Eligible Intermediate Subsidiary. Means each Subsidiary of the Borrower which is identified as an Eligible Intermediate Subsidiary on Schedule 5 attached hereto and made a part hereof and each Subsidiary of the Borrower which is designated in writing as an Eligible Intermediate Subsidiary by the Required Banks subsequent to the Closing Date; provided, however, no Subsidiary of Borrower shall be an Eligible Intermediate Subsidiary (and if such Subsidiary previously qualified as an Eligible Intermediate Subsidiary, such qualification shall immediately and automatically cease) if, at any time: (a) such Person incurs or otherwise becomes liable for any Indebtedness other than Permitted Indebtedness; or (b) the total Indebtedness of such Person which is allocable to Capital Leases exceeds ten percent (10%) of the book value of such Person's total Assets; or (c) except as permitted by Section 3.3 or otherwise excluded from the definition of the term "Collateral" as set forth in this Agreement, any of the Assets of such Person are not (or cease to be) subject to a valid and fully perfected Lien which secures the Obligations, or any of its Assets is or becomes subject to another Lien (except Permitted Liens), or the Lien upon such Asset which secures the Obligations ceases to 14 20 be prior to all other Liens except those Permitted Liens, if any, which are stipulated on Schedule 6 to be prior Liens and those Liens, if any, which are agreed to by the Required Banks in writing subsequent to the Closing Date; (d) such Person is not bound by a full and unconditional Guaranty of the Obligations; or (e) such Person ceases to be a wholly-owned Subsidiary of the Borrower or another Eligible Intermediate Subsidiary. Eligible Operating Subsidiary. Means each Subsidiary of the Borrower which owns and operates a Hospital, Health Care Facility or Health Care Service Business and which is identified as an Eligible Operating Subsidiary on Schedule 5 attached hereto and made a part hereof and each Subsidiary of the Borrower which is designated in writing as an Eligible Operating Subsidiary by the Required Banks subsequent to the Closing Date; provided, however, no Subsidiary of Borrower shall be an Eligible Operating Subsidiary (and if such Subsidiary previously qualified as an Eligible Operating Subsidiary, such qualification shall immediately and automatically cease) if, at any time: (a) such Person incurs or otherwise becomes liable for any Indebtedness other than Permitted Indebtedness; or (b) the total Indebtedness of such Person which is allocable to Capital Leases exceeds ten percent (10%) of the book value of such Person's total Assets; or (c) except as permitted by Section 3.3 or otherwise excluded from the definition of the term "Collateral" as set forth in this Agreement, any of the Assets of such Person are not (or cease to be) subject to a valid and fully perfected Lien which secures the Obligations, or any of its Assets is or becomes subject to another Lien (except Permitted Liens), or the Lien upon such Asset which secures the Obligations ceases to be prior to all other Liens except those Permitted Liens, if any, which are stipulated on Schedule 6 to be prior Liens and those Liens, if any, which are agreed to by the Required Banks in writing subsequent to the Closing Date; or (d) such Person is not bound by a full and unconditional Guaranty of the Obligations; or (e) such Person ceases to be a wholly-owned Subsidiary of the Borrower or an Eligible Intermediate Subsidiary or another Eligible Operating Subsidiary; or (f) such Person ceases to own or operate a Hospital, Health Care Facility or Health Care Service Business, or (f) such Person owns or operates any business other than a Hospital, Health Care Facility or Health Care Service Business. Notwithstanding the requirements set forth in above clause (e), Metropolitan Hospital, L.P. shall be deemed to be an Eligible Operating Subsidiary so long as CHC of Virginia, Inc. remains the sole general partner with full right, power and authority to manage the business and affairs of such limited partnership in accordance with the MHLP Agreement, the limited partners comprising such limited partnership are active members of the medical staff of the Hospital owned by such partnership or are, otherwise, permitted to be limited partners pursuant to the terms of the MHLP Agreement, and CHC of Virginia, Inc. is the owner and holder, at all times, of at least eighty-two percent (82%) of the total partnership interests. Furthermore, notwithstanding the requirements set forth above in this clause (e), DHHS Partnership shall be deemed to be an Eligible Operating Subsidiary so long as Champion-Fargo remains the managing general partner with full right, power and authority to manage and control the business and affairs of such limited partnership in accordance with the DHHS Partnership Agreement (which has not been and will not be amended or otherwise modified without the prior written consent of the Required Banks), Champion-Fargo is the owner and holder, at all times, of at least 50% of the total partnership interests and Champion-Fargo manages and controls the business and affairs of the hospitals owned by the DHHS Partnership pursuant to the DHHS Operating Agreement. Furthermore, notwithstanding the requirements 15 21 set forth in this clause (c) above, CHC-Salt Lake City, Inc. shall be deemed to be an Eligible Operating Subsidiary notwithstanding the fact that fee simple title to the real property owned by it which is subject to the Ground Lease described on Schedule 6 is encumbered by the Deed of Trust and Security Agreement and the Assignment of Rents and Leases granted in favor of United of Omaha Life Insurance Company which are more fully described on Schedule 6. Eligible Receivables. Means, at the applicable time of determination, an amount expressed in U.S. Dollars equal to the amount owing (taking into account discounts and contractual allowances given or to be given on such amounts) on all Receivables associated with services which have already been performed, which have been booked and which have been billed, or are pending billing, with respect to which the Person to whom such Receivables are payable is not entitled to Medicare or Medicaid reimbursement for services provided which are subject to a perfected, first-priority Lien securing an Intercompany Note executed by the Person who is the owner and holder of such Receivables; provided, however, Eligible Receivables shall not include any Receivables which remain unpaid for more than 120 days after the Invoice Date or any Receivables owing from Affiliates of the payee or any Receivables which Agent has determined, in its sole credit judgment, to be ineligible based upon such credit considerations as the Agent may reasonably deem appropriate. For purposes of this definition, the term "Invoice Date" means the date (not more than 120 days after the date on which the services were actually provided which gave rise to the applicable Receivable) on which the invoice is first sent to the patient (or other responsible party or payor) for the services provided. Environmental Laws. Means all federal, state and local laws, rules, regulations, ordinances, codes, permits, orders or decrees relating or pertaining to the public health and safety or the environment or otherwise governing the generation, use, handling, collection, treatment, storage, transportation, recovery, re-cycling, removal, discharge or disposal of Hazardous Materials (including, without limitation, RCRA, CERCLA, the Clean Water Act, the Clean Air Act, TSCA, EPCRKA and OSHA) from time to time in effect, as the same may be amended, supplemented or otherwise modified from time to time. EPCRKA. Means the Emergency Planning and Community Right to Know Act (15 U.S.C. Section 2601 et seq.), as amended, and all rules and regulations issued pursuant thereto. ERISA. Means the Employee Retirement Income Security Act of 1974, as amended and in effect from time to time, and any successor act or code and all rules and regulations issued pursuant thereto. Eurodollar Advance Failure. Has the meaning set forth in the definition of the term Eurodollar Consequential Loss. Eurodollar Business Day. Means a Business Day on which dealings in U.S. Dollars are carried out in the London interbank market. Eurodollar Consequential Loss. Means such amount or amounts as shall in the reasonable judgment of any Bank to be the amount which will compensate such Bank for any 16 22 loss, cost or expense incurred by such Bank as a result of any of the following, whether voluntary or involuntary: (a) any payment or prepayment of any portion of any Eurodollar Loan on a date other than the last day of the Interest Period applicable thereto (a "Eurodollar Prepayment"); (b) the conversion of any Eurodollar Loan to a Base Rate Loan on a date other than the last day of the Interest Period applicable thereto (a "Eurodollar Conversion"); (c) the rescission of a Rollover Notice or the failure of any Eurodollar Loan, or portion thereof, to continue as a Eurodollar Loan for a successive Interest Period pursuant to a Rollover Notice or the failure of any Base Rate Loan, or portion thereof, to be converted to a Eurodollar Loan pursuant to a Rollover Notice (a "Eurodollar Rescission"); (d) after Borrower's request that a Eurodollar Loan be made pursuant to this Agreement, the failure of all or any portion of such Eurodollar Loan to be made (a "Eurodollar Advance Failure"); or (e) if, notwithstanding provisions to the contrary that are set forth in this Agreement, the Interest Period applicable to any Eurodollar Loan would, but for clause (iii) of the definition of the term Interest Period, extend beyond the Maturity Date. Compensation owing to a Bank as a result of any such loss, cost or expense resulting from a Eurodollar Prepayment, Eurodollar Conversion, Eurodollar Rescission or Eurodollar Advance Failure, if and to the extent applicable, shall include, without limitation, an amount equal to the sum of (i) the amount of the interest which, but for such event, such Bank would have earned for the remainder of the applicable Interest Period, reduced, if such Bank does, in the ordinary course of its business, redeploy the amount so affected for any portion of such Interest Period, by the interest earned by such Bank as a result of such redeployment, plus (ii) any expense or penalty incurred by such Bank. Eurodollar Conversion. Has the meaning set forth in the definition of the term "Eurodollar Consequential Loss." Eurodollar Loan. Means any Loan which bears interest at a rate determined by reference to the Eurodollar Rate. Eurodollar Prepayment. Has the meaning set forth in the definition of the term "Eurodollar Consequential Loss." Eurodollar Rate. Means, with respect to each Eurodollar Loan for each Interest Period, a rate per annum equal to (a) the Interbank Offered Rate applicable to such Eurodollar Loan and Interest Period, divided by (b) 1.00 minus the Eurodollar Reserve Requirement. The Eurodollar Rate shall be adjusted automatically as of the effective date of any change in the Eurodollar Reserve Requirement. Eurodollar Rescission. Has the meaning set forth in the definition of the term "Eurodollar Consequential Loss." Eurodollar Reserve Requirement. Means, as of the date of any determination, that percentage (expressed as a decimal fraction) which is in effect on such day, as prescribed by the Board of Governors, for determining the maximum reserve requirements (including, without limitation, basic, supplemental, marginal and emergency reserves) applicable to "Eurocurrency liabilities" as defined (as of such date) in Regulation D or under any other then applicable 17 23 similar or successor regulation which prescribes reserve requirements applicable to Eurocurrency liabilities or Eurocurrency fundings. Each determination by Agent of the Eurodollar Reserve Requirement shall be conclusive in the absence of manifest error. Event of Default. Has the meaning provided in Section 8.1 of this Agreement. Exhibit. Means, unless specifically indicated otherwise, the exhibits attached to this Agreement. Facility. Means the Revolving Loan Facility. Federal Funds Rate. Means a fluctuating per annum interest rate at all times equal to the lesser of (a) the Maximum Lawful Rate (such interest rate to be adjusted simultaneously with any change in the Maximum Lawful Rate), or (b) the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the weighted average of the rates on overnight Federal Funds transactions with members of the Federal Reserve System arranged by Federal Funds brokers on the applicable determination date, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, provided that (i) if the date for which such rate is to be determined is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next succeeding Business Day, and (ii) if such rate is not so published for any day, the Federal Funds Rate for such day shall be the average rate charged to the Reference Banks on the applicable determination date on such transactions; provided, however, subject to all provisions of Section 10.4, if at any time the Federal Funds Rate shall be computed on the basis of the Maximum Lawful Rate, any subsequent reduction in the Federal Funds Rate shall not reduce such interest rate thereafter payable below the Maximum Lawful Rate until the aggregate amount of such interest accrued and payable equals the total amount of interest that would have accrued if such interest had at all times been computed solely on the basis of clause (b) above. Interest computed at the Federal Funds Rate shall be computed on the basis of a year of 365 or 366 days, as the case may be, actual days elapsed, including the first day but excluding the last day of the period for which interest is payable. Financial Officer. Means, with respect to any Person which is not a natural Person, the chief financial officer, treasurer or controller of such Person. Financial Statements. Means all balance sheets, earnings statements, statements of operations, statements of stockholder's equity, statements of cash flow and other financial data (whether of the Borrower, any Subsidiary of Borrower, any other Loan Party or any other Person) which have been or may hereafter be furnished to the Agent or any Bank in connection with this Agreement or the transactions contemplated hereby. All Financial Statements shall be prepared in comparative form with respect to each corresponding period of the preceding Fiscal Year in accordance with GAAP and shall include any notes comprising a part thereof. Fiscal Year. Means, with respect to any Person, the applicable twelve-month period designated by such Person as its Fiscal Year. 18 24 Fixed Charges. Means, for the applicable period of determination, an amount equal to the sum of (a) scheduled principal payments made on Indebtedness of Borrower and its Consolidated Subsidiaries, plus (b) Interest Expense of the Borrower and its Consolidated Subsidiaries. Fixed Charge Coverage Ratio. Means, for the applicable period of determination, the ratio of (a) EBITDA minus Adjusted Capital Expenditures, to (b) Fixed Charges, all determined on a consolidated basis for the Borrower and its Consolidated Subsidiaries based on the immediately preceding consecutive twelve month period. GAAP. Means generally accepted accounting principles, applied on a consistent basis (which, in the case of the Borrower and its Consolidated Subsidiaries, means that the same shall be consistent with Borrower's and its Consolidated Subsidiaries most recent audited Financial Statements existing as of the Closing Date), as set forth in Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants or in statements of the Financial Accounting Standards Board or the Securities and Exchange Commission which are applicable in the circumstances as of the date of such Financial Statements, and the requisite that such principles be applied on a consistent basis means that the accounting principles in a current period are comparable in all material respects to those applied in a preceding period, with any exceptions thereto noted. Good faith and good faith. Have the same meaning as the term "Good faith" is defined in Section 1.201(19) of the UCC. Governmental Requirements. Means any and all laws, ordinances, rules and regulations of any Tribunal applicable to this Agreement, any other Loan Paper or the transactions contemplated hereby or thereby or to the Borrower, any Subsidiary of the Borrower, any other Loan Party or any of their Assets, businesses or operations. Group Member. Means Borrower and each other Person which is a member of a "controlled group" which includes the Borrower or is under common control with the Borrower within the meaning of Sections 414(b) and (c) of the Code. Guarantors. Means each and every Person (other than the Borrower) who may now or hereafter be or become obligated or liable for the payment or performance of all or any portion of the Obligations including, without limitation, the Persons identified as Guarantors on Schedule 3 attached hereto and made a part hereof for all purposes. Guaranty. Means, with respect to any Person, any contract, agreement, understanding or undertaking of such Person pursuant to which such Person guarantees, or in effect guarantees, or agrees to become obligated or liable for the payment of any Indebtedness of any other Person (the "primary obligor") or performance of any other obligation of a primary obligor in any manner, whether directly or indirectly, including without limitation, agreements (a) to purchase any such Indebtedness or any Asset constituting security therefor, (b) to advance or supply funds for the purchase or payment of any such Indebtedness, or to maintain net worth 19 25 or working capital or other balance sheet or financial conditions, or otherwise to advance or make funds available for the purchase or payment of any such Indebtedness, (c) to purchase an Asset or service primarily for the purpose of assuring the holder of any such Indebtedness of the ability of the primary obligor to pay or perform the Indebtedness, or (d) to otherwise assure the holder of any such Indebtedness against loss with respect to such Indebtedness or any other obligations of a primary obligor; provided, however, that such term shall not include the endorsement of negotiable Instruments or Documents of Title for deposit or collection in the ordinary course of business. Hazardous Materials. Means (a) any "hazardous waste" as defined in RCRA, (b) any "hazardous substance" as defined in CERCLA, (c) any "toxic pollutants" as defined in the Clean Water Act, (d) any "hazardous air pollutants" as defined in the Clean Air Act, (e) asbestos, (f) polychlorinated biphenyls, (g) underground storage tanks, whether empty, filled or partially filled with any substance, (h) any substance the presence of which on the property in question is prohibited by any Environmental Law, and (i) any other substance which under any Environmental Law requires special handling or notification of or reporting to any Federal, State or local governmental entity or other Tribunal in its generation, use, collection, treatment, storage, transportation, recovery, removal, discharge or disposal. Health Care Facility. Means a business (other than a Hospital or a Health Care Service Business) and the Assets used or otherwise related to such business which provides health care services to individuals which are ancillary to the services provided by the Hospitals and Health Care Facilities, including by way of example, but without limiting the generality of the foregoing, surgery centers, rehabilitation hospitals, sub-acute care hospitals, nursing homes, psychiatric hospitals, and medical clinics. Health Care Service Business. Means a business (other than a Hospital or Health Care Facility) and the Assets used or otherwise related to such business which provides goods or services to Hospitals or Health Care Facilities or which provides health care services to individuals which are ancillary to the services provided by a Hospital or Health Care Facility including by way of example, but without limiting the generality of the foregoing: home health care businesses; hospices; centers for wellness and disease prevention; laboratories; information, data processing and automation service businesses; purchasing, warehousing and distribution businesses; personnel placement businesses; occupational and on-the-job training and testing businesses; physical therapy businesses; and management, training, education, employment and other similar businesses. Hospital. Means and, for purposes of this Agreement, shall be limited to, hospitals which provide general acute-care or general tertiary-care to individuals who are ill or injured. The term shall include the businesses and operations of the Hospital, all facilities and other Assets used or intended to be used in connection with the Hospital and all businesses and operations (including the Assets used or otherwise related to such businesses and operations) which are ancillary to the businesses and operations of the Hospital, including ancillary Health Care Service Businesses, if such businesses and the Hospital are owned and operated by the same Person or Persons and/or Affiliates of such Person or Persons. 20 26 Indebtedness. Means, with respect to any Person, any and all indebtedness, liabilities, and obligations of such Person, including, without limitation and without duplication, (a) all obligations of such Person for borrowed money and all obligations of such Person evidenced by bonds, notes, debentures or similar instruments, (b) all "liabilities" which would be reflected on a balance sheet of such Person prepared in accordance with GAAP, (c) all indebtedness, liabilities and obligations of such Person with respect to any Guaranty, (d) all obligations of such Person with respect to any Capital Lease (but excluding obligations of such Person with respect to any operating lease), (e) all obligations of such Person with respect to any banker's acceptance or surety bonds or as an account party with respect to any letter of credit, (f) all indebtedness, liabilities, and obligations secured by a Lien on any Asset of such Person to the extent of the value of such Asset, and (g) all deferred payment obligations, however characterized, incurred in connection with the acquisition by such Person of any Asset including, without limitation, Securities and deferred payment obligations relating to non-compete and/or consulting agreements; but excluding, (i) trade accounts payable by such Person arising in the ordinary course of business that are not more than 90 days past due, and (ii) with respect to Borrower, accrued but unpaid dividends on any series of preferred stock of Borrower to the extent that Borrower is required to defer payment of such dividends by the provisions of the Loan Papers. Notwithstanding the foregoing, the contingent obligations of the Borrower and Champion-Fargo under Section 3.03(g) of the DHHS Partnership Agreement shall not be deemed to constitute Indebtedness of the Borrower until such time as the obligations are no longer contingent or until such time as Dakota gives the Borrower or Champion-Fargo notice that it is exercising its rights under Section 3.03(g) of the DHHS Partnership Agreement. Interbank Offered Rate. Means, with respect to each Interest Period, the rate of interest per annum determined by Agent to be the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the rates per annum at which deposits in immediately available freely transferable funds in U.S. Dollars are offered to each of the Reference Banks (at approximately 11:00 a.m., London, England time, two (2) Eurodollar Business Days prior to the first day of such Interest Period) in the London interbank market for delivery on the first day of such Interest Period, such deposits being for a period of time equal or comparable to such Interest Period and in an amount equal or comparable to each Reference Bank's Pro Rata Share of the principal amount of the Eurodollar Loan to which such Interest Period relates. Each determination by Agent of the Interbank Offered Rate shall be conclusive in the absence of manifest error. Notwithstanding the foregoing, the Required Banks may, at any time and from time to time, in their sole discretion, with respect to any Interest Period applicable to any Eurodollar Loan designate as the "Interbank Offered Rate" in lieu of the rate determined pursuant to the above formula either (a) the Interbank Offered Rate for United States dollar deposits in the London market that is quoted to the Agent by Knight-Ridder Money Center Services (or such comparable service as Agent may, in its sole discretion, designate), or (b) the Interbank Offered Rate for United States dollar deposits in the London market in an amount equal or comparable to the applicable Eurodollar Loan and with a maturity equal or comparable to the applicable Interest Period, as shown on Ruters' Monitor Money Rates Service "LIBOR" page or published in a comparable financial publication recognized by large United States money center commercial banks, in which event, the term "Interbank Offered Rate" shall mean the rate 21 27 determined pursuant to clause (a) or (b), whichever shall be selected by the Agent in its sole discretion. Intercompany Acquisition Notes. Means those certain promissory notes identified as Intercompany Acquisition Notes on Schedule 4 attached hereto and incorporated herein by reference together with all promissory notes issued after the Closing Date by a Subsidiary of the Borrower to Borrower or from one of Borrower's Subsidiaries to another for purposes of evidencing all or any portion of the cost incurred by the Borrower or such Subsidiary (other than the portion of such costs which is paid, directly or indirectly, with proceeds of the Loans) to consummate the acquisition of a Hospital, Health Care Facility or Health Care Service Business and all renewals, extensions, amendments, restatements and replacements of any such promissory notes. Intercompany Loan Documents. Means each and every instrument, agreement and other document evidencing, securing or otherwise relating to any Intercompany Note or any Intercompany Acquisition Note and all renewals, extensions, amendments and other modifications made from time to time with respect thereto. Intercompany Notes. Means those certain promissory notes identified as Intercompany Notes on Schedule 4 together with all Additional Intercompany Notes and all renewals, extensions, amendments, restatements and replacements of any of such promissory notes. Interest Expense. Means, for the applicable period of determination, the aggregate amount of interest expense (excluding amortization of debt issuance costs) accrued during such period on Indebtedness of the Person or Persons with respect to which such calculation is made, including the interest portion of payments under Capital Leases, all as determined in accordance with GAAP. Interest Payment Date. Means (a) with respect to any Base Rate Loan, the last day of March, June, September and December of each calendar year that occurs prior to the Maturity Date commencing on the first of such days to occur after the Closing Date, (b) with respect to any Eurodollar Loan as to which Borrower has selected an Interest Period of one (1), two (2) or three (3) months, the last day of such Interest Period, (c) with respect to any Eurodollar Loan as to which Borrower has selected an Interest Period of six (6) months, the last day of the three (3) month period falling within such Interest Period (commencing with the day that is three (3) months from the first day of such Interest Period) and the last day of such Interest Period, (d) the Maturity Date, and (e) with respect to all interest accruing from and after the Maturity Date, such interest shall be due and payable on demand, and each date on which a demand for payment is made shall be referred to as an "Interest Payment Date"; provided, however, if any such payment date does not occur on a Business Day, then the Interest Payment Date shall be the next succeeding Business Day. Interest Period. Means, with respect to each Eurodollar Loan, the period commencing (a) on the borrowing date of such Eurodollar Loan, or (b) on the conversion date pertaining to such Eurodollar Loan, if such Eurodollar Loan is made pursuant to a conversion as described 22 28 in Section 2.9(a) hereof, or (c) on the day following the last day of the Interest Period during which Borrower gives a Rollover Notice in the case of a rollover of such Eurodollar Loan to a successive Interest Period, as described in Section 2.9(c) hereof, and ending on the numerically corresponding day of the calendar month that is one, two, three, or six months after the commencement date of the Interest Period, as Borrower shall select in accordance with Sections 2.4(a), 2.9(a) or 2.9(c) hereof; provided, that, (i) any Interest Period which would otherwise end on a day which is not a Eurodollar Business Day shall be extended to the next succeeding Eurodollar Business Day unless such Eurodollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Eurodollar Business Day, (ii) any Interest Period that begins on the last Eurodollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (i) above, end on the last Eurodollar Business Day of the calendar month in which the Interest Period terminates, (iii) if the Interest Period for any Eurodollar Loan would otherwise end after the Maturity Date, such Interest Period shall end on the Maturity Date, and (iv) no Interest Period may commence before and end after any Commitment reduction date or principal payment date, unless after giving effect thereto, the aggregate amount of Loans having Interest Periods, which end after such date shall be equal to or less than the aggregate principal amount of the Loans scheduled to be outstanding hereunder after such date. JCAHO. Means the Joint Commission on Accreditation of Health Care Organizations. L/C Application. Means Banque Paribas' standard form of application and agreement for standby letters of credit, completed to the satisfaction of Banque Paribas. L/C Request Certificate. Means a L/C Request Certificate in the form of Exhibit J hereto, appropriately completed, executed by Borrower and delivered to Banque Paribas pursuant to Section 2.2(c) in connection with Borrower's request for the issuance, amendment, renewal or extension of a Letter of Credit. Lateral Borrowing. Has the meaning ascribed to such term in clause g of the definition of Permitted Indebtedness which is set forth below. Letter of Credit. Means a standby letter of credit issued by Banque Paribas for the account of the Borrower pursuant to this Agreement and the applicable L/C Application and all renewals, extensions, amendments, replacements, substitutions and other modifications made from time to time with respect thereto. Letter of Credit Fee. Means a fee based on the aggregate undrawn face amounts of all Letters of Credit outstanding from time to time which shall be calculated as of the last day of each March, June, September and December of each calendar year, beginning with the first of such dates following the Closing Date, and shall equal the amount determined by multiplying (a) the average daily aggregate undrawn face amounts of all Letters of Credit outstanding during the quarter of the calendar year ending on the date of determination, times (b) the product (expressed as a decimal) determined by multiplying the Applicable Letter of Credit Fee 23 29 Percentage by a fraction, the numerator of which is the number of days contained in the quarter of the calendar year ending on the date as of which such calculation is made (excluding, in the case of the first calendar year quarter, the days occurring prior to the Closing Date and, in the case of the quarter of the calendar year during which the Revolving Loan Maturity Date occurs, the days following such date), and the denominator which is the number of days contained in the applicable calendar year (e.g. 365 or 366). Letter of Credit Fee Payment Date. Means each date as of which (a) the Letter of Credit Fee is determined (e.g. the last day of each March, June, September and December of each calendar year), and (b) the Revolving Loan Maturity Date (or, if such date is not a Business Day, the first Business Day thereafter), beginning on the first of such days following the Closing Date and ending on the Revolving Loan Maturity Date. Lien. Means any valid and enforceable interest in any property, whether real, personal or mixed, securing an Indebtedness, obligation or liability owed to or a claim by any Person other than the owner of such property, whether such interest is based on the common law or any constitution, statute or contract and including, but not limited to, a security interest, pledge, mortgage, assignment, conditional sale or trust receipt, or a transfer, lease, consignment or bailment for security purposes. Loan. Means each Revolving Loan. Loan Papers. Means, collectively, this Agreement, the Note, the Security Documents, the Letters of Credit, the L/C Applications, the L/C Request Certificates and any and all other agreements, instruments, certificates and other documents now or hereafter executed or delivered in connection with any of the foregoing or the transactions contemplated thereby (including, without limitation, those agreements, instruments, certificates, and other documents, the forms of which appear as Exhibits hereto), as such agreements, instruments, certificates and other documents may be amended, renewed, extended, restated, replaced, substituted, supplemented or otherwise modified from time to time. Loan Party. Means the Borrower, each Guarantor and each other Person who shall be liable for the payment or performance of all or any portion of the Obligations or who shall own any property that is subject to (or purported to be subject to) a Lien which secures all or any portion of the Obligations. Loan Request Certificate. Means a Loan Request Certificate in the form of Exhibit C hereto, appropriately completed, executed by Borrower and delivered to Agent pursuant to Section 2.4(a) in connection with Borrower's request for an Advance. Margin Stock. Means margin stock, as such term is defined in Regulation U. Material Adverse Effect. Means any (a) material adverse effect upon the validity, performance or enforceability of any Loan Paper or the validity, enforceability, perfection or intended priority of any Lien created or intended to be created thereunder or the rights or 24 30 remedies of Agent or any Bank under any of the foregoing, (b) material adverse effect upon the financial condition or financial performance or the business, operations or prospects of Borrower or of Borrower and the Consolidated Subsidiaries taken as a whole, (c) material adverse effect upon the ability of Borrower or any Subsidiary of Borrower to fulfill its payment obligations, if any, under the Loan Papers, or (d) material adverse effect upon the value of the Collateral taken as a whole. Maturity Date. Means March 31, 1999, or such earlier date on which the entire unpaid principal amount of the Loans shall become due and payable whether by the lapse of time, acceleration or otherwise; provided, however, if such date is not a Business Day, then the Maturity Date shall be the next succeeding Business Day. Maximum Lawful Rate. Means the maximum rate (or, if the context so permits or requires, an amount calculated at such rate) of interest from time to time permitted under Federal or state laws now or hereafter applicable to the portion of the Obligations in question, after taking into account, to the extent required by applicable law, any and all relevant payments, charges deemed to be interest (whether or not so characterized by the parties) and calculations. Banks hereby notify and disclose to Borrower and Consolidated Subsidiaries that, for purposes of Tex.Rev.Civ.Star.Ann. art. 5069-1.04, as it may be amended from time to time, the applicable rate ceiling shall be the "indicated rate" ceiling from time-to-time in effect as limited by Art. 5069-1.04(b); provided, however, to the extent permitted by applicable law, Banks shall have the right to change the applicable rate ceiling from time to time in accordance with applicable law. MHLP Agreement. Means that certain Amended and Restated Agreement of Limited Partnership of Richmond Metropolitan Hospital, Ltd. dated as of September 30, 1984, as amended by First Amendment to Amended and Restated Agreement of Limited Partnership of Metropolitan Hospital, L.P., dated as of February 26, 1987, as the same may be amended or otherwise modified from time to time. Mortgage. Means each mortgage or deed of trust pursuant to which the Borrower or a Loan Party grants (or purports to grant) a Lien on any real property as security for all or any portion of the Obligations as the same may be renewed, extended, restated, supplemented, increased, amended or modified from time to time. Mortgaged Estates. Means the Assets encumbered by the Mortgages. Net Worth. Means, as of the applicable date of determination and without duplication, the stockholders' equity of Borrower and its Consolidated Subsidiaries, plus the value of redeemable preferred stock issued by the Borrower, all as determined in accordance with GAAP. Note. Means any Revolving Note as the same may, from time to time, be extended, renewed, amended, increased, substituted, or otherwise modified (including any substitution pursuant to Section 10.6) or all of such Revolving Notes, as the context may require. 25 31 Obligations. Means (a) all Indebtedness, obligations and liabilities of the Borrower to any Bank or the Agent under this Agreement or any other Loan Paper including, without limitation, all Loans, Advances and Reimbursement Obligations whether liquidated or unliquidated, direct or indirect, absolute or contingent, joint or several or joint and several, due or to become due, or now existing or hereafter arising; (b) all Indebtedness, obligations, and liabilities owing to any Bank or the Agent by any Subsidiary of the Borrower or other Loan Party under any Guaranty or other Loan Paper whether liquidated or unliquidated, direct or indirect, absolute or contingent, joint or several or joint and several, due or to become due, or now existing or hereafter arising; (c) without limiting the generality of the foregoing, all interest accruing on any of the Obligations described in clauses (a) and (b) above and attorneys' fees incurred in the enforcement or collection thereof, regardless of whether any such Obligations are direct or indirect, fixed or contingent, joint or several or joint and several, or due or to become due, or now existing or hereafter arising; (d) all fees payable pursuant to any Loan Paper; and (e) all renewals, extensions, amendments, supplements, increases and other modifications made from time to time with respect to any of the foregoing. Original Loan Agreement. Means that certain Loan Agreement dated as of November 5, 1993 entered into by Champion Healthcare Corporation, a Texas corporation (which was subsequently merged into and succeeded by the Borrower), Banque Paribas, NationsBank of Tennessee, N.A., First Union National Bank of North Carolina, and Banque Paribas, as agent for itself and such other banks, as such Loan Agreement was subsequently amended by that certain First Amendment to Loan Agreement dated as of December 31, 1993, that certain Second Amendment to Loan Agreement dated as of May 31, 1994, that certain Third Amendment to Loan Agreement dated as of October 21, 1994, that certain Fourth Amendment to Loan Agreement dated as of December 5, 1994, that certain Fifth Amendment to Loan Agreement dated as of December 21, 1994, and that certain Sixth Amendment to Loan Amendment dated as of April 13, 1995. OSHA. Means the Occupational Safety and Health Act (29 U.S.C. Section 651 et seq.) as amended, and all rules and regulations issued pursuant thereto. Other Assets. Means, as to any Person, all Assets on such Person's balance sheet, as of the applicable date of determination, other than cash, current assets and land, building and equipment. Permitted Acquisition. Means an Acquisition by the Borrower or an Eligible Intermediate Subsidiary or Eligible Operating Subsidiary (either directly through an Asset purchase or indirectly through the acquisition of at least one hundred percent (100%) of the outstanding Securities of the Person which owns such Assets) of a Hospital, Health Care Facility or Health Care Service Business on terms mutually agreeable to the owner thereof, as to which all of the conditions precedent to an Acquisition Advance, as set out in Section 4.2, have been met; provided, however, that (a) no acquisition of a Hospital shall constitute a Permitted Acquisition without the prior written approval of the Required Banks if the total costs to acquire such Hospital (including, without limitation, direct and indirect costs and Indebtedness assumed in connection with such Acquisition, but net of working capital, determined in accordance with 26 32 GAAP, of the Hospital being acquired, to the extent the Borrower, or the Eligible Intermediate Subsidiary or Eligible Operating Subsidiary which is the purchaser, receives the benefit of such working capital on a dollar per dollar basis) exceed $25,000,000 or if such total costs are greater than the product obtained by multiplying five (5) times the EBITDA of the Hospital to be acquired, determined as of the date of acquisition; (b) no Acquisition of a Health Care Facility shall constitute a Permitted Acquisition without the prior written approval of the Required Banks if the total costs to acquire such Health Care Facility (including, without limitation, direct and indirect costs and Indebtedness assumed in connection with such Acquisition, but net of working capital, determined in accordance with GAAP, of the Health Care Facility to be acquired, to the extent the Borrower, or the Eligible Intermediate Subsidiary or Eligible Operating Subsidiary which is the purchaser, receives or otherwise obtains the benefit of such working capital on a dollar per dollar basis) exceed $7,500,000 or if such total costs are greater than the product obtained by multiplying three (3) times the EBITDA of the Health Care Facility to be acquired, determined as of the acquisition date; and (c) no Acquisition of a Health Care Service Business shall constitute a Permitted Acquisition without the prior written approval of the Required Banks unless such Health Care Service Business is located in and provides services to the region and consumer markets then served by the Borrower or one or more of its Consolidated Subsidiaries (or which will, upon contemporaneously closing a Permitted Acquisition of a Hospital, be served by Borrower or a Consolidated Subsidiary) and the total costs to acquire any single Health Care Service Business does not exceed $5,000,000 (including, without limitation, direct and indirect costs and Indebtedness assumed in connection with such Acquisition, but net of working capital, determined in accordance with GAAP, of the Health Care Service Business to be acquired, to the extent the Borrower, or the Eligible Intermediate Subsidiary or Eligible Operating Subsidiary which is the purchaser, receives or otherwise obtains the benefit of such working capital on a dollar per dollar basis) and the aggregate total costs to acquire all Health Care Service Businesses which are acquired after the Closing Date (including, without limitation, direct and indirect costs and Indebtedness assumed in connection with such Acquisition, but net of working capital, determined in accordance with GAAP, of the Health Care Service Business to be acquired, to the extent the Borrower, or the Eligible Intermediate Subsidiary or Eligible Operating Subsidiary which is the purchaser, receives or otherwise obtains the benefit of such working capital on a dollar per dollar basis) do not exceed $15,000,000. Permitted Indebtedness. Means: (a) the Obligations; (b) the obligations to pay taxes that are not delinquent or that are being contested in accordance with Section 6.1(e); (c) accounts payable and other expenses incurred in the ordinary course of business (including, without limitation, accounts payable and other expenses incurred by a Subsidiary of the Borrower which are payable or owing to another Person who is the Borrower or another Subsidiary of the Borrower through the cash management system of Borrower and its Subsidiaries to the extent the same is not required, pursuant to this Agreement to be evidenced by an Intercompany Note); 27 33 (d) salaries and wages payable in the ordinary course of business consistent with past practices; (e) the existing Indebtedness owed by the Borrower or an Eligible Intermediate Subsidiary or Eligible Operating Subsidiary expressly identified on Schedule 6 hereto (including renewals and extensions thereof on terms no less favorable than the existing terms or such other terms as may have been approved in writing by the Required Banks and, specifically excluding, increases thereof unless otherwise permitted under this Agreement or another Loan Paper or approved in writing by the Required Banks); (f) contractual obligations incurred in the ordinary course of business which would not be classified as "liabilities" on a balance sheet prepared in accordance with GAAP; (g) the Indebtedness owed by an Eligible Intermediate Subsidiary or Eligible Operating Subsidiary to the Borrower or to another Eligible Intermediate Subsidiary or Eligible Operating Subsidiary if (i) such Indebtedness is evidenced by an Intercompany Note, (ii) the aggregate amount of all such Indebtedness which is owed by any such Eligible Intermediate Subsidiary or Eligible Operating Subsidiary is less than or equal to the product obtained by multiplying three (3) times the sum of the EBITDA of such Subsidiary (only if it is an Eligible Operating Subsidiary) plus the EBITDA of each of its Eligible Operating Subsidiaries, determined as of the last day of the immediately preceding calendar month (the EBITDA of all Subsidiaries of such Eligible Intermediate Subsidiary or Eligible Operating Subsidiary with respect to which such calculation is made which are not Eligible Operating Subsidiaries shall be excluded), (iii) such Indebtedness is secured by Liens on the same Assets of such Eligible Intermediate Subsidiary or Eligible Operating Subsidiary that secure the Obligations and such Liens are subordinate to all Liens securing the Obligations but not otherwise subordinate to any other Liens except those, if any, which are superior to the Liens securing the Obligations, and (iv) such Indebtedness is subordinated to the Obligations (including all Guaranties of the Obligations by any of Borrower's Subsidiaries) on the same terms and conditions as are set forth in the form of the Intercompany Note attached as Exhibit K-1 or, in the case of an Intercompany Note which evidences Lateral Borrowing, Exhibit K-2. Notwithstanding the limitation contained in clause (ii) above upon the amount of Indebtedness permitted by this clause (g), (A) there shall be no such limitation on the Indebtedness owed by one Eligible Operating Subsidiary to another Eligible Operating Subsidiary which does not hold any ownership interest in the Eligible Operating Subsidiary which owes such Indebtedness (provided, however, that all of the other requirements set forth in clauses (i), through (iv) shall be satisfied), and (B) in lieu of the limitation upon the amount of such Indebtedness which is set forth in clause (ii) above with respect to CHC/Psychiatric Healthcare Corporation, the limitation which shall be applicable to such Indebtedness which may be owed by CHC/Psychiatric Healthcare Corporation shall be the lesser of $5,000,000.00 or ninety percent (90%) of the PHC Eligible Receivables and, to the extent cash dividends are paid to CHC/Psychiatric Healthcare Corporation by Psychiatric Healthcare Corporation of Louisiana and/or Psychiatric Healthcare Corporation of Missouri subsequent to the Closing Date ("PHC 28 34 Subsidiary Dividends"), amounts equal to such PHC Subsidiary Dividends may be borrowed by CHC/Psychiatric Healthcare Corporation from the Borrower or another Eligible Intermediate Subsidiary or Eligible Operating Subsidiary. (h) Indebtedness owed by an Eligible Intermediate Subsidiary or Eligible Operating Subsidiary to the Borrower or to another Eligible Intermediate Subsidiary or Eligible Operating Subsidiary if such Indebtedness is evidenced by an Intercompany Acquisition Note which is unsecured and is subordinated to the Obligations (including all Guaranties of the Obligations by any of Borrower's Subsidiaries) and to all Intercompany Notes on the same terms and conditions as are set forth in the form of the Intercompany Acquisition Note attached hereto as Exhibit K-3; (i) other Indebtedness of the Borrower if, prior to incurring such Indebtedness, Borrower has provided to the Agent and the Banks Financial Statements, prepared on a Pro Forma basis, which demonstrate to the satisfaction of the Agent that (i) the Borrower and all Eligible Operating Subsidiaries are and shall remain in compliance with all terms, covenants and provisions of this Agreement (provided, however, that with respect to covenants which involve the calculation of EBITDA for the Borrower and its Consolidated Subsidiaries, calculations of EBITDA made for such covenants shall only be made for the Borrower and Consolidated Subsidiaries), and (ii) the ratio of Senior Debt to EBITDA (determined on a consolidated basis for the Borrower and its Consolidated Subsidiaries in accordance with Section 6.2(i) for the immediately preceding twelve consecutive calendar months) is less than, and will remain less than, 2.50 to 1.00; (j) Additional Subordinated Debt of Borrower; and (k) obligations under Capital Leases (subject to any applicable limitation set forth in the definition of Eligible Intermediate Subsidiary or Eligible Operating Subsidiary in Section 1.2 above). Permitted Investments. Means investments in: (a) Indebtedness, evidenced by notes maturing not more than 180 days after the date of issue, issued or guaranteed by the government of the U.S.; (b) time deposits and certificates of deposit, maturing not more than 180 days after the date of issue, issued by commercial banks, each of which is a member of the Federal Reserve System and which has combined capital and surplus and undivided profits of not less than $1,000,000,000, or any other financial institution if the amount on deposit is fully insured by the Federal Deposit Insurance Corporation; (c) commercial paper, maturing not more than 180 days after the date of issue, issued by a corporation (other than an Affiliate of Borrower) with a rating of "P-1" (or its then equivalent) according to Moody's Investors Service, Inc., "A-1" (or its then equivalent) according to Standard & Poor's Corporation, or "F-1" (or its then equivalent) 29 35 according to Fitch's Investors Service, Inc., or a better rating on any such rating index or another index approved by Agent in its sole discretion; (d) money market funds that invest only in securities which mature within one year after the date of purchase and which have ratings which meet the standards of clause (c) above; (e) Securities issued or guaranteed by the government of the U.S. which mature no later than one year after the date of acquisition; and (f) agreements to repurchase investments permitted under the categories set forth above. Permitted Liens. Means, with respect to any Asset: (a) Liens securing the Obligations in favor of Agent and Banks; (b) pledges or deposits made in the ordinary course of business to secure payment of worker's compensation insurance (or to participate in any fund in connection with worker's compensation insurance), unemployment insurance, pensions or social security programs; (c) Liens imposed by mandatory provisions of law and arising in the ordinary course of business (such as materialmen's, mechanic's and warehousemen's Liens and other like Liens) securing Indebtedness the payment of which is not yet due; (d) Liens for taxes, assessments and governmental charges or levies imposed upon a Person or upon such Person's income or profits or property if the same are not yet due and payable; (e) the Liens referred to in clauses (A), (B) and (C) below if and only if (i) the amount, applicability or validity thereof is currently (at the time in question) being contested in good faith by appropriate action promptly and diligently conducted and adequate cash reserves (segregated to the extent required by GAAP) have been set aside therefor, (ii) levy and execution thereon have been stayed and continue to be stayed, and (iii) they do not in the aggregate materially detract from the value of the property of the Person in question or materially impair the use of such property in such Person's business: (A) Liens for taxes due and payable, (B) Liens upon, and defects of title to, personal property and claims asserted in legal proceedings prior to adjudication of a dispute on the merits, and (C) judgment Liens on appeal; (f) Liens arising from good faith deposits in connection with tenders, leases, real estate bids or contracts (other than contracts involving the borrowing of money), deposits to secure public or statutory obligations, and deposits to secure (or in lieu of) surety, 30 36 stay, appeal or customs bonds, and deposits to secure the payment of taxes, assessments, customs duties or other similar charges; (g) encumbrances consisting of: (i) zoning restrictions, restrictive covenants, encroachments, protrusions, easements or other restrictions on or affecting the use of real property, provided that such items do not in the aggregate materially detract from the value of the property of the Person in question or materially impair the use of such property in such Person's business, and none of which is violated by existing or proposed structures or uses; and (ii) matters disclosed in a title commitment, title policy or survey approved by Agent; (h) Liens solely securing Capital Leases provided that each such Lien is limited to the Asset so leased; (i) Liens securing the Indebtedness permitted under clause (g) of the definition of "Permitted Indebtedness" in this Agreement if and to the extent that, and so long as, such Indebtedness and the Liens securing such Indebtedness have been collaterally assigned to Agent for the benefit of Banks as security for the payment and performance of the Obligations pursuant to Security Documents in form and substance satisfactory to Agent; and (j) Liens, if any, described on Schedule 6 hereto; provided, however, that none of the aforesaid Liens, other than the Liens permitted pursuant to clauses (a), (c), (d), (e), (g), (h), (i) and (j) preceding, shall constitute a Permitted Lien if it attaches or relates to any of the Collateral or any Security issued by an Eligible Intermediate Subsidiary or Eligible Operating Subsidiary of the Borrower; and provided, further, however, that each of the Liens referred to in clauses (b) through (j) preceding shall be of inferior priority to the Liens in favor of Agent and Banks except as may be expressly otherwise provided on Schedule 6 hereto or except as Agent and Required Banks may subsequently agree in writing. Person. Means an individual or a corporation, partnership, trust, incorporated or unincorporated association, joint venture, joint stock company, limited liability company, government (or an agency or political subdivision thereof) or other entity of any kind. PHC Eligible Receivables. Means Receivables created by Psychiatric Healthcare Corporation of Louisiana or Psychiatric Healthcare Corporation of Missouri in the ordinary course of business arising out of the sale by either such Person of goods or the rendition of services by either such Person. Receivables of Psychiatric Healthcare Corporation of Louisiana or Psychiatric Healthcare Corporation of Missouri shall not be deemed to be PHC Eligible Receivables unless no more than one hundred twenty (120) days have elapsed since the invoice date for the Receivable. PHC Eligible Receivables shall not include Receivables payable directly to either of Psychiatric Healthcare Corporation of Louisiana or Psychiatric Healthcare Corporation of Missouri by an account debtor who is not entitled to Medicare or Medicaid benefits and does not have medical or hospitalization insurance or is not covered under an 31 37 employee reimbursement program, provider plan, or similar program maintained with the applicable Psychiatric Healthcare Corporation of Louisiana or Psychiatric Healthcare Corporation of Missouri, as applicable. PHC Subsidiary Dividends. Has the meaning set forth in clause (g) of the definition of Permitted Indebtedness. Plan. Means all "employee benefit plans" as defined in Section 3(3) of ERISA with respect to which Borrower or any Consolidated Subsidiary is a party or bound or with respect to which it has any direct, indirect or contingent liability. Potential Default. Means the occurrence of any event which, with notice or the lapse of time or both, would become or create an Event of Default (and, unless otherwise expressly stated or the context in which such term is used otherwise indicates, the term means an Event of Default), and "potential default" means the occurrence of any event which, with notice or the lapse of time or both, would become an event of default under the agreement, document or instrument in question (and, unless otherwise expressly stated or the context in which such term is used otherwise indicates, the term means an Event of Default). Prescribed Forms. Means such duly executed form(s), statement(s) or document(s), and in such number of copies, which may, from time to time, be prescribed by law and which, pursuant to applicable provisions of (a) an income tax treaty between the U. S. and the country of residence of the Bank providing the form(s), statement(s) or document(s), (b) the Code, or (c) any applicable rule or regulation under the Code, permit Borrower to make payments hereunder or under any other Loan Paper to or for the account of such Bank free of, or at a reduced rate of, deduction or withholding for income or similar taxes. Prime Rate. Means the rate of interest from time to time publicly announced by The Chase Manhattan Bank, North America ("Chase") at its principal office as its prime commercial lending rate or such other banking institution as may be selected by the Agent with notice to the Borrower. Such rate is set by Chase as a general reference rate of interest, taking into account such factors as Chase may deem appropriate, it being understood that many of Chase's commercial or other loans are priced in relation to such rate, that it is not necessarily the lowest or best rate actually charged to any customer and that Chase may make various commercial or other loans at rates of interest having no relationship to such rate. Prior Debt. Means the Indebtedness described on Schedule 8 attached hereto and made a part hereof for all purposes. Pro-Forma and Pro-Forma Effect. Means, in making any calculation to determine if Borrower and its Consolidated Subsidiaries are in compliance with Sections 6.2(c) (g), (h), (i) or (j) or to determine if any condition precedent to an Advance has been met, that the calculation will be made assuming that: (a) any Permitted Acquisition made or to be made with the proceeds of an Advance during the twelve-month period preceding the date as of which the determination is made (the "Reference Period") and any Indebtedness associated with any 32 38 Acquisition which is incurred during the Reference Period, were made or incurred on the first day of the Reference Period; and (b) any funds used or to be used by Borrower or any Subsidiary in consummating an Acquisition during the Reference Period were used for that purpose on the first day of the applicable Reference Period; (c) EBITDA for the Borrower and its Consolidated Subsidiaries for the Reference Period includes EBITDA which is allocable to Assets and Subsidiaries acquired in Acquisitions completed during the Reference Period for the entire Reference Period including that part of such period which preceded the date of the Acquisition, but shall exclude the EBITDA allocable to any of such Assets or Subsidiaries which shall be sold or otherwise transferred in transactions completed contemporaneously with the Acquisition or which shall be completed within a reasonable time thereafter as a part of the transactions which resulted in the Acquisition; (d) Interest Expense with respect to any Indebtedness assumed to have been incurred on the first day of the applicable Reference Period pursuant to clause (a) above which bears interest at a floating rate was incurred during the Reference Period at a fixed rate of interest per annum which was equal to the interest rate provided under the agreement governing such Indebtedness on the first day of the Reference Period; (e) Interest Expense for the applicable Reference Period does not include amounts which would otherwise be characterized as Interest Expense accruing during the Reference Period if such Interest Expense was or will be refinanced with proceeds of Indebtedness assumed to have been incurred as of the first day of the Reference Period pursuant to clause (a) above; (f) nonrecurring expenses incurred by the Borrower or any of its Subsidiaries with respect to Acquisitions completed prior to the Closing Date which would ordinarily be deducted from earnings for purposes of determining net income in accordance with GAAP, shall not be deemed to constitute expenses of such nature for purposes of this calculation; and (g) non-recurring expenses incurred by the Borrower and/or its Subsidiaries on or before the Closing Date in connection with the financing transactions contemplated by this Agreement or the Original Loan Agreement which would ordinarily be deducted from earnings for purposes of determining net income in accordance with GAAP, shall not be deemed to constitute expenses of such nature for purposes of this calculation. Proprietary Rights. Means all patents, copyrights, trademarks, servicemarks, trade names, trade styles and applications and licenses relating thereto and rights thereunder. Pro Rata Share. Means, with respect to each Bank, as of the date of any determination, such Bank's proportionate share of the Aggregate Commitments. As of the date of this Agreement, the Pro Rata Share of each Bank is as set forth on Schedule 1 hereto. Quarterly Dates. Means the last day of March, June, September and December of each calendar year, the first of which shall be the first such day after the Closing Date. RCRA. Means the Solid Waste Disposal Act (42 U.S.C. Section 6901 et seq.), as amended and in effect from time to time, and all regulations issued pursuant thereto (known as RCRA for a subsequent amending act). Receivables. Means all present and future Accounts, accounts receivable and other rights to payment for Goods sold or leased or for services rendered, whether now existing or hereafter 33 39 arising, and whether or not such Accounts, accounts receivable or other rights have been earned by performance. Reference Banks. Means Banque Paribas and such other Bank or Banks (if any) as Agent may, in addition to Banque Paribas, designate as Reference Banks from time to time in its discretion upon notice to Borrower and Banks. Register. Has the meaning provided in Section 10.6(d) of this Agreement. Regulation D. Means Regulation D of the Board of Governors from time to time in effect and shall include any successor or other regulation relating to reserve requirements applicable to member banks of the Federal Reserve System (or its successor). Regulation U. Means Regulation U of the Board of Governors from time to time in effect and shall include any successor or other regulation hereafter promulgated by the Board of Governors to replace Regulation U and having substantially the same function. Reimbursement Obligation. Means Borrower's obligation to reimburse for any drawing under, or payment made by Banque Paribas with respect to, any Letter of Credit. Reportable Event. Means any reportable event as defined in Section 4043 of Title IV of ERISA and applicable regulations. Required Banks. Means, as of any date of determination, Banks which hold, in the aggregate, 66.66% or more of the sum of the aggregate principal amount of the Loans plus the aggregate face amount of the Letters of Credit then outstanding or, if no Loans or Letters of Credit are then outstanding, 66.66% or more of the Aggregate Commitments; provided, however, with respect to the matters described in Section 10.7 below, the term "Required Banks" shall mean those Banks which hold, in the aggregate, 100% of the sum of the aggregate principal amount of the Loans plus the aggregate face amount of the Letters of Credit then outstanding or, if no Loans or Letters of Credit are then outstanding, 100% of the Aggregate Commitments. Restricted Payments. Means, with respect to any Person (a) cash dividends or distributions or any other dividends or distributions on, or in respect of, any class of Securities of such Person, except for distributions made solely in Securities of the same class, and (b) any and all funds, cash, property or other payments or distributions made (including, without limitation, sinking fund payments) in respect of the retirement, redemption, repurchase or other acquisition of such Securities, unless such Securities shall be redeemed or acquired through the exchange of such Securities with Securities of the same class. Revolving Credit Contract Rate. Means, as of any date of determination, the fluctuating per annum rate of interest which equals the lesser of the Maximum Lawful Rate (such interest rate to be adjusted simultaneously with any change in the Maximum Lawful Rate) or: (a) with 34 40 respect to Base Rate Loans, the Prime Rate (such interest to be adjusted simultaneously with any change in the Prime Rate) plus the Applicable Base Rate Percentage; and (b) with respect to each Eurodollar Loan, the Eurodollar Rate applicable to such Loan plus the Applicable Eurodollar Rate Percentage; provided, however, subject to all provisions of Section 10.4, if at any time the Revolving Credit Contract Rate shall be computed on the basis of the Maximum Lawful Rate, any subsequent reduction in the Revolving Credit Contract Rate shall not reduce such interest rate thereafter payable below the Maximum Lawful Rate until the aggregate amount of such interest accrued and payable equals the total amount of interest that would have accrued if such interest had at all times been computed solely on the basis of clauses (a) and (b) above. Except as otherwise provided in Section 2.7(d) with respect to Eurodollar Loans, interest computed at the Revolving Credit Contract Rate shall be computed on the basis of a year of 365 or 366 days, as the case may be, actual days elapsed, including the first day but excluding the last day of the period for which interest is payable. The Borrower, Banks and Agent understand and acknowledge that the Applicable Base Rate Percentage and Applicable Eurodollar Rate Percentage are calculated for each quarter of Borrower's Fiscal Year based on information provided by the Borrower to the Banks and Agent and that such information may not be provided to the Banks and Agent for a number of days following the first day of the quarter of Borrower's Fiscal Year with respect to which such percentages are applicable. Consequently, the Revolving Credit Contract Rate which may be applicable during a certain quarter of Borrower's Fiscal Year may not be known prior to the commencement of such quarter. In such event, the Revolving Credit Contract Rate, once determined, shall be applied retroactively to the first day of the applicable quarter of Borrower's Fiscal Year. Prior to the determination of such interest rate, the Banks and Agent may calculate the Revolving Credit Contract Rate by using the percentage specified in clause (a) of each of the definitions of Applicable Base Rate Percentage and Applicable Eurodollar Rate Percentage. Upon determining the Applicable Base Rate Percentage and applicable Eurodollar Rate Percentage and, thereby, establishing the actual Revolving Credit Contract Rate for the applicable quarter of Borrower's Fiscal Year, the Borrower, Banks and Agent shall, as soon as may reasonably be practical, make such adjustments, if any, as are necessary with respect to the calculation of interest, payments made upon the Obligations and the application of payments made upon the Obligations to give effect to the Revolving Credit Contract Rate. Without limiting the generality of Section 10.4, the Borrower understands and acknowledges that errors and miscalculations may result in determining the Revolving Credit Contract Rate and the calculation of interest on the Obligations and the application of payments made upon the Obligations and agrees that the Agent and Banks shall have the absolute unconditional right to fully investigate any alleged error or miscalculation and, in the event an error or miscalculation has occurred, to correct such error or miscalculation through the reallocation of payments made to principal and/or interest, the refund of excess interest, the demand for payment of interest which was not charged or collected or any other action deemed necessary or appropriate by the Agent, and IN NO EVENT SHALL THE AGENT OR ANY BANK BE SUBJECT TO ANY PENALTY PROVIDED BY LAW OR OTHERWISE INCLUDING, WITHOUT LIMITATION, ANY PENALTY WHICH WOULD OTHERWISE RESULT FROM THE CONTRACTING FOR, CHARGING, RECEIVING, TAKING, COLLECTING, RESERVING OR APPLYING INTEREST IN SUCH EVENT IN EXCESS OF THE MAXIMUM LAWFUL RATE. 35 41 Revolving Loan. Means any Advance made under the Revolving Loan Facility and "Revolving Loans" means all of such Advances. Revolving Loan Commitment. Means, with respect to each Bank, such Bank's commitment to make Revolving Loans under the Revolving Loan Facility in an aggregate principal amount at any time outstanding of up to but not exceeding an amount equal to its Pro Rata Share of the Aggregate Revolving Loan Commitment. The recital of a Revolving Loan Commitment does not mean that any Bank is obligated to advance such amount. Revolving Loan Facility. Means the credit facility in the maximum amount of Aggregate Revolving Loan Commitment made available pursuant to Section 2.1 of this Agreement. Revolving Loan Maturity Date. Has the same meaning as the term "Maturity Date" which is set forth above. Revolving Note(s). Has the meaning provided in Section 2.1 (c) of this Agreement. Rollover Notice. Has the meaning provided in Section 2.9(a) of this Agreement. Schedule. Means, unless specifically indicated otherwise, the schedules attached to this Agreement. Section. Means, unless specifically indicated otherwise, the sections and subsections of this Agreement. Securities. Means any and all securities and other equity rights or ownership interests of any type or character in any Person which is not a natural Person, including, without limitation, (a) capital stock or other equity rights, bonds, notes or other instruments convertible into capital stock or other equity interests, (b) options, warrants or other rights to acquire capital stock or other equity interests, and (c) partnership and joint venture interests. Security Documents. Means all security agreements, pledges, assignments, agency agreements, Guaranties, Mortgages, financing statements, stock certificates, stock powers, lock box agreements and such related agreements, documents, instruments and certificates as may exist or be required from time to time by the Agent or the Banks to create or evidence (or which purport to create or evidence) a Lien or which constitute (or purport to constitute) a Guaranty and which secure, guarantee or otherwise ensure collection, payment or performance of all or any portion of the Obligations or otherwise pertain to any such Lien or Guaranty together with all renewals, extensions, supplements, restatements, amendments and other modifications made from time to time with respect thereto. Senior Debt. Means each of the following: (a) the Obligations, (b) the Indebtedness of Borrower and its Consolidated Subsidiaries which is evidenced by Capital Leases, and (c) any other Indebtedness of Borrower and its Consolidated Subsidiaries which is not expressly 36 42 subordinated in right of payment to the Obligations (including all Guaranties of the Obligations by any of Borrower's Subsidiaries) and all Intercompany Notes other than pension obligations, deferred taxes, malpractice reserves and minority interests (determined in accordance with GAAP) included within the definition of Indebtedness, as such term is defined in this Agreement. Solvent. Means, with respect to any Person, as of the date of the applicable determination, that on such date (a) the fair value of the Assets of such Person (both at fair valuation and at present fair salable value) is greater than the total amount of liabilities, including, without limitation, contingent liabilities, of such Person, (b) the present fair salable value of the Assets of such Person is not less than the amount which would be sufficient to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person is able to realize upon its Assets and pay its debts, contingent obligations and other commitments and liabilities as they mature in the normal course of business, (d) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay such debts and liabilities as they become due and owing, and (e) such Person is not engaged in a business or a transaction, and does not intend to engage in a business or a transaction, for which such Person's Assets would constitute unreasonably small capital after giving due consideration to current and anticipated future capital requirements and current and anticipated future business conduct and prevailing practices in the industry in which such Person is engaged. In computing the amount of contingent liabilities at any time, such liabilities shall be computed at the amount which, in light of the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. Subordinated Debt. Means the Indebtedness described on Schedule 7 attached hereto and made a part hereof and all Additional Subordinated Debt. Subsidiary. Means, as of the date of any determination, each Person, which is not a natural Person, with respect to which 50% or more of the Securities having ordinary voting power (or comparable power) sufficient to select a majority of the board of directors (or Persons holding comparable authority) is directly or indirectly owned, separately or collectively, by Borrower and Subsidiaries of Borrower, and the terms "Subsidiary" and "Subsidiaries" include Subsidiaries of Subsidiaries. Title Policies. Means mortgagee policies of the title insurance, together with such endorsements thereto as may be requested by Agent, acceptable in form and substance to Agent, issued by title companies acceptable to Agent, insuring that the Mortgages create first and prior Liens on the Mortgaged Estates, subject only to the Permitted Encumbrances defined in each such Mortgage. Treasury Rate. Means the Yield Rate on U.S. Treasury Securities of a comparable amount and which have a maturity that is comparable to the principal amount with respect to which the Treasury Rate is applicable, as such Yield Rate is reported in the Wall Street Journal on the fifth Business Day preceding the date such Treasury Rate is determined (or if no Yield 37 43 Rate is published for such U.S. Treasury Security, then the nearest equivalent U.S. Treasury Security as shall be selected by the Agent in its sole discretion, and if the publication of such Yield Rate in the Wall Street Journal is discontinued, the Agent shall determine such Yield Rate from another source selected by it, in its sole discretion). Tribunal. Means any Federal, State, municipal or other governmental department, judicial body, commission, board, bureau, agency or instrumentality of the U. S. or of any state, commonwealth, country, nation, territory, possession, county, parish or municipality, whether now or hereafter constituted or existing. TSCA. Means the Toxic Substances Control Act (15 U.S.C. Section 2601 et seq.) as amended and in effect from time to time, and all rules and regulations issued pursuant thereto. UCC. Means the Uniform Commercial Code as enacted in the applicable jurisdiction, as amended and in effect from time to time. U.S. Means the United States of America. ARTICLE II THE LOANS 2.1 Revolving Loan Facility. (a) Revolving Loan Commitments. Upon the terms and subject to the conditions set forth in this Agreement, and upon request of Borrower, as provided herein, each Bank agrees, severally and not jointly, to make Advances under the Revolving Loan Facility to or for the account of Borrower from the date hereof to the Revolving Loan Maturity Date; provided, however, that (i) the aggregate principal amount of the Advances made by such Bank under this Section 2.1(a) and outstanding, plus such Bank's Pro Rata Share of the aggregate undrawn face amount of all Letters of Credit then outstanding, may not at any time exceed such Bank's Revolving Loan Commitment, (ii) the aggregate principal amount of all the Advances made by all Banks under this Section 2.1(a) and outstanding, plus the aggregate undrawn face amount of all Letters of Credit then outstanding, may not at any time exceed the Aggregate Revolving Loan Commitment, and (iii) the aggregate principal amount of all the Advances made by all Banks under this Section 2.1(a) and outstanding, plus the aggregate undrawn face amount of all Letters of Credit then outstanding, may not at any time exceed the product obtained by multiplying three (3) times the sum calculated by adding together the EBITDA, determined on a Pro Forma basis, of each Eligible Operating Subsidiary as of the last day of the immediately preceding month. Each Revolving Loan shall be made as a part of a borrowing or credit accommodation consisting of revolving loans made by Banks; provided, however, that the failure of any Bank to advance its Pro Rata Share of any such Loan shall not in itself relieve any other Bank of its obligation under this Section 2.1(a) (it being agreed, however, that no Bank shall be responsible or have any liability for the failure of any other Bank to do so). Prior to the Revolving Loan Maturity Date, Borrower may borrow, repay and reborrow under the Revolving Loan Facility up to the 38 44 full amount of the Aggregate Revolving Loan Commitment in accordance with the terms of this Agreement. (b) Limitations on Advances. Notwithstanding anything to the contrary contained in Section 2.1(a) or elsewhere in this Agreement, no Bank shall be obligated, pursuant to Section 2.1(a) or otherwise, to make any Advance to or for the account of Borrower, and Borrower shall not be entitled to borrow if, after giving full effect to the requested Advances by such Bank and all other Banks, the aggregate principal amounts outstanding on the Revolving Credit Notes plus the aggregate undrawn face amounts of all Letters of Credit then outstanding would cause the violation of any of the limitations set forth in Section 2.1(a)(i), (ii) and (iii). (c) Revolving Notes. Each Bank's Advances outstanding under its Revolving Loan Commitment shall be evidenced by a promissory note executed by Borrower and payable to the order of such Bank in the maximum original principal amount of such Bank's Revolving Loan Commitment, substantially in the form of Exhibit D hereto (as amended, renewed, extended, restated, replaced, substituted, supplemented or otherwise modified from time to time, individually, a "Revolving Note" and, collectively, the "Revolving Notes"). (d) Use of Proceeds. All proceeds of the Revolving Loans and Letters of Credit shall be used, subject to the terms and conditions of this Agreement and the other Loan Papers, solely (i) to finance Permitted Acquisitions, (ii) to fund the working capital needs of the Borrower and its Subsidiaries which arise in the ordinary course of business and for Capital Expenditures of the Borrower and its Subsidiaries, (iii) to refinance the Prior Debt, and (iv) to satisfy such other general corporate financing needs of the Borrower and, subject to the terms and conditions of this Agreement and any other Loan Papers, of the Borrower's Subsidiaries which may, from time to time, arise in the ordinary course of business. None of such proceeds may be used by Borrower or any Subsidiary (A) for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any Margin Stock or of refinancing Indebtedness originally incurred for such purpose, or (B) for any purpose which constitutes a violation of, or is inconsistent with, the regulations of the Board of Governors, including, without limitation, Regulation G, T, U or X of the Board of Governors, or (C) for any other purpose which constitutes a violation of, or would be in consistent with, the terms and conditions of this Agreement or any other Loan Paper. 