-----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, UqmppF17GPvMFAgyHXJFWnuoACU6K5AIyNEQEOhyxQmWNTWGsO7pdV9w0TxWyARm H0x2YpEU8qyVJ9HzNzKfRg== 0000950144-97-010485.txt : 19970930 0000950144-97-010485.hdr.sgml : 19970930 ACCESSION NUMBER: 0000950144-97-010485 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970929 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUORUM HEALTH GROUP INC CENTRAL INDEX KEY: 0000854694 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-GENERAL MEDICAL & SURGICAL HOSPITALS, NEC [8062] IRS NUMBER: 621406040 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-22766 FILM NUMBER: 97687601 BUSINESS ADDRESS: STREET 1: 103 CONTINENTAL PL CITY: BRENTWOOD STATE: TN ZIP: 37027 BUSINESS PHONE: 6153717979 FORMER COMPANY: FORMER CONFORMED NAME: HMC HOLDINGS CORP DATE OF NAME CHANGE: 19900701 10-K 1 QUORUM HEALTH GROUP FORM 10-K 1 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED JUNE 30, 1997 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 number 000-22766 QUORUM HEALTH GROUP, INC. (Exact name of registrant as specified in its charter) DELAWARE 62-1406040 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 103 CONTINENTAL PLACE, BRENTWOOD, TENNESSEE 37027 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (615) 371-7979 (COMPANY'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT COMMON STOCK, PAR VALUE $.01 TITLE OF CLASS Indicate by check mark whether the registrant (1) has filed all reports required 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 requirement 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 nonaffiliates of the registrant was $1,696,789,248 as of September 22, 1997. The number of Shares of Common Stock outstanding as of such date was 74,269,087. The following documents are incorporated by reference into Part III, Items 10, 11, 12 and 13 of this Form 10-K: Registrant's definitive proxy materials for its 1997 Annual Meeting of Stockholders. 2 TABLE OF CONTENTS Page ITEM 1. BUSINESS............................................................1 Overview............................................................1 Business Strategy...................................................1 Owned Hospitals.....................................................5 Management Services.................................................8 Government Payment Programs........................................10 Government Regulation..............................................12 Competition........................................................15 National Purchasing Contracts......................................16 Employees and Physicians...........................................17 Professional Liability.............................................18 ITEM 2. PROPERTIES.........................................................18 ITEM 3. LEGAL PROCEEDINGS..................................................18 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................18 ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........................................18 ITEM 6. SELECTED FINANCIAL DATA............................................20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION.................................22 Impact of Acquisitions.............................................22 Results of Operations..............................................22 Liquidity and Capital Resources....................................25 General............................................................29 Inflation..........................................................29 Forward Looking Statements ........................................29 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................30 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.............................30 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS...................................30 ITEM 11. EXECUTIVE COMPENSATION.............................................30 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.....................................................30 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................30 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K...........................................................31 SIGNATURES...............................................................Sig-1 3 PART I ITEM 1. BUSINESS OVERVIEW Quorum Health Group, Inc., through its subsidiaries, owns and operates acute care hospitals and local and regional healthcare systems throughout the United States. At June 30, 1997 Quorum(1) owned, managed under contract or provided consulting services to acute care hospitals in 44 states. At such date, the Company owned and operated nineteen acute care hospitals with 4,205 licensed beds and provided comprehensive management services to 241 hospitals with approximately 27,641 licensed beds. During fiscal 1997, the Company had contracts with 96 additional hospitals to provide selected consulting and support services. Quorum's subsidiary, Quorum Health Resources, Inc., is the largest contract manager of not-for-profit hospitals in the United States. As discussed in more detail under "Owned Hospitals" below, Quorum acquired 5 acute care hospitals during fiscal 1997 and one additional acute care hospital in September 1997. During fiscal 1997, Quorum tendered for and repurchased $97.8 million in principal amount of its $100 million 11 7/8% Senior Subordinated Notes due 2002. Quorum also replaced its secured $600 million revolving credit facility with an unsecured, revolving credit facility which allows Quorum to borrow, repay and reborrow up to $850 million. At June 30, 1997 Quorum had available $487 million under its credit facility. BUSINESS STRATEGY The Company's strategy is (i) to operate with integrity and in compliance with the law, (ii) to continue to improve the financial performance and the scope and quality of healthcare services of its owned hospitals, (iii) to acquire additional acute care hospitals, primarily in medium-sized markets, and to achieve additional market penetration in such markets, (iv) to utilize the Company's network of hospital management professionals to identify strategic hospital acquisitions and other opportunities to create networks with other hospitals and health care providers and (v) to maintain the Company's management contract business as an important line of business and as a source of market knowledge and stable cash flow. The Company believes that its experience and position as a leading provider of management services to acute care hospitals in the United States affords it a competitive advantage in acquiring and operating hospitals and in creating healthcare service networks in local markets. - -------- (1) The term "Quorum" or "the Company" as used herein refers to Quorum Health Group, Inc. and its direct and indirect subsidiaries, affiliated partnerships and affiliated limited liability companies, unless otherwise stated or indicated by context. The term "subsidiaries" as used herein also means affiliated partnerships and affiliated limited liability companies. 1 4 The Quorum Business Ethics Program It is the Company's policy that its business be conducted in compliance with the law. To further this objective, the Company established its Business Ethics Program in 1995. The Program is managed and implemented on a day-to-day basis by the Company's Vice President/Ethics & Business Conduct and her staff who work with the Company's legal department and outside law firms who act as special counsel to the Company, as well as other health care consultants. The Program runs under the oversight of a management Compliance Committee made up of the Company's Chief Executive Officer, Chief Operating Officer, General Counsel, Vice President/Internal Audit and its Vice President/Ethics and Business Conduct. The Program is also overseen by the Audit Committee of the Company's Board of Directors, which reviews with management compliance with the Program, as well as ways to strengthen the Program. The Business Ethics Program was adopted to ensure that high standards of conduct are met in the operation of the Company's business and to ensure that the Company has implemented policies and procedures so that the Company's employees will act in full compliance with all applicable laws, regulations and Company policies. The Company first formally adopted its "Policy on Business Practices" in 1991 as a statement of the proper standards of behavior for its employees. Under the Business Ethics Program, the Policy, which has been revised several times, is distributed annually to all Company employees. The Business Ethics Program provides initial and periodic legal compliance and ethics training to every Company employee. Under the Business Ethics Program, the Company also reviews various areas of the Company's operations and develops and implements, with management, policies and procedures designed to foster compliance with the law. All employees are encouraged to report, without fear of retaliation, any suspected legal or ethical violations to their supervisors, designated compliance officers in the Company's hospitals and divisions or the Company's legal department. In addition, employees may report suspected violations to a toll-free telephone hotline, on an anonymous basis if they desire. The Company is subject to a complex framework of federal, state and local laws. Although the Company believes that it is in material compliance with such laws, a determination that the Company has violated such laws, or even the public announcement that the Company was being investigated concerning possible violations, could have a material adverse effect on the Company. See "Government Regulation" and "Item 3. Legal Proceedings". Operating Strategy for Owned Hospitals The Company believes that its management expertise, access to capital, financial and operating systems, national purchasing strength, and educational and training programs will enable the Company's owned hospitals to compete successfully against other hospitals and health care providers. In addition, the Company believes that its experience in working with physicians, hospital owners and managed care plans enhances the ability of its owned hospitals to attract patients and to recruit and retain physicians and other medical personnel, which are critical to the success of any hospital. In attempting to improve the financial performance of its owned hospitals, the Company typically takes a number of steps to lower operating costs and enhance revenues. Initiatives include application of purchasing economies, enhancement of payment and accounts receivable practices, implementation of flexible staffing plans, improved length of stay management, and increased focus on resource consumption. The Company also generally seeks to improve the operations of its acquired hospitals by expanding and improving the quality of the services provided by a hospital to make it more attractive to physicians, patients and third-party payors. The Company also recruits additional physicians and markets the hospital's services directly to businesses, governments, managed care organizations and others. In addition, the Company seeks opportunities to form networks or alliances with other health care providers in appropriate markets. These network relationships may be in the form of purchase, joint venture, lease, management or other contracts. Acquisition Strategy The hospital industry continues to experience consolidation in response to increasing competitive pressure, as well as pressure on payments from government and private payors. Over the past several years, alternative health care delivery systems, such as home health services, inpatient and outpatient rehabilitation facilities, outpatient surgery and emergency and diagnostic centers, have grown substantially, as health care providers, government agencies and private insurance companies have sought means of providing quality health care in a cost efficient manner. Notwithstanding these developments, the Company believes that patients and physicians will continue to rely on acute care hospitals as the primary source of sophisticated health care. Continuing cost containment measures imposed by the Medicare and Medicaid programs and by private payors over the past several years have placed economic strains on many hospitals as they have attempted to operate within an increasingly competitive environment. The Company believes that these pressures have caused many acute care hospitals to consider other management and ownership alternatives. Some sponsors of tax-exempt acute care hospitals are reassessing their ability to provide health care as independent providers and are seeking to align themselves with larger health systems. The Company anticipates that such reassessments may lead owners to sell or merge a significant number of hospitals and will create opportunities for the Company to make strategic acquisitions of facilities. A significant element of Quorum's strategy is to actively pursue acquisitions of acute care hospitals because it believes that well-positioned, efficiently managed acute care hospitals will continue to be the center of the health care delivery system in the United States. Acquisition candidates will typically be hospitals ranging in size from 100 to 400 beds, that are generally located in markets that will support more than one hospital. The Company's acquisition efforts are directed at identifying hospitals whose financial and operating performance would be enhanced by the Company's management expertise and 2 5 resources. The Company is primarily interested in medium-sized markets with population bases of between 50,000 and 500,000 people. The Company intends to make acquisitions that will either enhance the Company's position within its existing markets or enable it to enter into new markets consistent with its strategic criteria. The Company's acquisitions of Doctors Hospital of Stark County (Massillon, Ohio), Barberton Citizens Hospital (Barberton, Ohio) and Wesley Health System (Hattiesburg, Mississippi) represent entries into such targeted markets. The Company intends to enter markets that are large enough to permit the creation of medical service networks with the ability to effectively and profitably serve patient and payor needs. The Company is primarily interested in markets in which the ownership of one or possibly two hospitals would give the Company sufficient market position to permit the Company to play a significant role in the health care delivery systems in such communities. The Company's acquisition strategy is not directed at markets in which ownership of a greater number of hospitals is required to be an effective competitor in that market. In certain cases, local market conditions make it desirable for hospital owners to integrate their operations with physician groups, outpatient centers or other medical service providers in the community. Integration of services can enable providers to respond to payor demands for more cost-effective care through more effective case management and more extensive use of outpatient services. Integration also allows hospitals and physicians to work in closer collaboration to enhance the quality of care and expand available services, in the local market. In two cases, Mary Black Memorial Hospital (Spartanburg, South Carolina) and ParkView Regional Medical Center (Vicksburg, Mississippi), the Company and local physicians have consolidated the operations of the acute care hospital and their respective practices under common ownership. Although the Company concentrates its acquisition efforts primarily in medium-sized markets, attractive acquisition opportunities may also arise in other smaller markets. These smaller market hospitals may be in proximity to one of the Company's medium-sized markets or in a separate, independent market. The Company's acquisition of Carolinas Hospital System-Kingstree (Kingstree, South Carolina) and Clinton County Hospital (Frankfort, Indiana) are examples of such smaller market purchases. The Company believes that its nationwide network of hospital management employees provides a competitive advantage in identifying suitable hospital acquisition candidates and in understanding the local markets in which such hospitals operate. The Company's experience has been that the financial performance and prospects of hospitals within the size range and in the markets targeted by the Company vary widely, and the Company believes that acquisition prices will vary accordingly. Over time, the Company's results of operations are positively affected by acquisitions of acute care hospitals. The Company has completed acquisitions of several acute care hospitals in recent years, and intends to pursue additional acquisitions. There can be no assurance that the Company will be able to realize expected operating and economic efficiencies from its recent acquisitions or from any future acquisitions. In addition, there can be no assurance that the Company will be able to locate suitable acquisition candidates in the future, consummate acquisitions on favorable terms or successfully integrate newly acquired businesses and facilities with the Company's operations. In particular, some not-for-profit hospitals may be unwilling to consider selling to a for-profit purchaser. Additionally, sales of not-for-profit hospitals to for-profit buyers are coming under increasing scrutiny by state attorneys general in a number of states. Such reviews could result in lengthening the time required to complete 3 6 acquisitions, and could make not-for-profit hospitals less willing to sell to for-profit buyers. The Company has not experienced negative effects from such reviews in prior acquisitions. Management Services Strategy The Company's strategy for the growth of its management services business includes continuing to utilize its national network of hospital employees for the generation of leads for new contract clients; targeting larger hospitals for contract relationships; and pursuing network, managed care and joint venture opportunities with its client hospitals, other healthcare providers, and insurers. As the hospital industry consolidates, the demand for the Company's management services may be affected by the reduction in the number of independent hospitals. To minimize the effects of such consolidation, the Company's strategy for increasing the revenue and profitability of its management services business involves providing additional services to existing managed hospitals, seeking appropriate fee increases, and developing and marketing new services, in addition to obtaining new contracts. 4 7 OWNED HOSPITALS Acquisitions The Company acquired its first acute care hospital in fiscal 1991. The Company acquired three facilities in fiscal 1992 (one of which has been divested), eleven facilities in fiscal 1994 (ten of which were acquired in a single transaction of which five have been divested and two exchanged for two other hospitals), three facilities in fiscal 1995, two facilities in fiscal 1996, and five facilities during fiscal 1997. In September 1997, the Company acquired Methodist Hospital, a 211-bed acute care hospital in Hattiesburg, Mississippi. As of September 15, 1997, the Company owned and operated twenty hospitals. Of the Company's owned hospitals, seventeen are located in smaller or medium-sized markets and three are located in the larger markets of Columbus, Ohio; Las Vegas, Nevada; and Omaha, Nebraska. The Company has agreed to sell Midlands Hospital (Omaha, Nebraska), and expects the sale will be completed in the fall of 1997. Operations The Company's owned hospitals are general acute care hospitals and, as such, offer a wide range of facilities and inpatient medical services such as operating/recovery rooms, intensive care and coronary care units, diagnostic services and emergency room services, as well as outpatient services such as same-day surgery, laboratory, pharmacy and rehabilitation services and respiratory therapy. The Company's hospitals provide certain specialty services which differ at each hospital, but which include cancer treatment, open heart surgery, skilled nursing, treatment for chemical dependency and home health care services. The Company's owned hospitals are not engaged in extensive medical research or educational programs. The following table sets forth certain information with respect to each of the Company's owned hospitals as of June 30, 1997.
LICENSED BEDS IN DATE OF HOSPITAL AND LOCATION BEDS(1) SERVICE(2) ACQUISITION - --------------------- ------- ---------- ----------- ParkView Regional Medical Center 231 193 November 1990 Vicksburg, Mississippi(3) Park Medical Center 404 165 February 1992 Columbus, Ohio Flowers Hospital 400 400 June 1992 Dothan, Alabama Desert Springs Hospital 241 241 October 1993 Las Vegas, Nevada Macon Northside Hospital 103 103 October 1993 Macon, Georgia Middle Georgia Hospital 119 119 October 1993 Macon, Georgia Gadsden Regional Medical Center 346 257 December 1993 Gadsden, Alabama Abilene Regional Medical Center 160 160 May 1994 Abilene, Texas Medical Center Enterprise 135 117 May 1994 Enterprise, Alabama Midlands Community Hospital 208 160 August 1994 Papillion, Nebraska Carolinas Hospital System 424 380 February 1995 Florence, South Carolina Carolinas Hospital System -- Lake City(4) 48 40 June 1995 Lake City, South Carolina Lutheran Hospital of Indiana 377 357 August 1995 Fort Wayne, Indiana Jacksonville Hospital 89 56 June 1996 Jacksonville, Alabama
5 8 Mary Black Memorial Hospital 229 193 July 1996 Spartanburg, South Carolina (5) Carolinas Hospital System -- Kingstree (4) 78 40 August 1996 Kingstree, South Carolina Doctors Hospital of Stark County 162 162 November 1996 Massillon, Ohio (6) Barberton Citizens Hospital 363 285 December 1996 Barberton, Ohio (6) Clinton County Hospital 88 53 June 1997 Frankfort, Indiana (4)
(1) Licensed beds are the number of beds for which a facility has been licensed by the appropriate state agency regardless of whether the beds are actually available for patient use. (2) Beds in service are the number of beds that are readily available for patient use. (3) Owned by a corporation in which a Quorum subsidiary owns a 68% interest and is the manager. (4) Held pursuant to operating leases, each of which has an initial term of ten years and two renewal options of five years each, except Clinton County Hospital which provides for two renewal options of ten years each. (5) Owned by a limited liability company in which a Quorum subsidiary owns an 89% interest and is the managing partner. (6) Owned by limited liability companies in which Quorum subsidiaries own a 95% interest and are the managing members. Selected Operating Statistics The following table sets forth certain operating statistics for the Company's owned hospitals for each of the years presented. The statistics for the year ended June 30, 1997 include a full year of operations for fifteen hospitals and partial periods for four hospitals acquired during such year. The statistics for the year ended June 30, 1996 include a full year of operations for twelve hospitals and partial periods for two hospitals acquired and one hospital divested during such year. The statistics for the year ended June 30, 1995 include a full year of operations for ten hospitals and partial periods for three hospitals acquired during such year. The results for the year ended June 30, 1994 include a full year of operations for four hospitals and partial periods for nine hospitals acquired, three of which were divested or exchanged during such year. The results for the year ended June 30, 1993 include a full year of operations for all four of the hospitals owned by the Company in that period.
YEAR ENDED JUNE 30 ------------------ 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Number of hospitals(1) 19 14 13 10 4 Licensed beds(1)(2) 4,205 3,281 2,909 2,229 1,041 Beds in service(1)(3) 3,481 2,691 2,368 1,796 705 Admissions(4) 119,551 94,872 73,338 55,522 26,331 Average length of stay (days) 5.6 5.8 6.2 6.0 6.4 Patient days(5) 666,353 548,772 451,501 335,807 169,669 Adjusted patient days(6) 1,046,657 830,955 665,657 480,098 254,349 Occupancy rate (licensed beds)(7) 46.8% 46.2% 47.6% 47.6% 44.7% Occupancy rate (beds in service)(8) 56.5% 56.2% 58.9% 61.5% 65.5%
6 9 Gross inpatient revenue (in thousands) $1,447,771 $1,115,363 $888,811 $622,037 $239,848 Gross outpatient revenue (in thousands) $826,279 $ 573,529 $421,582 $267,278 $119,706
(1) At end of period. (2) Licensed beds are the number of beds for which a facility has been licensed by the appropriate state agency regardless of whether the beds are actually available for patient use. (3) Beds in service are the number of beds that are readily available for patient use. (4) Admissions represent the number of patients admitted for inpatient treatment. (5) Patient days represent the total number of days of patient care provided to inpatients. (6) Adjusted patient days have been calculated based on an industry-accepted, revenue-based formula (multiplying actual patient days by the sum of gross inpatient revenue and gross outpatient revenue and dividing the result by gross inpatient revenue) to reflect an approximation of the number of inpatients and outpatients served. (7) Percentages are calculated by dividing average daily census by weighted average licensed beds. (8) Percentages are calculated by dividing average daily census by weighted average beds in service. Sources of Revenue The sources of the Company's owned hospital revenues are charges related to the services provided by the hospitals and their staffs, such as radiology, operating room, pharmacy, physiotherapy and laboratory procedures, and basic charges for the hospital room and related services such as general nursing care, meals, maintenance and housekeeping. The Company's hospitals receive payments for health care services from (i) the federal Medicare program, (ii) state Medicaid programs, (iii) private health care insurance carriers, HMOs, PPOs and other managed care programs, and self-insured employers, (iv) the Civilian Health and Medical Program of the Uniformed Services ("CHAMPUS"), and (v) patients directly. The following table sets forth the percentage of gross revenue (revenue before deducting contractual adjustments, policy and charity discounts) of the Company's owned hospitals from Medicare, Medicaid and other sources for the periods indicated. The data for the periods presented are not strictly comparable due to the significant effect that acquisitions have had on the Company. See "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition".
YEAR ENDED JUNE 30 ------------------ 1997 1996 1995 ---- ---- ---- Medicare 47.5% 48.5% 49.8% Medicaid 7.6% 7.5 7.4 Other sources 44.9% 44.0 42.8 ----- ---- ---- Total 100.0% 100.0% 100.0% ====== ====== ======
7 10 Amounts received from certain payors, such as Medicare, Medicaid and managed care organizations, such as HMOs and PPOs, generally are less than the hospitals' customary charges for the services provided. Patients are generally not responsible for any difference between customary hospital charges and amounts paid under these programs for such services, but are responsible to the extent of any exclusions, deductibles or coinsurance features of their coverage. As a result of initiatives to control health care costs, an increasing number of third-party payors are negotiating the amounts they will pay for services performed rather than simply paying health care providers the amounts billed. The gross revenues of each of the Company's owned hospitals are affected by a number of factors. Among these are inpatient occupancy levels, the type of ancillary services and therapy programs ordered by physicians for their hospital patients, the volume of outpatient procedures and the charges for the services provided by the hospital. Payment rates for inpatient routine services vary significantly depending on the type of service (e.g., acute care, intensive care or psychiatric) and the geographic location of the hospital. The Company has experienced an increase in the percentage of patient revenues attributable to outpatient services in recent years. This increase is primarily the result of advances in technology (which allow more services to be provided on an outpatient basis); increased pressures from Medicare, Medicaid, HMOs, PPOs and insurers to reduce hospital stays and provide services, where possible, on a less expensive outpatient basis and the integration of physician practices into certain of the Company's hospitals. The Company's experience with respect to increased outpatient volume mirrors the trend in the hospital industry. All of the Company's hospitals (as do most acute care hospitals) derive a substantial portion of their revenue from the Medicare and Medicaid programs, which pay participating health care providers for covered services rendered and items furnished to qualified beneficiaries. Both of these are governmental programs which are heavily regulated and use complex methods for determining payments to providers. These programs are subject to frequent changes which in recent years have reduced, and in future years are expected to continue to reduce, payments to hospitals. In light of its hospitals' high percentage of Medicare and Medicaid patients, the Company's ability in the future to operate its business successfully will depend in large measure on its ability to adapt to changes in these programs. See "Government Payment Programs". In addition, private payors, especially managed care payors, are also attempting to reduce payments to hospitals by demanding discounted fee structures or per diem payment rates, instituting prospective payment or DRG-based systems or, in some cases, requiring the assumption by health care providers of all or a portion of the financial risk through prepaid capitation arrangements. To the extent such efforts are successful, and to the extent that private payors fail to pay amounts which are adequate to cover the costs of providing services to their beneficiaries, such efforts may have a negative impact on the results of operations of the Company's hospitals. MANAGEMENT SERVICES The Company's management services business consists of managing hospitals owned by others under management contracts. In addition, the Company offers a variety of operational and strategic consulting services and related educational and management programs to meet the specific needs of hospitals that may or may not be part of the Company's contract management program. The Company attempts to focus such consulting services on health care providers located in identified strategic markets. During fiscal 1997, fees received by the Company's management 8 11 services business accounted for approximately 10% of the Company's net operating revenues. With 241 managed hospitals as of June 30, 1997, the Company is the largest provider of management services to acute care hospitals in the United States. Based on industry data published in 1997, the second and third ranked contract management organizations managed 52 and 22 hospitals, respectively. The Company believes that its industry reputation and leading market position provide a competitive advantage in seeking additional management contracts. The Company provides hospital owners with a comprehensive range of management and professional services. Upon entering into a management contract, the Company assesses the operations of the hospital and, based on such assessment, develops a management plan tailored to the specific needs of the hospital. The Company annually reviews the management plan with the hospital's governing board and prepares an annual progress report to identify cost savings and achievements. To implement the management plan adopted for each hospital, the Company provides the hospital with the services of a hospital administrator and, typically, a chief financial officer. Although the hospital administrator and chief financial officer are employees of the Company, such employees remain under the direction and control of the client hospital's governing board, and the balance of the hospital staff remain employees of the hospital, under the control and supervision of the hospital. The Company's hospital management team is supported by the Company's regional and corporate management staff, which has broad experience in managing hospitals of all sizes in diverse markets throughout the United States. Such locations also afford the Company a significant marketing advantage in responding to new business opportunities because the Company's staff is knowledgeable of the economic, demographic and regulatory factors affecting local markets. See "Competition". The Company's hospital management contracts generally provide for a term of three to five years. As of the end of each of the last two fiscal years of the Company, the rate of attrition for the management contracts at the commencement of such period has averaged approximately 7.5% per year. Over the same period, the Company has generally been able to offset the effects of such attrition by obtaining additional management contracts and increasing revenue from other sources. The Company believes that, generally, the fees paid under its management contracts are not directly affected by hospital industry trends. Management contract fees are based on amounts agreed upon by the Company and the hospital's governing board and are usually not based on census levels, payment programs, revenue of the hospital or other variables. As the agent of the hospital's governing board, the Company is not directly responsible for hospital licensure, liability coverage or capital expenditures or for other functions normally the responsibility of the governing board. The Company is not obligated to fund and is not responsible for paying any hospital expenses. In providing its management services, the Company is not considered a health care provider for regulatory purposes. See "Government Regulation". 9 12 GOVERNMENT PAYMENT PROGRAMS The federal government provides two major health care programs: (1) the Medicare program for the elderly and disabled, and (2) the Medicaid program for the poor. Medicare is the health insurance component of Social Security, while Medicaid is a program that differs considerably from state to state. Most hospitals, including the Company's owned hospitals, derive a substantial portion of their revenue from the Medicare and Medicaid programs. Both programs were enacted in 1965 and were to pay participating hospitals for providing covered services to beneficiaries. Legislative action and related regulations during the past thirty years have resulted in significant changes in the way these programs pay hospitals for services provided. In recent years most of these changes have reduced payments to hospitals. Medicare Medicare is a federal health insurance program primarily designed for individuals entitled to Social Security who are age 65 or older. The Medicare program consists of Part A and Part B. Part A covers inpatient hospital services and services furnished by certain others, such as nursing homes and home health agencies. Part B covers the services of doctors, suppliers of medical items and outpatient hospital services. The Health Care Financing Administration ("HCFA") administers the Medicare program through local intermediaries and carriers. In 1983, Congress adopted a prospective payment system ("PPS") for most Medicare routine and ancillary inpatient hospital operating costs. Under this system, hospital discharges are classified into 495 diagnosis related group categories (known as "DRG's"), which categorize illnesses and injuries according to estimated intensity of hospital resources necessary to furnish care. A hospital's DRG payment is determined by multiplying a standard federal rate by the weight assigned to the applicable DRG. Additional add-on payments are made for: (1) hospital stays that are extremely costly (called outliers), (2) treating a large number of indigent patients (called disproportionate share), and (3) the added cost incurred as a result of residency training (called indirect medical education). There are two standard federal rates: one for large metropolitan areas (population over one million) and one for all other areas. The applicable rate is adjusted by a local "wage index", as provided by HCFA, prior to being multiplied by the applicable DRG weight. At the beginning of PPS, Congress intended to increase these standard amounts for increases in the cost of the mix of goods and services used to provide hospital care (the "Market Basket"). In practice, the DRG rate increases have seldom matched increases in the Market Basket. In the current Federal fiscal year ("FY") 1997, hospitals received an effective DRG rate increase equal to Market Basket minus .7%. The Balanced Budget Act of 1997 (the "Budget Act") provides for a freeze in DRG rates through September 30, 1998. Over the following four Federal fiscal years, the Budget Act calls for increases in DRG rates equal to the Market Basket minus 1.9%, 1.8%, 1.1% and 1.1%, respectively. The Company cannot predict how the Budget Act will affect the profitability of its health care facilities. See "Owned Hospitals-Sources of Revenue". Medicare makes separate payments to hospitals for capital costs, and since FY 1992 these payments have also been made on a PPS basis. Capital related costs generally include depreciation, capital interest, lease and rental expense, property taxes and insurance related to the plant and equipment. Under this system hospitals are to transition to a standard federal rate for capital over 10 13 a ten year period. The standard federal rate for capital is used much like the standard DRG rate described above in that the federal rate is multiplied by the DRG weight to arrive at a predetermined payment. Hospitals whose cost was less than the "base year" federal rate, transition up to the federal rate over a ten year period. Hospitals whose cost was over the "base year" federal rate, transition down to the federal rate over a ten year period. The latter hospitals can transition to 100% of the federal rate sooner, if they so chose. The Budget Act provides for Medicare capital rates to be reduced in the aggregate by approximately 15.3% beginning in FY 1998. Approximately 90% of this reduction represents a permanent decrease in the capital payment rates. The Budget Act also eliminates the "formula driven overpayment" (the "FDO") for services rendered on and after October 1, 1997. The FDO represents payments for outpatient services which were greater than those anticipated when Medicare changed the payment methodology for such services. The Budget Act also made numerous changes to the payment formulas for other parts of the Medicare program in such areas as "disproportionate share" and "bad debt" payments and payments for skilled nursing services, psychiatric and rehabilitation units in acute care hospitals, and home health agencies. In general, the Company anticipates that all of the changes resulting from the Budget Act as described above will result in lower payments from the Medicare program. The Budget Act projects that Medicare spending will be reduced by $116 billion over the next five years as part of an effort to balance the Federal budget by 2002. A substantial portion of this is achieved by reduced payments to hospitals. Additional spending reductions may be required to balance the Federal budget, some of which may come from the Medicare program. Furthermore, reductions in Medicare spending, or other changes to the program, may be required to maintain the solvency of the Medicare program or the Social Security system as a whole. While the Company expects further reductions in Medicare payments, it cannot predict the timing, magnitude or effect of such reductions. Medicaid Medicaid funding is shared between the state and the federal government. On the average, Medicaid funding is split evenly between the state and the Federal government with the Federal government "matching" state spending. Although each state must meet federal guidelines, the states have wide latitude as it pertains to additional individuals covered and additional benefits provided. Hospital payment methodologies vary from state to state but most pay for inpatient services based on DRGs and outpatient services based on a fee schedule. Generally, Medicaid payment is less than the cost of providing the services. States receive a significant amount of funding from the Federal government to make payments to hospitals treating a large number of Medicaid and indigent or low income patients. States vary in how they distribute these funds. The Budget Act calls for a reduction of approximately $12 billion in these payments over a five year period. The federal government and the states continue to look for ways to reduce, or limit increases in, Medicaid spending. The Company cannot predict what actions the federal government or the states may take, and therefore is unable to predict the impact on the Company of changes to the Medicaid program. See "Owned Hospitals-Sources of Revenue" and "Government Payment Programs-Medicare". 11 14 Cost Reports The Company's facilities are required to file cost reports annually with Medicare and Medicaid. These reports are subject to audit and often require several years before a final settlement is reached. Preparation of cost reports is subject to complex regulations, administrative rulings and fiscal intermediary interpretations, all of which change frequently. Management believes adequate provision has been made in its financial statements for any retroactive adjustment resulting from such final settlement. Until final settlement, however, significant issues remain unresolved and previously determined allowances could be more or less than ultimately required. See "Government Regulation-False Claims." GOVERNMENT REGULATION The health care industry is subject to extensive governmental regulation at the federal, state and local levels. These laws and regulations require that hospitals meet various detailed standards relating to the adequacy of medical care, equipment, personnel, operating policies and procedures, maintenance of adequate records, utilization, rate setting, compliance with building codes and environmental protection laws, and numerous other matters. There are also extensive and complex regulations governing a hospital's participation in government programs such as Medicare and Medicaid. Failure to comply with applicable laws and regulations can expose the Company to criminal penalties and civil sanctions, and jeopardize a hospital's licensure, ability to participate in the Medicare and Medicaid and other government programs and ability to operate as a hospital. In recent years there has been increased scrutiny of the health care industry, in part due to escalating health care costs, particularly in the Medicare program, and increasing concern over the Federal budget deficit. The federal government and a number of states are rapidly increasing the resources devoted to investigating allegations of fraud and abuse in the Medicare and Medicaid programs. At the same time, regulatory and law enforcement authorities are taking an increasingly strict view of the requirements imposed on providers by the Social Security Act and Medicare and Medicaid regulations. False Claims The Social Security Act imposes criminal and civil penalties for willfully making false claims to Medicare and Medicaid for services not rendered or for misrepresenting actual services rendered in order to obtain higher payment. Careful and accurate coding and billing of claims for payment is required in order to avoid liability under the federal false claims statute. At the same time, the complexity of the regulations, the dependence of hospitals on physician documentation of medical records and the subjective judgment involved make accurate billing difficult. Violation of the federal false claims statute may subject a hospital to treble damages, fines of up to $10,000 per false claim and exclusion from the Medicare and Medicaid programs. See "Government Payment Programs-Cost Reports". Federal and State Fraud and Abuse and Anti-Referral Laws The Social Security Act also prohibits offering, paying, soliciting or receiving renumeration intended to induce referrals of patients whose care is paid for by the Medicare or Medicaid programs. Thus, financial arrangements between hospitals and persons, such as physicians, who are in a position to refer patients or induce the acquisition of any goods or services paid for by the Medicare or Medicaid programs, must comply with the "fraud and abuse" anti-kickback provisions of the Social Security Act (the "Antifraud Amendments"). In 12 15 addition to felony criminal penalties (fines of up to $25,000 and imprisonment for up to five years per referral), the Social Security Act establishes civil monetary penalties and the sanction of excluding violators from Medicare and Medicaid participation. The Antifraud Amendments have been interpreted broadly by the federal regulators and the courts to prohibit the intentional payment of anything of value if even one purpose of the payment is to influence the referral of Medicare or Medicaid business. Many commonplace commercial arrangements between hospitals and physicians could be considered by the government to violate this broad interpretation of the Antifraud Amendments. Many states have also passed laws similar to the Antifraud Amendments, which apply regardless of the source of payment. Self-Referral Prohibitions Portions of the Budget Reconciliation Act of 1993 (the "1993 Act")also affect providers who receive payments under the Medicare and Medicaid programs. One of the provisions of the 1993 Act is known as "Stark II", and is an expansion of the previous prohibition on self-referral by physicians. "Stark I" prohibited