2.2 Letters of Credit. (a) Issuance of Letters of Credit. Upon the terms and subject to the conditions set forth in this Agreement, including, without limitation, the satisfaction of all conditions to Advances contained in this Agreement and all conditions to the issuance of Letters of Credit contained in this Section 2.2, and upon request of Borrower, as provided herein, Banque Paribas agrees to issue, and each other Bank agrees, severally and not jointly, to participate in the issuance of, Letters of Credit for the account of Borrower and to renew, extend and provide substitutions for Letters of Credit, from time to time, from the date hereof through the Revolving Loan Maturity Date pursuant to the terms of the applicable L/C Request Certificate and L/C Application therefor; provided, however, that Banque Paribas shall have no obligation 39 45 to issue any Letter of Credit or to renew, extend or provide a substitution for any Letter of Credit and no Bank shall have the obligation to participate in any such Letter of Credit if (i) the aggregate principal amount of the Advances made by any Bank under Section 2.1(a) above which remain outstanding, plus such Bank's Pro Rata Share of the aggregate undrawn face amount of all Letters of Credit then outstanding would exceed such Bank's Revolving Loan Commitment, (ii) the aggregate principal amount of all the Advances made by all Banks under Section 2.1(a) which are then outstanding, plus the aggregate undrawn face amount of all Letters of Credit then outstanding would exceed the Aggregate Revolving Loan Commitment, (iii) the aggregate principal amount of all the Advances made by all Banks under Section 2.1(a) which are then outstanding, plus the aggregate undrawn face amount of all Letters of Credit then outstanding would exceed the product obtained by multiplying three (3) times the sum calculated by adding together the EBITDA of each Eligible Operating Subsidiary, determined on a Pro Forma basis as of the last day of the immediately preceding month, (iv) such proposed Letter of Credit would cause the aggregate undrawn face amount of all Letters of Credit then outstanding to exceed $5,000,000, (v) such proposed Letter of Credit would not expire at least ten days prior to the outside date specified as the Revolving Loan Maturity Date, (vi) the expiration date of the proposed Letter of Credit would extend for more than one year beyond the date of issuance or, if applicable, the date the Letter of Credit is renewed, extended or substituted, (vii) the proposed Letter of Credit or the proceeds thereof would be used in whole or in part for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any Margin Stock, (viii) if drawn, the proceeds of such proposed Letter of Credit would be used for a purpose which is not permitted under the terms of this Agreement, or (ix) a Potential Default or Event of Default occurred and is continuing (or would result from the issuance, renewal, extension or substitution of such proposed Letter of Credit) which has not been waived by the Required Banks in accordance with this Agreement. Each Letter of Credit shall be issued as a part of a borrowing or credit accommodation consisting of a Letter of Credit issued by Banque Paribas and participated in by Banks in accordance with their respective Pro Rata Shares; provided, however, that the failure of any Bank to participate in the issuance of any Letter of Credit to the extent of its Pro Rata Share shall not relieve any other Bank from its obligation under this Section 2.2(a) (it being agreed, however, that no Bank shall be responsible or have any liability for the failure of any other Bank to do so). (b) L/C Request Certificate and L/C Application. A L/C Request Certificate with respect to each requested issuance, amendment, renewal, extension or substitution of a Letter of Credit together with an EBITDA Certificate, appropriately completed, which shall demonstrate that no EBITDA Overadvance then exists or will result from such Letter of Credit transaction shall be delivered by Borrower to the Agent and Banque Paribas, not later than 1:00 p.m., Houston, Texas time, at least three Business Days prior to the requested date of the issuance, amendment, renewal, extension or substitution of the Letter of Credit, and in all cases the L/C Request Certificate shall be effective and irrevocable upon receipt thereof by the Agent or Banque Paribas. Banque Paribas shall, if the requested terms of such Letter of Credit or amendment, renewal, extension or substitution thereof are not inconsistent with this Agreement and are otherwise acceptable to Banque Paribas, in its discretion, issue the requested Letter of Credit or amend, renew, extend or substitute the Letter of Credit in accordance with the terms hereof upon receipt of such L/C Request Certificate and the applicable L/C Application 40 46 appropriately completed and specifying all information called for in the L/C Application (which information shall include, unless not applicable, without limitation, the requested date of issuance of such Letter of Credit, which date shall be a Business Day, the requested face amount of such Letter of Credit, the expiration date of such Letter of Credit, the name and address of the beneficiary of such Letter of Credit, the form of such Letter of Credit or the amendment, renewal or extension thereof requested and such other information as Banque Paribas shall require pursuant to the L/C Application). No L/C Request Certificate, L/C Application or Letter of Credit shall contain any terms or conditions that are inconsistent with this Agreement; provided, however, that (i) if any terms or conditions contained in any L/C Request Certificate, L/C Application or Letter of Credit are inconsistent with this Agreement, this Agreement shall control as between and among the parties to this Agreement, and (ii) notwithstanding anything to the contrary contained herein, the Reimbursement Obligations shall exist, and shall not be impaired, reduced or otherwise affected by, any such inconsistent terms or conditions. (c) Issuance of Letters of Credit. Not later than 1:00 p.m., Houston, Texas time, on the issuance or effective date set forth in the applicable L/C Application, subject to the terms and conditions of this Agreement and the other Loan Papers, Banque Paribas shall make the Letter of Credit or the amendment, renewal, extension or substitution thereof available to Borrower at Banque Paribas' office for Borrower's delivery to the beneficiary thereof. Immediately upon the issuance of any Letter of Credit, Banque Paribas shall be deemed to have sold and transferred to each other Bank, and each such other Bank shall be deemed unconditionally and irrevocably to have purchased and received from Banque Paribas, without recourse or warranty, an undivided interest and participation, to the extent of such other Bank's Pro Rata Share, in such Letter of Credit (as the same may thereafter be amended, renewed, extended or substituted pursuant to this Agreement), each drawing thereunder and the obligations of Borrower under this Agreement and the L/C Application with respect thereto and any Collateral and other security therefor or Guaranty pertaining thereto. Upon any change in the Pro Rata Share of any Bank which may hereafter occur, it is hereby agreed that, with respect to all Letters of Credit then outstanding, there shall be an automatic adjustment to the interest and participation hereby created to reflect the new Pro Rata Shares of the Banks. BANQUE PARIBAS SHALL HAVE NO LIABILITY TO THE BORROWER OR ANY BANK FOR ANY ACTION TAKEN OR OMITTED BY BANQUE PARIBAS UNDER OR IN CONNECTION WITH A LETTER OF CREDIT, IF TAKEN OR OMITTED IN THE ABSENCE OF GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. (d) Reimbursement Obligations; Advances under Letters of Credit. Drafts drawn under each Letter of Credit shall be promptly reimbursed by Borrower to Banque Paribas not later than the first Business Day following the date of drawing and shall bear interest from the date of drawing until reimbursed in full at a rate per annum equal to the interest rate in effect during such period for Base Rate Loans. Banque Paribas shall give Borrower telephonic or telecopy notice of the drawing under any Letter of Credit on the same day when drawn, but failure by Banque Paribas to give such notice shall not affect Borrower's obligation to reimburse Banque Paribas for such drawing on the first Business Day following the date of the drawing and shall not create liability for the Agent or any Bank. The payment by Banque Paribas of a draft drawn under any Letter of Credit shall constitute, for all purposes of this Agreement, the 41 47 making, concurrently with such payment and regardless of compliance with any condition precedent set forth in Article IV or any other provision of this Agreement or any other Loan Paper, an Advance under the Revolving Loan Facility, which shall be a Base Rate Loan, in the amount of such payment. In the event and to the extent that any draft drawn under any Letter of Credit shall not have been promptly reimbursed, together with interest accrued thereon, Banque Paribas shall promptly notify the Agent and each other Bank of such failure, and each such other Bank shall, on the first Business Day following such notification, and notwithstanding (A) anything to the contrary contained in Section 2.1 or this Section 2.2 or elsewhere in this Agreement, or (B) any EBITDA Overadvance, the existence of any Potential Default or Event of Default or the inability of or failure by Borrower or any Subsidiary to comply with any condition precedent set forth in Article IV or any other provision of this Agreement or any other Loan Paper (which conditions precedent shall not apply to this Section 2.2(d)), pay to Banque Paribas in immediately available funds in accordance with Section 2.4(c), an amount equal to such Bank's Pro Rata Share of the unreimbursed portion of such drawing and interest accrued thereon. If and to the extent any such other Bank shall not have so made its Pro Rata Share of the unreimbursed portion of the amount of such drawing and interest accrued thereon, such other Bank agrees to pay to Banque Paribas, forthwith on demand, such amount, together with interest thereon, for each day from such date until the date such amount is paid to Banque Paribas at the Federal Funds Rate. The failure of any Bank to pay to Banque Paribas such Bank's Pro Rata Share of the unreimbursed portion of any drawing under any Letter of Credit and all interest accrued thereon shall not relieve any other Bank of its obligation hereunder to pay such Bank's Pro Rata Share thereof on the date required, as specified above, but no Bank shall be liable or otherwise responsible for the failure of any other Bank to do so. Whenever Banque Paribas receives a payment of a Reimbursement Obligation from Borrower as to which Banque Paribas has received any payments from the other Banks pursuant to this Section 2.2(d) or interest thereon, Banque Paribas shall pay to each other Bank which has paid its Pro Rata Share thereof to Banque Paribas, in immediately available funds, an amount equal to such other Bank's Pro Rata Share thereof. (e) Letter of Credit Fees. On each Letter of Credit Fee Payment Date, subject to Section 10.4, Borrower shall pay to Agent, for the ratable benefit of the Banks, a Letter of Credit Fee. The Borrower, Banks and Agent understand and acknowledge that the applicable Letter of Credit Fee Percentage is calculated for each quarter of Borrower's Fiscal Year based on information provided by the Borrower to the Banks and Agent and that such information may not be provided to the Bank and Agent for a number of days following the first day of the quarter of Borrower's Fiscal Year with respect to which the Letter of Credit Fee is calculated. Consequently, the Applicable Letter of Credit Fee Percentage may not be known prior to the date the Letter of Credit Fee is calculated or is payable. In such event, the Banks and Agent may calculate the Letter of Credit Fee by using the percentage specified in clause (a) of the definition of Applicable Letter of Credit Fee Percentage; however, upon determining the Applicable Letter of Credit Fee Percentage and, thereby, determining the actual Letter of Credit Fee for the applicable quarter of Borrower's Fiscal Year, the Banks and Agent shall make such adjustments, if any, as are necessary with respect to the calculation of the Letter of Credit Fee and payments made with respect thereto to give effect to the actual Letter of Credit Fee. Without limiting the generality of Section 10.4, the Borrower understands and acknowledges that 42 48 errors may result in determining the Letter of Credit Fee and agrees that the Agent and Banks shall have the absolute unconditional right to fully investigate any alleged error or miscalculation and, in the event a miscalculation has occurred, to correct such error through the refund of any excess Letter of Credit Fee, the demand for payment of any Letter of Credit Fee which was not charged or collected or any other action deemed necessary or appropriate by the Agent, and in no event shall the Agent or any Bank be subject to any penalty provided by law or otherwise, including, without limitation, any penalty which would otherwise result from the contracting for, charging, receiving, taking, collecting, reserving or applying interest in such event in excess of the Maximum Lawful Rate. (f) Nature of Letter of Credit Obligations Absolute. The obligations of Borrower to reimburse Banque Paribas for drawings made under Letters of Credit together with interest accrued thereon shall be unconditional and irrevocable and shall be paid strictly in accordance with this Section 2.2 and the applicable L/C Application regardless of the circumstances, including, without limitation: (i) any lack of validity or enforceability of any Letter of Credit; (ii) the existence of any claim, setoff, defense or other right which Borrower may have at any time against a beneficiary of any Letter of Credit or against any Bank, whether in connection with this Agreement, the transactions contemplated herein or any unrelated transaction; (iii) any draft, demand, statement, certificate or other document presented under any Letter of Credit being forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) payment by Banque Paribas against presentation of a demand, draft or certificate or other document which does not comply with the terms of such Letter of Credit (except for any payment resulting from Banque Paribas' gross negligence or willful misconduct); (v) any other circumstance or happening whatsoever which is similar to any of the foregoing; or (vi) the fact that any Potential Default or Event of Default shall have occurred and be continuing. 2.3 Determinations of EBITDA for Eligible Operating Subsidiaries. EBITDA for each Eligible Operating Subsidiary shall be calculated by Borrower on a Pro Forma basis as of the Closing Date and on a monthly basis thereafter (or a more frequent basis, if Borrower so elects, pursuant to Section 6.3(a)) after the Closing Date and shall be certified to Agent by a Financial Officer of Borrower pursuant to each EBITDA Certificate to be delivered by Borrower to Agent pursuant to Section 4.1(d) or 6.3(a); provided, however, that, notwithstanding anything to the contrary contained in this Agreement or any EBITDA Certificate, Agent shall have the final right in good faith to review and adjust, at any time and from time to time, based upon any information available to Agent, any determination made by Borrower with respect to the EBITDA of any Eligible Operating Subsidiary to the extent such determination is not in accordance with this Agreement. In the event that Agent determines, at any time or from time to time, that the EBITDA of any Eligible Operating Subsidiary is different from the amount calculated as such by Borrower pursuant to the then most recent EBITDA Certificate delivered to Agent, then Agent shall promptly notify Borrower and each Bank of the EBITDA for such Eligible Operating Subsidiary, as determined by Agent. 43 49 2.4 Borrowing and Related Procedures. (a) Loan Request Certificate. Banks shall make Advances to Borrower in accordance with the terms hereof upon receipt by Agent of an EBITDA Certificate, appropriately completed, which shall demonstrate that no EBITDA Overadvance then exists or would result from the requested Advance together with a Loan Request Certificate appropriately completed and specifying all information called for in the Loan Request Certificate, including, without limitation, the following information: (i) the requested amount of such Advance, which amount must be equal to $1,000,000 or an integral multiple of $100,000 in excess thereof; (ii) the specific use of the proceeds of such Advance (e.g., whether it is to be an Acquisition Advance); (iii) whether such Advance shall be a Base Rate Loan or a Eurodollar Loan; (iv) in the case of an Advance requested to be a Eurodollar Loan, the duration of the Interest Period applicable thereto; and (v) the requested date of such Advance, which date shall be a Business Day in the case of a Base Rate Loan and a Eurodollar Business Day in the case of a Eurodollar Loan. Such Loan Request Certificate shall be delivered by Borrower to Agent (A) with respect to any requested Base Rate Loan, not later than 1:00 p.m., Houston, Texas time, one Business Day prior to the requested date of the Advance, and (B) with respect to any requested Eurodollar Loan, not later than 1:00 p.m., Houston, Texas time, at least three Eurodollar Business Days prior to the requested date of the Advance, and in all cases the Loan Request Certificate shall be effective and irrevocable upon receipt thereof by Agent. (b) Notice to Banks. Upon receipt of a Loan Request Certificate, Agent shall promptly notify each Bank, no later than (2) Eurodollar Business Days prior to the requested date of the Advance, of the contents thereof and of such Bank's Pro Rata Share with respect thereto. Upon determination of the interest rate applicable to any Eurodollar Loan, Agent shall promptly notify each Bank of such interest rate. (c) Funding of Loans. Not later than 11:00 a.m., Houston, Texas time, on the funding date set forth in the Loan Request Certificate with respect to any Revolving Loan, each Bank shall make available its Pro Rata Share of the requested Advance, in immediately available funds, to Agent at Agent's address referred to in Section 10.1, subject to the terms and conditions of this Agreement and the other Loan Papers, and Agent shall, not later than 1:00 p.m., Houston, Texas time on the same date, make the funds so received by Agent from Banks available to Borrower; provided, however, that Borrower hereby directs that the portion of the 44 50 initial Advance under the Revolving Loan Facility which is to be used to pay the Prior Debt shall be paid by Agent directly to the holders of such Prior Debt, all pursuant to written instructions to be received by Agent from Borrower. Unless Agent shall have received written notice from a Bank prior to the date of any requested Advance that such Bank will not make available to Agent such Bank's Pro Rata Share of such Advance, Agent may assume that such Bank has timely made such share available to Agent on the date of such requested Advance, and Agent may (but shall not be obligated to), in reliance upon such assumption, make available to Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have made its Pro Rata Share thereof available to Agent, such Bank and Borrower severally agree to pay to Agent, forthwith upon demand, such corresponding amount, together with interest thereon, for each day from the date such amount is made available by Agent until the date such amount is repaid to Agent at (i) with respect to Borrower, the interest rate applicable to the subject Loan, and (ii) with respect to such Bank, the Federal Funds Rate. If (and only if) such Bank shall repay to Agent such corresponding amount, such amount shall constitute such Bank's share of the Loan for purposes of this Agreement. 2.5 Principal Payments. On May 31, 1998, the amount by which the sum of the aggregate principal amount of all Advances then outstanding plus the aggregate undrawn face amount of all Letters of Credit then outstanding shall exceed $80,000,000, together with all unpaid interest accrued on such amount, shall be and become immediately due and payable upon the Revolving Loans [and the Aggregate Revolving Loan Commitment shall be permanently reduced pursuant to Section 2.12(a)] and, on the Revolving Loan Maturity Date, the entire unpaid principal balance of all Advances and all accrued unpaid interest thereon shall be and become immediately due and payable. 2.6 Prepayments. (a) Voluntary Prepayments. Subject to the terms of this Agreement, including without limitation Section 2.10(d), Borrower may prepay the Loans in whole or in part at any time and from time to time by notifying Agent of the particular Loans to be prepaid, the amount of such prepayment and the prepayment date; provided, however, that (i) with respect to partial prepayments, the prepayment of principal must be in an amount equal to $1,000,000 or an integral multiple of $100,000 in excess thereof, (ii) no prepayment of Eurodollar Loans shall be permitted pursuant to this Section 2.6(a) unless (A) such prepayment is made on the last day of the Interest Period applicable thereto, or (B) if such prepayment is made prior to such last day, the Eurodollar Consequential Loss estimated by Agent to be attributable to such Eurodollar Prepayment is, if Agent in its discretion makes such request for payment at such time (which request shall be made by Agent at the direction of the Required Banks), paid by Borrower concurrently with such prepayment (any such payment or request for payment of the estimated Eurodollar Consequential Loss shall be subject to adjustment based upon the actual amounts owing by Borrower with respect to such Eurodollar Prepayment pursuant to this Agreement), (iii) no prepayment of Eurodollar Loans shall be permitted pursuant to this Section 2.6(a) if, as a result of any such prepayment, the aggregate principal amount of Eurodollar Loans remaining outstanding shall be less than $5,000,000, and (iv) Borrower may prepay Eurodollar Loans only upon three Business Days' prior written notice to Agent. Agent shall, promptly after 45 51 receiving notice from Borrower of any voluntary prepayment to be made pursuant to this Section 2.6(a), notify each Bank of the principal amount of the Loans held by such Bank which are to be prepaid, the prepayment date and the manner of application of the prepayment. Any notice by Borrower given with respect to a proposed prepayment of a Eurodollar Loan shall commit Borrower to prepay such Loan in accordance with such notice unless such notice is revoked by Borrower prior to any reliance on such notice by any Bank. (b) Mandatory Prepayments; EBITDA Overadvance; Reduction in Commitments. Subject to the terms of this Agreement, if, upon any determination of EBITDA for the Eligible Operating Subsidiaries, Agent determines that an EBITDA Overadvance exists, then Agent shall promptly give notice of such EBITDA Overadvance to Borrower, and Borrower shall, within one Business Day following such notice, prepay the aggregate outstanding principal amounts of the Revolving Notes by an amount equal to or greater than the EBITDA Overadvance. (c) Application of Payments. Prepayments shall be applied to the Loans in the following manner. Each voluntary and mandatory prepayment of principal made pursuant to this Section 2.6 shall be made together with accrued but unpaid interest to the date of payment and shall be applied toward payment of the outstanding Loans in the following manner: (i) first, toward payment of fees and the interest accrued on the principal amount prepaid; (ii) second, toward prepayment of principal outstanding on the Base Rate Loans; (iii) third, toward prepayment of principal outstanding on the Eurodollar Loans; and (iv) fourth, toward payment of the remaining Obligations, in such manner as Agent shall, in its discretion, determine. Subject to the foregoing, prepayments shall be applied to such of the Eurodollar Loans as Borrower may designate by written notice delivered to the Agent; provided, however, that (A) Borrower shall select Eurodollar Loans to be prepaid in a manner which will minimize any Eurodollar Consequential Loss resulting from such prepayments, (B) if Borrower fails to designate the Eurodollar Loans to which such prepayments shall be applied, then Agent shall be entitled to apply the prepayments to the Eurodollar Loans in any manner that Agent deems appropriate provided that Agent uses reasonable efforts to minimize any Eurodollar Consequential Loss resulting therefrom, (C) if, as the result of the application of any mandatory prepayment, a Eurodollar Prepayment would occur, then Agent, upon receipt of such mandatory prepayment, shall place the portion thereof that would, if immediately applied, cause a Eurodollar Prepayment in a Deposit Account maintained by Agent and pledged as Collateral for the Obligations for the benefit of Banks (pursuant to agreements in form and substance satisfactory to Agent) and shall apply such portion to the outstanding Obligations on the earliest date thereafter as is possible without causing a Eurodollar Prepayment, and (D) if a Potential Default or Event of Default has occurred and is continuing at the time of any prepayment, then Agent shall be entitled to apply the prepayment to the Obligations in any manner Agent shall deem appropriate. 2.7 Interest. (a) Interest Payment Dates. Interest accrued on the unpaid principal amount of the Revolving Notes outstanding from time to time shall be due and payable on each Interest Payment Date. 46 52 (b) Interest Rates Prior to Default. The principal amounts of all Loans from time to time outstanding shall bear interest at the applicable Revolving Credit Contract Rate, subject to Sections 2.7(d) and 10.4. (c) Default Rate. Notwithstanding any provision to the contrary contained in this Section 2.7, upon the occurrence of an Event of Default, unless otherwise expressly provided herein or in another Loan Paper, the unpaid principal balance and, to the extent permitted by applicable law, accrued but unpaid interest on the Obligations then outstanding (including, without limitation, the Loans) shall bear interest at the Default Rate from the date of the occurrence of such Event of Default to the date such Event of Default is cured or is waived by the Banks in accordance with the terms of this Agreement or, if earlier, the date such Obligations are paid; provided, however, that the Obligations consisting of other than Loans shall not (unless otherwise expressly stated herein to the contrary) begin to bear interest until such amounts are past due. (d) Computation of Interest. Subject to Section 10.4, interest on the Obligations (i) consisting of other than Eurodollar Loans shall be calculated on the basis of the actual number of days elapsed and computed as if each year consisted of 365 or 366 days, as the case may be, and (ii) consisting of Eurodollar Loans shall be calculated on the basis of the actual number of days elapsed and computed as if each year consisted of 360 days, except when such computation would cause the Maximum Lawful Rate to be exceeded on all or any portion of such Obligations, in which event, interest shall be computed with respect to such Obligations (or portion thereof) as if each year consisted of 365 or 366 days, as the case may be. Such computations shall be made by including the first day but excluding the last day of the period for which such interest is payable. 2.8 Fees. Borrower shall pay the following fees in connection with this Agreement: (a) Commitment Fee. On each Commitment Fee Payment Date, subject to Section 10.4, the Borrower shall pay the Commitment Fee which is due and payable on such date to Agent for distribution to the Banks. The Borrower, Banks and Agent understand and acknowledge that the Applicable Commitment Fee Percentage is calculated for each quarter of Borrower's Fiscal Year based on information provided by the Borrower to the Banks and Agent and that such information may not be provided to the Banks and Agent for a number of days following the first day of the quarter of the Borrower's Fiscal Year with respect to which the Commitment Fee is calculated. Consequently, the Applicable Commitment Fee Percentage may not be known prior to the date as of which the Commitment Fee is calculated or is payable. In such event, the Banks and Agent may calculate the Commitment Fee by using the percentage specified in clause (a) of the definition of Applicable Commitment Fee Percentage, but upon determining the Applicable Commitment Fee Percentage and, thereby, calculating the actual Commitment Fee for the applicable quarter of Borrower's Fiscal Year, the Borrower, Banks and Agent shall, as soon as may reasonably be practical, make such adjustments, if any, as are necessary with respect to the calculation of the Commitment Fee and payments made with respect thereto to give effect to the actual Commitment Fee. Without limiting the generality of Section 10.4, the Borrower understands and acknowledges that errors may result in determining 47 53 the Commitment Fee and payments made with respect to the Commitment Fee and agrees that the Agent and Banks shall have the absolute unconditional right to fully investigate any alleged error or miscalculation and, in the event a miscalculation has occurred, to correct such error through the refund of any excess Commitment Fee, the demand for payment of any Commitment Fee which was not charged or collected or any other action deemed necessary or appropriate by the Agent and, in no event, shall the Agent or any Bank be subject to any penalty provided by law or otherwise including, without limitation, any penalty which would otherwise result from the contracting for, charging, receiving, taking, collecting, reserving or applying interest in such event in excess of the Maximum Lawful Rate. (b) Computation of Fees. Each determination by Agent with respect to Commitment Fees or Letter of Credit Fees shall be presumed correct. (c) Sharing of Commitment Fees and Letter of Credit Fees. All Commitment Fees and Letter of Credit Fees payable to Agent shall be distributed to Banks in accordance with their respective Pro Rata Shares. Unless otherwise expressly provided herein or in another Loan Paper, all other fees payable by Borrower to Agent with respect to the Facility shall not be so distributed and shall be retained by Agent. (d) Charging Borrower's Account. In the event Borrower fails to pay any Commitment Fee or Letter of Credit Fee on the date the same is due and payable, Banks are hereby authorized (but shall not be required) to advance or to cause to be advanced the amount of such fee as a Loan to Borrower. 2.9 Eurodollar Loans: Conversion, Rollover, Etc. (a) Conversion from Base Rate Loans. Provided that no Potential Default or Event of Default shall have occurred and be continuing, upon three Eurodollar Business Days' prior written notice from Borrower to Agent specifying the commencement date and length of the applicable Interest Period selected by Borrower, Borrower may convert an amount equal to $1,000,000, or an integral multiple of $100,000 in excess thereof, of any outstanding Base Rate Loan into a Eurodollar Loan. Such notice shall be given by Borrower's execution and delivery to Agent of a Rollover Notice in the form of Exhibit E hereto, appropriately completed (a "Rollover Notice"). Each such Rollover Notice shall be effective and irrevocable upon receipt thereof by Agent. (b) Conversion from Eurodollar Loans. Unless Agent shall have actually received notice from Borrower requesting otherwise, delivered in accordance with Section 2.9(c) below, at least three Eurodollar Business Days prior to the last day of the Interest Period applicable to any Eurodollar Loan, then on the last day of the applicable Interest Period, such Eurodollar Loan shall be converted to a Base Rate Loan. (c) Rollover. Provided that no Potential Default or Event of Default shall have occurred and be continuing, at least three Eurodollar Business Days prior to the last day of the Interest Period applicable to a Eurodollar Loan, Borrower may give to Agent written notice that 48 54 all or any portion of such Eurodollar Loan shall continue as a Eurodollar Loan upon the expiration of the then-current Interest Period by executing and delivering to Agent a Rollover Notice. Such Rollover Notice shall specify the amount of the Eurodollar Loan which shall be continued (which amount must be $1,000,000 or an integral multiple of $100,000 in excess thereof) and the length of the succeeding Interest Period selected by Borrower with respect thereto. Each Rollover Notice shall be effective and irrevocable upon receipt thereof by Agent. If the required Rollover Notice shall not have been timely received by Agent, then Borrower shall be deemed to have elected to have such Eurodollar Loan be converted to a Base Rate Loan as provided in Section 2.9(b). (d) Lending Office. Any Bank may cause any Eurodollar Loan to be made by its principal office or by a foreign or domestic subsidiary, Affiliate, branch or correspondent. Notwithstanding the right of any Bank to fund all or any portion of a Eurodollar Loan in any manner that it deems appropriate, such Bank shall, regardless of the actual means of funding, be deemed to have funded the Eurodollar Loan in accordance with the interest option from time to time selected by Borrower. 2.10 Protection of Yield. (a) Increased Costs, etc. Subject to Section 10.4, if at any time, and from time to time, any Bank determines that the adoption, modification or implementation of, or compliance with, any applicable law, rule or regulation regarding taxation (exclusive of any law, rule or regulation imposing taxes on the income of such Bank or imposing franchise taxes on such Bank), required levels of reserves, deposits, insurance or capital (including any allocation of capital requirements or conditions), or similar requirements applicable to such Bank, or any interpretation or administration thereof by any Tribunal, central bank or other Person charged with the interpretation or administration of or assuring compliance with any of such requirements, has or would have the effect of (i) increasing such Bank's costs of making, funding or maintaining any of the Loans, its Commitment, the Facility or any part thereof, or (ii) reducing the yield or rate of return of such Bank on any of the Loans, its Commitment, the Facility or any part thereof, to a level below that which such Bank would have achieved but for the adoption, modification, interpretation, administration or implementation of, or compliance with, any such requirements, Borrower shall, within 15 days after request therefor by such Bank, pay to such Bank such additional amounts as will compensate such Bank for such increase in costs or reduction in yield or rate of return of such Bank. No failure by any Bank to immediately request payment of any additional amounts payable under this Section 2.10(a) shall constitute a waiver of such Bank's right to request payment of such amounts at any subsequent time. Each Bank requesting that Borrower pay additional amounts pursuant to this Section 2.10(a) shall submit to Borrower and Agent a certificate, executed by such Bank, as to such additional amounts, which certificate shall be presumed correct. Such certificate shall set forth in reasonable detail the nature of the occurrence giving rise to such claim for additional amounts, the additional amounts to be paid to it hereunder, and the method by which such amounts were determined. In determining such amounts, such Bank may use any reasonable averaging or attribution method which it determines to be appropriate. Any portion of the additional amounts required to be paid under this Section 2.10(a) remaining unpaid 15 days after 49 55 the due date thereof shall bear interest at the Default Rate. Notwithstanding the foregoing, if and to the extent that any additional amounts to be paid by Borrower pursuant to this Section 2.10(a) directly relate to Base Rate Loans, then Borrower shall be obligated to pay such amounts only if and to the extent that the general circumstances which have caused such additional amounts to be owing are applicable to the Required Banks. (b) Substitute Interest Rate. Notwithstanding anything to the contrary contained in this Agreement, if, on or before any date on which a Eurodollar Rate is to be determined hereunder, Agent determines that deposits of U.S. Dollars in the appropriate amount for the appropriate period are not being offered in the interbank eurodollar market for U. S. Dollars, or that by reason or circumstances affecting such market, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate, then Agent shall promptly give notice of such determination to Borrower, and such determination shall be conclusive and binding in the absence of manifest error. During the 15 days next following the giving of such notice, Borrower and Agent shall negotiate in good faith in order to arrive at a mutually satisfactory alternative interest rate (the "Substitute Rate") to replace the rate otherwise applicable to the pertinent Eurodollar Loans of Borrower during the applicable Interest Periods. If, within such 15 day period, Borrower and Agent agree in writing upon a Substitute Rate, such rate shall be effective from the first day of each applicable Interest Period. If Agent and Borrower fail to agree upon a Substitute Rate within such 15 day period, the Substitute Rate applicable to the pertinent Eurodollar Loans during each applicable Interest Period shall be the interest rate applicable to Base Rate Loans. (c) Changes in Law Rendering Loan Unlawful or Impractical. In the event that (i) any change in applicable law, treaty or regulation or the interpretation thereof (whether or not having the force of law) shall make it unlawful, impossible or impractical for any Bank to make or continue to maintain all or any portion of a Eurodollar Loan, or (ii) any Tribunal, central bank or other fiscal, monetary or other authority having jurisdiction over any Bank or all or any portion of a Eurodollar Loan shall request such Bank in writing to comply with restrictions (whether or not having the force of law) which seek to prohibit such Bank from making or continuing to maintain such a Eurodollar Loan, then such Bank shall so notify Borrower and Agent, and upon notice by such Bank, such Eurodollar Loan shall be converted to a Base Rate Loan, except that, subject to the provisions of Section 2.10(d) hereof, such conversion need not be effected on the last day of the Interest Period applicable to such Eurodollar Loan, and upon notice by such Bank, the obligation of such Bank to make or to continue to maintain such Eurodollar Loan hereunder shall terminate. Such notice shall be accompanied by a certificate of such Bank provided to Borrower and Agent as to the reasons why it is no longer lawful, possible or practical for such Bank to make or continue to maintain such Eurodollar Loan and such certificate shall be presumed correct. (d) EURODOLLAR CONSEQUENTIAL LOSS. BORROWER AGREES TO INDEMNIFY AND HOLD HARMLESS EACH BANK FROM AND AGAINST ANY EURODOLLAR CONSEQUENTIAL LOSS; PROVIDED, HOWEVER, THAT NO SUCH OBLIGATION OF INDEMNITY SHALL EXIST WITH RESPECT TO ANY EURODOLLAR PREPAYMENT (IF ANY) RESULTING FROM ANY BANK'S FAILURE TO FUND AN 50 56 ADVANCE (I) THAT SUCH BANK WAS OBLIGATED TO FUND, AND (II) WHICH WAS INITIALLY FUNDED BY AGENT PURSUANT TO SECTION 2.4(C). BORROWER SHALL PAY, WITHIN 15 DAYS AFTER REQUEST THEREFOR BY ANY BANK, THE AMOUNT OF ANY EURODOLLAR CONSEQUENTIAL LOSS INCURRED BY SUCH BANK. A CERTIFICATE OF SUCH BANK PROVIDED TO BORROWER AND AGENT SPECIFYING THE AMOUNT OF ANY EURODOLLAR CONSEQUENTIAL LOSS SUFFERED BY SUCH BANK AND THE BASIS UPON WHICH SUCH LOSS IS COMPUTED SHALL BE PRESUMED CORRECT. (e) Reasonable Efforts. Borrower and Banks shall use reasonable efforts to avoid or to minimize amounts payable by Borrower pursuant to this Section 2.10, and Borrower shall, as promptly as practical, notify Agent, and each Bank shall, as promptly as practicable, notify Borrower and Agent, of the existence of any event or circumstance of which it is aware which will require the payment by Borrower of any such amounts; provided, however, that the failure to give any such notification shall not result in any liability to any Bank and shall not affect the rights of any Bank or the obligations of Borrower hereunder or under any other Loan Paper; provided, further, however, that Borrower shall not be obligated to pay any additional amount to any Bank pursuant to this Section 2.10 unless request is made for payment of such additional amount within one year after such Bank became aware that such additional amount was owing by Borrower. 2.11 Manner and Application of Payment. (a) Manner of Payment. All Obligations shall be paid by Borrower without setoff, counterclaim or deduction of any kind, except as may be permitted by Section 2.13(a), to Agent (for the account of Agent and Banks, as appropriate) not later than 11:00 a.m., Houston, Texas time, on the date due, and shall be payable in lawful currency of the U. S. in immediately available funds. Agent will promptly (on the same Business Day that such payment is received if such payment is received by Agent by 11:00 a.m., Houston, Texas time) distribute to each Bank its Pro Rata Share of each payment made upon the Loans and each Commitment Fee and Letter of Credit Fee which is received by Agent for the account of Banks. From and after the effective date of each Assignment and Acceptance which is accepted by Agent and with respect to which all pertinent information is recorded in the Register pursuant to Section 10.6, Agent shall make all payments under this Agreement with respect to the interest assigned thereby to the Bank which is the assignee thereunder, and the parties to such Assignment and Acceptance shall, directly between themselves, make all appropriate adjustments in such payments for periods prior to such effective date. Whenever any payment with respect to any of the Obligations shall be due on a date which is not a Business Day, the date for payment thereof shall be extended to the next succeeding Business Day. If the date for any payment of principal is extended, interest shall accrue and be payable by Borrower with respect to such extension. (b) Application of Payments. Payments (other than prepayments) made upon the Loans and other Obligations shall be applied by Agent toward payment of such Loans and Obligations in such manner as the Agent shall, in its discretion, determine unless the Required Banks request a different application of such payment, in which event the Agent shall apply such 51 57 payments to the Loans and other Obligations in the manner requested by the Required Banks. Without limiting the foregoing, payments (other than prepayments) made upon the Loans and other Obligations may be applied to payment of such Loans and Obligations in the following manner: (i) first, against fees and the interest accrued and unpaid on the Loans or Obligations as of the date of such payments; (ii) second, against the principal of the Base Rate Loans; (iii) third, against the principal of the Eurodollar Loans; and (iv) fourth, against the remaining Obligations. Notwithstanding the foregoing, Borrower may designate by written notice delivered to Agent in accordance with this Agreement, any Eurodollar Loans which could be repaid first to minimize any Eurodollar Consequential Loss resulting from such payments; provided, however, that if Borrower shall fail to deliver written notice designating the Eurodollar Loans to which such payments could be applied to minimize any Eurodollar Consequential Loss or if a Potential Default or Event of Default has occurred or is continuing, then Agent shall be entitled to apply the payment to the Eurodollar Loans in any manner which Agent shall deem appropriate. 2.12 Termination and Reduction of Commitments. (a) Automatic Termination and Reduction of Commitments. The Aggregate Revolving Loan Commitment shall automatically terminate on the Revolving Loan Maturity Date. Furthermore, the Aggregate Revolving Loan Commitment shall automatically be permanently reduced to $80,000,000 on May 31, 1998. Upon the reduction of the Aggregate Revolving Loan Commitment, each Bank's separate Revolving Loan Commitment shall be proportionately reduced so that the Revolving Loan Commitment of each Bank shall equal its Pro Rata Share of the Aggregate Revolving Loan Commitment, as the same has been reduced. (b) Voluntary Termination or Reduction of Commitments. Upon at least three Business Days' prior notice to Agent, Borrower may at any time, in whole, permanently terminate the Aggregate Revolving Loan Commitment, or from time to time, in part, permanently reduce, the Aggregate Revolving Loan Commitment. Each partial reduction of the Aggregate Revolving Loan Commitment shall be in an amount equal to $1,000,000 or an integral multiple of $250,000 in excess thereof. The Aggregate Revolving Loan Commitment may not be reduced (or terminated) pursuant to this Section 2.12(b) to an amount that is less than the aggregate principal amount of the Revolving Loans then outstanding plus the aggregate undrawn face amounts of all Letters of Credit then outstanding. Once so terminated or reduced, the Aggregate Revolving Loan Commitment may not thereafter be increased by Borrower. Upon any reduction of the Aggregate Revolving Loan Commitment, the separate Revolving Loan Commitment of each Bank shall be proportionately reduced so that the amount of each Bank's Revolving Loan Commitment shall equal its Pro Rata Share of the Aggregate Revolving Loan Commitment, as the same has been reduced. 2.13 Taxes (a) Taxes. Any and all payments by Borrower under this Agreement, the Notes or the other Loan Papers shall be made free and clear of, and without deduction for, any and all present or future taxes, levies, imports, deductions, charges or withholdings and all liabilities 52 58 with respect thereto (hereinafter referred to as "Taxes"), excluding, in the case of Agent and each Bank, taxes imposed on its income, and franchise taxes imposed upon it, by the jurisdiction under the laws of which Agent or such Bank (as the case may be) is organized or is or should be qualified to do business or any political subdivision thereof, and excluding, in the case of each Bank, taxes imposed on its income, and franchise taxes imposed upon it, by the jurisdiction of such Bank's lending office or any political subdivision thereof. (b) Other Taxes. To the extent permitted by applicable law and subject to Section 10.4, Borrower agrees to and shall pay any and all present or future stamp or documentary taxes or other excise or property taxes, charges or similar levies now or hereafter imposed, excluding only taxes imposed on the income of Agent or a Bank and franchise taxes imposed on Agent or a Bank, which arise from any payment made under this Agreement or the other Loan Papers or from the execution, delivery, registration or recordation of this Agreement or any other Loan Paper or which may otherwise become payable with respect to this Agreement or any other Loan Paper or any Collateral (hereinafter referred to as "Other Taxes"). (c) Additional Amounts Payable by Borrower. Subject to Section 10.4, if Borrower shall be required by law to deduct any amount in respect of Taxes or Other Taxes (including, without limitation, withholding taxes), taxes imposed on the income of Agent or a Bank and franchise taxes imposed on Agent or a Bank, from or in respect of any sum payable under this Agreement or under any Note to Agent or any Bank, (i) the sum payable by Borrower shall be increased to an amount which shall, after making all required deductions (including deductions applicable to additional sums payable under this Section 2.13) result in the payment to Agent or such Bank (as the case may be) the amount that it would have received had no such deductions been made, (ii) Borrower shall make such deductions, and (iii) Borrower shall pay the full amount deducted to the taxation authority or other Tribunal entitled to the receipt thereof in accordance with applicable law. (d) TO THE EXTENT PERMITTED BY APPLICABLE LAW AND SUBJECT TO SECTION 10.4, BORROWER SHALL INDEMNIFY AGENT AND EACH BANK FOR THE FULL AMOUNT OF TAXES (INCLUDING, WITHOUT LIMITATION, WITHHOLDING TAXES) AND OTHER TAXES (INCLUDING, WITHOUT LIMITATION, ANY TAXES AND OTHER TAXES IMPOSED BY ANY JURISDICTION ON AMOUNTS PAYABLE UNDER THIS SECTION 2.13) PAID BY AGENT OR SUCH BANK (AS THE CASE MAY BE) AND ALL LIABILITIES (INCLUDING PENALTIES, ADDITIONS TO TAX, INTEREST AND EXPENSES) ARISING THEREFROM OR WITH RESPECT THERETO, WHETHER OR NOT SUCH TAXES OR OTHER TAXES WERE CORRECTLY OR LEGALLY ASSERTED. SUCH INDEMNIFICATION SHALL BE MADE BY BORROWER WITHIN 15 DAYS FROM THE DATE AGENT OR SUCH BANK (AS THE CASE MAY BE) MAKES REQUEST THEREFOR AND PROVIDES BORROWER WITH A RECEIPT EVIDENCING PAYMENT THEREOF. (e) Tax Receipts, Refunds. Within 30 days after the date of any payment of Taxes or Other Taxes by or at the direction of Borrower, Borrower will furnish to Agent the original or a certified copy of a receipt evidencing payment thereof. In the event that (i) Agent or any 53 59 Bank ever receives any refund, credit or deduction from any taxing authority or other Tribunal which the Agent or such Bank would not otherwise have been entitled to receive if Borrower had not paid the Taxes or Other Taxes as required by this Section 2.13 (it being understood that the decision as to whether or not to claim, and if claimed, as to the amount of any such refund, credit or deduction shall be made by Agent or such Bank, as the case may be, in its sole discretion), and (ii) Agent or such Bank (as the case may be) determines that such refund, credit or deduction relates to such payment by Borrower of Taxes or Other Taxes, then Agent or Bank (as the case may be) shall pay to Borrower an amount equal to (A) any net reduction in taxes actually obtained by Agent or such Bank (as the case may be) and determined by Agent or such Bank to be attributable to such refund, credit or deduction, less (B) all reasonable expenses of Agent or Bank (as the case may be) attributable to such refund, credit or deduction. Agent and Banks shall not be obligated, in connection with any term or provision of this Section 2.13, to allow Borrower to obtain copies of or to review any tax returns or books or records of Agent or any Bank. (f) Change of Lending Office. Any Bank claiming any additional amounts payable pursuant to this Section 2.13 for Taxes or Other Taxes shall use its reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) to change the jurisdiction of its lending office if the making of such a change would avoid the need for, or reduce the amount of, any such additional amounts, unless such Bank determines in good faith that such change would be disadvantageous to such Bank. (g) Reasonable Efforts. Agent and each Bank agree that they will take reasonable actions to avoid or to minimize amounts payable by Borrower under this Section 2.13; provided, however, that neither Agent nor any Bank shall be obligated by reason of this Section 2.13 to take any action which it, in good faith, determines would be disadvantageous to it, and neither the Agent nor any Bank shall be required to contest the payment of any Taxes or Other Taxes or to disclose any information regarding its tax affairs or tax computations or reorder its tax or other affairs or tax or other planning. Notwithstanding anything to the contrary in this Section 2.13, in no event shall Borrower ever be obligated to pay penalties assessed or interest applicable to past due Taxes or Other Taxes if and to the extent that such penalties or interest are due to Agent's or such Bank's (as the case may be) failure to comply with applicable laws. ARTICLE III SECURITY AND GUARANTIES 3.1 Security Documents. To secure, guaranty and otherwise ensure the full and timely performance of Borrower's and each other Loan Party's covenants set forth in this Agreement or in any other Loan Paper and to secure the repayment of the Notes and all other Obligations, except as otherwise provided in Sections 3.2 and 3.3 below, the Borrower agrees (a) to grant and assign, and cause each of its Subsidiaries to grant and assign, a fully perfected, valid Lien upon each item of Collateral owned by it subject to no other Lien except Permitted Liens and prior to all Liens except those Permitted Liens, if any, stipulated on Schedule 6 to be prior Liens or otherwise agreed to by the Required Banks in writing subsequent to the Closing 54 60 Date, and (b) to cause each of its Subsidiaries to execute and deliver to the Agent a full, unconditional and continuing Guaranty of the Obligations in form and substance satisfactory to Agent, provided, however, the Guaranties of Subsidiaries of Borrower which do not constitute Eligible Intermediate Subsidiaries, Eligible Operating Subsidiaries or De Minimis Subsidiaries shall be limited to the aggregate Indebtedness owed by such Person to the Borrower or to an Eligible Intermediate Subsidiary or Eligible Operating Subsidiary including, without limitation (but without constituting authority to any such Person to incur Indebtedness which would otherwise result in violation of this Agreement) Indebtedness of the type described in Section 6.2(a)(i)(B). 3.2 De Minimis Subsidiaries. Notwithstanding Section 3.1 above, the Assets of De Minimis Subsidiaries shall be excluded from the Collateral, and no De Minimis Subsidiary shall be required to grant or assign a Lien on any of its Assets as security for the Obligations; provided, however, that, promptly upon any Subsidiary ceasing to be a De Minimis Subsidiary, this Section 3.2 shall no longer apply to such Subsidiary or its Assets and Borrower shall, and shall cause such Subsidiary to, promptly comply with the terms and provisions of Section 3.1. 3.3 New Subsidiaries, Subsequently Acquired Collateral. Borrower shall, promptly after the formation or acquisition, notify Agent of the existence of any Subsidiary of the Borrower which is not identified as such on Schedule 5 hereto and also shall, promptly upon request by Agent, cause each such Subsidiary (subject to Section 3.2 above and the following provisions of this Section 3.3) to execute and deliver (as appropriate) to Agent, for the benefit of the Banks, such Security Documents as Agent may, from time to time, in its discretion, request, all in form and substance satisfactory to Agent, to secure, guarantee and otherwise assure the full and timely payment and performance of the Obligations including, without limitation, (a) a Guaranty of the Obligations (which shall be joint and several with Borrower and each other Subsidiary of Borrower which is a Guarantor), and (b) such Security Documents as shall create valid and fully perfected, first priority Liens on all Assets of such Subsidiary (including the Securities issued to it by its own Subsidiaries and all Intercompany Notes and Intercompany Acquisition Notes payable to it by its own Subsidiaries and by any other Subsidiary of the Borrower, but excluding those Assets, if any, which are excluded from the definition of the term "Collateral" as set forth in this Agreement) subject to no other Lien except Permitted Liens and prior to all Liens except those Permitted Liens, if any, stipulated on Schedule 6 to be prior Liens or otherwise agreed to by the Required Banks in writing subsequent to the Closing Date. Notwithstanding the foregoing, however, no Subsidiary of the Borrower which does not constitute an Eligible Intermediate Subsidiary or Eligible Operating Subsidiary shall be required to grant or assign a Lien on any of its Assets to secure the Obligations or to Guaranty any of the Obligations so long as it has not incurred any Indebtedness to the Borrower or to an Eligible Intermediate Subsidiary or Eligible Operating Subsidiary [such as Indebtedness described in Section 6.2(a)(i)(B)] and it is wholly owned by an Eligible Intermediate Subsidiary, the Securities of which are subject to fully perfected, first priority Liens securing the Obligations, and all Intercompany Notes and Intercompany Acquisition Notes issued by it have been pledged by the Eligible Intermediate Subsidiary which is its parent to secure the Obligations and such Intercompany Notes and Intercompany Acquisition Notes are subject to fully perfected, first-priority Liens which secure the Obligations. 55 61 3.4 Cash Collateral Account. (a) Cash Collateral. Upon the occurrence of an Event of Default and demand by Agent, or upon the occurrence of any Event of Default under Section 8.1(f) or 8.1(g) without demand by Agent, Borrower shall, pursuant to Section 8.3(a)(vi), promptly pay to Agent, in immediately available funds, an amount equal to 110% of the maximum amount then available to be drawn under the Letters of Credit then outstanding. Furthermore, in the event that, for whatever reason, the maturity of any Letter of Credit extends beyond the Revolving Loan Maturity Date, Borrower will promptly pay to Agent, in immediately available funds on the Revolving Loan Maturity Date, an amount equal to 110% of the maximum amount then available to be drawn under the Letters of Credit then outstanding. Any amounts so received by Agent pursuant to this Section 3.2(a) shall be deposited by Agent in a deposit account maintained by Agent, or by any Bank selected by Agent in its discretion, for the benefit of Banks (the "Cash Collateral Account"). (b) Security Interest. As security for the payment of all Reimbursement Obligations and for all other Obligations, Borrower hereby grants, conveys, assigns, pledges, sets over and transfers to Agent (for the benefit of Banque Paribas and Banks), and creates in Agent's favor (for the benefit of Banque Paribas and Banks) a security interest in, all money, instruments and securities at any time held in or acquired in connection with the Cash Collateral Account, together with all proceeds thereof. The Cash Collateral Account shall be under the sole dominion and control of Agent, and Borrower shall not have any right to withdraw or cause Agent to withdraw any funds deposited in the Cash Collateral Account. At any time and from time to time, upon Agent's request, Borrower promptly shall execute and deliver any and all such further agreements, documents, instruments and certificates, including financing statements, as may be necessary, appropriate or desirable in Agent's judgment to obtain the full benefits (including perfection and priority) of the security interest created or intended to be created by this Section 3.2(b) and of the rights and powers herein granted. Borrower shall not create or suffer to exist any Lien on any amounts or investments held in the Cash Collateral Account other than the Lien granted under this Section 3.2(b). (c) Application of Funds. Agent may, and shall upon request of Borrower, (i) apply any funds in, the Cash Collateral Account toward payment of Reimbursements Obligations when the same become due and payable if and to the extent that Borrower shall fail directly to pay such Reimbursement Obligations and (ii) after the date on which the Commitments of Banks shall have terminated, all Letters of Credit shall have expired and all Reimbursement Obligations shall have been paid in full, apply any proceeds remaining in the Cash Collateral Account first to pay any unpaid Obligations then outstanding hereunder and then to refund any remaining amount to Borrower. (d) Investment of Funds. Agent may invest the funds held in the Cash Collateral Account (so long as the aggregate amount of such funds exceeds any relevant minimum investment requirement) in (i) direct obligations of the U.S. or any agency thereof, or obligations guaranteed by the U.S. or any agency thereof and (ii) one or more types of other cash-equivalent investments as Agent may desire from time to time, in each case with such 56 62 maturities as Agent may specify, pending application of such funds toward payment of Reimbursement Obligations or of other Obligations as provided herein. All such investments shall be made in Agent's name for the account and benefit of Agent (provided, however, that Borrower shall be obligated to pay all taxes with respect to such investments) and shall be subject to Section 3.2(c). Borrower recognizes that any losses or taxes with respect to such investments shall be borne solely by Borrower, and Borrower agrees to indemnify and hold Agent and Banks harmless from and against any such losses or taxes. Agent may liquidate any investment held in the Cash Collateral Account in order to apply the proceeds of such investment toward payment of the Reimbursement Obligations or other Obligations then due and payable, as the case may be, without regard to whether such investment has matured and without liability for any penalty or other fee incurred (with respect to which Borrower hereby agrees to reimburse Agent) as a result of such application. (e) Fees. Borrower shall pay to Agent or the Bank with whom the Cash Collateral Account has been established, for the account of Agent or such Bank (as applicable), the fees customarily charged by Agent or such Bank with respect to the maintenance of accounts similar to the Cash Collateral Account. ARTICLE IV CONDITIONS PRECEDENT 4.1 Initial Advance or Letter of Credit. The obligations of the Banks to make the initial Advance under the Revolving Loan Facility or of Banque Paribas to issue the initial Letter of Credit hereunder shall be subject to the prior satisfaction of each of the following conditions precedent: (a) Notes. The Revolving Notes shall have been duly executed by Borrower and delivered to Agent. (b) Security Documents. All Security Documents deemed necessary or appropriate by the Agent or Banks including, without limitation, an unconditional and irrevocable Guaranty of the Obligations duly executed by each of the Borrower's Subsidiaries subject to no limitations other than those, if any, agreed to in writing by the Required Banks and such Security Documents which are necessary or appropriate to create a fully perfected, valid Lien on each item of Collateral subject to no other Lien except Permitted Liens and prior to all Liens except those Permitted Liens, if any, stipulated on Schedule 6 to be prior Liens or otherwise agreed to by the Required Banks in writing subsequent to the Closing Date, all of which shall be in form and substance acceptable to the Agent and Banks and shall have been duly executed by the Borrower and the applicable Loan Parties (as appropriate) and delivered to Agent and, if and to the extent appropriate, filed and recorded. (c) Corporate Certificate. A Corporate Certificate in the form of Exhibit F hereto, appropriately completed, shall have been duly executed by the Borrower and each other Loan Party and certain of their respective officers, as indicated therein, and delivered to Agent. The 57 63 resolutions of the Board of Directors of such corporation, the certificate or articles of incorporation of such corporation and the bylaws of such corporation shall be attached thereto shall be in form and substance reasonably satisfactory to Agent. In the event any Loan Party is not a corporation, such Loan Party shall deliver a certificate which is substantially the same as the Corporate Certificate attached as Exhibit F, modified in the manner that is appropriate to reflect such entity's status and to which shall be attached evidence of authorization which is comparable to board of directors resolutions and copies of all documents by which such Loan Party was created and is governed. (d) EBITDA Certificate. Agent shall have received an EBITDA Certificate, appropriately completed, dated as of the date of such Advance or date of issuance of any Letter of Credit or amendment thereto, and certified as to accuracy by a Financial Officer of Borrower which shall demonstrate that no EBITDA Overadvance is then existing or will result from the requested Advance or issuance of the Letter of Credit. (e) Good Standing and Authority. Certificates shall have been delivered to the Agent which have been issued by the appropriate Tribunal of each jurisdiction in which Borrower and each other Loan Party is incorporated or otherwise formed and of each other jurisdiction in which the Borrower and each other Loan Party transacts business if it is required to qualify in such jurisdiction to conduct business and if the failure to so qualify could cause a Material Adverse Effect, each dated a Current Date, to the effect that the Borrower or such other Loan Party is in existence, in good standing with respect to the payment of franchise and similar taxes and duly qualified to transact business in such jurisdiction. (f) Opinions of Counsel. A legal opinion of Michener, Larimore, Swindle, Whitaker, Flowers, Sawyer, Reynolds & Chalk, L.L.P., and other counsel reasonably acceptable to Agent as to matters relating to the law of jurisdictions and Tribunals other than the State of Texas or the U.S., as counsel for Borrower and the other Loan Parties, substantially in the form of Exhibit G attached hereto shall have been duly executed by such counsel and delivered to Agent. (g) UCC and Lien Searches. Search certificates from the Secretaries of State (or such other Tribunals as may be appropriate for UCC or other Lien searches) of Borrower and each of Borrower's Subsidiary's and each other Loan Party's state of incorporation or formation, the states where the Borrower's, each such Subsidiary's and each other Loan Party's chief executive offices are located and all other states in which the Borrower, any such Subsidiary or any other Loan Party transacts business setting forth all UCC filings, financing statements and other Lien filings against Borrower, any such Subsidiary or any other Loan Party, shall have been delivered to Agent, which certificates shall confirm that the Assets of Borrower, the such Subsidiaries and the other Loan Parties are free and clear of all Liens except Permitted Liens, if any. (h) Balance Sheets. The March 31, 1995 consolidating balance sheet of Borrower and each Consolidated Subsidiary, a consolidated balance sheet of Borrower and its Consolidated Subsidiaries dated as of March 31, 1995, a Pro Forma consolidating balance sheet of Borrower and each Consolidated Subsidiary dated as of March 31, 1995, and a Pro Forma consolidated balance sheet of Borrower and its Consolidated Subsidiaries dated as of March 31, 1995, shall 58 64 have been delivered to Agent, each of which shall be certified by a Financial Officer of Borrower and, with respect to the consolidating balance sheets and Pro Forma consolidating balance sheets, such balance sheets shall reflect, to the satisfaction of Agent, that (i) both before and after giving effect to the transactions contemplated by this Agreement (and assuming funding of the Revolving Loans in an amount equal to the greatest amount of principal which is projected by Borrower to ever be outstanding upon the Aggregate Revolving Loan Commitment), the Borrower and each Consolidated Subsidiary is, both as a separate entity and on a consolidated basis with its Subsidiaries, Solvent and (ii) there has not occurred any material adverse change in the financial condition of Borrower or any of its Consolidated Subsidiaries since March 31, 1995. (i) Cash Flow Projections and Financial Statements. Consolidated cash flow projections of Borrower and its Consolidated Subsidiaries and other Financial Statements of Borrower and each of its Subsidiaries as Agent may request, for the seven year period following the Closing Date commencing with Fiscal Year 1994, shall have been delivered to the Agent, which projections and Financial Statements shall be certified by a Financial Officer of Borrower, and with respect to the projections and Financial Statements of each Subsidiary of Borrower, such cash flow projections shall reflect, to the satisfaction of Agent, that, both before and after giving effect to the transactions contemplated by this Agreement (and assuming funding of the Revolving Loans in an amount equal to the greatest amount of principal which is projected by Borrower to ever be outstanding upon the Aggregate Revolving Loan Commitment), the Borrower and each of its Subsidiaries is, both as a separate entity and on a consolidated basis with its Subsidiaries, Solvent. (j) Fees. All fees required to have been paid by Borrower pursuant to this Agreement on any other Loan Paper shall have been paid (to the extent then due). (k) Insurance, etc. Borrower and each Subsidiary of Borrower shall have obtained and shall maintain insurance as required pursuant to Section 6.1(c) and Agent shall have received a letter from Alexander & Alexander (or another insurance broker for Borrower which is satisfactory to Agent) addressed to the Agent to the effect that the insurance set forth in Section 6.1(g) of this Agreement covers all Assets of a character usually insured by Persons engaged in the same or similar business similarly situated against loss or damage of the kinds and in the amount customarily insured against by such Persons and is insurance as is usually carried by such Persons. (l) No Material Adverse Effect. There shall not have occurred any event or events and there shall not exist any circumstance or circumstances which, individually or collectively, could cause a Material Adverse Effect. (m) No Litigation, etc. There are no investigations, actions, suits or proceedings pending or threatened in or before any Tribunal that could cause a Material Adverse Effect. (n) Environmental Reports. Agent shall have received reports addressed to Agent or upon which Agent is expressly entitled to rely, in form and substance reasonably satisfactory to 59 65 Agent, as to the environmental status of the Mortgaged Estates and such of the operating facilities and real estate holdings of Borrower and each Subsidiary of Borrower as may be acceptable to Agent, and the status of such environmental matters shall be reasonably satisfactory to Agent. (o) Landlord's Waivers. Agent shall have received, from each landlord who owns any real property leased by Borrower or any Subsidiary of Borrower on which tangible Assets of Borrower or any Subsidiary of Borrower which have a fair market value in excess of $2,000,000.00 are located (unless all of such Assets are excluded from the Collateral pursuant to the terms of this Agreement), a waiver, in form and substance satisfactory to Agent, of such landlord's interest in the Assets of Borrower or the applicable Subsidiary of Borrower. (p) Intercompany Notes and Intercompany Acquisition Notes. Agent shall have received the original Intercompany Notes and Intercompany Acquisition Notes, which promissory notes shall be in form and substance reasonably satisfactory to Agent and shall be endorsed to Agent and collaterally assigned to Agent as Collateral for the Obligations. (q) Stock Certificates and Stock Powers. Agent shall have received the original stock certificates (or other certificates, if any, issued with respect to Securities) evidencing the shares of each of the Borrower's Eligible Intermediate Subsidiaries and Eligible Operating Subsidiaries (to the extent such Securities are evidenced by certificates) together with blank stock powers relating thereto duly executed and delivered by the Borrower and each such Subsidiary of Borrower, as appropriate, with respect to each such Person's Subsidiaries which are Eligible Intermediate Subsidiaries or Eligible Operating Subsidiaries. (r) Proceedings Satisfactory. All proceedings taken in connection with the transactions contemplated by the Loan Papers shall be reasonably satisfactory to Agent, all Loan Papers shall be in form and substance reasonably satisfactory to Agent, and all legal matters incident to this Agreement and the other Loan Papers and the transactions contemplated by the Loan Papers shall be reasonably satisfactory to Jenkens & Gilchrist, a Professional Corporation, counsel to Agent. (s) Closing Certificate. A Closing Certificate in the form of Exhibit H hereto, appropriately completed, shall have been executed by Borrower and certain of its officers, as indicated therein, and delivered to Agent. (t) Title Policies. Agent shall have received the Title Policies or unconditional and irrevocable commitments for the issuance of the Title Policies together with the agreement of each title company to issue its Title Policy upon recordation of the Mortgage, the Lien of which is to be insured by such Title Policy. (u) Surveys. Agent shall have received a survey covering each of the Mortgaged Estates and such other operating facilities and real estate holdings of the Borrower or any Subsidiary of Borrower as Agent may request, certified to Agent and acceptable to Agent. 60 66 (v) Appraisals. Agent shall have received satisfactory appraisals of each of the Mortgaged Estates and such other operating facilities and real estate holdings of the Borrower or any Subsidiary of Borrower as Agent may request (excluding the Mortgaged Estates and facilities owned, respectively, by CHC-A of Midland, Inc. and CHC-B of Midland, Inc.). (w) Payment of the Prior Debt. Borrower will have provided for the full and final payment of the Prior Debt and shall have obtained the unconditional and irrevocable agreement of the holder of the Prior Debt to immediately execute and deliver to Agent releases for all Liens securing all or any part of the Prior Debt in form suitable for recordation and filing, as appropriate; provided, however, the Borrower shall have until June 30, 1995 to discharge (or replace with Letters of Credit issued pursuant to this Agreement) the letters of credit issued by CoreStates Bank, N.A. which constitute Prior Debt. 4.2 Each Acquisition Advance. The obligation of Banks to make each Acquisition Advance under the Revolving Loan Facility shall be subject to the prior or concurrent satisfaction of each of the following conditions precedent: (a) Covenant Compliance\EBITDA Limitation. Borrower and its Consolidated Subsidiaries must be in compliance with each of the covenants set forth in Sections 6.1 and 6.2 immediately prior to the Acquisition Advance and consummation of the Permitted Acquisition and on a Pro Forma basis immediately following the Advance and consummation of the Permitted Acquisition which shall be demonstrated in advance in writing as required in Section 4.(b) below and the amount of the Acquisition Advance shall not exceed three (3) times the EBITDA of the Hospital, Health Care Facility or Health Care Services Business to be acquired. To the extent the acquisition costs exceed three (3) times the EBITDA of the Hospital, Health Care Facility or Health Care Services Business to be acquired, such costs may be paid by Borrower from sources other than the Loans if such amounts are evidenced by an Intercompany Acquisition Note. (b) Permitted Acquisitions, Acquisition Documents. No Acquisition Advance shall be requested by the Borrower and none of the proceeds of any Advance shall be used by the Borrower to acquire or make any investment in any Person or to acquire or make any investment in the Assets of any Person unless (i) such Acquisition or investment constitutes a Permitted Acquisition, and (ii) Agent and the Banks have received, at least thirty (30) days prior to the Advance, all documentation relevant to the proposed Acquisition or investment including, without limitation, the purchase agreement (subject only to future modifications which are not material) and due diligence items (including, without limitation, satisfactory appraisals, environmental assessments, title commitments and surveys for all real property), and (iii) Agent and Banks have received, at least forty-five (45) days prior to the Advance, such Financial Statements (prepared on a Pro Forma basis) as the Agent may reasonably request. All documentation and Financial Statements must be in form and substance satisfactory to the Agent and Required Banks and shall demonstrate that the Acquisition or investment constitutes a Permitted Acquisition and, without limiting the generality of the foregoing, that the requirements of Section 4.2 above are satisfied. 61 67 4.3 All Advances and Letters of Credit. The obligation of Banks to make any Advance and the obligation of Banque Paribas to issue any Letter of Credit (including, without limitation, the initial Advance or Letter of Credit) under any Facility shall be subject to the condition that each condition specified in Section 4.1 and Section 4.2 (if the requested Advance is an Acquisition Advance) shall previously have been and shall continue to be satisfied, whether or not any such condition was previously waived, and to the prior satisfaction of each of the following additional conditions precedent: (a) EBITDA Overadvance. After giving full effect to the requested Advance or issuance, renewal, extension or substitution of the Letter of Credit, no EBITDA Overadvance would result. (b) No Default. As of the date of the making of such Advance or issuance, renewal, extension or substitution of a Letter of Credit and after giving effect thereto, no Potential Default or Event of Default then exists or would exist. (c) Representations and Warranties. The representations and warranties contained in the Loan Papers (including, without limitation, those contained in Article V hereof and those relating to the information disclosed on the Schedules hereto) shall be true and correct in all material respects on the date such Advance is made or such Letter of Credit is issued, renewed, extended or substituted with the same force and effect as though made on and as of such date, except (with respect to an Advance or issuance, renewal, extension or substitution of a Letter of Credit proposed to be made on other than the Closing Date) to the extent that such representations or warranties are expressly by their terms made only as of the Closing Date or another specific date other than such date. (d) Covenants and Agreements. All covenants and agreements to have been complied with and performed by Borrower and each applicable Subsidiary of the Borrower or other Loan Party at the time of or prior to the making of such Advance or the issuance, renewal, extension or substitution of such Letter of Credit shall have been fully complied with and performed. (e) Loan Request Certificate. With respect to each Advance, the Loan Request Certificate relating thereto, appropriately completed and executed by Borrower in form and substance satisfactory to Agent, shall have been delivered to Agent. (f) Security Interests. Each item of Collateral shall be subject to a valid and enforceable and fully perfected Lien upon such item of Collateral subject to no other Lien except the Permitted Liens and prior to all Liens except those, if any, stipulated on Schedule 6 to the prior Liens or otherwise agreed to by the Required Banks in writing subsequent to the Closing Date. (g) Payment of the Prior Debt. With respect to all Advances made subsequent to June 30, 1995, Borrower shall have provided for the full and final payment of all Prior Debt and shall have obtained and, where appropriate, recorded or filed, releases for all Liens securing all or any part of the Prior Debt. 62 68 (h) Additional Items. Such additional agreements, documents, instruments and certificates as Agent, Banks or Jenkens & Gilchrist, a Professional Corporation, counsel to Agent, may reasonably request to ensure or evidence the transactions contemplated by this Agreement and the other Loan Papers and compliance by Borrower and each other Loan Party with this Agreement and each other Loan Paper to which it is a party shall have been duly executed, where applicable, and delivered to Agent. 4.4 Representation and Warranty. Each request for an Advance and each L/C Request Certificate shall constitute a representation and warranty by Borrower to Agent and Banks that all conditions precedent in this Article IV applicable thereto have been satisfied in full (both as of the date of the request and, unless the Agent and the Banks are otherwise notified by the Borrower in writing, as of the date of the Advance or issuance, renewal, extension or substitution of the Letter of Credit, as applicable). Each delivery of a Rollover Notice to Agent shall constitute a representation and warranty by Borrower to Agent and Banks that no Potential Default or Event of Default then exists (both as of the date of the notice and, unless the Agent and the Banks are otherwise notified by the Borrower in writing, as of the date of the Advance or issuance, renewal, extension or substitution of the Letter of Credit). 4.5 Determinations Regarding Conditions Precedent. Except as may be expressly stated in this Article IV to the contrary, all determinations of compliance with applicable conditions precedent shall be made by Agent in good faith. If and to the extent that any Bank shall, in accordance with this Article IV, have the right to make or be involved in any such determination, such Bank shall be deemed to have consented to, approved or accepted or to be satisfied with each agreement, document, instrument or certificate or other matter to be consented to, satisfactory to, approved by or accepted by such Bank unless (a) an officer of Agent responsible for the administration of this Agreement and holding the position of Vice President or higher shall have received written notice from such Bank, prior to the relevant time and date, specifying its objection thereto, and (b) such objection shall not have been withdrawn by written notice to Agent. 4.6 Waivers of Conditions Precedent. No waiver by the Agent or any Bank of any condition precedent to any Advance shall be effective unless such waiver is in writing and signed by the Required Banks. The Agent and Required Banks may condition their approval of any waiver of a condition precedent including, without limitation, the waiver of any condition precedent to an Acquisition Advance upon the payment by the Borrower of a fee or other consideration which the Agent and Banks, in their sole discretion, consider appropriate. ARTICLE V REPRESENTATIONS AND WARRANTIES Borrower hereby represents and warrants to Agent and Banks, as follows: 5.1 Organization, Standing, Qualification. Except as disclosed on Schedule 10, each of Borrower and its Subsidiaries (a) is duly organized, validly existing and in good standing 63 69 under the laws of its State of formation, (b) has all requisite power, corporate or otherwise, to conduct its business and to execute, deliver and perform its obligations under this Agreement and the other Loan Papers to which it is a party, and (c) is duly qualified to transact business in each jurisdiction where the nature of its Assets or the conduct of its business requires such qualification and where the failure to so qualify could have a Material Adverse Effect. 5.2 Authorization, Enforceability, etc. (a) The execution, delivery, and performance by the Borrower and the other Loan Parties of the Loan Papers to which each is a party have been duly authorized by all necessary action and do not and will not (i) violate any provision of any material agreement or any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award presently in effect to which Borrower or any other Loan Party is a party or by which it or any of its material Assets are bound or affected, (ii) result in, or require the creation or imposition of, any Lien (other than a Permitted Lien in favor of Agent and Banks) upon or with respect to any Collateral or any other Asset owned by Borrower or any Subsidiary, or (iii) except as may be disclosed on Schedule 10, result in a breach of, or constitute a default by Borrower or any Subsidiary or other Loan Party under, any indenture, loan or credit agreement or any other material contract, agreement, document or instrument to which it is a party or by which it or any of its Assets are bound or affected. (b) No approval, authorization, order, license, permit, franchise or consent of or registration, declaration, qualification or filing, and no lapse of a waiting period or lack of objection, with or from any Tribunal or other Person is required in connection with the execution, delivery and performance by Borrower or any Subsidiary or any other Loan Party of any Loan Paper to which it is a party or by which it or any of its Assets are bound or affected. (c) This Agreement has been duly executed and delivered by Borrower and constitutes the legal, valid and binding obligation of Borrower, enforceable against Borrower in accordance with its terms, subject to applicable Debtor Relief Laws. The other Loan Papers to which the Borrower, any Subsidiary or any other Loan Party is a party, when duly executed and delivered by Borrower, such Subsidiary or such other Loan Party, will constitute the legal, valid and binding obligations of such Person, enforceable against such Person in accordance with their respective terms, subject to applicable Debtor Relief Laws. Except as disclosed on Schedule 10, the Security Documents, when duly executed and delivered by Borrower and each other Loan Party which is a party thereto, will create in favor of Agent and Banks a valid, first priority Lien on each item of the Collateral. 5.3 Financial Statements and Business Condition. (a) Borrower's Financial Statements (including the Base Financial Statements) were prepared in accordance with GAAP and fairly present the consolidated and consolidating financial conditions and results of operations of Borrower and its Consolidated Subsidiaries as of, and for the Fiscal Year (or portion thereof, as the case may be) ending on, the date(s) thereof, subject to year-end adjustments (if applicable). There were no material liabilities, direct 64 70 or indirect, fixed or contingent, of Borrower or any Consolidated Subsidiary as of the dates of Borrower's Financial Statements (including the Base Financial Statements) which are not reflected therein or in the notes thereto or which otherwise have not been disclosed to Agent and Banks in Schedule 10. Except for occurrences heretofore disclosed in writing to Agent and Banks and described in such disclosure as being adverse (if any), there has not occurred any material adverse change in the financial condition of Borrower or any Consolidated Subsidiary from the financial condition shown in the Base Financial Statements, and neither Borrower nor any Consolidated Subsidiary has incurred any material liability, direct or indirect, fixed or contingent except in the ordinary course of its business as currently conducted. No event or events have occurred, and no circumstance or circumstances exist, which, individually or collectively, has or could have a Material Adverse Effect. (b) The balance sheets referred to in Section 4.1(h) fairly present the financial conditions of Borrower, the Eligible Intermediate Subsidiaries, the Eligible Operating Subsidiaries and/or the Consolidated Subsidiaries, as the case may be, as of the dates thereof. Borrower's Pro-Forma balance sheets referred to in Section 4.1(h) reflect the transactions contemplated by this Agreement. 5.4 Filing of Tax Returns. Each of Borrower, the Subsidiaries and the Loan Parties has filed all tax returns required to have been filed and has paid all taxes shown to be due and payable on such returns, including interest and penalties, and all other taxes which are payable by it, to the extent the same have become due and payable. Borrower is not aware of any proposed tax assessment against it or any Subsidiary or other Loan Party, and all tax liabilities of each of Borrower, each Subsidiary and each other Loan Party are adequately provided for. No tax liability of Borrower, any Subsidiary or any other Loan Party has been asserted for taxes in excess of those already paid, except as is being contested by such taxpayer in good faith consistent with the requirements therefor set forth in Section 6.1 (e). 5.5 Title to Properties: Prior Liens. Each of Borrower and the Subsidiaries has good and indefeasible title to all material Assets purported to be owned by it and each Loan Party has good and indivisible title to each item of Collateral purported to be owned by it (except for minor defects in title and minor encumbrances not in any case materially detracting from the value of the Assets affected thereby). As of the Closing Date, no Person has any right, title or interest in or to, or Lien against, the Collateral, except for Permitted Liens. No Permitted Liens described in clause (e) of the definition of such term will be prior or superior to the Liens of the Security Documents when such Security Documents are duly filed or recorded, as appropriate unless expressly stipulated on Schedule 6 to be Prior Liens. 5.6 Leases. All material real property leases under which Borrower or any Subsidiary is lessee or tenant are in full force and effect, and there does not exist any default or potential default thereunder by which any such lease could be terminated. Each such lease existing as of the Closing Date is identified on Schedule 10 attached hereto and copies of all such leases and all amendments and supplements thereto shall be furnished to Agent upon request. 