physicians from referring their Medicare patients to any clinical laboratory in which they or any member of their immediate family had a financial interest. "Stark II" expanded the prohibited patient base to both Medicare and Medicaid patients, and expanded the prohibited health care service from clinical laboratories to add a number of "designated health care services", including home health and inpatient and outpatient hospital services. There are certain exceptions in the 1993 Act for, among other things, prepaid health plans and ownership by a referring physician of an investment interest in an entire hospital, as opposed to ownership of a subdivision or department of a hospital. Currently, physicians hold ownership interests in two of the Company's hospitals. To date, no regulations have been promulgated interpreting "Stark II". Sanctions for violating "Stark I" or "Stark II" include civil money penalties up to $15,000 per prohibited service provided, assessments equal to 200% of the dollar value on each such service provided and exclusion from the Medicare and Medicaid programs. In addition to the federal prohibition, many states have enacted similar anti-self-referral statutes applicable to all patient referrals, including private pay patients, as well as Medicare and Medicaid patients. Although the Company exercises care in an effort to conduct its business in compliance with all applicable laws and to structure its arrangements with health care providers to comply with the Antifraud Amendments and Stark I and II, there can be no assurance that such laws will ultimately be interpreted in a manner consistent with the practices of the Company. The Company could be materially adversely affected if it were to be found in violation of the false claims act, the Antifraud Amendments or "Stark I/Stark II". See "Business Strategy-The Quorum Business Ethics Program" and "Item 3. Legal Proceedings". Health Insurance Portability and Accountability Act of 1996 The Health Insurance Portability and Accountability Act of 1996 ("HIPPA") became law in August 1996. The new law includes a number of amendments or supplements to the Antifraud Amendments. It also contains provisions relating to portability of health insurance coverage and limitations on preexisting condition exclusions. Most of the provisions of HIPPA became effective January 1, 1997. HIPPA is intended to enhance federal health care law enforcement by creating and funding three new health care fraud and abuse enforcement programs: The Fraud and Abuse Control Program, The Medicare Integrity Program and the Beneficiary Incentive Program. The Fraud and Abuse Control Program calls for the 13 16 coordination of federal, state and local authorities to control fraud and abuse with respect to not only Medicare and Medicaid but, for the first time, with respect to private health insurance plans as well. The Medicare Integrity Program directs the Department of Health and Human Services ("HHS") to enter into separate contracts with private entities to carry out certain fraud and abuse detection activities. Through the Beneficiary Incentive Program, HIPPA authorizes the Secretary of HHS to provide payments to individuals who (i) report information leading to the imposition of civil monetary penalties under the fraud and abuse laws or (ii) make suggestions that result in Medicare and Medicaid program savings. Under HIPPA, health care fraud, now defined as knowingly and willfully executing or attempting to execute a "scheme or device" to defraud any health care benefit program, is made a federal criminal offense. In addition, for the first time, federal enforcement officials will have the ability to exclude from Medicare and Medicaid any investors, officers and managing employees associated with business entities that have committed health care fraud, even if the investor, officer or employee had no knowledge of the fraud. HIPPA also establishes a new violation for the payment of inducements to Medicare and Medicaid beneficiaries in order to influence those beneficiaries to order or receive services from a particular provider or practitioner. HIPPA also required HHS to establish a national health care fraud and abuse data collection program. This program will collect reports of final adverse actions (including civil, criminal, license and certification sanctions and any other publicly available negative findings) against health care providers, suppliers or licensed practitioners. Governmental agencies and private plans will both report and have access to the information collected by the program. Also, HIPAA requires the Secretary of HHS to issue advisory opinions with respect to whether particular transactions violate the Medicare and Medicaid anti-kickback laws. Certificate of Need Laws State certificate of need laws, which vary from state to state, may place limitations on a hospital's ability to expand services, add new equipment, or construct new facilities. However, the Company has not experienced, and does not expect to experience, any material adverse effects from state certificate of need requirements or from the imposition, elimination or relaxation of such requirements. See "Competition". Hospital Licensing Hospitals are subject to periodic inspection by federal, state and local authorities in order to determine their compliance with applicable regulations and standards. Such compliance must be demonstrated to maintain licensure and to participate as a certified health care provider in the Medicare and Medicaid programs. All of the Company's owned hospitals are licensed under appropriate state laws and are certified to participate in the Medicare program. In addition, it is a policy of the Company that all its owned hospitals apply for accreditation by the appropriate accreditation body, such as the Joint Commission on Accreditation of Healthcare Organizations or the American Osteopathic Association. All of the Company's owned hospitals are so accredited with the exception of Carolinas Hospital Systems-Lake City and -Kingstree, which are in the process of applying for accreditation in early 1998. Accreditation indicates that a hospital meets certain minimum standards and generally satisfies the applicable health and administrative standards for Medicare certification, although accreditation is not required to obtain Medicare certification. The Company believes that its owned hospitals are in substantial compliance with current federal, state, local and independent review body regulations and 14 17 standards. However, these requirements are subject to administrative and judicial interpretation and legislative change, and it may be necessary for the Company to effect changes in its facilities, equipment, personnel and services in order to remain qualified. Although the Company intends to continue to maintain its licensure and certifications, there can be no assurance that its owned hospitals will be able to comply with all future requirements or that failure to so comply would not adversely affect the Company. COMPETITION Owned Hospitals The hospital industry is highly competitive. Moreover, competition among hospitals and other health care providers for patients and physicians has intensified in recent years as hospital occupancy rates have declined in the United States as a result of cost containment pressures from both government and private payors, changing technology, changes in government regulation, changes in practice patterns (e.g., shifting from inpatient to outpatient treatments) and other factors. These changes have led to significant unused inpatient hospital capacity. New competitive strategies of hospitals and other health care providers place increasing emphasis on the use of alternative health care delivery systems (such as home health services, outpatient surgery and emergency and diagnostic centers) that eliminate or reduce lengths of hospital stays. In some cases, these strategies include the use of larger regional facilities that employ equipment and services more specialized than those available at the Company's owned hospitals. The Company expects that these competitive trends will continue, and may intensify. The areas served by the Company's hospitals are also served by other hospitals or facilities that provide inpatient or outpatient services similar to those offered by the Company's hospitals. In some cases, competing hospitals are more established, better equipped or offer a wider range of services than those of the Company or have financial resources greater than those of the Company. In addition, certain competing hospitals are owned by tax-supported government agencies or by tax-exempt, not-for-profit corporations that may be supported by endowments and charitable contributions. The competitive position of a hospital may also be affected by its ability to negotiate service contracts with managed care organizations, including HMOs and PPOs, and employees. These organizations attempt to direct and control the use of hospital services through managed care programs and discounts from established charges. The Company's owned hospitals are generally located in less developed managed care markets, but all currently have contracts with HMOs and PPOs. The number and quality of the physicians on a hospital's staff is an important factor in providing a competitive advantage to a hospital because physicians direct the majority of hospital admissions and services. Admitting physicians are usually on the medical staffs of several hospitals in an area; therefore, the Company attempts to attract its physicians' patient referrals to the Company's hospital by offering quality services, current technological capabilities, convenient location, quality facilities and equipment, and participation in payor contracts. The Company believes that its hospitals compete within local markets on the basis of many factors, including the quality of care, ability to attract and retain qualified physicians, location, breadth of services and technology offered 15 18 and prices charged. The Company's competition ranges from large multi-facility companies to small single-hospital owners and may be investor-owned or non-profit. The Company's hospitals must also compete with the services available at outpatient surgery and diagnostic centers, physicians' offices and other alternative delivery sites. State certificate of need laws, which place limitations on a hospital's ability to expand hospital services and to add new equipment without regulatory approval, may have the effect of restricting competition. The application process for approval of covered services, facilities, changes in operations and capital expenditures is, therefore, highly competitive. In those states that do not have a certificate of need law or that set relatively high levels of expenditures before such expenditures become reviewable by state authorities, competition in the form of new services, facilities and capital spending is more prevalent. With the exception of Texas and Indiana, each of the states in which the Company owns hospitals has certificate of need requirements, and the Company may acquire hospitals in other states having such requirements. The Company has not experienced, and does not expect to experience, any material adverse effects from state certificate of need requirements or from the imposition, elimination or relaxation of such requirements. See "Government Regulation". Management Services In seeking management services, hospitals have various alternatives to those offered by the Company and other hospital management companies. Hospitals managed by hospital management companies represent less than 10% of the total acute care hospitals in the United States, primarily because most hospitals have their own management staff. Some hospitals choose to obtain management services from the many large, tertiary care facilities that create referral networks with smaller surrounding hospitals. NATIONAL PURCHASING CONTRACTS As a result of its management and consulting contracts with hospitals throughout the United States, the Company has many opportunities to provide a wide range of national purchasing arrangements with various vendors of medical supplies, equipment, pharmaceuticals and certain services. The collective buying power of the Company's managed hospitals has allowed many of such hospitals to benefit from these arrangements through volume discounts, rebates and other cost savings. The Company's owned hospitals also benefit from similar savings. In some cases the Company has the opportunity to earn administrative fees from vendors in return for the Company's group purchasing activities. The Company annually notifies each managed hospital of any administrative fees the Company receives under its purchasing contracts as a result of the hospital's purchases. During fiscal 1996, the Company entered into a five-year purchasing alliance with Premier, Inc. ("Premier"), formerly APS Health- care Systems, a for-profit corporation which provides group purchasing and other services to its clients. The purchasing alliance combines the purchasing power of the Company's owned and managed facilities with the purchasing power of the more than 1,700 hospitals affiliated with the Premier program. The increased purchasing power has created opportunities for reductions in the prices of hospital supplies, equipment, and pharmaceuticals to the Company's hospitals. Under the Premier purchasing alliance, the Company has agreed to use Premier as its exclusive national group purchasing organization. The Company received $6.9 million in administrative fees from Premier with respect to calendar year 1996 supply purchases. Pursuant to an amendment entered into in June 1997, Premier has agreed to pay the Company an annual administrative fee of $6.4 million if the amount 16 19 paid by the Company's owned and managed hospitals for products purchased through the purchasing alliance satisfies a minimum threshold. The minimum threshold is $400 million for 1997 and escalates 10% annually. The administrative fee is adjusted proportionately for purchases above or below the threshold. EMPLOYEES AND PHYSICIANS As of June 30, 1997, the Company's owned facilities employed approximately 17,000 employees. As of such date, the Company had 118 employees on its corporate staff and approximately 817 employees providing hospital management and consulting services. The Company's employees are not represented by any labor union, with the exception of approximately 360 registered nurses at Desert Springs Hospital and approximately 215 employees at Barberton Citizens Hospital who are covered by union contracts. The Company believes that its relations with its employees are generally good. Physicians on the medical staffs of the Company's hospitals are generally not employees of the Company, however, a small number of physicians, have been historically employed by, or have contracted with, the Company primarily to staff emergency rooms, to provide certain ancillary services and to serve in administrative capacities, such as directors of special services. Recently, the Company also has employed physicians, primarily primary care physicians, in selected markets. In addition, physicians are employees of the entities formed by the consolidations of two of the Company's hospitals with physician practices in their respective markets. Members of the medical staffs of the Company's hospitals often also are members of the medical staffs of hospitals not owned by the Company and each may terminate his or her affiliation with a Company hospital at any time. Generally, a patient is admitted to a hospital only at the request of a member of the hospital's medical staff. Medical staff members, including physicians employed by the Company, have sole discretion over where to admit their patients. PROFESSIONAL LIABILITY As part of the business of owning and managing hospitals, the Company is subject to the assertion of liability for events occurring as part of the ordinary course of hospital operations. To cover claims arising out of the operations of both managed and owned hospitals, the Company generally maintains professional malpractice liability insurance and general liability insurance on a claims made basis in amounts which management believes to be sufficient for its operations. The Company also maintains umbrella coverage. At various times in the past, the cost of malpractice and other liability insurance has risen significantly. Therefore, there can be no assurance that such insurance will continue to be available or will be available at a reasonable price for the Company to maintain adequate levels of insurance. Through its typical hospital management contract, the Company attempts to protect itself from such liability by requiring the hospital to maintain certain specified limits of insurance coverage, including professional liability, comprehensive general liability, workers' compensation and fidelity insurance, and by requiring the hospital to name the Company as an additional insured party on the hospital's professional and comprehensive general liability policies. The Company's management contracts also usually provide for the indemnification of the Company by the hospital against claims that arise out of the hospital's activities. The indemnification provisions help protect the Company against claims not covered by insurance, such as some medical staff antitrust claims and employment-related claims. 17 20 Although the majority of the Company's management contracts contain the Company's standard insurance and indemnification provisions, a small portion do not, for various reasons. In some states, state law limits a public hospital's ability to indemnify a private company. In those cases, the Company attempts to negotiate for the maximum protection permitted by law. In other states, public hospitals still enjoy total or partial sovereign immunity and, as a result, do not purchase insurance except to the extent of their limited liability. Although the Company and its insurer treats the hospitals' insurance and indemnification obligations as the Company's primary coverage, the Company also maintains its own insurance as secondary coverage. ITEM 2. PROPERTIES The Company currently leases office space in two buildings located in Brentwood, Tennessee, for its principal corporate offices. The space is leased for a term of ten years, to expire in 2005. The field offices of Quorum Health Resources, Inc. are also leased, with terms ranging from one to five years. For a description of the Company's owned hospital properties, see "Item 1. Business-Owned Hospitals". The Company believes that its properties are adequate for its business requirements. ITEM 3. LEGAL PROCEEDINGS The Company is from time to time subject to claims and suits arising in the ordinary course of business, including claims for damages for personal injuries, breach of management contracts or for wrongful restriction of or interference with physicians' staff privileges. In certain of such actions, plaintiffs request punitive or other damages that may not be covered by insurance. The Company is not currently a party to any proceeding which, in management's opinion, would have a material adverse effect on the Company's financial position or results of operations. In June 1993, the OIG requested information from the Company in connection with an investigation involving the Company's procedures for preparing Medicare cost reports. In January 1995, the U.S. Department of Justice issued a Civil Investigative Demand which also requested information from the Company in connection with that same investigation. As a part of the government's investigation, several former and current employees of the Company have been interviewed. The Company is continuing to provide information and is cooperating fully with the investigation. The Company cannot predict whether the government will commence litigation regarding this matter. However, management believes that any claims likely to be asserted by the government as a result of its investigation would not have a material adverse effect on the Company's financial position or results of operation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock became listed on the Nasdaq Stock Market National Market ("Nasdaq") under the symbol "QHGI" on May 26, 1994. On September 22, 1997, the last reported sales price of the Common Stock on Nasdaq was $24.13. 18 21 As of June 30, 1997, the Company had approximately 1,923 holders of record and the Company estimated an additional 3,500 beneficial owners. The following table shows the high and low bid information for the Common Stock as reported by Nasdaq for each quarter of the fiscal year ended June 30, 1997 and June 30, 1996 (adjusted for the effect of a 3 for 2 stock dividend paid on or about September 16, 1997):
1996 HIGH LOW ---- ---- --- First Quarter 16 13 1/4 Second Quarter 15 5/64 13 11/64 Third Quarter 19 11/64 14 1/2 Fourth Quarter 18 21/64 15 43/64 1997 HIGH LOW ---- ---- --- First Quarter 17 53/64 15 1/4 Second Quarter 19 53/64 16 21/64 Third Quarter 23 18 53/64 Fourth Quarter 25 59/64 19 53/64
Quorum has not paid any cash dividends on its Common Stock since its inception, presently intends to retain its earnings for use in its business, and does not anticipate paying any cash dividends in the foreseeable future. The declaration of dividends is within the discretion of the Board of Directors, which will review this dividend policy from time to time; however, the declaration of dividends is currently prohibited by Quorum's bank credit facility and certain other agreements. See "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition" and Note 3 of Notes to Consolidated Financial Statements. 19 22 ITEM 6. SELECTED FINANCIAL DATA The following table of selected financial data should be read in conjunction with the Company's Consolidated Financial Statements and the notes thereto included elsewhere in this report. QUORUM HEALTH GROUP, INC. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JUNE 30 ------------------ 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- SUMMARY OF OPERATIONS(1) Net operating revenue $1,413,946 $1,098,547 $850,167 $641,040 $343,132 Operating expenses 1,153,031 890,203 693,859 524,962 286,873 Depreciation and amortization 75,134 55,901 37,566 28,153 14,809 Interest expense 45,601 36,568 22,209 25,066 13,954 Minority interest 741 109 1,046 1,035 1,174 Net gain on sale of assets -- 787 -- -- -- Income before income taxes and extraordinary item 139,439 116,553 95,487 61,824 26,322 Provision for income taxes 55,357 47,321 39,532 25,610 10,432 Income before extraordinary item 84,082 69,232 55,955 36,214 15,890 Per common share: Income before extraordinary item -- 1.11 0.93 0.76 0.64 0.33 primary Income before extraordinary item -- 1.11 0.93 0.76 0.60 0.31 fully diluted Cash dividends declared 0 0 0 0 0 FINANCIAL POSITION AT YEAR END(1) Total assets 1,278,991 $1,020,561 $773,502 $625,802 $275,037 Long-term debt excluding current maturities 519,940 430,877 287,364 225,444 138,765 Stockholders' equity 518,115 431,864 356,389 294,053 79,561
- -------------------- (1) The Company's financial statements for the years presented are not strictly comparable due to the significant effect that acquisitions and divestitures have had on such statements. Per share amounts are adjusted to reflect a 3 for 2 stock dividend paid 20 23 on or about September 16, 1997. See "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition". 21 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION IMPACT OF ACQUISITIONS The Company was formed in July 1989 to acquire a hospital contract management business. During fiscal 1997, the Company acquired five hospitals and affiliated health care entities. The Company also sold a minority interest in an acute care hospital in Papillon, Nebraska and agreed to sell its remaining interest in fiscal 1998. During fiscal 1996, the Company acquired two hospitals and affiliated health care entities and sold one hospital and a minority interest in another hospital. During fiscal 1995, the Company acquired three hospitals and affiliated health care entities. Because of the financial impact of the Company's recent acquisitions and divestitures, it is difficult to make meaningful comparisons between the Company's financial statements for the fiscal years presented. In addition, due to the current number of owned hospitals, each additional hospital acquisition can significantly affect the overall operating margin of the Company. During a one to three year transition period after the acquisition of a hospital, the Company has typically taken a number of steps to lower operating costs. The impact of such actions can be partially offset by cost increases to expand the hospital's services, strengthen its medical staff and improve its market position. The benefits of these investments and of other activities to improve operating margins may not occur immediately. Consequently, the financial performance of an acquired hospital may adversely affect overall operating margins in the near-term. As the Company makes additional hospital acquisitions, the Company expects that this effect will be mitigated by the expanded financial base of existing hospitals. RESULTS OF OPERATIONS The table below reflects the percentage of net operating revenue represented by various categories in the Consolidated Statements of Income and the percentage change in the related dollar amounts. The results of operations for the year ended June 30, 1997 include a full year of operations for fifteen hospitals and partial periods for four hospitals acquired during the year. The results of operations for the year ended June 30, 1996 include a full year of operations for twelve hospitals and partial periods for two hospitals acquired and one hospital divested during the year. The results of operations for the year ended June 30, 1995 include a full year of operations for ten hospitals and partial periods for three hospitals acquired during the year. 22 25
Percentage Increase (Decrease) of Dollar Amounts -------------- 1997 1996 Fiscal Year vs. vs. 1997 1996 1995 1996 1995 ---- ---- ---- ---- ---- Net operating revenue 100.0% 100.0% 100.0% 28.7% 29.2% Operating expenses (1) 81.5 81.0 81.6 29.5 28.3 ----- ----- ----- ----- ----- EBITDA (2) 18.5 19.0 18.4 25.2 33.8 Depreciation and amortization 5.3 5.1 4.5 34.4 48.8 Interest 3.2 3.3 2.6 24.7 64.7 Minority interest 0.1 0.0 0.1 579.8 (89.6) ----- ----- ----- ----- ----- Income before income taxes and extraordinary item 9.9 10.6 11.2 19.6 22.1 Provision for income taxes 3.9 4.3 4.6 17.0 19.7 ----- ----- ----- ----- ----- Income before extraordinary item 6.0 6.3 6.6 21.4 23.7 Extraordinary charges .6 -- -- 100.0 -- ----- ----- ----- ----- ----- Net income 5.4% 6.3% 6.6% 9.6% 23.7% ===== ===== ===== ===== ======
- -------------------- (1) Operating expenses represent expenses before interest, minority interest, income taxes, depreciation and amortization expense. (2) EBITDA represents earnings before interest, minority interest, income taxes, depreciation and amortization expense, net gain on sale of assets and extraordinary charges. The Company has included EBITDA data because such data is used by certain investors to measure a company's ability to service debt. EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be considered an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Fiscal 1997 Compared to Fiscal 1996 The Company's net operating revenue was $1,413.9 million in fiscal 1997, compared to $1,098.5 million in fiscal 1996, an increase of $315.4 million or 29%. This increase was attributable to, among other things, five hospital acquisitions, a full year of revenue from two hospitals acquired during fiscal 1996, a 10% increase in revenue generated by hospitals owned during both periods (calculated by comparing the same periods in both fiscal periods for hospitals owned for one year or more) and a 3% increase in management services revenue. Operating expenses as a percent of net operating revenue increased to 81.5% in fiscal 1997 from 81.0% for fiscal 1996 which was primarily attributable to the fiscal 1997 acquisitions of owned hospitals. Operating expenses as a percent of net operating revenue for the Company's owned hospitals increased to 82.0% in fiscal 1997 from 81.7% for fiscal 1996. For the Company's hospitals owned during both periods, operating expenses as a percent of net operating revenue decreased to 80.8% in fiscal 1997 from 81.5% for fiscal 1996 which was primarily attributable to a reduction in salaries and benefits, fees and supplies expense as a percent of net operating revenue. EBITDA as a percent of net operating revenue was 18.5% in fiscal 1997 compared to 19.0% in fiscal 1996. EBITDA as a percent of net operating revenue for the Company's owned hospitals was 18.0% in fiscal 1997 compared to 18.3% in fiscal 1996. EBITDA as a percent of net operating revenue for the Company's 23 26 hospitals owned during both periods was 19.2% in fiscal 1997 compared to 18.5% in fiscal 1996. EBITDA as a percent of net operating revenue for the Company's management services business was 22.7% in fiscal 1997 compared to 23.9% in fiscal 1996. Depreciation and amortization expense as a percent of net operating revenue increased to 5.3% in fiscal 1997 from 5.1% in fiscal 1996 primarily due to the fiscal 1996 and 1997 acquisitions and the Company's investment in management information systems. Interest expense as a percent of net operating revenue decreased to 3.2% in fiscal 1997 from 3.3% in fiscal 1996 due to the replacement of subordinated debt with bank debt (as discussed below), a reduction in interest rates and repayments of bank debt with cash flow generated from operations. The provision for income taxes as a percent of net operating revenue decreased to 3.9% in fiscal 1997 from 4.3% in fiscal 1996 primarily attributable to a lower effective tax rate and a relative change in pretax income. Income before extraordinary item as a percent of net operating revenue was 6.0% in fiscal 1997 compared to 6.3% in fiscal 1996. This decrease was primarily attributable to the fiscal 1997 acquisitions and was partially offset by the increased profitability of the Company's hospitals owned during both periods, as discussed above. During the fourth quarter of fiscal 1997, the Company incurred extraordinary charges of $8.2 million (net of applicable income taxes of $5.1 million). The charges consist of the premium associated with the purchase of the 11.875% Senior Subordinated Notes, transaction costs, the write-off of unamortized loan costs of the Notes and the write-off of unamortized loan costs of the $600 million secured revolving credit facility. The Notes were purchased through a tender offer and the revolving credit facility was replaced with the new unsecured revolving credit facility. Fiscal 1996 Compared to Fiscal 1995 The Company's net operating revenue was $1,098.5 million in fiscal 1996, compared to $850.2 million in fiscal 1995, an increase of $248.3 million or 29%. This increase was attributable to, among other things, two hospital acquisitions, a full year of revenue from three hospital acquisitions during fiscal 1995, a 4% increase in revenue generated by hospitals owned during both periods and a 7% increase in management services revenue. Operating expenses as a percent of net operating revenue decreased to 81.0% in fiscal 1996 from 81.6% in fiscal 1995. Operating expenses as a percent of net operating revenue for the Company's owned hospitals decreased to 81.7% in fiscal 1996 from 82.6% in fiscal 1995. For the Company's hospitals owned during both periods, operating expenses as a percent of net operating revenue decreased to 81.3% in fiscal 1996 from 81.8% in fiscal 1995 which was primarily attributable to relative reductions in supplies expense. Operating expenses as a percent of net operating revenue for the Company's management services business increased to 76.1% in fiscal 1996 from 75.7% in fiscal 1995 which was primarily attributable to the costs of new services. EBITDA as a percent of net operating revenue was 19.0% for fiscal 1996 compared to 18.4% in fiscal 1995. EBITDA as a percent of net operating revenue for the Company's owned hospitals was 18.3% compared to 17.4% in fiscal 1995. EBITDA as a percent of net operating revenue for the Company's owned hospitals during both periods was 18.7% compared to 18.2% in fiscal 1995. EBITDA as a 24 27 percent of net operating revenue for the Company's management services business was 23.9% compared to 24.3% in fiscal 1995 which was primarily attributable to the costs of new services. Depreciation and amortization expense as a percent of net operating revenue increased to 5.1% in fiscal 1996 from 4.5% in fiscal 1995 primarily due to the fiscal 1995 and 1996 acquisitions and the Company's investment in hospital management information systems. Interest expense as a percent of net operating revenue increased to 3.3% in fiscal 1996 from 2.6% in fiscal 1995 due to the fiscal 1995 and 1996 acquisitions and the issuance of the Senior Subordinated Notes in November 1995. The provision for income taxes as a percent of net revenue decreased to 4.3% in fiscal 1996 from 4.6% in fiscal 1995 which is primarily attributable to a lower effective tax rate and a relative change in pretax income. Net income as a percent of net operating revenue was 6.3% in fiscal 1996 compared to 6.6% in fiscal 1995. This decrease was primarily attributable to the fiscal 1995 and fiscal 1996 acquisitions and was partially offset by the increased profitability of the Company's hospitals owned during both periods, as discussed above. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1997, the Company had working capital of $180.5 million, including cash and cash equivalents of $19.0 million. The ratio of current assets to current liabilities was 2.2 to 1.0 at June 30, 1997 compared to 2.6 to 1.0 at June 30, 1996. The Company's cash requirements excluding acquisitions have historically been funded by cash generated from operations. Cash generated from operations was $173.4 million, $114.2 million and $88.2 million for the years ended June 30, 1997, 1996 and 1995, respectively. The increase is primarily due to the fiscal 1996 and 1997 acquisitions. Capital expenditures excluding acquisitions for the years ended June 30, 1997, 1996 and 1995, were $83.0 million, $62.1 million, and $58.3 million, respectively. The management services business does not require significant capital expenditures. Capital expenditures for owned hospitals may vary from year to year depending on facility improvements and service enhancements undertaken by the hospitals. The Company has begun construction of a replacement hospital in Florence, South Carolina with fiscal 1998 capital expenditures of up to $60 million and a total project cost of approximately $85 million. In fiscal 1998, the Company expects to make capital expenditures from $80 million to $100 million, excluding acquisitions and the replacement hospital. During fiscal 1997, the Company acquired five hospitals and affiliated health care entities for approximately $184.6 million. The Company also sold a minority interest in an acute care hospital in Papillon, Nebraska and agreed to sell its remaining interest in fiscal 1998. During fiscal 1996, the Company acquired two hospitals and affiliated health care entities for approximately $205.3 million. Also, during fiscal 1996, the Company sold one hospital and a minority interest in another hospital. During fiscal 1995, the Company acquired three hospitals and affiliated health care entities for approximately $99.7 million. 25 28 Effective September 1, 1997, the Company acquired a hospital in Hattiesburg, Mississippi. The Company intends to acquire additional acute care facilities, and the Company is actively seeking out such acquisitions. There can be no assurance that the Company will not require additional debt or equity financing for any particular acquisition. Also, the Company continually reviews its capital needs and financing opportunities and may seek additional equity or debt financing for its acquisition program or other needs. At June 30, 1997, the Company had $363.9 million outstanding under its Revolving Line of Credit. During fiscal 1997, the Company replaced its secured $600.0 million revolving credit facility with a new unsecured five-year revolving credit facility in the amount of $850.0 million. The credit agreement provides for two consecutive one-year extensions subject to approval of 100% of the lenders. The loan bears interest, at the Company's option, at generally the lender's base rate or a fluctuating rate ranging from .25 to .75 percentage points above LIBOR. The Company pays a facility fee ranging from .18 to .25 percentage points on the commitment. The interest rate margins and facility fee rates are based on the Company's leverage ratio. The Company may prepay the amount outstanding at any time. The added capacity may be used to fund acquisitions and for other general corporate purposes. During fiscal 1996, the Company issued $150.0 million in Senior Subordinated Notes maturing on November 1, 2005 and bearing interest at 8.75%. The Notes are subject to redemption at the option of the Company at a price of 104.375% on or after November 1, 2000, 102.188% on or after November 1, 2001 and at par on or after November 1, 2002. The Notes are unsecured obligations and are subordinated in right of payment to all existing and future senior indebtedness. During fiscal 1997, the Company purchased for cash $97.8 million of its 11.875% Senior Subordinated Notes through a tender offer at a price of $1,087 per $1,000 principal amount. The Notes were repurchased with borrowings under the Company's revolving line of credit. The Company also amended its related Indenture to eliminate certain restrictive covenants. The remaining Notes outstanding are subject to redemption at the option of the Company at 105.875% at December 15, 1997. The credit facilities contain certain financial covenants including but not limited to the prohibition of dividend payments and other distributions and repurchases of common stock, restrictions on investments, asset dispositions, borrowings and the ability to merge or consolidate with or transfer assets to another entity, the maintenance of net worth and various financial ratios, including a fixed charge ratio and a leverage ratio. The Company is required to repurchase all Senior Subordinated Notes at 101% upon a change in control. Interest rate swap agreements are used on a limited basis to manage the Company's interest rate exposure. The agreements are contracts to periodically exchange fixed and floating interest rate payments over the life of the agreements. The floating-rate payments are based on LIBOR and fixed-rate payments are dependent upon market levels at the time the swap agreement is consummated. In fiscal 1997, the Company amended its 1993 interest rate swap agreements to effectively convert two borrowings of $50.0 million each from fixed-rate to floating-rate through September 16, 2001 and December 1, 2001. In addition, the Company entered into interest rate swap agreements which effectively convert $100.0 million and $200.0 million of floating-rate borrowings 26 29 to fixed-rate borrowings through December 12, 2001 and March 20, 2002, respectively. For the years ended June 30, 1997, 1996 and 1995, the Company received a weighted average rate of 5.8%, 5.8% and 5.6%, respectively and paid a weighted average rate of 5.9%, 4.8% and 4.2%, respectively. On August 19, 1997, the Board of Directors approved a three-for-two stock split effected in the form of a stock dividend payable on or about September 16, 1997 to shareholders of record on September 2, 1997. The shares of common stock, price per share, the number of shares subject to options and the exercise prices have been retroactively restated to give effect to the stock dividend for all periods presented. In fiscal 1997, the Company adopted a Stockholder Rights Plan and declared a dividend of one right for each share of common stock held as of the close of business on April 28, 1997. Each right entitles stockholders to acquire one-third of a share of common stock at an exercise price of $100, subject to adjustment. Such rights become exercisable only if a person or group acquires beneficial ownership of 15 percent or more of the Company's common stock or commences a tender or exchange offer which would result in that person or group owning 15 percent or more of the Company's common stock. After any person has acquired 15 percent or more of the Company's common stock, each right not owned by such person or certain related parties will entitle its holder to purchase a number of shares of the Company's common stock (or any combination of common stock, preferred stock, debt securities and cash, as determined by the Board of Directors) having a market value of two times the then-current exercise price of the right. In the event the Company is involved in a merger or other business combination transaction with another person or sells 50 percent or more of its assets or earning power to another person, each right will entitle its holder to purchase a number of shares of the Company's common stock or the acquiring company's common stock having a market value of two times the then-current exercise price of the right. The rights may be redeemed at $.01 per right at any time until the tenth day following public announcement that a 15 percent position has been acquired. The rights expire on April 28, 2007. The Internal Revenue Service (IRS) is in the process of conducting examinations of the Company's federal income tax returns for the years 1993 through 1995. During fiscal 1996, the IRS proposed certain adjustments in connection with its examination of the Company's federal income tax returns for the fiscal years ending June 30, 1990 through 1992. The most significant adjustment involves the amortization deductions claimed on certain acquired intangible assets in conjunction with the acquisition of Quorum Health Resources, Inc. The Company is currently protesting all of the proposed adjustments through the appeals process of the IRS and does not expect the resolution of this contingency to materially affect the Company's results of operations or financial position. In June 1993, the Office of the Inspector General (OIG) of the Department of Health and Human Services requested information from the Company in connection with an investigation involving the Company's procedures for preparing Medicare cost reports. In January 1995, the U.S. Department of Justice issued a Civil Investigative Demand which also requested information from the Company in connection with that same investigation. As a part of the government's investigation, several former and current employees of the Company have been interviewed. The Company has provided information and is cooperating fully with the investigation. The Company cannot predict whether the government will commence litigation regarding this matter. Management believes that any claims 27 30 likely to be asserted by the government as a result of its investigation would not have a material effect on the Company's results of operations or financial position. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share", which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options will be excluded. Basic earnings per share before extraordinary loss for the years ended June 30, 1997 and June 30, 1996 will be $.04 and $.03, respectively, more than primary earnings per share. Basic earnings per share for the years ended June 30, 1997 and June 30, 1996 will be $.03 per share more than primary earnings per share. The amount of dilutive earnings per share will be the same as the amount of fully diluted earnings per share for all periods. GENERAL The federal Medicare program and state Medicaid programs accounted for approximately 55%, 56%, and 57% of gross patient service revenue for the years ended June 30, 1997, 1996 and 1995, respectively. The payment rates under the Medicare program for inpatients are prospective, based upon the diagnosis of a patient. The payment rate increases have historically been less than actual inflation. Both federal and state legislators are continuing to scrutinize the health care industry for the purpose of reducing health care costs. While the Company is unable to predict what, if any, future health reform legislation may be enacted at the federal or state level, the Company expects continuing pressure to limit expenditures by governmental health care programs. Under the Balanced Budget Act of 1997 (the 1997 Act), there will be no increases in the rates paid to acute care hospitals for inpatient care through September 30, 1998. Payments for Medicare outpatient services provided at acute care hospitals and home health services historically have been paid based on costs, subject to certain limits. The 1997 Act requires that the payment for those services be converted to a prospective payment system, which will be phased in over time. Further changes in the Medicare or Medicaid programs and other proposals to limit health care spending could have a material adverse impact upon the health care industry and the Company. The 1997 Act also contains various provisions that create new opportunities for the Company. Certain of those provisions, such as those allowing for creation of Provider Service Organizations, allow providers such as the Company to contract directly with the federal government for the provision of medical care to Medicare beneficiaries on a fully capitated basis. Under capitation, the Company receives a certain amount from the federal government for each Medicare beneficiary enrolled in its plans and assumes the risks and rewards of meeting the health care needs of those enrolled in its plans. The Company may purchase insurance to cover all or a portion of the cost of meeting the health care needs of those covered. The Company cannot predict at this time what the ultimate effect of these opportunities will be. In addition, states, insurance companies and employers are actively negotiating amounts paid to hospitals, which are typically lower than their standard rates. The trend toward managed care, including health maintenance organizations, preferred provider organizations and various other forms of 28 31 managed care, may adversely affect hospitals' ability to maintain their current rate of net revenue growth and operating margins. The Company's acute care hospitals, like most acute care hospitals in the United States, have significant unused capacity. The result is substantial competition for patients and physicians. Inpatient utilization continues to be negatively affected by payor-required pre-admission authorization and by payor pressure to maximize outpatient and alternative health care delivery services for less acutely ill patients. The Company expects increased competition and admission constraints to continue in the future. The ability to successfully respond to these trends, as well as spending reductions in governmental health care programs, will play a significant role in determining hospitals' ability to maintain their current rate of net revenue growth and operating margins. The Company expects the industry trend from inpatient to outpatient services to continue due to the increased focus on managed care and advances in technology. Outpatient revenue of the Company's owned hospitals for the years ended June 30, 1997, 1996 and 1995, was approximately 36.3%, 34.0% and 32.2% of gross patient service revenue, respectively. The Company's results of operations are also significantly affected in a positive manner over time by the Company's ability to acquire acute care hospitals at acceptable prices. While the Company believes that trends in the health care industry described above may create possible future acquisition opportunities, it can give no assurances that it can continue to purchase acute care hospitals. The Company's owned hospitals accounted for 90% of the Company's net operating revenue in fiscal 1997 compared to 88% in fiscal 1996 and 85% in fiscal 1995. Carolinas Hospital System, Desert Springs Hospital, Flowers Hospital, Gadsden Regional Medical Center and Lutheran Hospital of Indiana accounted for approximately 50% of the Company's net operating revenue in fiscal 1997. INFLATION The health care industry is labor intensive. Wages and other expenses increase during periods of inflation and when shortages in marketplaces occur. In addition, suppliers pass along rising costs to the Company in the form of higher prices. The Company has generally been able to offset increases in operating costs by increasing charges, expanding services and implementing cost control measures to curb increases in operating costs and expenses. The Company cannot predict its ability to offset or control future cost increases. FORWARD-LOOKING STATEMENTS Certain statements contained in this Report, including, without limitation, statements containing the words "believes", "anticipates", "intends", "expects" and words of similar import, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions, both nationally and in the regions in which the Company operates; industry capacity; demographic changes; existing government regulations 29 32 and changes in, or the failure to comply with, governmental regulations; legislative proposals for health care reform; the ability to enter into managed care provider arrangements on acceptable terms; changes in Medicare and Medicaid payment levels; liability and other claims asserted against the Company; competition; the loss of any significant customers; changes in business strategy or development plans; the ability to attract and retain qualified personnel, including physicians; the availability and terms of capital to fund the expansion of the Company's business, including the acquisition of additional facilities. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's consolidated financial statements are submitted in a separate section of this report. See pages F-1, F-2, and F-4 through F-24. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS Information concerning this Item is incorporated by reference to the Company's definitive proxy materials for the Company's 1997 Annual Meeting of Stockholders. ITEM 11. EXECUTIVE COMPENSATION Information concerning this Item is incorporated by reference to the Company's definitive proxy materials for the Company's 1997 Annual Meeting of Stockholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information concerning this Item is incorporated by reference to the Company's definitive proxy materials for the Company's 1997 Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning this Item is incorporated by reference to the Company's definitive proxy materials for the Company's 1997 Annual Meeting of Stockholders. 30 33 PART IV EXHIBIT INDEX ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) and (2). Financial statements and schedules of the Company and its subsidiaries required to be included in Part II, Item 8 are indexed on Page F-1 and submitted as a separate section of this report. (a)(3) Exhibits. 3.1 Certificate of Incorporation of the Company filed with Secretary of State of Delaware July 14, 1989, as amended by Certificate of Amendment of Certificate of Incorporation filed with Secretary of State of Delaware on July 28, 1989. (Incorporated by reference to Exhibit 3.1 to the Company's Registration Statement No. 33-31717-A on Form S-18.) 3.2 Certificate of Amendment of Certificate of Incorporation effective with the Secretary of State of Delaware on June 1, 1990. (Incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended June 30, 1990.) 3.3 Certificate of Amendment of Certificate of Incorporation effective with the Secretary of State of Delaware on November 1, 1990. (Incorporated by reference to Exhibit 3.3 to the Company's Annual Report on Form 10-K for the year ended June 30, 1991.) 3.4 Certificate of Amendment of Certificate of Incorporation effective with the Secretary of State of Delaware on December 17, 1991. (Incorporated by reference to Exhibit 3.4 to the Company's Annual Report on Form 10-K for the year ended June 30, 1992.) 3.5 Form of Certificate of Amendment of Certificate of Incorporation effective with the Secretary of State of Delaware on April 12, 1994. (Incorporated by reference to Exhibit 3.1.5 to the Company's Registration Statement No. 33-77674 on Form S-1.) 3.6 Bylaws of the Company as amended April 12, 1994. (Incorporated by reference to Exhibit 3.2 to the Company's Registration Statement No. 33-77674 on Form S-1.) 3.7 Bylaws of the Company as amended April 16, 1997. (Incorporated by reference to Exhibit 3(ii) to the Company's Report on Form 8-K dated April 16, 1997.) 4.1.1 Indenture, dated as of December 15, 1992, between Quorum Health Group, Inc. and United States Trust Company of New York, as Trustee relating to the Company's $100,000,000 11-7/8% Senior Subordinated Notes due December 15, 2002. (Incorporated by reference to Exhibit 4 to the Company's Amendment to Application or Report on Form 8 dated February 17, 1993, amending the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1992.) 31 34 4.1.2 Indenture, dated as of November 1, 1995, between Quorum Health Group, Inc. and United States Trust Company of New York, as Trustee relating to the Company's $150,000,000 8-3/4% Senior Subordinated Notes due November 1, 2005. (Incorporated by reference to Exhibit 4.1.2 to the Company's Registration Statement No. 33-98274 on Form S-3.) 4.1.3 First Supplemental Indenture, dated as of May 7, 1997, between Quorum Health Group, Inc. and United States Trust Company of New York, as Trustee relating to the Company's $100,000,000 11-7/8% Senior Subordinated Notes due December 1, 2005. 4.3.1 Form of Subscription Agreement dated July 31, 1989 between the Company and its Original Stockholders. (Incorporated by reference to Exhibit 4.4 to the Company's Registration Statement No. 33-31717-A on Form S-18.) 4.3.2 Form of Subscription Agreement dated as of July 25, 1990 among the Company and its Subsequent Stockholders. (Incorporated by reference to Exhibit 4.10 to the Company's Annual Report on Form 10-K for the year ended June 30, 1990.) 4.4.1 Form of Registration Rights Agreement dated July 31, 1989 between the Company and its Original Stockholders. (Incorporated by reference to Exhibit 4.6 to the Company's Registration Statement No. 33-31717-A on Form S-18.) 4.4.2 Amendment dated as of July 25, 1990 to Registration Rights Agreement dated July 31, 1989 among the Company and its Original Stockholders. (Incorporated by reference to Exhibit 4.8 to the Company's Annual Report on Form 10-K for the year ended June 30, 1990.) 4.4.3 Amendment dated as of February 25, 1991 to Registration Rights Agreement dated July 31, 1989 among the Company and its Original Stockholders. (Incorporated by reference to Exhibit 10.7.3 to the Company's Registration Statement No. 33-77674 on Form S-1.) 4.4.4 Amendment dated as of April 23, 1991 to Registration Rights Agreement dated July 31, 1989 among the Company and its Original Stockholders. (Incorporated by reference to Exhibit 10.7.4 to the Company's Registration Statement No. 33-77674 on Form S-1.) 4.4.5 Amendment and Restatement dated as of December 20, 1991 to Registration Rights Agreement dated July 31, 1989 among the Company and its Original Stockholders. (Incorporated by reference to Exhibit 10.7.5 to the Company's Registration Statement No. 33-77674 on Form S-1.) 4.4.6 Amendment and Restatement dated as of January 15, 1992 to Registration Rights Agreement dated July 31, 1989 among the Company and its Original Stockholders. (Incorporated by reference to Exhibit 10.7.6 to the Company's Registration Statement No. 33-77674 on Form S-1.) 4.4.7 Amendment and Restatement dated as of May 7, 1992 to Registration Rights Agreement dated July 31, 1989 among the Company and its 32 35 Original Stockholders. (Incorporated by reference to Exhibit 10.7.7 to the Company's Registration Statement No. 33-77674 on Form S-1.) 4.4.8 Amendment and Restatement dated as of June 1, 1992 to Registration Rights Agreement dated July 31, 1989 among the Company and its Original Stockholders. (Incorporated by reference to Exhibit 10.7.8 to the Company's Registration Statement No. 33-77674 on Form S-1.) 4.4.9 Amendment and Restatement dated as of July 1, 1992 to Registration Rights Agreement dated July 31, 1989 among the Company and its Original Stockholders. (Incorporated by reference to Exhibit 4.12 to the Company's Annual Report on Form 10-K for the year ended June 30, 1992.) 4.4.10 Amendment and Restatement dated as of September 29, 1992 to Registration Rights Agreement dated July 31, 1989 among the Company and its Original Stockholders. (Incorporated by reference to Exhibit 10.75 to the Company's Registration Statement No. 33-52910 on Form S-1.) 4.4.11 Amendment and Restatement dated as of September 30, 1992 to Registration Rights Agreement dated July 31, 1989 among the Company and its Original Stockholders. (Incorporated by reference to Exhibit 10.74 to the Company's Registration Statement No. 33-52910 on Form S-1.) 4.4.12 Form of Amendment and Restatement dated as of January 28, 1993 to Registration Rights Agreement dated July 31, 1989 among the Company and its Original Stockholders. (Incorporated by reference to Exhibit 10.7.12 to the Company's Registration Statement No. 33-77674 on Form S-1.) 4.4.13 Amendment No. 1 dated as of September 28, 1993 to the Amendment and Restatement of Registration Rights Agreement dated as of September 30, 1992. (Incorporated by reference to Exhibit 10.7.13 to the Company's Registration Statement No. 33-77674 on Form S-1.) 4.4.14 Amendment No. 2 dated as of October 15, 1993 to the Amendment and Restatement of Registration Rights Agreement dated as of September 30, 1992 as amended. (Incorporated by reference to Exhibit 10.7.14 to the Company's Registration Statement No. 33-77674 on Form S-1.) 4.4.15 Amendment No. 3 dated as of November 5, 1993 to the Amendment and Restatement of Registration Rights Agreement dated as of September 30, 1992 as amended. (Incorporated by reference to Exhibit 10.7.15 to the Company's Registration Statement No. 33-77674 on Form S-1.) 4.4.16 Form of Rights Agreement dated as of April 16, 1997, between Quorum Health Group, Inc. and First Union National Bank of North Carolina, including the form of Rights Certificate as Exhibit A and the form of Summary of Rights to Purchase Common Stock as Exhibit B. (Incorporated by reference to Exhibit 4 to the Company's Report on Form 8-K dated April 16, 1997.) 4.4.17 Form of Letter to Stockholders of Quorum Health Group, Inc. regarding the adoption of the Rights Plan pursuant to the Rights 33 36 Agreement. (Incorporated by reference to the Company's Report on Form 8-K dated April 16, 1997.) 4.4.18 Credit Agreement dated as of April 22, 1997, by and among Quorum Health Group, Inc., as Borrower, certain banks as Lenders, and First Union National Bank of North Carolina, as agent. 4.4.19 First Amendment to Credit Agreement effective as of June 30, 1997, by and among Quorum Health Group, Inc., as Borrower, certain banks as Lenders, and First Union National Bank of North Carolina, as agent. 10.1 Compensation Plans and Arrangements A. Restated Stock Option Plan, as amended. (Incorporated by reference to Exhibit B to the Company's definitive Proxy Statement for the Annual Meeting of Stockholders held November 15, 1994.) B. Directors Stock Option Plan, as amended. (Incorporated by reference to Exhibit A to the Company's definitive Proxy Statement for the Annual Meeting of Stockholders held November 15, 1994.) C. Letter dated February 23, 1990 regarding employment of James E. Dalton, Jr. (Incorporated by reference to Exhibit 10.1.D to the Company's Annual Report on Form 10-K for the year ended June 30, 1993.) D. Employee Stock Purchase Plan, as amended. (Incorporated by reference to Exhibit C to the Company's definitive Proxy Statement for the Annual Meeting of Stockholders held November 15, 1994.) E. Quorum Health Group, Inc. 401(k) Savings and Retirement Plan. (Incorporated by reference to Exhibit 10.1.6 to the Company's Registration Statement No. 33-77674 on Form S-1.) F. Form of Quorum Health Group, Inc. Non-qualified Deferred Compensation Plan. (Incorporated by reference to Exhibit 10.1.7 to the Company's Registration Statement No. 33-77674 on Form S-1.) G. Form of Severance Agreement with certain executive officers of the Company. (Incorporated by reference to Exhibit 10.1 (G) to the Company's Annual Report on Form 10-K for the year ended June 30, 1995.) H. Employment Agreement between the Company and Eugene C. Fleming. (Incorporated by reference to Exhibit 10.1(H) to the Company's Annual Report on Form 10-K for the year ended June 30, 1996.) I. Severance Agreement and General Release between the Company and Robert A. Yeager. (Incorporated by reference to Exhibit 10.1(I) to the Company's Report on Form 10-K for the year ended June 30, 1996.) J. Letter Agreement between the Company and Robert D. Huseby. (Incorporated by reference to Exhibit 10.1(J) to the Company's Report on Form 10-K for the year ended June 30, 1996.) 34 37 10.2 Baxter Supply Agreement dated as of December 1, 1989 by and among Baxter Health care Corporation, HCA, HealthTrust, Inc. and Quorum Health Resources, Inc. (Incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the year ended June 30, 1990.) 10.3 Amendment to Supply Agreement effective January 1, 1991 by and among Baxter Health care Corporation, HCA, HealthTrust, Inc., and Quorum Health Resources, Inc. (Incorporated by reference to Exhibit 10.51 to the Company's Annual Report on Form 10-K for the year ended June 30, 1992.) 10.4 Pharmacy Products Group Agreement dated as of January 1, 1990 between Quorum Health Resources, Inc. and Baxter Health care Corporation. (Incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the year ended June 30, 1990.) 10.5 Foodservice Distribution Agreement dated September 1, 1989 by and between Baxter Health care Corporation, HCA, Quorum Health Resources, Inc. and HealthTrust. (Incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the year ended June 30, 1990.) 10.6 Quorum Health Resources, Inc. Model Hospital Management Agreement. 10.7 Incorporation, Conveyance and Stock Purchase Agreement dated as of August 16, 1993, as amended September 30, 1993, by and among Quorum, Inc. as Purchaser, Charter Medical Corporation ("Charter"), a Delaware corporation; Charter Northside Hospital, Inc. ("CNH"), a Georgia corporation; Middle Georgia Hospital, Inc. ("MGH"), a Georgia corporation; Shallowford Community Hospital, Inc. ("SCHI"), a Georgia corporation; Metropolitan Hospital, Inc. ("MHI"), a Georgia corporation; Physicians & Surgeons Hospital, Inc. ("PSH"), a Louisiana corporation; Charter Regional Medical Center, Inc. ("CMRC"), a Texas corporation; Desert Springs Hospital, Inc. ("DSH"), a Nevada corporation; Charter Suburban Hospital, Inc. ("CSH"), a California corporation; Charter Community Hospital of Des Moines, Inc. ("CCH"), an Iowa corporation; and Stuart Circle Hospital Corporation ("SCHC"), a Virginia corporation. (Incorporated by reference to Exhibit 2.1 to the Company's Report on Form 8-K dated October 13, 1993.) 10.8 Asset Purchase Agreement dated as of December 1993 among Mercy Health Center of Central Iowa, as Buyer, and NC-CCH, Inc., as Seller, and Quorum Health Group, Inc. (Incorporated by reference to Exhibit 10.28 to the Company's Registration Statement No. 33-77674 on Form S-1.) 10.9 Asset Purchase Agreement dated as of October 7, 1993 as amended November 30, 1993, among Baptist Health Services, Inc. and Baptist 35 38 Hospital of Gadsden, Inc. as Sellers and QHG of Gadsden, Inc. as Buyer. (Incorporated by reference to Exhibit 2 to the Company's Report on Form 8-K dated December 14, 1993.) 10.10 Asset Purchase Agreement dated as of December 31, 1993 among Cleveland Regional Medical Center, L.P., as Buyer, and Dynamic Health, Inc., and NC-CRMC, Inc., as Seller, and Quorum Health Group, Inc. (Incorporated by reference to Exhibit 10.30 to the Company's Registration Statement No. 33-77674 on Form S-1.) 10.11 Lease dated September 21, 1989 by and between DJ Investments which subsequently assigned its interest to A.G. Dorsey, Capricon II 1989 Trust and J. Cutler Roberts, Trustee, and Desert Springs Hospital, Inc. (Incorporated by reference to Exhibit 10.39 to the Company's Registration Statement No. 33-77674 on Form S-1.) 10.12 Lease dated January 21, 1994 by and between QB Partners I and Quorum Health Resources, Inc. (Incorporated by reference to Exhibit 10.42 to the Company's Registration Statement No. 33-77674 on Form S-1.) 10.13 Asset Purchase Agreement dated April 29, 1994 by and between NC-PSH, Inc., and Sisters of Charity of the Incarnate Word, Shreveport, Louisiana, doing business as Schumpert Medical Center (Incorporated by reference to Exhibit 10.45.1 to the Company's Registration Statement No. 33-77674 on Form S-1.) 10.14 Lease Agreement dated December 8, 1994 by and between QB Partners I and Quorum Health Group, Inc., as amended by Addendum dated March 25, 1995. (Incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the year ended June 30, 1995.) 10.15 Asset Purchase Agreement dated November 1, 1990 by and between Mercy Regional Medical Center, Sisters of Mercy Health Systems, St. Louis, Inc. and ParkView Medical Associates, L.P. (Incorporated by reference to the Company's Report on Form 8-K filed November 15, 1990.) 10.16 Asset Purchase and Sale Agreement dated as of September 20, 1991, by and between Quorum Health Group, Inc., as buyer, and St. John's Hospital & Health Center, Inc. and Incarnate Word Health Services, as seller. (Incorporated by reference to Exhibit 2.1 to the Company's Report on Form 8-K dated September 30, 1991.) 10.17 Asset Purchase Agreement dated as of January 31, 1992 between QHG of Ohio, Inc. and St. Anthony Medical Center, Inc. and its members regarding Park Medical Center. (Incorporated by reference to Exhibit 2.3 to the Company's Annual Report on Form 10-K for the year ended June 30, 1992.) 10.18 Asset Purchase Agreement dated as of May 31, 1992, by and between QHG of Alabama, Inc., as buyer, its ultimate parent, Quorum Health Group, Inc. and Flowers Hospital, Incorporated, as seller. (Incorporated by reference to Exhibit 2.1 to the Company's Report on Form 8-K dated June 1, 1992.) 