65 71 5.7 Ownership of Borrower and Subsidiaries. As of the Closing Date, the ownership (record and beneficial) of Borrower and the Subsidiaries is accurately set forth on Schedule 5 attached hereto. 5.8 Solvency. Each of Borrower and the Subsidiaries is, both as a separate entity and on a consolidated basis with its Subsidiaries, and both before and after giving effect to the transactions contemplated by this Agreement, Solvent. 5.9 Business, Compliance. Each of Borrower and the Subsidiaries has performed and complied with all material obligations required to be performed or complied with by it, and is not in default (to the extent it could be materially and adversely affected) under any license, permit, order, authorization, grant, contract, agreement or regulation material to its business to which it is a party or by which it or any of its Assets are bound or affected. The businesses and operations of each of Borrower and the Subsidiaries have been and are being conducted in accordance with all applicable laws, rules and regulations of all Tribunals, except for such conduct which would not result in a Material Adverse Effect. 5.10 Licenses, Permits, etc. Borrower and each Subsidiary possesses such valid Proprietary Rights and consents, authorizations, licenses, permits, accreditation, exemptions and orders of Tribunals or otherwise (including, without limitation, accreditation by JCAHO, except for the following: CHC-A of Midland, Inc., which is not accredited by JCAHO; and CHC-B of Midland, Inc. which shall not be accredited by JCAHO until the expiration of eighteen (18) months after the date on which the Hospital being constructed by such Person is completed and placed in operation; and accreditation and certification as providers of health care services eligible to receive payment and compensation and to participate under Medicare and Medicaid) as are necessary or appropriate to carry on its business as now being or currently proposed to be conducted. Schedule 10 contains a description of all Proprietary Rights of Borrower and each Subsidiary existing as of the Closing Date that are material to such Person's business and disclosure of the Person that owns the rights thereto. 5.11 Litigation, Proceedings, etc. Except as otherwise provided in Schedule 10, there are no investigations, actions, suits, proceedings, orders or injunctions pending or threatened against or affecting Borrower, any Subsidiary, any other Loan Party or the Assets of any such Person, at law or in equity, or before or by any Tribunal which (a) either has had or could reasonably be expected to have a Material Adverse Effect, or (b) is either related or could reasonably be expected to relate to the Loans, the Commitments, the Facility or the other transactions contemplated by the Loan Papers, and no accidents, acts or actions have occurred which involve any claim which is not fully covered by insurance or for which adequate reserves have not been established which are reflected in the Base Financial Statements. Neither Borrower, any Subsidiary nor any other Loan Party is in default with respect to any order, writ, injunction or decree of any Tribunal, which default could cause a Material Adverse Effect. 5.12 Plans. As of the Closing Date, Schedule 10 identifies all Plans and, except as set forth on Schedule 10, each such Plan has been maintained at all times in compliance, in all material respects, with its provisions and applicable law, including, without limitation, 66 72 compliance with the applicable provisions of ERISA. As of the Closing Date, (a) none of the Plans is an "employee stock ownership plan" as defined in Section 4975(e)(7) of the Code, (b) except to the extent described on Schedule 10, no Group Member has provided, or agreed to provide, medical benefits to any former employee or dependent of such employee for periods subsequent to the severance of such employee's employment, other than as specifically required under Section 4980B of the Code, and (c) except as set forth on Schedule 10, there has been no prohibited transaction (within the meaning of Section 406 of ERISA or Section 4975 of the Code) with respect to any Plan. Without limiting the generality of any other provision hereof, neither the Borrower, any Subsidiary nor any other Loan Party is directly or indirectly or contingently liable with respect to any "employee benefit plan" as defined in Section 3(3) of ERISA with respect to which the Borrower or any other Person which is a member of a "controlled group" that includes or is under common control with the Borrower, within the meaning of Sections 414(b) and (c) of the Code, is a party or bound or with respect to which the Borrower or any such Person shall have any direct or indirect or contingent liability. 5.13 Chief Executive Office; Locations of Collateral, Trade Names. The chief executive office and principal place of business of Borrower, each Subsidiary of Borrower and each other Loan Party are located in Harris County, Texas, or at such other location as is shown on Schedule 10. As of the Closing Date, the present and foreseeable locations of the offices and facilities of Borrower and each Subsidiary of Borrower and all of the tangible Collateral and the books and records relating to the Collateral, and all assumed or trade names of Borrower, each Subsidiary of Borrower and each Loan Party or any division of any such Person, are set forth on Schedule 10. 5.14 Federal Reserve Regulations. Neither Borrower nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying Margin Stock. 5.15 Fiscal Year. The Fiscal Year of Borrower and each of its Subsidiaries ends on December 31st. 5.16 Environmental Matters. (a) Each of the Borrower, the Subsidiaries of Borrower and the other Loan Parties is in compliance, in all material respects, with all Environmental Laws. (b) There are no presently outstanding complaints that Borrower or any Subsidiary of Borrower or other Loan Party is now or at any time prior hereto was in violation of any Environmental Law. There are no administrative or judicial proceedings presently pending or any administrative or judicial proceedings threatened by a Tribunal against Borrower, any Subsidiary of Borrower or any other Loan Party pursuant to any Environmental Law, and there is no claim presently outstanding against Borrower, any such Subsidiary or any other Loan Party which was asserted pursuant to any Environmental Law. 67 73 (c) Except as may be disclosed on Schedule 10, there are no facts or circumstances known to Borrower or any Subsidiary of Borrower or other Loan Party that could reasonably form the basis of any claim against Borrower, any such Subsidiary or any other Loan Party under any Environmental Law, including, but not limited to, any claim arising from past or present environmental practices asserted under CERCLA, RCRA, the Clean Air Act, the Clean Water Act or any other Federal, State or local Environmental Law. 5.17 Labor Disputes. Except as may be set forth on Schedule 10, as of the Closing Date (a) there is no collective bargaining agreement or other labor contract covering employees of Borrower, any Subsidiary of Borrower or any other Loan Party, (b) no such collective bargaining agreement or other labor contract is scheduled to expire during the term of this Agreement, and (c) to Borrower's knowledge, no union or other labor organization is seeking to organize, or to be recognized as, a collective bargaining unit of employees of Borrower, any such Subsidiary or any other Loan Party. There is no pending or, to Borrower's knowledge, threatened strike, work stoppage, unfair labor practice claim or other labor dispute against or affecting Borrower, any Subsidiary of Borrower or any other Loan Party or their respective employees which would be likely to have a Material Adverse Effect. 5.18 Subsidiaries. Except as identified on Schedule 5, as of the Closing Date the Borrower has no Subsidiaries. As of the Closing Date, all Eligible Intermediate Subsidiaries, Eligible Operating Subsidiaries, Consolidated Subsidiaries and De Minimis Subsidiaries are identified on Schedule 5. Except as may be expressly stated to the contrary on Schedule 5, as of the Closing Date all Subsidiaries of Borrower are Consolidated Subsidiaries. 5.19 Investment Company Act, Public Utility Holding Company Act. Neither the Borrower, any Subsidiary of Borrower nor any other Loan Party is (a) an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940, as amended, or (b) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935, as amended. 5.20 Common Benefit. Borrower and all Subsidiaries of Borrower are members of an affiliated group. Borrower and each Subsidiary of Borrower expect to derive substantial benefit (and Borrower and each Subsidiary of Borrower may reasonably be expected to derive substantial benefit), directly and indirectly, from the Loans and the other transactions contemplated by this Agreement and the other Loan Papers. Each Subsidiary of Borrower will receive reasonably equivalent value in exchange for the Collateral and Guaranty being provided by it as security for the payment and performance of the Obligations. By contract, Borrower provides cash management and related services to its Subsidiaries. 5.21 Burdensome Contracts; Certain Contracts with Account Debtors. Neither Borrower, any Subsidiary of Borrower nor any other Loan Party is a party to, or bound by, any agreement, contract or Plan which is materially burdensome (taking into consideration any benefits provided thereby) and which has, or is expected to have, a Material Adverse Effect. 68 74 5.22 Intercompany Notes and Intercompany Acquisition Notes. The Intercompany Notes and Intercompany Acquisition Notes evidence all Indebtedness advanced by the payees thereof to the makers thereof, and the Indebtedness evidenced thereby was, or may hereafter be, incurred to finance Acquisitions made by such makers or to capitalize such makers or arose, or may hereafter arise, from the cash management system maintained by Borrower and its Subsidiaries. 5.23 Health Care Proceedings. Except as may be disclosed on Schedule 10, there is no pending investigation of Borrower or any Subsidiary by JCAHO, which investigation is not otherwise conducted in the ordinary course of business and no criminal, civil or administrative action, audit, or investigation by a fiscal intermediary or by the federal government or any other Tribunal exists or is threatened with respect to Borrower or any Subsidiary which could reasonably be expected to adversely affect Borrower's or any Subsidiary's (a) right to receive a material portion of Medicare and Medicaid reimbursement to which it would otherwise be entitled, or (b) right to participate in the Medicare and Medicaid programs, or which could otherwise have a material adverse effect on the receipt of Medicare and Medicaid reimbursements by Borrower or any Subsidiary, and neither Borrower nor any Subsidiary is subject to any pending but unassessed Medicare or Medicaid claim-payment adjustments, except to the extent Borrower or such Subsidiary has established adequate reserves for such adjustments in accordance with GAAP. 5.24 Senior Debt. The Obligations and all renewals, amendments, modifications, supplements, extensions, refundings or refinancings of any of the Obligations, constitute "Senior Indebtedness" of the Borrower (as such term is defined in Article IX of the Note Purchase Agreement described on Schedule 7), and the holders thereof from time to time shall be entitled to all of the rights of a holder of "Senior Indebtedness." 5.25 Full Disclosure. No information, exhibit or written report furnished by or on behalf of Borrower or any Subsidiary or any other Loan Party to Agent or any Bank in connection with this Agreement or the transactions contemplated hereby contains any material misstatement of fact or omits the statement of a material fact necessary to make the statements contained herein or therein not misleading. ARTICLE VI COVENANTS 6.1 Affirmative Covenants. So long as any portion of the Obligations remains unpaid or unperformed or any Bank is committed to make any Loan or issue any Letter of Credit or any Letter of Credit remains outstanding hereunder: (a) Payment and Performance of Obligations. Borrower shall pay all principal, interest, fees and other charges with respect to the Obligations when and as the same become due and payable in accordance with the Loan Papers and shall strictly observe and perform, or cause to be observed and performed, all covenants, agreements, terms, conditions and limitations 69 75 contained in the Loan Papers applicable to it or any Subsidiary of Borrower or other Loan Party and shall do all things necessary to prevent the occurrence of any default thereunder. (b) Maintenance of Existence, Qualification and Assets. Borrower shall at all times maintain, and cause each Subsidiary of Borrower (other than Subsidiaries which are not Eligible Intermediate Subsidiaries, Eligible Operating Subsidiaries or De Minimis Subsidiaries and which are not obligated upon any Indebtedness owed to Borrower or to an Eligible Intermediate Subsidiary or Eligible Operating Subsidiary or De Minimis Subsidiary) to maintain (i) its legal existence, (ii) its qualification to transact business and good standing in all jurisdictions where the nature of its Assets or the conduct of its business requires such qualification and where the failure to so qualify could cause a Material Adverse Effect, and (iii) its material Assets (exclusive of obsolete Assets) in proper repair, working order and condition, ordinary wear and tear excepted. (c) Maintenance of Insurance. Borrower shall at all times maintain, and cause each Subsidiary of Borrower to maintain, insurance covering such risks and in such amounts as is customarily maintained by businesses similarly situated, including, without limitation, insurance covering the following in such amounts as Agent may reasonably determine to be appropriate: (i) workmen's compensation insurance, except as may be provided in Section 6.1(k); (ii) commercial general liability (which includes property damage insurance) in respect of all activities in which such Person might incur personal liability for the death or injury of any third Person, or damage to or destruction of another's property; (iii) insurance against loss or damage by fire, lightning, hail, tornado, explosion and other similar risk; and (iv) comprehensive automobile liability insurance. (d) Maintenance of Security. Borrower shall execute and deliver, or cause to be executed and delivered by the appropriate Subsidiary of Borrower or other Person, to Agent all Security Documents and shall take such other actions, as Agent deems necessary or appropriate in order to maintain valid, enforceable and perfected Liens (subject to no Lien other than Permitted Liens and prior to all Liens other than those Permitted Liens, if any, which are stipulated on Schedule 6 to be prior Liens or otherwise agreed to by the Required Banks in writing subsequent to the Closing Date) in favor of Agent on all Collateral, including any Collateral acquired after the date of this Agreement, securing the Obligations. (e) Payment of Taxes and Claims. Borrower shall pay, and shall cause each Subsidiary of Borrower to pay, all taxes imposed upon it or any of its Assets or with respect to any of its franchises, businesses, income or profits and shall cause each other Loan Party to pay all taxes imposed on any Collateral owned (or purported to be owned) by it, before any penalty or interest accrues thereon and all claims (including, without limitation, claims for labor, services, materials and supplies) for sums which have become due and payable and which by law have or might become a vendor's Lien or landlords', mechanics', laborers', materialmen's, operator's, statutory or other similar Lien affecting any of its Assets or, in the case of other Loan Parties, the Collateral owned by any such Person (or purported to be owned by it); provided, however, that neither Borrower, any Subsidiary of Borrower nor any other Loan Party shall be required to pay any such taxes or claims if and to the extent that (i) the amount, 70 76 applicability or validity thereof is currently (at the time in question) being contested in good faith by appropriate action promptly initiated and diligently conducted, and (ii) such Person shall have set aside on its books cash reserves (segregated to the extent required by GAAP) that are adequate for the payment of such taxes or claims; and provided, further, that all such taxes, penalties, interest and claims shall in any event be paid forthwith upon the commencement of any proceedings to foreclose any Lien which may have attached as security therefor. Borrower shall promptly notify Agent of any taxes or claims contested by Borrower, any Subsidiary of Borrower or any other Loan Party and the circumstances relating thereto, in detail reasonably satisfactory to Agent. (f) Compliance with Laws and Documents. Borrower shall comply, and shall cause each Subsidiary of Borrower and each other Loan Party to comply, in all material respects, with the provisions of any and all laws, rules, regulations, orders, Governmental Requirements and agreements material to its businesses and operations, including, without limitation, all Environmental Laws and all applicable rules and regulations of JCAHO (except for CHC-A of Midland, Inc., which is not JCAHO accredited, and CHC-B of Midland, Inc. which shall not be accredited by JCAHO during the period which ends eighteen (18) months after the date the Hospital being constructed by such Person is completed and becomes operational), Medicare and Medicaid, and shall maintain or cause to be maintained its ability to fully perform its obligations thereunder. With respect to any Plan of any Group Member which is subject to the minimum funding standards of ERISA, Borrower shall cause such Group Member to at all times make prompt payments of contributions required to be made to meet such minimum funding standards. (g) Inspections. Borrower shall, at any reasonable time and from time to time during business hours, after Agent shall have given Borrower one Business Day's prior notice, permit, and shall cause each Subsidiary of Borrower to permit, any agents or representatives of Agent or any Bank to inspect any of Borrower's or such Subsidiary's Assets and to examine and make copies of and abstracts from its records and books of account and to discuss its affairs, finances and accounts with any of its officers, employees or independent public accountants (and by this provision Borrower authorizes said accountants to discuss with Agent and Banks and their agents and representatives, the affairs, finances and accounts of Borrower and its Subsidiaries). The foregoing rights of the Agent and Banks shall be subject to the rights of patients to maintain the confidentiality of their medical records. (h) Records. Borrower shall keep, and shall cause each Subsidiary of Borrower to keep, adequate books and records reflecting all financial transactions of such Person, in which complete entries shall be made in accordance with GAAP. (i) Expenses. Borrower shall promptly pay, from time to time upon request made by Agent, any and all costs, fees and expenses paid or incurred by Agent, Banks or Banque Paribas incident to (i) this Agreement or any other Loan Paper or any amendment thereto or the filing or recordation, if appropriate, thereof (including, without limitation, the fees and expenses of Agent and Banque Paribas and counsel to Agent and Banque Paribas incurred in connection with the negotiation, preparation, execution and administration of the Loan Papers or any amendment thereto and the filing or recordation, if appropriate, of any Loan Papers), and (ii) the 71 77 syndication of the Loans or Commitment by Agent or Banque Paribas. In addition, Borrower shall promptly pay, from time to time upon request made by Agent after the occurrence of a Potential Default or an Event of Default, any and all costs, fees and expenses incurred by Agent or any Bank incident to (A) the collection and enforcement of the Obligations and the Loan Papers, (B) the exercise of any right or remedy under or with respect to the Obligations and the Loan Papers, and (C) the defense or prosecution of any action, suit or proceeding under or with respect to the Obligations and the Loan Papers. Without limiting the obligations of Borrower under the preceding sentence, each Bank shall endeavor in good faith to mitigate the costs, fees and expenses for which Borrower is liable under the preceding sentence, by engaging the services of one common counsel on behalf of all Banks in each applicable jurisdiction, but only if and to the extent that, and for such period of time as such Bank determines, in its sole discretion, that the use of such common counsel is consistent with its best interests under the circumstances. (j) Maintenance of Assets. Borrower shall maintain, and shall cause each Subsidiary of Borrower (other than Subsidiaries which are not Eligible Intermediate Subsidiaries, Eligible Operating Subsidiaries or De Minimis Subsidiaries and which are not obligated on any Indebtedness owed to Borrower or to an Eligible Intermediate Subsidiary or Eligible Operating Subsidiary or De Minimis Subsidiary) to maintain, all Proprietary Rights and other Assets material to the conduct of its business as heretofore or to be conducted by it. (k) Workers' Compensation. If and to the extent that Borrower or any Subsidiary of Borrower is or becomes a non-subscriber under any applicable workers' compensation statute, Borrower shall, and shall cause each such Subsidiary to, consistently take all reasonable precautions as may be necessary or appropriate to minimize the risk of loss to Borrower or such Subsidiary associated with, or arising from, claims that would otherwise be covered by such workers' compensation statute if Borrower or such Subsidiary had continued to subscribe under such statute. (l) Further Assurances. Borrower and each Subsidiary of Borrower shall execute and deliver, or shall cause to be executed and delivered, any and all other and further agreements, documents, instruments and certificates as, in the judgment of Agent, may be necessary or appropriate to more effectively evidence or secure the Obligations and the performance of the terms and provisions of the Loan Papers (subject, however, to the limitations set forth in Sections 3.2 and 3.3). (m) Maintenance of Solvency. Borrower shall, from time to time, take all actions as may be necessary or appropriate to ensure that each Subsidiary of Borrower is and remains, at all times, both as a separate entity and on a consolidated basis with its Subsidiaries, Solvent; provided, however, that Borrower shall not take any such actions (i) if and to the extent that taking such actions would cause Borrower not to be Solvent or would cause a Potential Default, or an Event of Default, or (ii) after the occurrence of a Potential Default or an Event of Default without the prior written consent of Agent. Furthermore, the obligation of Borrower pursuant 72 78 to this Section 6.1(m) shall be subordinate and junior, in all respects, to the rights of Banks to receive any and all payments with respect to the Obligations (including all Guaranties of the Obligations by Borrower's Subsidiaries), and no Subsidiary of the Borrower, no creditor of any such Subsidiary (other than Agent and Banks) and no other Person (other than Agent and Banks) acting by or through any such Subsidiary shall have any rights with respect to this Section 6.1(m) or may enforce the terms or provisions of this Section 6.1(m). (n) Ownership of Consolidated Subsidiaries. Borrower shall ensure that each Eligible Intermediate Subsidiary and each Eligible Operating Subsidiary remains a Consolidated Subsidiary, and Borrower shall ensure that each other currently existing Consolidated Subsidiary (other than Subsidiaries which are not Eligible Intermediate Subsidiaries, Eligible Operating Subsidiaries or De Minimis Subsidiaries and which are not obligated upon any Indebtedness owed to Borrower or to an Eligible Intermediate Subsidiary, Eligible Operating Subsidiary or De Minimis Subsidiary) remains a Consolidated Subsidiary. Furthermore, Borrower shall insure that each of Borrower's Subsidiaries which does not constitute an Eligible Intermediate Subsidiary or an Eligible Operating Subsidiary is a Subsidiary of an Eligible Intermediate Subsidiary which is wholly-owned by Borrower and/or another Eligible Intermediate Subsidiary, and all Securities of any Eligible Intermediate Subsidiary which holds an ownership interest in any such Person shall be subject to fully perfected, first priority Liens which secure the Obligations, and the Borrower and each Eligible Intermediate Subsidiary which holds an ownership interest in any such Person shall have granted, as security for the Obligations, a fully perfected, first-priority Lien on all Intercompany Notes and Intercompany Acquisition Notes payable to it including, without limitation, the Intercompany Notes and Intercompany Acquisition Notes which are payable to it by such Person. (o) Rank of Obligations. Borrower shall, and shall cause each Subsidiary of Borrower to, do all things necessary to ensure that their respective Obligations under this Agreement and the other Loan Papers rank, and at all times shall rank (i) at least pari passu in right of payment with all other (if any) senior, unsubordinated Indebtedness of Borrower or any Subsidiary of Borrower, and (ii) with respect to the Collateral, senior to all other Indebtedness of Borrower or any Subsidiary of Borrower except for those items, if any, which are specified on Schedule 6 to be Permitted Liens which are the senior to the Liens which secure the Obligations. (p) Management Letters. Borrower shall, and shall cause its Subsidiaries to, promptly implement the recommendations contained in any management or similar letter delivered to the Borrower or any Subsidiary of Borrower by its accountants unless the board of directors (or Persons holding comparable authority) of such Person finds in a written resolution that to implement such recommendations would be impractical or unreasonable or not otherwise in the best interest of such Person. (q) Maintenance of Business. Borrower shall, and shall cause each of its Subsidiaries (other than Subsidiaries which are not Eligible Intermediate Subsidiaries, Eligible Operating Subsidiaries or De Minimis Subsidiaries and which are not obligated upon any Indebtedness owed to Borrower or to an Eligible Intermediate Subsidiary or Eligible Operating Subsidiary or 73 79 De Minimis Subsidiary) to, continue and preserve in all material respects (i) the nature of its activities and operations as they exist on the Closing Date, including, without limitation, the maintenance of all licenses and permits necessary for the conduct of such business, its accreditation by JCAHO [except for CHC-A of Midland, Inc. and CHC-B of Midland, Inc. until the expiration of eighteen (18) months following the date on which the Hospital being construction by such Person is completed and placed in operation] or any equivalent authority over hospitals, and (ii) its qualification as a provider of health care services eligible for compensation under Medicare and Medicaid and equivalent programs; provided, however, Borrower may close its operations at 3201 Sage Street, Midland, Texas, upon completion of the Midland Hospital Project, and increase the operations of CHC-B of Midland, Inc. in connection with the Midland Hospital Project. (r) Intercompany Notes and Intercompany Acquisition Notes. All Indebtedness owed by any Subsidiary of Borrower to the Borrower or to any other Subsidiary of Borrower (other than that described in clause (c) of the definition of Permitted Indebtedness and similar Indebtedness that may, from time to time, be owing by one Subsidiary of the Borrower which is not an Eligible Operating Subsidiary to another such Subsidiary) shall be evidenced by an Intercompany Note or Intercompany Acquisition Note, and all Intercompany Notes and Intercompany Acquisition Notes (a) shall contain terms and provisions substantially identical to the terms and provisions contained in the forms of Intercompany Notes which are attached hereto as Exhibit K-1 and Exhibit K-2, as applicable, or the form of Intercompany Acquisition Note which is attached hereto as Exhibit K-3 and made a part hereof for all purposes, (b) shall at all times remain expressly subordinate and inferior, pursuant to terms and provisions satisfactory to Agent, to the payment of the Obligations including, without limitation, all Guaranties of the Obligations given by Subsidiaries of the Borrower (all Intercompany Acquisition Notes and all Intercompany Notes other than those Intercompany Notes payable to the Borrower or to an Eligible Intermediate Subsidiary or to an Eligible Operating Subsidiary which holds an ownership interest in the maker of any such promissory note shall at all times, remain expressly subordinate to all other Intercompany Notes pursuant to terms and provisions essentially identical to those contained in the forms of Intercompany Notes as attached Exhibit K-1 and Exhibit K-2, as applicable, or the form of Intercompany Acquisition Note attached as Exhibit K-3), (c) each Intercompany Note which is payable to the Borrower or to an Eligible Intermediate Subsidiary or to an Eligible Operating Subsidiary which holds an ownership interest in the maker of such promissory note by an Eligible Intermediate Subsidiary or an Eligible Operating Subsidiary shall be secured by valid and fully perfected Liens on the same Assets of the maker of such Intercompany Note which constitute Collateral under this Agreement, (d) all Intercompany Notes which are payable to the Borrower or to an Eligible Intermediate Subsidiary or Eligible Operating Subsidiary by a Subsidiary of the Borrower which is not an Eligible Intermediate Subsidiary or Eligible Operating Subsidiary shall be secured by such Subsidiaries' Receivables, as contemplated by Section 6.2(a) below (provided, however, all Liens securing any such Intercompany Note shall be and remain subordinate and inferior, pursuant to terms and provisions satisfactory to Agent, to the Liens which secure the Obligations including, without limitation, Guaranties of the Obligations given by the Borrower's Subsidiaries), and (e) all Intercompany Acquisition Notes, all Intercompany Notes owed by an Eligible Operating Subsidiary to another Eligible Operating Subsidiary which does not hold an ownership interest 74 80 in the maker of such promissory note and those Intercompany Notes payable by a Subsidiary of the Borrower which is not an Eligible Intermediate Subsidiary or Eligible Operating Subsidiary to another such Subsidiary shall be unsecured and shall be subordinate to the Obligations (including, without limitation, Guaranties of the Obligations given by Subsidiaries of the Borrower) and shall be unsecured. 6.2 Negative Covenants. So long as any portion of the Obligations remains unpaid or unperformed or any Bank is committed to make any Loan or issue any Letter of Credit or any Letter of Credit remains outstanding hereunder: (a) Limitation on Indebtedness. Borrower shall not, and shall not permit any Subsidiary of the Borrower to, create, incur, assume, have outstanding, act as surety with respect to or provide a Guaranty with respect to any Indebtedness except Permitted Indebtedness; provided, however: (i) Subsidiaries of the Borrower which are not Eligible Intermediate Subsidiaries or Eligible Operating Subsidiaries may incur other Indebtedness if (A) the holder of such Indebtedness is not the Borrower or another Subsidiary of Borrower, or (B) in the event the holder of such Indebtedness is the Borrower or another Subsidiary of the Borrower, (1) such Indebtedness is evidenced by an Intercompany Note, (2) such Indebtedness was incurred prior to the Closing Date or, if it is incurred after the Closing Date, it is senior to all Indebtedness of such Subsidiary other than the Obligations (or such Subsidiary's Guaranty of such Obligations), (3) it is secured by a valid, fully perfected, first priority Lien upon the Receivables of such Subsidiary, and (4) the principal amount outstanding on such Indebtedness does not at any time exceed an amount expressed in U.S. Dollars, equal to seventy-five percent (75%) of such Subsidiary's Eligible Receivables [(or, with respect to Psychiatric Healthcare Corporation of Louisiana and Psychiatric Healthcare Corporation of Missouri, an amount expressed in U.S. Dollars, equal to ninety percent (90%) of the PHC Eligible Receivables owned by such Person (provided, however, that the aggregate amount of such Indebtedness owed by both such Persons shall not exceed $5,000,000) and, with respect to each such Person, and an amount equal to any PHC Subsidiary Dividends made by each Person]; provided that, in the case of a Subsidiary of Borrower which has, as its Subsidiary or Subsidiaries, one or more Persons which are not either Eligible Intermediate Subsidiaries or Eligible Operating Subsidiaries, such Intermediate Subsidiary of Borrower may incur Indebtedness pursuant to this Section 6.2(a)(1)(B) in an aggregate amount equal to seventy-five percent (75%) of the Eligible Receivables of its Subsidiaries which are not Eligible Intermediate Subsidiaries or Eligible Operating Subsidiaries to the extent that such Subsidiaries are permitted to incur Indebtedness under this Section 6.2(a)(i)(B). (ii) Borrower may enter into a Guaranty of the Indebtedness owed by a Subsidiary which is not an Eligible Intermediate Subsidiary or Eligible Operating Subsidiary if, but only if, such Guaranty is unsecured and qualifies as Additional Subordinated Debt and the Indebtedness which is guaranteed is owed by such Subsidiary to a Person which is not another Subsidiary of Borrower; and 75 81 (iii) Borrower and Eligible Intermediate Subsidiaries and Eligible Operating Subsidiaries may enter into Guaranties of lease obligations owed by Subsidiaries which are not Eligible Intermediate Subsidiaries or Eligible Operating Subsidiaries (both Capital Leases and operating leases) if the total amount of such Indebtedness for which the Borrower and all Eligible Intermediate Subsidiaries and Eligible Operating Subsidiaries are liable does not, at any time, exceed five percent (5%) of the book value of the total Assets of all Eligible Intermediate Subsidiaries and Eligible Operating Subsidiaries, determined on a consolidated basis, with the amount of such Indebtedness being calculated over the duration of the applicable leases, discounted to a current value using a discount rate equal to the applicable Treasury Rate. (b) Ownership of Subsidiaries. Borrower shall not permit any change in the ownership of any Subsidiary of the Borrower (other than Subsidiaries which are not Eligible Intermediate Subsidiaries, Eligible Operating Subsidiaries or De Minimis Subsidiaries and which are not obligated upon any Indebtedness owed to Borrower or to an Eligible Intermediate Subsidiary or Eligible Operating Subsidiary or De Minimis Subsidiary). (c) Current Ratio. Giving Pro-Forma Effect to any Acquisition made or to be made or Indebtedness incurred or to be incurred as of the date of determination, Borrower shall not permit the ratio of (i) the sum of (A) the current Assets of Borrower and its Consolidated Subsidiaries plus (B) the amount by which the lesser of (1) the Aggregate Revolving Loan Commitment or (2) the product obtained by multiplying three (3) times the sum calculated by adding the EBITDA determined separately on a ProForma basis as of the date of determination for each of the Eligible Operating Subsidiaries, exceeds the aggregate principal amounts then outstanding on the Revolving Notes plus the aggregate undrawn face amounts of all Letters of Credit which are then outstanding, to (ii) current liabilities of Borrower and its Consolidated Subsidiaries to be less than 1.5 to 1. Notwithstanding the foregoing, current liabilities of Borrower and its Consolidated Subsidiaries shall not be deemed to include the Loans merely because the stated maturity date for the Loans or any portion thereof does not extend beyond one (1) year. (d) Minimum Total Equity. Giving Pro-Forma Effect to any Acquisition made or to be made or Indebtedness incurred or to be incurred as of the date of determination, Borrower and the Consolidated Subsidiaries shall at all times maintain consolidated stockholders' equity equal to such Persons' consolidated stockholders' equity existing as of December 31, 1994 plus ninety-five percent (95%) of the sale proceeds (net of issuing costs) from the issuance by the Borrower or any Subsidiary of Borrower of its own Securities (other than Securities issued to Borrower or a Subsidiary of Borrower) plus fifty percent (50%) the positive net income determined on a consolidated basis with respect to the Borrower and the Consolidated Subsidiaries for each of Borrower's Fiscal Years ending subsequent to December 31, 1994; provided, however, that for purposes of this Section 6.2(d), the following non-cash charges shall not be deducted from earnings for purposes of calculating net income, (i) if the Hospital currently owned by CHC-A of Midland, Inc. is sold or closed following completion of the Hospital being constructed by CHC-B of Midland, Inc., up to $2,000,000 of any non-cash writeoff that may result from the sale or closure of such Hospital, (ii) the unamortized portion 76 82 of any deferred financing costs which may be incurred by Borrower in connection with the Subordinated Debt up to, but not to exceed, $3,500,000, and (iii) up to $300,000 of any unamortized charges which may be incurred by Metropolitan Hospital, L.P. in connection with the discharge of the Prior Debt. (e) Interest Coverage Ratio. Giving Pro-Forma Effect to any Acquisition made or to be made or Indebtedness incurred or to be incurred as of the date of determination, Borrower shall not, on the last day of any quarter of Borrower's Fiscal Year, permit the ratio of (i) EBITDA, to (ii) Interest Expense (all of which shall be determined on a consolidated basis for the Borrower and Consolidated Subsidiaries based on the immediately preceding consecutive twelve month period) to be less than the ratio set forth below as being applicable to determinations made during the period specified beside such ratio: Closing Date - 6/30/95 1.85 to 1.00 7/1/95 - 9/30/95 1.95 to 1.00 10/1/95 and thereafter 2.00 to 1.00 (f) Fixed Charge Coverage Ratio. Giving Pro-Forma Effect to any Acquisition made or to be made or Indebtedness incurred or to be incurred as of the date of determination, Borrower shall not, on the last day of any quarter of Borrower's Fiscal Year, permit the Fixed Charge Coverage Ratio to be less than the ratio set forth below as being applicable to determinations made during the period specified beside such ratio: Closing Date - 9/30/95 1.25 to 1.00 10/1/95 and thereafter 1.50 to 1.00 (g) Maximum Senior Debt to Capital Ratio. Giving Pro-Forma Effect to any Acquisition made or to be made or Indebtedness incurred or to be incurred as of the date of determination, Borrower shall not, on the last day of any quarter of Borrower's Fiscal Year, permit the ratio of Senior Debt to Capital to exceed the ratio that is set forth below as being applicable to determinations made during the period specified beside such ratio: Closing Date - 9/30/95 0.50 to 1.00 10/1/95 and thereafter 0.45 to 1.00 (h) Maximum Consolidated Total Debt to Capital Ratio. Giving Pro-Forma Effect to any Acquisition made or to be made or Indebtedness incurred or to be incurred as of the date of determination, Borrower shall not, on the last day of any quarter of Borrower's Fiscal Year, permit the ratio of Consolidated Total Debt to Capital to exceed the ratio specified below as being applicable to determinations made during the period set forth beside such ratio: Closing Date - 12/31/95 0.70 to 1.00 1/1/96 - 3/31/96 0.685 to 1.00 4/1/96 and thereafter 0.65 to 1.00 77 83 (i) Maximum Consolidated Total Debt to EBITDA Ratio. Giving Pro-Forma Effect to any Acquisition made or to be made or Indebtedness incurred or to be incurred as of the date of determination, Borrower shall not, on the last day of any quarter of Borrower's Fiscal Year, permit the ratio of Consolidated Total Debt to EBITDA (determined on a consolidated basis for the Borrower and its Consolidated Subsidiaries for the immediately preceding consecutive twelve month period) to exceed the ratio specified below as being applicable to determinations made during the period set forth beside such ratio: Closing Date - 6/30/95 5.25 to 1.00 7/1/95 - 9/30/95 5.00 to 1.00 10/1/95 - 12/31/95 4.85 to 1.00 1/1/96 - 3/31/96 4.50 to 1.00 4/1/96 - 6/30/96 4.00 to 1.00 7/1/96 and thereafter 3.75 to 1.00 (j) Maximum Senior Debt to EBITDA Ratio. Giving Pro-Forma Effect to any Acquisition made or to be made or Indebtedness incurred or to be incurred as of the date of determination, Borrower shall not, on the last day of any quarter of Borrower's Fiscal Year, permit the ratio of Senior Debt to EBITDA (determined on a consolidated basis for the Borrower and its Consolidated Subsidiaries for the immediately preceding consecutive twelve month period) to exceed the ratio specified below as being applicable during the period set forth beside such ratio or, if Borrower has at any time incurred Permitted Indebtedness of the type described in clause (i) of such definition, the ratio of 2.50 to 1.00.: Closing Date - 9/30/95 3.50 to 1.00 10/1/95 and thereafter 3.00 to 1.00 (k) Restricted Payments, etc. Borrower shall not, and shall not permit any Subsidiary of Borrower to, make any Restricted Payments, except Restricted Payments payable (i) to Borrower or (ii) to any Eligible Intermediate Subsidiary or any Eligible Operating Subsidiary by one of its Subsidiaries. (l) Acquisitions. Borrower shall not, and shall not permit any Subsidiary of Borrower to, acquire all or substantially all of the Assets or Securities of any class of any other Person; provided, however, that Borrower or a Consolidated Subsidiary may make Permitted Acquisitions and Permitted Investments and Acquisitions of the type described in Section 6.2(m)(viii) below, subject to the limitations applicable thereto; provided, further, however that no such Permitted Acquisitions or Permitted Investments and Acquisitions may be made if a Potential Default or Event of Default has occurred and is continuing or would result therefrom. (m) Loans, Advances and Investments. Borrower shall not, and shall not permit any Subsidiary of Borrower to, directly or indirectly make any loan, advance, extension of credit or capital contribution to, make any investment in, or purchase or commit to purchase any Securities or evidences of financial obligations of, or interests in, any Person except (i) 78 84 Permitted Investments and Permitted Acquisitions, (ii) trade and customer accounts receivable which are for goods furnished or services rendered in the ordinary course of business and are payable in accordance with customary trade terms, (iii) capital contributions to Subsidiaries which are consistent with prudent business practices, (iv) capital contributions to any Eligible Intermediate Subsidiary or Eligible Operating Subsidiary to the extent necessary to ensure that such Subsidiary remains Solvent, (v) Permitted Indebtedness which is described in clauses (c) and (g) of the definition of such term and Permitted Indebtedness which is described on Schedule 6 to the extent such Indebtedness is owing to the Borrower or a Subsidiary of the Borrower on the Closing Date, (vi) Indebtedness described in Section 6.2(a)(i)(B), (vii) normal and customary arrangements with physicians and employees not to exceed $2,000,000 in the aggregate outstanding, (viii) investments, including Acquisitions, which do not otherwise constitute Permitted Acquisitions, but which constitute businesses and operations which are an integral part of the business of an Eligible Operating Subsidiary, (ix) that certain promissory note dated April 13, 1995 executed by Medical Services of Salt Lake City, Inc. payable to the order of CHC-Salt Lake City, Inc. in the original principal amount of $3,545,936, (x) that certain promissory note dated June 1, 1994 executed by Primary Management Baytown, Inc., (xi) the partnership interest held by Champion-Fargo in the DHHS Partnership and the DHHS Note; provided, however, that (A) the Borrower shall not permit the aggregate capital contributions made subsequent to the Closing Date which are described in clause (iii) above, to the extent such capital contributions are made to Subsidiaries of the Borrower which are not either Eligible Intermediate Subsidiaries or Eligible Operating Subsidiaries, plus the aggregate amount of the Indebtedness described in clause (vi) above, plus the aggregate amount of loans, advances and extensions of credit described in clause (vii) above, plus the aggregate value of the investments described in clause (viii) above whether such investments were made before or after the Closing Date, plus the aggregate amount of Indebtedness owed by Psychiatric Healthcare Corporation of Louisiana and/or Psychiatric Healthcare Corporation of Missouri to CHC/Psychiatric Healthcare Corporation and/or the Borrower and/or any other Eligible Intermediate Subsidiary or Eligible Operating Subsidiary (the "Subject Loans, Advances and Investments") to exceed, at any time, an amount equal to ten percent (10%) of the book value of the total Assets of the Eligible Operating Subsidiaries (determined on a consolidated basis), and provided further, the (B) Borrower shall not permit the aggregate dollar amount of the Subject Loans, Advances and Investments made by Borrower and its Subsidiaries to any single Person to exceed, at any time, an amount equal to twenty-five percent (25%), of the amount which equals ten percent (10%) of the book value of the total Assets of the Eligible Operating Subsidiaries (determined on a consolidated basis). (n) Mergers and Dissolutions. Borrower shall not, and shall not permit any Subsidiary of the Borrower (other than Subsidiaries which are not Eligible Intermediate Subsidiaries, Eligible Operating Subsidiaries or De Minimis Subsidiaries and which are not obligated upon any Indebtedness owed to Borrower or to an Eligible Intermediate Subsidiary or Eligible Operating Subsidiary or De Minimis Subsidiary) to (i) merge or consolidate with any Person, or (ii) be dissolved or liquidated except CHC-A of Midland, Inc. may be dissolved or liquidated upon completion of the Hospital being constructed by CHC-B of Midland, Inc., and ASSISI Properties, Inc., FM Radiology Center, Inc. and Psychiatric Healthcare Corporation of Texas may be dissolved so long as the material Assets of such Subsidiary (other than Psychiatric 79 85 Healthcare Corporation of Texas) (or, if such Subsidiary is not wholly-owned, the percentage of its material Assets owned by the parent corporation) are transferred to Borrower or a Consolidated Subsidiary and Agent retains a perfected, first priority Lien on all of such Assets. (o) No Sales of Assets, Negative Pledge, No Negative Pledge in Favor of Other Lenders. Borrower shall not, and shall not permit any Subsidiary of Borrower, to directly or indirectly, sell, transfer, assign, encumber or otherwise dispose of, or create, or allow to be created or to otherwise exist, any Lien upon, any of its Assets except for Permitted Liens and except for sales of Assets for full and fair consideration made in the ordinary course of business or otherwise consistent with prudent business practices provided that the aggregate book value of such Assets which may be sold subsequent to the Closing Date shall not exceed an amount equal to five percent (5%) of the book value of the total Assets of the Eligible Operating Subsidiaries determined on a consolidated basis as of the Closing Date; provided, however, that without the prior written consent of Banks, neither the Borrower nor any of its Subsidiaries may sell the Securities of any Subsidiary of Borrower or any material portion of the Assets of any Eligible Operating Subsidiary (or otherwise liquidate the Assets of any Eligible Operating Subsidiary), and neither Borrower nor any Subsidiary of Borrower may sell its Receivables or any Hospital, Health Care Facility or Health Care Service Business owned by it. Except as set forth in this Section 6.2(o) or the other Loan Papers in favor of Agent and Banks, Borrower shall not, and shall not permit any Subsidiary of Borrower to, (i) covenant or agree, with any other lender(s) or other Person(s), not to create, or not to allow to be created or otherwise exist, any Lien upon any Asset, or (ii) covenant or agree, with any other lender(s) or other Person(s), to any other arrangement that is functionally equivalent or similar to a negative pledge (provided, however, that such a negative pledge or the functional equivalent thereof may be created or otherwise exist in favor of other lender(s) or other Person(s) to the same extent that Permitted Liens, other than Permitted Liens in favor of Agent and Banks and Permitted Liens securing Intercompany Notes, are permitted to be created or otherwise exist pursuant to this Agreement) in favor of such other lender(s) or other Person(s) with respect to any of its Assets. Without the prior written consent of Required Banks, which consent shall not be unreasonably withheld, Borrower shall not cause, permit or consent to the issuance of any Securities of any Subsidiary. Notwithstanding the foregoing, Subsidiaries of the Borrower which are not Eligible Intermediate Subsidiaries or Eligible Operating Subsidiaries, shall have the right, without the prior consent of the Agent or any Bank, to, directly and indirectly, sell, transfer, assign, encumber and otherwise dispose of and create and allow to be created and to otherwise exist Liens upon all or any portion of its Assets unless such Assets constitute Receivables or the proceeds thereof which are required under the terms of this Agreement to be pledged as security for the Obligations or an Intercompany Note, and such Subsidiary may, so long as no Indebtedness is owing by such Subsidiary to Borrower or to an Eligible Intermediate Subsidiary or Eligible Operating Subsidiary, sell the Securities issued by any of its Subsidiaries (and the Securities issued by it may also be sold), and such Subsidiary may, so long as it has not incurred any Indebtedness to the Borrower or any Eligible Intermediate Subsidiary or Eligible Operating Subsidiary, become a party to or otherwise be and become bound by agreements of the nature described in clauses 6) and (ii) above. 80 86 (p) Fiscal Year. Borrower shall not and shall not permit any Subsidiary of Borrower to change its Fiscal Year from that in effect on the Closing Date. (q) Plans. Borrower shall not, and shall not permit any other Person, to take any action that will cause any representation or warranty contained in Section 5.12, if made on and again as of any date on or after the date of this Agreement, to not be true. (r) Transactions with Affiliates. Borrower shall not, and shall not permit any Subsidiary of Borrower to, enter into any transactions with any Affiliate of Borrower or such Subsidiary except pursuant to the reasonable requirements of such Person's business and upon fair and reasonable terms no less favorable to such Person than would result in a comparable arms' length transaction with a Person who is not an Affiliate. Except as permitted pursuant to Sections 6.2(k), 6.2(l), 6.2(m) or 6.2(n) neither Borrower nor any Eligible Intermediate Subsidiary or Eligible Operating Subsidiary shall, directly or indirectly, make any payments to any Affiliate or Affiliates (other than compensation paid to individuals for services rendered who are officers or directors of Borrower or any Subsidiary and amounts paid to Management Prescriptives, Inc. for services rendered) exceeding $500,000 in aggregate amount (as to Borrower and all Consolidated Subsidiaries collectively) during any Fiscal Year of the Borrower. (s) Change of Chief Executive Offices, Etc. Borrower shall not, and shall not permit any Subsidiary of Borrower to, change the location of its chief executive office or principal places of business or change the location(s) where it keeps its books and records with respect to any Collateral owned by it or where it keeps any tangible Collateral unless (i) Borrower has given Agent sixty (60) days' prior written notice of any such change, and (ii) Borrower and each such Subsidiary of Borrower has executed and delivered to Agent, and Agent has filed and recorded, to the extent it deems necessary or appropriate, any and all financing statements and other Security Documents as, in the judgment of Agent, may be necessary or appropriate to ensure that the Liens which secure or purport to secure the Obligations or any portion thereof are valid and subsisting Liens which are fully perfected and are prior to all Liens other than those Permitted Liens, if any, which are stipulated on Schedule 6 to be prior Liens or which are otherwise agreed to by Banks in writing subsequent to the Closing Date. (t) Intercompany Notes and Intercompany Acquisition Notes, etc. Borrower shall not, without the prior written consent of the Required Banks, call or otherwise demand payment of any Intercompany Note or Intercompany Acquisition Note or permit any of its Subsidiaries to call a demand payment thereon, and Borrower shall not amend, modify or terminate, or permit the amendment, modification or termination of, any Intercompany Note, Intercompany Acquisition Note or other Intercompany Loan Document or take any action to release any Person from liability thereon or to release any Lien or collateral securing the same (unless such release is given in connection with an Asset disposition permitted by Section 6.2(o) above) or to otherwise impair or adversely affect the validity or enforceability thereof or any right, power or benefit arising thereunder or with respect thereto. Without limiting the generality of the foregoing, the Intercompany Notes and Intercompany Acquisition Notes shall at all times remain expressly subordinate to the payment of the Obligations (including, without limitation, all Guaranties of the Obligations by Borrower's Subsidiaries) pursuant to the subordination terms 81 87 and provisions currently contained therein. Any and all Indebtedness (if any, whether now in existence or hereafter incurred) of any of Borrower's Subsidiaries to Borrower or of any such Subsidiary to another Subsidiary of Borrower of the same type as or a similar type to (in terms of function or purpose) the Indebtedness evidenced by the Intercompany Notes or Intercompany Acquisition Notes shall be evidenced by a promissory note(s) containing terms and provisions similar to the terms and provisions contained in the forms of the Intercompany Notes and Intercompany Acquisition Note attached as Exhibits K-1, K-2 and K-3 and shall at all times remain expressly subordinate to the payment of the Obligations (including without limitation, all Guaranties of the Obligations by Borrower's Subsidiaries) pursuant to subordination terms and provisions essentially identical to those currently contained in the forms of the Intercompany Notes and Intercompany Acquisition Note attached as Exhibits K-1, K-2 and K-3. Borrower shall not, and shall not permit any of Borrower's Subsidiaries to, sell, transfer, assign, encumber or otherwise dispose of, or create, or allow to be created or to otherwise exist, any Lien (other than in favor of the Agent as security for the Obligations) upon any Intercompany Note or Intercompany Acquisition Note or any other Indebtedness (if any, whether now in existence or hereafter incurred) of any of Borrower's Subsidiaries to Borrower or of any such Subsidiary to another Subsidiary of Borrower of the same type as or a similar type to (in terms of function or purpose) the Indebtedness evidenced by the Intercompany Notes or Intercompany Acquisition Notes. (u) Exceptions to Covenants. Borrower shall not, and shall not permit any of its Subsidiaries to, take any action or fail to take any action which is permitted by any of the covenants contained in this Agreement if such action or omission would result in the breach of any other covenant contained in this Agreement or another Loan Paper. (v) Subordinated Debt. Borrower will not make any payments with regard to Subordinated Debt or Additional Subordinated Debt except (i) regularly scheduled payments of interest, which may be made only when no Event of Default or Potential Event of Default exists and then only if making such payment would not create a Potential Default or Event of Default, and (ii) repayment of Subordinated Debt with the proceeds of the sale of equity Securities of Borrower, which repayments may be made only when no Event of Default or Potential Default exists and then only if making such repayments would not create a Potential Default or Event of Default. Borrower will not amend or modify the Subordinated Debt or any agreement, document or instrument relating thereto without the prior written consent of Required Banks if such amendment or modification (including waivers of default and events of default) (A) would have the effect of changing any of the payment terms (including the maturity date of such Subordinated Debt or any portion thereof); (B) would alter the rate of interest or any fees or other compensation payable with respect to such Subordinated Debt to the holders thereof; (C) would impair or otherwise adversely affect the priority of such Subordinated Debt or any term, provision or agreement relating to the subordination thereof; (D) would increase the likelihood of any future default or event of default thereunder or with respect thereto; or (E) would, in any manner, strengthen the collection or enforcement rights of the holders of such Subordinated Debt. Whether or not Borrower is required to obtain the prior written consent of the Required Banks with respect to any amendment or modification of the Subordinated Debt or any waiver of any covenant or provision applicable thereto, Borrower shall, immediately prior to the 82 88 effective date thereof, provide the Agent and Banks with copies of all such amendments, modifications and waivers. (w) Intercompany Loans to DHHS Partnership. The restrictions on the aggregate amount of Indebtedness owed by an Eligible Intermediate Subsidiary or an Eligible Operating Subsidiary, as set forth in clause (g) of the definition of Permitted Indebtedness, shall not be applicable to Indebtedness owed by DHHS Partnership to Champion-Fargo or from Champion-Fargo to the Borrower, but neither the Borrower nor any other Subsidiary of Borrower shall, directly or indirectly, make loans or advances to DHHS Partnership if the aggregate principal amount outstanding at any time would exceed $25,000,000. Furthermore, such loans and advances may only be made so long as Dakota has guaranteed repayment of at least a percentage of the amounts outstanding under the DHHS Note which are equal to the ownership percentage of Dakota in DHHS Partnership and DHHS Partnership has (i) granted to the Agent, for the ratable benefit of the Banks, a perfected, first priority Lien upon its Receivables pursuant to such Security Documents as the Agent may deem necessary or appropriate and which are in form and substance satisfactory to the Agent, (ii) agreed not to permit any Liens (other than those in favor of the Agent and those securing Capital Leases, to the extent that such Liens attach only to the Assets leased and such Capital Leases are permitted under the terms of this Agreement) to attach to any of the DHHS Partnership Assets, (iii) agreed not to enter into a negative pledge in favor of any Person other than the Agent and the Banks, and (iv) agreed not to incur any Indebtedness other than that evidenced by the DHHS Note and Capital Leases of Assets existing at the time of the formation of DHHS Partnership when such Assets were contributed to DHHS Partnership. Furthermore, working capital advances made by the Borrower, Champion-Fargo and/or other Subsidiaries of the Borrower to DHHS Partnership, whether directly or indirectly, shall not exceed the lesser of $10,000,000 or 75% of the Eligible Receivables of DHHS Partnership. If, however, DHHS Partnership grants to the Agent, for the ratable benefit of the Banks, a perfected, first priority Lien upon all of its Assets, pursuant to Security Documents deemed necessary or appropriate by the Agent and which are in form and substance acceptable to the Agent and agrees not to permit any Liens (other than those which secure the Obligations, including, without limitation, any Guaranty of the Obligations by a Subsidiary of Borrower, and those securing Capital Leases, to the extent that such Liens attach only to the Assets leased and such Capital Leases are permitted under this Agreement to attach to its Assets) and agrees not to incur any Indebtedness other than that evidenced by the DHHS Note and Capital Leases of Assets existing at the time of the formation of DHHS Partnership when such Assets were contributed to DHHS Partnership and agrees not to enter into a negative pledge in favor of any Person other than the Agent and the Banks, then Champion-Fargo may make advances (not to exceed $10,000,000 for working capital advances and not to exceed $15,000,000 in advances for other capital purposes) to DHHS Partnership in an amount up to the sum of (A) the lesser of $10,000,000 or 75% of the Eligible Receivables of DHHS Partnership plus (B) $15,000,000. Notwithstanding anything to the contrary contained in this Section 6.2(x), no loans or advances may be made by the Borrower, Champion-Fargo or any other Subsidiary of Borrower, directly or indirectly, to DHHS Partnership while a default exists under the DHHS Note or the other documents evidencing or securing the loan evidenced by the DHHS Note. Except as expressly contemplated above, notwithstanding anything to the contrary contained herein or any other Loan Paper, DHHS Partnership shall incur no Indebtedness other than that described above and that 83 89 described in clauses (b), (c), (d), (f) and (k) of the definition of the term Permitted Indebtedness, as set forth in this Agreement. (x) Agreements Regarding Operations. Borrower shall not, and shall not permit any of its Subsidiaries to amend, modify or terminate the DHHS Partnership Agreement, DHHS Operating Agreement, MHLP Agreement or any other agreement which permits or otherwise affects the ability of the Borrower or an Eligible Intermediate Subsidiary to appoint or elect a majority of the directors of an Eligible Operating Subsidiary or to otherwise control the business or affairs of any such Eligible Operating Subsidiary, and neither the Borrower nor any of its Subsidiaries shall take any action, without the prior written consent of the Required Banks, which could dilute, impair or otherwise adversely affect the ability of the Borrower or Eligible Intermediate Subsidiary, as applicable, to control the business and affairs of an Eligible Operating Subsidiary. (y) De Minimis Subsidiaries. Borrower shall not, at any time, permit the aggregate book value of the total Assets of all De Minimis Subsidiaries of the Borrower to exceed five percent (5%) of the book value of the total Assets of the Borrower and its Consolidated Subsidiaries. Furthermore, Borrower shall not, at any time, permit the aggregate EBITDA for all De Minimis Subsidiaries of the Borrower to exceed five percent (5%) of the EBITDA of the Borrower and its Consolidated Subsidiaries. 6.3 Reporting Requirements. So long as any portion of the Obligations remains unpaid or any Bank is committed to make any Loan hereunder, Borrower shall furnish to Agent and each Bank the following: (a) EBITDA Certificate, Schedules and Financial Statements. As soon as available and in any event on or before the expiration of forty-five (45) days after the end of each month commencing with the first of such dates to occur after the Closing Date, an EBITDA Certificate, appropriately completed, in each case as of the last day of the applicable month in reasonable detail and certified as to accuracy by a Financial Officer of Borrower and all Eligible Operating Subsidiaries. Borrower and the Eligible Operating Subsidiaries may, in addition to providing the monthly EBITDA Certificate required pursuant to this Section 6.3(a), provide an EBITDA Certificate to Agent at any time. As soon as available, and in any event within forty-five (45) days after the end of each month during each Fiscal Year, consolidated statements of cash flows of Borrower for such month and for the period from the beginning of the respective Fiscal Year to the end of such month, and, on a consolidated and consolidating basis, the related statement of income and balance sheet prepared as of the end of such period and operating statistics of the Borrower and its Consolidated Subsidiaries during such period. Notwithstanding the foregoing, from and after the first anniversary of the Closing Date, so long as no Potential Default or Event of Default shall then be existing, the EBITDA Certificate and other information and reports specified above shall only be required to be delivered on a quarterly basis contemporaneously with the quarterly financial reports and annual financial reports required by Sections 6.3(b) and (c) below. 84 90 (b) Quarterly Financial Reports. As soon as available and in any event within forty-five (45) days after the end of each of the first three fiscal quarterly periods of each of Borrower's Fiscal Years, consolidated and consolidating statements of income, stockholders' equity and cash flows of the Borrower for such period and for the period from the beginning of the respective Fiscal Year of the Borrower to the end of such period, and the related balance sheet as at the end of such period, setting forth in each case in comparative form the corresponding figures for the corresponding period in the preceding Fiscal Year of the Borrower, accompanied by the certificate of a Financial Officer of the Borrower, which certificate shall state that such Financial Statements fairly present the financial condition and results of operations of Borrower and its Consolidated Subsidiaries in accordance with GAAP, as at the end of, and for, such period (subject to normal year-end audit adjustments). (c) Annual Financial Reports. As soon as available and in any event within one hundred-twenty (120) days after the end of each Fiscal Year of the Borrower, the audited consolidated statements of income, stockholders' equity and cash flows of Borrower, and the related balance sheet of the Borrower and its Consolidated Subsidiaries as at the end of such Fiscal Year of the Borrower, setting forth in each case in comparative form the corresponding figures for the preceding Fiscal Year of the Borrower, and accompanied by the related opinion of independent public accountants of recognized national standing acceptable to the Agent and Banks which opinion shall state that said Financial Statements fairly present the financial condition and results of operations of the Borrower and its Consolidated Subsidiaries as at the end of, and for, such Fiscal Year, and that such Financial Statements have been prepared in accordance with GAAP, and a certificate of such accountants stating that their audit has not disclosed, except as specifically stated, the existence of any condition which constitutes an Event of Default. In conjunction with each delivery of Financial Statements required by this Section 6.3(c) said independent public accountants shall further certify that, in making the audit necessary to the certification of such Financial Statements, they have obtained no knowledge of any failure to comply with any covenants set forth in this Agreement or, if any such knowledge exists, specifying the nature and period of existence thereof. (d) Compliance Certificates. Concurrently with the Financial Statements required pursuant to Sections 6.3(b) and (c), a Compliance Certificate substantially in the form of Exhibit I hereto, appropriately completed. (e) Notice of Default under this Agreement. Promptly upon becoming aware of the occurrence thereof, notification of any Potential Default or Event of Default, specifying in connection with such notification all actions taken or proposed to be taken in order to remedy such circumstance. (f) Notice of Defaults under other Documents. Within three (3) Business Days after Borrower becomes aware of the occurrence thereof, notification of Borrower's or any of its Subsidiaries' default or potential default under any instrument, agreement or other document evidencing or otherwise relating to any Subordinated Debt and under any material agreement, document, instrument or certificate to which such Person is a party or by which such Person or its Assets is bound or affected which could have a Material Adverse Effect. 85 91 (g) Change in Location of Collateral or Office. Promptly upon the occurrence thereof, notification of (i) any change in the location of any tangible Collateral or any books or records pertaining to any of the Collateral if different from the location of such tangible Collateral or books or records described on Schedule 10, (ii) any change in Borrower's or any Subsidiary's chief executive office or other office location or corporate, trade or other name, and (iii) any additional trade or other name(s) under which Borrower or any Subsidiary of Borrower transacts business. (h) Notice of Legal Proceedings. Promptly upon becoming aware of the existence thereof, notification of the institution of any investigation, action, suit, proceeding, order, injunction or dispute with any Person or Tribunal and involving Borrower or any Subsidiary or any of their respective Assets or any other Collateral which could have a Material Adverse Effect. (i) ERISA. Promptly after such failure, notification of any failure of any Group Member to make a required installment or any other required payment under Section 412 of the Code on or before the due date for such installment or payment which would give rise to the assessment of a Lien under such Section 302 of ERISA; and promptly after becoming aware of the occurrence of any event or condition which has the result that any representation or warranty contained in Section 5.12, if made on and again as of any date on or after the date of this Agreement, ceases to be true, a notification specifying the nature of such event or condition; provided, further, that, where such event or condition would be reasonably expected to have a Material Adverse Effect, such notification shall include a description of what action Borrower or any Group Member is taking or proposes to take with respect thereto and, when known, any action taken by the Internal Revenue Service or the Department of Labor with respect thereto. (j) Burdensome Contracts; Certain Contracts with Account Debtors. Within thirty days after any agreement or contract of any type described in Section 5.21 comes into existence (except to the extent that such agreement or contract is described on Schedule 10), notification of the existence of such agreement or contract and such other information relating thereto as Agent may reasonably request. (k) Proprietary Rights. Promptly upon the coming into existence thereof, notification of any Proprietary Rights of Borrower or any Consolidated Subsidiary (except to the extent that such Proprietary Rights are expressly identified on Schedule 10 as relating thereto or used in connection therewith). (l) Reports and Information. Such information (not otherwise required to be furnished under the Loan Papers) respecting Borrower's or Subsidiary's businesses, affairs, books, material Assets, or liabilities or any of the Collateral, and such opinions, agreements, documents, instruments, certificates and outside audits in addition to those mentioned in this Agreement, as Agent (or any Bank through Agent) may reasonably request from time to time, including, without limitation, information regarding the subject matter of the information disclosed on Schedule 10 hereto. 86 92 (m) Public Reports. Promptly upon their becoming available, to the extent that the stock of any of the Borrower or its Subsidiaries, becomes publicly traded, one copy of each financial statement, report, notice or proxy statement sent by the Borrower or any Subsidiary of Borrower to stockholders generally, and of each Form 10K, Form 10Q, Form 8K and registration statement or prospectus filed by the Borrower or any Subsidiary of Borrower, with any securities exchange or the Securities and Exchange Commission or any successor agency. (n) Annual Budgets. As soon as available but in no event later than forty-five (45) days following the end of each Fiscal Year of Borrower, the annual budget of the Borrower for the following Fiscal Year, which budget shall have been presented to and reviewed and approved by the board of directors of the Borrower and which is subject to year-end adjustments. (o) Management Letters. Promptly after the Borrower or any Subsidiary receives the same, a copy of any management letter prepared for or submitted to the Borrower or any Subsidiary by its accountants. (p) Borrowing Base Certificate. So long as any Indebtedness of the type described in Section 6.2(a)(i)(B) remains outstanding, as soon as available and in any event on or before the forty-fifth (45th) day following the last day of each month commencing with the first of such dates to occur after the Closing Date, the Borrower shall furnish to the Agent and to each Bank a Borrowing Base Certificate appropriately completed, in each case, as of the last day of the applicable month, in reasonable detail and certified as to accuracy by a Financial Officer of the Borrower and the Subsidiary which is obligated for the payment of such Indebtedness. ARTICLE VII CERTAIN RIGHTS OF AGENT AND BANKS 7.1 Protection of Collateral. Agent, and/or any Bank with the consent of Agent, may at any time take such steps as they deem necessary or appropriate to protect their interest in and to preserve the Collateral or the Liens which secure all or any part of the Obligations, all at the expense of Borrower (unless such actions become necessary or appropriate primarily or exclusively due to the gross negligence or wilful misconduct of Agent or any Bank). Borrower agrees to cooperate fully with any and all of Agent's and Banks' efforts to preserve the Collateral or any such Liens and Agent's and Banks' interests therein and will take such actions to preserve the Collateral or any such Liens and Agent's and Banks' interests therein as Agent may reasonably direct. All of Agent's and Banks' expenses of preserving the Collateral or any such Liens and their interests therein, including any expenses relating to the compensation and bonding of a custodian, shall be charged to Borrower and added to the Obligations. Additionally, following the occurrence of an Event of Default, Agent or any Bank with the consent of Agent, may take further protective measures, including, but not limited to, the hiring of such security guards or the placing of other security protection measures as they may deem appropriate, the employment and maintenance at Borrower's or any of Borrower's Subsidiaries' premises of a custodian who shall have full authority to do all acts necessary to protect the Collateral or the Liens which secure all or any part of the Obligations and Agent's and Banks' 87 93 interests therein, and the leasing of warehouse facilities to which all or part of the Collateral may be moved. 7.2 Use of Equipment. Following the occurrence of an Event of Default and during the continuance thereof, subject to the rights of patients to maintain the confidentiality of their medical records, Agent, or any Bank with the consent of Agent, (a) may use Borrower's or any of Borrower's Subsidiaries' owned or leased lifts, hoists, trucks and other facilities or equipment for handling or removing the Collateral or books and records pertaining thereto, and (b) shall have, and are hereby irrevocably granted, a right of ingress and egress to the places where the Collateral and the books and records relating thereto are located, and may proceed over and through Borrower's or any of Borrower's Subsidiaries' owned or leased property. 7.3 Collection of Receivables. Following the occurrence of an Event of Default and until Borrower's authority to do so is terminated by Agent (which may occur at any time when Agent, in its sole discretion, may deem it to be in Banks' best interest to terminate such authority), Borrower shall, at its sole cost and expense, but on Banks' behalf and for Banks' account, collect as Banks' property and in trust for Banks all amounts unpaid on the Receivables, and shall not commingle such collections with Borrower's or any of Borrower's Subsidiaries' funds or use the same except to pay the Obligations. At any time following the occurrence of an Event of Default, without notice to Borrower or any Subsidiary of Borrower, Agent shall have the right to send notice of Agent's Lien in the Receivables to any third party holding or otherwise concerned with any of the Collateral, and shall have, at its option, the sole and exclusive right to collect the Receivables (to the extent of Banks' Lien therein) and take possession of the Collateral. Any of Agent's or Banks' collection expenses, including, but not limited to, stationery and postage, telephone, telegraph, facsimile, secretarial and clerical expenses and the salaries of any collection personnel used for any such collections, shall be charged to Borrower and added to the Obligations. 7.4 Appointment of Agent. Following the occurrence of an Event of Default, Agent shall have the right to receive, endorse, assign and/or deliver in the name of Agent, any Bank, or Borrower any check, draft or other instrument for the payment of money relating to any Collateral, and Borrower hereby waives notice of presentment, protest and non-payment of any instrument so endorsed. Following the occurrence of an Event of Default, Borrower hereby irrevocably appoints Agent and/or Agent's designee as Borrower's attorney-in-fact (which appointment shall be irrevocable and deemed coupled with an interest) with full power and authority, in the place and stead of Borrower, from time to time: to endorse Borrower's name upon any notes, acceptances, checks (except to the extent that Agent is prohibited by applicable Governmental Requirements from endorsing Medicare or Medicaid payments), drafts, money orders or other evidences of payment of Collateral that may come into Agent's or any Bank's possession; to sign Borrower's name on any agreements, documents, instruments or certificates relating to any Collateral; to sign Borrower's name on all financing statements, endorsements, or any other agreements, documents, instruments or certificates deemed necessary or appropriate by Agent to preserve, protect or perfect Agent's and Banks' interests in the Collateral and to file the same; to obtain and adjust insurance relating to any Collateral; to ask, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to 88 94 become due under or in respect of any Collateral; to receive, endorse and collect drafts or other instruments, documents and chattel paper relating to any Collateral; to file any claims and to take any action or to initiate any proceeding which Agent may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Agent with respect to any Collateral; and to do all other acts and things necessary to carry out this Agreement. ALL ACTS OF AGENT OR ITS DESIGNEE ARE HEREBY AUTHORIZED AND NEITHER SHALL BE LIABLE FOR ANY ACT OF OMISSION OR COMMISSION, OR FOR ANY ERROR OF JUDGMENT OR MISTAKE OF FACT OR LAW (INCLUDING ITS OWN NEGLIGENCE OR INADVERTENCE), UNLESS DONE MALICIOUSLY OR RESULTING FROM AGENT'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT; THIS POWER BEING COUPLED WITH AN INTEREST IS IRREVOCABLE WHILE ANY OF THE OBLIGATIONS REMAIN UNPAID OR ANY OF THE COMMITMENTS ARE IN EFFECT. 7.5 No Liability. AGENT AND BANKS SHALL NOT, UNDER ANY CIRCUMSTANCES OR IN ANY EVENT WHATSOEVER, HAVE ANY LIABILITY FOR ANY ERROR OR OMISSION OR DELAY OF ANY KIND OCCURRING IN CONNECTION WITH THE MAINTENANCE OR DISPOSITION OF ANY COLLATERAL (SPECIFICALLY INCLUDING THAT RESULTING FROM ITS NEGLIGENCE OR INADVERTENCE), EXCEPT FOR LIABILITY TO THE EXTENT RESULTING FROM ITS GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. Following the occurrence of any Event of Default, Agent may, without notice to or consent from Borrower or any Subsidiary of Borrower, sue upon or otherwise collect, extend the time of payment of, or compromise upon any terms, any of the Receivables or other Collateral or any security, instrument or insurance applicable thereto and/or release the obligor thereon. ARTICLE VIII EVENTS OF DEFAULT 8.1 Nature of Events. An "Event of Default" shall exist if any one or more of the following shall occur and be continuing: (a) Payments. Borrower or any Subsidiary of Borrower or any other Loan Party shall fail to make any payment or mandatory prepayment of principal, interest, fees, costs, expenses or other amounts with respect to the Obligations on or before the date such payment or prepayment is due and such failure continues for more than five (5) days; (b) Covenant Defaults. Borrower shall fail to observe or perform, or to cause any of its Subsidiaries to observe and perform, any covenant or agreement contained in Section 6.1, Section 6.2 or Section 6.3 of this Agreement; or Borrower, any Subsidiary of the Borrower or any other Loan Party shall fail to observe or perform any other covenant or agreement contained in the Loan Papers (other than covenants and agreements pertaining to payment of the Obligations which shall be governed by Section 8.1(a) and such failure shall continue for a period of thirty (30) days following Borrower's receipt of notice thereof from Agent; 89 95 (c) Representations or Warranties. Any representation, warranty or other statement made or deemed made by or on behalf of Borrower, any Subsidiary of Borrower or any other Loan Party and contained in the Loan Papers or in any agreement, document, instrument or certificate furnished in compliance or connection with the Loan Papers is false, misleading or incorrect in any material respect as of the date made or deemed made; (d) Enforceability of Liens. Any Lien (other than a Lien expressly and voluntarily released by Agent and Banks) which secures or purports to secure the Obligations or any portion thereof of is or becomes invalid or unenforceable or is not, or ceases to be, a fully perfected in favor of Agent and Banks encumbering the Asset intended to be encumbered, or is or becomes equal or subordinate in terms of priority to any other Lien except those Liens, if any, stipulated on Schedule 6 to be prior or otherwise agreed to by the Required Banks in writing subsequent to the Closing Date; (e) Other Debt. Any event or condition exists with respect to Indebtedness having an outstanding principal amount aggregating in excess of $2,000,000 (at any time outstanding) of Borrower or any Subsidiary of Borrower, the effect of which is (i) to cause or to permit any holder of such Indebtedness to cause the same, or a material portion thereof, to become due prior to its stated maturity or prior to its regularly scheduled date(s) of payment and such right of acceleration is not waived by the holder (whether or not such acceleration occurs), (ii) that all or any portion of any such Indebtedness is declared to be due and payable, or required to be prepaid (other than by regularly scheduled payment) prior to the scheduled maturity thereof, or (iii) that all or any portion of any such Indebtedness is not paid, renewed or rearranged when due; (f) Involuntary Proceedings. A case or proceeding is commenced or petition or complaint is filed against Borrower, any Subsidiary of Borrower or any other Loan Party under any Debtor Relief Law and such case, petition, proceeding or complaint remains in effect for more than 30 days; a receiver, liquidator or trustee of Borrower, any Subsidiary of Borrower or any other Loan Party, or of any material Asset of Borrower or any Subsidiary of Borrower or any of the Collateral, is appointed by court order and such order remains in effect for more than 60 days; or any material Asset of Borrower or any Subsidiary of Borrower or any of the Collateral is sequestered by court order and such order remains in effect for more than 60 days; (g) Voluntary Proceedings. Borrower, any Subsidiary of Borrower or any other Loan Party voluntarily seeks, consents to, or acquiesces in the benefit of any provision of any Debtor Relief Law; consents to the filing of any petition against it under any Debtor Relief Law; makes an assignment for the benefit of its creditors; admits in writing its inability to pay its debts generally as they become due; or consents to the appointment of a receiver, trustee, liquidator or conservator for it or any part of its Assets; (h) Undischarged Judgments. Any judgment(s), decree(s) or order(s) for the payment of money aggregating in excess of $1,000,000 (at any time outstanding) shall be rendered against Borrower, any Subsidiary of Borrower or any other Loan Party and such judgment(s), decree(s) 90 96 or order(s) shall not be satisfied and shall be in effect for any period of 45 consecutive days without being vacated, discharged, satisfied or stayed or bonded pending appeal; (i) Attachment. The failure to have discharged, within a period of 45 days after the commencement thereof, any attachment, sequestration or similar proceeding against any Collateral; (j) Reportable Event. The occurrence of a Reportable Event described in Section 4043(b)(1), (5), (6) or (9) of ERISA with respect to any Plan (except that with respect to a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA, Borrower must have knowledge of such Reportable Event), or any proceedings occur or are instituted which shall have a material possibility of resulting in the termination of a Plan subject to the provisions of Title IV of ERISA, or the incurrence of a withdrawal liability under Section 4201 of ERISA, provided, in each case, that the aggregate liability which is incurred by Borrower and/or any Subsidiary of Borrower as a result of such event or events, individually or collectively, shall exceed $1,000,000; (k) Change of Control. The occurrence of any Change of Control; (l) Material Adverse Effect. The occurrence of any event or events and/or the existence of any circumstance or circumstances which, individually or collectively, has or have a Material Adverse Effect; or (m) Other Indebtedness Secured by Liens. The occurrence of any event of default or any event which, with giving of notice or the passage of time or both, would constitute an event of default with respect to any Indebtedness of Borrower or any Subsidiary of Borrower (other than the Obligations which shall be governed by Section 8.1(a) above) which is secured by a Lien on any Asset of Borrower or any Subsidiary of Borrower. 