36 39 10.19 Agreement and Plan of Share Exchange dated June 19, 1992 among Hospital Management Professionals, Inc., Robert D. Huseby, Sheldon L. Krizelman and Thomas W. Singleton and Quorum Health Resources, Inc. (Incorporated by reference to Exhibit 2.1 to the Company's Report on Form 8-K dated July 14, 1992.) 10.20 Asset Purchase Agreement dated as of January 4, 1995, by and between QHG of South Carolina, Inc., as buyer and Carolinas Hospital System, Inc., as seller. (Incorporated by reference to Exhibit 2.1 to the Company's Report on Form 8-K dated February 1, 1995). 10.21 Asset Purchase Agreement dated April 21, 1995, as amended by Amendment No. 1, Amendment No. 2, and Amendment No. 3, by and between QHG of Indiana, Inc., et al., as buyers, and The Lutheran Hospital of Indiana, Inc., et al., as sellers. (Incorporated by reference to Exhibit 2.1 to the Company's Report on Form 8-K dated August 1, 1995.) 10.22 Purchase Agreement dated as of January 28, 1993 between the Company and HCA, Inc. (Incorporated by reference to Exhibit 10.8 to the Company's Registration Statement No. 33-77674 on Form S-1.) 10.23 Purchase Agreement dated as of September 28, 1993 among the Company and Certain Shareholders. (Incorporated by reference to Exhibit 10.9 to the Company's Registration Statement No. 33-77674 on Form S-1.) 10.24 Purchase Agreement dated as of October 15, 1993 among the Company and Certain Shareholders. (Incorporated by reference to Exhibit 10.10 to the Company's Registration Statement No. 33-77674 on Form S-1.) 10.25 Purchase Agreement dated as of October 26, 1993 between the Company and HCA, Inc. (Incorporated by reference to Exhibit 10.11 to the Company's Registration Statement No. 33-77674 on Form S-1.) 10.26 Purchase Agreement dated as of November 5, 1993 between the Company and HCA, Inc. (Incorporated by reference to Exhibit 10.12 to the Company's Registration Statement No. 33-77674 on Form S-1.) 10.27 Asset Purchase Agreement dated as of April 6, 1994 by and between Quorum, Inc. and Bon Secours Health System, Inc. for the purchase of the capital stock of NC-SCHC, Inc. and Stuart Circle MOB, Inc. (Incorporated by reference to Exhibit 10.13 to the Company's Registration Statement No. 33-77674 on Form S-1.) 10.28 Asset Exchange Agreement dated as of April 8, 1994 by and among NC-SCHI, Inc., Dunwoody MOB, Inc., NC-MHI, Inc., Quorum Health Group, Inc., Galen Hospitals of Texas, Inc., Galen Medical Corporation, American Medicorp Development Co. and Columbia/HCA Health care Corporation for the like kind exchange of Abilene Regional Medical Center and Medical Center Enterprise for Dunwoody Medical Center and Metropolitan Hospital. (Incorporated by reference to Exhibit 10.14 to the Company's Registration Statement No. 33-77674 on Form S-1.) 37 40 10.30 Group Purchasing Organization Participating Agreement between APS Healthcare Purchasing Partners, L.P. and Quorum Health Group, Inc. dated November 30, 1995. (Incorporated by reference to Exhibit 10.30 to the Company's Report on Form 10-K for the year ended June 30, 1996.) 10.31 First Amendment effective as of June 1, 1997, to Group Purchasing Organization Participating Agreement between Premier Purchasing Partners, L.P., f/k/a APS Healthcare Purchasing Partners, L.P. dated November 30, 1995. 10.32 Lease Agreement by and between QHG of South Carolina, Inc., a subsidiary of the Company, and C. Edward Floyd, M.D., a Director of the Company. (Incorporated by reference to Exhibit 10.31 to the Company's Report on Form 10-K for the year ended June 30, 1996.) 11 Computation of Earnings per Share. 21 Subsidiaries of the Company. 23 Consent of Ernst & Young LLP. 27 Financial Data Schedule (for SEC use only) (b) Reports on Form 8-K. A Report on Form 8-K was filed with the Commission on April 17, 1997, to inform the market of the declaration of a distribution of one common share purchase right for each outstanding share of the Company's Common Stock, $0.01 par value. 38 41 ANNUAL REPORT ON FORM 10-K ITEM 8, ITEM 14(a)(1) AND (2) AND (d) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CERTAIN EXHIBITS FINANCIAL STATEMENT SCHEDULE QUORUM HEALTH GROUP, INC. BRENTWOOD, TENNESSEE JUNE 30, 1997 F-1 42 Quorum Health Group, Inc. and Subsidiaries Form 10-K -- Item 8 and Item 14(a) (1) and (2) and (d) Index to Financial Statements and Financial Statement Schedule The following consolidated financial statements of Quorum Health Group, Inc. and subsidiaries are included in Item 8: Page No. Consolidated Statements of Income-- Years Ended June 30, 1997, 1996 and 1995 F- 4 Consolidated Balance Sheets-- June 30, 1997 and 1996 F- 5 Consolidated Statements of Stockholders' Equity-- Years Ended June 30, 1997, 1996 and 1995 F- 7 Consolidated Statements of Cash Flows-- Years Ended June 30, 1997, 1996 and 1995 F- 8 Notes to Consolidated Financial Statements-- June 30, 1997 F- 9 The following consolidated financial statement schedule of Quorum Health Group, Inc. And subsidiaries is included in Item 14(d): Schedule II-- Valuation and Qualifying Accounts S- 1 All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. F-2 43 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Quorum Health Group, Inc. We have audited the accompanying consolidated balance sheets of Quorum Health Group, Inc. and subsidiaries as of June 30, 1997 and 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule 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 consolidated financial position of Quorum Health Group, Inc. and subsidiaries at June 30, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Nashville, Tennessee August 4, 1997 except for Note 12, as to which the date is August 19, 1997 F-3 44 QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED JUNE 30 ------------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Revenue: Net patient service revenue $ 1,274,498 $ 963,485 $ 724,287 Hospital management/professional services 78,708 78,409 73,913 Reimbursable expenses 60,740 56,653 51,967 ----------- ----------- ----------- Net operating revenue 1,413,946 1,098,547 850,167 Expenses: Salaries and benefits 561,327 420,904 319,736 Reimbursable expenses 60,740 56,653 51,967 Supplies 198,469 160,849 121,869 Fees 125,720 102,690 83,443 Other operating expenses 116,856 92,624 68,064 Provision for doubtful accounts 89,919 56,483 48,780 Depreciation and amortization 75,134 55,901 37,566 Interest 45,601 36,568 22,209 Minority interest 741 109 1,046 Net gain on sale of assets -- (787) -- ----------- ----------- ----------- 1,274,507 981,994 754,680 ----------- ----------- ----------- Income before income taxes and extraordinary item 139,439 116,553 95,487 Provision for income taxes 55,357 47,321 39,532 ----------- ----------- ----------- Income before extraordinary item 84,082 69,232 55,955 Extraordinary charges from retirement of debt (8,197) -- -- ----------- ----------- ----------- Net income $ 75,885 $ 69,232 $ 55,955 =========== =========== =========== Net income per common share: Income before extraordinary item $ 1.11 $ 0.93 $ 0.76 Extraordinary charges from retirement of debt (0.11) -- -- ----------- ----------- ----------- Net income $ 1.00 $ 0.93 $ 0.76 =========== =========== =========== Weighted average common shares 75,926 74,639 73,737 =========== =========== ===========
See accompanying notes. F-4 45 QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
JUNE 30 ------------------------- 1997 1996 ---------- ---------- ASSETS Current assets: Cash and cash equivalents $ 19,008 $ 20,382 Accounts receivable, less allowance for doubtful accounts of $55,360 at June 30, 1997 and $39,752 at June 30, 1996 248,732 185,743 Supplies 31,622 27,170 Other 31,739 25,772 ---------- ---------- Total current assets 331,101 259,067 Property, plant and equipment, at cost: Land 62,109 53,273 Buildings and improvements 324,450 237,359 Equipment 462,726 362,007 Construction in progress 21,192 17,796 ---------- ---------- 870,477 670,435 Less accumulated depreciation 183,705 119,740 ---------- ---------- 686,772 550,695 Cost in excess of net assets acquired, net 185,932 142,708 Other 75,186 68,091 ---------- ---------- Total assets $1,278,991 $1,020,561 ========== ==========
F-5 46 QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JUNE 30 ------------------------ 1997 1996 ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 77,225 $ 47,049 Accrued salaries and benefits 61,936 42,694 Deferred revenue 6,198 4,965 Other current liabilities 3,391 1,509 Current maturities of long-term debt 1,869 2,441 ---------- ---------- Total current liabilities 150,619 98,658 Long-term debt, less current maturities 519,940 430,877 Deferred income taxes 38,249 33,343 Other liabilities and deferrals 25,450 19,855 Minority interests in consolidated entities 26,618 5,964 Commitments and contingencies Stockholders' equity: Common stock, $.01 par value; 100,000 shares authorized; 74,137 issued and outstanding at June 30, 1997 and 72,969 at June 30, 1996 741 730 Additional paid-in capital 272,692 262,337 Retained earnings 244,682 168,797 ---------- ---------- 518,115 431,864 ---------- ---------- Total liabilities and stockholders' equity $1,278,991 $1,020,561 ========== ==========
See accompanying notes. F-6 47 QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
COMMON STOCK ADDITIONAL -------------------- PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS TOTAL -------- -------- -------- -------- -------- Balance at July 1, 1994 70,364 $ 704 $249,739 $ 43,610 $294,053 Options exercised and related tax benefits 892 9 3,223 -- 3,232 Stock issued under employee stock purchase plan 420 4 3,145 -- 3,149 Net income -- -- -- 55,955 55,955 -------- -------- -------- -------- -------- Balance at June 30, 1995 71,676 717 256,107 99,565 356,389 Options exercised and related tax benefits, net of shares tendered in payment 969 10 2,764 -- 2,774 Stock issued under employee stock purchase plan 324 3 3,466 -- 3,469 Net income -- -- -- 69,232 69,232 -------- -------- -------- -------- -------- Balance at June 30, 1996 72,969 730 262,337 168,797 431,864 Options exercised and related tax benefits, net of shares tendered in payment 888 9 6,430 -- 6,439 Stock issued under employee stock purchase plan 280 2 3,925 -- 3,927 Net income -- -- -- 75,885 75,885 -------- -------- -------- -------- -------- Balance at June 30, 1997 74,137 $ 741 $272,692 $244,682 $518,115 ======== ======== ======== ======== ========
See accompanying notes. F-7 48 QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED JUNE 30 ------------------------------------- 1997 1996 1995 --------- --------- --------- OPERATING ACTIVITIES: Net income $ 75,885 $ 69,232 $ 55,955 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 66,907 51,191 33,630 Amortization of intangible assets 8,227 4,710 3,936 Extraordinary charges from retirement of debt 13,307 -- -- Provision for doubtful accounts 89,919 56,483 48,780 Provision for deferred taxes 5,106 13,893 11,369 Other 5,032 2,304 3,150 Changes in operating assets and liabilities, net of effects from acquisitions: Accounts receivable (114,589) (71,219) (56,790) Supplies and other current assets (93) (4,736) (3,232) Other assets (8,646) (13,790) (5,174) Accounts payable, accrued expenses and income taxes 27,630 2,005 (3,983) Other current liabilities 1,143 102 (2,846) Other liabilities 3,558 3,996 3,409 --------- --------- --------- Net cash provided by operating activities 173,386 114,171 88,204 INVESTING ACTIVITIES: Purchase of acquired companies (184,575) (205,326) (99,721) Purchase of property, plant and equipment (82,977) (62,122) (58,298) Other 8,104 1,018 6,610 --------- --------- --------- Net cash used in investing activities (259,448) (266,430) (151,409) FINANCING ACTIVITIES: Borrowings under bank debt 691,700 363,750 269,083 Repayments of bank debt (504,800) (368,000) (212,275) Repurchase of Senior Subordinated Notes (106,380) -- -- Proceeds from issuance of Senior Subordinated Notes -- 150,000 -- Loan origination costs (1,217) (5,194) (2,137) Proceeds from issuance of common stock, net 10,366 6,243 6,381 Other (4,981) (1,633) (681) --------- --------- --------- Net cash provided by financing activities 84,688 145,166 60,371 --------- --------- --------- Decrease in cash and cash equivalents (1,374) (7,093) (2,834) Cash and cash equivalents at beginning of year 20,382 27,475 30,309 --------- --------- --------- Cash and cash equivalents at end of year $ 19,008 $ 20,382 $ 27,475 ========= ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ (42,601) $ (32,198) $ (21,877) ========= ========= ========= Income taxes paid $ (44,489) $ (34,483) $ (30,398) ========= ========= =========
F-8 49 QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 1. ORGANIZATION AND ACCOUNTING POLICIES Quorum Health Group, Inc. (the Company) owns and operates acute care hospitals and local and regional health care systems nationwide through its affiliates. At June 30, 1997, the Company owned 19 hospitals and managed over 240 hospitals. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Accounts Receivable Accounts receivable consist primarily of amounts due from (i) the federal government and state governments under Medicare, Medicaid and other government programs and (ii) other payors including commercial insurance companies, health maintenance organizations, preferred provider organizations, self-insured employers and individual patients. The concentration of net accounts receivable from government programs as a percent of total net accounts receivable is 35% and 33% for the years ended June 30, 1997 and 1996, respectively. Concentration of credit risk relating to accounts receivable is limited to some extent by the diversity and number of patients and payors and the geographic dispersion of the Company's operations. Supplies Supplies are stated at the lower of cost (first-in, first-out method) or market. F-9 50 QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Property, Plant and Equipment Depreciation is computed on a straight-line basis principally with a range of depreciable lives from 20-40 years for buildings and improvements and 3-20 years for equipment, or over the lives of leases if shorter. Cost in Excess of Net Assets Acquired Cost in excess of net assets acquired (or goodwill) consists of the excess purchase price over the fair value of acquired tangible and identifiable intangible assets. Goodwill is amortized on a straight-line basis primarily over 15 to 40 years. The carrying value of goodwill is reviewed if the facts and circumstances suggest that it may be impaired. If this review indicates that goodwill will not be recoverable based on the undiscounted cash flows of the entity acquired over the remaining amortization period, the Company's carrying value of the goodwill will be reduced to estimated fair value. Accumulated amortization of cost in excess of net assets acquired was $15.7 million and $10.1 million at June 30, 1997 and 1996, respectively. Deferred Loan Costs Deferred loan costs are included in other non-current assets and are amortized over the term of the related debt by the interest method. Deferred loan costs are net of accumulated amortization of $.9 million and $3.5 million at June 30, 1997 and 1996, respectively. Risk Management The Company maintains self-insured medical plans for certain employees and has entered into reinsurance agreements with independent insurance companies to limit its losses. Unpaid claims are accrued based on the estimated ultimate cost of settlement, including claim settlement expenses, in accordance with past experience. The Company generally is insured for professional liability based on a claims-made policy purchased in the commercial market. The provision for professional liability and comprehensive general liability claims include estimates of the ultimate costs for claims incurred but not reported, in accordance with actuarial projections based on past experience. Management is aware of no potential professional liability claims whose settlement would have a material adverse effect on the Company's consolidated financial position or results of operations. F-10 51 QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Net Operating Revenue Net patient service revenue is received primarily from the federal Medicare and state Medicaid programs and from commercial insurance carriers. Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered, including estimated retroactive adjustments under agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. Net patient service revenue is net of contractual adjustments and policy discounts of $1,026.3 million, $746.8 million and $602.2 million for the years ended 1997, 1996 and 1995, respectively. Approximately 55%, 56% and 57% of gross patient service revenue was from Medicare and Medicaid for the years ended 1997, 1996 and 1995, respectively. Financial Instruments The Company enters into interest rate swap agreements as a means of managing its interest rate exposure. The differential to be paid or received is recognized over the life of the agreement as an adjustment to interest expense. Stock Based Compensation The Company generally grants stock options for a fixed number of shares to employees with an exercise price which approximates the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly, recognizes no compensation expense for the stock option grants. Income Per Common Share Income per common share is based on the weighted average number of shares of common stock outstanding, and common stock equivalents consisting of dilutive stock options. Fully diluted earnings per share is not presented because such amounts approximate earnings per share. Newly Issued Accounting Standard In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share", which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to F-11 52 QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) restate all prior periods. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options will be excluded. Basic earnings per share before extraordinary item for the years ended June 30, 1997 and June 30, 1996 will be $.04 and $.03, respectively, more than primary earnings per share. Basic earnings per share for the years ended June 30, 1997 and June 30, 1996 will be $.03 per share, more than primary earnings per share. The amount of dilutive earnings per share will be the same as the amount of fully diluted earnings per share for all periods. Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. 2. ACQUISITIONS AND DIVESTITURES During fiscal 1997, the Company acquired certain assets and the business of five hospitals and affiliated health care entities. The Company also sold a minority interest in an acute care hospital in Papillion, Nebraska and agreed to sell its remaining interest in fiscal 1998. During fiscal 1996, the Company acquired certain assets and the business of two hospitals and affiliated health care entities and sold one hospital and a minority interest in another hospital for approximately $6.3 million in cash and notes receivable. During fiscal 1995, the Company acquired certain assets and the business of three hospitals and affiliated health care entities. Hospital and affiliated business acquisitions are summarized as follows (in thousands): F-12 53 QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED JUNE 30 ------------------ 1997 1996 1995 --------- --------- --------- Fair value of assets acquired $ 233,582 $ 210,099 $ 118,910 Fair value of liabilities assumed (29,943) (4,773) (19,189) Contributions from minority investors (19,064) -- -- --------- --------- --------- Net cash used for acquisitions $ 184,575 $ 205,326 $ 99,721 ========= ========= =========
All of the foregoing acquisitions were accounted for using the purchase method of accounting. The allocation of the purchase price associated with certain of the acquisitions has been determined by the Company based upon available information and is subject to further refinement. Included in the acquisitions were costs in excess of net assets acquired of approximately $48.5 million, $37.6 million, and $3.0 million for the years ended June 30, 1997, 1996, and 1995 respectively. The operating results of the acquired companies have been included in the accompanying consolidated statements of income from the respective dates of acquisition. The following unaudited pro forma results of operations give effect to the operations of the entities acquired and divested in fiscal 1997, 1996 and 1995 as if the respective transactions had occurred as of the first day of the fiscal year immediately preceding the year of the transactions (in thousands, except per share data):
YEAR ENDED JUNE 30 ------------------ 1997(1) 1996(2) 1995(3) ---------- ---------- ---------- Net operating revenue $1,481,821 $1,358,293 $1,061,350 Income before extraordinary item 83,551 64,459 62,307 Net income 75,354 64,459 62,307 Income per common share before extraordinary item 1.10 .86 .84 Net income per common share .99 .86 .84
- ---------- (1) Includes Kingstree Hospital, Doctors Hospital of Stark County, Barberton Citizens Hospital and Clinton County Hospital. (2) Includes The Lutheran Hospital of Indiana, Inc., Jacksonville Hospital, Mary Black Health System, Kingstree Hospital, Doctors Hospital of Stark County, Barberton Citizens Hospital, Clinton County Hospital and excludes the hospital divested in fiscal 1996. (3) Includes Midlands Community Hospital, Carolinas Hospital System, Lake City Community Hospital, The Lutheran Hospital of Indiana, F-13 54 QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Inc. and Jacksonville Hospital and excludes the hospital divested in fiscal 1996. The pro forma results of operations do not purport to represent what the Company's results of operations would have been had such transactions in fact occurred at the beginning of the years presented or to project the Company's results of operations in any future period. 3. LONG-TERM DEBT Long-term debt consists of the following (in thousands):
JUNE 30 ------- 1997 1996 --------- --------- Revolving Line of Credit $ 363,900 $ 177,000 8.75% Senior Subordinated Notes 150,000 150,000 11.875% Senior Subordinated Notes 2,224 100,000 Other debt 5,685 6,318 --------- --------- 521,809 433,318 Less current maturities (1,869) (2,441) --------- --------- $ 519,940 $ 430,877 ========= =========