8.2 Concurrent Acceleration. In the event of the occurrence of an Event of Default specified in Sections 8.1(f) or 8.1(g), the aggregate unpaid amount of the Obligations shall immediately, and concurrently with the occurrence of such Event of Default, become due and payable in full without any action or notification of any kind required by Agent or any Bank, including, without limitation, presentment, demand, protest or notice of protest, dishonor, notice of intention to accelerate and notice of acceleration, all of which are expressly hereby waived by Borrower. 8.3 Certain Rights of Banks. (a) Remedies Upon Default. Should an Event of Default occur, Agent may, at its discretion, and, at the request of Required Banks, Agent shall, take any one or more of the following actions: (i) Acceleration. Without demand or notice of any nature whatsoever, declare the unpaid balance of the Obligations, or any part thereof, immediately due and 91 97 payable, whereupon the same shall be due and payable (unless accelerated automatically pursuant to Section 8.2); (ii) Termination. Terminate any Commitment in its entirety or as to any portion thereof, to the extent Agent or Required Banks shall deem appropriate; (iii) Judgment. Reduce any claim to judgment; (iv) Setoff. Exercise the rights of setoff and/or banker's Lien against any Collateral including, without limitation, the interests of Borrower or any Subsidiary of Borrower which is a Guarantor (to the extent of its Guaranty) in and to every account and other Assets of Borrower or any such Subsidiary of Borrower which are in the possession of Agent or any Bank to the extent of the full amount of the Obligations; (v) Foreclosure. Foreclose any or all Liens which secure the Obligations or any portion thereof or otherwise realize upon any and all of the rights Agent or any Bank may have in and to the Collateral, or any part thereof; (vi) Letters of Credit. If any Letter of Credit shall then be outstanding, (A) make demand upon Borrower to, and promptly upon such demand Borrower shall, or (B) with respect to any Event of Default under Section 8.1(f) or Borrower shall promptly without demand by Agent, pay to Agent in immediately available funds at the office of Agent, for deposit in the Cash Collateral Account, an amount equal to 110 % of the maximum amount available to be drawn under the outstanding Letters of Credit; and (vii) Exercise of Rights. Exercise any and all other rights or remedies afforded by any applicable laws or by the Loan Papers, at law, in equity, or otherwise, as Agent or Required Banks shall deem appropriate, including, but not limited to, the right to bring suit or other proceeding before any Tribunal, either for specific performance of any covenant or condition contained in the Loan Papers or in aid of the exercise of any right or remedy granted to Agent or any Bank in the Loan Papers. (b) Performance by Agent. Should any covenant, duty or agreement of Borrower or any Subsidiary of Borrower or any other Loan Party fail to be performed in accordance with the terms of the Loan Papers, Agent may, at its discretion, perform or attempt to perform, such covenant, duty or agreement on behalf of Borrower, such Subsidiary or such Loan Party. In such event, Borrower shall, at the request of Agent, promptly pay to Agent any amount expended by Agent in such performance or attempted performance, together with interest accrued thereon at the Default Rate until Agent is reimbursed therefor. Notwithstanding the foregoing, it is expressly understood that Agent does not assume and shall never have any liability or responsibility for the performance of any covenant, duty or agreement of Borrower, any Subsidiary of Borrower or any other Loan Party under the Loan Papers. 92 98 (c) Duties and Rights. Agent and Banks may execute any of their duties and/or exercise any of their rights or remedies by or in the name of Agent or any Bank and by or through any of their officers, directors, employees, attorneys, agents or other representatives. (d) Banks Not in Control. Borrower acknowledges that none of the covenants or other provisions contained in this Agreement or any other Loan Paper shall give Agent or any Bank the right or power to exercise control over the affairs and/or management of Borrower, any Subsidiary of Borrower or any other Loan Party. (e) Waivers. The acceptance by Agent or any Bank at any time and from time to time of partial payment of the Obligations shall not be deemed to be a waiver of any Event of Default or Potential Default then existing. No waiver by Agent or any Bank of any Event of Default or Potential Default shall be deemed to be a waiver of any other or subsequent Event of Default or Potential Default. No delay or omission by Agent or any Bank in exercising any right or remedy shall impair such right or remedy or be construed as a waiver thereof or an acquiescence therein, and no single or partial exercise of any such right or remedy shall preclude other or further exercise thereof, or the exercise of any other right or remedy under the Loan Papers or otherwise. Except as otherwise provided in this Agreement or by applicable law, Borrower and each surety, endorser, guarantor and other party liable for the payment or performance of all or any portion of the Obligations severally waive presentment and demand for payment, protest, and notice of protest, notice of intention to accelerate, acceleration and nonpayment, and agree that their liability shall not be affected by any renewal or extension in the time of payment of any Obligation, or by any release or change in any security for the payment or performance of the Obligations, regardless of the number of such renewals, extensions, releases or changes. (f) Cumulative Rights. All rights and remedies available to Agent and/or any Bank under the Loan Papers shall be cumulative of and in addition to all other rights and remedies granted to Agent and/or any Bank at law or in equity, whether or not the Obligations are due and payable and whether or not Agent and/or any Bank shall have instituted any suit for collection or other action in connection with the Loan Papers. (g) Expenditures by Banks. Any sums expended by or on behalf of Agent or any Bank pursuant to the exercise of any right or remedy shall, to the extent the same are required to be paid or reimbursed by Borrower pursuant to Section 6.1(i), become part of the Obligations and shall bear interest at the Default Rate, from the date of such expenditure until the date repaid. (h) DIMINUTION IN VALUE OF COLLATERAL. NEITHER AGENT NOR ANY BANK SHALL HAVE ANY LIABILITY OR RESPONSIBILITY WHATSOEVER FOR ANY DIMINUTION OR LOSS IN VALUE OF ANY COLLATERAL (SPECIFICALLY INCLUDING THAT WHICH MAY ARISE FROM AGENT OR ANY BANK'S NEGLIGENCE OR INADVERTENCE, WHETHER SUCH NEGLIGENCE OR INADVERTENCE IS THE SOLE OR CONCURRING CAUSE OF ANY DAMAGE), 93 99 EXCEPT THAT ARISING IN CONNECTION WITH AGENT'S OR ANY BANK'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. (i) INDEMNIFICATION OF AGENT AND BANKS. BORROWER AGREES TO INDEMNIFY AGENT, EACH BANK AND AGENT'S AND EACH BANK'S DIRECTORS, OFFICERS, EMPLOYEES, ATTORNEYS AND AGENTS (AGENT, EACH BANK AND EACH SUCH OTHER PERSON IS HEREINAFTER CALLED AN "INDEMNITEE") AND HOLD THEM AND EACH OF THEM HARMLESS FROM AND AGAINST ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, CLAIMS, COSTS, EXPENSES AND DISBURSEMENTS (COLLECTIVELY "CLAIMS") OF ANY KIND OR NATURE WHATSOEVER WHICH MAY BE IMPOSED ON, INCURRED BY OR ASSERTED AGAINST ANY INDEMNITEE, IN ANY WAY RELATING TO OR ARISING OUT OF THE LOAN PAPERS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN (INCLUDING, WITHOUT LIMITATION, ANY CLAIMS RELATING TO OR ARISING OUT OF THE EXECUTION OR DELIVERY OF THIS AGREEMENT OR ANY OTHER LOAN PAPER, THE PERFORMANCE OF THE TERMS AND PROVISIONS HEREOF AND THEREOF AND THE OBLIGATIONS THEREUNDER, AND THE USE OF THE PROCEEDS OF THE LOANS) OR ANY ENVIRONMENTAL LAW, NO MATTER HOW SUCH CLAIMS ARISE OR RESULT, AND INCLUDING, WITHOUT LIMITATION, THOSE CLAIMS THAT MAY ARISE OR RESULT FROM ANY INDEMNITEE'S SOLE OR CONTRIBUTORY NEGLIGENCE OR INADVERTENCE; PROVIDED, HOWEVER, THAT NO INDEMNITEE SHALL HAVE THE RIGHT TO BE INDEMNIFIED HEREUNDER (i) TO THE EXTENT THAT SUCH CLAIMS DIRECTLY RELATE TO OR ARISE OUT OF ANY BREACH BY SUCH INDEMNITEE OF ITS OBLIGATIONS UNDER THE LOAN PAPERS, (ii) TO THE EXTENT THAT SUCH CLAIMS DIRECTLY RELATE TO OR ARISE OUT OF THE RELATIONSHIP BETWEEN (A) AN ASSIGNOR BANK AND AN ASSIGNEE BANK UNDER THIS AGREEMENT, OR (B) A BANK AND A PARTICIPANT OF SUCH BANK UNDER THIS AGREEMENT, OR (iii) TO THE EXTENT THAT THE CLAIMS AS TO WHICH SUCH INDEMNITEE IS SEEKING INDEMNIFICATION ARE DETERMINED BY A COURT OF COMPETENT JURISDICTION BY FINAL AND NONAPPEALABLE ORDER OR JUDGMENT TO HAVE RESULTED FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH INDEMNITEE. SUCH INDEMNIFICATION SHALL NOT GIVE BORROWER ANY RIGHT TO PARTICIPATE IN THE SELECTION OF COUNSEL FOR ANY INDEMNITEE OR THE CONDUCT OF ANY DISPUTE OR PROCEEDING FOR WHICH INDEMNIFICATION MAY BE CLAIMED. (j) Right of Setoff. If an Event of Default exists, then each Bank is hereby authorized at any time and from time to time, to the fullest extent permitted by applicable law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other Indebtedness at any time owing by such Bank to or for the credit or account of Borrower or any Guarantor against any or all of the Obligations now or hereafter existing and held by such Bank, irrespective of whether or not such Bank shall have 94 100 made any demand under this Agreement or any other Loan Paper and whether or not such Obligations shall be matured or unmatured. ARTICLE IX THE AGENT 9.1 Appointment and Authorization, Administration, Duties. (a) General. Each Bank hereby appoints and authorizes the Agent to act as its Agent hereunder and under the other Loan Papers with such powers as are specifically delegated to the Agent by the terms of this Agreement and the other Loan Papers, together with such other powers as are reasonably incidental thereto. The general administration of the Loan Papers and any other documents contemplated by this Agreement shall be performed by Agent or its designees. Agent shall not be required to exercise any right or remedy with respect to any Event of Default except as may be expressly directed by Required Banks. In the event Required Banks direct Agent to exercise any right or remedy available hereunder, Agent agrees to commence taking action with respect to such right or remedy within a reasonable period of time and to diligently pursue such action or to submit its resignation pursuant to Section 9.10. Except as otherwise provided herein or otherwise agreed to by Agent and Banks in writing, each Bank hereby irrevocably authorizes Agent, at Agent's discretion, to take or refrain from taking such actions as Agent on such Bank's behalf and to exercise or refrain from exercising such powers, rights and remedies under the Loan Papers and any other documents contemplated by this Agreement as are delegated by the terms hereof or thereof, as appropriate, together with all powers, rights and remedies reasonably incidental thereto. Notwithstanding the foregoing or any term or provision of this Agreement, Agent shall have no duties or responsibilities except as expressly set forth in this Agreement or the other Loan Papers. Unless otherwise expressly stated in this Agreement or in the other Loan Papers to the contrary, all references in this Agreement and the other Loan Papers to Agent shall be deemed to be references to Agent in its capacity as agent for and on behalf of Banks pursuant to this Agreement and the other Loan Papers. (b) Collateral. Each Bank irrevocably appoints and authorizes Agent to hold the Collateral and enforce the Liens granted as security for the Obligations and to take such action as Agent on its behalf and to exercise such powers, rights and remedies under this Agreement and the other Loan Papers or otherwise as are delegated to Agent by the terms hereof or thereof, together with all such powers, rights and remedies as are reasonably incidental thereto, provided, however, that, as between and among Banks, Agent will not prosecute, settle or compromise any claim against Borrower or any Subsidiary of Borrower or any other Loan Party or release or institute enforcement or foreclosure proceedings against any Collateral or Guaranty securing the Obligations or any part thereof, except with the consent of Required Banks or, if and to the extent required pursuant to Section 10.7, all Banks. Without limiting the generality of the foregoing, each Bank authorizes Agent to (i) enter into any Loan Papers securing payment of the Obligations in the capacity of agent for and on behalf of Banks, and (ii) to administer all of the Collateral and to enforce the interests of Banks therein in accordance with the Loan Papers. 95 101 Any action for enforcement of the interests of Banks under the Loan Papers shall be taken either as Agent for Banks or directly in the respective names of Banks, as counsel to Agent may at the time advise. Subject to Section 10.7, Banks consent and agree that any action taken by Agent with the consent or at the direction of Required Banks as provided herein shall be taken for and on behalf of all Banks, including those which may not have so consented or directed, in order to protect or enforce the Liens securing the Obligations; provided, however, that any Bank may direct Agent not to act for or on its behalf in any such proceeding if such Bank executes in favor of Agent a release of its rights to share in the benefits of any such action and a release of its legal and beneficial interest in the Lien created by the Loan Papers on the Collateral which is the subject of such action. Banks and Borrower agree that Agent is not a fiduciary for Banks, Borrower, any Subsidiary of Borrower, any Loan Party or any other Person but simply is acting in the capacity described herein to alleviate administrative burdens for all parties hereto and that Agent has no duties or responsibilities to Banks, Borrower, any Subsidiary of Borrower, any Loan Party or any other Person except those (if any) expressly set forth herein. (c) Sub-Agents. Each Bank hereby authorizes Agent (in its sole discretion) (i) to appoint sub-agents (including any Banks) to be the holders of record of any Lien to be granted to Agent (for its benefit and the benefit of Banks) or Banks or to hold on behalf of Agent any Collateral or instruments relating thereto, and (ii) so long as an Event of Default shall not have occurred and be continuing, to release a Lien granted to it (for its benefit and the benefit of Banks) on any Asset sold or otherwise disposed of and permitted to be sold or otherwise disposed of in accordance with the terms hereof or the other Loan Papers. 9.2 Advances and Payments. On the date of each Advance, Agent shall be authorized, but not obligated, to advance, for the account of each Bank making such Advance, the amount of the Advance to be made by it in accordance with its Commitment hereunder if and to the extent that such Bank does not make such amount timely available to Agent for advance to Borrower pursuant to this Agreement. Each Bank agrees to immediately reimburse Agent in immediately available funds for any amount so advanced on its behalf by Agent. If any such reimbursement is not made in immediately available funds on the same day on which Agent shall have made any such amount available on behalf of any Bank, such Bank shall pay interest to Agent at the Federal Funds Rate until such reimbursement is made. All amounts to be paid to Banks by Agent shall be credited to Banks, forthwith after collection by Agent, in immediately available funds, in such manner as Banks and Agent shall from time to time agree. 9.3 Sharing of Payments. Each Bank agrees that if it shall obtain any payment (whether voluntarily, involuntarily through the exercise of a right of banker's Lien, setoff or counterclaim, including, without limitation, a secured claim under the Bankruptcy Code or other Lien arising with respect to or in lieu of such secured claim and received by such Bank under any Debtor Relief Law, or otherwise) in respect of any obligation owing to such Bank as a result of which the unpaid portion of its Loans is proportionately less than the unpaid portion of the Loans of other Banks (based upon the respective Pro Rata Shares of the Banks), (a) it shall promptly purchase at par from such other Banks a participation in the Loans of such other Banks, so that the aggregate unpaid principal amount of the Loans of each Bank shall be in accordance with their respective Pro Rata Shares, (b) it shall pay interest calculated at the 96 102 Federal Funds Rate to such other Banks on the amount purchased from the date it received the disproportionate payment until the date of the purchase of such participation, and (c) such other adjustments shall be made from time to time as shall be equitable to ensure that Banks share such payment pro rata based upon their respective Pro Rata Shares. Notwithstanding anything to the contrary contained herein, if a Bank shall obtain payment under any circumstances contemplated herein while any Obligations shall remain outstanding, such Bank shall promptly turn over such payment to Agent for distribution, as appropriate, to Banks on account of the Obligations as provided herein. Borrower expressly consents to the foregoing arrangements and agrees that any Bank or Banks holding (or deemed to be holding) a participation in any of the Loans or other Obligations may exercise any and all rights of payment (including, without limitation, rights of banker's lien, setoff and counterclaim) with respect to such participation as fully as if such Bank were the direct creditor of Borrower in the amount of such participation. 9.4 Distribution of Information. Agent will forward to all Banks copies of all Financial Statements and reports of a material nature furnished to it hereunder by Borrower other than those which are by the terms hereof to be distributed by Borrower directly to Banks; provided, however, that any failure by Agent to do so shall not result in any liability to Agent. 9.5 Notice to Banks. Except as otherwise provided in this Agreement or except with respect to communications or notices to be provided directly to Banks by Borrower or any Subsidiary of Borrower or other Loan Party pursuant to this Agreement or any other Loan Paper, upon receipt by Agent from Borrower or any such other Person of any communication calling for an action on the part of Banks, or upon notice to Agent of any Event of Default, Agent will, in a reasonably prompt fashion, give to Banks notice of the nature of such communication or Event of Default, as the case may be; PROVIDED, HOWEVER, THAT ANY FAILURE BY AGENT TO GIVE ANY SUCH NOTICE SHALL NOT RESULT IN ANY LIABILITY TO AGENT UNLESS SUCH FAILURE CONSTITUTES GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. 9.6 Liability of Agent. (a) OTHER AGENTS. AGENT, WHEN ACTING ON BEHALF OF BANKS, MAY EXECUTE ANY OF ITS RESPONSIBILITIES OR DUTIES UNDER THIS AGREEMENT BY OR THROUGH ITS, OR ANY BANK'S, OFFICERS, DIRECTORS, EMPLOYEES, ATTORNEYS OR AGENTS. ALL SUCH OFFICERS, DIRECTORS, EMPLOYEES, ATTORNEYS AND AGENTS, WHEN EXERCISING THE RIGHTS OR PERFORMING THE DUTIES OF AGENT, SHALL BE DEEMED TO BE INCLUDED IN THE TERM "AGENT." NEITHER AGENT NOR ITS OFFICERS, DIRECTORS, EMPLOYEES, ATTORNEYS OR AGENTS SHALL BE LIABLE TO BANKS OR ANY OF THEM FOR ANY ACTION TAKEN OR OMITTED TO BE TAKEN IN GOOD FAITH, OR BE RESPONSIBLE TO BANKS OR TO ANY OF THEM FOR THE CONSEQUENCES OF ANY OVERSIGHT OR ERROR OF JUDGMENT, OR FOR ANY LOSS, UNLESS THE SAME SHALL HAPPEN THROUGH ITS GROSS NEGLIGENCE OR WILFUL MISCONDUCT. AGENT AND ITS OFFICERS, DIRECTORS, EMPLOYEES, ATTORNEYS AND AGENTS SHALL IN NO EVENT BE LIABLE TO 97 103 BANKS OR TO ANY OF THEM FOR ANY ACTION TAKEN OR OMITTED TO BE TAKEN BY ANY OF THEM PURSUANT TO INSTRUCTIONS RECEIVED FROM THE BANKS (OR, IF APPLICABLE, THE REQUIRED BANKS) OR IN RELIANCE UPON THE ADVICE OF COUNSEL SELECTED BY ANY OF THEM. WITHOUT LIMITING THE FOREGOING, NEITHER AGENT NOR ANY OF ITS OFFICERS, DIRECTORS, EMPLOYEES, ATTORNEYS OR AGENTS SHALL BE RESPONSIBLE TO ANY OF BANKS FOR THE DUE EXECUTION, VALIDITY, GENUINENESS, EFFECTIVENESS, SUFFICIENCY OR ENFORCEABILITY OF, OR FOR ANY STATEMENT, WARRANTY OR REPRESENTATION IN, OR FOR THE PERFECTION OR PRIORITY OF ANY LIEN CONTEMPLATED BY THIS AGREEMENT OR ANY OTHER LOAN PAPER, OR SHALL BE REQUIRED TO ASCERTAIN OR TO MAKE ANY INQUIRY CONCERNING THE PERFORMANCE OR OBSERVANCE BY BORROWER, ANY SUBSIDIARY OF BORROWER OR ANY OTHER LOAN PARTY OF ANY OF THE TERMS, CONDITIONS, COVENANTS OR AGREEMENTS OF THIS AGREEMENT OR ANY OTHER LOAN PAPER. (b) NO RESPONSIBILITY FOR FAILURE OF PERFORMANCE. NEITHER AGENT NOR ANY OF ITS OFFICERS, DIRECTORS, EMPLOYEES, ATTORNEYS OR AGENTS (WHEN ACTING IN ITS OR THEIR CAPACITIES AS OR ON BEHALF OF AGENT HEREUNDER) SHALL HAVE ANY RESPONSIBILITY TO BORROWER, ANY SUBSIDIARY OF BORROWER OR ANY OTHER LOAN PARTY ON ACCOUNT OF THE FAILURE OR DELAY IN PERFORMANCE OR BREACH BY ANY OF BORROWER, ANY SUBSIDIARY OR ANY OTHER LOAN PARTY OR BANK OF ANY OF THEIR RESPECTIVE OBLIGATIONS UNDER THIS AGREEMENT OR ANY OTHER LOAN PAPER. (c) Communications. Agent, as agent hereunder, shall be entitled to rely on any communication, instrument or document reasonably believed by it to be genuine or correct and to have been signed or sent by a Person or Persons believed by it to the proper Person or Persons, and it shall be entitled to rely on advice of legal counsel, independent public accountants and other professional advisers and experts selected by it. 9.7 REIMBURSEMENT AND INDEMNIFICATION. EACH BANK AGREES (A) IF AND TO THE EXTENT NOT PROMPTLY REIMBURSED BY BORROWER, TO REIMBURSE AGENT, IN ACCORDANCE WITH SUCH BANK'S PRO RATA SHARE (EXCEPT AS PROVIDED BELOW IN THIS SECTION 9.7, ON DEMAND, FOR ALL FEES, COSTS AND EXPENSES INCURRED BY AGENT UNDER THE LOAN PAPERS, INCLUDING, WITHOUT LIMITATION, REASONABLE COUNSEL FEES AND COMPENSATION OF AGENTS PAID FOR SERVICES RENDERED ON BEHALF OF BANKS, AND ANY OTHER EXPENSE INCURRED IN CONNECTION WITH THE PREPARATION, EXECUTION, ADMINISTRATION, OR ENFORCEMENT THEREOF, (B) IF AND TO THE EXTENT NOT PROMPTLY REIMBURSED OR INDEMNIFIED BY BORROWER, TO REIMBURSE, INDEMNIFY AND HOLD HARMLESS AGENT AND ANY OF ITS OFFICERS, DIRECTORS, EMPLOYEES, ATTORNEYS OR AGENTS, IN ACCORDANCE WITH SUCH BANK'S PRO RATA SHARE (EXCEPT AS PROVIDED 98 104 BELOW IN THIS SECTION 9.7), ON DEMAND, FROM AND AGAINST ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER WHICH MAY BE IMPOSED ON, INCURRED BY, OR ASSERTED AGAINST IT OR ANY OF THEM IN ANY WAY RELATING TO OR ARISING OUT OF THIS AGREEMENT OR ANY OTHER LOAN PAPER OR ANY ACTION TAKEN OR OMITTED BY IT OR ANY OF THEM UNDER THIS AGREEMENT OR ANY OTHER LOAN PAPER (EXCEPT SUCH AS SHALL RESULT FROM THE GROSS NEGLIGENCE OR WILFUL MISCONDUCT OF AGENT OR ITS OFFICERS, DIRECTORS, EMPLOYEES, ATTORNEYS OR AGENTS), AND (C) THAT AGENT MAY OFFSET DISTRIBUTIONS OF PRINCIPAL, INTEREST AND FEES DUE TO A BANK BY THE AMOUNT OF UNREIMBURSED AMOUNTS DUE AND OWING IN ACCORDANCE WITH THE PROVISIONS OF THIS SECTION 9.7 IF SUCH BANK HAS NOT REIMBURSED OR INDEMNIFIED AGENT UPON A WRITTEN REQUEST BY AGENT FOR REIMBURSEMENT OR INDEMNIFICATION. IF AND TO THE EXTENT THAT AGENT, IN ITS DISCRETION, DETERMINES THAT ANY AMOUNT TO BE REIMBURSED OR INDEMNIFIED PURSUANT TO THIS SECTION 9.7 DOES NOT RELATE TO ANY PARTICULAR COMMITMENT (OR LOAN MADE PURSUANT TO ANY PARTICULAR COMMITMENT), THEN SUCH REIMBURSEMENT OR INDEMNIFICATION, AS THE CASE MAY BE, SHALL BE MADE IN ACCORDANCE WITH SUCH BANK'S PRO RATA SHARE OF THE AGGREGATE COMMITMENTS. 9.8 Rights of Agent. It is understood and agreed that Banque Paribas shall have the same powers, rights, remedies and obligations hereunder (including the right to give such instructions) as the other Banks and may exercise such powers, rights and remedies, as well as its powers, rights and remedies under other agreements, documents, instruments and certificates to which it is or may be party, and engage in other transactions with Borrower, any Subsidiary of the Borrower, any Affiliate of Borrower or any other Loan Party, as though it were not the Agent under this Agreement. 9.9 Independent Investigation and Credit Decision by Banks. Each Bank acknowledges and agrees that it has decided to enter into this Agreement and to make Loans hereunder based on its own analysis of (a) the transactions contemplated hereby, (b) the creditworthiness of Borrower, Subsidiaries of the Borrower and any other Loan Parties, (c) this Agreement. and the other Loan Papers, and (d) the business, legal and other issues relating thereto, and further acknowledges and agrees that neither Banque Paribas nor Agent shall bear any responsibility therefor. Each Bank acknowledges and agrees that it will, independently and without reliance upon Agent, or any other Bank, continue to make its own credit decisions and other decisions regarding the taking or not taking of any action under this Agreement or the other Loan Papers. 9.10 Successor Agent. Agent may resign at any time by giving at least five (5) Business Days' prior notice thereof to Banks and Borrower, and the Retiring Agent shall be discharged from its responsibilities, duties and obligations under this Agreement. Upon any such resignation, within five (5) days after the retiring Agent's giving of notice of resignation, 99 105 Required Banks shall appoint a successor Agent from among Banks and such Bank appointed by Required Banks as such shall thereupon become successor Agent (unless such Bank shall decline to accept such appointment). If no successor Agent shall have been so appointed by Required Banks and shall have accepted such appointment, within five (5) days after the retiring Agent's giving of notice of resignation, the retiring Agent may, on behalf of Banks, appoint a successor Agent which shall either be a Bank or a commercial bank reasonably acceptable to Borrower constituting an Eligible Assignee and having capital and surplus of at least $750,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the powers, rights, remedies, privileges, responsibilities and duties of the retiring Agent. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article IX shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. ARTICLE X MISCELLANEOUS 10.1 Notices. Unless otherwise expressly provided in this Agreement, all notices or other communications required or permitted to be given under this Agreement shall be in writing and may be personally served, telecopied, telefaxed, telexed or sent by facsimile, courier or first class prepaid mail (airmail if to an address in a foreign country from the party delivering such notice or communication) and shall be deemed to have been given and received when delivered in person or by courier service, upon transmission of a facsimile, telecopy, telefax or telex or four days after deposit in the mail (certified or registered, return receipt requested, with postage prepaid and properly addressed). Notices or other communications by Borrower to Agent or any Bank shall not be effective until given and actually received. For purposes of this Agreement, the addresses of the parties to this Agreement (until 15 days' prior notice of a change thereof is delivered as provided in this Section 10. 1) shall be as set forth below each party's name on the signature pages hereof. A photocopy of any notice or other communication sent to the Agent or any Bank shall be sent to Jenkens & Gilchrist, a Professional Corporation, 1445 Ross Avenue, Suite 3200, Dallas, Texas 75202, Attention: William P. Durbin, and a copy of any notice or other communication sent to the Borrower shall be sent to Michener, Larimore, Swindle, Whitaker, Flowers, Sawyer, Reynolds & Chalk, L.L.P., 301 Commerce Street, Suite 3500, Fort Worth, Texas 76102, Attention Wayne M. Whitaker. 10.2 Survival. All representations, warranties, covenants, and agreements made by Borrower, any Subsidiary of Borrower or any other Loan Party herein or in any other Loan Paper shall be considered to have been relied upon by Agent and Banks and shall survive the delivery of the Loan Papers, the making of Loans and the creation and extension of the Obligations, regardless of any investigation made by or on behalf of Agent or any Bank. All covenants and agreements made by Borrower, any Subsidiary of Borrower or any other Loan Party herein or in any other Loan Paper regarding the payment of principal, interest, fees, taxes, costs or expenses, and all covenants and agreements made (a) by Borrower, any Subsidiary of Borrower or any other Loan Party or (b) by Banks herein, (i) to or in favor of any one or more 100 106 of Agent and Banks, or (ii) to or in favor of Agent, respectively, regarding any indemnification or reimbursement or disclaimer of liability (including, without limitation, the provisions of Sections 2.10, 2.13, 8.3(h) and (i), 9.7 and 10.14 hereof), shall survive the termination of this Agreement and the other Loan Papers. 10.3 GOVERNING LAW. THIS AGREEMENT AND THE OTHER LOAN PAPERS SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND APPLICABLE U.S. FEDERAL LAWS. 10.4 Maximum Interest. The following provisions shall control this Agreement, the Notes and the other Loan Papers notwithstanding any term or provision contained in this Agreement or any other Loan Paper to the contrary: (a) No agreements, conditions, provisions or stipulations contained in this Agreement or in any other Loan Paper, or the occurrence of a Potential Default or an Event of Default, or the exercise by the Banks of the right to accelerate the payment of the maturity of principal or interest, or to exercise any option whatsoever contained in this Agreement or any other Loan Paper, or the arising of any contingency whatsoever, shall be construed to permit or shall entitle the Banks or any Bank to contract for, charge or receive, in any event, interest exceeding the maximum amount allowed from time to time by applicable state or federal laws as now or as may hereinafter be in effect (the "Maximum Amount"), and in no event shall Borrower or any other Loan Party be obligated by contract or otherwise to pay interest exceeding the Maximum Amount. All agreements, conditions, provisions or stipulations contained in this Agreement or any other Loan Paper, if any, which (in the absence of this Section 10.4) may in any event or contingency whatsoever operate to bind, obligate or compel Borrower or any other Loan Party to pay interest exceeding the Maximum Amount shall be without binding force or effect, at law or in equity, and shall, as a matter of consensual contract between and among the parties thereto, be deemed to not have been contracted for, charged or received, in each case to the extent only of the excess of interest over such Maximum Amount and shall, as a matter of consensual contract between and among the parties, be automatically limited to the Maximum Amount. Furthermore, in the event any interest is contracted for, charged or received in excess of the Maximum Amount (the "Excess"), Borrower and each other Loan Party acknowledge, agree and stipulate that any such amount shall be the result of an accidental and bona fide error, and any such contract, charge or receipt shall be canceled to the extent of such Excess, and any such Excess that is received shall be, first, applied to reduce the principal of any Obligations due, and second, returned to Borrower or to such other Person who may be entitled thereto by law, it being the intention of the parties hereto not to enter at any time into an usurious or otherwise illegal relationship. The parties hereto and each other Loan Party recognize that with fluctuations in the Revolving Credit Contract Rate and Default Rate, from time to time, an unintentional result could inadvertently occur. BY THE EXECUTION OF THIS AGREEMENT, BORROWER AND EACH OTHER LOAN PARTY COVENANT THAT (i) THE CANCELLATION, CREDIT OR RETURN OF ANY EXCESS SHALL CONSTITUTE ACCEPTANCE OF SUCH EXCESS, AND (ii) NEITHER BORROWER NOR ANY OTHER LOAN PARTY SHALL SEEK OR PURSUE ANY OTHER REMEDY, LEGAL OR EQUITABLE, AGAINST AGENT OR ANY BANK BASED, IN WHOLE OR 101 107 IN PART, UPON THE CONTRACTING FOR, CHARGING OR RECEIVING OF ANY INTEREST IN EXCESS OF THE MAXIMUM AMOUNT. For the purpose of determining whether or not any Excess has been contracted for, charged or received by Agent or any Bank, all interest at any time contracted for, charged or received in connection with Borrower's obligations or any other Loan Party's obligations shall be amortized, prorated, allocated and spread in equal parts (or as otherwise may be appropriate to reflect variations in the maximum lawful rate) during the entire term of this Agreement and the other Loan Papers. (b) The provisions of Section 10.4(a) shall be deemed to be incorporated into every Loan Paper or communication relating to the Obligations, whether or not any provision of Section 10.4(a) is referred to therein. All such documents and communications and all figures set forth therein shall, for the sole purpose of computing the extent of the obligations asserted by the Banks thereunder, be automatically recomputed by the Borrower or any other Loan Party, and by any court considering the same, to give effect to the adjustments or credits required by Section 10.4(a). (c) If the applicable state or federal law is amended in the future to allow a greater amount of interest to be charged under this Agreement or any other Loan Paper than is presently allowed by applicable state or federal law, then the limitations on interest hereunder and thereunder shall be increased to the maximum allowed by applicable state or federal law, as amended, which increase shall be effective hereunder on the effective date of such amendment, and all interest charges owing to the Agent or any Bank by reason thereof shall be payable upon demand. 10.5 Invalid Provisions. If any provision of this Agreement or any of the other Loan Papers is held by a court of competent jurisdiction to be illegal, invalid or unenforceable under present or future laws effective during the term thereof, such provision shall be fully severable, this Agreement and the Loan Papers shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part hereof or thereof, and the remaining provisions hereof or thereof shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance therefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision there shall be added automatically as a part of this Agreement or the other Loan Papers (as the case may be) a provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. 10.6 Successors and Assigns. (a) Interested Parties; Prohibition Regarding Assignment by Borrower. This Agreement and the other Loan Papers shall be binding upon and inure to the benefit of Borrower, Banks, and Agent and their respective successors and assigns; provided, however, that neither Borrower nor any other Loan Party may assign, transfer or delegate any of its rights, duties or obligations under this Agreement or the other Loan Papers without the prior written consent of Agent and Banks. Banks may assign, sell and transfer their interests, rights 102 108 and obligations under this Agreement and the other Loan Papers only in accordance with this Section 10.6. (b) Assignment by Banks. Any Bank may assign to one or more Eligible Assignees all, or a proportionate part of all, of its interests, rights and obligations under this Agreement and the other Loan Papers; provided, however, that (i) each such assignment shall be of a constant, and not a varying, percentage of all of the assigning Bank's interests, rights and obligations under this Agreement, (ii) the amount of each such assignment (determined as of the "Effective Date" specified in the Assignment and Acceptance) shall not be less than the lesser of the entire amount of such Bank's Loans or the principal amount of $1,000,000 or an integral multiple of $100,000 in excess thereof, and (iii) the parties to each such assignment shall execute and deliver to Agent, for its acceptance and recording in the Register, an Assignment and Acceptance, together with the Notes subject to such assignment, and a processing and recordation fee of $2,500 payable to Agent. Upon such execution, delivery, acceptance and recording, from and after the "Effective Date" specified in the Assignment and Acceptance, which "Effective Date", unless Agent otherwise agrees, shall not be earlier than five (5) Business Days after the date of acceptance and recording by Agent (provided, however, that, as between the assigning Bank and the assignee thereunder only, the effective date may be the effective date of execution and delivery as between such Persons or as otherwise specified in the Assignment and Acceptance or agreed to by such Persons), (A) the assignee thereunder shall be a Bank under this Agreement and, to the extent provided in such Assignment and Acceptance, shall have the interests, rights and obligations of a Bank hereunder, and (B) the assigning Bank thereunder shall, to the extent provided in such Assignment and Acceptance, be released from its contractual obligations under this Agreement, and (C) in the case of an Assignment and Acceptance covering all or the remaining portion of the assigning Bank's interests, rights and obligations under this Agreement, such assigning Bank shall cease to be a Bank under this Agreement. Each Bank shall, in a reasonably prompt fashion after it has engaged in any material discussions with an Eligible Assignee that could lead to an assignment referred to in this Section 10.6(b), notify Borrower of the identity of such Eligible Assignee unless such Eligible Assignee has expressly requested that its identity remain confidential; provided, however, that (1) the failure to give any such notification shall not result in any liability to such Bank and shall not affect the rights of Banks or the obligations of Borrower hereunder, and (2) Borrower shall use reasonable efforts to keep the identity of such Eligible Assignee confidential until such identity is otherwise made known to Agent. (c) Effect of Assignment and Acceptance. By executing and delivering an Assignment and Acceptance, the assigning Bank thereunder and the Eligible Assignee thereunder shall be deemed to confirm to and agree with each other and the other parties hereto as follows: (i) such assignee is an Eligible Assignee; (ii) other than as provided in the Assignment and Acceptance, such assigning Bank makes no representation or warranty and assumes no responsibility with respect to any representations, warranties or other statements made in or in connection with this Agreement or any other Loan Paper or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Loans, this Agreement or any other Loan Paper or any Collateral; (iii) such assigning Bank makes no representation or warranty and assumes no responsibility with respect to the financial condition of Borrower, any Subsidiary of 103 109 the Borrower or any other Loan Party or the performance or observance by Borrower, any Subsidiary of the Borrower or any other Loan Party of any of its obligations under this Agreement or any other Loan Paper; (iv) such assignee confirms that it has received a copy of this Agreement, together with copies of the most recent Financial Statements delivered pursuant to Sections 6.3(b) and 6.3(c) (or if none of such Financial Statements shall have been delivered, then copies of the Base Financial Statements) and such other agreements, documents, instruments, certificates and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (v) such assignee will independently and without reliance upon Agent, such assigning Bank or any other Bank and based on such agreements, documents, instruments, certificates and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Loan Papers; (vi) such assignee appoints and authorizes Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the other Loan Papers as are delegated to the Agent by the terms hereof, together with such powers as are reasonably incidental thereto; (vii) such assignee agrees that it will perform, in accordance with their terms, all the obligations which by the terms of this Agreement and the other Loan Papers are required to be performed by it as a Bank; and (viii) such assignee makes loans in the ordinary course of its business. (d) Register. Agent shall maintain at its offices in Houston, Texas a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Banks, and the Commitments of, and principal amount of the Loans owing to each Bank pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive in the absence of manifest error, and Borrower, Subsidiaries of Borrower, each other Loan Party, Agent and Banks may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Bank for all purposes of this Agreement and the other Loan Papers. The Register shall be available for inspection by Borrower, the Subsidiaries of Borrower and Banks at any reasonable time and from time to time upon reasonable prior notice. (e) Acceptance and Recording. Upon its receipt of an Assignment and Acceptance executed by an assigning Bank and an Eligible Assignee and the required processing and recordation fee, Agent shall, if such Assignment and Acceptance is duly completed and is in the required form, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register, and (iii) give prompt notice thereof to Banks and Borrower. Within five (5) Business Days after its receipt of any such notice from Agent, Borrower, at its own expense, shall execute and deliver to Agent, in exchange for the surrendered Note or Notes, a new Note or Notes payable to the order of such assignee in the appropriate principal amount(s) evidencing such assignee's assigned Loans and Commitments and, if the assignor Bank has retained a portion of its Loans and Commitments, a new Note or Notes payable to the order of such assignor in the appropriate principal amount(s) evidencing such assignor's Loans and Commitments retained by it. Such new Note(s) shall be dated the date of the surrendered Note(s) which they replace and shall otherwise be in substantially the form of the surrendered Notes. 104 110 (f) Participations. Each Bank may, without the consent of Borrower, any Subsidiary of the Borrower, any other Loan Party or Agent, sell participations to one or more banks in all or a portion of its interests, rights and obligations under this Agreement (including all or a portion of its Loans and Commitments) held by it; provided, however, that (i) such Bank shall remain a Bank for all purposes of this Agreement and the transferee of such participation shall not constitute a Bank under this Agreement, (ii) such Bank's obligations under this Agreement shall remain unchanged, (iii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, (iv) the participating banks or other entities shall be entitled to the benefit of the provisions contained in Sections 2.10 and 2.13 to the same extent as if they were Banks, except that no such participant shall be entitled to receive any greater benefit pursuant to Section 2.10 than its assignor Bank would have been entitled to receive with respect to the rights participated, and (v) Borrower, the Subsidiaries of Borrower, each other Loan Party, Agent and the other Banks shall continue to deal solely and directly with such Bank in connection with such Bank's interests, rights and obligations under this Agreement, and such Bank shall retain the sole right to enforce the obligations of Borrower, the Subsidiaries of Borrower and the other Loan Parties relating to the Loans and to approve any amendment, modification or waiver of any provision of this Agreement or, if applicable, any other Loan Paper, provided that such participation agreement may provide that such Bank will not agree to any amendment, modification or waiver of this Agreement or any other Loan Paper, without the consent of such participant, that would (A) reduce the principal or the rate of interest payable by Borrower on any Loan or reduce any fees payable by Borrower to or for the benefit of Banks, (B) postpone any date fixed for the payment of principal of or interest on the Loans or any fees payable by Borrower to or for the benefit of Banks, (C) increase any Commitment of any Bank or subject any Bank to any obligation to make Loans except as expressly provided herein, (D) release any Collateral securing or any Guaranty guaranteeing any of the Obligations, or (E) amend Section 10.7 or any other provision of this Agreement requiring the consent or other action of all Banks. (g) Disclosure. Any Bank may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 10.6, disclose to the assignee or participant or proposed assignee or participant any information relating to Borrower, any Subsidiary of Borrower or any other Loan Party, the Collateral or any Loan Paper furnished to such Bank by or on behalf of the Borrower, any Subsidiary of Borrower or any other Loan Party; provided, however, that, prior to any such disclosure, each such assignee or participant or proposed assignee or participant shall execute an agreement whereby such assignee or participant shall agree (subject to customary exceptions) to preserve the confidentiality of any non-public information received from such Bank on the same terms and conditions as contained in Section 10.13. (h) Substitution of Banks. If (i) any Bank has demanded compensation under Section 2.10(a) in an aggregate amount exceeding $15,000 during any calendar year, (ii) it becomes unlawful, impossible or impractical for any Bank to make or continue to maintain Eurodollar Loans pursuant to Section 2.10(c) and such circumstance is not applicable to Banque Paribas and Required Banks, or (iii) any Bank is or becomes insolvent or a receiver, conservator or similar authority is appointed for any Bank, then Agent and/or Borrower shall each have the 105 111 right, but not the obligation, upon notice to the other and to such Bank, to designate, with the consent of such assignee, an assignee for any such Bank, which assignee shall be an Eligible Assignee mutually satisfactory to Agent and Borrower, to purchase such Bank's Loans and Commitments and to assume such Bank's obligations; provided, however, that Borrower shall have the right to designate any assignee for Banque Paribas. Within ten (10) Business Days after the giving of any such notice, such Bank shall be obligated to sell its Loans and Commitments, and such assignee shall be obligated to purchase such Loans and assume such Bank's obligations pursuant to an Assignment and Acceptance. The purchase price therefor shall be an amount equal to the sum of (A) the outstanding principal amount of the Loans payable to such Bank, plus (B) all accrued and unpaid interest on such Loans, plus (C) all accrued and unpaid fees and other amounts due to such Bank pursuant to this Agreement. (i) Assignment to Federal Reserve Banks. Notwithstanding anything to the contrary contained in this Section 10.6, any Bank may at any time or from time to time assign as collateral all or any portion of its rights under this Agreement with respect to its Loans, Commitments and Notes to a Federal Reserve Bank. No such assignment shall release the assigning Bank from its obligations under this Agreement. 10.7 Entirety and Amendments. This Agreement and the other Loan Papers embody the entire agreement between or among the parties hereto relating to the subject matter hereof, supersede all prior commitment letters, term sheets, discussions, agreements and understandings, if any, relating to the subject matter hereof, and except as provided below, neither this Agreement nor any provision hereof or of any other Loan Paper may be waived, amended or modified except by an agreement in writing executed jointly by Borrower and Required Banks, and the same may be supplemented only by documents delivered or to be delivered in accordance with the express terms hereof, provided however, that, without the prior written consent of all Banks, no such agreement shall (a) reduce the principal amount of, or extend the maturity of, or extend any other date for the payment of any principal of or interest on any Loan or waive or excuse any such payment or any part thereof, or reduce the rate of interest on any Loan (other than any such change in the rate of interest resulting from a change in the Revolving Contract Rate or Default Rate in accordance with the definition of such term), (b) increase the Commitments [as the same shall be reduced pursuant to Section 2.12(a)] or obligations of any Bank, (c) modify the provisions of this Section 10.7 or the definition of "Required Banks", (d) release any Collateral securing or any Guaranty guaranteeing any of the Obligations, (e) reduce any fee payable hereunder to Agent or any Bank, (f) increase the amount of the Aggregate Revolving Loan Commitment or the Aggregate Commitment, or (g) amend any provision which requires the consent of all Banks or the consent of the Required Banks for any action such that, as a result of the amendment, fewer Banks are required to consent to such action; provided, further, that no such agreement shall change or amend or otherwise affect the powers, rights, remedies or duties of Agent hereunder without the prior written consent of Agent. Each Bank and each holder of a Note shall be bound by any waiver, amendment or modification authorized by this Section 10.7 regardless of whether its Note shall have been marked to make reference thereto, and any consent by any Bank or holder of a Note pursuant to this Section 10.7 shall bind any Person subsequently acquiring a Note from it, whether or not such Note shall have been so marked. Notwithstanding anything contained in this Agreement to the contrary, the 106 112 Banks understand that CHC-B of Midland, Inc. owns certain real property in Midland, Texas upon which a hospital and a medical office building are being constructed and that a portion of the real property has been leased pursuant to the terms of a ground lease to Westwood Medical Office Building, Ltd. which will own the portion of the improvements which constitute the medical office building. The Banks further understand that Westwood Medical Office Building, Ltd. may obtain interim construction financing and intends to obtain permanent financing for such office building from sources other than the Loan. CHC-B of Midland, Inc. previously granted a first priority Lien on the entire hospital/medical office building project and the real estate upon which it is situated. At such time as alternate financing is arranged, CHC-B of Midland, Inc. will request a release or subordination of the Liens upon that portion of the real estate which is subject to the ground lease and the medical office building constructed thereon. Banks hereby authorize Agent, in its discretion, to release or subordinate (or to not release or subordinate) the Liens upon such real estate and medical office building for such purpose without the further consent or approval of any Bank. Borrower shall not be a third party beneficiary of the authority hereby granted to Agent or be entitled to any release or subordination of such Lien unless Agent, in the exercise of its discretion, determines to grant such release or subordination and, in such event, on such terms and conditions as Agent may require. 10.8 Counterparts; Effectiveness. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any of the parties hereto may execute this Agreement by signing any such counterpart. 10.9 No Duty. All attorneys, accountants, appraisers, consultants and other professional Persons retained by Agent or any Bank shall have the right to act exclusively in the interests of Agent or such Bank, respectively, and shall have no duty of disclosure, duty of loyalty, duty of care or other duty or obligation of any type or nature whatsoever to Borrower, any Subsidiary of the Borrower or any other Loan Party or any of their respective stockholders or owners or any other Person. 10.10 Banks Not Fiduciaries. The-relationship between (a) Borrower and (b) Agent and Banks, is solely that of debtor and creditor, and neither Agent nor any Bank has or shall have any fiduciary or other special relationship with Borrower, any Subsidiary of the Borrower or any other Loan Party, and no term or provision of any of the Loan Papers shall be construed so as to deem such relationship to be other than that of debtor and creditor. 10.11 Article 15.10(b). The parties hereto agree that, except for Section 15.10(b) thereof, the provisions of Article 5069 - 15.01 et seq. of the Revised Civil Statutes of Texas, 1925, as amended (regulating certain revolving credit loans and revolving triparty accounts) shall not apply to the Loans or the Loan Papers. 10.12 NO ORAL AGREEMENTS. THIS WRITTEN AGREEMENT, TOGETHER WITH THE OTHER LOAN PAPERS, AS WRITTEN, REPRESENT THE FINAL AGREEMENTS BETWEEN AND AMONG THE PARTIES HERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO 107 113 UNWRITTEN ORAL AGREEMENTS BETWEEN BORROWER AND AGENT OR ANY BANK. 10.13 Confidentiality. Agent and each Bank agree (on behalf of itself and each of its Affiliates, directors, officers, employees and representatives) to use reasonable precautions to keep confidential, in accordance with customary procedures for handling confidential information of the nature involved and in accordance with safe and sound banking practices, any non-public information supplied to it by Borrower or any Subsidiary of Borrower pursuant to this Agreement, provided that Agent and each Bank may disclose (and shall not be required to keep confidential) such non-public information (a) to the extent authorized by Borrower or any Subsidiary of Borrower, (b) to the extent required by law, rule, regulation or judicial process of any Tribunal, (c) to its counsel or agents, (d) to bank examiners, regulators, auditors or accountants, (e) to Agent or any other Bank, (f) in connection with any action, suit or proceeding to which it or any one or more of Banks is a party, (g) to any assignee or participant (or prospective assignee or participant) or Affiliate of a Bank so long as such assignee or participant (or prospective assignee or participant) or Affiliate agrees to preserve the confidentiality of any non-public information to the extent required of Banks pursuant to this Section 10.13, (h) which has become public knowledge through no violation of this Agreement, (i) to the extent such information becomes available through a Person other than Borrower or a Subsidiary of Borrower without knowledge by Agent or such Bank (as the case may be) of any requirements of confidentiality, (j) to the extent such information was already known by, or in the possession of, Agent or such Bank, as the case may be, without restriction on disclosure thereof at the time such information was supplied by Borrower or any Subsidiary of Borrower, or (k) to the extent such information is also furnished to Agent or any Bank by a third party not having any similar duty of confidentiality to Borrower. Except as otherwise provided in the immediately preceding sentence, all such non-public information supplied to Agent or any Bank shall not be copied or distributed to any Person other Agent and Banks without the prior written consent of Borrower. The obligations of confidentiality under this Section 10.13 shall supersede and replace the obligations of Agent and each Bank under any confidentiality letter or other confidentiality agreement in respect of the transactions contemplated by this Agreement initially signed and delivered to Borrower prior to the date hereof. 10.14 Construction of Indemnity and Reimbursement Obligations. IT IS THE EXPRESS INTENTION OF THE PARTIES HERETO THAT ALL COVENANTS AND AGREEMENTS MADE BY (a) BORROWER OR (b) BANKS HEREIN TO OR IN FAVOR OF AGENT OR ANY BANK REGARDING ANY INDEMNIFICATION OR REIMBURSEMENT OR DISCLAIMER OF LIABILITY, TO THE EXTENT THAT SUCH COVENANTS AND AGREEMENTS PROVIDE (EXPRESSLY OR BY CLEAR IMPLICATION) THAT THE BENEFICIARY OF SUCH PROVISIONS SHALL BE RESPONSIBLE ONLY FOR ITS OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OR THE LIKE, ARE INTENDED TO AND SHALL INDEMNIFY, REIMBURSE AND PROTECT SUCH BENEFICIARY PURSUANT TO THE TERMS THEREOF NOTWITHSTANDING SUCH BENEFICIARY'S OWN NEGLIGENCE (AS OPPOSED TO GROSS NEGLIGENCE OR WILLFUL MISCONDUCT), WHETHER OR 108 114 NOT THAT NEGLIGENCE IS THE SOLE OR CONCURRING CAUSE OF ANY AMOUNT TO BE INDEMNIFIED, REIMBURSED OR PROTECTED AGAINST. 10.15 Jurisdiction, Etc. (a) Jurisdiction. Borrower hereby irrevocably and unconditionally submits, for itself and its Assets, to the nonexclusive jurisdiction of any Texas court or Federal court sitting in Houston, Texas, or Dallas, Texas, and any appellate court thereof, in any suit, action or proceeding arising out of or relating to this Agreement or any of the other Loan Papers, or for recognition or enforcement of any order or judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such suit, action or proceeding may be heard and determined in such court located in Texas, or to the extent permitted by law, in such Federal court in Harris County, Texas or Dallas County, Texas. Each of the parties hereto agrees that a final judgment in any such suit, action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that Agent or any Bank may otherwise have to bring any suit, action or proceeding relating to this Agreement or any of the other Loan Papers against Borrower or its property in the courts of any jurisdiction. (b) Venue. BORROWER HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT IT MAY LEGALLY AND EFFECTIVELY DO SO, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE OTHER LOAN PAPERS IN ANY TEXAS COURT OR FEDERAL COURT SITTING IN HOUSTON, TEXAS, OR DALLAS, TEXAS. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH SUIT, ACTION OR PROCEEDING IN ANY SUCH COURT. (c) Service of Process. EACH PARTY TO THIS AGREEMENT IRREVOCABLY CONSENTS TO SERVICE OF PROCESS BY PERSONAL SERVICE, COURIER OR MAIL IN THE MANNER PROVIDED FOR NOTICES IN SECTION 10.1. NOTHING IN THIS AGREEMENT SHALL AFFECT THE RIGHT OF ANY PARTY TO THIS AGREEMENT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. 10.16 Changes in Accounting Principles. If any changes in the accounting principles from those in effect on the date hereof are hereafter adopted which result in a change in the method of calculation of any of the financial covenants, standards or terms in this Agreement, the parties hereto agree to enter into negotiations in order to amend such provisions so as to equitably reflect such changes with the desired result that the criteria for evaluating the financial condition of Borrower, its Subsidiaries and each other Person shall be the same after such changes as if such changes had not been made. 109 115 10.17 References to Schedule 10. Any reference in this Agreement to Schedule 10 shall be deemed to be a reference only to that portion of Schedule 10 which specifically relates to the Section of this Agreement in which such reference is made. 10.18 Renewal, Extension, Amendment and Restatement. This Agreement is entered into for purposes of renewing and extending the Loans and other credit accommodations made pursuant to the Original Loan Agreement and for the purpose of amending and restating the Original Loan Agreement. This Agreement shall not constitute a novation of all or any portion of the Borrower's, any of the Borrower's Subsidiaries' or any other Loan Party's indebtedness or obligations evidenced by or arising under or otherwise existing with respect to the Original Loan Agreement or any instrument, agreement or other document executed or delivered in connection therewith (herein collective referred to as the "Original Loan Papers"). All Indebtedness and Obligations that are owed to the Agent or any Bank under the Original Loan Agreement or under any Original Loan Paper shall continue, and all Liens that presently exist as security therefor shall continue in full force and effect as security for the Obligations without change in the priority thereof. 10.19 WAIVER OF JURY TRIAL. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY LEGAL OR EQUITABLE ACTION, SUIT OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN PAPER OR ANY TRANSACTION CONTEMPLATED HEREBY OR THEREBY OR THE SUBJECT MATTER OF ANY OF THE FOREGOING. IN WITNESS WHEREOF, Borrower, Agent and Banks have caused this Agreement to be executed and delivered by their duly authorized officers effective as of the date first above written. BORROWER: CHAMPION HEALTHCARE CORPORATION By: /s/ DEBORAH H. FRANKOVICH -------------------------- Name: Deborah H. Frankovich Title: Vice President 110 116 Address and Telecopy for notice purposes 14340 Torrey Chase, Suite 320 Houston, Texas 77014 Attn: Chief Financial Officer Telecopy No.: (713) 583-5495 AGENT: BANQUE PARIBAS, as Agent for Banks By: /s/ GLENN E. MEALBY ------------------------------- Name: Glenn E. Mealby ------------------------------- Title: Vice President ------------------------------- By: /s/ PATRICK J. MILON ------------------------------- Name: Patrick J. Milon ------------------------------- Title: SVP-DEPUTY GENERAL MANAGER ------------------------------- Address and Telecopy No. for Notice Purposes: 1200 Smith Street, Suite 3100 Houston, Texas 77002 Telecopy No.: (713) 659-4811 111 117 BANKS: ----- BANQUE PARIBAS By: /s/ GLENN E. MEADY -------------------------------- Name: Glenn E. Meady -------------------------------- Title: Vice President -------------------------------- By: /s/ PATRICK J. MILON -------------------------------- Name: Patrick J. Milon -------------------------------- Title: SVP-DEPUTY GENERAL MANAGER -------------------------------- Address and Telecopy No. for Notice Purposes: --------------------------------------------- 1200 Smith Street, Suite 3100 Houston, Texas 77002 Telecopy No.: (713) 659-4811 ----------------- AMSOUTH BANK OF ALABAMA By: /s/ WILLIAM P. BARNES -------------------------------- Name: William P. Barnes -------------------------------- Title: Vice President -------------------------------- 112 118 Address and Telecopy No. for Notice Purposes: 1900 Fifth Avenue North 7th Floor Birmingham, Alabama 35203 Attention: Page Barnes Telecopy No.: (205) 326-5601 Telephone No.: (205) 326-4081 BANK ONE, TEXAS, N.A. By: /s/ WALTER F. RODGERS III ------------------------------------------ Name: Walter F. Rodgers III ---------------------------------------- Title: Vice President --------------------------------------- Address and Telecopy No. for Notice Purposes: --------------------------------------------- 910 Travis Houston, Texas 77002-5860 Attention: Mark E. Story Telecopy No.: (713) 751-6199 Telephone No.: (713) 751-3829 CORESTATES BANK, N.A. By: /s/ PAUL HOGAN ------------------------------------------ Name: Paul Hogan ---------------------------------------- Title: Assistant Vice President --------------------------------------- 113 119 Address and Telecopy No. for Notice Purposes: --------------------------------------------- Philadelphia National Bank 1500 Market Street, West Tower Philadelphia, PA 19101 Attention: Paul Hogan Telecopy No.: (215) 786-7721 Telephone No.: (215) 786-4344 NATIONSBANK OF TEXAS, N.A. By: /s/ FRANK T. HUNDLEY -------------------------------------------- Name: Frank T. Hundley ------------------------------------------ Title: Senior Vice President ----------------------------------------- Address and Telecopy No. for Notice Purposes: --------------------------------------------- 700 Louisiana Houston, Texas 77002 Attention: Frank Hundley Telecopy No.: (713) 247-6719 Telephone No.: (713) 247-6441 114 EX-4.01.D 3 SERIES E NOTE PURCHASE AGREEMENT 1 Champion Healthcare Corporation $35,000,000 Series 11% Senior Subordinated Notes Due December 31, 2003 with Warrants to Purchase Common Stock Series E Note Purchase Agreement Dated May 1, 1995 2 TABLE OF CONTENTS
SECTION HEADING PAGE ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II ISSUE, PURCHASE AND SALE OF NOTES AND WARRANTS . . . . . . . . . . . . . . . . . 8 A. Authorization of Issue of Notes and Warrants . . . . . . . . . . . . . . 8 B. Purchase and Sale of Notes and Warrants . . . . . . . . . . . . . . . . . 8 C. Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 D. Certain Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 E. Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE III CONDITIONS TO CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Conditions to Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE IV PREPAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 A. Optional Prepayment Upon Public Offering . . . . . . . . . . . . . . . . 11 B. Optional Prepayment in Whole or in Part with Premium . . . . . . . . . . 12 C. Mandatory Prepayment at Holders' Option upon Change in Control Event . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 D. Notice of Prepayment and Change in Control . . . . . . . . . . . . . . . 13 E. Partial Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 F. Purchase of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 G. Application of Notes for Exercise of Warrants . . . . . . . . . . . . . . 14 H. Mandatory Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 ARTICLE V CERTAIN COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 A. Financial Statements and Other Reports . . . . . . . . . . . . . . . . . 15 B. Restricted Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 C. Ratio of EBITDA to Interest Expense . . . . . . . . . . . . . . . . . . . 18 D. Ratio of EBITDA to Total Debt Service . . . . . . . . . . . . . . . . . . 18 E. Ratio of Indebtedness to Stockholders' Equity . . . . . . . . . . . . . . 18 F. Treatment of D/C Partnership. The Company shall, for the purpose of determining compliance with the financial covenants contained in this Article V, treat the D/C Partnership as a consolidated Subsidiary . . . . . . . . . . . . . . . . 19 G. Consolidated Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . 19 H. Permanent Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 I Limitation on Funded Indebtedness . . . . . . . . . . . . . . . . . . . . 19 J. Merger, Consolidation, Sale, Lease, Transfer or Other Disposition of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3 K. Restricted Investments . . . . . . . . . . . . . . . . . . . . . . . . . 20 L. Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 M. Inspection of Property . . . . . . . . . . . . . . . . . . . . . . . . . 22 N. Corporate Existence, Licenses and permits . . . . . . . . . . . . . . . . 22 O. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 P. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Q Books and Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 R. Notice of Events Involving Securities . . . . . . . . . . . . . . . . . . 23 S. No "Prohibited Transactions" and Employee Benefits . . . . . . . . . . . 23 T. Compliance with Environmental laws . . . . . . . . . . . . . . . . . . . 24 U. Transactions with Affiliates or Officers . . . . . . . . . . . . . . . . 24 V. Issuance of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 W. Board Visitation Rights . . . . . . . . . . . . . . . . . . . . . . . . . 25 X. No Change in Business . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Y. Issuance of Additional Warrants . . . . . . . . . . . . . . . . . . . . . 25 Z. Post Closing Conditions . . . . . . . . . . . . . . . . . . . . . . . . . 26 AA. No Amendment of D Note Agreement . . . . . . . . . . . . . . . . . . . . 26 ARTICLE VI EVENTS OF DEFAULT AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . 27 ARTICLE VII REPRESENTATIONS, COVENANTS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . 29 A. Organization, Standing, Qualification of Company and Subsidiaries, and Authorization . . . . . . . . . . . . . . . . . . . . . 29 B. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . 30 C. Actions Pending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 D. Outstanding Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 E. Title, Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 F. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 G. Burdensome and Conflicting Agreements and Charter Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 H. Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 I. Possession of Patents, etc . . . . . . . . . . . . . . . . . . . . . . . 32 J. Offering of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 K. Broker's or Finder's Commissions . . . . . . . . . . . . . . . . . . . . 33 L. Application of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . 33 M. Governmental Consent . . . . . . . . . . . . . . . . . . . . . . . . . . 33 N. Holding Company Status . . . . . . . . . . . . . . . . . . . . . . . . . 33 O. Investment Company Status . . . . . . . . . . . . . . . . . . . . . . . . 34 P. ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Q. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 R. Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 S. Environmental Compliance . . . . . . . . . . . . . . . . . . . . . . . . 35 T. Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 U. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
4 ARTICLE VIII REPRESENTATIONS AND COVENANTS OF THE PURCHASERS . . . . . . . . . . . . . . . . . 37 A. Investment Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 B. Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 C. Waiver of Preemptive Rights . . . . . . . . . . . . . . . . . . . . . . . 37 ARTICLE IX SUBORDINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 A. Subordination of Notes . . . . . . . . . . . . . . . . . . . . . . . . . 37 ARTICLE X RESTRICTIONS ON TRANSFER . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 A. Restrictive Legends . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 B. Notice of Proposed Transfer . . . . . . . . . . . . . . . . . . . . . . . 42 C. Termination of Restrictions . . . . . . . . . . . . . . . . . . . . . . . 43 D. Compliance with Rule 144 and Rule 144A . . . . . . . . . . . . . . . . . 43 E. Non-Applicability of Restrictions on Transfer . . . . . . . . . . . . . . 43 ARTICLE XI MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 A. Note Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 B. Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 C. Consent to Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . 45 D. Notices to Subsequent Holder . . . . . . . . . . . . . . . . . . . . . . 46 E. Form, Registration, Transfer and Exchange of Notes; Lost Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 F. Registration, Transfer and Exchange of Warrants . . . . . . . . . . . . . 46 G. Persons Deemed Owners . . . . . . . . . . . . . . . . . . . . . . . . . . 47 H. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 I. Survival of Representations, Warranties and Indemnities . . . . . . . . . 48 J. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . 48 K. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 L. Accounting Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 M. Satisfaction Requirement . . . . . . . . . . . . . . . . . . . . . . . . 49 N. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 O. Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 P. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Q. Non Business Days . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 R. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Signature Page . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 LIST OF EXHIBITS EXHIBIT II-A-1 Form of Notes EXHIBIT II-A2 Form of Warrants EXHIBIT III B Form of Opinion of Company Counsel EXHIBIT III-J Form of Stock Registration Agreement
5 EXHIBIT III-K Form of Addendum Agreement EXHIBIT V-U Transaction with Affiliates or Officers EXHIBIT VII-A List of Subsidiaries EXHIBIT VII-B Financial Statements EXHIBIT VII-C Actions Pending EXHIBIT VII-D Certain Indebtedness EXHIBIT VII-G Burdensome and Conflicting Agreements and Charter Provisions EXHIBIT VII-P Retiree Medical or Death Benefits and Other Benefits Payable after Termination of Employment and Employee Plans EXHIBIT VII-R Certain Reserved Shares and Owners of 5% or More of Securities and Holders of Piggy-Back Registration Rights
6 SERIES E NOTE PURCHASE AGREEMENT THIS SERIES E NOTE PURCHASE AGREEMENT, dated May 1, 1995 (herein as the same may be amended or modified from time to time, called this "Agreement"), by and among CHAMPION HEALTHCARE CORPORATION, a Delaware corporation (the "Company"), and the respective purchasers named in Schedule I of this Agreement (individually, a "Purchaser" and collectively, the "Purchasers"). WITNESSETH: WHEREAS, the Company desires to issue Thirty-Five Million Dollars ($35,000,000) aggregate principal amount of its Series E 11% Senior Subordinated Notes due December 31, 2003 (the "Notes") and detachable warrants (the "Warrants") initially evidencing the right to purchase an aggregate of 525,000 shares of common stock of the Company; and WHEREAS, the Company desires to sell the Notes and the Warrants to the Purchasers, and the Purchasers desire to purchase the Notes and the Warrants from the Company, on the terms and subject to the conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises and the mutual agreements contained herein, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS For the purposes of this Agreement, the following terms shall have the following respective meanings: "Addendum Agreement" shall mean the Addendum Agreement dated June 12, 1995 by and between the Purchasers, Champion Healthcare Corporation and the Stockholders (as defined therein), attached hereto as Exhibit III-K, and shall also mean the D Stockholders Agreement as amended pursuant to the Addendum Agreement. "Affiliate" shall mean, with respect to any Person, any person that, directly or indirectly, controls, is controlled by or is under common control with such Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise. "Applicable Rate" shall mean with respect to the outstanding principal amount of the Notes, 11% per annum from the date of issue up to and including December 31, 2000, and 12% per annum thereafter; provided, however, that in the event that the Company has not completed a public issuance of debt of the Company having a maturity of more than one year which shall result in the receipt by the Company of gross proceeds in a minimum of $100,000,000 prior to March 31, 1996, the Applicable Rate shall be 11.50% for the period from April 1, 1996 to and including December 31, 2000. 1 7 "Bank Agreement" is defined in paragraph 9A. "Certificate of Incorporation" shall mean the Company's Certificate of Incorporation as filed with the Secretary of State of the State of Delaware effective the Closing Date. "Change in Control Event" shall mean (i) if (A) Charles R. Miller shall have beneficial ownership of fewer than 80% of the number of shares of Common Stock (on a fully diluted basis) beneficially owned by him on the Closing Date, after taking into account any subdivision or combination of Common Stock, at any time prior to the first anniversary of completion by the Company of a Successful Public Offering or (B) at any time prior to the second anniversary of such Successful Public Offering Charles R. Miller shall have beneficial ownership of fewer than 40% of the number of shares of Common Stock beneficially owned by him on the Closing Date, after taking into account any subdivision or combination of Common Stock, (it being understood that Charles R. Miller shall be deemed to have beneficial ownership of any shares held by any member of his immediate family or the trustee of any trust created for the benefit of any such family member), or (ii) the acquisition in one or more transactions not involving a public offering of Common Stock by any Person or group (within the meaning of Section 13(d)(3) of the Exchange Act) together with any Affiliate of such Person or member of such group of beneficial ownership, direct or indirect, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding voting securities, or (iii) the sale, transfer or other disposition in one or more transactions of all or substantially all of the assets of the Company or (iv) the merger or consolidation of the Company with or into another Person, other than a wholly-owned Subsidiary, unless such merger or consolidation does not result in a reclassification, conversion, exchange or cancellation of any outstanding shares of Common Stock of the Company, or (v) the Company proceeds to acquire its Common Stock (or undertakes a corporate reorganization or recapitalization or other action) if the effect of such acquisition (or other action) would be either (1) to reduce substantially or to eliminate any public market for the shares of the Company's Common Stock or (2) to remove the Company from registration with the Commission under the Exchange Act or (3) to require the Company to make a filing under Section 13(e) of the Exchange Act or (4) to cause a delisting of the Company's Common Stock from the National Association of Securities Dealers, Inc. Automated Quotation System (unless such stock is delisted as a result of being listed on a national securities exchange) or to cause a delisting of the Company's Common Stock from a national securities exchange, or (vi) either the Company and/or one or more Subsidiaries of the Company is materially or completely liquidated or is the subject of any voluntary or involuntary dissolution or winding up, except as to any Subsidiary which may be liquidated, dissolved or wound-up in accordance with the provisions of paragraph 5(J). Notwithstanding the conditions set forth in subclause (i) above, a Change in Control Event shall not be deemed to have occurred with respect to Charles R. Miller at any time after (1) his termination of employment (provided, that such termination is not due to a Voluntary Termination or Involuntary Termination with Cause as such terms are used in the Employment Agreement between Charles R. Miller and the Company as in effect on the date hereof), or (2) any permanent disability that prevents his continued employment or (3) his death. 2 8 "Code" shall mean the Internal Revenue Code of 1986, as amended. "Commission" shall mean the Securities and Exchange Commission or any other governmental authority at the time administering the Securities Act or the Exchange Act. "Common Stock" shall mean and include the Company's presently authorized common stock, $.01 par value per share, as constituted on the Closing Date, and, when used in Article X hereof or in the Warrants, shall also mean and include any capital stock of any class of the Company hereafter authorized which shall not be either (i) limited to a fixed sum or percentage of par value in respect of the rights of the holders thereof to receive dividends and to participate in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding-up of the Company, or (ii) redeemable at any time by the Company, or both; provided, however, that the shares issuable upon exercise of the Warrants shall include only shares of capital stock of the Company designated as Common Stock on the Closing Date or, in case of any reclassification of the outstanding shares thereof, the stock, securities or assets provided for in 1E of the Warrants, which are not limited to any such fixed sum or percentage of par value and are not so redeemable by the Company. "Consolidated Net Worth" shall mean, as of any date, the consolidated net worth of the Company and its consolidated Subsidiaries, as determined in accordance with generally accepted accounting principles consistently applied as set forth in the most recent quarterly balance sheet of the Company; provided, however that Redeemable Preferred Stock shall not be treated as a liability and shall be included as a component of stockholder's equity on such balance sheet in making such determination. "Current Indebtedness" shall mean, as of any date, with respect to any Person, (i) all liabilities for borrowed money and all liabilities secured by any Lien existing on property owned by such Person whether or not such liabilities have been assumed and (ii) all such liabilities, as guarantor or in any similar capacity, with respect to borrowed money, which, as to (i) or (ii), are payable on demand or within one year from the date of determination, except any such liabilities which are renewable or extendible at the option of the debtor to a date more than one year from the date of determination. "D/C Partnership" shall mean Dakota/Champion Partnership, a North Dakota partnership. "D Note Agreement" shall mean the Series D Note and Stock Purchase Agreement, dated as of December 31, 1993, as amended, between the Company and the parties listed therein. "D Stockholders Agreement" shall mean the D Stockholders Agreement dated December 31, 1993, as amended, by and between the Company, the holders of Series A Preferred Stock, the holders of Series BB Preferred Stock, the holders of the Series C Preferred Stock, the holders of the Series D Preferred Stock, the Purchasers purchasing Warrants pursuant hereto and each of the other parties signatory thereto. "E Stock Registration Agreement" shall mean that certain Series E Stock Registration Agreement dated May 1, 1995 entered into between the Company and the Purchasers in the form set forth as Exhibit III-K hereto. 3 9 "EBITDA" means, for any period, the sum (determined without duplication on a consolidated basis in accordance with generally accepted accounting principles consistently applied) of (a) net income (or net loss) of the Company on a consolidated basis (calculated before extraordinary items and income attributable to minority interests in Affiliates which has not been remitted in cash to the Company on a consolidated basis) plus (b) Interest Expense for such period deducted in the determination of such net income (or net loss) plus (c) depreciation and amortization to the extent deducted in determining net income (or net loss) plus (d) writeoffs of assets subject to amortization prior to the end of the amortization period to the extent deducted in determining net income (or net loss) plus (e) all taxes accrued for such period on or measured by income to the extent deducted in determining such net income (or net loss) plus (f) expenses incurred in connection with the preparation and execution of this Agreement and future financing agreements, notes and security instruments to the extent they were included in operating expenses (in accordance with generally accepted accounting principles consistently applied) and not included in (c) or (d) above plus (g) any non-cash compensation expense attributable to stock option or other equity compensation arrangements to the extent such non-cash compensation expense was deducted in computing net income (or net loss) plus (h) the EBITDA allocable to any business acquired (whether by stock, assets or partnership) less any EBITDA allocable to any assets or businesses sold, held for sale or otherwise transferred with or as part of the subject acquisition transaction, as though such acquisition were made on the first day of the period plus (i) the amount of non-recurring merger or acquisition charges related to such business acquired. "Environmental Laws" shall have the meaning set forth in paragraph 7S hereof. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Affiliate" shall mean any entity required to be aggregated with the Company or any Subsidiary under Section 414(b), (c), (m) or (o) of the Code. "Event of Default" shall mean any of the events specified in Article VI, provided that there has been satisfied any requirement in connection with such event for the giving of notice, or the lapse of time, or the happening of any further condition, event or act, and "Default" shall mean any of such events, whether or not any such requirement has been satisfied. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any similar or successor federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Exercise Price" shall have the meaning set forth in paragraph 1A of the Warrants. "Expiration Date" shall mean December 31, 2003. "Fixed Charges" means, for any period, an amount equal to the sum of (a) scheduled principal payments made on Indebtedness plus (b) Interest Expense. "Funded Indebtedness" shall mean, as of any date, with respect to any Person, without duplication: (a) its liabilities for borrowed money other than Current Indebtedness; 4 10 (b) liabilities secured by any Lien existing on property owned by such Person (whether or not such liabilities have been assumed), other than Current Indebtedness; (c) obligations other than Current Indebtedness of such Person, contingently or otherwise, as obligor, guarantor or otherwise, under any lease of real or personal property or comparable arrangement with respect to use or title which are required by generally accepted accounting principles consistently applied to be capitalized; (d) obligations other than Current Indebtedness of such Person, contingently or otherwise, as guarantor or otherwise, under any arrangement with respect to liabilities for borrowed money which, if the Company were the obligor, would represent Funded Indebtedness or which are required by generally accepted accounting principles consistently applied to be capitalized; (e) any other obligations (other than deferred taxes, malpractice liability accruals or other estimates of liabilities for which there is no specific requirement for future payment) which are required by generally accepted accounting principles consistently applied to be shown as liabilities on its balance sheet and which are payable or remain unpaid more than one year from the date of determination thereof; and (f) but specifically excluding (1) any equity interests owned by other unrelated parties in businesses or operations of such Person which are required by generally accepted accounting principles to be reflected as a liability or otherwise than an asset on the balance sheet; and (2) with respect to Funded Indebtedness of the Company, the Indebtedness in the principal amount not exceeding $9,999,750 due April 15, 1996 owed to Wilmington Savings Fund Society FSB, a federal savings bank. "Hazardous Substances" shall have the meaning set forth in paragraph 7S hereof. "Indebtedness" shall mean Current Indebtedness and Funded Indebtedness. "Interest Expense" means, for any period, the aggregate amount of interest expense (excluding amortization of debt issuance costs) accrued during such period on Indebtedness of the Company on a consolidated basis, in accordance with generally accepted accounting principles consistently applied. "Lien" shall mean any interest in property securing an obligation owed to, or a claim by, a Person other than the owner of the property, whether such interest is based on the common law, statute or contract, and including but not limited to the security interest lien arising from a mortgage, encumbrance, pledge, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. The term "Lien" shall include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting property, except any such usual or normal reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases or other title exceptions or encumbrances affecting property that are not disruptive to the use of such property in the ordinary course of business. For the purposes of this Agreement, the Company or a Subsidiary shall be deemed to be the owner of any property which it has acquired or holds subject to a conditional sale agreement, financing lease or other arrangement pursuant to which title to the 5 11 property has been retained by or vested in some other Person for security purposes. "Maturity Date" shall mean December 31, 2003. "Multiemployer Plan" shall mean a plan which is a Multiemployer Plan as defined in Section 4001(a)(3) of ERISA. "Net Income" shall mean the net income of the Company on a consolidated basis after the effect of income taxes as reflected on the statement of operations prepared in accordance with generally accepted accounting principles consistently applied. "Net Loss" shall mean the net loss of the Company on a consolidated basis after the effect of income taxes as reflected on the statement of operations prepared in accordance with generally accepted accounting principles consistently applied. "1993 Notes" shall mean the Series D 11% Senior Subordinated Notes due December 31, 2003 issued pursuant to the D Note Agreement. "Officer's Certificate" shall mean a certificate signed in the name of the Company by its Chairman of the Board, its President, one of its Vice Presidents or its Treasurer or Chief Financial Officer. "Permanent Capital" shall mean the sum of (a) the outstanding principal amount of the Notes, plus (b) the outstanding principal amount of the 1993 Notes, plus (c) Indebtedness subordinated in right to payment to the Notes and the 1993 Notes (pursuant to subordination provisions substantially identical to the provisions of Article IX of this Agreement except that the Notes and the 1993 Notes shall be included within the definition of "Senior Indebtedness" for purposes of such subordination provisions and having a final maturity and scheduled payments of principal commencing after the final maturity of the Notes and the 1993 Notes), plus (or if negative, minus) (d) Stockholders' Equity, determined in accordance with generally accepted accounting principles consistently applied. "Person" shall mean and include an individual, a corporation, an association, a partnership, a trust or estate, a government or any department or agency thereof. "Redeemable Preferred Stock" shall mean collectively (i) the Series A Preferred Stock, (ii) the Series BB Preferred Stock, (iii) the Series C Preferred Stock, (iv) the Series D Preferred Stock and (v) all other series of preferred stock of the Company which shall not have mandatory sinking fund or other scheduled redemption provisions prior to the final maturity of the Notes, but which may be redeemable upon the occurrence of a "Change in Control Event" or a "Default Event", as such terms are defined in the Certificate of Incorporation. "Responsible Officer" shall mean the Chairman of the Board, the Treasurer or any Executive Vice President of the Company. "Restricted Securities" shall mean at any time (a) the Common Stock previously issued or, unless the context otherwise requires, issuable upon exercise of the Warrants, and (b) any Common Stock issued subsequent to the exercise of the Warrants as a dividend or other distribution with respect to, or in exchange for or in replacement of, the Common Stock issued upon such exercise; provided, however, that immediately after and throughout the period during which the restrictions 6 12 on the transferability of such Common Stock shall have ceased and terminated in accordance with Article X hereof, the same shall cease to be Restricted Securities. Where the context so requires, "holders of Restricted Securities" shall include holders of Warrants exercisable for Restricted Securities. "Securities Act" shall mean the Securities Act of 1933, as amended, and any similar or successor Federal statute, and the rules and regulations of the Commission thereunder, all as the same may be in effect at the time. "Senior Indebtedness" shall have the meaning set forth in Article IX hereof. "Series A Preferred Stock" shall mean the Series A Convertible Preferred Stock and Series A-1 Convertible Preferred Stock of the Company having a preference upon liquidation or dissolution of the Company as set forth in the Certificate of Incorporation. "Series BB Preferred Stock" shall mean the Series BB Cumulative Convertible Preferred Stock of the Company having a preference upon liquidation or dissolution of the Company as set forth in the Certificate of Incorporation. "Series C Preferred Stock" shall mean the Series C Cumulative Convertible Preferred Stock of the Company having a preference upon liquidation or dissolution of the Company as set forth in the Certificate of Incorporation. "Series D Preferred Stock" shall mean the Series D Cumulative Convertible Preferred Stock of the Company having a preference upon liquidation or dissolution of the Company as set forth in the Certificate of Incorporation. "Series D Stock Registration Agreement" shall mean that certain Series D Stock Registration Agreement dated December 31, 1993, as amended, by and among the Company and the "Purchasers" as defined therein. "Stockholders' Equity" shall mean at any time stockholders' equity as set forth on the most recent consolidated balance sheet of the Company and its consolidated Subsidiaries prepared in accordance with generally accepted accounting principles consistently applied; provided, however, that Redeemable Preferred Stock shall be included in such calculation. "Subsidiary" shall mean a corporation of which the Company owns, directly or indirectly, more than 50% of the shares of stock entitled to vote in the election of directors (excluding shares so entitled to vote only upon a failure to pay dividends or other contingencies). "Successful Public Offering" shall mean the first public offering of Common Stock after December 6, 1994 which shall have resulted in both (i) gross proceeds of at least $25,000,000 and (ii) the receipt by the Company of gross proceeds of at least $15,000,000. "Total Assets" shall mean and include all of the assets of the Company and its consolidated Subsidiaries, determined in accordance with generally accepted accounting principles consistently applied. "Total Debt Service" shall mean for any fiscal period, as of the end of any fiscal period of the Company and its consolidated Subsidiaries, the sum of (i) Interest Expense on all Indebtedness 7 13 and (ii) all scheduled principal payments due on all Indebtedness during such fiscal period, all computed with respect to the Company and its Subsidiaries on a consolidated basis, in accordance with generally accepted accounting principles consistently applied. "Warrant" or "Warrants" shall have the meaning set forth in paragraph 2A hereof. ARTICLE II ISSUE, PURCHASE AND SALE OF NOTES AND WARRANTS A. Authorization of Issue of Notes and Warrants. The Company has authorized the issue of its Notes in the aggregate principal amount of $35,000,000 and the issue of Warrants initially evidencing the right to purchase an aggregate of 525,000 shares of Common Stock of the Company to be sold together with but detachable from the Notes. The Notes shall be dated the date of issue, shall mature on the Maturity Date, shall bear interest on the unpaid balance thereof from the date thereof until the principal thereof shall have become due and payable in cash at the Applicable Rate, payable quarterly on each March 31, June 30, September 30 and December 31, beginning June 30, 1995 and shall be substantially in the form of Exhibit II-A1 attached hereto; provided, however, that during any period in which there is a default in the payment of interest or principal, interest shall accrue at the Applicable Rate plus two percent compounded annually. All interest on the Notes shall be computed on the basis of the actual number of days elapsed and a year of 365 or 366 days, as applicable. The Warrants shall be dated the date of issue, shall expire on the Expiration Date and shall be substantially in the form attached hereto as Exhibit II-A2. The term "Note" or "Notes" as used herein shall include each Note delivered pursuant to any provision of this Agreement and each Note delivered in substitution or exchange for any such Note, in any case which is at the time outstanding. The term "Warrant" or "Warrants" as used herein shall include each warrant delivered pursuant to any provision of this Agreement and each warrant delivered in substitution or exchange for any such Warrant, in any case which is at the time outstanding. B. Purchase and Sale of Notes and Warrants. At the Closing (as defined below) and subject to the terms and conditions of this Agreement, each Purchaser severally, and not jointly, agrees to purchase from the Company and the Company agrees to issue and sell to each Purchaser, Notes in such principal amount ("Notes Purchased") and Warrants ("Warrants Purchased") initially exercisable to purchase such number of shares of Common Stock as is set forth opposite such Purchaser's name in the columns labeled, respectively, Notes Purchased and Warrants Purchased on Schedule I hereto. Such sales of Notes and Warrants to each Purchaser is to be a separate sale, and no Purchaser shall have any liability under this Agreement on account of any other Purchaser and each of the Purchasers shall be deemed to have entered into separate agreements for the purchase and sale of the Notes and Warrants to be purchased by such Purchaser. The purchase price for the Warrants Purchased and Notes Purchased to be purchased by each Purchaser shall be the amount set forth opposite such Purchaser's name in the column labeled "Investment" in Schedule I. C. Closing. The Closing shall take place at 11:00 a.m. Central Standard time on June 12, 1995 (the "Closing"). The Closing shall take place at the offices of Chapman and Cutler, or at such other location as the Purchasers and the Company may agree, whereupon the Company will deliver 8 14 to the Purchasers (i) one or more Notes, as each Purchaser may request, registered in the name of or as directed by such Purchaser, evidencing the principal amount of Notes to be purchased by such Purchaser and (ii) Warrants registered in the name of or as directed by such Purchaser, against payment of the purchase price thereof by certified or official bank check or by wire transfer of immediately available funds to or upon the order of the Company. Should any Purchaser fail to purchase any Notes and Warrants as provided herein, then the remaining Purchasers shall have the right, but not the obligation, to acquire the amount of such defaulting Purchaser's Notes or Warrants pro rata or, alternatively, as they among themselves may mutually agree. D. Certain Tax Matters. The Purchasers and the Company agree that for federal income tax and other purposes the purchase price payable under Paragraph 2C hereof shall be allocated $1,000 to each $1,000 principal amount of the Notes and Warrants initially exercisable to purchase fifteen (15) shares of Common Stock. The Purchasers and the Company agree that the issue price of the Notes within the meaning of Section 1273(b) and 1273(c)(2)(B) of the Code is $980.905 for each $1,000 principal amount of the Notes and that therefore there is $19.095 original issue discount (as defined in Section 1273(a)(1) of the Code) with respect to the Notes. Such $19.095 original issue discount will be used for federal income tax purposes (including reporting purposes) with respect to the transactions under or contemplated by this Agreement. E. Terms. Except as otherwise set forth in this Agreement, the terms and provisions of this Agreement shall continue in full force and effect until such time as all Notes shall have been paid in full and all Warrants shall have been exercised or shall have expired by their terms. ARTICLE III CONDITIONS TO CLOSING Conditions to Closing. The Purchasers' obligation to purchase and pay for the Notes and Warrants at the Closing is subject to the satisfaction, on or before the Closing Date, of the following conditions: (a) Opinion of Purchasers' Counsel. On or prior to the Closing the Purchasers shall have received from Chapman and Cutler, who are acting as special counsel for the Purchasers in connection with this transaction, favorable opinions, dated the Closing Date, satisfactory to each Purchaser. (b) Opinion of Company's Counsel. On the Closing Date the Purchasers shall have received from Michener, Larimore, Swindle, Whitaker, Flowers, Sawyer, Reynolds & Chalk, L.L.P., which is acting as counsel to the Company in connection with this transaction, a favorable opinion, dated the Closing Date satisfactory to each Purchaser, substantially in the form and to the effect set forth in Exhibit III-B hereto. (c) Expenses. On the Closing Date, the Company shall have paid the fees and expenses of Chapman and Cutler as special counsel to the Purchasers. (d) Purchase of Notes and Warrants. At the Closing, Purchasers shall have purchased the Notes and Warrants set forth opposite their names on Schedule I under the columns labeled "Notes Purchased" and "Warrants Purchased". 9 15 (e) Representations and Warranties; No Default. The representations and warranties contained in Article VII hereof shall be true on and as of the Closing Date, except to the extent of changes caused by the transactions herein contemplated; there shall exist on the Closing Date after giving effect to the transactions described herein no Event of Default or Default; all conditions to the Closing set forth in this paragraph 3A shall have been met; and the Company shall have delivered to the Purchasers an Officer's Certificate, dated the Closing Date, to such effects. (f) Compliance with this Agreement. The Company shall have performed and complied in all material respects with all agreements, covenants and conditions contained herein and in any other document contemplated hereby or thereby which are required to be performed or complied with by the Company on or before the Closing Date. (g) Purchase Permitted by Applicable Laws. The purchase of and payment for the Notes and Warrants to be purchased by the Purchasers on the Closing Date on the terms and conditions herein provided (including the use of the proceeds of the Notes by the Company) shall not violate any applicable law or governmental regulation (including without limitation Regulations G, T and X of the Board of Governors of the Federal Reserve System) and shall not subject the Purchasers to any tax, penalty, liability or other onerous condition under or pursuant to any applicable law or governmental regulation relating to the extension of credit. (h) Compliance with Outstanding Debt Issues. On the Closing Date, the Company shall have delivered to the Purchasers such evidence as the Purchasers or their special counsel may reasonably request showing that the execution, delivery and performance by the Company of this Agreement and the sale of the Notes and Warrants and the issuance of the Common Stock upon the exercise of the Warrants will not conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in the creation of any Lien upon any of the properties or assets of the Company or any Subsidiary pursuant to, or otherwise violate, any instrument evidencing any Indebtedness of the Company or any of its Subsidiaries or any agreement relating thereto, including without limitation, a ninth amendment of the D Note Agreement. (j) E Stock Registration Agreement. The Purchasers and the Company shall have entered into the E Stock Registration Agreement in substantially the form set forth in Exhibit III-J hereto. (k) Addendum Agreement. The Purchasers and the Company shall have executed and delivered the Addendum Agreement in substantially the form set forth in Exhibit III-K hereto. (l) Waivers. The Company shall have entered into an amendment and waiver agreement of the Series D Stock Registration Agreement which shall include the Purchasers as Existing Shareholders (as defined therein) and waive the prohibition on granting certain registration rights to other shareholders, and otherwise satisfactory in form and substance to the Purchasers. Furthermore, the Shareholders (as defined in the D Stockholders Agreement) shall have waived the preemptive rights granted to such shareholders pursuant to Section 4.1 thereof and such amendment and waiver agreement shall be otherwise satisfactory in form and substance to the Purchasers. (m) Payment of Closing Fee. Prior to the issuance and sale of the Notes and 10 16 Warrants to the Purchasers, the Company shall have paid to the Purchasers, on a pro-rata basis in immediately available funds, an aggregate closing fee equal to .5% of the principal amount of Notes being issued hereunder. (n) Proceedings. On the Closing Date, all corporate and other proceedings taken or to be taken in connection with the transactions contemplated hereby and all documents incident thereto shall be satisfactory in form and substance to the Purchasers and their special counsel, and the Purchasers and their special counsel shall have received all such counterpart originals or certified or other copies of such documents as they may reasonably request. (o) Private Placement Number. The Purchasers shall have received a Private Placement Number from Standard & Poor's Corporation for the Notes and Warrants issued hereunder. ARTICLE IV PREPAYMENTS The Notes shall be subject to optional and mandatory prepayments as specified in paragraphs 4A, 4B and 4C hereof. A. Optional Prepayment Upon Public Offering. Without regard to prepayments, if any, pursuant to paragraph 4B or 4C hereof, the Notes shall be subject to prepayment of principal at the option of the holders thereof as follows: (a) 25% of the principal amount of the Notes (at par) outstanding, together with interest accrued thereon to the date of prepayment (with no prepayment penalty), if the Company shall complete a public offering after December 6, 1994 of Common Stock of the Company which shall result in the receipt by the Company, and any selling Shareholder of gross proceeds in a minimum of $25,000,000, provided that the aggregate payments to the holders of the Notes and the holders of the 1993 Notes, which shall be made in accordance with the formula set forth in subparagraph (c) below (such pro rata payments to the holders of the 1993 Notes, the "Required 1993 Series Prepayments"), shall not in any event exceed an amount equal to fifty percent (50%) of the gross proceeds of such public offering to the Company (less underwriter's discounts, commissions and any underwriter's fees paid by the Company); (b) For each whole $1,000,000 increment of such gross proceeds in excess of $25,000,000 the principal amount of Notes subject to prepayment of principal, at the option of the holders, shall increase by 1%, up to a maximum of 50%, provided such payments provided for in paragraphs 4A(a) and 4A(b) in the aggregate, together with the aggregate Required 1993 Series Prepayments, shall not in any event exceed an amount equal to fifty percent (50%) of the gross proceeds of such public offering to the Company (less underwriter's discounts, commissions and any underwriter's fees paid by the Company); and (c) Such prepayments shall be allocated between the Notes and the 1993 Notes pro rata as follows: Each holder of Notes or 1993 Notes requesting prepayment shall receive a principal prepayment equal to the amount so prepayable to all such holders of Notes and 1993 Notes multiplied by a fraction, the numerator of which is the principal amount of the Notes or 1993 Notes 11 17 held by such holder and the denominator of which is the aggregate principal amount of Notes and 1993 Notes outstanding with respect to which the holders thereof have requested prepayment (the "Proration Formula"). The principal amount of the Notes and the 1993 Notes outstanding shall be determined immediately prior to effective date of such public offering. The Company shall notify each holder of Notes of the occurrence of such public offering as aforesaid within 10 days after the effective date of the registration statement pertaining thereto under the Securities Act. Each such holder may, for a period ending 30 days after the date such notice is received by such holder, subject to completion of the offering, request in writing that up to 25% (or such higher percentage that is applicable by virtue of clause (b) above) of the principal amount of the Notes held by such holder be prepaid. Within three (3) days after receipt by the Company of such a request, the Company will confirm the date of prepayment to the requesting holder and will in each case immediately upon the expiration of such 30-day period, prepay the Notes of all holders requesting prepayment in the principal amount required to be prepaid, in accordance with the Proration Formula, together with accrued and unpaid interest thereon to the date of prepayment thereof. Any such prepayments shall be in immediately available funds to the place or bank account which such holder has designated for such payments hereunder. B. Optional Prepayment in Whole or in Part with Premium. The Notes shall be subject to prepayment, at any time in whole, or from time to time in part, at the option of the Company on or after December 31, 1995, at the applicable percentage of principal amount so to be prepaid set forth below, together in each case with interest accrued thereon to the date of prepayment: PERIOD PERCENTAGE December 31, 1995 to December 30, 1996 112.5% December 31, 1996 to December 30, 1997 110.7143% December 31, 1997 to December 30, 1998 108.9286% December 31, 1998 to December 30, 1999 107.1429% December 31, 1999 to December 30, 2000 105.3572% December 31, 2000 to December 30, 2001 103.5715% December 31, 2001 to December 30, 2002 101.7858% December 31, 2002 to and thereafter 100% All partial prepayments pursuant to this paragraph 4B and paragraph 4B of the D Note 12 18 Agreement shall be allocated pro rata among the Notes and the 1993 Notes. C. Mandatory Prepayment at Holders' Option upon Change in Control Event. (a) The Notes shall be subject to prepayment by the Company, and the Company shall immediately prepay such Notes, in whole or in part, in cash, at the option of the holder, upon the occurrence of a Change in Control Event and thereafter for a period ending 90 days subsequent to receipt by the holders of Notes of notice from the Company to the effect that a Change in Control Event has occurred, upon at least ten days written notice to the Company by such holder specifying (a) the principal amount of Notes to be prepaid and (b) the prepayment date. (b) The prepayment price of the Notes as to each holder shall at the election of such holder be (i) the sum of (A) the product of 3% multiplied by the principal amount to be prepaid, (B) the principal amount to be prepaid and (C) accrued interest; or (ii) the sum of (A) the product of the applicable percentage in paragraph 4B (with 112.5% deemed to be applicable to any period prior to December 31, 1995) times the principal amount to be prepaid and (B) accrued interest, together with the surrender to the Company for cancellation of 15 Warrants for each $1,000 principal amount of Notes being prepaid. D. Notice of Prepayment and Change in Control. The Company shall give each holder of Notes written notice of each prepayment pursuant to paragraph 4B hereof not less than 30 days nor more than 45 days prior to any prepayment date, specifying such prepayment date, the principal amount of the Notes (and, if not all Notes are then held by a Purchaser, of the Notes held by each holder) to be prepaid on such date and the paragraph pursuant to which such prepayment is to be made. Notice of prepayment having been given as aforesaid, the principal amount of the Notes specified in such notice, together with interest thereon to the date of prepayment and the premium, if any, herein provided, shall become due and payable on the prepayment date specified. The Company shall give each holder of a Note written notice of a Change in Control Event not more than 10 days after such event. E. Partial Prepayments. Upon prepayment of less than all of the Notes pursuant to paragraph 4B, the principal amount so prepaid (which, in the case of a partial prepayment, shall be in a minimum amount of $500,000 and integral multiples thereof in the case of a prepayment pursuant to paragraph 4B) shall be allocated to all Notes at the time outstanding in proportion to the outstanding principal amounts thereof. Upon any partial prepayment of any Note, such Note shall, at the option of the holder thereof, be either (a) surrendered to the Company in exchange for a new Note in a principal amount equal to the principal amount remaining unpaid on the Note surrendered, and otherwise having the same terms and provisions as the Note surrendered, or (b) made available to the Company at the principal office of the original holder of such Note for notation thereon of the portion of the principal so prepaid, except that, so long as any Purchaser shall hold any Note, the Company agrees that such Purchaser may make notation of any portion of the principal so prepaid on such Note on such Purchaser's records. F. Purchase of Notes. The Company covenants that it will not, and will not permit any Subsidiary to, directly or indirectly, pay, prepay, exchange, purchase or otherwise acquire any Note or any 1993 Note except by making a payment or prepayment in accordance with the provisions of 13 19 the Notes and of this Agreement. Any Note acquired by the Company or any Subsidiary shall be canceled and shall not thereafter be deemed outstanding for any purpose hereunder. G. Application of Notes for Exercise of Warrants. Notwithstanding any other provision of this Agreement (including without limitation, Article IX hereof), the holder of any Note may, at any time, and from time to time prior to and including the date of repayment in full of all amounts due under the Note, or, with respect to any principal amount of Notes for which the Company has given notice of prepayment in accordance with this Article IV prior to the date of such prepayment, apply all or any part of the unpaid principal thereof and accrued interest thereon to the payment of all or a portion of the exercise price of Warrants or the warrants issued and outstanding pursuant to (i) the Note Purchase Agreement dated May 27, 1992 between the Company and the parties listed therein or (ii) the D Note Agreement. Under the terms and conditions set forth in the form of Warrant attached hereto as Exhibit II-A2, Warrants with sufficient Warrant Values (as therein defined) may be tendered in payment of the Exercise Price. H. Mandatory Exchange. Notwithstanding the foregoing provisions of this Article IV, if at any time prior to December 31, 1995, the Company shall complete a public offering of Indebtedness having a final maturity date which is one year or more subsequent to the date of issuance in an original principal amount issued in a public offering of not less than $100,000,000, except as otherwise provided in this paragraph 4H, it may require the holders of Notes (a) to exchange (through a redemption or otherwise) their Notes, in whole but not in part, for such Indebtedness having a principal amount equal to the principal amount of the Notes exchanged, if: (i) such exchange is approved by the consent of the holders of not less than 80% in principal amount of the Notes then outstanding, and (ii) concurrently with such exchange, the Company pays in cash all unpaid interest accrued to the date of such exchange on all of the outstanding Notes which are so exchanged or redeemed, and (iii) at the time of such exchange, no Default or Event of Default shall be in existence; provided, however, that any holder of Notes not consenting to such exchange shall not be required to effect such exchange, and such holder shall, at its sole option, participate in such exchange as if it had consented thereto or be paid on the date of exchange an amount in cash equal to 103% of the principal amount of such holder's Notes plus unpaid interest accrued thereon to the date of prepayment. In connection with any such exchange or payment, no Warrants shall be cancelled, whether or not the holder thereof participates in such exchange. The Company shall give each holder of Notes not less than 10 days nor more than 30 days notice of the date of such exchange or payment (which notice shall describe in reasonable detail the principal amount of Notes being exchanged and the holders thereof and shall certify to the holders of the Notes that the conditions set forth in clauses (i), (ii) and (iii) above will be true and correct on and as of the date of the exchange), and concurrently with such exchange shall deliver to each holder of Notes participating in such exchange a final prospectus relating to the indebtedness delivered in such exchange. 14 20 ARTICLE V CERTAIN COVENANTS A. Financial Statements and Other Reports. So long as any Purchaser or any transferee of such Purchaser shall hold any Note or Warrants which in the aggregate are initially exercisable to purchase 75,000 shares of Common Stock, the Company will deliver to such Purchaser or such transferee: (a) as soon as practicable and in any event within 45 days after the end of each month, copies of the Company's consolidated balance sheet, consolidated income statement and consolidated statement of cash flows in the manner in which such documents are routinely prepared. (b) as soon as practicable and in any event within 45 days after the end of each of the first three quarters, (i) key operating indicators, consolidated statements of income, stockholders' equity and cash flows of the Company and its consolidated Subsidiaries for such fiscal period and for the period from the beginning of the current fiscal year to the end of such fiscal period, and a consolidated balance sheet of the Company and its consolidated Subsidiaries as at the end of such fiscal period, setting forth in each case in comparative form consolidated figures for the corresponding periods in the preceding fiscal year and (ii) consolidated statements of income of the Company and its consolidated Subsidiaries for such fiscal period and for the period from the beginning of the current fiscal year to the end of such fiscal period, setting forth in comparative form consolidated figures in comparative form for the corresponding period in the budget delivered pursuant to paragraph 5A(i) hereto, all in reasonable detail, prepared in accordance with generally accepted accounting principles consistently followed throughout the periods involved, certified as to fair presentation by the principal financial officer of the Company and accompanied by a written discussion of operations in summary form prepared by the Company with respect to such fiscal period; (c) as soon as practicable and in any event within 45 days after the end of each of the first three quarters, and within 120 days after the end of the fourth quarter key operating indicators, consolidating statements of income, stockholders' equity and cash flows of the Company and its consolidated Subsidiaries for such fiscal period and for the period from the beginning of the current fiscal year to the end of such fiscal period, and a consolidating balance sheet of the Company and its consolidated Subsidiaries as at the end of such fiscal period; (d) as soon as practicable and in any event within 120 days after the end of each fiscal year of the Company, (i) unaudited consolidating statements of income, stockholders' equity and cash flows of the Company and its consolidated Subsidiaries for such year and unaudited consolidating balance sheets of the Company and its Subsidiaries as at the end of such year and (ii) consolidated statements of income, stockholders' equity and cash flows of the Company and its consolidated Subsidiaries for such year, and the consolidated balance sheets of the Company and its consolidated Subsidiaries as at the end of such year, setting forth in each case in comparative form corresponding figures from the preceding fiscal year, prepared in accordance with generally accepted accounting principles consistently followed throughout the periods involved and accompanied by an opinion of (i) Coopers & Lybrand, or (ii) another firm among the six largest independent public accountants of recognized national standing selected by the Company or (iii) another firm of 15 21 independent public accountants of national standing mutually agreeable to the Company and the holders of a majority in aggregate principal amount of the Notes then outstanding (the "Accountants"), to the effect that such financial statements have been prepared in accordance with generally accepted accounting principles consistently applied (except for changes in application in which the Accountants concur and as are noted therein) and present fairly the financial condition of the Company and its Subsidiaries and that the examination of the Accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards and accordingly included such test of the accounting records and such other auditing procedures as were considered necessary in the circumstances (an "Audit Opinion"); and accompanied by a written discussion of operations in summary form with respect to such fiscal year prepared by the Company; (e) together with the financial information described in paragraph 5A(d), (i) statements of income, partners' equity and cash flows of D/C Partnership for the fiscal year most recently ended and a balance sheet of D/C Partnership as at the end of such fiscal year, setting forth in each case in comparative form corresponding figures from the preceding fiscal year, commencing with the fiscal year ended December 31, 1996, prepared in accordance with generally accepted accounting principles consistently followed throughout the periods involved and accompanied by an Audit Opinion of the Accountants, (ii) a reconciliation prepared by the Chief Financial Officer of the Company of the annual audited financial statements described in paragraph 5A(d)(ii) that reconciles the unaudited consolidated financial statements used by the Company in computing compliance with the financial covenants of Article V, as described in paragraph 5F, (iii) a statement of the Accountants that they have reviewed the reconciliation described in clause (ii) above and based upon such review the Accountant has no reason to believe such reconciliation is incorrect or misleading in any material respect and (iv) the unaudited consolidated financial statements used by the Company in computing compliance with the financial covenants of Article V, as described in paragraph 5F. (f) promptly upon transmission thereof to its stockholders, copies of all such financial statements, proxy statements, notices and reports including without limitation Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q in definitive form which it files or which it is or may be required to file with the Commission; (g) promptly upon receipt thereof, copies of reports, if any, submitted to the Company by independent accountants in connection with each annual or interim audit of the books of the Company made by such accountants; (h) prior to a Successful Public Offering, promptly upon transmission thereof to members of the Board of Directors, copies of any intermediate financial information prepared in addition to that described in paragraphs 5A(a), (b), (c) or (d) and copies of any other material information distributed to the Board of Directors; provided, however, without limiting the information rights of the Purchasers and any Purchasers' transferees pursuant to paragraph 5W hereof, no such financial information or other material information shall be delivered if it is determined by management and the Board of Directors that such information is of such a proprietary and confidential nature that its contents should reasonably be limited to the Board of Directors and 16 22 notice to such effect is sent to the Purchasers and their transferees; (i) as soon as practicable and in any event within 45 days after the end of each fiscal year of the Company, a month-by-month and hospital-by-hospital budget for each succeeding fiscal year and a year-by-year budget for the next, second and third succeeding fiscal years; (j) promptly, such additional financial and other information as any holder may from time to time reasonably request; (k) promptly upon sending to its senior secured lenders, copies of required covenant compliances and information regarding events of default under any such agreement, unless in either case the same or substantially the same information is otherwise required to be sent pursuant to the terms hereof; and (l) promptly upon the occurrence thereof, notice of any waiver of any event of default or compliance with any covenant in its senior secured loan agreements or any amendment or modification of any such agreements. Together with each delivery of financial statements required by clause (b) or (c) above, the Company will deliver to each of the Purchasers or their transferees who then hold any Notes or Warrants an Officer's Certificate stating that during the period covered by the most recent statement of income delivered to the Purchasers no Event of Default or Default or "Default Event" (as that term is defined in the Certificate of Incorporation) has occurred, or, if such has occurred, specifying the nature and status thereof, the period of existence thereof and what action the Company has taken or proposes to take with respect thereto. The financial statements required to be delivered by clause (d) above shall also be accompanied by a written statement of the independent public accountants who certify such financial statements to the effect that, in the course of the examination upon which their certification was based, they have obtained no knowledge of any Event of Default or Default or Default Event insofar as any such Event of Default or Default or Default Event relates to any financial matters, or, if they have obtained knowledge of any such failure, specifying the nature and period of existence thereof. Forthwith upon any Responsible Officer obtaining knowledge of an Event of Default or Default, the Company will deliver to each holder of Notes and/or Warrants an Officer's Certificate specifying the nature thereof, the period of existence thereof and what action the Company has taken or proposes to take with respect thereto. Each holder of Notes and/or Warrants is hereby authorized to deliver a copy of financial statements delivered to it pursuant to this paragraph 5A to any regulatory body having jurisdiction over it which requests such information. Each holder of Notes is further authorized, from and after the date hereof, so long as it shall hold any Note, to request any reasonable information from, and to have access to, the Company's independent public accountants, and the Company will direct such accountants to make available to such holder such information. B. Restricted Payments. So long as any Note shall remain outstanding, the Company will not, and will not permit any Subsidiary to, (i) declare or pay any dividends on, or make any other distribution or payment on account of any shares of any class of stock of the Company, 17 23 whether now or hereafter outstanding, or make any other distribution in respect thereof, either directly or indirectly, whether in cash, property or in obligations of the Company, except for (1) dividends payable in Common Stock as permitted by the Certificate of Incorporation as in effect on the Closing Date or (2) payment of dividends on the Series A Preferred Stock, the Series BB Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock upon the completion of a "Successful Secondary Public Offering" as such term is defined in the Certificate of Incorporation on the date hereof (a "Successful Secondary Public Offering") or conversion of such shares or (3) payment of dividends on the Series A Preferred Stock, Series BB Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock upon a Change in Control Event or redemption of such shares, in each case as permitted by the Certificate of Incorporation as in effect on the Closing Date (provided, however, (x) no payment of dividends shall be made pursuant to clauses (2) or (3) until the Company shall have made all payments required under paragraph 4A and 4C herein, and (y) no payment or dividends shall be made pursuant to clauses (2) or (3), or otherwise, if there exists, or immediately after giving effect to such payment or dividend there exists, an Event of Default), or (ii) retire, redeem, purchase or otherwise acquire, any shares of any class of capital stock of the Company or Indebtedness subordinated to the Notes. Notwithstanding anything contained herein to the contrary and in addition to and not in limitation of the foregoing instructions, no payments described in clauses (1), (2) or (3) above (other than payments under clause (2) above upon the completion of a Successful Secondary Public Offering), shall be made if: (a) such dividends, distributions or payments set forth in (i) above exceed an amount equal to the lesser of (x) 25% of the Net Income of the Company on a consolidated basis and cumulative for all periods after December 31, 1992 (treated as one accounting period) or (y) 12-1/2% of the Net Income of the Company on a consolidated basis for the fiscal year following the fiscal year in which a Net Loss occurred, or (b) during the fiscal year following two consecutive fiscal years where there was for each such period a Net Loss. C. Ratio of EBITDA to Interest Expense. So long as any Note shall remain outstanding the Company, on a consolidated basis, will not permit, as at the end of the most recent fiscal quarter of the Company, the ratio of (i) EBITDA to (ii) Interest Expense on all Indebtedness (plus the amount of Interest Expense due on Indebtedness assumed or incurred in connection with any business acquired (whether by stock, assets or partnership) during the period, which shall be deemed to be outstanding at the beginning of the period), in each case after June 30, 1995, for the immediately preceding twelve month period, to be less than 2.0 to 1.0. D. Ratio of EBITDA to Total Debt Service. So long as any Note shall remain outstanding the Company, on a consolidated basis, will not permit, as at the end of the most recent fiscal quarter of the Company, the ratio of (i) EBITDA to (ii) Total Debt Service (plus the amount of Total Debt Service on Indebtedness assumed or incurred in connection with any business acquired (whether by stock, assets or partnership) during the period, which shall be deemed to be outstanding at the beginning of the period), in each case after June 30, 1995, for the immediately preceding twelve month period, to be less than 1.5 to 1.0. E. Ratio of Indebtedness to Stockholders' Equity. So long as any Note shall remain outstanding the Company, on a consolidated basis, will not cause or permit the ratio of consolidated 18 24 Indebtedness (as set forth on the most recent balance sheet of the Company) to Stockholders' Equity to be greater than 4.0 to 1.0; provided, however, that for purposes of calculations under this paragraph 5E, it is expressly agreed that the Company may expense or otherwise charge (i) bank fees, legal and advisors' fees and other closing costs incurred as a result of the sale of the Notes, the 1993 Notes and in connection with the execution and delivery of the Bank Agreement; and (ii) accrued and unpaid dividends on the Series A Preferred Stock, Series BB Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Common Stock; and provided, further, however, that the failure of the Company to comply with the covenant set forth in this paragraph 5E solely as a result of and to the extent adversely affected by the charges set forth in clauses (i) and (ii) of this paragraph 5E, shall not constitute or be deemed an Event of Default or any other breach or violation of any term or provision of this Agreement. F. Treatment of D/C Partnership. The Company shall, for the purpose of determining compliance with the financial covenants contained in this Article V, treat the D/C Partnership as a consolidated Subsidiary. G. Consolidated Net Worth. So long as any Note shall remain outstanding the Company, on a consolidated basis, will not permit Consolidated Net Worth to be less than: $60,000,000 plus 50% of positive Net Income determined on a cumulative basis for each full fiscal quarter beginning with the fiscal quarter ending September 30, 1995 (it being agreed that the minimum amount of Consolidated Net Worth required to be maintained pursuant to this paragraph 5G shall not be reduced in the event that there is a Net Loss for any such full fiscal quarter) from and after the Closing; provided, however, that for purposes of calculations under this paragraph 5G, it is expressly agreed that the Company may expense or otherwise charge (i) bank fees, legal and advisors' fees and other closing costs incurred as a result of this transaction; (ii) accrued and unpaid dividends on the Series A Preferred Stock, Series BB Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Common Stock; and (iii) deferred charges reflected as a line item on the Company's balance sheet at December 31, 1994 against earnings or as a direct charge against Consolidated Net Worth when such charge is in accordance with generally accepted accounting principles consistently applied; and provided, further, however, that the failure of the Company to comply with the covenant set forth in this paragraph 5G solely as a result of and to the extent adversely affected by the charges set forth in clause (i), (ii) and (iii) of this paragraph 5G, shall not constitute or be deemed an Event of Default or any other breach or violation of any term or provision of this Agreement. H. Permanent Capital. So long as any Note shall remain outstanding the Company, on a consolidated basis, will have Permanent Capital of not less than (i) $141,000,000 from the Closing Date through December 31, 1995, and (ii) $146,000,000 thereafter. I. Limitation on Funded Indebtedness. So long as any Note shall remain outstanding the Company, on a consolidated basis, will not incur Funded Indebtedness in an amount greater than $45,000,000 (other than (i) Senior Indebtedness, (ii) the 1993 Notes, (iii) Funded Indebtedness not to exceed $16,153,925 assumed pursuant to the acquisition of Psychiatric Healthcare Corporation, (iv) Indebtedness not exceeding $32,000,000 incurred solely in connection with the acquisition of Springhill Medical Center, Mobile, Alabama, and (v) the Notes), unless EBITDA for the immediately preceding twelve months is greater than 250% of Fixed Charges for such twelve (12) 19 25 month period plus the amount of Fixed Charges on Indebtedness assumed or incurred in connection with any business acquired (whether by stock, assets or partnership) during the period, which shall be deemed to be outstanding at the beginning of the period. The Company may, at its option, for purposes of this provision only, exclude EBITDA attributable to hospitals acquired within such twelve month period and either held for sale or not in operation. J. Merger, Consolidation, Sale, Lease, Transfer or Other Disposition of Assets. (1) So long as any Note shall remain outstanding, (a) neither the Company nor any Subsidiary will sell, transfer, lease or otherwise dispose of any assets to any Person to the extent the aggregate assets so sold, transferred, leased or disposed during (i) any twelve (12) month period had an aggregate book value in excess of the greater of either (1) $5,000,000 or (2) five percent (5%) or more of the consolidated total assets of the Company and its Subsidiaries at the end of the most recent fiscal quarter preceding such sale, transfer, lease or disposition or (ii) the period from and after the Closing Date to and including the date of any determination hereunder exceeds the greater of $60,000,000 or 25% or more of the consolidated total assets of the Company and its Subsidiaries at the end of the most recent fiscal quarter preceding such sale, transfer, lease or other disposition; provided, however, without regard to the foregoing limitation, (x) the Company and any of its Subsidiaries may sell, transfer, trade, lease or otherwise dispose of any assets if within 360 days of any such action the Company or any Subsidiary replaces any such assets with similar (or improved) assets which are used by the Company or any Subsidiary in its operations and (y) any Subsidiary may dissolve, liquidate or wind-up its business, provided the distribution of all of its assets shall be made either to the Company or to a consolidated Subsidiary; and (b) neither the Company nor any Subsidiary will sell, lease, transfer or otherwise dispose of all or substantially all of its assets or consolidate with or merge with or into any Person or permit any Person other than a Subsidiary to merge with or into it; provided that this subparagraph shall not restrict any Subsidiary from selling, leasing, transferring, trading or otherwise disposing of all or substantially all of its assets if such transaction is otherwise permitted by subparagraph (a) above. K. Restricted Investments. So long as any Note shall remain outstanding the Company will not, and will not permit any Subsidiary to, make or authorize any Restricted Investment. For the purposes of this paragraph the term "Restricted Investment" shall mean (x) any investment, made in cash or otherwise, by the Company or any Subsidiary (i) in any Person, whether by acquisition of stock, indebtedness or other obligation or security, by a loan, advance or capital contribution, or otherwise, or (ii) in any property, (y) any loan for a purpose other than as described in clause (x) of this paragraph or (z) any advance except the following: (a) investments in and advances to wholly-owned Subsidiaries or companies which simultaneously become wholly-owned Subsidiaries; (b) investments in property and equipment to be used in the business of the Company or any wholly-owned Subsidiary; (c) investments in direct obligations of, or obligations the principal and interest 20 26 of which are guaranteed by, the United States of America or any agency thereof maturing in three years or less from the date of acquisition; (d) investments in certificates of deposit or banker's acceptances issued by any commercial bank located in the United States, Canada, Western Europe or Japan which is owned by a bank holding company the commercial paper of which is rated A2 or P2, respectively, by Standard & Poor's Corporation or Moody's Investors Service, or higher, and which has capital, surplus and undivided profits aggregating at least $100,000,000; (e) investments in commercial paper maturing within 270 days or less from the date of acquisition rated in one of the two highest grades by Standard & Poor's Corporation or Moody's Investors Service or by another rating agency of nationally recognized standing; (f) investments in money market funds; (g) investments held by the Company or any Subsidiary on the Closing Date; (h) accounts receivable, prepaid items, inventories and other current assets and deferred charges, all as determined in accordance with generally accepted accounting principles consistently applied, arising in the ordinary course of business; (i) loans in a principal amount not to exceed $3,000,000 to the purchaser or an Affiliate of the purchaser of certain assets that include the land and buildings purchased on September 1,1992 from HCA Health Services of Texas principally located on Garth Road, Baytown, Texas; (j) loans to D/C Partnership; provided that such loans shall not be outstanding during any period in which the Company does not have operational control of the D/C Partnership, whether pursuant to the Operating Agreement dated December 21, 1994 between the Company and D/C Partnership or otherwise; and (k) in addition to the investments, loans and advances described in clauses (a) through (j) above, investments, loans and advances made in the ordinary course of business and normal and customary arrangements with physicians and employees, which in the aggregate are not in excess at any one time of 10% of the total assets of the Company and its consolidated Subsidiaries on a consolidated basis; provided, however that approval of the Board of Directors of the Company shall be required prior to (i) any loan or advance to an employee, officer or director of the Company (other than day-to-day routine business expenses or pursuant to established policies approved by the Board of Directors of the Company), (ii) any loan, advance or arrangement with a physician or group of physicians in excess of $10,000,000 and (iii) any loan, advance or arrangement with an Affiliate of a physician or group of physicians (except D/C Partnership) in excess of $5,000,000; L. Notice. So long as any Notes shall remain outstanding the Company will notify each holder of a Note or Notes (a) immediately upon receipt by the Company of any notice of, or knowledge by any Responsible Officer of, any event of default under any material Current Indebtedness or Funded Indebtedness, which notice shall describe what action by the Company is intended to be taken with respect to such event, (b) immediately upon the public announcement of any transaction, including without limitation any merger, combination or consolidation, in which 21 27 the Company will not be the surviving corporation, or a sale of all or substantially all of the Company's assets and (c) of any Responsible Officer obtaining knowledge of, and upon the occurrence of, any Change of Control Event. M. Inspection of Property. So long as any Note or Warrant remains outstanding the Company will permit any Purchaser or Purchaser transferee holding (together with any Affiliates of such Purchaser or Purchaser transferee) an aggregate of $5,000,000 in principal amount of Notes or an aggregate number of Warrants which if exercised would result in the receipt by the Company of proceeds of $2,000,000, or a Person designated in writing by the holders of a majority in aggregate principal amount of Notes outstanding or a majority of the Warrants outstanding (provided the aggregate of such Warrants would if exercised result in the receipt by the Company of proceeds of $2,000,000) to be a Person acting on their behalf to visit and inspect any of the properties of the Company and its Subsidiaries, to advise and consult with management and examine and make abstracts of any of its books and records at any time during normal business hours and as often as may be reasonably requested and to discuss the affairs, finances and accounts of any of such corporations with the principal officers of the Company and such Subsidiaries, all at such reasonable times and as often as such holders may reasonably request. N. Corporate Existence, Licenses and Permits; Maintenance of Properties. So long as any Notes shall remain outstanding the Company will at all times do or cause to be done all things necessary to maintain, preserve and renew its existence as a corporation organized under the laws of a state of the United States of America, preserve and keep in force and effect, and cause each of its Subsidiaries to preserve and keep in force and effect, all licenses and permits necessary and material to the conduct of the business of the Company and its consolidated Subsidiaries, taken as a whole, and to maintain and keep, and cause each of its Subsidiaries to maintain and keep, such of its and their respective properties in good repair, working order and condition (except for normal wear and tear), and from time to time to make all needful and proper repairs, renewals and replacements, including without limitation all trade name and trademark registration renewals, so that any business material to the Company carried on in connection therewith may be properly and advantageously conducted at all times. O. Taxes. So long as any Note shall remain outstanding the Company will duly pay and discharge, and cause each of its Subsidiaries duly to pay and discharge, all taxes (including payroll), assessments and governmental charges upon or against the Company or its Subsidiaries or their respective properties, in each case before the same become delinquent, unless and to the extent that the same are being contested in good faith and by appropriate proceedings and the Company and its Subsidiaries shall have set aside on their books adequate reserves with respect thereto. P. Insurance. So long as any Note shall remain outstanding the Company will apply for and continue in force and effect, or cause to be applied for and continued in force and effect, adequate insurance covering the respective risks of the Company and its Subsidiaries of such types and in such amounts and with such deductibles as are customary for other similarly situated corporations engaged in similar lines of business and with good and responsible insurance companies and will not, without the approval of the Board of Directors of the Company, maintain key man life insurance coverage on Charles R. Miller in an amount less than $5,000,000. The 22 28 Company and its Subsidiaries may utilize programs whereby it does not obtain insurance coverage for certain risks (including workers' compensation and hospital professional liability) except in amounts in excess of specified limits, as approved by the Company's Board of Directors. Q. Books and Accounts. So long as any Note shall remain outstanding the Company will, and will cause each Subsidiary to, maintain proper books of record and account in which full, true and correct entries shall be made of its transactions and set aside on its books from its earnings for each fiscal year all such proper reserves as in each case shall be required in accordance with generally accepted accounting principles consistently applied. R. Notice of Events Involving Securities. The Company will give each holder of a Note or Notes or Warrant or Warrants or Common Stock issued upon exercise of any Warrant or Warrants which had been held by such holder at the time of exercise thereof, unless the Company shall have previously given such holder notice of such filing pursuant to another provision of this Agreement, (a) within ten days thereafter, notice of the filing by the Company with the Commission or with any national securities exchange either an application to register any securities of the Company pursuant to Section 12 of the Exchange Act, or a registration statement under Section 5 of the Securities Act, relating to any securities of the Company, (b) as promptly as practicable after any acquisition by it or by any Subsidiary of any of the Company's equity securities in excess in one transaction or a series of related transactions of 1% of the number of such securities then outstanding and, in any event, in connection with the materials delivered pursuant to paragraph 5A(b) hereof, as at the close of each fiscal year, notice of all acquisitions by it or by any Subsidiary of any of the Company's equity securities, specifying the class and number of such equity securities so acquired, and (c) promptly upon notice thereof, notice of the filing of any Schedule 13D or 13G with respect to securities of the Company pursuant to the Exchange Act (with copies of any such Schedule to accompany or follow such notice as soon as practicable). S. No "Prohibited Transactions" and Employee Benefits. So long as any Note shall remain outstanding, neither the Company nor any Subsidiary nor any ERISA Affiliate will establish, maintain, contribute to or incur an obligation to contribute to any plan (including a Multiemployer Plan) subject to Title IV of ERISA or Section 412 of Internal Revenue Code of 1986, as amended. Except as disclosed on Exhibit VII-P, neither the Company nor any Subsidiary shall incur any liability with respect to retiree medical or death benefits or other benefits payable after termination of employment. All employee benefit plans and arrangements (regardless of whether such plan or arrangements are covered by ERISA) maintained by or contributed to by the Company, any Subsidiary or any ERISA Affiliate shall be maintained in compliance with all applicable law, including any reporting requirements. With respect to any plan maintained by or contributed to by the Company or any Subsidiary, neither the Company nor any Subsidiary will fail to make any contribution due under the terms of such plan or as required by law. Neither the Company nor any Subsidiary, nor any other Person including any fiduciary, will engage in any transaction prohibited by Section 406 of ERISA or Section 4975 of the Code which could subject the Company, any Subsidiary or any entity that the Company or any Subsidiary has an obligation to indemnify to any tax or penalty imposed under Section 4975 of the Code or Section 502 of ERISA. The Company will not, and will not permit any Subsidiary to, enter into any transaction or take any action which 23 29 will result in any transaction contemplated by the Agreement becoming a transaction prohibited by Section 406 of ERISA or Section 4975 of the Code. T. Compliance with Environmental Laws. So long as any Note shall remain outstanding the Company will not, and will not permit any Subsidiary to, except in compliance with applicable Environmental Laws, or in the event of any noncompliance with applicable Environmental Laws, only to the extent to which such noncompliance would not have a material adverse effect on the business, operations or financial condition of the Company, individually, or the Company and its Subsidiaries, taken as a whole, (a) use any of the property of the Company or any Subsidiary or any portion thereof for the handling, processing, storage or disposal of Hazardous Substances, (b) cause or permit to be located on any of the property any underground tank or other underground storage receptacle for Hazardous Substances, (c) generate any Hazardous Substances on any of the property, (d) conduct any activity on the property or use any property in any manner so as to cause a release (i.e., releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, disposing or dumping) or threatened release of Hazardous Substances on, upon or into the property or (e) otherwise conduct any activity on the property or use any property in any manner that would lead to any environmental claim or violate any Environmental Law or bring such property in violation of any Environmental Law. U. Transactions with Affiliates or Officers. Except as disclosed on Exhibit V-U, so long as any Note shall remain outstanding, the Company will not, and will not permit any Subsidiary to, (a) enter into any transaction, including, without limitation, the purchase, sale or exchange of property or the rendering of any services, with any Affiliate (other than the Company or a Subsidiary of the Company), or any officer or director thereof, or enter into, assume or suffer to exist any employment or consulting contract with any Affiliate (other than the Company or a Subsidiary of the Company), or any officer or director thereof, except any transaction or contract which is in the ordinary course of the Company's business and which is upon fair and reasonable terms no less favorable to the Company than it would obtain in a comparable arm's length transaction with a Person not an Affiliate, (b) make any advance or loan to any Affiliate (other than the Company or Subsidiary of the Company), or any director or officer thereof or of the Company or to any trust of which any of the foregoing is a beneficiary, or (c) pay any fees or expenses to, or reimburse or assume any obligation for the reimbursement of any expenses incurred by, any Affiliate (other than the Company or a Subsidiary of the Company or Donaldson, Lufkin & Jenrette for investment banking services pursuant to an agreement negotiated at arms length and containing terms and conditions as are customarily contained in such agreements) or any officer or director thereof; provided that nothing contained in this paragraph 5U shall be deemed to prohibit (i) the Company or any of its Subsidiaries from providing reasonable compensation and related fringe benefits (except as set forth in paragraph 5S), advances permitted by paragraph 5K(h), reimbursement of normal business expenses or indemnification rights to any of its respective officers, directors, consultants and employees; or (ii) the payment of reasonable fees and reasonable out-of-pocket expenses to counsel and directors who are not employees of the Company or any of its Subsidiaries. V. Issuance of Notes. Except for (i) the issuance and sale of Notes pursuant to the terms of this Agreement to the Purchasers named herein and (ii) the issuance of Notes in accordance with 24 30 Paragraph 11E hereof, the Company, so long as any Notes are outstanding, shall not issue, sell or deliver any Notes. W. Board Visitation Rights. (a) So long as any Note or a Warrant shall remain outstanding, the Company will notify any Purchaser or Purchaser transferee holding (together with any Affiliates of such Purchaser or Purchaser transferee) an aggregate of $5,000,000 in principal amount of Notes or an aggregate number of Warrants which if exercised would result in the receipt by the Company of proceeds of $2,000,000, concurrently with notice given to members of the Board of Directors, of all regularly scheduled quarterly meetings of the Board of Directors of the Company and will use all reasonable efforts to notify such Purchaser or Purchaser transferee, concurrently with notice given to members of the Board of Directors, of any special meetings of the Board of Directors of the Company. The Company will permit such Purchasers or Purchaser transferees to attend all such meetings as an observer and to participate as an elected member with all rights of an elected member (unless the Purchaser or Purchaser Transferee is a bank or bank holding company, in which case such person shall be deemed an observer only), voting excepted, and the Company shall deliver to such designated Purchaser or Purchaser transferee all notices, reports and materials as are delivered to members of the Board of Directors and the Company shall use its reasonable efforts to deliver such notices, reports and materials at the same time such items are delivered to the Board. Notwithstanding the foregoing, the Company shall be entitled to withhold any such report or material and/or exclude any herein permitted observer from any portion of any such meeting if counsel for the Company determines at any time that the distribution of any such report or material and/or the participation of any such permitted observer may result in the waiver of the attorney-client privilege, or may violate any law, rule, regulation or confidentiality agreement or create any liability to the Company or any member of the Board of Directors. If at any time the Board exercises its right to withhold any report or material or exclude any permitted observer, it will give reasonable notice thereof. Any Purchaser or Purchaser transferee attending any meeting of the Board of Directors shall be bound by the same obligations and liabilities of an elected member of the Board of Directors as to the use and disclosure of confidential, proprietary or other material nonpublic information of the Company and corporate opportunities (other than with respect to any such information or any such corporate opportunity obtained by such Purchaser or Purchaser transferee from sources other than in connection with the exercise of rights pursuant to this paragraph 5W). (b) All rights of any Purchaser or Purchaser transferee under this paragraph 5W shall expire upon the completion by the Company of a Successful Public Offering. X. No Change in Business. Neither the Company nor any of its Subsidiaries will change substantively the character of its business as conducted on the Closing Date as represented in Paragraph 7U hereof. Y. Issuance of Additional Warrants. Unless the Company shall have (i) prepaid or exchanged the Notes in whole in accordance with the provisions of Article IV or (ii) completed a Qualified Public Debt Offering not later than December 31, 1996, the Company shall on January 1, 1997, issue to the holders of the Notes then outstanding, for no additional consideration, Warrants initially evidencing the right to purchase Common Stock of the Company, such Warrants to be dated the date of issue, to expire on the Expiration Date, to be issued to each holder of the Notes in an 25 31 amount equal to three shares of Common Stock per $1,000 principal amount of the Notes held by such holder and to be substantially in the form attached hereto as Exhibit II-A2. A "Qualified Public Debt Offering" shall mean a public offering of not less than $100,000,000 principal amount of Indebtedness of the Company (the "New Debt") (i) having a final maturity more than one year from the date of issue thereof, (ii) on terms and conditions reasonably customary in the public high yield debt market for instruments similar to the New Debt at the time of such offering, and (iii) in which the holders of the Notes are given an offer by the Company to exchange the Notes for New Debt either (x) having an interest rate at least equal to the Applicable Rate of the Notes or (y) if the interest rate borne by the New Debt is less than the Applicable Rate of the Notes, then pursuant to which the Interest Rate Difference is paid to the holders of the Notes in cash, together with accrued but unpaid interest on the Notes to the date of exchange. "Interest Rate Difference" shall mean the present value of the cash stream (assuming no prepayments of principal after the date of exchange) representing the amount by which the Applicable Rate of the Notes on the date of exchange exceeds the interest rate borne by the New Debt, discounted quarterly at the interest rate borne by the New Debt from the date of final maturity of the Notes to the date of exchange. Z. Post Closing Conditions. (a) NAIC Rating. The Company shall within 120 days following the Closing Date furnish evidence satisfactory to the holders of the Notes of the rating assigned to the Notes by the National Association of Insurance Commissioners. (b) Amendment of Certificate of Incorporation. The Company shall (i) at the first regular or special meeting of the Company's shareholders following the Closing Date and in any event on or prior to June 1, 1996, cause the Certificate of Incorporation to be amended to provide that the declaration and payment of dividends and the redemption of the Series A Preferred Stock, the Series BB Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock and any other outstanding series of preferred stock of the Company shall be prohibited if such declaration and payment or redemption would violate any financial covenant in Article V and (ii) take all other actions necessary to cause such amendment to become effective on or prior to June 30, 1996. AA. No Amendment of D Note Agreement. The Company will not, directly or indirectly, amend, modify or supplement any term, provision or condition of the D Note Agreement or the 1993 Notes in any manner so as to increase or improve the relative rights thereunder of the holders of the l993 Notes or Warrants issued pursuant to the D Note Agreement (the "Series D Warrants"), or increase the obligations thereunder of the Company, (ii) the Series D Stock Registration Agreement in any manner so as to increase or improve the relative rights thereunder of the holders of any securities entitled to be registered thereunder, or increase the obligations thereunder of the Company, or (iii) the Series D Warrants, in any manner so as to increase or improve the relative rights thereunder of the holders of the Series D Warrants, or increase the obligations thereunder the Company; in any case without the prior written consent of the holders 66-2/3% of the aggregated principal amount of the Notes then outstanding. BB. Shelf Registration. If the Company shall at any time file a registration statement with the Commission pursuant to Rule 415 under the Securities Act registering Common Stock issued 26 32 or issuable upon (a) conversion of the Series A Preferred Stock, the Series BB Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock or any other shares of securities convertible into Common Stock or (b) the exercise of warrants to purchase Common Stock outstanding immediately prior to the Closing, then the Company will include in such registration statement the Common Stock issued and issuable upon the exercise of the Warrants, together with any Common Stock issued as a dividend or other distribution with respect thereto subsequent to the exercise of the Warrants but prior to the date of filing such registration statement. ARTICLE VI EVENTS OF DEFAULT AND REMEDIES 6. Events of Default and Remedies. A. If any of the following events shall occur and be continuing for any reason whatsoever (and whether such occurrence shall be voluntary or involuntary or come about or be affected by operation of law or otherwise): (i) the Company shall default in the payment (whether or not such payment is prohibited under Article IX hereof) of any principal of or premium, if any, on any Note when the same shall become due, either by the terms thereof or otherwise as herein provided; or (ii) the Company shall default in the payment (whether or not such payment is prohibited under Article IX hereof) of any interest on any Note and such default shall have continued for six business days; or (iii) the Company shall default in the making of any required purchase of any Note as provided in paragraph 4A or 4C hereof; or (iv) the Company or any Subsidiary shall default in any payment of principal of or interest on any other obligation for borrowed money (or any obligation or obligations under a conditional sale or other title retention agreement or any obligation or obligations issued or assumed as full or partial payment for property whether or not secured by a purchase money mortgage or any obligation under notes payable or drafts accepted representing extensions of credit) in any case if such obligation is for an amount in excess of $2,000,000, beyond any period of grace provided with respect thereto or shall default in the performance of any other agreement, term or condition contained in any agreement under which any such obligation is created (or if any other default under any such agreement shall occur and be continuing) if the effect of such default is to cause, or permit the holder or holders of such obligation or obligations (or a trustee on behalf of such holder or holders) to cause, such obligation or obligations to become due prior to its or their stated maturity; or (v) a final judgment, decree or order for the payment of money in excess of $2,000,000 shall be rendered against the Company or any Subsidiary, and such judgments shall not be covered by insurance and the same shall not be discharged or execution thereon stayed pending appeal within 60 days after entry thereof, or, in the event of such a stay, such judgment shall not be discharged, or again stayed pending further appeal, within 60 days after such stay shall expire; or (vi) any representation or warranty made by the Company herein or in any writing furnished in connection with the issuance and sale of the Notes and Warrants and the purchase 27 33 thereof by the Purchasers shall be false in any material respect on the date as of which made; or (vii) the Company shall default in the performance or observance of any agreement, covenant, term or condition contained in paragraphs 5B, 5C, 5D, 5E, 5G, 5H, 5I, 5J, 5K, 5N, 5V, 5W or 5X; or (viii) the Company shall default in the performance or observance of any other agreement, covenant, term or condition contained in this Agreement (other than as provided in clause (i), (ii), (iii) or (vii) of this Article VI, for which the respective grace period, if any, described in such clause shall apply), including without limitation the furnishing in writing of any representation or warranty required to be furnished after the Closing Date pursuant to this Agreement, and such default shall not have been remedied within 30 days; provided, however, that if there shall have occurred a default under paragraph 5A(a) through (d) hereto, then such 30 day period shall not begin until a Purchaser shall have delivered a notice of such default to the Company; or (ix) if the Company or any Subsidiary shall (a) apply for or consent to the appointment of a receiver, trustee, liquidator or custodian or the like for itself or for its property, (b) admit in writing its inability to pay its debts generally as they become due, (c) make a general assignment for the benefit of creditors, (d) commence a voluntary case under the Federal bankruptcy laws of the United States of America or file a voluntary petition or answer seeking reorganization, an arrangement with creditors or an order for relief or seeking to take advantage of any insolvency law or file an answer admitting the material allegations of a petition filed against it in any bankruptcy, reorganization or insolvency proceeding, or corporate action shall be taken by it for the purpose of effecting any of the foregoing; or (x) if without the application, approval or consent of the Company or any Subsidiary, a proceeding shall be instituted in any court of competent jurisdiction, under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking in respect of the Company or any Subsidiary an order for relief or an adjudication in bankruptcy, reorganization, dissolution, winding up, liquidation, a composition or arrangement with creditors, a readjustment of debts, the appointment of a trustee, receiver, liquidator or custodian or the like of the Company or such Subsidiary or of all or any substantial part of its assets, or other like relief in respect thereof under any bankruptcy or insolvency law, and, if such proceeding is being contested by the Company or such Subsidiary in good faith, the same shall (a) result in the entry of an order for relief or any such adjudication or appointment or (b) continue undismissed, or pending and unstayed, for any period of thirty (30) consecutive days; B. Upon the happening of any event described in any of clauses (i) through (iii) of Paragraph 6A hereof, then in each such event any holder or holders of 35% in aggregate principal amount of the Notes at the time outstanding may at any time (unless all Events of Default shall theretofore have been waived or remedied) at its or their option and in addition to any right, power or remedy permitted by law or equity or herein granted, by written notice or notices to the Company, declare such holder's or holders' Notes to be due and payable. Upon the happening of any event described in clauses (iv) through (viii) of Paragraph 6A, then and in each such event any holder or holders of 51% or more in aggregate principal amount of the Notes then outstanding may at any time 28 34 (unless all Events of Default shall theretofore have been waived or remedied) at its or their option and in addition to any right, power or remedy permitted by law or equity or herein granted, by written notice or notices to the Company, declare all the Notes to be due and payable. Upon any such declaration pursuant to the preceding sentence or upon the happening of any event described in clause (ix) or (x) in Paragraph 6A hereof (in which case no declaration is required), all Notes shall forthwith immediately mature and become due and payable, together with interest accrued thereon, all without present, demand, protest or notice, all of which are hereby waived. However, if, at any time after the principal of the Notes shall so become due and payable and prior to the date of maturity stated in the Notes, all arrears of principal and interest on the Notes (with interest at the rate specified in the Notes on any overdue principal and any overdue premium and, to the extent legally enforceable, on any overdue interest) shall be paid to the holders of Notes by or for the account of the Company, and all other defaults under this Agreement, shall have been remedied or waived by holders representing not less than two-thirds of the principal amount of Notes outstanding, then and in such instance such default may be waived and its consequences rescinded and annulled by the holders of not less than two-thirds of the principal amount of Notes outstanding by written notice to the Company, which waiver shall be binding upon all holders. It is expressly understood and agreed that the decision so to waive any default and so to rescind and annul any consequences thereof is within the sole judgment and control of the holders of the Notes, and such holders shall be under no obligation so to do. ARTICLE VII REPRESENTATIONS, COVENANTS AND WARRANTIES The Company represents, covenants and warrants as follows: A. Organization, Standing, Qualification of Company and Subsidiaries, and Authorization. The Company is a corporation duly organized and existing in good standing under the laws of the State of Delaware; each Subsidiary having assets in excess of $100,000 or annual revenues in excess of $100,000 is duly organized and existing in good standing under the laws of the jurisdiction in which it is incorporated; the aggregate assets of all Subsidiaries which