Revolving Line of Credit During fiscal 1997, the Company replaced its secured $600.0 million revolving credit facility with a new unsecured five-year revolving credit facility in the amount of $850.0 million. The credit agreement provides for two consecutive one-year extensions subject to approval of 100% of the lenders. The loan bears interest, at the Company's option, at generally the lender's base rate or a fluctuating rate ranging from .25 to .75 percentage points above LIBOR. The Company pays a facility fee ranging from .18 to .25 percentage points on the commitment. The interest rate margins and facility fee rates are based on the Company's leverage ratio. The Company may prepay the amount outstanding at any time. The interest rate in effect at June 30, 1997 was 6.3%. 8.75% Senior Subordinated Notes During fiscal 1996, the Company issued $150.0 million in Senior Subordinated Notes maturing on November 1, 2005 and bearing interest at 8.75%. The Notes are subject to redemption at the option of the Company at 104.375% on or after November 1, 2000, 102.188% on or after November 1, 2001 and at par on or after November 1, 2002. The Notes are unsecured obligations and are subordinated in right of payment to all existing and future senior indebtedness. F-14 55 QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11.875% Senior Subordinated Notes During fiscal 1997, the Company purchased for cash $97.8 million of its 11.875% Senior Subordinated Notes (Notes) through a tender offer at a price of $1,087 per $1,000 principal amount. The Notes were repurchased with borrowings under the Company's Revolving Line of Credit. The Company also amended the related Indenture to eliminate certain restrictive covenants. The remaining Notes outstanding are subject to redemption at the option of the Company at prices declining from 105.875% at December 15, 1997 to par on December 15, 1999. Other Debt Other debt consists primarily of subsidiary secured debt, capital leases and various notes payable. Principal and interest payments are paid in periodic installments through 2008. Interest rates are fixed and range from 6.3% to 10.5%. Other Long-Term Debt Information The credit facilities contain certain financial covenants including but not limited to the prohibition of dividend payments and other distributions, repurchase of common stock, investments, asset dispositions, restrictions on borrowings, the ability to merge or consolidate with or transfer assets to another entity, the maintenance of net worth and various financial ratios, including a fixed charge ratio and a leverage ratio. The Company is required to repurchase all Senior Subordinated Notes at 101% upon a change in control. Maturities of long-term debt for the fiscal years subsequent to June 30, 1997 are as follows: 1998 - $1.9 million; 1999 - $1.1 million; 2000 - $.5 million; 2001 - $.4 million; 2002 - $366.3 million and thereafter - $151.7 million. Extraordinary Charges from Retirement of Debt During the fourth quarter of fiscal 1997, the Company incurred extraordinary charges of $8.2 million (net of applicable income taxes of $5.1 million). The charges consist of the premium associated with the purchase of the Notes, transaction costs, the write-off of unamortized loan costs of the Notes and the write-off of unamortized loan costs of the $600.0 million secured revolving credit facility. The Notes were repurchased through a tender offer and the revolving credit facility was replaced with the new unsecured revolving credit facility. F-15 56 QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. INCOME TAXES The provision for income taxes consists of the following (in thousands):
YEAR ENDED JUNE 30 ------------------ 1997 1996 1995 ------- ------- ------- Current: Federal $43,580 $28,379 $24,609 State and local 6,671 5,049 3,554 ------- ------- ------- 50,251 33,428 28,163 Deferred: Federal 4,451 12,680 9,966 State and local 655 1,213 1,403 ------- ------- ------- 5,106 13,893 11,369 ------- ------- ------- $55,357 $47,321 $39,532 ======= ======= =======
A reconciliation of the actual income tax expense and income taxes computed by applying the statutory federal income tax rate to income before income taxes is as follows:
YEAR ENDED JUNE 30 ------------------ 1997 1996 1995 ---- ---- ---- Federal statutory rate 35.0% 35.0% 35.0% State and local income taxes, net of federal income tax benefit 3.4 3.5 3.4 Nondeductible amortization of cost in excess of net assets acquired .3 .1 .2 Other 1.0 2.0 2.8 ---- ---- ---- 39.7% 40.6% 41.4% ==== ==== ====
Deferred income taxes result from temporary differences in the recognition of assets, liabilities, revenues and expenses for financial accounting and tax purposes. Sources of these differences and the related tax effects are as follows (in thousands): F-16 57 QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30 ------- 1997 1996 -------- -------- Deferred tax liabilities: Depreciation and amortization $(42,932) $(34,697) Provision for doubtful accounts (6,579) (5,867) Other (756) (951) -------- -------- Total deferred tax liabilities (50,267) (41,515) -------- -------- Deferred tax assets: Accrued expenses 5,907 6,016 Employee compensation 5,928 4,300 Other 961 362 -------- -------- Total deferred tax assets 12,796 10,678 -------- -------- Net deferred tax liabilities $(37,471) $(30,837) ======== ========
The balance sheet classification of deferred income taxes is as follows (in thousands):
JUNE 30 ------- 1997 1996 -------- -------- Current $ 778 $ 2,506 Long-term (38,249) (33,343) -------- -------- Total $(37,471) $(30,837) ======== ========
5. STOCKHOLDERS' EQUITY AND STOCK BENEFIT PLANS Stock Option Plan The Company accounts for its stock option plans in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees." In 1995, the Financial Accounting Standards Board issued Statement No. 123 "Accounting for Stock-Based Compensation" (SFAS 123) which, if fully adopted, changes the method for recognition of costs in an entity's financial statements. The Company has adopted the disclosure-only provisions of SFAS 123 and accordingly, recognizes no compensation expense for the Company's stock option plans. Had compensation expense for the stock option plan been determined consistent with the provisions of SFAS 123, the Company's net earnings and earnings per share would have been as follows (in thousands, except per share data): F-17 58 QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED JUNE 30 ------------------ 1997 1996 ------------------------ ------------------------ As Pro As Pro Reported Forma Reported Forma ---------- ---------- ---------- ---------- Income before extraordinary item $ 84,082 $ 81,432 $ 69,232 $ 68,050 Net income 75,885 73,235 69,232 68,050 Income per common share before extraordinary item 1.11 1.07 .93 .91 Net income per common share 1.00 .96 .93 .91
Stock-based compensation costs on a pro forma basis would have reduced pretax income by $3.4 million and $1.3 million in fiscal 1997 and 1996, respectively. Because the SFAS 123 method of accounting has not been applied to options granted prior to July 1, 1995, the resulting pro forma disclosures may not be representative of that to be expected in future years. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following range of assumptions used for the option grants which occurred during 1997 and 1996:
YEAR ENDED JUNE 30 ------------------ 1997 1996 ---- ---- Volatility .172 .176 Interest rate 6.3%-6.5% 6.4%-6.5% Expected life (years) 4.4 4.6 Forfeiture rate 5.6% 5.6%
Under the Company's stock option plans, non-qualified and incentive stock options to purchase common stock may be granted to officers, employees and directors. Under these plans, options are generally granted at an exercise price equal to the fair market value on the date of grant. Stock options are exercisable over a period determined by the Board of Directors, but no longer than ten years after the date of the grant. The Company has reserved 9,632,667 shares of common stock under these plans. Information regarding the option plans for fiscal 1997, 1996, and 1995 are summarized below (share amounts in thousands): F-18 59 QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STOCK OPTION PRICE WEIGHTED AVERAGE OPTIONS PER SHARE EXERCISE PRICE ------ ------------- ---------------- Balances, July 1, 1994 4,136 $ 1.00-$ 7.50 $ 2.90 Granted 1,043 .67- 13.83 11.62 Exercised (893) 1.00- 5.00 2.11 Cancelled (126) 1.00- 12.09 5.11 ------ Balances, June 30, 1995 4,160 .67- 13.83 5.19 Granted 3,200 10.13- 17.33 15.06 Exercised (1,101) 1.00- 13.67 2.86 Cancelled (323) 1.00- 15.67 10.65 ------ Balances, June 30, 1996 5,936 .67- 17.33 10.65 Granted 1,776 .67- 23.83 17.66 Exercised (926) 1.00- 16.59 5.85 Cancelled (304) 1.00- 16.59 12.18 ------ Balances, June 30, 1997 6,482 .67- 23.83 13.18 ======
1997 1996 ---- ---- Weighted average fair value for options granted during the year $5.07 $4.19 Options exercisable 1,692 1,190 Options available for grant 3,747 1,359
The following table summarizes information regarding the options outstanding at June 30, 1997 (share amounts in thousands): F-19 60 QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------- ------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING RANGE OF AVERAGE AVERAGE CONTRACT EXERCISE NUMBER EXERCISE NUMBER EXERCISABLE LIFE (YRS) PRICES OUTSTANDING PRICE EXERCISABLE PRICE ---------- ------ ----------- ----- ----------- ----- 1 $ 4.00 189 $ 4.00 185 $ 4.00 2 5.00- 7.50 233 5.27 157 5.26 3 1.00-13.67 970 8.91 586 6.71 4 13.33-17.50 966 14.46 194 14.31 5 21.00 20 21.00 -- -- 7 4.00- 5.00 542 4.25 87 4.26 8 .67-10.13 63 1.05 33 1.41 9 .67-17.50 2,397 15.14 336 14.56 10 12.63-23.84 1,102 19.81 114 12.63 ----- ----- 6,482 1,692 ===== =====
Employee Stock Purchase Plan The Company has a qualified and nonqualified employee stock purchase plan. The purchase price of the shares under the qualified plan is 85% of the lesser of the fair market value on the first day (March 1) or the last day (February 28) of the plan year. The purchase price of the shares under the nonqualified plan is the fair market value on the last day (February 28) of the plan year. Employees may designate up to 10% of their compensation (not to exceed $25,000 in any calendar year) for the purchase of stock. During fiscal 1997, 281,837 shares were issued yielding net proceeds of approximately $3.9 million. During fiscal 1996, 324,123 shares were issued yielding net proceeds of approximately $3.5 million. During fiscal 1995, 419,514 shares were issued yielding net proceeds of approximately $3.1 million. The Company has reserved 2,250,000 shares of common stock under the plan. Stockholder Rights Plan In fiscal 1997, the Company adopted a Stockholder Rights Plan and declared a dividend of one right for each share of common stock held as of the close of business on April 28, 1997. Each right entitles stockholders to acquire one-third of a share of common stock at an exercise price of $100, subject to adjustment. Such rights become exercisable only if a person or group acquires beneficial ownership of 15 percent or more of the Company's common stock or commences a tender or exchange offer which would result in that person or group owning 15 percent or more of the Company's common stock. After any person has acquired 15 percent or more of the Company's common stock, each right F-20 61 QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) not owned by such person or certain related parties will entitle its holder to purchase a number of shares of the Company's common stock (or any combination of common stock, preferred stock, debt securities and cash, as determined by the Board of Directors) having a market value of two times the then-current exercise price of the right. In the event the Company is involved in a merger or other business combination transaction with another person or sells 50 percent or more of its assets or earning power to another person, each right will entitle its holder to purchase a number of shares of the Company's common stock or the acquiring company's common stock having a market value of two times the then-current exercise price of the right. The rights may be redeemed at $.01 per right at any time until the tenth day following public announcement that a 15 percent position has been acquired. The rights expire on April 28, 2007. 6. EMPLOYEE BENEFIT PLANS The Company sponsors defined contribution employee benefit plans which cover substantially all employees. Employees may contribute up to 15% of eligible compensation subject to Internal Revenue Service (IRS) limits. The plans permit the Company to make a discretionary base contribution and a discretionary match to employee deferrals. The Company's contribution to the plans is determined annually by the Board of Directors. Base contributions under the plans vest at the end of each plan year and matching contributions vest after five years of qualifying service. Benefit plan expense for the years ended June 30, 1997, 1996 and 1995 totaled approximately $13.0 million, $9.2 million and $8.2 million, respectively. 7. LEASES The Company leases hospitals, medical office buildings and equipment under agreements that generally require the Company to pay all maintenance, property taxes and insurance costs and that expire on various dates extending to the year 2007. Certain leases include options to purchase the leased property during or at the end of the lease term at fair market value. Rental expense for all operating leases totaled $22.2 million, $17.1 million, and $12.8 million for the years ended June 30, 1997, 1996 and 1995, respectively. Future minimum rental commitments under noncancelable operating leases at June 30, 1997 are as follows: 1998 - $15.4 million; 1999 - $12.9 million; 2000 - $10.8 million; 2001 - $9.4 million; 2002 - $7.9 million and thereafter - $21.1 million. F-21 62 QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. COMMITMENTS The Company has entered into a $60 million commitment to construct a hospital and medical office building in Florence, South Carolina. The facilities are to be completed in fiscal 1999. 9. CONTINGENCIES Management continually evaluates contingencies based on the best available evidence and believes that provision for losses has been provided to the extent necessary. In the opinion of management, the ultimate resolution of the following contingencies will not have a material effect on the Company's results of operations or financial position. Litigation The Company currently, and from time to time, is expected to be subject to claims and suits arising in the ordinary course of business. Net Patient Service Revenue Final determination of amounts earned under the Medicare and Medicaid programs often occurs in subsequent years because of audits by the programs, rights of appeal and the application of numerous technical provisions. Financial Instruments Interest rate swap agreements are used on a limited basis to manage the Company's interest rate exposure. The agreements are contracts to periodically exchange fixed and floating interest rate payments over the life of the agreements. The floating-rate payments are based on LIBOR and fixed-rate payments are dependent upon market levels at the time the swap agreement was consummated. In fiscal 1997, the Company amended its 1993 interest rate swap agreements to effectively convert two borrowings of $50.0 million each from fixed-rate to floating-rate through September 16, 2001 and December 1, 2001. In addition, the Company entered into interest rate swap agreements which effectively convert $100.0 million and $200.0 million of floating-rate borrowings to fixed-rate borrowings through December 12, 2001 and March 20, 2002, respectively. For the years ended June 30, 1997, 1996 and 1995, the Company received a weighted average rate of 5.8%, 5.8% and 5.6%, respectively and paid a weighted average rate of 5.9%, 4.8% and 4.2%, respectively. The Company is exposed to credit losses in the event of nonperformance F-22 63 QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) by the counterparty to its financial instruments. The Company anticipates that the counterparty will be able to fully satisfy its obligations under the contracts. Income Taxes The IRS is in the process of conducting examinations of the Company's federal income tax returns for the years ended 1993 through 1995. During fiscal 1996, the IRS proposed certain adjustments in connection with its examination of the Company's federal income tax returns for the fiscal years ending June 30, 1990 through 1992. The most significant adjustment involves the amortization deductions claimed on certain acquired intangible assets in conjunction with the acquisition of Quorum Health Resources, Inc. The Company is currently protesting the proposed adjustments through the appeals process of the IRS. Other In June 1993, the Office of the Inspector General (OIG) of the Department of Health and Human Services requested information from the Company in connection with an investigation involving the Company's procedures for preparing Medicare cost reports. In January 1995, the U.S. Department of Justice issued a Civil Investigative Demand which also requested information from the Company in connection with that same investigation. As a part of the government's investigation, several former and current employees of the Company have been interviewed. The Company has provided information and is cooperating fully with the investigation. The Company cannot predict whether the government will commence litigation regarding this matter. 10. FAIR VALUES OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments, with the exception of long-term debt, approximate their carrying amounts in the consolidated balance sheets. The carrying value of long-term debt (including current portion) was $521.8 and $433.3 million for the years ended June 30, 1997 and 1996, respectively. The fair value of long-term debt was $521.1 million and $443.5 million for the years ended June 30, 1997 and 1996, respectively. The fair value of publicly traded notes has been determined using the quoted market price at June 30, 1997 and 1996. The fair values of the remaining long-term debt are estimated using discounted cash flows, based on the Company's incremental borrowing rates. The estimates of fair value include the effect of the interest rate swap agreements. F-23 64 QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Quarterly financial information for the years ended June 30, 1997 and 1996 is summarized below (in thousands, except per share data):
QUARTER ------- 1ST 2ND 3RD 4TH -------- -------- -------- -------- 1997 - ---- Net operating revenue $316,001 $342,137 $377,096 $378,712 Income before income taxes and extraordinary item 29,065 33,346 39,941 37,087 Net income 17,526 20,108 24,084 14,167 Income per common share before extraordinary item .23 .27 .32 .29 Net income per common share .23 .27 .32 .18 1996 - ---- Net operating revenue $253,712 $273,244 $286,007 $285,584 Income before income taxes 24,546 28,406 33,543 30,058 Net income 14,580 16,873 19,925 17,854 Net income per common share .19 .23 .27 .24
12. SUBSEQUENT EVENT On July 10, 1997, the Company signed an Asset Purchase Agreement to acquire certain assets and businesses of Wesley Health System, Inc. in Hattiesburg, Mississippi. The proposed transaction is subject to the completion of customary closing conditions and obtaining certain regulatory approvals. On August 19, 1997, the Board of Directors approved a three-for-two stock split effected in the form of a dividend payable to shareholders of record on September 2, 1997. The shares of common stock, price per share, the number of shares subject to options and the exercise prices in the consolidated financial statements have been retroactively restated to give effect to the stock dividend for all periods presented. F-24 65 QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ------------------------------------------------------------------------------------------------ ADDITIONS ------------------------ (1) (2) (3) BALANCE AT CHARGED TO CHARGED TO BALANCE BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS AT END OF DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD - ------------------------------------------------------------------------------------------------ (In thousands) Year ended June 30, 1997: Allowance for doubtful accounts $39,752 $89,919 $18,424(a) $92,735(b) $55,360 Year ended June 30, 1996: Allowance for doubtful accounts $44,828 $56,483 $ 9,210(a) $70,769(b) $39,752 Year ended June 30, 1995: Allowance for doubtful accounts $31,384 $48,780 $12,803(c) $48,139(b) $44,828
(a) Allowance for doubtful accounts of acquired companies. (b) Accounts written off, net of recoveries. (c) Allowance for doubtful accounts of acquired hospitals and allowance for doubtful accounts not sold in connection with the divestiture of a hospital identified at the date of acquisition as being held for sale. S-1 66 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 in the City of Brentwood, State of Tennessee on September 26, 1997. QUORUM HEALTH GROUP, INC. By: /s/ Steve B. Hewett ------------------------------- Steve B. Hewett Title: Vice President (Chief 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 below:
SIGNATURE TITLE /s/ James E. Dalton, Jr. President, Chief Executive Sept. 26, 1997 - ------------------------ James E. Dalton, Jr. Officer and Director (Principal Executive Officer) /s/ Steve B. Hewett Vice President (Chief Sept. 26, 1997 - ------------------------ Steve B. Hewett Financial Officer) /s/ Terry E. Allison Vice President and Assistant Sept. 26, 1997 - ------------------------ Terry E. Allison Treasurer (Chief Accounting Officer) /s/ Russell L. Carson Chairman of the Board Sept. 26, 1997 - ------------------------ Russell L. Carson /s/ Sam A. Brooks, Jr. Director Sept. 26, 1997 - ------------------------ Sam A. Brooks, Jr. /s/ Dr. C. Edward Floyd Director Sept. 26, 1997 - ------------------------ Dr. C. Edward Floyd /s/ Joseph C. Hutts Director Sept. 26, 1997 - ------------------------ Joseph C. Hutts /s/ Kenneth J. Melkus Director Sept. 26, 1997 - ------------------------ Kenneth J. Melkus /s/ Thomas S. Murphy,Jr. Director Sept. 26, 1997 - ------------------------ Thomas S. Murphy, Jr.