are either not duly organized or existing in good standing, or both, in their respective jurisdictions of incorporation does not exceed $100,000; and the Company has and each Subsidiary has the corporate power to own its respective property and to carry on its respective business as now being conducted. The Company is and each Subsidiary is duly qualified and in good standing as a foreign corporation to do business in every jurisdiction where the character of the properties owned or leased by it or the nature of any business transacted by it makes such qualification necessary and where such nonqualification or lack of good standing would have a material adverse effect on the business of the Company and its consolidated Subsidiaries taken as a whole. The Company has no Subsidiaries other than as set forth in Exhibit VII-A. The Company has delivered to the Purchasers true, complete and correct copies of its Certificate of Incorporation and By-laws, as amended and in full force and effect on the Closing Date. The Company has taken all actions necessary to authorize it to enter into and perform its obligations under this Agreement, including without limitation the issuance of the Notes and 29 35 Warrants (and to issue the shares of Common Stock issuable upon exercise of the Warrants), the E Stock Registration Agreement, the Addendum Agreement and the Certificate of Incorporation of the Company and to consummate the transactions contemplated hereby and thereby. The Company has duly executed and delivered this Agreement and, as of the Closing Date, the Notes, the Warrants, the E Stock Registration Agreement and the Addendum Agreement. The Company has full right, power and authority to execute and perform its obligations under this Agreement, the Notes, the Warrants, the E Stock Registration Agreement and the Addendum Agreement and this Agreement, and the Notes, the Warrants, the E Stock Registration Agreement and the Addendum Agreement constitute the legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms. B. Financial Statements. The Company has furnished the Purchasers with consolidated balance sheets of the Company and its consolidated Subsidiaries as at December 31, 1994 and the related consolidated statements of income, stockholders' equity and cash flows of the Company and its consolidated Subsidiaries for the fiscal year ended December 31, 1994, all certified by Coopers & Lybrand, including in each case the related schedules and notes, and the unaudited consolidated balance sheets of the Company and its consolidated Subsidiaries and the key operating indicators of the Company and its consolidated Subsidiaries as at March 31, 1995 and the unaudited consolidated statements of income, stockholders' equity and cash flows of the Company and its consolidated Subsidiaries for the period ended on such date, prepared by the Company and certified by its principal financial officer. Except as disclosed in Exhibit VII-B, all such financial statements (including any related schedules and/or notes) have been prepared in accordance with generally accepted accounting principles consistently applied, except to the extent set forth in the notes to such financial statements, throughout the periods involved and to the extent required by such principles show all liabilities, direct and contingent, of the Company and its consolidated Subsidiaries. Except as disclosed in Exhibit VII-B, the balance sheets and the related schedules and notes fairly present on a consolidated basis the financial condition of the Company and its consolidated Subsidiaries as at the respective dates thereof; and the statements of income and stockholders' equity and the related schedules and notes and the key operating indicators fairly present on a consolidated basis the results of the operations of the Company and its consolidated Subsidiaries for the respective periods indicated. Except as disclosed in Exhibit VII-B, there have been no material adverse changes in the business, operations, property, assets, prospects, condition, financial or other, of the Company and its Subsidiaries, on a consolidated basis, since December 31, 1994. C. Actions Pending. Except as disclosed in Exhibit VII-C there is no action, suit, investigation or proceeding pending or, to the knowledge of the Company, threatened against the Company or any of its Subsidiaries before any court, arbitrator or administrative or governmental body that (i) questions the validity of this Agreement, the Notes, the Warrants, the shares of Common Stock issuable upon exercise of the Warrants, the E Stock Registration Agreement, the Addendum Agreement or the Certificate of Incorporation of the Company or any action taken or to be taken pursuant hereto or thereto or (ii) might adversely affect the right, title or interest of any Purchaser to the Notes, the Warrants or the shares of Common Stock issuable upon exercise of the 30 36 Warrants or (iii) that materially and adversely affects, or as to which there is a reasonable possibility of an adverse decision that would materially and adversely affect, either individually or collectively, the business, property, assets or condition of the Company and its consolidated Subsidiaries taken as a whole. Neither the Company nor any Subsidiary is in violation of any judgment, order, writ, injunction, decree, rule or regulation of any court or governmental department, commission, board, bureau, agency or instrumentality, the violation of which might, either individually or collectively, materially and adversely affect the business, property, assets or financial position of the Company and its consolidated Subsidiaries taken as a whole. D. Outstanding Debt; No Default. Neither the Company nor any of its Subsidiaries has outstanding any Current Indebtedness or Funded Indebtedness except as set forth in the consolidated balance sheet of the Company and its consolidated Subsidiaries as at March 31, 1995 or as set forth in Exhibit VII-D. The Company has no outstanding subordinated indebtedness other than the Notes, the 1993 Notes and the Indebtedness described on Exhibit VII-D. There exists no event of default by the Company or any Subsidiary under the provisions of any instrument evidencing such Current Indebtedness or Funded Indebtedness and there exists no event of default by the Company or any Subsidiary, or any default by the Company or any Subsidiary the effect of which would have a material adverse effect on the Company and its Subsidiaries taken as a whole, under the provisions of any other Indebtedness of the Company or of any Subsidiary or of any agreement relating thereto that is or could be material to the Company or such Subsidiary. E. Title, Liens. The Company has, and each of its Subsidiaries has, good and marketable title to its respective properties and assets reflected in the consolidated balance sheet of the Company and its consolidated Subsidiaries as at December 31, 1994 (other than properties and assets disposed of in the ordinary course of business and equity interests owned by others in Subsidiaries of the Company) and except for property purchased under title retention transactions or capitalized leases. Neither the Company nor any Subsidiary has pledged or mortgaged its assets to secure any indebtedness other than (i) to Banque Paribas, Agent under a loan agreement dated as of November 5, 1993, as amended, (ii) purchase money indebtedness, (iii) mortgages to secure the assets being acquired, (iv) capital leases, (v) deposits in the ordinary course or (vi) as otherwise disclosed to the Purchasers in any exhibit hereto. F. Taxes. The Company has, and each of its Subsidiaries has timely, filed all Federal, State and other income and payroll tax returns that, to the knowledge of the Company, are required to be filed, and each has paid all taxes as shown on said returns and on all assessments received by it to the extent that such taxes have become due except for taxes or assessments the payment of which is being contested in good faith by proper action and against which adequate accounting reserves are being maintained. The Company is not aware of any proposed tax assessment against it or any Subsidiary and all tax liabilities are provided for with adequate reserves. G. Burdensome and Conflicting Agreements and Charter Provisions. Neither the Company nor any Subsidiary is a party to any contract or agreement or subject to any charter or other corporate restriction which materially and adversely affects its business as currently conducted, properties or assets or financial condition. Except as disclosed in Exhibit VII-G and other than prohibitions on the prepayment of debt contained in the Bank Agreement (which restricts the 31 37 Company's ability to perform its obligations under paragraph 4A and 4C hereof), neither the execution nor delivery nor performance of this Agreement and of the Notes, the Warrants, E Stock Registration Agreement, and the Addendum Agreement by the Company, nor the offering, issuance and sale of the Notes or Warrants by the Company, nor fulfillment of nor compliance with the terms and provisions of this Agreement and of the Notes, the Warrants, E Stock Registration Agreement or the Addendum Agreement by the Company, nor the issuance by the Company of shares of Common Stock upon exercise of the Warrants, will conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in any violation of, or result in the creation of any Lien upon any of the properties or assets of the Company or any Subsidiary pursuant to, or require any consent, approval or other action by any court or administrative or governmental body or any other Person pursuant to, the charter or by-laws of the Company or any Subsidiary, any award of any arbitrator or any agreement (including any agreement with stockholders), instrument, order, judgment, decree, statute, law, rule or regulation to which the Company or any Subsidiary is subject, except for such approval as may be required in connection with fulfillment of, or compliance with, the provisions of Article X hereof (which such approval shall have been obtained prior to or concurrent with the Closing Date) or causes anti-dilution clauses of any outstanding securities to become operative or give rise to preemptive rights (except with respect to such clauses or preemptive rights which have been waived). Neither the Company nor any Subsidiary is a party to, or otherwise subject to any provision contained in, any instrument evidencing Indebtedness of the Company or such Subsidiary, any agreement relating thereto or any other contract or agreement (including its charter) which, except to the extent complied with by the Company or consented to in connection with the execution of this Agreement, the E Stock Registration Agreement and the Addendum Agreement and the issuance of the Notes and Warrants, restricts or otherwise limits the incurring of the Indebtedness evidenced by the Notes. H. Leases. The Company and each of its Subsidiaries enjoys peaceful and undisturbed possession of all leases necessary in any material respect for the operation of its respective properties and assets, none of which contains any unusual or burdensome provisions which materially or adversely affects or impairs the operation of such properties or assets. All such leases are valid and subsisting and are in full force and effect. Neither the Company nor any Subsidiary is in default under any material lease under which the Company or any Subsidiary leases any property or equipment. I. Possession of Patents, etc. The Company and each Subsidiary possess or has the right to the use of all the patents, trademarks, trade names, service marks, copyrights, licenses and other rights free from burdensome restrictions that are currently used by them or are necessary in any material respect for the ownership, maintenance and operation of their respective businesses, properties and assets, and neither the Company nor any Subsidiary is in violation of any thereof in any material respect or has received notice from or has knowledge of any material claim by any Person that it is now infringing any of the foregoing. J. Offering of Notes. Neither the Company nor Donaldson, Lufkin & Jenrette (the only Person authorized or employed by the Company as agent, broker, dealer or otherwise in connection with the offering or sale of the Notes and Warrants or any similar security by the Company) nor any 32 38 other agent acting on the Company's behalf has, directly or indirectly, offered the Notes or Warrants or any similar security of the Company for sale to, or solicited any offers to buy the Notes or Warrants or any similar security of the Company from, or otherwise approached or negotiated with respect thereto with more than 35 Persons including the Purchasers (all of which Persons are accredited investors or institutional investors), and neither the Company nor any agent acting on its behalf has taken or will take any action which would subject the issuance or sale of the Notes or Warrants to the provisions of Section 5 of the Securities Act, or to the registration or qualification requirements of any securities or Blue Sky law of any applicable jurisdiction. K. Broker's or Finder's Commissions. Except for any fees payable to Donaldson, Lufkin & Jenrette in connection with the issuance of the Notes and Warrants (which fees will be paid by the Company), no broker's or finder's or placement fee or commission will be payable with respect to the issuance of the Notes and Warrants or the transactions contemplated hereby, and the Company will hold the Purchasers harmless from any claim, demand or liability for broker's or finder's or placement fees or commissions alleged to have been incurred in connection with the issuance of the Notes and Warrants or such transactions. L. Application of Proceeds. Neither the Company nor any Subsidiary owns any "margin security" within the meaning of Regulation G (12 CFR Part 207) of the Board of Governors of the Federal Reserve System (herein called a "margin security"). The proceeds from the sale of the Notes and Warrants by the Company will be used for general corporate purposes. Neither the Company nor any agent acting on its behalf has taken or will take any action which might cause this Agreement or the Notes to violate Regulation G, Regulation T, Regulation X or any other regulation of the Board of Governors of the Federal Reserve System or to violate the Exchange Act, in each case as in effect now or as the same hereafter may be in effect. M. Governmental Consent. Neither the nature of the Company or of any Subsidiary, nor any of their respective businesses or properties, nor any relationship between the Company or any Subsidiary and any other Person, nor any circumstance in connection with the offer, issue, sale or delivery of the Notes or Warrants is such as to require any consent, approval or authorization of, or any notice to, or filing, registration or qualification with, any court or administrative or governmental body in connection with the execution and delivery of this Agreement, the Series E Stock Registration Agreement, the Addendum Agreement or the offer, issue, sale or delivery of the Notes or Warrants or (except as may be required in connection with fulfillment of Article X hereof), all of which consents, approvals, authorizations, notices, filings, registrations or qualifications shall have been obtained or made on or prior to the Closing Date, fulfillment of, or compliance with, the terms and provisions of this Agreement, the Series E Stock Registration Agreement, the Addendum Agreement or of the Notes or Warrants, or is such as to require or give rise to any limitation on the Purchasers' ownership of any equity securities of the Company. N. Holding Company Status. Neither the Company nor any Subsidiary is a "holding company," or a Subsidiary or affiliate of a "holding company," or a "subsidiary company" of a "holding company," or a "public utility," within the meaning of the Public Utility Holding Company Act of 1935, as amended, or a "public utility" within the meaning of the Federal Power Act, as 33 39 amended. O. Investment Company Status. Neither the Company nor any Subsidiary is an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended, or an "investment adviser" within the meaning of the Investment Advisers Act of 1940, as amended. P. ERISA. All of the "employee pension benefit plans" within the meaning of Section 3(2) of ERISA which are maintained by or contributed to by the Company, any of its Subsidiaries or any ERISA Affiliate and which are intended to meet the requirements of Section 401(a) of the Code are disclosed in the Company's financial statements. Any such plan intending to qualify under Section 401(a) or 401(k) of the Code does so qualify. Neither the Company nor any of its Subsidiaries nor any ERISA Affiliate maintains, contributes to or has contributed to a Multiemployer Plan or any other plan subject to Title IV of ERISA or Section 412 of the Code. All material employee benefit plans and arrangements covered by ERISA, maintained by or contributed to by the Company, any of its Subsidiaries or any ERISA Affiliate are in substantial compliance with all applicable law, including any reporting requirements. Except as disclosed on Exhibit VII-P, neither the Company nor any Subsidiary has any liability with respect to retiree medical or death benefits or other benefits payable after termination of employment. Neither the Company, nor any of its Subsidiaries nor any other Person, including any fiduciary, has engaged in any transaction prohibited by Section 4975 of the Code or Section 406 of ERISA which could subject the Company or any of its Subsidiaries or any Person the Company or any of its Subsidiaries have an obligation to indemnify to any material tax or penalty imposed under Section 4975 of the Code or Section 502 of ERISA. Q. Disclosure. Neither this Agreement and the Schedule and Exhibits attached hereto nor any other document, certificate or statement furnished to any Purchaser by or on behalf of the Company in connection herewith (including without limitation the private placement memorandum of the Company distributed by the Company in connection with the offer of the Notes and Warrants), contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein, in the light of the circumstances under which made, not misleading. There is no fact peculiar to the Company or its Subsidiaries and known to the Company which materially adversely affects or in the future may (so far as the Company can now foresee) materially adversely affect the business, operations, property, assets, prospects, or condition, financial or other, of the Company and its Subsidiaries, taken as a whole, which has not been set forth in this Agreement and the Schedule and Exhibits attached hereto or in the Notes or Warrants being purchased under this Agreement or in the other documents described herein and furnished to each of the Purchasers by or on behalf of the Company prior to the Closing Date in connection with the transactions contemplated hereby. R. Capital Stock. As of the Closing Date and after giving effect to the transactions herein provided, the Company has authorized a total of 40,400,000 shares of its capital stock of all classes, consisting of 25,000,000 shares of Common Stock, 15,400,000 shares of Preferred Stock divided into the following classes: 3,500,000 shares of Series A Preferred Stock, 6,500,000 shares of Series A-1 Convertible Preferred Stock, 2,300,000 shares of Series BB Preferred Stock, 500,000 34 40 shares of Series C Preferred Stock, 2,200,000 shares of Series D Preferred Stock and 400,000 shares of Series B $2.125 Increasing Rate Cumulative Convertible Preferred Stock ("Series BB Preferred Stock"). As of June 1, 1995, 4,243,975 shares of Common Stock are issued and outstanding, 3,500,000 shares of Series A Preferred Stock are issued and outstanding, 2,769,109 shares of Series A-1 Convertible Preferred Stock are issued and outstanding 1,577,547 shares of Series BB Preferred Stock are issued and outstanding, 448,811 shares of Series C Preferred Stock are issued and outstanding, 2,112,819 shares of Series D Preferred Stock are issued and outstanding (which will be adjusted for the issuance of up to 44,500 additional shares pursuant to the terms of the acquisition agreement for Psychiatric Healthcare Corporation), and no shares of Series BB Preferred Stock are outstanding. The Company holds no shares of its capital stock in its treasury. Since June 1, 1995 the Company has not issued any shares of capital stock. All of such outstanding shares have been validly issued and are fully paid and nonassessable. The Company has reserved such number of shares of Common Stock for issuance pursuant to such instruments or agreements as are set forth in Exhibit VII-R hereto. The shares of Common Stock issuable upon exercise of the Warrants have been reserved and will, when issued, be duly authorized, validly issued, fully paid and non-assessable. None of the shares of the Company's capital stock outstanding at Closing (i) were subject to preemptive rights when issued or (ii) provide the holders thereof with any preemptive rights with respect to any capital stock of the Company or any capital stock referred to in the immediately following subparagraph of this Paragraph 7R. Except as otherwise stated in this paragraph or disclosed on Exhibit VII-R and except for shares reserved for issuance in connection with the Warrants, the Company has not granted or issued, or agreed to grant or issue, any options, warrants or similar rights to acquire or receive any of the authorized but unissued shares of its capital stock of any class or any securities convertible into shares of its capital stock of any class. As of the date hereof, no Person holds of record or beneficially owns 5% or more of the outstanding shares of any class of the capital stock of the Company except as set forth in Exhibit VII-R hereto. Except as described in Exhibit VII-R above, the Company has not taken any action after June 1, 1995 and prior to the Closing Date which, had Section 1B of the Warrants been in effect on and after such date and to and including the Closing Date, would have required an adjustment in the Exercise Price as defined in Section 1A of the Warrants. S. Environmental Compliance. (a) Neither the Company nor any Subsidiary is in violation, or alleged to be in violation of any judgment, decree, order, law, license, rule or regulation pertaining to environmental matters, including without limitation, those arising under the Resource Conservation and Recovery Act ("RCRA"), the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986 ("SARA"), the Federal Clean Water Act, the Federal Clean Air Act, the Toxic Substances Control Act, or any federal, state or local statute, regulation, ordinance, order or decree relating to health, safety or the environment (hereinafter "Environmental Laws"), which violation would have a material adverse effect on the business, assets or financial condition of the 35 41 Company individually or the Company and its Subsidiaries, taken as a whole. (b) Neither the Company nor any Subsidiary has received written notice from any third party, including without limitation any federal, state or local governmental authority, (i) that the Company or any Subsidiary has been identified by the United States Environmental Protection Agency ("EPA") as a potentially responsible party under CERCLA with respect to a site listed on the National Priorities List, 40 C.F.R. Part 300 Appendix B (1986); (ii) that any hazardous waste, as defined by 42 U.S.C. Section 6903(5), any hazardous substances as defined by 42 U.S.C. Section 9601(14), any pollutant or contaminant as defined by 42 U.S.C. Section 9601(33), any medical waste and any toxic substances, oil or hazardous materials or other chemicals or substances regulated by any Environmental Laws ("Hazardous Substances") which any one of them has generated, transported or disposed of has been released at any site at which a federal, state or local agency has conducted or has ordered that either the Company or any Subsidiary conduct a remedial investigation, removal or other response action pursuant to any Environmental Law or have named the Company or any Subsidiary as a Potentially Responsible Party or are seeking contribution from the Company or any Subsidiary; or (iii) that it is or shall be a named party to any claim, action, cause of action, complaint, or legal or administrative proceeding (in each case, contingent or otherwise) arising out of any third party's incurrence of costs, expenses, losses or damages of any kind whatsoever in connection with the release of Hazardous Substances. (c) To the knowledge of the Company, to the extent such activity would have a material adverse effect on the business, assets or financial condition of the Company, individually, or of the Company and its Subsidiaries, taken as a whole: (i) no portion of the property of the Company or any Subsidiary has been used for the handling, processing, storage or disposal of Hazardous Substances except in accordance with applicable Environmental Laws; and no underground tank or other underground storage receptacle for Hazardous Substances is located on any portion of the property; (ii) in the course of any activities conducted by the Company, its Subsidiaries or operators of their properties, no Hazardous Substances have been generated or are being used on the property except in accordance with applicable Environmental Laws; (iii) there have been no releases (i.e., any past or present releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, disposing or dumping) or threatened releases of Hazardous Substances on, upon, into or from the property of the Company or any Subsidiary, which releases would have a material adverse effect on the value of any of the property or adjacent properties or the environment; and (iv) in addition, any Hazardous Wastes as defined by 42 U.S.C. Section 6903(5), if any, that have been generated on any of the property have been transported offsite only by carriers having an identification number issued by the EPA, treated or disposed of only by treatment or disposal facilities maintaining valid permits as required under applicable Environmental Laws, which transporters and facilities have been and are, to the best of the Company's knowledge, operating in material compliance with such permits and applicable Environmental Laws. T. Solvency. The Company is both as a separate corporate entity and on a consolidated basis, and both before and after giving effect to the transactions contemplated by this Agreement, solvent. U. Business. As described in the private placement memorandum distributed by the 36 42 Company in the offer of the Notes and Warrants, the Company and its Subsidiaries are engaged primarily in the business of owning and/or operating hospitals and other health care facilities and related businesses ARTICLE VIII REPRESENTATIONS AND COVENANTS OF THE PURCHASERS A. Investment Purpose. Each Purchaser as to itself represents and warrants that (i) it is acquiring the Notes and Warrants to be purchased by it hereunder for its own general account and/or one or more separate accounts maintained by it for investment and not with a view to any distribution of the Notes or Warrants to be purchased by it hereunder, but subject, nevertheless, to the disposition of the Notes and Warrants being at all times within its control, (ii) either (a) no part of the funds used to acquire the Notes and Warrants constitutes assets allocated to any separate account maintained by such Purchaser in which any employee benefit plan (or its related trust) has any interest or (b) no part of the funds used to purchase the Notes or Warrants constitute assets of an employee benefit plan (within the meaning of Section 3 (3) of ERISA as interpreted by the Department of Labor regulations as in effect on the date hereof) and (iii) it is an "accredited investor" as defined in Rule 501 under the Securities Act. B. Authority. Each Purchaser as to itself represents and warrants that it has the power, is authorized or otherwise duly qualified to execute this Agreement. C. Waiver of Preemptive Rights. Each Purchaser having the right to acquire Notes or Warrants in amounts different from the amounts set forth in Schedule I, do by their execution hereof, waive such rights. ARTICLE IX SUBORDINATION A. Subordination of Notes. Notwithstanding anything in this Agreement, any Note or elsewhere to the contrary, the indebtedness evidenced by the Notes, and any renewals, extensions, modifications, refundings or refinancings thereof, including principal, premium, if any, and interest, and any costs of collection in connection with the Notes, including attorney fees, shall at all times be wholly subordinate and junior in right of payment, to the extent and in the manner hereinafter set forth in this Article 9, to all indebtedness not to exceed $200,000,000 as to principal amount of the Company under the Amended and Restated Loan Agreement dated as of May 31, 1995, among the Company, Banque Paribas, as Agent, and the banks which are parties thereto (the "Bank Agreement"), specifically including, without limitation, all principal not to exceed $200,000,000, premium, if any, interest (including interest accruing after the commencement of any proceeding by or against the Company under the Bankruptcy Code, to the extent such interest is allowed as a claim in such proceeding), commitment fees, facilities fees, reimbursable expenses, indemnities, costs of collection (including attorneys' fees), and all other monetary obligations payable in connection with such indebtedness, whether outstanding on the date hereof or created or incurred after the date hereof (including any renewals, extensions, increases, modifications, refundings or refinancings thereof) (such indebtedness of the Company to which the Notes are subordinate and junior is sometimes 37 43 hereafter referred to as "Senior Indebtedness"): (1) (a) In the event of any liquidation, dissolution or winding up of the Company, or of any execution, sale, receivership, insolvency, bankruptcy, liquidation, readjustment, reorganization or other similar proceeding relative to the Company or its property, whether in bankruptcy, insolvency, reorganization or receivership proceedings or upon an assignment for the benefit of creditors or any other marshalling of the assets and liabilities of the Company, or otherwise (collectively, "Debtor Relief Proceedings"), all Senior Indebtedness shall first be paid in full in cash (or otherwise satisfied in a manner acceptable to the holders of the Senior Indebtedness in their sole and absolute discretion) before any payment is made upon the indebtedness evidenced by the Notes; and in any such event any payment or distribution of any kind or character, whether in cash, property or securities (other than in securities or other evidences of indebtedness, the payment of which is subordinated to the payment of all Senior Indebtedness which may at the time be outstanding to at least the same extent as the Notes are subordinated) which shall be made upon or in respect of the Notes shall be paid over to the holders of such Senior Indebtedness, pro rata, for application in payment thereof unless and until such Senior Indebtedness shall have been paid in full in cash (or otherwise satisfied in a manner acceptable to the holders of the Senior Indebtedness in their sole and absolute discretion). (b) In the event of the failure of the holders of the Notes, or any of them, to file claims or proofs of claim in any Debtor Relief Proceeding prior to the date which is thirty days before the applicable bar date or other time limit for filing of such claims or proofs of claim, the holders of the Notes hereby irrevocably authorize and empower the holders of the Senior Indebtedness to file claims or proofs of claim in any such Debtor Relief Proceeding, in the name of the holders of the Senior Indebtedness or in the name of the holders of the Notes. The holders of the Notes hereby agree to execute and deliver to the holders of the Senior Indebtedness such powers of attorney, assignments or other instruments as may be requested by the holders of the Senior Indebtedness in order to enable the holders of the Senior Indebtedness to file such claims or proofs of claim upon or with respect to any or all of the Notes. (c) The holders of the Notes agree that, unless the holders of the Senior Indebtedness have contested the validity or enforceability of the Agreement or the Notes, none of the holders of the Notes shall take any action in any Debtor Relief Proceeding which would contest the validity or enforceability of (i) the Bank Agreement, (ii) the obligations of the Company under the Bank Agreement, (iii) the liens or security interests securing the Senior Indebtedness, (iv) the rights of the holders of the Senior Indebtedness under the Bank Agreement and the documents, instruments, and agreements securing the obligations of the Company under the Bank Agreement, or (v) the validity or enforceability of the provisions of this Article 9. (2) Except as otherwise specifically provided in this paragraph (2), the holders of the Notes shall not be entitled to any payments of principal, premium, or interest on the Notes until after the Senior Indebtedness shall have been paid in full in cash (or otherwise satisfied in a manner acceptable to the holders of the Senior Indebtedness in their sole and absolute discretion). If (a) no default or event of default exists under the Bank Agreement (and no event occurs which, upon the giving of notice or passage of time, or both, would constitute a default or an event of 38 44 default under the Bank Agreement), and (b) if the making of the prepayments of principal, premium and interest on the Notes required under Article IV(A) hereof would not create or result in the occurrence of a default or an event of default under the Bank Agreement (or an event or occurrence which, with the giving of notice or passage of time, or both, would constitute a default or an event of default under the Bank Agreement), then the prepayments of principal, premium and interest on the Notes required under Article IV(A) hereof may be made. If no default or event of default exists under the Bank Agreement (and no event occurs which, upon the giving of notice or passage of time, or both, would constitute a default or an event of default under the Bank Agreement), the total principal, premium and interest required to be paid on the Notes on the Maturity Date may be paid on December 31, 2003; provided that if any such default or event of default blocking payment on the Notes pursuant to this sentence is waived by the holders of the Senior Indebtedness or cured to the satisfaction of the holders of the Senior Indebtedness, the total principal, premium and interest required to be paid on the Notes on the Maturity Date shall thereupon be immediately paid. So long as the holders of the Notes have not received notice (as provided in paragraph (4) below) that a default or an event of default exists under the Bank Agreement (or that an event has occurred which, upon the giving of notice or passage of time, or both, would constitute a default or an event of default under the Bank Agreement), and so long as no payment default exists with respect to the Senior Indebtedness, the Company may make and the holders of the Notes may receive the scheduled installments of interest payable on the Notes. During the continuance of any payment default under the documents evidencing or securing any Senior Indebtedness, no payment of principal, premium or interest otherwise permitted hereunder shall be made on the Notes until the time at which the payment default with respect to the Senior Indebtedness is either waived by the holders of the Senior Indebtedness or is cured to the satisfaction of the holders of the Senior Indebtedness. During the continuance of any default or event of default under the documents evidencing or securing any Senior Indebtedness (or upon the occurrence of any event which with notice or lapse of time or both, would become a default or an event of default under the Bank Agreement), other than a payment default, of which the holders of the Notes have received notice (as provided in paragraph 4 below), no payment of principal, premium or interest otherwise permitted hereunder shall be made on the Notes until the earliest of (a) the payment in full in cash of all Senior Indebtedness (or the provision for such payment or other satisfaction of the Senior Indebtedness in a manner acceptable to the holders of the Senior Indebtedness in their sole and absolute discretion), (b) the expiration of a 180-day period beginning on the day the holders of the Notes receive notice of the occurrence of the default or the event of default (or the occurrence of the event which, with the giving of notice, or passage of time, or both, would constitute a default or an event of default) (such 180-day period or shorter time if terminated under clause (c) following, being referred to hereinafter as a "Blockage Period"), or (c) the time at which the default or event of default (or the event which, with the giving of notice or passage of time, or both, would constitute a default or event of default under the Bank Agreement) with respect to the Senior Indebtedness is either waived by the holders of the Senior Indebtedness or is cured to the satisfaction of the holders of the Senior Indebtedness. Upon the expiration of any Blockage Period, regularly-scheduled interest payments may be made with respect to the Notes unless and until the holders of the Notes receive notice of an additional Blockage Period, which notice must specify a different default or 39 45 event of default than that specified in the notice which initiated the preceding Blockage Period (or the recurrence, but not merely the continuance, of such prior default or event of default). The holders of the Senior Indebtedness may not impose more than four Blockage Periods while the Senior Indebtedness is outstanding, and the holders of the Senior Indebtedness may not impose any Blockage Period until at least forty-five (45) days have elapsed since the end of the immediately preceding Blockage Period (if any). (3) Until the Senior Indebtedness shall have been paid in full in cash (or otherwise satisfied in a manner acceptable to the holders of the Senior Indebtedness in their sole and absolute discretion), the holders of the Notes (or any of them) may not accelerate the maturity of the Notes, exercise any remedies with respect to the Company on account of the Notes or the indebtedness evidenced thereby or take any action to collect any amounts unpaid on the Notes until the earliest of (a) the institution of any Debtor Relief Proceeding relating to the assets or liabilities of the Company, (b) the acceleration of the maturity of any Senior Indebtedness, (c) the initiation by the holders of the Senior Indebtedness of any judicial proceeding to collect any Senior Indebtedness, or (d) the expiration of a thirty-day period beginning on the day the holders of the Senior Indebtedness receive notice from the holders of the Notes (as provided in paragraph (4) below) specifying the default with respect to the Notes and the actions which the holders of the Notes intend to take (such thirty-day period, or longer period if extended as specified in the following sentence, is referred to hereinafter as the "Standstill Period"). Without limiting or affecting the rights of the holders of the Notes upon the occurrence of any event referred to in clauses (a) through (c) of the immediately preceding sentence (in which event clause (d) of the immediately preceding sentence and this sentence shall not apply), if any Blockage Period exists at the time a notice is given under clause (d) of the immediately preceding sentence, or if any Blockage Period is initiated during any Standstill Period, the Standstill Period will continue through the later of the expiration of the thirty day period or the expiration of such Blockage Period. The expiration of, or existence or absence of, any Standstill Period does not affect the subordination provided for in the other paragraphs of this Article 9. (4) Notice by the holders of the Senior Indebtedness to the holders of the Notes required by paragraph (2) above and notice by the holders of the Notes to the holders of the Senior Indebtedness required by clause (d) of paragraph (3) above will be deemed received on the earliest of (a) when given, if sent by confirmed telecopy, (b) upon oral confirmation of delivery, if sent by courier, and (c) on the signing of a receipt therefor, if given by registered or certified mail, return receipt requested. Notice is effective upon receipt (actual or deemed) of such notice by the party to which notice is given, without regard to whether or not any other similarly-situated party has received such notice, and the Blockage Period or Standstill Period with respect to such party shall commence upon that party's (actual or deemed) receipt of notice. (5) Following an acceleration of the maturity of any Senior Indebtedness, and as long as such acceleration shall continue unrescinded, such Senior Indebtedness shall first be paid in full in cash (or otherwise satisfied in a manner acceptable to the holders of the Senior Indebtedness in their sole and absolute discretion), before any payment is made on, or with respect to, the Notes, regardless of whether or not such acceleration takes place during any Blockage Period, regardless 40 46 of the number of Blockage Periods which have taken place, and regardless of how many days have elapsed since the end of the immediately preceding Blockage Period, if any. (6) In the event that, notwithstanding the foregoing, any cash or distribution of assets of the Company, whether in cash, property, securities or otherwise, which, under the provisions of this Agreement should not have been paid to the holders of the Notes, is received by the holders of the Notes, any one of them or any person on their behalf, or provision is made for such payment or distribution, such payment or distribution shall be held in trust for the benefit of and shall immediately be paid or delivered directly to the holders of the Senior Indebtedness, on a pro rata basis, with any necessary endorsement, for application to the payment of the Senior Indebtedness, due or not due, until the Senior Indebtedness shall have been fully paid or satisfied. The provisions of this Article 9 are solely for the purpose of defining the relative rights of the holders of Senior Indebtedness on the one hand, and the holder of any Note on the other hand, and nothing herein shall impair, as between the Company and the holder of any Note, the obligation of the Company, which is unconditional and absolute, to pay the principal of, premium (if any) and interest thereon in accordance with its terms; nor shall anything herein prevent the holder of any Note from exercising all remedies otherwise permitted by applicable law or hereunder upon default hereunder or under any Note, subject to the rights of the holders of the Senior Indebtedness under this Article 9 and the agreements of the holders of the Notes contained herein, and nothing herein shall prevent the exercise of the Warrants (or any part thereof) in accordance with their terms. The provisions of this Article 9 are for the benefit of the holders of the Senior Indebtedness, and the holders of the Senior Indebtedness are entitled to enforce the provisions of this Article 9. Notwithstanding any other provisions of this Agreement to the contrary, the provisions of this Article 9 may not be amended or modified without the written consent of all of the holders of the Senior Indebtedness. Subject to the payment in full in cash of all Senior Indebtedness (or the provision for such payment or other satisfaction of the Senior Indebtedness in a manner acceptable to the holders of the Senior Indebtedness in their sole and absolute discretion), the holders of the Notes shall be subrogated to the rights of the holders of Senior Indebtedness to receive payments or distributions of cash, property or securities of the Company applicable to the Senior Indebtedness until all amounts owing on the Notes shall be paid in full, and, as between the Company, its creditors other than holders of Senior Indebtedness, and the holders of the Notes, no such payment or distribution made to the holders of Senior Indebtedness by virtue of this Article 9 which otherwise would have been made to the holders of the Notes shall be deemed to be a payment by the Company on account of the Senior Indebtedness, it being understood that the provisions of this Article 9 are and are intended solely for the purpose of defining the relative rights of the Holders of the Notes, on the one hand, and the holders of the Senior Indebtedness, on the other hand. No right of any present or future holder of any Senior Indebtedness to enforce the subordination herein shall at any time be prejudiced or impaired by any act or failure to act on the part of the Company or by any non-compliance by the Company with the terms, provisions and covenants of this Agreement regardless of any knowledge thereof any such holder may have or be 41 47 otherwise charged with. ARTICLE X RESTRICTIONS ON TRANSFER The Warrants, Notes and any Restricted Securities shall not be transferable except upon the conditions specified in this Article X, which conditions are intended to insure compliance with the provisions of the Securities Act and state securities laws in respect of the transfer of any such securities. A. Restrictive Legends. (a) Unless and until otherwise permitted by this Article, each certificate for a Warrant, Note or any Restricted Securities issued to a Purchaser or a nominee thereof, or to any subsequent transferee of such certificate shall be stamped or otherwise imprinted with a legend in substantially the following form: "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, and thus may not be offered for sale, sold, transferred or otherwise disposed of unless registered under the Securities Act of 1933, as amended, or unless an exemption from such registration is available. Further, such transfer is subject to the conditions specified in the Series E Note Purchase Agreement dated May 1, 1995 pursuant to which such securities were issued and sold by Champion Healthcare Corporation (the "Company") and the Addendum Agreement dated May 1, 1995, copies of which agreements are on file and may be inspected at the principal office of the Company. A copy of each agreement will be furnished by the Company to the holder hereof upon request and without charge. Under certain circumstances specified in such Series E Note Purchase Agreement, the Company has agreed to deliver to the holder hereof a new certificate, not bearing this legend, for all or part of the number of the securities evidenced hereby, as the case may be, registered in the name of such holder or its designated nominee." (b) The Company may order its transfer agents for Notes, Warrants and Restricted Securities to stop the transfer of any Note, Warrant or Restricted Securities bearing the legend set forth in Subparagraph (a) of this paragraph 10A until the conditions of this Article X with respect to the transfer of such securities have been satisfied. B. Notice of Proposed Transfer. If, prior to any transfer or sale of any Warrant or Restricted Securities, the holder desiring to effect such transfer or sale shall deliver a written notice to the Company describing briefly the manner of such transfer or sale and a written opinion of counsel for such holder (who may be counsel employed by any institutional holder) (provided that such counsel (if other than counsel for the Company or for the Purchasers in connection with the issuance of the Notes and Warrants hereunder), and the form and substance of such opinion, are reasonably satisfactory to the Company) to the effect that such transfer or sale may be effected without the registration of such securities under the Securities Act, the Company shall thereupon permit or cause its transfer agent (if any) to permit such transfer or sale to be effected; provided, however, that if in such written notice the transferring holder represents and warrants to the Company that the transfer or sale is to a purchaser or transferee whom the transferring holder knows or reasonably believes to be a "qualified institutional buyer", as that term is defined in Rule 144A promulgated by the Securities and Exchange Commission under the Securities Act ("Rule 144A"), 42 48 no opinion shall be required. C. Termination of Restrictions. (a) Notwithstanding the foregoing provisions of this Article X, the restrictions imposed by this Article X upon the transferability of Notes, Warrants and Restricted Securities shall not apply and shall terminate as to any particular Warrant, Note or Restricted Securities if (1) such security is effectively registered under the Securities Act and sold by the holder thereof in accordance with such registration, or (2) a written opinion to the effect that such restrictions are no longer required or necessary under any federal or state securities law or regulation have been received from counsel for the holder thereof (who may be counsel employed by any institutional holder) or counsel for the Company, or (3) such security is sold without registration under the Securities Act in compliance with Rule 144 promulgated by the Securities and Exchange Commission under the Securities Act ("Rule 144") or Rule 144A, or (4) the Company is reasonably satisfied that the holder of such security shall, in accordance with the terms of Subsection (k) of Rule 144, be entitled to sell such security pursuant to such Subsection, or (5) a letter or an order shall have been issued to the holder thereof by the staff of the Securities and Exchange Commission or stating that no enforcement action shall be recommended by such staff or taken by such Commission, as the case may be, if such security is transferred without registration under the Securities Act in accordance with the conditions set forth in such letter or order and such letter or order specifies that no subsequent restrictions on transfer are required. (b) Whenever the restrictions imposed by this Article X shall terminate, as hereinabove provided, the holder of any particular Note, Warrant or Restricted Securities then outstanding as to which such restrictions shall have terminated shall be entitled to receive from the Company, without expense to such holder, one or more new certificates for any Note, Warrant or Restricted Securities not bearing the restrictive legend set forth in paragraph 10A(a) hereof. D. Compliance with Rule 144 and Rule 144A. At the written request of any holder of any Note, Warrant or Restricted Securities who proposes to sell any Note, Warrant or Restricted Securities in compliance with Rule 144, the Company shall furnish to such holder, within ten days after receipt of such request, a written statement as to whether or not the Company is in compliance with the filing requirements of the Securities and Exchange Commission as set forth in such Rule. For purposes of effecting compliance with Rule 144A, in connection with any resales of any Note, Warrant or Restricted Securities that hereafter may be effected pursuant to the provisions of Rule 144A, any holder of any Note, Warrant or Restricted Securities desiring to effect such resale and each prospective institutional purchaser of any such Note, Warrant or Restricted Securities designated by such holder shall have the right, at any time the Company is not subject to Section 13 or 15(d) of the Securities and Exchange Act, to obtain from the Company, upon the written request of such holder and at the Company's expense the documents specified in Section (d)(4)(i) of Rule 144A, as such rule may be amended from time to time. E. Non-Applicability of Restrictions on Transfer. Notwithstanding the provisions of paragraph 10B hereof, any record owner of any Note, Warrant or Restricted Securities may from time to time transfer all or any part of such record owner's Note, Warrant or Restricted Securities (i) to a nominee identified in writing to the Company as being the nominee of or for such record owner, and any nominee of or for a beneficial owner of any Note, Warrant or Restricted Securities 43 49 identified in writing to the Company as being the nominee of or for such beneficial owner may from time to time transfer all or part of any Note, Warrant or Restricted Securities registered in the name of such nominee but held as nominee on behalf of such beneficial owner, to such beneficial owner, (ii) to an Affiliate, (iii) with respect to Bank of America Illinois and its employees, any transfer by and between Bank of America Illinois, its affiliates and employees, or (iv) if such record owner is a partnership or the nominee of a partnership, to a partner, retired partner, or estate of a partner or retired partner, of such partnership, so long as such transfer is in accordance with the transferee's interest in such partnership and is without consideration; provided, however, that each such transferee shall remain subject to all restrictions on the transfer of securities herein contained. ARTICLE XI MISCELLANEOUS A. Note Payments. The Company agrees that, so long as the Purchasers shall hold any Note, it will make payments of principal thereof and interest and premium, if any, thereon, which comply with the terms of this Agreement, by wire transfer of immediately available funds for credit to each Purchaser's account as set forth on Schedule II, or such other account in the United States of America as such Purchaser may designate in writing, notwithstanding any contrary provision herein or in any Note with respect to the place of payment. The Company agrees to afford the benefits of this paragraph to any institutional investor of recognized standing which in accordance with all of the terms hereof is the direct or indirect transferee of any Note purchased by the Purchasers hereunder. B. Expenses. (a) Transaction. The Company agrees, whether or not the transactions hereby contemplated shall be consummated, to pay, and save the Purchasers harmless against liability for the payment of, all out-of-pocket expenses arising in connection with the execution and delivery of this Agreement and the acquisition and issuance of the Notes and Warrants and Common Stock issuable upon exercise of the Warrants, limited to (i) taxes and filing fees, to the extent such expenses are taxes or filing fees that arise as a result of the Closing of the transactions contemplated hereby taking place in Texas, together with interest and penalties, if any, (ii) printing costs, if any; (iii) the fees and expenses of Chapman and Cutler, in connection with services rendered with respect to this Agreement, the Notes, the Warrants, the E Stock Registration Agreement and the Addendum Agreement through and including completion of the Closing, not to exceed $80,000, and any subsequent modification thereof, consent thereunder (including any proposed modification or consent, whether or not finalized); (iv) the fees and expenses of Rudnick & Wolfe, as counsel to the holders of the 1993 Notes; and (v) the investment banking fees and expenses of Donaldson, Lufkin & Jenrette incurred in connection with transactions related to the execution of this Agreement and the issuance of the Notes and Warrants. (b) Monitoring. The Company agrees to pay all reasonable out-of-pocket expenses arising in connection with the exercise of a Purchaser's rights under paragraph 5M, provided Purchaser submits a request, in writing, for the payment of such expenses in advance of any such activity for which payment will be sought, which request shall also contain a statement of a valid 44 50 business reason therefor. Within three days of receipt of such request, the president or any senior officer of the Company shall notify such Purchaser of the Company's approval or rejection of such request; provided, however, the Purchaser shall not be precluded from exercising its rights under paragraph 5M pending such notification from the Company. If such request is rejected, the Purchaser may thereupon submit its request to the Board of Directors, the approval in writing by the majority of which shall bind the Company to pay the requested expenses. (c) Enforcement and Bankruptcy. The Company agrees to pay all reasonable out-of-pocket expenses of Purchasers and their transferees arising in connection with the enforcement of the rights of Purchasers contained herein and in any case involving the bankruptcy of the Company. (d) Survival. The obligations of the Company under this paragraph shall survive transfer by the Purchasers and payment of any Note or exercise of any Warrant and transfer by the Purchasers of any Common Stock. C. Consent to Amendments. (a) Notes. This Agreement, as to any amendment of rights exclusively those of holders of Notes, may be amended, and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, if the Company shall obtain the written consent to such amendment, action or omission to act given by the holder or holders of at least two-thirds of the aggregate principal amount of the Notes at the time outstanding, except that, without the written consent of the holder or holders of all the Notes at the time outstanding, no amendment to this Agreement shall change the maturity of any Note, or change the principal of, or the rate or time of payment of interest or any premium payable with respect to, any Note, or affect the time or amount of any required prepayments or modify the subordination provisions in a manner adverse to the holders of Notes, or change the transfer restrictions with respect to the Notes, or reduce the proportion of the principal amount of the Notes required with respect to any consent. (b) Notes and Warrants. Subject to the provisions and exceptions of subparagraph (a) above, this Agreement, as to any amendment of any mutual rights of the holders of Notes and Warrants, may be amended, and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, if the Company shall obtain the written consent to such amendment, action or omission to act given by the (i) holder or holders of at least two-thirds (2/3) of the aggregate principal amount of the Notes at the time outstanding and (ii) holder or holders of Warrants initially exercisable to purchase two-thirds (2/3) of all shares of Common Stock issuable upon the exercise of all Warrants at the time outstanding. (c) Consideration, Binding Effect, etc. Any consideration given to any holder to obtain his consent shall be given pro rata to all such holders of Notes or Warrants, whether or not they give consent. Each holder of any Note or Warrant at the time or thereafter outstanding (or of shares of Common Stock entitled to any rights hereunder) shall be bound by any consent authorized by this paragraph, whether or not such Note or Warrant shall have been marked to indicate such consent, but any Note issued thereafter may bear a notation referring to any such consent. No course of dealing between the Company and the holder of any Note or Warrant nor any delay in exercising any 45 51 rights hereunder or under any Note or Warrant shall operate as a waiver of any rights of any holder of such Note or Warrant. As used herein and in the Notes and Warrants, the term "this Agreement" and references thereto shall mean this Agreement as it may from time to time be amended or supplemented. D. Notices to Subsequent Holder. If any Note or Warrant shall have been transferred to another holder pursuant to paragraph 11E and such holder shall have designated in writing the address to which communications with respect to such Note or Warrant shall be mailed, all notices, certificates, requests, statements and other documents required or permitted to be delivered to the Purchasers by any provision hereof shall also be delivered to each such holder. E. Form, Registration, Transfer and Exchange of Notes; Lost Notes. The Notes are issuable only as registered Notes without coupons in the denominations of $100,000 and integral multiples of $5,000 in excess of $l00,000 for such Note; provided, however, that if the aggregate principal amount of Notes purchased by any one Purchaser is less than $100,000, then any such Note is issuable only as a registered Note in the denomination of such aggregate principal amount. The Company shall keep at its principal office a register in which the Company shall provide for the registration of Notes and of transfers of Notes. Upon surrender of any Note for registration of transfer in compliance with the terms of this Agreement at the office of the Company, the Company shall, at its expense (other than for transfer taxes, if any), execute and deliver one or more new Notes of like tenor and of a like aggregate principal amount registered in the name of the designated transferee or transferees. At the option of the holder of any Note, such Note may be exchanged for other Notes of like tenor and of any authorized denominations, of a like aggregate principal amount, upon surrender of the Note to be exchanged at the office of the Company. Whenever any Notes are so surrendered for exchange, the Company or such transfer agent shall, at the Company's expense (other than for transfer taxes, if any), execute and deliver the Notes which the holder of Notes making the exchange is entitled to receive. Every Note presented or surrendered for registration of transfer or exchange shall be duly endorsed, or be accompanied by a written instrument of transfer duly executed, by the holder of such Note or his attorney duly authorized in writing. Any Note or Notes issued in exchange for any Note or upon transfer thereof shall carry the rights to unpaid interest and interest to accrue which were carried by the Note so exchanged or transferred, so that neither gain nor loss of interest to accrue shall result from any such transfer or exchange. Upon receipt of written notice or other evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Note and, in the case of any such loss, theft, or destruction, upon receipt of a Purchaser's unsecured indemnity agreement, or, in the case of any other holder of a Note or Notes, other indemnity reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such Note, the Company will make and deliver a new Note, as the case may be, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Note. F. Registration, Transfer and Exchange of Warrants. The Company shall keep at its principal office a register in which the Company shall provide for the registration of Warrants and of transfers of Warrants. Upon surrender of any Warrants for registration of transfer in compliance with the terms of this Agreement at such office, the Company shall, at its expense (other than for transfer taxes and duties, if any) execute and deliver or cause to be executed and delivered one or 46 52 more new Warrants of like tenor and representing the right to purchase a like amount of Common Stock, registered in the name of the designated transferee or transferees. At the option of the holder of any Warrant, such Warrant may be exchanged for other Warrants of like tenor and representing the right to purchase a like amount of Common Stock, upon surrender of the Warrant to be exchanged at such office of the Company. Whenever any Warrants are so surrendered for exchange, the Company shall, at its expense (other than for transfer taxes and duties, if any), execute and deliver or cause to be executed and delivered the Warrants which the holder of Warrants making the exchange is entitled to receive. Every Warrant presented or surrendered for registration of transfer or exchange shall be duly endorsed, or be accompanied by a written instrument of transfer duly executed, by the holder of such Warrant or his attorney duly authorized in writing. Upon receipt of written notice or other evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any warrant and, in the case of any such loss, theft, or destruction, upon receipt of a Purchaser's unsecured indemnity agreement, or in the case of any such mutilation upon surrender and cancellation of such Warrant, the Company will make and deliver a new Warrant of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant. G. Persons Deemed Owners. Prior to due presentment for registration of transfer, the Company may treat the Person in whose name any Note is registered as the owner and holder of such Note for the purpose of receiving payment of principal of and interest and premium (if any) on such Note and for all other purposes whatsoever, whether or not such Note shall be overdue, and the Company shall not be affected by notice to the contrary. H. Indemnification. The Company hereby agrees to indemnify, defend, and hold harmless each holder of Notes as well as each of such holder's subsidiaries, affiliates, directors, officers, trustees or employees (collectively, all such parties being referred to herein as the "Indemnities") and reimburse the Indemnities for, from and against all demands, claims, actions or causes of actions, assessments, losses, damages, liabilities, claims, costs and expenses, including without limitation, interest, penalties, reasonable attorneys' fees, disbursements and expenses asserted against, resulting to, imposed upon, or incurred by any Indemnitee, directly or indirectly, by reason of or resulting from (i) a breach of any material representation, warranty, covenant, agreement, or other obligation of the Company contained in or made pursuant to this Agreement or any facts or circumstances constituting such a breach, or (ii) any investigation or proceeding against any one of the Company, the Indemnities, or their agents, arising out of or in connection with this Agreement, the Notes, the Warrants, the E Stock Registration Agreement or the Addendum Agreement or any transaction contemplated hereby or thereby or any document or instrument executed herewith or therewith or pursuant hereto or thereto), whether or not the transactions contemplated by this Agreement are consummated, which investigation or proceeding requires the participation of any Indemnitee or its agents or is commenced or filed against any Indemnitee or its agents because of this Agreement, the Notes, the Warrants, the E Stock Registration Agreement or the Addendum Agreement or any of the transactions contemplated hereby or thereby or any other document or instrument executed herewith or therewith or pursuant hereto or thereto), other than an investigation or proceeding in which it is finally determined that there was gross negligence or willful misconduct on the part of such Indemnitee or its agents which was not taken by them in reliance upon any of the Company's representations, warranties, covenants or agreements in this Agreement, 47 53 the Stock Registration Agreement, the Addendum Agreement or in any other documents or instruments contemplated hereby or thereby or executed herewith or therewith or pursuant hereto or thereto or (iii) any environmental claims (including, but not limited to, claims under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, or other federal, state, local, or foreign Environmental Laws) arising from actions taken (or from the failure to take action) or from events, circumstances, or conditions whenever occurring or existing; provided, however, that the Company shall not indemnify any Indemnitee under clause (iii) above for any environmental claim arising as a result of any action taken by any Indemnitee. (a) Third Party Claims. After receipt of any claim or notice of the commencement of any action against a party entitled to indemnification hereunder ("indemnified party") in respect of which indemnity may be sought hereunder, the indemnified party will notify each party which is required to indemnify the indemnified party or for which indemnity may be sought hereunder ("indemnifying party") in writing of the receipt or commencement thereof. The omission of the indemnified party to so notify any indemnifying party shall not relieve any indemnifying party of their obligations to indemnify in respect of such action under this paragraph 11H. In the event of the commencement of any such action as to which the indemnified party notifies the indemnifying parties as aforesaid, each indemnifying party shall be entitled to participate therein and assume the defense thereof with counsel chosen by them, provided, however, that any Indemnitee, or any agent thereof, shall have the right (without releasing the Company from any of its obligations hereunder) to employ its own counsel and either to direct its own defense or to participate in the Company's defense, but the fees and expenses of such counsel shall be at the expense of such person unless (x) the employment of such counsel shall have been authorized in writing by the Company in connection with such defense or (y) the Company shall not have provided its counsel to take charge of such defense or (z) the Indemnitee, or such agent of the Indemnitee, shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to those available to the Company, and conflict with any defenses of the Company, then in any of such events referred to in clauses (x), (y) or (z) such counsel fees and expenses (but only for one counsel for each Indemnitee and its respective agents) shall be borne by the Company. Any settlement of any such action, suit, claim or proceeding shall require the consent of both the Company and such indemnified person (neither of which shall unreasonably withhold its consent). I. Survival of Representations, Warranties and Indemnities. All representations, warranties and indemnities contained herein or made in writing by the Company in connection herewith shall survive the execution and delivery of this Agreement and of the Notes and Warrants, regardless of any investigation made by any Purchaser or on such Purchaser's behalf. J. Successors and Assigns. All covenants and agreements in this Agreement contained by or on behalf of either of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto whether so expressed or not; provided, that the Company may not assign any of its rights, duties or obligations under this Agreement, except with the Purchasers' written consent. K. Notices. All notices and other communications provided for or given or made hereunder shall be in writing and shall be effective when received upon the earlier of: (i) by hand or by 48 54 first class mail (or registered mail, if required), (ii) by electronic facsimile transmission, (iii) by courier or (iv) actual receipt if to the Purchasers at their address set forth on Schedule I hereto, to transferees of the Purchasers at their address set forth in the records of the Company or the transfer agent of the Company, and if to the Company, at Champion Healthcare Corporation, 14340 Torrey Chase, Suite 320, Houston, Texas 77014, or to such other address with respect to any such party as such party shall give notice in writing. L. Accounting Terms. Unless otherwise set forth herein, all accounting terms and provisions in this Agreement shall be construed to be as determined in accordance with generally accepted accounting principles then in effect. M. Satisfaction Requirement. If any agreement, certificate or other writing, or any action taken or to be taken, is by the terms of this Agreement required to be satisfactory to any Purchaser, the determination of such satisfaction shall be made by such Purchaser in its sole and exclusive judgment exercised in good faith. N. Governing Law. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of Texas without regard to its conflict of law provisions. This Agreement may not be changed orally, but (subject to the provisions of paragraph 11C) only by an agreement in writing signed by the party against whom enforcement is sought. O. Headings; Table of Contents. The descriptive headings of the several paragraphs of this Agreement and the table of contents are inserted for convenience only and do not constitute a part of this Agreement. P. Counterparts. This Agreement may be executed simultaneously in two or more counterparts, all of which shall be deemed but one and the same instrument and each of which shall be deemed an original, and it shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart. Q. Non Business Days. If the date for making any payment or the last date for performance of any act or the exercising of any right, as provided in this Agreement, shall not be a business day, such payment may be made or act performed or right exercised on the next succeeding business day, with the same force and effect as if done on the nominal date provided in this Agreement, except that interest shall accrue and be payable for the period after such nominal date. R. Confidentiality. The Purchasers acknowledge that the Company intends to acquire and possibly dispose of hospitals and other businesses and assets generally within the healthcare industry and that much of the information the Company has provided and agreed to provide and make available to Purchasers could materially and adversely affect the Company if it were to be directly or indirectly provided or made available to competitors, entities providing financing to competitors or any advisor to such competitors. Therefore, each Purchaser agrees with respect to any information disclosed hereunder by the Company (other than consolidated financial statements or other publicly available information) that such Purchaser will take the same steps with respect to such information that such Purchaser normally takes to prevent disclosure of its own confidential information provided, that the foregoing shall not prohibit disclosure of such information (i) to any other Purchaser, (ii) to the 49 55 employees, officers or agents of any Purchaser, (iii) to the extent necessary or appropriate in connection with the enforcement of the Agreement or the Notes or Warrants, (iv) to any person to which such Purchaser is required to make such disclosure pursuant to applicable law, rule or regulation in connection with any transfer or proposed transfer of a security, provided that such transferee or proposed transferee agrees that any such information shall be subject to the provisions hereof, or (v) to any federal, state or other governmental or regulatory authority having jurisdiction over such holder including, without limitation, the National Association of Insurance Commissioners. It is specifically understood that the Company's audited annual consolidated financial statements and its unaudited quarterly consolidated financial statements (but not supplemental operating data) may be summarized and used by Purchasers for any proper purpose (including, without limitations, (i) in reports to partners of such Purchasers and (ii) as may be required by (x) applicable governmental or regulatory authority or (y) in connection with enforcement of the Agreement or the Notes or Warrant) other than disclosure to known competitors of the Company or its Subsidiaries. 50 56 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the day and year first above written. CHAMPION HEALTHCARE CORPORATION By /s/ James G. VanDevender Name: James G. VanDevender Title: Executive Vice President CHAMPION HEALTHCARE CORPORATION 14340 Torrey Chase Suite 320 Houston, Texas 77014 Telefacsimile: (713) 583-5495 Confirmation: (713) 583-5491 51 57 Accepted as of June 12, 1995: THE LINCOLN NATIONAL LIFE INSURANCE COMPANY By Lincoln National Investment Management Company, Its Attorney-In-Fact By /s/ William N. Holm, Jr. Its Vice President Accepted as of June 12, 1995: SECURITY-CONNECTICUT LIFE INSURANCE COMPANY By Lincoln National Investment Management Company, Its Attorney-In-Fact By /s/ William N. Holm, Jr. Its Vice President Accepted as of June 12, 1995: LINCOLN NATIONAL INCOME FUND, INC. By /s/ H. Thomas McMeekin Its President Accepted as of June 12, 1995: THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY By /s/ Gary A. Poliner Its Vice President 52 58 53 59 Accepted as of June 12, 1995: BANK OF AMERICA ILLINOIS By /s/ Ford S. Bartholow Ford S. Bartholow Its Managing Director /s/ Christopher J. Perry Christopher J. Perry /s/ Robert F. Perille Robert F. Perille /s/ M. Ann O'Brien M. Ann O'Brien /s/ Ford S. Bartholow Ford S. Bartholow /s/ Jeffrey M. Mann Jeffrey M. Mann /s/ Matthew W. Clary Matthew W. Clary /s/ Thomas E. Van Pelt, Jr. Thomas E. Van Pelt, Jr. 54 60 Accepted as of June 12, 1995: INDOSUEZ CAPITAL ASSET ADVISORS, INC. By /s/ John G. Popp John G. Popp Its President Accepted as of June 12, 1995: INDOSUEZ CAPITAL FUNDING I, LIMITED By /s/ John G. Popp John G. Popp Its Collateral Manager Accepted as of June 12, 1995: INDOSUEZ HIGH YIELD PARTNERS By /s/ John G. Popp John G. Popp Its Partner 55 61
INVESTMENT DOLLAR AMOUNTS OF WARRANTS NAME OF PURCHASER NOTES TO BE PURCHASED TO BE PURCHASED The Lincoln National Life Insurance $14,000,000 210,000 Company c/o Lincoln National Investment Management Company 200 East Berry Street Renaissance Square Fort Wayne, Indiana 46802 Attention: Investments-Private Placements Lincoln National Income Fund, Inc. $500,000 7,500 c/o Lincoln National Investment Management Company 200 East Berry Street Renaissance Square Fort Wayne, Indiana 46802 Attention: Investments-Private Placements Security-Connecticut Life Insurance $500,000 7,500 Company c/o Lincoln National Investment Management Company 200 East Berry Street Renaissance Square Fort Wayne, Indiana 46802
I-1 62 Attention: Investments-Private Placements The Northwestern Mutual Life $13,000,000 195,000 Insurance Company 720 East Wisconsin Avenue Milwaukee, Wisconsin 53202 Attention: Securities Department Bank of America Illinois $4,000,000 52,800 Mezzanine Investments Group 231 South LaSalle Street Chicago, IL 60697 Attention: Ford Bartholow, Managing Director
I-2 63
INVESTMENT DOLLAR AMOUNTS OF WARRANTS NAME OF PURCHASER NOTES TO BE PURCHASED TO BE PURCHASED Christopher J. Perry $-0- 2,700 c/o Bank of America Illinois Mezzanine Investments Group 231 South LaSalle Street Chicago, IL 60697 Attention: Ford Bartholow, Managing Director Robert F. Perille $-0- 1,575 c/o Bank of America Illinois Mezzanine Investments Group 231 South LaSalle Street Chicago, IL 60697 Attention: Ford Bartholow, Managing Director M. Anne O'Brien $-0- 1,425 c/o Bank of America Illinois Mezzanine Investments Group 231 South LaSalle Street Chicago, IL 60697 Attention: Ford Bartholow, Managing Director Ford S. Bartholow $-0- 900 c/o Bank of America Illinois Mezzanine Investments Group 231 South LaSalle Street
I-3 64 Chicago, IL 60697 Attention: Ford Bartholow, Managing Director Jeffrey M. Mann $-0- 240 c/o Bank of America Illinois Mezzanine Investments Group 231 South LaSalle Street Chicago, IL 60697 Attention: Ford Bartholow, Managing Director Matthew W. Clary $-0- 180 c/o Bank of America Illinois Mezzanine Investments Group 231 South LaSalle Street Chicago, IL 60697 Attention: Ford Bartholow, Managing Director
I-4 65
INVESTMENT DOLLAR AMOUNTS OF WARRANTS NAME OF PURCHASER NOTES TO BE PURCHASED TO BE PURCHASED Thomas E. Van Pelt, Jr. $-0- 180 c/o Bank of America Illinois Mezzanine Investments Group 231 South LaSalle Street Chicago, IL 60697 Attention: Ford Bartholow, Managing Director Indosuez Capital Asset Advisors, Inc. $2,500,000 30,000 1211 Avenue of the Americas New York, New York 10036 Attention: Indosuez Capital Funding I, Limited $500,000 -0- 1211 Avenue of the Americas New York, New York 10036 Attention: Indosuez High Yield Partners -0- 15,000 1211 Avenue of the Americas ============ ======== New York, New York 10036 Attention: Total $35,000,000 525,000
I-5 66 NAME OF PURCHASER THE LINCOLN NATIONAL LIFE INSURANCE COMPANY c/o Lincoln National Investment Management Company 200 East Berry Street Renaissance Square Fort Wayne, Indiana 46802 Attention: Investments--Private Placements Payments All payments on or in respect of the Notes to be by bank wire transfer of Federal or other immediately available funds (identifying each payment as "Champion Healthcare Corporation, Series E 11% Senior Subordinated Notes due 2003, PPN 15850B A* 5, principal or interest") to: Bankers Trust Company (ABA #021001033) Private Placement Processing New York, New York Account Number 99-911-145 for the account of: The Lincoln National Life Insurance Company (MZP) Custodial Account Number 98124 Notices All notices and communications, including notices with respect to payments and written confirmation of each such payment, to be addressed to: Lincoln National Investment Management Company 200 East Berry Street, Renaissance Square 2R-02 Fort Wayne, Indiana 46802 II-1 67 Attention: William N. Holm, Jr./Mezzanine Finance With a copy of each notice of payment to: Bankers Trust Company P.O. Box 998 Bowling Green Station New York, New York 10274 Attention: Private Placement Unit Name of Nominee in which Notes are to be issued: None Taxpayer I.D. Number: 35-0472300 Securities are to be delivered to: Bankers Trust Company 14 Wall Street, 4th Floor, Window #44 New York, New York 10005 Attention: Marlene Maynard, Mail Stop 4049 Ref: Account Name and Custody Account Number II-2 68 NAME OF PURCHASER SECURITY-CONNECTICUT LIFE INSURANCE COMPANY c/o Lincoln National Investment Management Company 200 East Berry Street Renaissance Square Fort Wayne, Indiana 46802 Attention: Investments--Private Placements Payments All payments on or in respect of the Notes to be by bank wire transfer of Federal or other immediately available funds (identifying each payment as "Champion Healthcare Corporation, Series E 11% Senior Subordinated Notes due 2003, PPN 15850B A* 5, principal or interest") to: Shawmut Bank Connecticut, N.A. (ABA #011900445) 777 Main Street Hartford, Connecticut 06115 for credit to: Security-Connecticut Life Insurance Company (CUN) Account Number 0156196 Notices All notices of payment on or in respect of the Notes and written confirmation of each such payment to: Security-Connecticut Life Insurance Company 20 Security Drive Avon, Connecticut 06001 Attention: Jodi Dean II-3 69 All notices and communications other than those in respect to payments to be addressed as first provided above. Name of Nominee in which Notes are to be issued: None Taxpayer I.D. Number: 35-1468921 Securities are to be delivered to: Security-Connecticut Life Insurance Company 20 Security Drive Avon, Connecticut 06001 Attention: Jodi Dean II-4 70 NAME OF PURCHASER LINCOLN NATIONAL INCOME FUND, INC. c/o Lincoln National Investment Management Company 200 East Berry Street Renaissance Square Fort Wayne, Indiana 46802 Attention: Investments--Private Placements Payments All payments on or in respect of the Notes to be by bank wire transfer of Federal or other immediately available funds (identifying each payment as "Champion Healthcare Corporation, Series E 11% Senior Subordinated Notes due 2003, PPN 15850B A* 5, principal or interest") to: Bankers Trust Company (ABA #021001033) Private Placement Processing New York, New York Account Number 99-911-145 for the account of: Lincoln National Income Fund, Inc. Custodial Account Number 98245 Notices All notices and communications, including notices with respect to payments and written confirmation of each such payment, to be addressed to: Lincoln National Investment Management Company 200 East Berry Street, Renaissance Square 2R-02 Fort Wayne, Indiana 46802 II-5 71 Attention: William N. Holm, Jr./Mezzanine Finance With a copy of each notice of payment to: Bankers Trust Company P.O. Box 998 Bowling Green Station New York, New York 10274 Name of Nominee in which Notes are to be issued: None Taxpayer I.D. Number: 35-1273664 Securities are to be delivered to: Bankers Trust Company 14 Wall Street, 4th Floor, Window #44 New York, New York 10005 Attention: Marlene Maynard, Mail Stop 4049 Ref: Account Name and Custody Account Number II-6 72 NAME OF PURCHASER THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY 720 East Wisconsin Avenue Milwaukee, Wisconsin 53202 Attention: Securities Department Telecopier Number: (414) 299-7124 Payments All payments on or in respect of the Notes to be by bank wire transfer of Federal or other immediately available funds (identifying each payment as "Champion Healthcare Corporation, Series E 11% Senior Subordinated Notes due 2003, PPN 15850B A* 5, principal or interest") to: Bankers Trust Company (ABA #021-001-033) 16 Wall Street Insurance Unit, 4th Floor New York, New York 10005 for credit to: The Northwestern Mutual Life Insurance Company Account Number 00-000-027 Notices All notices and communications to be addressed as first provided above, except notices with respect to payments and written confirmation of each such payment to be addressed, Attention: Treasurer's Department/Securities Operations (Telecopier Number 414-299-2111). Name of Nominee in which Notes are to be issued: None Taxpayer I.D. Number: 39-0509570 II-7 73 NAME OF PURCHASER BANK OF AMERICA ILLINOIS 231 South LaSalle Street Chicago, IL 60697 Attention: Ford Bartholow/Mezzanine Investments Group Telecopier Number: (312) 828-6298 Payments All payments on or in respect of the Notes to be by bank wire transfer of Federal or other immediately available funds (identifying each payment as "Champion Healthcare Corporation, Series E 11% Senior Subordinated Notes due 2003, PPN 15850B A* 5, principal or interest") to: Bank of America Illinois (ABA #071000039) Chicago, Illinois RC 2148 Attention: Bradley Baker for credit to: Account Number 6638763 Champion Healthcare Corporation Notices All notices and communications to be addressed as first provided above. Name of Nominee in which Notes are to be issued: None II-8 74 NAME OF PURCHASER INDOSUEZ CAPITAL ASSET ADVISORS, INC. 1211 Avenue of the Americas New York, New York 10036 Attention: Ray Wright Telecopier Number: (212) 278-2250 Payments All payments on or in respect of the Notes to be by bank wire transfer of Federal or other immediately available funds (identifying each payment as "Champion Healthcare Corporation, Series E 11% Senior Subordinated Notes due 2003, PPN 15850B A* 5, principal or interest") to: Banque Indosuez (ABA 026002668) New York, New York Ref: Indosuez Capital Asset Advisors, Inc. Notices All notices and communications to be addressed as first provided above. Name of Nominee in which Notes are to be issued: None Taxpayer I.D. Number: 13-3714013 II-9 75 NAME OF PURCHASER INDOSUEZ CAPITAL FUNDING I LIMITED 1211 Avenue of the Americas New York, New York 10036 Attention: Elaine Mah Telecopier Number: (212) 278-2250 Payments All payments on or in respect of the Notes to be by bank wire transfer of Federal or other immediately available funds (identifying each payment as "Champion Healthcare Corporation, Series E 11% Senior Subordinated Notes due 2003, PPN 15850B A* 5, principal or interest") to: Texas Commerce Bank N.A. (ABA 113000609) Houston, Texas BNF=Trust Clearing Account OBI=Attn: Asset Backed Group/Indosuez A/C #55030011340102 for credit to: Account Number 7001109635800 Notices All notices and communications, including notices with respect to payments and written confirmation of each such payment, to be addressed to: Indosuez Capital Funding I, Limited c/o Texas Commerce Bank N.A. Attn: Asset Backed Group, A/C 13401 600 Travis Street, 8th Floor Houston, TX 77002-8039 Name of Nominee in which Notes are to be issued: OBIE & CO. II-10 76 NAME OF PURCHASER INDOSUEZ HIGH YIELD PARTNERS 1211 Avenue of the Americas New York, New York 10036 Attention: Ray Wright Telecopier Number: (212) 278-2250 Payments All payments on or in respect of the Notes to be by bank wire transfer of Federal or other immediately available funds (identifying each payment as "Champion Healthcare Corporation, Series E 11% Senior Subordinated Notes due 2003, PPN 15850B A* 5, principal or interest") to: Banque Indosuez (ABA 026002668) New York, New York Ref: Indosuez High Yield Partners Notices All notices and communications to be addressed as first provided above. Name of Nominee in which Notes are to be issued: None Taxpayer I.D. Number: 13-3762288 II-11 77 EXHIBIT II-A1 FORM OF NOTE The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, and thus may not be offered for sale, sold, transferred or otherwise disposed of unless registered under the Securities Act of 1933, as amended, or unless an exemption from such registration is available. Further, such transfer is subject to the conditions specified in the Series E Note Purchase Agreement dated May 1, 1995 (the "Agreement") pursuant to which such securities were issued and sold by Champion Healthcare Corporation (the "Company") and the D Stockholders Agreement dated as of December 31, 1993, copies of which agreements are on file and may be inspected at the principal office of the Company. A copy of each agreement will be furnished by the Company to the holder hereof upon request and without charge. Under certain circumstances specified in such Series E Note Purchase Agreement, the Company has agreed to deliver to the holder hereof a new certificate, not bearing this legend, for all or part of the number of the securities evidenced hereby, as the case may be, registered in the name of such holder or its designated nominee. This Note has been issued with Original Issue Discount. The Chief Financial Officer of Champion Healthcare Corporation at (713) 583-5491 will make available to the holder of this Note upon request the information required by Section 1.1275-3(b)(1)(i) of the Internal Revenue Regulations. CHAMPION HEALTHCARE CORPORATION Series E 11% Senior Subordinated Note Due December 31, 2003 No. E-______________ $___________________ [date] FOR VALUE RECEIVED, the undersigned, Champion Healthcare Corporation (herein called the "Company"), a corporation organized and existing under the laws of the State of Delaware, hereby 1 78 promises to pay to [_____________] or registered assigns, the principal sum of [__________________] on December 31, 2003, with interest (computed on the basis of the number of days actually elapsed and a 365-or 366-day year, as applicable) on the unpaid balance thereof from the date of issuance hereof until December 31, 2003 or until the principal hereof shall have become due and payable, at the Applicable Rate, payable quarterly on each March 31, June 30, September 30 and December 31 in each year, commencing June 30, 1995; provided, however, that during any period in which there is a default in the payment of interest or principal, interest shall accrue at the Applicable Rate plus 2% per annum compounded annually. "Applicable Rate" shall mean with respect to the outstanding principal amount of the Notes, 11% per annum from the date of issue up to and including December 31, 2000, and 12% per annum thereafter; provided, however, that in the event that the Company has not completed a public issuance of debt of the Company having a maturity of more than one year which shall result in the receipt by the Company of gross proceeds in a minimum of $100,000,000 prior to March 31, 1996, the Applicable Rate shall be 11.50% for the period from April 1, 1996 to and including December 31, 2000. This Note is subject to mandatory and optional prepayment at the times, in the amounts and subject to the conditions set forth in the Agreement. Payments of principal, premium and interest are to be made by wire transfer to the account of the payee set forth on Schedule II to the Agreement, or in such other manner or to such other place in the United States of America as the payee hereof or its registered assigns shall designate to the Company in writing, in lawful money of the United States of America. This Note is one of a duly authorized issue of Senior Subordinated Notes due December 31, 2003 of the Company, originally issued pursuant to the Series E Note Purchase Agreement (the "Agreement") dated May 1, 1995, by and among the Company, the Purchasers listed on Schedule I to the Agreement and certain other parties named therein and is entitled to the benefit of the Agreement, and each holder of this Note, by his acceptance hereof, agrees to be bound by the provisions of the Agreement. As provided in the Agreement, (i) this Note is subject to prepayment, in whole or in part, as specified in such Agreement, (ii) the payment of the principal of, premium, if any, and interest on this Note is expressly subordinated on the terms and conditions set forth in the Agreement to the payment of all Senior Indebtedness of the Company, as defined in the Agreement, and (iii) this note may be transferred only upon fulfillment by the Company and the holder hereof of conditions specified in the Agreement. 2 79 As provided and subject to the restrictions on transfer set forth in the Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or his attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company shall not be affected by any notice to the contrary. This Note shall be governed by and enforced in accordance with the laws of the State of Texas. The Company agrees to make prepayments of the Notes on the dates and in the amounts specified in the Agreement. Should the indebtedness represented by this Note or any part thereof be collected in any proceeding provided for in the Agreement or be placed in the hands of attorneys for collection, the Company agrees to pay, in addition to the principal, premium, if any, and interest due and payable hereon, all costs of collecting this Note, including reasonable attorney's fees and expenses. In case an Event of Default, as defined in the Agreement, shall occur and be continuing, this Note may, as provided for in the Agreement, be declared due and payable in the amount, in the manner and with the effect provided in the Agreement. CHAMPION HEALTHCARE CORPORATION By: James G. VanDevender, Title: Executive Vice President 3 80 FIRST AMENDMENT TO SERIES E NOTE PURCHASE AGREEMENT THIS FIRST AMENDMENT, dated as of the 1st day of October, 1995, by and between CHAMPION HEALTHCARE CORPORATION, a Delaware corporation (the "Company"), LINCOLN NATIONAL LIFE INSURANCE COMPANY, LINCOLN NATIONAL INCOME FUND, INC., SECURITY-CONNECTICUT LIFE INSURANCE COMPANY, THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY, BANK OF ILLINOIS, INDOSUEZ CAPITAL ASSET ADVISORS, INC., INDOSUEZ CAPITAL FUNDING I, LIMITED, and INDOSUEZ HIGH YIELD PARTNERS (individually, a "Purchaser" and collectively, the "Purchasers") W I T N E S S E T H : WHEREAS, the Company, the Purchasers and other individuals entered into the Series E Note Purchase Agreement, dated as of May 1, 1995 ("Series E Agreement"), pursuant to which the Company issued to (i) Purchasers, and the Purchasers purchased Thirty-five Million Dollars ($35,000,000.00) aggregate principal amount of the Company's Series E 11% Senior Subordinated Notes due December 31, 2003 ("Series E Notes") and (ii) Purchasers and certain individuals, and the Purchasers and certain individuals purchased detachable warrants initially evidencing the right to purchase an aggregate of 525,000 shares common stock of the Company ("E Warrants"); WHEREAS, the Company has determined it is in the Company's best interest to permit a subsidiary to increase the amount of certain loans by it to $3,500,000, which are subject to, and in excess of, the $3,000,000 limitation contained in Article V.K "Restricted Investments", sub part "(i)"; and WHEREAS, the Company has requested the Purchasers to amend the Series E Agreement, and the Purchasers are willing to modify and amend such terms and provisions thereof. NOW, THEREFORE, for and in consideration of these premises and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Purchasers hereby agree as follows: 1. TERMS. All capitalized terms defined in the Series E Agreement and not otherwise defined herein shall have the same definitions when used herein as set forth in the Series E Agreement. 2. ARTICLE 5.K. RESTRICTED INVESTMENTS. The covenant regarding restricted investments contained in Article V. K. is amended by deleting sub part "(i)" and replacing it as follows: 81 "(i) loans in a principal amount not to exceed $3,500,000 to the purchaser or an Affiliate of the purchaser of certain assets that include the land and buildings purchased on September 1, 1992 from HCA Health Services of Texas principally located on Garth Road, Baytown, Texas;" 3. PRIORITY. In the event of any inconsistency between the terms of this First Amendment and terms of the Series E Agreement, as amended, the terms of this First Amendment shall control. 4. MISCELLANEOUS. a. HEADINGS. Section headings are for reference only, and shall not affect the interpretation or meaning of any provision of this First Amendment. b. EFFECT OF FIRST AMENDMENT. The Series E Agreement, as amended by this First Amendment, shall remain in full force and effect except that any reference therein, or in any documents or instruments required thereunder or annexes or schedules thereto, referring to the Series E Agreement, shall be deemed to refer to the Series E Agreement as amended by this First Amendment. c. GOVERNING LAW. This First Amendment shall be governed by, and construed in accordance with, the laws of the State of Delaware, without regard to the principles of conflicts of laws thereof. d. COUNTERPARTS. This First Amendment may be executed by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed an original but all such counterparts shall constitute but one and the same First Amendment. IN WITNESS WHEREOF, the Company and the Purchasers have caused this First Amendment to be executed by their respective duly authorized officers as of the date first above written. CHAMPION HEALTHCARE CORPORATION By: ____________________________________ James G. VanDevender Executive Vice-President [Remaining signatures on following pages] First Amendment to Series E Agreement Page 2 82 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY By: Lincoln National Investment Management Company, Its Attorney-In-Fact By: ----------------------------------------------- Its Vice President SECURITY-CONNECTICUT LIFE INSURANCE COMPANY By: Lincoln National Investment Management Company, Its Attorney-In-Fact By: ---------------------------------------------- Its Vice President LINCOLN NATIONAL INCOME FUND, INC. By: ---------------------------------------------- THE NORTHWESTERN MUTUAL LIFE INSURANCE By: ---------------------------------------------- Its Vice President First Amendment to Series E Agreement Page 3 83 BANK OF AMERICA ILLINOIS By: ---------------------------------------- Ford S. Bartholow Its Managing Director -------------------------------------- Christopher J. Perry -------------------------------------- Robert F. Perille -------------------------------------- M. Ann O'Brien -------------------------------------- Ford S. Bartholow -------------------------------------- Jeffrey M. Mann -------------------------------------- Matthew W. Clary -------------------------------------- Thomas E. Van Pelt, Jr. First Amendment to Series E Agreement Page 4 84 INDOSUEZ CAPITAL ASSET ADVISORS, INC. By: ------------------------------- John G. Popp Its President INDOSUEZ CAPITAL FUNDING I, LIMITED By: ------------------------------- John G. Popp Its Collateral Manager INDOSUEZ HIGH YIELD PARTNERS By: ------------------------------- John G. Popp Its Partner OBIE & CO. By: ------------------------------- Texas Commerce Bank NA Trust Department First Amendment to Series E Agreement Page 5 85 SECOND AMENDMENT TO SERIES E NOTE PURCHASE AGREEMENT THIS SECOND AMENDMENT, dated as of the [31st] day of December, 1995, by and between CHAMPION HEALTHCARE CORPORATION, a Delaware corporation (the "Company"), LINCOLN NATIONAL LIFE INSURANCE COMPANY, LINCOLN NATIONAL INCOME FUND, INC., SECURITY-CONNECTICUT LIFE INSURANCE COMPANY, THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY, BANK OF ILLINOIS, OBIE & CO., INDOSUEZ CAPITAL FUNDING I, LIMITED, INDOSUEZ HIGH YIELD PARTNERS AND OTHERS (individually, a "Purchaser" and collectively, the "Purchasers") W I T N E S S E T H : WHEREAS, the Company, the Purchasers and other individuals entered into the Series E Note Purchase Agreement, dated as of May 1, 1995, pursuant to which the Company issued to (i) Purchasers, and the Purchasers purchased Thirty-five Million Dollars ($35,000,000.00) aggregate principal amount of the Company's Series E 11% Senior Subordinated Notes due December 31, 2003 ("Series E Notes") and (ii) Purchasers and certain individuals, and the Purchasers and certain individuals purchased detachable warrants initially evidencing the right to purchase an aggregate of 525,000 shares common stock of the Company ("E Warrants") (collectively with the First Amendment, the "Series E Purchase Agreement"); WHEREAS, the Company and the Purchasers executed the First Amendment to Series E Note Purchase Agreement effective as of October 1, 1995 (the "First Amendment"); WHEREAS, the Company has determined it is in the Company's best interest to enter into the 1995 Recapitalization Agreement and as a part thereof issue shares of Common Stock to holders of its preferred stock in consideration for such holders of preferred stock agreeing to take certain actions; and WHEREAS, the Company has requested the Purchasers to waive certain terms and provisions thereof. NOW, THEREFORE, for and in consideration of these premises and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Purchasers hereby agree as follows: 1. TERMS. All capitalized terms defined in the Series E Agreement and not otherwise defined herein shall have the same definitions when used herein as set forth in the Series E Agreement. 86 2. WAIVER OF ARTICLE 5.B. RESTRICTED PAYMENTS. The restriction contained in Article V.B "Restricted Payments" is waived with respect to the issuance of Common Stock to the holders of the Company's shares of preferred stock in consideration for the actions taken in accordance with, and covenants contained in, the 1995 Recapitalization Agreement of the Company dated December [31], 1995 3. PRIORITY. In the event of any inconsistency between the terms of this Second Amendment and terms of the Series E Agreement, as amended, the terms of this Second Amendment shall control. 4. EFFECTIVE DATE. This Second Amendment is conditioned upon and will become effective with the closing of the 1995 Recapitalization Agreement by the Company. 5. MISCELLANEOUS. a. HEADINGS. Section headings are for reference only, and shall not affect the interpretation or meaning of any provision of this Second Amendment. b. EFFECT OF SECOND AMENDMENT. The Series E Agreement, as amended by the First Amendment and this Second Amendment, shall remain in full force and effect except that any reference therein, or in any documents or instruments required thereunder or annexes or schedules thereto, referring to the Series E Agreement, shall be deemed to refer to the Series E Agreement as so amended. c. GOVERNING LAW. This Second Amendment shall be governed by, and construed in accordance with, the laws of the State of Delaware, without regard to the principles of conflicts of laws thereof. d. COUNTERPARTS. This Second Amendment may be executed by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed an original but all such counterparts shall constitute but one and the same Second Amendment. Second Amendment to Series E Agreement Page 2 87 IN WITNESS WHEREOF, the Company and the Purchasers have caused this Second Amendment to be executed by their respective duly authorized officers as of the date first above written. CHAMPION HEALTHCARE CORPORATION By: ____________________________________ James G. VanDevender Executive Vice-President [Remaining signatures appear on the following pages] Second Amendment to Series E Agreement Page 3 88 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY By: Lincoln National Investment Management Company, Its Attorney-In-Fact By: ------------------------------------------------ Its Vice President SECURITY-CONNECTICUT LIFE INSURANCE COMPANY By: Lincoln National Investment Management Company, Its Attorney-In-Fact By: ----------------------------------------------- Its Vice President LINCOLN NATIONAL INCOME FUND, INC. By: ----------------------------------------------- THE NORTHWESTERN MUTUAL LIFE INSURANCE By: ----------------------------------------------- Its Vice President Second Amendment to Series E Note Purchase Agreement 89 BANK OF AMERICA ILLINOIS By: ---------------------------------------- Ford S. Bartholow Its Managing Director ------------------------------------ Christopher J. Perry ------------------------------------ Robert F. Perille ------------------------------------ M. Ann O'Brien ------------------------------------ Ford S. Bartholow ------------------------------------ Jeffrey M. Mann ------------------------------------ Matthew W. Clary ------------------------------------ Thomas E. Van Pelt, Jr. INDOSUEZ CAPITAL FUNDING I, LIMITED By: ------------------------------- John G. Popp Its Collateral Manager Second Amendment to Series E Note Purchase Agreement 90 INDOSUEZ HIGH YIELD PARTNERS By: ------------------------------- John G. Popp Its Partner OBIE & CO. By: ------------------------------- Texas Commerce Bank NA Trust Department Second Amendment to Series E Note Purchase Agreement 91 WAIVER AND CONSENT SERIES E STOCK REGISTRATION AGREEMENT The undersigned, parties to the Series E Stock Registration Agreement dated May 1, 1995, in connection with the 1995 Recapitalization Agreement of Champion Healthcare Corporation ("Company") dated December [31], 1995, hereby: (i) waive the prohibition in the last paragraph of Article II B. "Piggy-Back Registration." of the Series E Stock Registration Agreement, dated May 1, 1995 insofar as such prohibition would prevent the Company from including the Common Stock to be issued pursuant to the 1995 Recapitalization Agreement dated December [31], 1995, in the Stock Registration Agreement dated December 30, 1990, as amended, the Series B And Series C Stock Registration Agreement dated December 2, 1993, as amended and the Series D Stock Registration Agreement dated December 31, 1993, as amended; and (ii) consent to the inclusion of the Common Stock to be issued pursuant to the 1995 Recapitalization Agreement dated December [31], 1995, in the Stock Registration Agreement dated December 30, 1990, as amended, the Series B And Series C Stock Registration Agreement dated December 2, 1993, as amended and the Series D Stock Registration Agreement dated December 31, 1993, as amended. Dated effective December [31], 1995. CHAMPION HEALTHCARE CORPORATION By: ---------------------------------- JAMES G. VANDEVENDER Executive Vice President [Remaining signatures appear on the following pages] Champion Healthcare Corporation Registration Agreement Waiver re 1995 Recapitalization Agreement Page 1 92 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY By: Lincoln National Investment Management Company, Its Attorney-In-Fact By: ------------------------------------------------ Its Vice President SECURITY-CONNECTICUT LIFE INSURANCE COMPANY By: Lincoln National Investment Management Company, Its Attorney-In-Fact By: ----------------------------------------------- Its Vice President LINCOLN NATIONAL INCOME FUND, INC. By: ----------------------------------------------- THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY By: ----------------------------------------------- Its Vice President BANK OF AMERICA ILLINOIS By: ----------------------------------------------- Ford S. Bartholow Its Managing Director Registration Agreement Waiver re 1995 Recapitalization 93 ----------------------------------------------- Christopher J. Perry ----------------------------------------------- Robert F. Perille ----------------------------------------------- M. Ann O'Brien ----------------------------------------------- Ford S. Bartholow ----------------------------------------------- Jeffrey M. Mann ----------------------------------------------- Matthew W. Clary ----------------------------------------------- Thomas E. Van Pelt, Jr. INDOSUEZ CAPITAL FUNDING I, LIMITED By: ------------------------------------------- Name: Its Collateral Manager INDOSUEZ HIGH YIELD PARTNERS By: ------------------------------------------- John G. Popp Its Partner Registration Agreement Waiver re 1995 Recapitalization 94 OBIE & CO. By: ------------------------------------------- Texas Commerce Bank NA Trust Department Registration Agreement Waiver re 1995 Recapitalization EX-10.08 4 EMPLOYMENT AGREEMENT - CHARLES R. MILLER 1 EXHIBIT 10.08 EMPLOYMENT AGREEMENT THIS AGREEMENT (the "Agreement") made as of this 4th day of August, 1995 by and between CHAMPION HEALTHCARE CORPORATION, a Texas corporation (the "Company"), and CHARLES R. MILLER, an individual residing in Houston, Texas ("Executive") W I T N E S S E T H WHEREAS, Executive currently serves as the President and Chief Executive Officer of the Company; and WHEREAS, the Company desires to induce Executive to remain employed by the Company and Executive desires to continue employment with the Company upon the terms and conditions hereinafter set forth; and WHEREAS, the Company and Executive intend that Executive's current employment agreement with the Company, dated as of the 10th day of February, 1990, shall be superseded by the terms of this Agreement, NOW, THEREFORE, in consideration of the premises and the mutual promises, covenants and agreements contained herein, and intending to be legally bound, the parties hereto agree as follows: 1. EMPLOYMENT. The Company hereby agrees to continue to employ the services of Executive, and Executive hereby agrees to continue to render the same to the Company upon the terms and conditions hereinafter set forth. a. PRIOR AGREEMENTS. The Company and Executive hereby agree that, as of the effective date of this Agreement, the employment agreement, dated February 10, 1990, by and between the parties hereto shall be null and void and of no further effect, and, as of such date, Executive's employment with the Company shall be subject to the terms and conditions of this Agreement. 2. DUTIES. Executive shall serve as President and Chief Executive Officer of the Company. The authority, duties, responsibilities and position of Executive while employed pursuant to this Agreement shall be those set forth in the Bylaws of the Company for the office of President and Chief Executive Officer; subject, however, to such modifications, directions, and limitations specified, from time to time, by the Board of Directors of the Company (the "Board"), in its sole discretion. Upon any change in the status, office and/or duties of Executive or any 2 reduction in compensation or benefits under this Agreement, Executive shall have ninety (90) days from the effective date thereof to provide written consent thereto and the failure to provide such consent or the provision of a written refusal to the Company within such time period shall be deemed a termination in accordance with Paragraph 10(b) herein, effective on such 90th day or the date of delivery of such written refusal, whichever is earlier. Executive shall render such duties and services at the Company's principal office in Houston, Texas, or such other locations as agreed upon between the Board and Executive. 3. TERM. This Agreement shall have a term of five (5) years commencing on the date first above written, subject to earlier termination pursuant to Paragraph 10 hereof. Failure to renew this Agreement or enter into a new employment agreement upon the expiration of this Agreement on terms mutually agreeable between Executive and the Company shall constitute a termination of this Agreement in accordance with Paragraph 10(b) herein. 4. COMPENSATION. The Company shall pay to Executive, and Executive shall accept, as compensation for all services performed pursuant to this Agreement, for each full calendar year during the term of this Agreement, a base salary (the "Base Salary") of four hundred fifty thousand dollars ($450,000.00) per annum, payable in approximately equal installments at such intervals as are consistent with the Company's pay periods for regular salaried executive employees. Executive's Base Salary during the term of this Agreement shall be reviewed by the Board on an annual basis (commencing with calendar year 1996) and may be increased at the discretion of the Board. a. ADDITIONAL COMPENSATION. No bonuses or other additional compensation will be paid to Executive during the term of this Agreement without the approval of the Compensation Committee of the Board and the Board. 5. EXPENSES AND BENEFITS. In addition to compensation, Executive shall receive the following: a. EXPENSES. Subject to such general employee expense account policies as the Company may adopt from time to time, the Company shall pay for, or reimburse Executive upon presentation of vouchers, invoices, or receipts with respect to any and all expenses reasonably incurred by Executive in the performance of his duties and responsibilities for the Company, including, without limitation, expenses for such items as entertainment, travel, meals, lodging, initiation and membership fees, fees and dues for professional associations, and other similar items. Such vouchers, invoices, and receipts shall be reviewed periodically for reasonableness by the Audit Committee of the Board. In addition, no reimbursements shall be allowed for travel, meals, or lodging for Executive's spouse unless Executive obtains prior approval for such expenditures from the Company. b. RETIREMENT BENEFITS. While employed hereunder, Executive shall be entitled -2- 3 to participate in any and all pension and retirement plans, programs, and arrangements, including non-qualified supplemental plans, adopted by the Company and made available to its salaried executives. Nothing contained herein shall be construed to limit the discretion of the Board or its delegate to adopt, amend, modify, or terminate any such plans. c. HEALTH, DISABILITY AND DEATH BENEFITS. The Company shall provide (i) life insurance insuring Executive's life while employed hereunder; (ii) dependent life insurance coverage; (iii) disability insurance coverage; (iv) accidental death and dismemberment benefits, including a death benefit; (v) travel and accident insurance; and (vi) health coverage for Executive and his dependents, in each case in accordance with such standard coverage as adopted by the Company from time to time and generally provided to other salaried executives of the Company. Nothing contained herein shall be construed to limit the discretion of the Board or its delegate to adopt, amend, modify, or terminate any such plans. d. MISCELLANEOUS BENEFITS. To the extent not duplicative of the benefits otherwise specifically provided in this Paragraph 5, and subject to and in accordance with the terms and conditions contained therein, while employed hereunder, Executive shall be entitled to participate as and to the extent of any other eligible employee of the Company, in any and all employee benefit plans, policies, and programs now or hereafter maintained by the Company for its salaried executives in general. 6. COVENANT NOT TO COMPETE. While employed hereunder, Executive covenants and agrees as follows: a. DISCLOSURE. Executive has disclosed to the Board, in writing, all healthcare related interests, investments, or business activities, whether as a proprietor, stockholder, partner, co-venturer, director, officer, employee, independent contractor, agent, consultant, or in any other capacity or manner whatsoever and Executive shall notify the Board promptly, in writing, of any changes in or additions to such interests, activities, or investments. b. LIMITATIONS. During the term of this Agreement and for a period of one (1) year following the effective date of a termination of employment, unless otherwise provided herein, Executive shall not engage in the following: (i) own, either directly or indirectly, any interest in any business that competes with the Primary Business in which the Company is engaged, within a radius of 30 miles from any site, facility, or location which is owned, affiliated, managed or operated by the Company or any of its subsidiaries, including physician practices of any kind. For the purposes of this Agreement, Primary Business shall mean the delivery of integrated healthcare services in markets where the Company owns hospitals and/or skilled nursing facilities ("SNFs"), with the hospital serving as the hub of the local delivery system in conjunction with its physician medical staff. In addition to inpatient acute care, psychiatric care, and skilled nursing care, these services can -3- 4 include 1) individual physician practices and/or physician based organizations such as primary care and specialty clinics, physician-hospital organizations ("PHOs") or medical service organizations ("MSOs"), physician medical groups and 2) ambulatory programs such as home health care, ambulatory surgery, psychiatric services, occupational and sports medicine centers, psychiatric after-care and day care programs, and other diagnostic, rehabilitative and treatment services. Some of these services, sites and facilities may be located in satellite areas for the purpose of extending the hub hospital's geographic service area and to serve as access points and/or referral sources for either the local delivery system or the hub hospital. The Board may modify, from time to time, the definition of Primary Business to include any additional business or service activity in which the Company may engage during the term of this Agreement. Upon the modification of the definition, the Board shall provide written notification of such modification to Executive within thirty (30) calendar days. The definition of "Primary Business" shall also include definitive plans for expanding the Primary Business into new markets where the Company does not currently operate its Primary Business, regardless of whether such expansion occurs after Executive's termination. In the event of an expansion of the Primary Business within the applicable period of this Paragraph 6, the Board shall provide written notification to Executive within thirty (30) calendar days. (ii) participate or serve, either directly or indirectly, whether as a proprietor, stockholder, partner, co-venturer, director, officer, employee, independent contractor, agent, consultant, or in any other capacity or manner whatsoever in any business or service activity that competes with the Primary Business in which the Company is engaged. (iii) solicit any individual employed by the Company to leave the employment of the Company. Notwithstanding the foregoing, Executive may own, either directly or indirectly, any interest in any business that competes with the Primary Business of the Company if: (1) any such interest constitutes no more than a five percent (5%) interest in a publicly held company; (2) any such interest was held by Executive prior to employment with the Company or prior to the Company's involvement in such Primary Business and was properly disclosed to the Board pursuant to Paragraph 6(a); or (3) the Board provides written consent of Executive's ownership of any such interest. c. MODIFICATION OF LIMITATION. It is the desire and the intent of the parties that the provisions of this Paragraph 6 shall be enforceable to the fullest extent permissible under applicable law and public policy. Accordingly, if this Paragraph 6 or any portion thereof shall be adjudicated to be invalid or unenforceable, the length and scope of this Paragraph 6 shall be reduced to the extent necessary so that this covenant may be enforced to the fullest extent permissible under applicable law. 7. CONFIDENTIALITY. Executive agrees that, while employed hereunder and for -4- 5 one (1) year thereafter, he shall not, without the prior written consent of the Company, disclose to any third party or use for his own benefit or the benefit of any third party or for any purpose other than the exclusive benefit of the Company or its affiliates, any confidential information relating to the Company or any of its affiliates which was obtained by or revealed to him while in the employ of the Company or which is otherwise the property of the Company or any of its affiliates; provided that this provision shall not restrict Executive's use or disclosure of information (i) known generally to the public (other than that which he may have disclosed in breach of any agreement) or (ii) as required by law, so long as Executive gives the Company reasonable prior written notice of such required disclosure. At the request of the Company, Executive shall surrender promptly to the Company or its delegate, upon termination of his employment hereunder, or at any time prior thereto, any document, memorandum, record, letter, specification, or other paper in his possession or under his control relating to the operations, business, patients, or affairs of the Company. 8. CHANGE IN CONTROL. Executive may terminate his employment under this Agreement by tendering written notice of resignation of not fewer than ninety (90) days within six (6) calendar months of a Change in Control. In addition, Executive may terminate his employment hereunder by tendering written notice of resignation of not fewer than ninety (90) days within eighteen (18) calendar months after a Change in Control and within six (6) months after the occurrence of any of the following: (i) a failure to appoint Executive to the office of President and Chief Executive Officer; (ii) any material change by the Company in Executive's authority, duties, or responsibilities which would result in the loss or reduction of Executive's authority, responsibility, importance, or dignity; or (iii) any material breach of this Agreement, including without limitation, a reduction of Executive's Base Salary. For the purposes of this Agreement, a Change in Control shall be deemed to have occurred if (i) any "Person" (as defined in Sections 13(d) and 14(d)(2) of the Securities and Exchange Act of 1934, as amended), either alone or in conjunction with its "Affiliates" (as defined in Rule 405 of the General Rules and Regulations under the Securities Act of 1933, as amended), or (ii) other group of persons, corporations, partnerships or other entities who are not Affiliates but who are acting in concert with any Person, acquire ownership, whether of record or beneficially, of that number of shares of outstanding stock of the Company which would allow such Person or entity and/or its affiliates, or others acting in concert, to elect a majority of the Board. A Change in Control shall not include any acquisition of control (i) by any of the Company's three (3) senior officers as of August 4, 1995, whether acting alone or in concert with each other, provided Executive is a participant with one or more such officers; or (ii) pursuant to which Executive accepts equity securities of the Company or any entity with or into which the Company is merged or consolidated, or which controls or is controlled by the Company or any such entity except for equity securities received by Executive in his capacity as stockholder and in accordance with stock options and other benefits not materially in excess of those typically available to officers of other publicly held for-profit healthcare companies not subject to a change in control. -5- 6 In the event Executive terminates his employment after a Change in Control, the Company shall (i) pay Executive severance pay equal to Executive's then highest monthly rate of Base Salary under this Agreement multiplied by 12, the product of which is then multiplied by 2.99, on a monthly basis over a period of three (3) years, or at Executive's election, the Company shall fund a trust by cash or annuity in form and substance satisfactory to Executive in an amount sufficient to permit the trust to make monthly payments or any unpaid portion thereof over the prescribed period or the Company shall make a lump sum cash payment equal to the sum of the monthly installments without discount to present value and (ii) pay, award, fund or otherwise provide all benefits (including the continuation of all disability, life, and medical insurance as provided prior to the Change in Control), stock options, and bonuses, both vested and unvested, which bonuses shall be prorated to date of termination. In addition, the Company relinquishes any right it has or may have, by agreement or otherwise, to purchase any shares of stock of the Company owned by Executive. 9. TERMINATION. This Agreement may be terminated upon the occurrence of any one of the following: a. VOLUNTARY. Executive may terminate this Agreement at any time during the term of this Agreement by providing six (6) months prior written notice of termination to the Board. In the event of a voluntary termination by Executive, he shall not be bound by Paragraph 6(b)(i) and 6(b)(ii) of the covenant not to compete. b. INVOLUNTARY WITHOUT CAUSE. The Board, by a vote of the majority of the directors, may terminate this Agreement without Cause (as defined in Paragraph 9(c) below) at any time during the term of this Agreement by providing thirty (30) days prior written notice to Executive. For purposes of this Agreement, termination resulting from Executive's death or disability shall be considered as termination without cause under this Paragraph 9(b). c. INVOLUNTARY WITH CAUSE. The Board may terminate Executive for Cause at any time during the term of this Agreement by providing written notice that is immediately effective. Cause shall mean: (i) the conviction of Executive or a guilty plea to a felony crime; (ii) in tile judgment of the Board, Executive has committed any act of embezzlement, fraud, theft, dishonesty, or moral turpitude; (iii) the violation by Executive of the provisions of Paragraph 6 of this Agreement which is not cured within thirty (30) days after written notice of such violation is given by the Board to Executive; (iv) wilful, persistent, and continued refusal by Executive, not involving a good faith difference of business judgment, to follow the written directions or instructions of the Board pertaining to a material duty, responsibility, or function of Executive; and (v) wilful misconduct or gross negligence by Executive in the performance of his duties that has or will likely have a material adverse financial effect on the Company as a whole. 1O. PAYMENTS UPON TERMINATION. In the event of a termination described in Paragraph -6- 7 9 above, Executive shall receive the following payments and benefits, if any: a. VOLUNTARY. In the event Executive terminates his employment hereunder voluntarily in accordance with Paragraph 9(a), Executive shall receive his then current Base Salary and benefits, including stock options, set forth in this Agreement through the end of the notice period contained in Paragraph 9(a). b. INVOLUNTARY WITHOUT CAUSE. In the event the Company terminates Executive without Cause in accordance with Paragraph 9(b), Executive shall receive his then current Base Salary and then current health benefits for himself and his eligible dependents for a period of two (2) years after the effective date of such termination. c. INVOLUNTARY WITH CAUSE. In the event the Company terminates Executive for Cause in accordance with Paragraph 9(c), Executive shall receive his then current Base Salary and benefits up to the date he receives written notification of termination from the Board; provided, however, that if such termination for Cause becomes the subject of an arbitration proceeding in accordance with Paragraph II and Executive prevails in such arbitration, Base Salary and benefits shall be provided in accordance with Paragraph 10(b). 11. ALTERNATIVE DISPUTE RESOLUTION. Disputes between the parties arising out of or relating to this Agreement or the making, performance, or interpretation thereof shall be resolved as follows: a. NEGOTIATION. The parties shall attempt in good faith to resolve any controversy, dispute, or claim arising out of or relating to this Agreement or the making, performance, or interpretation thereof, by negotiations between executives of the parties who have the authority to settle the dispute. Any party may give the other party written notice of any dispute not resolved in the normal course of business. Within twenty (20) days after delivery of such notice, executives of both parties shall meet at a mutually acceptable time and place, and thereafter as often as they reasonably deem necessary, to exchange relevant information and to attempt to resolve the dispute. If a negotiator intends to be accompanied at a meeting by an attorney, the other negotiator shall be given at least three working days notice of such intention and may also be accompanied by an attorney. All negotiations pursuant to this Paragraph 11 (a) are confidential and shall be treated as compromise and settlement negotiations for purposes of all applicable rules of evidence. If the dispute is not resolved by negotiation within sixty (60) days, or if the parties fall to meet within twenty (20) days, and either party determines that the claim, dispute or controversy cannot be resolved by negotiation, such party may submit the controversy, claim or dispute to mediation as described below by providing a written notice of submission to mediation to the other party. b. MEDIATION. If either party submits a controversy, dispute or claim to mediation, the parties agree the mediation shall occur pursuant to the following procedures and -7- 8 understandings: (i) A mediation firm in Houston, Texas, acceptable to both parties, shall be designated to provide a mediator to work with the parties to resolve their differences and the party submitting the dispute or claim to mediation shall promptly provide such firm with a request to provide a mediator. (ii) The mediator appointed shall be knowledgeable with respect to the hospital and healthcare industry and may be rejected by the parties only for bias. (iii) Within thirty (30) days from the date of the notice submitting a dispute or claim to mediation, each party shall provide the mediator with a written summary of the facts and law with respect to the matter in dispute. (iv) Within sixty (60) days from the time of his or her appointment, the mediator shall meet with the parties and assist them in resolving the dispute, unless the parties mutually consent to an extension of such time. (v) The mediation conference or conferences shall be held in Houston, Texas, unless the mediator and the parties mutually agree on another location or locations. (vi) Efforts to reach a settlement shall continue until the conclusion of the mediation proceeding, which is deemed to occur when: (a) a written settlement is reached; (b) the mediator concludes and informs the parties in writing that further efforts would not be useful; or (c) the parties agree in writing that an impasse has been reached. Neither party may withdraw before the conclusion of the proceeding. (vii) If the mediation proceeding concludes without a settlement being reached, the dispute, controversy or claim shall be resolved by binding arbitration as described below. (viii) All discussions, representations, and statements made in the mediation process shall be privileged as settlement negotiations; nothing related to the mediation shall be admitted as evidence at arbitration or trial or shall be subject to discovery; and the mediator shall be immune from causes of action which may be brought against him or her with respect to such mediation proceedings under Texas law. (ix) The costs of the mediation, including the fees and expenses of the mediator, shall be borne as follows: one-third (1/3) by Executive and two-thirds (2/3) by the Company. c. ARBITRATION. Arbitration shall occur in Houston, Texas, in accordance with the Rules of the American Arbitration Association then existing, and judgment on the arbitration -8- 9 award may be entered in any court having jurisdiction over the subject matter in controversy. The procedure for arbitration shall be in accordance with the rules of the American Arbitration Association then existing except that the Company and Executive shall each select one arbitrator, and the two selected arbitrators shall choose a third arbitrator. In the event that either the Company or Executive fails to select an arbitrator within ten (10) days after arbitration is sought, or if the two arbitrators fail to select a third arbitrator within fifteen (15) days after arbitration is sought, the American Arbitration Association shall select the third arbitrator. Each arbitrator so selected shall be knowledgeable with respect to the United States for-profit hospital and healthcare industry. Expenses of arbitration, including reasonable attorneys' fees and costs of collection, may be awarded in any such arbitration. d. STATUTE OF LIMITATIONS. All applicable statutes of limitations and defenses based upon the passage of time shall be tolled while the procedures specified in this Paragraph 11 are pending. The parties shall take such action, if any, required to effectuate such tolling. e. PERFORMANCE. Each party is required to continue to perform its obligations under this Agreement pending final resolution of any dispute arising out of or relating to this Agreement. f. EXTENSION OF DEADLINES. All deadlines specified in this Paragraph 11 may be executed by mutual agreement. 12. ENFORCEMENT. The parties regard the alternate dispute resolution provisions of Paragraph 11 above to be an essential covenant of this Agreement and legally binding upon them. In the event of a violation of Paragraph 11, the parties recognize that the Company or Executive may suffer continuing and irreparable harm for which the Company or Executive will have no adequate remedy at law. Both parties hereby waive that either has an adequate remedy at law for any such breach. In recognition thereof, the Company and Executive hereby agree that, in the event of any such breach, either party shall be entitled to seek a decree of specific performance, mandamus, or any other appropriate remedy to enforce the provisions of this Agreement without any requirement that a bond be posted. The parties further agree that Paragraph 11 shall not in any way limit remedies at law or in equity otherwise available to either party. 13. INDEMNIFICATION. The Company shall indemnify and hold Executive harmless from all liability, costs and expenses incurred as a consequence of claims resulting from or arising out of Executive's status as an officer and/or Director of the Company, or as a result of having been an officer and/or Director of the Company to the full extent provided by Texas law, the Company's Articles of Incorporation and the Company's Bylaws. In addition, the Company shall reimburse Executive for all reasonable attorneys' fees, expenses and disbursements incurred in connection with the enforcement of this Agreement by Executive, provided Executive prevails in such enforcement proceeding. -9- 10 14. NOTIFICATION. Any notice required or permitted to be given to Executive under this Agreement shall be sufficient if in writing and if delivered to Executive personally or sent by overnight United States mail or overnight courier service to Executive's residence as listed in the Company's records. Any notice required or permitted to be given to the Company shall be sufficient if in writing and if delivered personally or sent by overnight United States mail or overnight courier service to the Company's principal office at 14340 Torrey Chase Boulevard, Suite 320, Houston, Texas, 77014, to the attention of the Chairman of the Option and Compensation Committee of the Board. Personal delivery to the Board shall be to the Chairman of the Board. In addition, copies of any notices to Executive shall also be sent to Wayne M. Whitaker, 3500 City Center Tower II, 301 Commerce Street, Fort Worth, TX 76102. The parties to this Agreement shall notify each other of changes in address pursuant to this Paragraph 14. 15. SURVIVAL. Paragraphs 6, 7, 12, and 13 of this Agreement shall survive any termination of Executive's employment hereunder unless otherwise provided herein. 16. MISCELLANEOUS. a. ASSIGNMENT AND BINDING EFFECT. Except as set forth herein, neither party may assign its rights or obligations hereunder without prior written consent of the other party. The respective rights and obligations under this Agreement shall be binding upon the parties hereto and their heirs, executors, administrators, successors, and assigns, including, in the case of the Company, any other corporation or entity with which the Company may be merged or otherwise combined or which may acquire all or substantially all of the Company's assets and, in the case of Executive, his estate or other legal representatives. b. GOVERNING LAW. This Agreement shall be governed as to its validity, interpretation, and effect by the laws of the State of Texas. Performance of this Agreement shall be in Harris County, Texas. c. SEVERABILITY. In the event that any provision or portion of this Agreement shall be determined to be invalid, illegal, or unenforceable for any reason, the remaining provisions and portions of this Agreement shall remain in full force and effect to the fullest extent permitted by law. Such invalid, illegal, or unenforceable provision shall be deemed modified to the extent necessary to make it valid, legal, and enforceable. d. ENTIRE AGREEMENT; AMENDMENTS. This Agreement constitutes the entire agreement and understanding of the parties hereto with respect to the subject matter hereof, supersedes all prior discussions, understandings and agreements with respect thereto and may not be modified or changed, except by an agreement in writing executed by the Company and Executive, with the approval of the Board. e. CAPTIONS. All captions and headings used herein are for convenient reference -10- 11 only and do not form part of this Agreement. f. WAIVER. The waiver of a breach of any term or provision of this Agreement shall not operate as or be construed to be a waiver of any other or subsequent breach of this Agreement. g. COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall constitute one and the same Agreement. IN WITNESS WHEREOF, the parties hereto, intending to be legally bound hereby, have executed this Agreement on the date first above written. CHAMPION HEALTHCARE CORPORATION By: /s/ JAMES G. VANDEVENDER ------------------------------ James G. VanDevender Executive Vice President EXECUTIVE By: /s/ CHARLES R. MILLER ------------------------------ Charles R. Miller -11- EX-10.09 5 EMPLOYMENT AGREEMENT - JAMES G. VANDEVENDER 1 EXHIBIT 10.09 EMPLOYMENT AGREEMENT THIS AGREEMENT (the "Agreement") made as of this 4th day of August, 1995 by and between CHAMPION HEALTHCARE CORPORATION, a Texas corporation (the "Company"), and JAMES G. VANDEVENDER, an individual residing in Houston, Texas ("Executive") WITNESSETH WHEREAS, Executive currently serves as the Executive Vice President and Chief Financial Officer of the Company; and WHEREAS, the Company desires to induce Executive to remain employed by the Company and Executive desires to continue employment with the Company upon the terms and conditions hereinafter set forth; and WHEREAS, the Company and Executive intend that Executive's current employment agreement with the Company, dated as of the 31st day of December, 1990, shall be superseded by the terms of this Agreement, NOW, THEREFORE, in consideration of the premises and the mutual promises, covenants and agreements contained herein, and intending to be legally bound, the parties hereto agree as follows: 1. EMPLOYMENT. The Company hereby agrees to continue to employ the services of Executive, and Executive hereby agrees to continue to render the same to the Company upon the terms and conditions hereinafter set forth. a. PRIOR AGREEMENTS. The Company and Executive hereby agree that, as of the effective date of this Agreement, the employment agreement, dated December 31, 1990, by and between the parties hereto shall be null and void and of no further effect, and, as of such date, Executive's employment with the Company shall be subject to the terms and conditions of this Agreement. 2. DUTIES. Executive shall serve as Executive Vice President and Chief Financial Officer of the Company. The authority, duties, responsibilities and position of Executive while employed pursuant to this Agreement shall be those set forth in the Bylaws of the Company for the office of Executive Vice President and Chief Financial Officer; subject, however, to such modifications, directions, and limitations specified, from time to time, by the Chief Executive Officer of the Company, in his sole discretion. Upon any change in the status, office and/or duties of Executive or any reduction in compensation or benefits under this Agreement, Executive shall 2 have ninety (90) days from the effective date thereof to provide written consent thereto and the failure to provide such consent or the provision of a written refusal to the Company within such time period shall be deemed a termination in accordance with Paragraph 10(b) herein, effective on such 90th day or the date of delivery of such written refusal, whichever is earlier. Executive shall render such duties and services at the Company's principal office in Houston, Texas, or such other locations as agreed upon between the Board of Directors of the Company (the "Board") and Executive. 3. TERM. This Agreement shall have a term of five (5) years commencing on the date first above written, subject to earlier termination pursuant to Paragraph 10 hereof. Failure to renew this Agreement or enter into a new employment agreement upon the expiration of this Agreement on terms mutually agreeable between Executive and the Company shall constitute a termination of this Agreement in accordance with Paragraph 10(b) herein. 4. COMPENSATION. The Company shall pay to Executive, and Executive shall accept, as compensation for all services performed pursuant to this Agreement, for each full calendar year during the term of this Agreement, a base salary (the "Base Salary") of three hundred thousand dollars ($300,000.00) per annum, payable in approximately equal installments at such intervals as are consistent with the Company's pay periods for regular salaried executive employees. Executive's Base Salary during the term of this Agreement shall be reviewed by the Board on an annual basis (commencing with calendar year 1996) and may be increased at the discretion of the Board. a. ADDITIONAL COMPENSATION. No bonuses or other additional compensation will be paid to Executive during the term of this Agreement without the approval of the Compensation Committee of the Board and the Board. 5. EXPENSES AND BENEFITS. In addition to compensation, Executive shall receive the following: a. EXPENSES. Subject to such general employee expense account policies as the Company may adopt from time to time, the Chief Executive Officer or his designee shall pay for, or reimburse Executive upon presentation of vouchers, invoices, or receipts with respect to any and all expenses reasonably incurred by Executive in the performance of his duties and responsibilities for the Company, including, without limitation, expenses for such items as entertainment, travel, meals, lodging, initiation and membership fees, fees and dues for professional associations, and other similar items. Such vouchers, invoices, and receipts shall be reviewed periodically for reasonableness by the Chief Executive Officer or his designee. In addition, no reimbursements shall be allowed for travel, meals, or lodging for Executive's spouse unless Executive obtains prior approval for such expenditures from the Company. b. RETIREMENT BENEFITS. While employed hereunder, Executive shall be entitled -2- 3 to participate in any and all pension and retirement plans, programs, and arrangements, including non-qualified supplemental plans, adopted by the Company and made available to its salaried executives. Nothing contained herein shall be construed to limit the discretion of the Board or its delegate to adopt, amend, modify, or terminate any such plans. c. HEALTH, DISABILITY AND DEATH BENEFITS. The Company shall provide (i) life Insurance insuring Executive's life while employed hereunder; (ii) dependent life insurance coverage; (iii) disability insurance coverage; (iv) accidental death and dismemberment benefits, including a death benefit; (v) travel and accident insurance; and (vi) health coverage for Executive and his dependents, in each case in accordance with such standard coverage as adopted by the Company from time to time and generally provided to other salaried executives of the Company. Nothing contained herein shall be construed to limit the discretion of the Board or its delegate to adopt, amend, modify, or terminate any such plans. d. MISCELLANEOUS BENEFITS. To the extent not duplicative of the benefits otherwise specifically provided in this Paragraph 5, and subject to and in accordance with the terms and conditions contained therein, while employed hereunder, Executive shall be entitled to participate as and to the extent of any other eligible employee of the Company, in any and all employee benefit plans, policies, and programs now or hereafter maintained by the Company for its salaried executives in general. 6. COVENANT NOT TO COMPETE. While employed hereunder, Executive covenants and agrees as follows: a. DISCLOSURE. Executive has disclosed to the Board, in writing, all healthcare related interests, investments, or business activities, whether as a proprietor, stockholder, partner, co-venturer, director, officer, employee, independent contractor, agent, consultant, or in any other capacity or manner whatsoever and Executive shall notify the Board promptly, in writing, of any changes in or additions to such interests, activities, or investments. b. LIMITATIONS. During the term of this Agreement and for a period of one (1) year following the effective date of a termination of employment, unless otherwise provided herein, Executive shall not engage in the following: (i) own, either directly or indirectly, any interest in any business that competes with the Primary Business in which the Company is engaged, within a radius of 30 miles from any site, facility, or location which is owned, affiliated, managed or operated by the Company or any of its subsidiaries, including physician practices of any kind. For the purposes of this Agreement, Primary Business shall mean the delivery of integrated healthcare services in markets where the Company owns hospitals and/or skilled nursing facilities ("SNFs"), with the hospital serving as the hub of the local delivery system in conjunction with its physician medical staff. In addition to inpatient acute care, psychiatric care, and skilled nursing care, these services can -3- 4 include 1) individual physician practices and/or physician based organizations such as primary care and specialty clinics, physician-hospital organizations ("PHOs") or medical service organizations ("MSOs"), physician medical groups and 2) ambulatory programs such as home health care, ambulatory surgery, psychiatric services, occupational and sports medicine centers, psychiatric after-care and day care programs, and other diagnostic, rehabilitative and treatment services. Some of these services, sites and facilities may be located in satellite areas for the purpose of extending the hub hospital's geographic service area and to serve as access points and/or referral sources for either the local delivery system or the hub hospital. The Board may modify, from time to time, the definition of Primary Business to include any additional business or service activity in which the Company may engage during the term of this Agreement. Upon the modification of the definition, the Board shall provide written notification of such modification to Executive within thirty (30) calendar days. The definition of "Primary Business" shall also include definitive plans for expanding the Primary Business into new markets where the Company does not currently operate its Primary Business, regardless of whether such expansion occurs after Executive's termination. In the event of an expansion of the Primary Business within the applicable period of this Paragraph 6, the Board shall provide written notification to Executive within thirty (30) calendar days. (ii) participate or serve, either directly or indirectly, whether as a proprietor, stockholder, partner, co-venturer, director, officer, employee, independent contractor, agent, consultant, or in any other capacity or manner whatsoever in any business or service activity that competes with the Primary Business in which the Company is engaged. (iii) solicit any individual employed by the Company to leave the employment of the Company. Notwithstanding the foregoing, Executive may own, either directly or indirectly, any interest in any business that competes with the Primary Business of the Company if: (1) any such interest constitutes no more than a five percent (5%) interest in a publicly held company; (2) any such interest was held by Executive prior to employment with the Company or prior to the Company's involvement in such Primary Business and was properly disclosed to the Board pursuant to Paragraph 6(a); or (3) the Board provides written consent of Executive's ownership of any such interest. c. MODIFICATION OF LIMITATION. It is the desire and the intent of the parties that the provisions of this Paragraph 6 shall be enforceable to the fullest extent permissible under applicable law and public policy. Accordingly, if this Paragraph 6 or any portion thereof shall be adjudicated to be invalid or unenforceable, the length and scope of this Paragraph 6 shall be reduced to the extent necessary so that this covenant may be enforced to the fullest extent possible under applicable law. 7. CONFIDENTIALITY. Executive agrees that, while employed hereunder and for -4- 5 one (1) year thereafter, he shall not, without the prior written consent of the Company, disclose to any third party or use for his own benefit or the benefit of any third party or for any purpose other than the exclusive benefit of the Company or its affiliates, any confidential information relating to the Company or any of its affiliates which was obtained by or revealed to him while in the employ of the Company or which is otherwise the property of the Company or any of its affiliates; provided that this provision shall not restrict Executive's use or disclosure of information (i) known generally to the public (other than that which he may have disclosed in breach of any agreement) or (ii) as required by law, so long as Executive gives the Company reasonable prior written notice of such required disclosure. At the request of the Company, Executive shall surrender promptly to the Company or its delegate, upon termination of his employment hereunder, or at any time prior thereto, any document, memorandum, record, letter, specification, or other paper in his possession or under his control relating to the operations, business, patients, or affairs of the Company. 8. CHANGE IN CONTROL. Executive may terminate his employment under this Agreement by tendering written notice of resignation of not fewer than ninety (90) days within six (6) calendar months of a Change in Control. In addition, Executive may terminate his employment hereunder by tendering written notice of resignation of not fewer than ninety (90) days within eighteen (18) calendar months after a Change in Control and within six (6) months after the occurrence of any of the following: (i) a failure to appoint Executive to the office of Executive Vice President and Chief Financial Officer; (ii) any material change by the Company in Executive's authority, duties, or responsibilities which would result in the loss or reduction of Executive's authority, responsibility, importance, or dignity; or (iii) any material breach of this Agreement, including without limitation, a reduction of Executive's Base Salary. For the purposes of this Agreement, a Change in Control shall be deemed to have occurred if (i) any "Person" (as defined in Sections 13(d) and 14(d)(2) of the Securities and Exchange Act of 1934, as amended), either alone or in conjunction with its "Affiliates" (as defined in Rule 405 of the General Rules and Regulations under the Securities Act of 1933, as amended), or (ii) other group of persons, corporations, partnerships or other entities who are not Affiliates but who are acting in concert with any Person, acquire ownership, whether of record or beneficially, of that number of shares of outstanding stock of the Company which would allow such Person or entity and/or its affiliates, or others acting in concert, to elect a majority of the Board. A Change in Control shall not include any acquisition of control (i) by any of the Company's three (3) senior officers as of August 4, 1995, whether acting alone or in concert with each other, provided Executive is a participant with one or more such officers; or (ii) pursuant to which Executive accepts equity securities of the Company or any entity with or into which the Company is merged or consolidated, or which controls or is controlled by the Company or any such entity except for equity securities received by Executive in his capacity as stockholder and in accordance with stock options and other benefits not materially in excess of those typically available to officers of other publicly held for-profit healthcare companies not subject to a change in control. -5- 6 In the event Executive terminates his employment after a Change in Control, the Company shall (i) pay Executive severance pay equal to Executive's then highest monthly rate of Base Salary under this Agreement multiplied by 12, the product of which is then multiplied by 2.99, on a monthly basis over a period of three (3) years, or at Executive's election, the Company shall fund a trust by cash or annuity in form and substance satisfactory to Executive in an amount sufficient to permit the trust to make monthly payments or any unpaid portion thereof over the prescribed period or the Company shall make a lump sum cash payment equal to the sum of the monthly installments without discount to present value and (ii) pay, award, fund or otherwise provide all benefits (including the continuation of all disability, life, and medical insurance as provided prior to the Change in Control), stock options, and bonuses, both vested and unvested, which bonuses shall be prorated to date of termination. In addition, the Company relinquishes any right it has or may have, by agreement or otherwise, to purchase any shares of stock of the Company owned by Executive. 9. TERMINATION. This Agreement may be terminated upon the occurrence of any one of the following: a. VOLUNTARY. Executive may terminate this Agreement at any time during the term of this Agreement by providing six (6) months prior written notice of termination to the Board. In the event of a voluntary termination by Executive, he shall not be bound by Paragraph 6(b)(i) and 6(b)(ii) of the covenant not to compete. b. INVOLUNTARY WITHOUT CAUSE. The Chief Executive Officer of the Company may terminate this Agreement without Cause (as defined in Paragraph 9(c) below) at any time during the term of this Agreement by providing thirty (30) days prior written notice to Executive. For purposes of this Agreement, termination resulting from Executive's death or disability shall be considered as termination without cause under this Paragraph 9(b). c. INVOLUNTARY WITH CAUSE. The Chief Executive Officer of the Company may terminate Executive for Cause at any time during the term of this Agreement by providing written notice that is immediately effective. Cause shall mean: (i) the conviction of Executive or a guilty plea to a felony crime; (ii) in the judgment of the Board, Executive has committed any act of embezzlement, fraud, theft, dishonesty, or moral turpitude; (iii) the violation by Executive of the provisions of Paragraph 6 of this Agreement which is not cured within thirty (30) days after written notice of such violation is given by the Board to Executive; (iv) wilful, persistent, and continued refusal by Executive, not involving a good faith difference of business judgment, to follow the written directions or instructions of the Board pertaining to a material duty, responsibility, or function of Executive; and (v) wilful misconduct or gross negligence by Executive in the performance of his duties that has or will likely have a material adverse financial effect on the Company as a whole. 10. PAYMENTS UPON TERMINATION. In the event of a termination described in Paragraph -6- 7 9 above, Executive shall receive the following payments and benefits, if any: a. VOLUNTARY. In the event Executive terminates his employment hereunder voluntarily in accordance with Paragraph 9(a), Executive shall receive his then current Base Salary and benefits, including stock options, set forth in this Agreement through the end of the notice period contained in Paragraph 9(a). b. INVOLUNTARY WITHOUT CAUSE. In the event the Company terminates Executive without Cause in accordance with Paragraph 9(b), Executive shall receive his then current Base Salary and then current health benefits for himself and his eligible dependents for a period of two (2) years after the effective date of such termination. c. INVOLUNTARY WITH CAUSE. In the event the Company terminates Executive for Cause in accordance with Paragraph 9(c), Executive shall receive his then current Base Salary and benefits up to the date he receives written notification of termination from the Board; provided, however, that if such termination for Cause becomes the subject of an arbitration proceeding in accordance with Paragraph 11 and Executive prevails in such arbitration, Base Salary and benefits shall be provided in accordance with Paragraph 10(b). 11. ALTERNATIVE DISPUTE RESOLUTION. Disputes between the parties arising out of or relating to this Agreement or the making, performance, or interpretation thereof shall be resolved as follows: a. NEGOTIATION. The parties shall attempt in good faith to resolve any controversy, dispute, or claim arising out of or relating to this Agreement or the making, performance, or interpretation thereof, by negotiations between executives of the parties who have the authority to settle the dispute. Any party may give the other party written notice of any dispute not resolved in the normal course of business. Within twenty (20) days after delivery of such notice, executives of both parties shall meet at a mutually acceptable time and place, and thereafter as often as they reasonably deem necessary, to exchange relevant information and to attempt to resolve the dispute. If a negotiator intends to be accompanied at a meeting by an attorney, the other negotiator shall be given at least three working days notice of such intention and may also be accompanied by an attorney. All negotiations pursuant to this Paragraph 11(a) are confidential and shall be treated as compromise and settlement negotiations for purposes of all applicable rules of evidence. If the dispute is not resolved by negotiation within sixty (60) days, or if the parties fall to meet within twenty (20) days, and either party determines that the claim, dispute or controversy cannot be resolved by negotiation, such party may submit the controversy, claim or dispute to mediation as described below by providing a written notice of submission to mediation to the other party. b. Mediation. If either party submits a controversy, dispute or claim to mediation, the parties agree the mediation shall occur pursuant to the following procedures and -7- 8 understandings: (i) A mediation firm in Houston, Texas, acceptable to both parties, shall be designated to provide a mediator to work with the parties to resolve their differences and the party submitting the dispute or claim to mediation shall promptly provide such firm with a request to provide a mediator. (ii) The mediator appointed shall be knowledgeable with respect to the hospital and healthcare industry and may be rejected by the parties only for bias. (iii) Within thirty (30) days from the date of the notice submitting a dispute or claim to mediation, each party shall provide the mediator with a written summary of the facts and law with respect to the matter in dispute. (iv) Within sixty (60) days from the time of his or her appointment, the mediator shall meet with the parties and assist them in resolving the dispute, unless the parties mutually consent to an extension of such time. (v) The mediation conference or conferences shall be held in Houston, Texas, unless the mediator and the parties mutually agree on another location or locations. (vi) Efforts to reach a settlement shall continue until the conclusion of the mediation proceeding, which is deemed to occur when: (a) a written settlement is reached; (b) the mediator concludes and informs the parties in writing that further efforts would not be useful; or (c) the parties agree in writing that an impasse has been reached. Neither party may withdraw before the conclusion of the proceeding. (vii) If the mediation proceeding concludes without a settlement being reached, the dispute, controversy or claim shall be resolved by binding arbitration as described below. (viii) All discussions, representations, and statements made in the mediation process shall be privileged as settlement negotiations; nothing related to the mediation shall be admitted as evidence at arbitration or trial or shall be subject to discovery; and the mediator shall be immune from causes of action which may be brought against him or her with respect to such mediation proceedings under Texas law. (ix) The costs of the mediation, including the fees and expenses of the mediator, shall be borne as follows: one-third (1/3) by Executive and two-thirds (2/3) by the Company. c. ARBITRATION. Arbitration shall occur in Houston, Texas, in accordance with the Rules of the American Arbitration Association then existing, and judgment on the arbitration -8- 9 award may be entered in any court having jurisdiction over the subject matter in controversy. The procedure for arbitration shall be In accordance with the rules of the American Arbitration Association then existing except that the Company and Executive shall each select one arbitrator, and the two selected arbitrators shall choose a third arbitrator. In the event that either the Company or Executive fails to select an arbitrator within ten (10) days after arbitration is sought, or if the two arbitrators fail to select a third arbitrator within fifteen (15) days after arbitration is sought, the American Arbitration Association shall select the third arbitrator. Each arbitrator so selected shall be knowledgeable with respect to the United States for-profit hospital and healthcare industry. Expenses of arbitration, including reasonable attorneys' fees and costs of collection, may be awarded in any such arbitration. d. STATUTE OF LIMITATIONS. All applicable statutes of limitations and defenses based upon the passage of time shall be tolled while the procedures specified in this Paragraph 11 are pending. The parties shall take such action, if any, required to effectuate such tolling. e. PERFORMANCE. Each party is required to continue to perform its obligations under this Agreement pending final resolution of any dispute arising out of or relating to this Agreement. f. EXTENSION OF DEADLINES. All deadlines specified in this Paragraph 11 may be executed by mutual agreement. 12. ENFORCEMENT. The parties regard the alternate dispute resolution provisions of Paragraph 11 above to be an essential covenant of this Agreement and legally binding upon them. In the event of a violation of Paragraph 11, the parties recognize that the Company or Executive may suffer continuing and irreparable harm for which the Company or Executive will have no adequate remedy at law. Both parties hereby waive that either has an adequate remedy at law for any such breach. In recognition thereof, the Company and Executive hereby agree that, in the event of any such breach, either party shall be entitled to seek a decree of specific performance, mandamus, or any other appropriate remedy to enforce the provisions of this Agreement without any requirement that a bond be posted. The parties further agree that Paragraph 11 shall not in any way limit remedies at law or in equity otherwise available to either party. 13. INDEMNIFICATION. The Company shall indemnify and hold Executive harmless from all liability, costs and expenses incurred as a consequence of claims resulting from or arising out of Executive's status as an officer and/or Director of the Company, or as a result of having been an officer and/or Director of the Company to the full extent provided by Texas law, the Company's Articles of Incorporation and the Company's Bylaws. In addition, the Company shall reimburse Executive for all reasonable attorneys' fees, expenses and disbursements incurred in connection with the enforcement of this Agreement by Executive, provided Executive prevails in such enforcement proceeding. -9- 10 14. NOTIFICATION. Any notice required or permitted to be given to Executive under this Agreement shall be sufficient if in writing and if delivered to Executive personally or sent by overnight United States mail or overnight courier service to Executive's residence as listed in the Company's records. Any notice required or permitted to be given to the Company shall be sufficient if in writing and if delivered personally or sent by overnight United States mail or overnight courier service to the Company's principal office at 14340 Thorough Chase Boulevard, Suite 320, Houston, Texas, 77014, to the attention of the Chief Executive Officer. In addition, copies of any notices to Executive shall also be sent to Wayne M. Whitaker, 3500 City Center Tower II, 301 Commerce Street, Fort Worth, TX 76102. The parties to this Agreement shall notify each other of changes in address pursuant to this Paragraph 14. 15. SURVIVAL. Paragraphs 6, 7, 12, and 13 of this Agreement shall survive any termination of Executive's employment hereunder unless otherwise provided herein. 16. MISCELLANEOUS. a. ASSIGNMENT AND BINDING EFFECT. Except as set forth herein, neither party may assign its rights or obligations hereunder without prior written consent of the other party. The respective rights and obligations under this Agreement shall be binding upon the parties hereto and their heirs, executors, administrators, successors, and assigns, including, in the case of the Company, any other corporation or entity with which the Company may be merged or otherwise combined or which may acquire all or substantially all of the Company's assets and, in the case of Executive, his estate or other legal representatives. b. GOVERNING LAW. This Agreement shall be governed as to its validity, interpretation, and effect by the laws of the State of Texas. Performance of this Agreement shall be in Harris County, Texas. c. SEVERABILITY. In the event that any provision or portion of this Agreement shall be determined to be invalid, illegal, or unenforceable for any reason, the remaining provisions and portions of this Agreement shall remain in full force and effect to the fullest extent permitted by law. Such invalid, illegal, or unenforceable provision shall be deemed modified to the extent necessary to make it valid, legal, and enforceable. d. ENTIRE AGREEMENT; AMENDMENTS. This Agreement constitutes the entire agreement and understanding of the parties hereto with respect to the subject matter hereof, supersedes all prior discussions, understandings and agreements with respect thereto and may not be modified or changed, except by an agreement in writing executed by the Company and Executive, with the approval of the Board. e. CAPTIONS. All captions and headings used herein are for convenient reference only and do not form part of this Agreement. -10- 11 f. WAIVER. The waiver of a breach of any term or provision of this Agreement shall not operate as or be construed to be a waiver of any other or subsequent breach of this Agreement. g. COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall constitute one and the same Agreement. IN WITNESS WHEREOF, the parties hereto, intending to be legally bound hereby, have executed this Agreement on the date first above written. CHAMPION HEALTHCARE CORPORATION By: /s/ CHARLES R. MILLER ------------------------------------------ Charles R. Miller President and Chief Executive Officer EXECUTIVE /s/ JAMES G. VANDEVENDER --------------------------------------------- James G. VanDevender -11- EX-10.10 6 EMPLOYMENT AGREEMENT - RONALD R. PATTERSON 1 EXHIBIT 10.10 EMPLOYMENT AGREEMENT THIS AGREEMENT (the "Agreement") made as of this 4th day of August, 1995 by and between CHAMPION HEALTHCARE CORPORATION, a Texas corporation (the "Company"), and RONALD R. PATTERSON, an individual residing in Houston, Texas ("Executive") WITNESSETH WHEREAS, Executive currently serves as the Executive Vice President and Chief Operating Officer of the Company; and WHEREAS, the Company desires to induce Executive to remain employed by the Company and Executive desires to continue employment with the Company upon the terms and conditions hereinafter set forth; and WHEREAS, the Company and Executive intend that Executive's current employment agreement with the Company, dated as of the 1st day of January, 1992, shall be superseded by the terms of this Agreement, NOW, THEREFORE, in consideration of the premises and the mutual promises, covenants and agreements contained herein, and intending to be legally bound, the parties hereto agree as follows: 1. EMPLOYMENT. The Company hereby agrees to continue to employ the services of Executive, and Executive hereby agrees to continue to render the same to the Company upon the terms and conditions hereinafter set forth. a. PRIOR AGREEMENTS. The Company and Executive hereby agree that, as of the effective date of this Agreement, the employment agreement, dated January 1, 1992, by and between the parties hereto shall be null and void and of no further effect, and, as of such date, Executive's employment with the Company shall be subject to the terms and conditions of this Agreement. 2. DUTIES. Executive shall serve as Executive Vice President and Chief Operating Officer of the Company. The authority, duties, responsibilities and position of Executive while employed pursuant to this Agreement shall be those set forth in the Bylaws of the Company for the office of Executive Vice President and Chief Operating Officer; subject, however, to such 2 modifications, directions, and limitations specified, from time to time, by the Chief Executive Officer of the Company, in his sole discretion. Executive shall render such duties and services at the Company's principal office in Houston, Texas, or such other locations as agreed upon between the Chief Executive Officer and Executive. 3. TERM. This Agreement shall have a term of three (3) years commencing on the date first above written, subject to earlier termination pursuant to Paragraph 10 hereof. Failure to renew this Agreement or enter into a new employment agreement upon the expiration of this Agreement on terms mutually agreeable between Executive and the Company shall constitute a termination of this Agreement in accordance with Paragraph 10(b) herein. 4. COMPENSATION. The Company shall pay to Executive, and Executive shall accept, as compensation for all services performed pursuant to this Agreement, for each full calendar year during the term of this Agreement, a base salary (the "Base Salary") of three hundred thousand dollars ($300,000.00) per annum, payable in approximately equal installments at such intervals as are consistent with the Company's pay periods for regular salaried executive employees. Executive's Base Salary during the term of this Agreement shall be reviewed by the Board of Directors of the Company (the "Board") on an annual basis commencing with calendar year 1996 and may be increased at the discretion of the Board. a. ADDITIONAL COMPENSATION. No bonuses or other additional compensation will be paid to Executive during the term of this Agreement without the approval of the Compensation Committee of the Board and the Board. 5. EXPENSES AND BENEFITS. In addition to compensation, Executive shall receive the following: a. EXPENSES. Subject to such general employee expense account policies as the Company may adopt from time to time, the Chief Executive Officer or his designee shall pay for, or reimburse Executive upon presentation of vouchers, invoices, or receipts with respect to any and all expenses reasonably incurred by Executive in the performance of his duties and responsibilities for the Company, including, without limitation, expenses for such items as entertainment, travel, meals, lodging, initiation and membership fees, fees and dues for professional associations, and other similar items. Such vouchers, invoices, and receipts shall be reviewed periodically for reasonableness by the Chief Executive Officer or his designee. In addition, no reimbursements shall be allowed for travel, meals, or lodging for Executive's spouse unless Executive obtains prior approval for such expenditures from the Company. b. RETIREMENT BENEFITS. While employed hereunder, Executive shall be entitled to participate in any and all pension and retirement plans, programs, and arrangements, including non-qualified supplemental plans, adopted by the Company and made available to its salaried executives. Nothing contained herein shall be construed to limit the discretion of the Board or -2- 3 its delegate to adopt, amend, modify, or terminate any such plans. c. HEALTH, DISABILITY AND DEATH BENEFITS. The Company shall provide (i) life insurance insuring Executive's life while employed hereunder; (ii) dependent life insurance coverage; (iii) disability insurance coverage; (iv) accidental death and dismemberment benefits, including a death benefit; (v) travel and accident insurance; and (vi) health coverage for Executive and his dependents, in each case in accordance with such standard coverage as adopted by the Company from time to time and generally provided to other salaried executives of the Company. Nothing contained herein shall be construed to limit the discretion of the Board or its delegate to adopt, amend, modify, or terminate any such plans. d. MISCELLANEOUS BENEFITS. To the extent not duplicative of the benefits otherwise specifically provided in this Paragraph 5, and subject to and in accordance with the terms and conditions contained therein, while employed hereunder, Executive shall be entitled to participate as and to the extent of any other eligible employee of the Company, in any and all employee benefit plans, policies, and programs now or hereafter maintained by the Company for its salaried executives in general. 6. COVENANT NOT TO COMPETE. While employed hereunder, Executive covenants and agrees as follows: a. DISCLOSURE. Executive has disclosed to the Board, in writing, all healthcare related interests, investments, or business activities, whether as a proprietor, stockholder, partner, co-venturer, director, officer, employee, independent contractor, agent, consultant, or in any other capacity or manner whatsoever and Executive shall notify the Board promptly, in writing, of any changes in or additions to such interests, activities, or investments. b. LIMITATIONS. During the term of this Agreement and for a period of one (1) year following the effective date of a termination of employment, unless otherwise provided herein, Executive shall not engage in the following: (i) own, either directly or indirectly, any interest in any business that competes with the Primary Business in which the Company is engaged, within a radius of 30 miles from any site, facility, or location which is owned, affiliated, managed or operated by the Company or any of its subsidiaries, including physician practices of any kind. For the purposes of this Agreement, Primary Business shall mean the delivery of integrated healthcare services in markets where the Company owns hospitals and/or skilled nursing facilities ("SNFs"), with the hospital serving as the hub of the local delivery system in conjunction with its physician medical staff. In addition to inpatient acute care, psychiatric care, and skilled nursing care, these services can include 1) individual physician practices and/or physician based organizations such as primary care and specialty clinics, physician-hospital organizations ("PHOs") or medical service organizations ("MSOs"), physician medical groups and 2) ambulatory programs such as home -3- 4 health care, ambulatory surgery, psychiatric services, occupational and sports medicine centers, psychiatric after-care and day care programs, and other diagnostic, rehabilitative and treatment services. Some of these services, sites and facilities may be located in satellite areas for the purpose of extending the hub hospital's geographic service area and to serve as access points and/or referral sources for either the local delivery system or the hub hospital. The Board may modify, from time to time, the definition of Primary Business to include any additional business or service activity in which the Company may engage during the term of this Agreement. Upon the modification of the definition, the Board shall provide written notification of such modification to Executive within thirty (30) calendar days. The definition of "Primary Business" shall also include definitive plans for expanding the Primary Business into new markets where the Company does not currently operate its Primary Business, regardless of whether such expansion occurs after Executive's termination. In the event of an expansion of the Primary Business within the applicable period of this Paragraph 6, the Board shall provide written notification to Executive within thirty (30) calendar days. (ii) participate or serve, either directly or indirectly, whether as a proprietor, stockholder, partner, co-venturer, director, officer, employee, independent contractor, agent, consultant, or in any other capacity or manner whatsoever in any business or service activity that competes with the Primary Business in which the Company is engaged. (iii) solicit any individual employed by the Company to leave the employment of the Company. Notwithstanding the foregoing, Executive may own, either directly or indirectly, any interest in any business that competes with the Primary Business of the Company if: (1) any such interest constitutes no more than a five percent (5%) interest in a publicly held company; (2) any such interest was held by Executive prior to employment with the Company or prior to the Company's involvement in such Primary Business and was properly disclosed to the Board pursuant to Paragraph 6(a); or (3) the Board provides written consent of Executive's ownership of any such interest. c. MODIFICATION OF LIMITATION. It is the desire and the intent of the parties that the provisions of this Paragraph 6 shall be enforceable to the fullest extent permissible under applicable law and public policy. Accordingly, if this Paragraph 6 or any portion thereof shall be adjudicated to be invalid or unenforceable, the length and scope of this Paragraph 6 shall be reduced to the extent necessary so that this covenant may be enforced to the fullest extent possible under applicable law. 7. CONFIDENTIALITY. Executive agrees that, while employed hereunder and for one (1) year thereafter, he shall not, without the prior written consent of the Company, disclose to any third party or use for his own benefit or the benefit of any third party or for any purpose other than the exclusive benefit of the Company or its affiliates, any confidential information -4- 5 relating to the Company or any of its affiliates which was obtained by or revealed to him while in the employ of the Company or which is otherwise the property of the Company or any of its affiliates; provided that this provision shall not restrict Executive's use or disclosure of information (i) known generally to the public (other than that which he may have disclosed in breach of any agreement) or (ii) as required by law, so long as Executive gives the Company reasonable prior written notice of such required disclosure. At the request of the Company, Executive shall surrender promptly to the Company or its delegate, upon termination of his employment hereunder, or at any time prior thereto, any document, memorandum, record, letter, specification, or other paper in his possession or under his control relating to the operations, business, patients, or affairs of the Company. 8. CHANGE IN CONTROL. Executive may terminate his employment under this Agreement by tendering written notice of resignation of not fewer than ninety (90) days within six (6) calendar months of a Change in Control. In addition, Executive may terminate his employment hereunder by tendering written notice of resignation of not fewer than ninety (90) days within eighteen (18) calendar months after a Change Control and within six (6) months after the occurrence of any of the following: (i) a failure to appoint Executive to the office of Executive Vice President and Chief Operating Officer; (ii) any material change by the Company in Executive's authority, duties, or responsibilities which would result in the loss or reduction of Executive's authority, responsibility, importance, or dignity; or (iii) any material breach of this Agreement, including without limitation, a reduction of Executive's Base Salary. For the purposes of this Agreement, a Change in Control shall be deemed to have occurred if (i) any "Person" (as defined in Sections 13(d) and 14(d)(2) of the Securities and Exchange Act of 1934, as amended), either alone or in conjunction with its "Affiliates" (as defined in Rule 405 of the General Rules and Regulations under the Securities Act of 1933, as amended), or (ii) other group of persons, corporations, partnerships or other entities who are not Affiliates but who are acting in concert with any Person, acquire ownership, whether of record or beneficially, of that number of shares of outstanding stock of the Company which would allow such Person or entity and/or its affiliates, or others acting in concert, to elect a majority of the Board. A Change in Control shall not include any acquisition of control (i) by any of the Company's three (3) senior officers as of August 4, 1995, whether acting alone or in concert with each other, provided Executive is a participant with one or more such officers; or (ii) pursuant to which Executive accepts equity securities of the Company or any entity with or into which the Company is merged or consolidated, or which controls or is controlled by the Company or any such entity except for equity securities received by Executive in his capacity as stockholder and in accordance with stock options and other benefits not materially in excess of those typically available to officers of other publicly held for-profit healthcare companies not subject to a change in control. In the event Executive terminates his employment after a Change in Control, the Company shall (i) pay Executive severance pay equal to Executive's then highest monthly rate of Base Salary under this Agreement multiplied by 12, the product of which is then multiplied -5- 6 by 2, on a monthly basis over a period of two (2) years, or at Executive's election, the Company shall fund a trust by cash or annuity in form and substance satisfactory to Executive in an amount sufficient to permit the trust to make monthly payments or any unpaid portion thereof over the prescribed period or the Company shall make a lump sum cash payment equal to the sum of the monthly installments without discount to present value and (ii) pay, award, fund or otherwise provided all benefits (including the continuation of all disability, life, and medical insurance as provided prior to the Change in Control), stock options, and bonuses, both vested and unvested, which bonuses shall be prorated to date of termination. In addition, the Company relinquishes any right it has or may have, by agreement or otherwise, to purchase any shares of stock of the Company owned by Executive. 9. TERMINATION. This Agreement may be terminated upon the occurrence of any one of the following: a. VOLUNTARY. Executive may terminate this Agreement at any time during the term of this Agreement by providing six (6) months prior written notice of termination to the Board. In the event of a voluntary termination by Executive, he shall not be bound by Paragraph 6(b)(i) and 6(b)(ii) of the covenant not to compete. b. INVOLUNTARY WITHOUT CAUSE. The Chief Executive Officer of the Company may terminate this Agreement without Cause (as defined in Paragraph 9(c) below) at any time during the term of this Agreement by providing thirty (30) days prior written notice to Executive. For purposes of this Agreement, termination resulting from Executive's death or disability shall be considered as termination without cause under this Paragraph 9(b). c. INVOLUNTARY WITH CAUSE. The Chief Executive Officer of the Company may terminate Executive for Cause at any time during the term of this Agreement by providing written notice that is immediately effective. Cause shall mean: (i) the conviction of Executive or a guilty plea to a felony crime; (ii) in the judgment of the Board, Executive has committed any act of embezzlement, fraud, theft, dishonesty, or moral turpitude; (iii) the violation by Executive of the provisions of Paragraph 6 of this Agreement which is not cured within thirty (30) days after written notice of such violation is given by the Board to Executive; (iv) wilful, persistent, and continued refusal by Executive, not involving a good faith difference of business judgment, to follow the written directions or instructions of the Board pertaining to a material duty, responsibility, or function of Executive; and (v) wilful misconduct or gross negligence by Executive in the performance of his duties that has or will likely have a material adverse financial effect on the Company as a whole. 10. PAYMENTS UPON TERMINATION. In the event of a termination described in Paragraph 9 above, Executive shall receive the following payments and benefits, if any: a. VOLUNTARY. In the event Executive terminates his employment hereunder -6- 7 voluntarily in accordance with Paragraph 9(a), Executive shall receive his then current Base Salary and benefits, including stock options, set forth in this Agreement through the end of the notice period contained in Paragraph 9(a). b. INVOLUNTARY WITHOUT CAUSE. In the event the Company terminates Executive without Cause in accordance with Paragraph 9(b), Executive shall receive his then current Base Salary and then current health benefits for himself and his eligible dependents for a period of eighteen (18) months after the effective date of such termination. c. INVOLUNTARY WITH CAUSE. In the event the Company terminates Executive for Cause in accordance with Paragraph 9(c), Executive shall receive his then current Base Salary and benefits up to the date he receives written notification of termination from the Board; provided, however, that if such termination for Cause becomes the subject of an arbitration proceeding in accordance with Paragraph 11 and Executive prevails in such arbitration, Base Salary and benefits shall be provided in accordance with Paragraph 10(b). 11. ALTERNATIVE DISPUTE RESOLUTION. Disputes between the parties arising out of or relating to this Agreement or the making, performance, or interpretation thereof shall be resolved as follows: a. NEGOTIATION. The parties shall attempt in good faith to resolve any controversy, dispute, or claim arising out of or relating to this Agreement or the making, performance, or interpretation thereof, by negotiations between executives of the parties who have the authority to settle the dispute. Any party may give the other party written notice of any dispute not resolved in the normal course of business. Within twenty (20) days after delivery of such notice, executives of both parties shall meet at a mutually acceptable time and place, and thereafter as often as they reasonably deem necessary, to exchange relevant information and to attempt to resolve the dispute. If a negotiator intends to be accompanied at a meeting by an attorney, the other negotiator shall be given at least three working days notice of such intention and may also be accompanied by an attorney. All negotiations pursuant to this Paragraph 11 (a) are confidential and shall be treated as compromise and settlement negotiations for purposes of all applicable rules of evidence. If the dispute is not resolved by negotiation within sixty (60) days, or if the parties fail to meet within twenty (20) days, and either party determines that the claim, dispute or controversy cannot be resolved by negotiation, such party may submit the controversy, claim or dispute to mediation as described below by providing a written notice of submission to mediation to the other party. b. MEDIATION. If either party submits a controversy, dispute or claim to mediation, the parties agree the mediation shall occur pursuant to the following procedures and understandings: (i) A mediation firm in Houston, Texas, acceptable to both parties, shall be -7- 8 designated to provide a mediator to work with the parties to resolve their differences and the party submitting the dispute or claim to mediation shall promptly provide such firm with a request to provide a mediator. (ii) The mediator appointed shall be knowledgeable with respect to the hospital and healthcare industry and may be rejected by the parties only for bias. (iii) Within thirty (30) days from the date of the notice submitting a dispute or claim to mediation, each party shall provide the mediator with a written summary of the facts and law with respect to the matter in dispute. (iv) Within sixty (60) days from the time of his or her appointment, the mediator shall meet with the parties and assist them in resolving the dispute, unless the parties mutually consent to an extension of such time. (v) The mediation conference or conferences shall be held in Houston, Texas, unless the mediator and the parties mutually agree on another location or locations. (vi) Efforts to reach a settlement shall continue until the conclusion of the mediation proceeding, which is deemed to occur when: (a) a written settlement is reached; (b) the mediator concludes and informs the parties in writing that further efforts would not be useful; or (c) the parties agree in writing that an impasse has been reached. Neither party may withdraw before the conclusion of the proceeding. (vii) If the mediation proceeding concludes without a settlement being reached, the dispute, controversy or claim shall be resolved by binding arbitration as described below. (viii) All discussions, representations, and statements made in the mediation process shall be privileged as settlement negotiations; nothing related to the mediation shall be admitted as evidence at arbitration or trial or shall be subject to discovery; and the mediator shall be immune from causes of action which may be brought against him or her with respect to such mediation proceedings under Texas law. (ix) The costs of the mediation, including the fees and expenses of the mediator, shall be borne as follows: one-third (1/3) by Executive and two-thirds (2/3) by the Company. c. ARBITRATION. Arbitration shall occur in Houston, Texas, in accordance with the Rules of the American Arbitration Association then existing, and judgment on the arbitration award may be entered in any court having jurisdiction over the subject matter in controversy. The procedure for arbitration shall be in accordance with the rules of the American Arbitration Association then existing except that the Company and Executive shall each select one arbitrator, -8- 9 and the two selected arbitrators shall choose a third arbitrator. In the event that either the Company or Executive fails to select an arbitrator within ten (10) days after arbitration is sought, or if the two arbitrators fail to select a third arbitrator within fifteen (15) days after arbitration is sought, the American Arbitration Association shall select the third arbitrator. Each arbitrator so selected shall be knowledgeable with respect to the United States for-profit hospital and healthcare industry. Expenses of arbitration, including reasonable attorneys' fees and costs of collection, may be awarded in any such arbitration. d. STATUTE OF LIMITATIONS. All applicable statutes of limitations and defenses based upon the passage of time shall be tolled while the procedures specified in this Paragraph 11 are pending. The parties shall take such action, if any, required to effectuate such tolling. e. PERFORMANCE. Each party is required to continue to perform its obligations under this Agreement pending final resolution of any dispute arising out of or relating to this Agreement. f. EXTENSION OF DEADLINES. All deadlines specified in this Paragraph 11 may be executed by mutual agreement. 12. ENFORCEMENT. The parties regard the alternate dispute resolution provisions of Paragraph 11 above to be an essential covenant of this Agreement and legally binding upon them. In the event of a violation of Paragraph 11, the parties recognize that the Company or Executive may suffer continuing and irreparable harm for which the Company or Executive will have no adequate remedy at law. Both parties hereby waive that either has an adequate remedy at law for any such breach. In recognition thereof, the Company and Executive hereby agree that, in the event of any such breach, either party shall be entitled to seek a decree of specific performance, mandamus, or any other appropriate remedy to enforce the provisions of this Agreement without any requirement that a bond be posted. The parties further agree that Paragraph 11 shall not in any way limit remedies at law or in equity otherwise available to either party. 13. INDEMNIFICATION. The Company shall indemnify and hold Executive harmless from all liability, costs and expenses incurred as a consequence of claims resulting from or arising out of Executive's status as an officer and/or Director of the Company, or as a result of having been an officer and/or Director of the Company to the full extent provided by Texas law, the Company's Articles of Incorporation and the Company's Bylaws. In addition, the Company shall reimburse Executive for all reasonable attorneys' fees, expenses and disbursements incurred in connection with the enforcement of this Agreement by Executive, provided Executive prevails in such enforcement proceeding. 14. NOTIFICATION. Any notice required or permitted to be given to Executive under this Agreement shall be sufficient if in writing and if delivered to Executive personally or sent -9- 10 by overnight United States mail or overnight courier service to Executive's residence as listed in the Company's records. Any notice required or permitted to be given to the Company shall be sufficient if in writing and if delivered personally or sent by overnight United States mail or overnight courier service to the Company's principal office at 14340 Torrey Chase Boulevard, Suite 320, Houston, Texas, 77014, to the attention of the Chief Executive Officer. In addition, copies of any notices to Executive shall also be sent to Wayne M. Whitaker, 3500 City Center Tower II, 301 Commerce Street, Fort Worth, TX 76102. The parties to this Agreement shall notify each other of changes in address pursuant to this Paragraph 14. 15. SURVIVAL. Paragraphs 6, 7, 12, and 13 of this Agreement shall survive any termination of Executive's employment hereunder unless otherwise provided herein. 16. MISCELLANEOUS. a. ASSIGNMENT AND BINDING EFFECT. Except as set forth herein, neither party may assign its rights or obligations hereunder without prior written consent of the other party. The respective rights and obligations under this Agreement shall be binding upon the parties hereto and their heirs, executors, administrators, successors, and assigns, including, in the case of the Company, any other corporation or entity with which the Company may be merged or otherwise combined or which may acquire all or substantially all of the Company's assets and, in the case of Executive, his estate or other legal representatives. b. GOVERNING LAW. This Agreement shall be governed as to its validity, interpretation, and effect by the laws of the State of Texas. Performance of this Agreement shall be in Harris County, Texas. c. SEVERABILITY. In the event that any provision or portion of this Agreement shall be determined to be invalid, illegal, or unenforceable for any reason, the remaining provisions and portions of this Agreement shall remain in full force and effect to the fullest extent permitted by law. Such invalid, illegal, or unenforceable provision shall be deemed modified to the extent necessary to make it valid, legal, and enforceable. d. ENTIRE AGREEMENT; AMENDMENTS. This Agreement constitutes the entire agreement and understanding of the parties hereto with respect to the subject matter hereof, supersedes all prior discussions, understandings and agreements with respect thereto and may not be modified or changed, except by an agreement in writing executed by the Company and Executive, with the approval of the Board. e. CAPTIONS. All captions and headings used herein are for convenient reference only and do not form part of this Agreement. f. WAIVER. The waiver of a breach of any term or provision of this Agreement -10- 11 shall not operate as or be construed to be a waiver of any other or subsequent breach of this Agreement. g. COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall constitute one and the same Agreement. IN WITNESS WHEREOF, the parties hereto, intending to be legally bound hereby, have executed this Agreement on the date first above written. CHAMPION HEALTHCARE CORPORATION By: /s/ CHARLES R. MILLER ------------------------------------------ Charles R. Miller President and Chief Executive Officer EXECUTIVE /s/ RONALD R. PATTERSON --------------------------------------------- Ronald R. Patterson -11- EX-10.23.G 7 FORM OF WARRANT - SERIES E NOTE 1 10.23(g) Form of Warrant issued pursuant to Series E Note Purchase Agreement, dated May 1, 1995, as amended. 2 AMENDMENT NO. 1 TO SERIES E WARRANTS THIS AMENDMENT NO.1 TO SERIES E WARRANTS, is dated December [31], 1995 ("Amendment"), by and among CHAMPION HEALTHCARE CORPORATION, a Delaware corporation (the "Company"), THE LINCOLN NATIONAL LIFE INSURANCE COMPANY, SECURITY-CONNECTICUT LIFE INSURANCE COMPANY, LINCOLN NATIONAL INCOME FUND, INC., THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY, BANK OF AMERICA ILLINOIS, INDOSUEZ CAPITAL FUNDING I, LIMITED, INDOSUEZ HIGH YIELD PARTNERS, and OBIE & CO. (individually, a "Holder" and collectively, the "Holders"). W I T N E S S E T H : WHEREAS, the Holders hold warrants evidencing the right to purchase shares of common stock of the Company that were issued pursuant to the Series E Note Purchase Agreement, dated as of May 1, 1995 as amended (such warrants, the "Series E Warrants"); WHEREAS, the Company has determined it is in the Company's best interest to enter into the 1995 Recapitalization Agreement and as a part thereof issue shares of Common Stock to holders of its preferred stock in consideration for such holders of preferred stock agreeing to take certain actions and offer holders of certain warrants to purchase common stock of the Company the right to exercise such warrants at a reduced exercise price for a specific period of time; and WHEREAS, the Company has requested the Holders to modify certain terms and provisions of the Series E Warrants and such Holders are willing to modify such terms and provisions; NOW, THEREFORE, for and in consideration of these premises and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the undersigned Holder hereby agree as follows: I. TERMS. All capitalized terms defined in the Series E Warrants and not otherwise defined herein shall have the same definitions when used herein as set forth in the Series E Warrant. II. AMENDMENT TO EXERCISE PRICE. Commencing on December [31], 1995 and ending on the ninetieth (90) day after the adoption of the amendment to the Company's Certificate of Incorporation provided for in the 1995 Recapitalization Agreement among the Company and the other parties thereto dated December 31, 1995, and only during such period, the Exercise Price shall be $7.00 per share, unless during such period the Exercise Price in effect immediately prior to the date of this amendment, if adjusted pursuant to the terms of the Warrant, would be less than $7.00 per share, then in such case such lesser Exercise Price shall be the Exercise Price. Amendment No. 1 to Series E Warrants Page 1 3 III. AMENDMENT SECTION 1B(10). "CERTAIN ISSUES EXCEPTED". The text of Section 1 B (10) "Certain Issues Excepted" to the Series E Warrants is amended by adding the following exceptions: "(V) upon the issuance or provision for issuance of [2,808,683] shares of Common Stock to the holders of the Company's Series A, A-1, BB, C and D Preferred Stock as a part of the terms of the 1995 Recapitalization Agreement of the Company dated [December 31, 1995]; and (W) upon the reduction, and any exercises pursuant thereto, of the exercise price of certain warrants to purchase shares of Company Common Stock as described in the 1995 Recapitalization Agreement of the Company dated December [31], 1995" IV. CONSENT TO AMENDING SERIES E WARRANTS. The undersigned holders consent to Amendment No.3 to the Series D Warrants issued pursuant to the Series D Note and Stock Purchase Agreement dated as of December 31, 1993, as amended, between the Company and the other parties thereto, in accordance with and pursuant to the terms of the 1995 Recapitalization Agreement dated December 31, 1995 between the Company and the other parties thereto. V. AGREEMENT TO DELIVER AMENDMENTS. The Holder agrees to deliver this Amendment, together with any future amendments to the Series E Warrants, to any transferee or purchaser thereof. VI. EFFECTIVE DATE OF AMENDMENT. This Amendment is conditioned upon and will become effective with the closing of the 1995 Recapitalization Agreement by the Company. VII. PRIORITY. In the event of any inconsistency between the terms of this Amendment and terms of the Series E Warrant, this Amendment shall control. VIII. MISCELLANEOUS. A. HEADINGS. Section headings are for reference only, and shall not affect the interpretation or meaning of any provision of this Amendment. B. EFFECT OF THIS AMENDMENT. The Series E Warrants as amended by this Amendment, shall remain in full force and effect except that any reference therein, or in any documents or instruments required thereunder or annexes or schedules thereto, referring to the Series E Warrants shall be deemed to refer to the Series E Warrants as amended by this Amendment. C. GOVERNING LAW. This Amendment shall be governed by, and construed in Amendment No. 1 to Series E Warrants Page 2 4 accordance with, the laws of the State of Delaware without regard to the principles of conflicts of laws thereof. D. COUNTERPARTS. This Amendment may be executed by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed an original but all such counterparts shall constitute but one and the same Amendment. IN WITNESS WHEREOF, the Company and the undersigned Purchaser have caused this Amendment to be executed by their respective duly authorized officers as of the date first above written. CHAMPION HEALTHCARE CORPORATION By:_________________________________________ James G. VanDevender Executive Vice-President [Remaining signatures appear on the following pages] Amendment No. 1 to Series E Warrants Page 3 5 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY By: Lincoln National Investment Management Company, Its Attorney-In-Fact By: _____________________________________ Its Vice President SECURITY-CONNECTICUT LIFE INSURANCE COMPANY By: Lincoln National Investment Management Company, Its Attorney-In-Fact By: _____________________________________ Its Vice President LINCOLN NATIONAL INCOME FUND, INC. By: _____________________________________ THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY By: _____________________________________ Its Vice President Amendment No. 1 to Series E Warrants 6 BANK OF AMERICA ILLINOIS By: ____________________________________ Ford S. Bartholow Its Managing Director _____________________________________ Christopher J. Perry _____________________________________ Robert F. Perille _____________________________________ M. Ann O'Brien _____________________________________ Ford S. Bartholow _____________________________________ Jeffrey M. Mann _____________________________________ Matthew W. Clary _____________________________________ Thomas E. Van Pelt, Jr. INDOSUEZ CAPITAL FUNDING I, LIMITED By: _____________________________________ Name: Its Collateral Manager Amendment No. 1 to Series E Warrants 7 INDOSUEZ HIGH YIELD PARTNERS By: _____________________________________ John G. Popp Its Partner OBIE & CO. By: _____________________________________ Texas Commerce Bank NA Trust Department Amendment No. 1 to Series E Warrants 8 WARRANT CERTIFICATE "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, and thus may not be offered for sale, sold, transferred or otherwise disposed of unless registered under the Securities Act of 1933, as amended, or unless an exemption from such registration is available. Further, such transfer is subject to the conditions specified in the Series E Note Purchase Agreement dated May 1, 1995 pursuant to which such securities were issued and sold by Champion Healthcare Corporation (the "Company") and the D Stockholders Agreement dated as of December 31, 1993, as amended, copies of which agreements are on file and may be inspected at the principal office of the Company. A copy of each agreement will be furnished by the Company to the holder hereof upon request and without charge. Under certain circumstances specified in such Series E Note Purchase Agreement, the Company has agreed to deliver to the holder hereof a new certificate, not bearing this legend, for all or part of the number of the securities evidenced hereby, as the case may be, registered in the name of such holder or its designated nominee." Issue Date: June 12, 1995 Warrants to Purchase Void after 5:00 P.M. Central Time Shares 2,700 No. E-8 December 31, 2003, Unless extended as provided for herein WARRANT CERTIFICATE REPRESENTING WARRANTS TO PURCHASE COMMON STOCK OF CHAMPION HEALTHCARE CORPORATION Champion Healthcare Corporation, a Delaware corporation (the "Company"), hereby certifies that, for value received, CHRISTOPHER J. PERRY the holder of these Warrants (the "Warrants," and each right to purchase a share of Common Stock, a "Warrant") is entitled, subject to the terms set forth below at any time, or from time to time, to purchase from the Company up to Two THOUSAND SEVEN HUNDRED (2,700) fully paid and nonassessable shares of Common Stock of the Company. These Warrants and all rights hereunder, to the extent such rights shall not have been exercised, shall terminate and become null and void at the later of times set forth in Section I A below. For purposes of these Warrants, the term "Common Stock" shall henceforth have the meaning set forth in the 9 Series E Note Purchase Agreement dated May 1, 1995 by and among the Company and the Purchasers listed on Schedule I thereto (the "Purchase Agreement"). Defined terms not otherwise defined herein shall have the meaning set forth in the Purchase Agreement. These Warrants shall be subject to the terms set forth in the Purchase Agreement and to the following terms and conditions: SECTION 1. EXERCISE OF WARRANT; EXERCISE PRICE; ADJUSTMENTS RELATIVE TO EXERCISE OF WARRANT. A. Exercise of Warrants. Subject to the conditions set forth in this Section 1, the holder of any Warrant may, at such holder's option, exercise such holder's rights under all or any part of the Warrants to purchase one share of Common Stock in exchange for one Warrant (the "Warrant Shares") at a price of $9.00 per share (the "Exercise Price"), subject to adjustments payable in cash or by application of principal of, or accrued interest on, Notes, or by tendering a number of Warrants with a Warrant Value (hereinafter defined) equal to the Exercise Price, or a combination thereof, as set forth herein, at any time and from time to time prior to the later of (i) 5:00 p.m., Houston, Texas time, on December 31, 2003 or (ii) 5:00 p.m., Houston, Texas time on the last date that the Notes are outstanding. The Warrant Shares and the Exercise Price are subject to certain adjustments as set forth in this Section 1, and the terms "Warrant Shares" and "Exercise Price" as used herein shall as of any time be deemed to include all such adjustments to be given effect as of such time in accordance with the terms hereof. B. Adjustment of Exercise Price Upon Issuance of Common Stock. If and whenever after the date hereof the Company shall issue or sell any shares of its Common Stock (except upon the exercise of the Warrants) for a consideration per share less than the Exercise Price in effect immediately prior to the time of such issue or sale or the Market Price at the time of such issue or sale, then, forthwith upon each such issue or sale, the Exercise Price with respect to the exercise of any Warrant subsequent to such event shall be reduced (but not increased, except as otherwise specifically provided in paragraph IB(3)) to the lower of the prices (calculated to the nearest cent) determined as follows: (a) by dividing (i) an amount equal to the sum of (A) the aggregate number of shares of Common Stock outstanding immediately prior to such issue or sale multiplied by the then existing Exercise Price, and (B) the consideration, if any, received by the Company upon such issue or sale, by (ii) the aggregate number of shares of Common Stock of all classes outstanding immediately after such issue or sale; and (b) by multiplying the Exercise Price in effect immediately prior to the time of such issue or sale by a fraction, the numerator of which shall be the sum of (i) the aggregate number of shares of Common Stock outstanding immediately prior to such issue or sale multiplied by the Market Price in-immediately prior to such issue or sale plus (ii) the consideration received 10 by the Company upon such issue or sale, and the denominator of which shall be the product of (iii) the aggregate number of shares of Common Stock of all classes outstanding immediately after such issue or sale, multiplied by (iv) the Market Price immediately prior to such issue or sale. No adjustment of the Exercise Price, however, shall be made in an amount less than 1% of the Exercise Price, but any such lesser adjustment shall be carried forward and shall be made at the time of and together with the next subsequent adjustment. For the purposes of this paragraph IB, the following paragraphs IB(1) through IB(IO) shall also be applicable: (1) Issuance of Rights or Options. In case at any time after the date hereof the Company shall in any manner grant (whether directly or by assumption in a merger or otherwise, except in the circumstances described in paragraph IC below) any rights to subscribe for or to purchase, or any options for the purchase of, Common Stock or any stock or securities convertible into or exchangeable for Common Stock (such convertible or exchangeable stock or securities being herein called "Convertible Securities"), whether or not such rights or options or the right to convert or exchange any such Convertible Securities are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such rights or options or upon conversion or exchange of such Convertible Securities (determined by dividing (i) the total amount, if any, received or receivable by the Company as consideration for the granting of such rights or options, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the exercise of such rights or options, plus, in the case of such rights or options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue or sale of such Convertible Securities and upon the conversion or exchange thereof, by (ii) the total maximum number of shares of Common Stock issuable upon the exercise of such rights or options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such rights or options) shall be less than the Exercise Price in effect immediately prior to the time of the granting of such rights or options (or less than the Market Price, determined as of the date of granting such rights or options, as the case may be), then the total maximum number of shares of Common Stock issuable upon the exercise of such rights or options or upon conversion or exchange of all such Convertible Securities issuable upon the exercise of such rights or options shall (as of the date of granting of such rights or options) be deemed to be outstanding and to have been issued for such price per share. Except as provided in paragraph IB (3), no further adjustment of the Exercise Price shall be made upon the actual issue of such Common Stock or of such Convertible Securities upon exercise of such rights or options or upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities. 11 (2) Issuance of Convertible Securities. In case at any time after the date hereof the Company shall in any manner issue (whether directly or by assumption in a merger or otherwise) or sell any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange (determined by dividing (i) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (ii) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities) shall be less than the Exercise Price in effect immediately prior to the time of such issue or sale (or less than the Market Price, determined as of the date of such issue or sale of such Convertible Securities, as the case may be), then the total maximum number of shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities shall (as of the date of the issue or sale of such Convertible Securities) be deemed to be outstanding and to have been issued for such price per share; provided, however, that (a) except as otherwise provided in paragraph IB(3), no further adjustment of the Exercise Price shall be made upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities, and (b) if any such issue or sale of such Convertible Securities is made upon exercise of any rights to subscribe for or to purchase or any option to purchase any such Convertible Securities for which adjustments of the Exercise Price have been or are to be made pursuant to other provisions of this paragraph IB, no further adjustment of the Exercise Price shall be made by reason of such issue or sale. (3) Change in Option Price or Conversion Rate. Upon the happening of any of the following events, namely, if the purchase price provided for in any right or option referred to in paragraph IB(1), the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities referred to in paragraph IB(1) or IB(2), or the rate at which any Convertible Securities referred to in paragraph IB(1) or IB(2) are convertible into or exchangeable for Common Stock shall change (other than under or by reason of provisions designed to protect against dilution), the Exercise Price then in effect hereunder shall forthwith be readjusted (increased or decreased, as the case may be) to the Exercise Price which would have been in effect at such time had such rights, options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or conversion rate, as the case may be, at the time initially granted, issued or sold, provided that in no event shall any such increase result in an Exercise Price higher than the Exercise Price which would have been in effect at the time of such adjustment had such right, option or Convertible Security never been granted, issued or sold. On the expiration of any such option or right referred to in paragraph IB(1) or the termination of any such right to convert or exchange any such Convertible Securities referred to in paragraph IB(1) or IB(2), the Exercise Price then in effect hereunder shall forthwith be readjusted (increased or decreased, as the case may be) to the Exercise Price which would have been in effect at the time of such expiration or termination had such right, option or Convertible Securities, to the extent outstanding immediately prior to such expiration or termination, never been granted, issued or sold, and the Common Stock issuable thereunder shall no longer be deemed to be outstanding. If the purchase price provided for in any such right or option referred to in paragraph IB(1) or the rate at which any Convertible Securities referred to in paragraph IB(1) or IB(2) are convertible into or exchangeable for Common Stock shall be reduced at any time 12 under or by reason of provisions with respect thereto designed to protect against dilution, then in case of the delivery of shares of Common Stock upon the exercise of any such right or option or upon conversion or exchange of any such Convertible Securities, the Exercise Price then in effect hereunder shall, if not already adjusted, forthwith be adjusted to such amount as would have obtained had such right, option or Convertible Securities never been issued as to such shares of Common Stock and had adjustments been made upon the issuance of the shares of Common Stock delivered as aforesaid, but only if as a result of such adjustment the Exercise Price then in effect hereunder is thereby reduced. (4) Stock Dividends. In case at any time the Company shall declare a dividend or make any other distribution upon or by reference to ownership of any class or series of stock of the Company payable in shares of Common Stock or Convertible Securities, any shares of Common Stock or Convertible Securities, as the case may be, issuable in payment of such dividend or distribution shall be deemed to have been issued or sold without consideration. (5) Consideration for Stock. In case at any time any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock or Convertible Securities shall be issued or sold for cash, the consideration received therefor shall be deemed to be the amount paid by the purchaser therefor, without deduction therefrom of any expenses incurred or any underwriting discounts and commissions or concessions paid or allowed by the Company in connection therewith. In case at any time any shares of Common Stock of any class or Convertible Securities or any rights or options to purchase any such shares of Common Stock or Convertible Securities shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company shall be deemed to be the fair value of such consideration as determined reasonably and in good faith by the Board of Directors of the Company, without deduction of any expenses incurred or any underwriting commissions or concessions paid or allowed by the Company in connection therewith. In case at any time any shares of Common Stock of any class or Convertible Securities or any rights or options to purchase such shares of Common Stock or Convertible Securities shall be issued in connection with any merger or consolidation in which the Company is the surviving corporation, the amount of consideration received therefor shall be deemed to be the fair value as determined reasonably and in good faith by the Board of Directors of the Company of such portion of the assets and business of the nonsurviving corporation as such Board may determine to be attributable to such shares of Common Stock, Convertible Securities, rights or options, as the case may be. In case at any time any rights or options to purchase any shares of Common Stock or Convertible Securities shall be issued in connection with the issue and sale of other securities of the Company, together comprising one integral transaction in which no consideration is allocated to such rights or options by the parties thereto, such rights or options shall be deemed to have been issued for an amount of consideration equal to the fair value thereof as determined reasonably and in good faith by the Board of Directors of the Company. (6) Record Date. In case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them (i) to receive a dividend or other distribution payable in shares of Common Stock or in Convertible Securities, or (ii) to subscribe for or purchase shares of Common Stock or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold as a result of the declaration of such dividend or the making of such other distribution or the date of the granting of such right of 13 subscription or purchase, as the case may be, unless such dividend or other distribution or right to subscribe when exercised is to be measured by the "Market Price" in effect on the date such dividend or other distribution or right to subscribe is exercised, in which case such date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been so issued or sold. (7) Treasury Shares. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company and the disposition of any such shares shall be considered an issue or sale of Common Stock for the purposes of this paragraph IB. (8) Definition of Market Price. "Market Price" shall mean, for any day, the average of the final sale prices of the Common Stock on all exchanges on which the Common Stock may at the time be listed or the final bid prices on the NASDAQ National Market System or NASDAQ over-the-counter market, in each such case, unless otherwise provided herein, averaged over a period of 20 consecutive business days ending 2 days prior to the day as of which "Market Price" is being determined; provided, however, that in connection with a firm underwriting of a public offering of Common Stock, "Market Price" for purposes of the issuance of shares of Common Stock pursuant to such underwritten public offering shall mean the initial public offering price in such underwritten offering. If at any time the Common Stock is not listed on any such exchange or quoted in any such domestic over-the-counter market, the "Market Price" for purposes of such issuance shall be determined as follows: (i) in the case of any issuance of Common Stock, or rights or options or Convertible Securities exercisable for or convertible into shares of Common Stock, in a financing effected as a placement including one or more institutional investors in an arms-length negotiated transaction exempt from the registration provisions of the Securities Act and in which at least a majority of the investors or purchasers are not Affiliates of the Company, the "Market Price" for purposes of such issuance shall be the price at which such securities are issued (provided that the price being paid by any Affiliate is the same as that being paid by the non-Affiliates); (ii) in the case of any issuance of any such securities in an acquisition or business combination, the "Market Price" shall, to the extent not otherwise determined pursuant to any other provision of this Section 1, be as determined reasonably and in good faith by or pursuant to the directions and authorization of the Board of Directors of the Company as of a date which is within 30 days preceding the date of which such determination is to be effective; (iii) in the case of any issuance of any such securities (other than an issuance to which clause (i) or (ii) above applies) in an amount which is less than 1% of the number of shares of Common Stock of the Company then outstanding on a fully diluted basis, "Market Price" for purposes of such issuance shall be as determined reasonably and in good faith by or pursuant to the directions and authorization of the Board of Directors of the Company as of a date which is within 30 days preceding the date as of which such determination is to be effective and (iv) in the case of any issuance of securities to which the provisions of any of clauses (i), (ii) and (iii) above do not apply, the "Market Price" for purposes of such issuance shall be deemed to be the fair value thereof as determined by an investment banking firm mutually acceptable to the Company and the holders of Warrants initially exercisable for a majority of all the shares of Common Stock issuable upon the exercise of all the then outstanding Warrants. The cost of such investment banking firm shall be borne by the Company. 14 (9) Determination of Market Price under Certain Circumstances. Anything herein to the contrary notwithstanding, in case at any time after the Closing Date the Company shall issue any shares of Common Stock or Convertible Securities, or any rights or options to purchase any such Common Stock or Convertible Securities, in connection with the acquisition by the Company of the stock or assets of any other corporation or the merger of any other corporation into the Company under circumstances where on the date of the issuance of such shares of Common Stock or Convertible Securities or such rights or options the consideration received for such Common Stock or deemed to have been received for the Common Stock into which such Convertible Securities or such rights or options are convertible is less than the Market Price of the Common Stock but on the date the number of shares of Common Stock or Convertible Securities (or in the case of Convertible Securities other than stock, the aggregate principal amount of Convertible Securities) or the number of such rights or options was determined (as set forth in a binding agreement between the Company and the other party to the transaction) the consideration received for such Common Stock or deemed to have been received for the Common Stock into which such Convertible Securities or such rights or options are convertible would not have been less than the Market Price thereof, such shares of Common Stock shall not be deemed to have been issued for less than the Market Price of the Common Stock. (10) Certain Issues Excepted. Anything to the contrary herein notwithstanding, the Company shall not be required to make any adjustment to the Exercise Price in respect to the following described securities issued or reserved for issuance by the Company (A) upon conversion of 3,500,000 shares of Series A Preferred Stock; (B) upon conversion of 2,769,109 shares of Series A-1 Preferred Stock; (C) upon the exercise of options granted to certain officers of the Company to purchase up to an aggregate of 180,000 shares of Common Stock at an exercise price of $1.00 per share; (D) upon the exercise of warrants exercisable to purchase 1,260,000 shares of Common Stock issued pursuant to the Note and Stock Purchase Agreement dated May 27, 1992; (E) upon the exercise of warrants exercisable to purchase 98,434 shares of Common Stock issued to Equus Investments 11, L.P. and Sprout Growth, L.P., pursuant to the Warrant Purchase Agreement dated December 31, 1990 among the Company, Equus Investments 11, L.P. and Sprout Growth, L.P. and the Warrant Purchase Agreement dated December 31, 1990 among the Corporation, Equus Investments 11, L.P., and Charles R. Miller; (F) upon conversion of (i) an aggregate 1,577,547 shares of Series BB Preferred Stock, (ii) an aggregate 448,81 1 shares of Series C Preferred Stock, and (iii) of an aggregate 2,157,319 shares of Series D Preferred Stock, all in accordance with the Certificate of Incorporation as of the date hereof; 15 (G) upon exercise of options granted to certain officers of the Company to purchase up to an aggregate of 300,000 shares of Common Stock pursuant to the Employee Stock Option plan No. 2 dated May 27, 1992; (H) under the Subscription Agreement dated as of February 10, 1990, as amended, between the Company and James G. VanDevender for 100,000 shares of Common Stock to be initially purchased; (I) upon exercise of options granted by the Company to certain officers to purchase up to an aggregate of 150,000 shares of Common Stock, at an exercise price of $4.00 per share; (J) pursuant to a stock dividend, subdivision or split-up whereunder an adjustment is made pursuant to paragraph ID; (K) upon the exercise of options to acquire up to 60,000 shares of Common Stock granted to members of the Board of Directors of the Company pursuant to the Champion Healthcare Corporation Directors' Stock Option Plan; (L) upon the exercise of warrants exercisable to purchase 132,500 shares of Common Stock issued pursuant to the Bridge Loan Agreement dated April 29, 1993; (M) upon the exercise of options to acquire up to 200,000 shares of Common Stock pursuant to the Employee Stock Option Plan No. 3; (N) upon the exercise of options to acquire up to 200,000 shares of Common Stock pursuant to the Physicians Stock Option Plan; (O) upon the exercise of warrants exercisable to purchase 25,000 shares of Common Stock issued to Virginia Retirement System pursuant to the Fifth Amendment dated December 2, 1993 to Note and Stock Purchase Agreement dated May 27, 1992; (P) upon the exercise of any warrant issued pursuant to the Series D Note and Stock Purchase Agreement dated December 31, 1993; (Q) upon exercise of any Warrant issued pursuant to the Purchase Agreement; (R) upon the exercise of options to be exercisable to purchase 300,000 shares of Common Stock pursuant to the Senior Executive Stock Option Plan No. 4, dated January 5, 1994; (S) upon the exercise of options to be exercisable to purchase 144,500 shares of Common Stock pursuant to the Selected Executive Stock Option Plan No. 5, dated May 25, 1995; (T) upon the exercise of options to be exercisable to purchase 245,070 shares of Common Stock pursuant to the 1988 Non-Qualified Stock Option Plan; and 16 (U) upon the issuance or provision for issuance of not more than 96,250 shares of Common Stock as a part of the terms of the acquisition of the operations of several hoi-ne healthcare companies including Brookside Health Group, Inc. provided, however, that to the extent any such option or other right (except in G, 1, K, M, N, R, S and T above) to acquire any share of Common Stock shall expire or be canceled prior to the exercise thereof, the Common Stock issuable pursuant thereto or any subsequent option or other right granted to acquire such Common Stock, shall no longer be excepted by this paragraph IB(IO); and provided further that the number of such shares of Common Stock may be adjusted from time to time in connection with any subdivision or combination or similar event which results in a proportional increase or decrease in all shares of Common Stock and Warrant Shares. C. Liquidating Dividends; Purchase Rights. (a) In case at any time after the date hereof the Company shall declare a dividend or make any other distribution upon the shares of Common Stock of any class payable otherwise than in shares of Common Stock or Convertible Securities, otherwise than out of consolidated earnings or consolidated earned surplus (determined in accordance with generally accepted accounting principles, including the making of appropriate deductions for minority interests, if any, in subsidiaries), and otherwise than in the securities to which the provisions of clause (b) below apply, the Company shall pay over to each holder of Warrants, immediately upon the exercise thereof on or after the dividend payment date, the securities and other property (including cash) which such holder would have received (together with all distributions thereon) if such holder had exercised the Warrants held by it on the record date fixed in connection with such dividend, and the Company shall take whatever steps are necessary or appropriate to keep in reserve at all times such securities and other property as shall be required to fulfill its obligations hereunder in respect of the shares issuable upon the exercise of all the Warrants. For the purposes of the foregoing, a dividend other than in cash shall be considered payable out of consolidated earnings or consolidated retained earnings only to the extent that such earnings or retained earnings are charged an amount equal to the fair value of such dividend as determined by the Board of Directors of the Company. (b) If at any time or from time to time on or after the date hereof the Company shall grant, issue or sell any options or rights (other than Convertible Securities) to purchase stock, warrants, securities or other property pro rata to the holders of Common Stock of all classes ("Purchase Rights"), then if the holder of Warrants shall be entitled to an adjustment pursuant to paragraph IB above, then in lieu of such adjustment, each holder of Warrants shall be entitled, at such holder's option, to acquire (whether or not such holder's Warrants shall have been exercised), upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Common Stock issuable upon the exercise of such Warrants, immediately prior to the time or times at which the Company granted, issued or sold such Purchase Rights. D. Subdivision or Combination of Stock. In case the Company shall at any time (i) subdivide its outstanding shares of Common Stock into a greater number of shares, the Exercise Price in effect immediately prior to such subdivision shall be proportionately reduced and the number of Warrant Shares of Common Stock for which this Warrant is exercisable shall be proportionately increased, and conversely, (ii) combine its outstanding shares of Common Stock into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall be proportionately increased and the number of Warrant Shares of Common Stock for which this Warrant is exercisable shall be proportionately decreased. 17 E. Changes in Common Stock. If any capital reorganization or reclassification of the capital stock of the Company, or consolidation or merger of the Company with another corporation, or sale, transfer or other disposition of all or substantially all of its properties to another corporation, shall be effected, then, as a condition of such reorganization, reclassification, consolidation, merger, sale, transfer or other disposition, lawful and adequate provision shall be made whereby each holder of Warrants shall thereafter have the right to purchase and receive upon the basis and upon the terms and conditions herein specified and in lieu of the shares of the Common Stock of the Company immediately theretofore issuable upon the exercise of the Warrants, such shares of stock, securities or properties, if any, as may be issuable or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of such Common Stock immediately theretofore issuable upon the exercise of the Warrants had such reorganization, reclassification, consolidation, merger, sale, transfer or other disposition not taken place, and in any such case appropriate provisions shall be made with respect to the rights and interests of each holder of Warrants to the end that the provisions hereof (including without limitation provisions for adjustment of the Exercise Price) shall thereafter be applicable, as nearly equivalent as may be practicable in relation to any shares of stock, securities or properties thereafter deliverable upon the exercise thereof. The Company shall not effect any such consolidation, merger, sale, transfer or other disposition, unless prior to or simultaneously with the consummation thereof the successor corporation (if other than the Company) resulting from such consolidation or merger or the corporation purchasing or otherwise acquiring such properties shall assume, by written instrument executed and mailed or delivered to the holders of Warrants at the last address of such holders appearing on the books of the Company, the obligation to deliver to such holders such shares of stock, securities or properties as, in accordance with the foregoing provisions, such holders may be entitled to acquire. The above provisions of this subparagraph shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, sales, transfers or other dispositions. F. Notice of Adjustment. Upon any adjustment of the Exercise Price, then and in each such case the Company shall promptly certify and upon the written request of holders of Warrants initially exercisable for a majority of all shares of Common Stock issuable upon the exercise of all Warrants then outstanding, obtain a certificate of a firm of independent public accountants of recognized national standing selected by the Board of Directors of the Company (who may be the regular auditors at the Company) certifying the Exercise Price resulting from such adjustment and the increase or decrease, if any, in the number of shares of Common Stock issuable upon the exercise of the Warrant or Warrants held by each holder of Warrants, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. The Company shall promptly mail a copy of such certification to each holder of Warrants. G. Certain Events. If any event occurs as to which in the opinion of the Board of Directors of the Company the other provisions of this Section I are not strictly applicable or if strictly applicable would not fairly protect the exercise rights of the holders of the Warrants in accordance with the essential intent and principles of such provisions, then such Board of Directors shall appoint a firm-n of independent certified public accountants (which may be the regular auditors of the Company) of recognized national standing, which shall give their opinion upon the adjustment, if any, on a basis consistent with such essential intent and principles, necessary to preserve, without dilution, the rights of the holders of the Warrants. Upon receipt of such opinion by the Board of Directors, the Company shall forthwith make the adjustments described therein; provided, however, that no such adjustment pursuant to this paragraph IG shall have the effect of increasing the Exercise Price as otherwise determined pursuant to this Section I except in the event of a combination of shares of the type contemplated in paragraph ID and then in no event to an amount larger than the Exercise Price as adjusted 18 pursuant to paragraph IH. H. Prohibition of Certain Actions. The Company will not (a) authorize or issue, or agree to authorize or issue, any shares of its capital stock of any class preferred as to dividends or as to the distribution of assets upon voluntary or involuntary liquidation, dissolution or winding-up of the Company unless the rights of the holders thereof shall be limited to a fixed sum or percentage of par value in respect of participation in dividends and in the distribution of such assets, (b) take any action which would result in any adjustment of the Exercise Price if the total number of shares of Common Stock issuable after such action upon exercise of all of the Warrants would exceed the total number of shares of Common Stock then authorized by the Company's Articles of Incorporation, or (c) authorize more than one class of Common Stock. I. Stock to Be Reserved. The Company will at all times reserve and keep available out of its authorized Common Stock, solely for the purpose of issue upon the exercise of Warrants as herein provided, such number of shares of Common Stock as shall then be issuable upon the exercise of all outstanding Warrants, and the Company will maintain at all times all other rights and privileges sufficient to enable it to fulfill all its obligations hereunder. The Company covenants that all shares of Common Stock which shall be so issuable shall, upon issuance, be duly authorized, validly issued, fully paid and nonassessable, free from preemptive or similar rights on the part of the holders of any shares of capital stock or securities of the Company, and free from all Liens and charges with respect to the issue thereof; and without limiting the generality of the foregoing, the Company covenants that it will from time to time take all such action as may be required to assure that the par value, if any, per share of the Common Stock is at all times equal to or less than the then effective Exercise Price. The Company will take all such action as may be necessary to assure that such shares of Common Stock may be so issued without violation by the Company of any applicable law or regulation, or of any requirements of any domestic securities exchange upon which the Common Stock may be listed. Without limiting the foregoing, the Company will take all such action as may be necessary to assure that, upon exercise of any of the Warrants, an amount equal to the lesser of (a) the par value of each share of Common Stock outstanding immediately prior to such exercise, or (b) the Exercise Price, shall be credited to the Company's stated capital account for each share of Common Stock issued upon such exercise, and that the balance of the principal amount of each Warrant exercised shall be credited to the Company's capital surplus account. J. Registration and Listing of Common Stock. If any shares of Common Stock required to be reserved for the purpose of the exercise of the Warrants hereunder require registration with or approval of any governmental authority under any Federal or state law (other than the Securities Act) before such shares may be issued upon such exercise, the Company will, at its expense and as expeditiously as possible, use its best efforts to cause such shares to be duly registered or approved, as the case may be. Shares of Common Stock issuable upon the exercise of the Warrants shall be registered by the Company under the Securities Act or similar statute then in effect if required by Article X of the Purchase Agreement and subject to the conditions stated in such Article. If and so long as the Common Stock is listed on any national securities exchange, the Company will, at its expense, obtain promptly and maintain the approval for listing on each such exchange upon official notice of issuance, of shares of Common Stock issuable upon the exercise of the then outstanding Warrants and maintain the listing of such shares after their issuance; and the Company will also list on such national securities exchange, will register under the Exchange Act and will maintain such listing of, any other securities that at any time are issuable upon the exercise of the Warrants, if and at the time that any securities of the same class shall be listed on such national securities exchange by the Company or shall require 19 registration under the Exchange Act. K. Issue Tax. The issuance of certificates for shares of Common Stock upon the exercise of the Warrants shall be made without charge to the holders of the Warrants exercised for any issuance tax in respect thereto. L. Closing of Books. The Company will at no time close its transfer books against the transfer of any Warrant or of any shares of Common Stock issued or issuable upon the exercise of any Warrant in any manner which interferes with the timely exercise of such Warrant. M. Notice to Holders of Warrants. In case at any time the Company shall take any action referred to in paragraph IC, ID, or IE (other than would require any adjustment in the Exercise Price), then the Company shall give prompt written notice of any such action to each holder of Warrants and of the effects of such action under the Warrant Certificate. N. Antidilution Adjustments under Other Securities. Without limiting any other rights available hereunder to the holders of Warrants, if there is an antidilution adjustment (x) under any security which is convertible into Common Stock of the Company whether issued prior to or after the Closing Date (except for the shares of Series A Preferred Stock, Series BB Preferred Stock, Series C Preferred Stock or Series D Preferred Stock) or (y) under any right, option or warrant to purchase Common Stock of the Company whether issued prior to or after the Closing Date (other than the Warrants), which (in the case of clause (x) or (y)) results in a reduction in the exercise or purchase price with respect to such security, right, option or warrant to an amount less than the then current Exercise Price or results in an increase in the number of shares obtainable under such security, right, option or warrant which has an effect equivalent to lowering a conversion or exercise price to an amount less than the then current Exercise Price, then an adjustment shall be made under this paragraph I(N) to the then current Exercise Price hereunder. Any such adjustment under this paragraph I(N) shall be whichever of the following results in a lower current Exercise Price: (A) a reduction in the current Exercise Price equal to the percentage reduction in such exercise or purchase price with respect to such security, right, option or warrant, or (B) a reduction in the current Exercise Price which will result in the same percentage increase in the number of shares of Common Stock available under this paragraph I(N) as the percentage increase in the number of shares available under such security, right, option or warrant. Any such adjustment under this paragraph I(N) shall only be made if it would result in a lower current Exercise Price than that which would be determined pursuant to any other antidilution adjustment otherwise required under this paragraph I as a result of the event or circumstance which triggered the adjustment to the security, right, option or warrant described in clause (x) or (y) above and if any such adjustment is so made under this paragraph I(N), then such other antidilution adjustment otherwise required under this paragraph I shall not be made as a result of such event or circumstance. 20 SECTION 2. METHOD OF EXERCISE OF WARRANTS. The Warrants may be exercised by the surrender of this Certificate, with the Form of Subscription attached hereto (or a reasonable facsimile thereof) duly executed by the holder, to the Company at its principal office (or, if such exercise is in connection with an underwritten public offering of Common Stock subject to this Warrant, at the location at which the underwriting agreement requires that such shares be delivered), accompanied by payment of the Exercise Price for the number of shares of Common Stock specified. The Warrants may be exercised for less than the full number of shares of Common Stock called for hereby by surrender of this Certificate in the manner and at the place provided above, accompanied by payment for the number of shares of Common Stock being purchased. If the Warrants should be exercised in part only, the Company shall, upon surrender of this Warrant Certificate for cancellation, execute and deliver a new Warrant Certificate evidencing the right of the holder to purchase the balance of the shares purchasable hereunder. Upon receipt by the Company of this Warrant Certificate as provided in this Section 2, in proper form for exercise, accompanied by the full Exercise Price, for the shares covered by such Form of Subscription, in cash or certified or bank cashier's check or Notes (with an instruction to apply unpaid principal thereof or interest thereon as part or all of the Exercise Price), or by tendering a number of additional Warrants with a Warrant Value at least equal to the Exercise Price or a combination thereof, the holder shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that the stock transfer books of the company shall then be closed or that certificates representing such Common Stock shall not then be actually delivered to the holder. The "Warrant Value" shall mean, with respect to any Warrant the positive remainder, if any, of the Market Price per share minus the then applicable Exercise Price. Warrants may be exercised using either the principal amount of or accrued interest on Notes or both, notwithstanding any subordination provisions relating to the Notes and notwithstanding such Notes are called or scheduled for repayment or prepayment for any reason, until such repayment or prepayment occurs. As soon as practicable after the exercise of these Warrants in whole or in part and, in any event, within ten days thereafter (unless such exercise shall be in connection with a public offering of Common Stock subject to this Warrant, in which event concurrently with such exercise), the Company at its expense will cause to be issued in the name of and delivered to the holder a certificate or certificates for the number of fully paid and nonassessable shares of Common Stock (and any unexercised Warrants) to which the holder shall be entitled upon such exercise. Each certificate for shares of Common Stock so delivered shall be in such denominations as may be requested by the holder and shall be registered in the name of the holder or such other name as the holder may designate. SECTION 3. MUTILATED OR MISSING WARRANT CERTIFICATES. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant Certificate, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification (an unsecured agreement being satisfactory in the case of an institutional holder) and upon surrender and cancellation of this Warrant Certificate, if mutilated, the Company will execute and deliver a new Warrant Certificate of like tenor and date. 21 SECTION 4. MISCELLANEOUS. A. Specific Performance. The parties agree that irreparable damage will result in the event that the agreements set forth in this Warrant Certificate are not specifically enforced, and the parties agree that any damage available at law for a breach of this Warrant Certificate would not be an adequate remedy. Therefore, the provisions hereof and the obligations of the parties hereunder shall be enforceable in a court of equity, or other tribunal with jurisdiction, by a decree of specific performance, and appropriate injunctive relief may be applied for and granted in connection therewith. Such remedies and all other remedies provided for in this Warrant Certificate shall, however, be cumulative and not exclusive and shall be in addition to any other remedies which a party may have under this Warrant Certificate otherwise. SECTION 5. GOVERNING LAW. This Warrant Certificate shall be construed and enforced in accordance with the laws of the State of Delaware, without regard to its choice of law provisions. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed, as of the day and year first above written. CHAMPION HEALTHCARE CORPORATION By: ________________________________ James G. VanDevender Executive Vice President 22 FORM OF SUBSCRIPTION DATE: To: Champion Healthcare Corporation The Undersigned, the holder of the attached Warrants, hereby irrevocably elects to exercise all or part of the purchase right represented by such Warrants for, and to purchase thereunder, _________________________ _ shares of Common Stock of Champion Healthcare Corporation (the "Company") and herewith makes payment of $______________ ________________ to the Company, evidenced by delivery of _____________________________________________________________ , and requests that the certificate of such shares be issued in the name of, and be delivered to ________________________________________________________, whose address is __________________________________________________________________. ____________________________________ (Name of Holder) ____________________________________ (Authorized Signatory) ____________________________________ (Address) EX-11 8 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS 1 FORM 10-K Champion Healthcare Corporation. Exhibit 11 -- Statement RE: Computation of Per Share Earnings
Year Ended December 31, --------------------------------------------- 1995 1994 1993 ---- ---- ---- (Dollars in thousands, except per share data) Primary: -------- Weighted average common shares outstanding 4,255 1,457 1,122 Net effect of dilutive stock options and warrants-- based on the treasury stock method using average market price (1) -- -- -- --------- ---------- --------- Total primary shares 4,255 1,457 1,122 ========= ========== ========= Net income (loss) $ 2,314 $ 2,243 $ (12,153) Preferred stock dividend requirement (11,060) (4,490) (1,589) Accretion of preferred stock issuance cost (271) (220) (63) --------- ---------- --------- Loss applicable to common stock $ (9,017) $ (2,467) $ (13,805) ========= ========== ========= Loss before extraordinary items $ (1.86) $ (1.69) $ (11.21) Extraordinary items (0.26) -- (1.10) ---------- ---------- --------- Loss per share $ (2.12) $ (1.69) $ (12.31) ========== ========== ========= Fully Diluted: ------------- Weighted average common shares outstanding 4,255 1,457 1,122 Net effect of dilutive stock options and warrants-- based on the treasury stock method using the year- end market price, if higher than average market price 729 778 456 Assumed conversion of preferred stock (2) 10,006 8,317 4,335 ---------- ----------- --------- Total fully diluted shares 14,990 10,552 5,913 ========== ========== ========= Net income (loss) $ 2,314 $ 2,243 $ (12,153) ========== ========== ========= Income (loss) before extraordinary items $ 0.23 $ 0.21 $ (1.85) Extraordinary items (0.08) -- (0.21) ---------- ---------- --------- Income (loss) per share $ 0.15 $ 0.21 $ (2.06) ========== ========== =========
(1) The effect of options was anti-dilutive for the years ended December 31, 1995, 1994 and 1993. (2) At December 31, 1995, 1994 and 1993, the Company had 2,605,714, 10,400,725 and 9,564,611 shares of preferred stock outstanding. EX-21 9 SUBSIDIARIES OF THE REGISTRANT 1 Exhibit 21 CHAMPION HEALTHCARE CORPORATION LIST OF SUBSIDIARIES
STATE OF NAME INCORPORATION DOING BUSINESS AS ------------------------------------ --------------- ------------------------------ CHC-A of Midland, Inc. Texas Physicians & Surgeons Hospital CHC-B of Midland, Inc. Texas Westwood Medical Center CHC Finance, Inc. Texas N/A Baytown Medical Center, Inc. Texas BayCoast Medical Center CHC/Psychiatric Healthcare Delaware N/A Corporation Psychiatric Healthcare Corporation Delaware Crossroads Regional Hospital of Louisiana Psychiatric Healthcare Corporation Delaware Lakeland Regional Hospital of Missouri Champion Healthcare Corporation of North Dakota N/A North Dakota, Inc. CareServices of America, Inc. Delaware N/A CHC-Salt Lake City, Inc. Utah Coalville Ambulance Magna Health Center Northeast Family Health Center Park City Ambulance Salt Lake Internal Medicine Salt Lake Regional Medical Center Salt Lake Regional Medical Services Southeast Center for Family Medicine Southwest Center for Family Medicine Southwest Emergency Clinic Sports Medicine and Specialty Clinics Utah Physician Medicine CHC-Jordan Valley, Inc. Utah N/A Champion Healthcare Holdings, Inc. Delaware N/A CHC of Virginia, Inc. Virginia N/A CHC - Prattville, Inc. Alabama N/A CHC - Nursing Center, Inc. Alabama N/A
EX-23 10 CONSENT OF COOPERS & LYBRAND L.L.P 1 Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Champion Healthcare Corporation, Inc. on Form S-8 (File No. 33-62137 and 33-61549) of (i) our report dated February 27, 1996, on our audits of the consolidated financial statements and financial statement schedules of Champion Healthcare Corporation as of December 31, 1995 and 1994, and for the years ended December 31, 1995, 1994, and 1993, (ii) our report dated February 16, 1996 on our audits of the financial statements of Dakota Heartland Health System as of December 31, 1995 and 1994, and for the year ended December 31, 1995, which reports are included in this Annual Report on Form 10-K. Houston, Texas /s/ Coopers & Lybrand L.L.P. March 30, 1996 EX-27 11 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1995. 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 7,583 0 33,262 10,116 3,470 50,579 158,382 10,733 291,260 40,738 162,447 119 46,029 0 31,750 291,260 0 167,520 0 137,895 409 12,016 13,618 3,582 150 3,432 0 (1,118) 0 2,314 (2.12) 0 TOTAL REVENUES INCLUDE OTHER REVENUE OF $4,020,000. OTHER EXPENSES INCLUDE DEPRECIATION AND AMORTIZATION EXPENSE OF $9,290,000. OTHER EXPENSES ALSO INCLUDE A CREDIT OF $8,881,000, REPRESENTING EQUITY IN THE EARNINGS OF DAKOTA HEARTLAND HEALTH SYSTEM. LOSS ON EARLY EXTINGUISHMENT OF DEBT. FULLY DILUTED INCOME PER SHARE IS NOT PRESENTED AS THE RESULTS ARE ANTIDILUTIVE.
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