Sig-1 67 /s/ Rocco A. Ortenzio Director Sept. 26, 1997 - --------------------- Rocco A. Ortenzio /s/ S. Douglas Smith Director Sept. 26, 1997 - ----------------------- S. Douglas Smith /s/ Colleen Conway Welch Director Sept. 26, 1997 - ------------------------ Colleen Conway Welch
Sig-2 EX-4.1.3 2 FIRST SUPPLEMENTAL INDENTURE 1 EXHIBIT 4.1.3 QUORUM HEALTH GROUP, INC. Issuer TO UNITED STATES TRUST COMPANY OF NEW YORK Trustee First Supplemental Indenture Dated as of May 7, 1997 $100,000,000 11 7/8% Senior Subordinated Notes due December 15, 2002 2 FIRST SUPPLEMENTAL INDENTURE dated as of May 7, 1997, between QUORUM HEALTH GROUP, INC., a corporation duly organized and existing under the laws of the State of Delaware (the "Company"), and United States Trust Company of New York, as Trustee (the "Trustee"). RECITALS WHEREAS, the Company and the Trustee are parties to that certain Indenture dated as of December 15, 1992 (the "Indenture"), regarding the Company's 117/8% Senior Subordinated Notes due December 15, 2002 (the "Notes"); WHEREAS, the Company has commenced an offer to purchase (the "Offer") for cash all of its outstanding Notes from all Holders, upon the terms and subject to the conditions set forth in the Offer to Purchase and Consent Solicitation Statement dated as of April 24, 1997 and in the related Consent and Letter of Transmittal dated April 24, 1997; WHEREAS, in connection with the Offer and forming a part thereof, the Company has solicited consents (the "Consents") of the Holders of the Notes to effect certain amendments ("the Amendments") to the Indenture (the "Solicitation"); WHEREAS, there have been validly delivered Consents of Holders of a majority in principal amount of the Notes outstanding that are owned by Holders other than the Company, any subsidiary or any person directly or indirectly controlling or controlled by, or under direct or indirect common control with, the Company or any subsidiary; WHEREAS, Section 902 of the Indenture permits the Company and the Trustee to enter into a Supplemental Indenture; and WHEREAS, in accordance with the terms of the Offer and Solicitation, the Company has determined that it is necessary or required to supplement the Indenture to reflect the Amendments. AGREEMENT NOW, THEREFORE, in consideration of the foregoing and the mutual premises contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby supplement and amend the Indenture (such amendments not to become operative until validly tendered Notes are accepted for payment by the Company) as follows: 3 1. The covenant entitled "Limitation on Consolidated Debt" (Section 1008 of the Indenture) is hereby deleted in its entirety. 2. The covenant entitled "Limitation on Layered and Junior Debt" (Section 1009 of the Indenture) is hereby deleted in its entirety. 3. The covenant entitled "Limitation on Restricted Payments" (Section 1010 of the Indenture) is hereby deleted in its entirety. 4. The covenant entitled "Limitation on Investments" (Section 1011 of the Indenture) is hereby deleted in its entirety. 5. The covenant entitled "Limitations Concerning Distributions by Subsidiaries, etc." (Section 1012 of the Indenture) is hereby deleted in its entirety. 6. The covenant entitled "Limitation on Liens" (Section 1013 of the Indenture) is hereby deleted in its entirety. 7. The covenant entitled "Limitation on Certain Sales of Capital Stock of Subsidiaries and Certain Assets" (Section 1015 of the Indenture) is hereby deleted in its entirety. 8. The covenant entitled "Change of Control" (Section 1016 of the Indenture) is hereby deleted in its entirety. 9. The covenant entitled "Unrestricted Subsidiaries" (Section 1018 of the Indenture) is hereby deleted in its entirety. 10. The covenant entitled "Mergers, Consolidations and Certain Sales and Purchases of Assets" (Section 801 of the Indenture) is hereby amended in full to be and read as follows: SECTION 801. Mergers, Consolidations and Certain Sales and Purchases of Assets. The Company (a) shall not consolidate with or merge into any other Person; (b) shall not permit any other Person to consolidate with or merge into (i) the Company or (ii) any Restricted Subsidiary in a transaction in which such Subsidiary remains a Restricted Subsidiary; (c) shall not, directly or indirectly, transfer, convey, sell, lease or otherwise dispose of all or substantially all of its proper ties and assets as an entirety; and (d) shall not, and shall not permit any Restricted Subsidiary to (i) directly or indirectly, acquire Capital Stock of or other ownership interests in any other Person such that such other Person becomes a Subsidiary of the Company or (ii) directly or 3 4 indirectly, purchase, lease or otherwise acquire all or substantially all of the properties and assets of any Person as an entirety or any existing business (whether existing as a separate entity, subsidiary, division, unit or otherwise) of any Person; unless, in any such transaction: (1) immediately before and after giving effect to such transaction and treating any Debt Incurred by the Company or a Subsidiary of the Company as a result of such transaction as having been Incurred by the Company or such Subsidiary at the time of such transaction, no Event of Default, and no event which, after notice or lapse of time, or both, would become an Event of Default, shall have happened and be continuing; (2) in the case the Company shall consolidate with or merge into another Person or shall directly or indirectly transfer, convey, sell, lease or otherwise dispose of all or substantially all of its properties and assets as an entirety, the Person formed by such consolidation or into which the Company is merged or the Person which acquires by transfer, conveyance, sale, lease or other disposition all or substantially all of the properties and assets of the Company as an entirety (for purposes of this Article Eight, a "Successor Company") shall be a corporation, partnership, limited liability company or trust, shall be organized and validly existing under the laws of the United States of America, any State thereof or the District of Columbia and shall expressly assume by an indenture supplemental hereto executed and delivered to the Trustee, in form satisfactory to the Trustee, the due and punctual payment of the principal of (and premium, if any) and interest on all the Securities and the performance of every covenant of this Indenture on the part of the Company to be performed or observed; and (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer, lease, other disposition, acquisition or purchase, and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture, complies with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with, and, with respect to such Officers' Certificate, setting forth the manner of determination of the Consolidated Net Worth and the Consolidated Cash Flow Ratio of the Company or, if applicable, of the Successor Company as required pursuant to the foregoing. 4 5 11. The covenant entitled "Limitation on Transactions with Affiliates and Related Persons" (Section 1014 of the Indenture) is hereby amended in full to be and read as follows: SECTION 1014. Limitation on Transactions with Affiliates and Related Persons. The Company shall not, and shall not permit any Subsidiary of the Company to, directly or indirectly, enter into any transaction (including the purchase, sale, lease or exchange of property, the rendering of any service or the making of any loan or advance) with any Affiliate or Related Person, unless (1) such Affiliate or Related Person is (both before and after such transaction) (a) a Wholly Owned Subsidiary of the Company or (b) another Subsidiary of the Company the minority interests in which are not held by any Affiliate or Related Person; (2) the Board of Directors shall determine (in its good faith judgment and evidenced by a Board Resolution) that: (i) the terms of such transaction are in the best interests of the Company or such Subsidiary; and (ii) such transaction is on terms no less favorable to the Company or such Subsidiary than those that could be obtained in a comparable arm's length transaction with an entity that is not an Affiliate or a Related Person; or (3) the transaction is in the ordinary course of business of the Company or such Subsidiary consistent with past practice and the total consideration given by the Company or such Subsidiary in such transaction or series of transactions of which it is a part (including cash, the fair value of non-cash property and the assumption of Debt, as evidenced by an Officer's Certificate) does not exceed $2,000,000. 12. Clause (3) of Section 5.01 of the Indenture entitled "Events of Default" is hereby deleted in its entirety. 13. In executing this First Supplemental Indenture, the Trustee acknowledges that it has received, as permitted by Section 903 of the Indenture, an opinion prepared by the Company's special counsel, Reboul, MacMurray, Hewitt, Maynard & Kristol, dated as of the date hereof, a copy of which is attached hereto as Exhibit A. 5 6 14. Capitalized terms used herein without definition shall have the meanings set forth in the Indenture. 15. This First Supplemental Indenture may be executed in any number of counterparts with the same effect as if the signature to each counterpart were upon a single instrument, and all such counter parts together will be deemed an original of this First Supplemental Indenture. IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the date first written above. Quorum Health Group, Inc. By:_____________________________________ Name: Title: Attest: _______________________________ United States Trust Company of New York By:_____________________________________ Name: Title: Attest: _______________________________ 6 EX-4.4.18 3 CREDIT AGREEMENT DATED 4-22-97 1 EXHIBIT 4.4.18 EXECUTION COPY ================================================================================ CREDIT AGREEMENT DATED AS OF APRIL 22, 1997, BY AND AMONG QUORUM HEALTH GROUP, INC., AS BORROWER, THE LENDERS REFERRED TO HEREIN, AND FIRST UNION NATIONAL BANK OF NORTH CAROLINA, AS AGENT ================================================================================ 2 TABLE OF CONTENTS ARTICLE I DEFINITIONS............................................................................. 1 SECTION 1.1 Definitions............................................................... 1 SECTION 1.2 General................................................................... 17 SECTION 1.3 Other Definitions and Provisions.......................................... 18 ARTICLE II CREDIT FACILITY........................................................................ 18 SECTION 2.1 Revolving Credit and Competitive Bid Loans................................ 18 SECTION 2.2 Swingline Loans........................................................... 19 SECTION 2.3 Procedure for Advances of Revolving Credit and Swingline Loans........................................................... 20 SECTION 2.4 Procedure for Advances of Competitive Bid Loans........................... 21 SECTION 2.5 Repayment of Loans........................................................ 23 SECTION 2.6 Notes..................................................................... 24 SECTION 2.7 Permanent Reduction of the Aggregate Commitment........................... 24 SECTION 2.8 Termination and Extension of Credit Agreement............................. 25 SECTION 2.9 Use of Proceeds........................................................... 25 SECTION 2.10 Guaranty Agreement........................................................ 26 ARTICLE III LETTER OF CREDIT FACILITY............................................................. 26 SECTION 3.1 L/C Commitment............................................................ 26 SECTION 3.2 Procedure for Issuance of Letters of Credit............................... 26 SECTION 3.3 Commissions and Other Charges............................................. 27 SECTION 3.4 L/C Participations........................................................ 27 SECTION 3.5 Reimbursement Obligation of the Borrower.................................. 28 SECTION 3.6 Obligations Absolute...................................................... 28 SECTION 3.7 Effect of Application..................................................... 29 ARTICLE IV GENERAL LOAN PROVISIONS................................................................ 29 SECTION 4.1 Interest.................................................................. 29 SECTION 4.2 Notice and Manner of Conversion or Continuation of Revolving Credit Loans.................................................... 31 SECTION 4.3 Fees...................................................................... 32 SECTION 4.4 Manner of Payment......................................................... 33 SECTION 4.5 Crediting of Payments and Proceeds........................................ 33 SECTION 4.6 Adjustments............................................................... 33 SECTION 4.7 Nature of Obligations of Lenders Regarding Extensions of Credit; Assumption by the Agent........................................ 34 SECTION 4.8 Changed Circumstances..................................................... 34 SECTION 4.9 Indemnity................................................................. 36 SECTION 4.10 Capital Requirements...................................................... 37 SECTION 4.11 Taxes..................................................................... 37
3 SECTION 4.12 Replacement of Lenders.................................................... 38 ARTICLE V CLOSING; CONDITIONS OF CLOSING AND BORROWING............................................ 39 SECTION 5.1 Closing................................................................... 39 SECTION 5.2 Conditions to Closing and Initial Extensions of Credit.................... 39 SECTION 5.3 Conditions to All Loans and Letters of Credit............................. 42 ARTICLE VI REPRESENTATIONS AND WARRANTIES OF THE BORROWER......................................... 43 SECTION 6.1 Representations and Warranties............................................ 43 SECTION 6.2 Survival of Representations and Warranties, Etc........................... 50 ARTICLE VII FINANCIAL INFORMATION AND NOTICES..................................................... 51 SECTION 7.1 Financial Statements...................................................... 51 SECTION 7.2 Notice of Litigation and Other Matters.................................... 52 SECTION 7.3 Loss of Accreditation, Etc................................................ 53 SECTION 7.4 Accuracy of Information................................................... 54 ARTICLE VIII AFFIRMATIVE COVENANTS................................................................ 54 SECTION 8.1 Preservation of Existence and Related Matters............................. 54 SECTION 8.2 Maintenance of Property................................................... 54 SECTION 8.3 Insurance................................................................. 54 SECTION 8.4 Accounting Methods and Financial Records.................................. 55 SECTION 8.5 Payment and Performance of Obligations.................................... 55 SECTION 8.6 Compliance With Laws and Approvals........................................ 55 SECTION 8.7 Environmental Laws........................................................ 55 SECTION 8.8 Compliance with ERISA..................................................... 56 SECTION 8.9 Compliance With Agreements................................................ 56 SECTION 8.10 Visits and Inspections.................................................... 56 SECTION 8.11 Wholly-Owned Entities..................................................... 56 SECTION 8.12 Further Assurances........................................................ 56 ARTICLE IX FINANCIAL COVENANTS.................................................................... 56 SECTION 9.1 Total Leverage Ratio...................................................... 57 SECTION 9.2 Senior Leverage Ratio..................................................... 57 SECTION 9.3 Fixed Charge Coverage Ratio............................................... 57 SECTION 9.4 Debt to Capital Ratio..................................................... 57 SECTION 9.5 Consolidated Net Worth.................................................... 57 ARTICLE X NEGATIVE COVENANTS...................................................................... 57 SECTION 10.1 Limitations on Debt....................................................... 57 SECTION 10.2 Limitations on Contingent Obligations..................................... 58 SECTION 10.3 Limitations on Liens...................................................... 58
4 SECTION 10.4 .......................................................................... 59 SECTION 10.5 Limitations on Mergers and Liquidation.................................... 62 SECTION 10.6 .......................................................................... 62 SECTION 10.7 Limitations on Dividends, Distributions and Changes in Capital Structure......................................................... 63 SECTION 10.8 Limitations on Exchange and Issuance of Capital Stock..................... 64 SECTION 10.9 Transactions with Affiliates.............................................. 64 SECTION 10.10 Certain Accounting Changes................................................ 64 SECTION 10.11 Amendments; Payments and Prepayments of Subordinated Debt................. 64 SECTION 10.12 Restrictive Agreements.................................................... 64 SECTION 10.13 Amendments and Prepayments of Other Debt.................................. 64 SECTION 10.14 Continuation of Current Business.......................................... 65 ARTICLE XI DEFAULT AND REMEDIES................................................................... 65 SECTION 11.1 Events of Default......................................................... 65 SECTION 11.2 Remedies.................................................................. 68 SECTION 11.3 Rights and Remedies Cumulative; Non-Waiver; etc........................... 68 ARTICLE XII THE AGENT............................................................................. 69 SECTION 12.1 Appointment............................................................... 69 SECTION 12.2 Delegation of Duties...................................................... 69 SECTION 12.3 Exculpatory Provisions.................................................... 69 SECTION 12.4 Reliance by the Agent..................................................... 70 SECTION 12.5 Notice of Default......................................................... 70 SECTION 12.6 Non-Reliance on the Agent and Other Lenders............................... 70 SECTION 12.7 Indemnification........................................................... 71 SECTION 12.8 The Agent in Its Individual Capacity...................................... 71 SECTION 12.9 Resignation of the Agent; Successor Agent................................. 72 ARTICLE XIII MISCELLANEOUS........................................................................ 72 SECTION 13.1 Notices................................................................... 72 SECTION 13.2 Expenses; Indemnity....................................................... 74 SECTION 13.3 Set-off................................................................... 74 SECTION 13.4 Governing Law............................................................. 74 SECTION 13.5 Consent to Jurisdiction................................................... 75 SECTION 13.6 Binding Arbitration; Waiver of Jury Trial................................. 75 SECTION 13.7 Reversal of Payments...................................................... 76 SECTION 13.8 Injunctive Relief......................................................... 76 SECTION 13.9 Accounting Matters........................................................ 76 SECTION 13.10 Successors and Assigns; Participations.................................... 77 SECTION 13.11 Amendments, Waivers and Consents.......................................... 80 SECTION 13.12 Performance of Duties..................................................... 80 SECTION 13.13 All Powers Coupled with Interest.......................................... 80 SECTION 13.14 Survival of Indemnities................................................... 80
5 SECTION 13.15 Titles and Captions....................................................... 80 SECTION 13.16 Severability of Provisions................................................ 80 SECTION 13.17 Counterparts.............................................................. 81 SECTION 13.18 Term of Agreement......................................................... 81
EXHIBITS Exhibit A-1 - Form of Revolving Credit Note Exhibit A-2 - Form of Competitive Bid Note Exhibit A-3 - Form of Swingline Note Exhibit B - Form of Notice of Borrowing Exhibit C-1 - Form of Competitive Bid Request Exhibit C-2 - Form of Competitive Bid Invitation Exhibit C-3 - Form of Competitive Bid Exhibit C-4 - Form of Competitive Bid Accept/Reject Letter Exhibit D - Form of Notice of Conversion/Continuation Exhibit E - Form of Compliance Certificate Exhibit F - Form of Assignment and Acceptance Exhibit G - Form of Notice of Account Designation Exhibit H - Form of Guaranty Agreement SCHEDULES Schedule 1 - Lenders and Commitments Schedule 1.1(b) - Lenders' Addresses Schedule 5.2(b) - Certain Guarantors Schedule 6.1(a) - Jurisdictions of Organization and Qualification Schedule 6.1(b) - Consolidated Entities and Capitalization Schedule 6.1(h) - Environmental Reports Schedule 6.1(i) - ERISA Plans Schedule 6.1(m) - Labor and Collective Bargaining Agreements Schedule 6.1(t) - Debt and Contingent Obligations Schedule 6.1(u) - Litigation Schedule 10.3 - Existing Liens Schedule 10.4 - Existing Loans, Advances and Investments 6 CREDIT AGREEMENT CREDIT AGREEMENT, dated as of the 22nd day of April, 1997, by and among QUORUM HEALTH GROUP, INC., a corporation organized under the laws of Delaware (the "Borrower"), the Lenders who are or may become a party to this Agreement, and FIRST UNION NATIONAL BANK OF NORTH CAROLINA, as Agent for the Lenders. STATEMENT OF PURPOSE The Borrower has requested, and the Lenders have agreed, to extend certain credit facilities to the Borrower on the terms and conditions of this Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, such parties hereby agree as follows: ARTICLE I DEFINITIONS SECTION 1.1 Definitions. The following terms when used in this Agreement shall have the meanings assigned to them below: "Absolute Rate" means, as to any Competitive Bid made by a Lender pursuant to Section 2.4(b), the fixed percentage rate per annum (expressed in the form of a decimal to no more than four decimal places) specified by the Lender making such Competitive Bid. "Absolute Rate Loan" means any Loan bearing interest at the Absolute Rate determined in accordance with Section 2.4. "Acquisition Capital Expenditures" means Capital Expenditures incurred in connection with the acquisition or substantial replacement of one or more Facilities or businesses. "Affiliate" means, with respect to any Person, any other Person (other than a Subsidiary) which directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such first Person or any of its Subsidiaries. The term "control" means the possession, directly or indirectly, of any other power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise. 7 "Agent" means First Union in its capacity as Agent hereunder, and any successor thereto appointed pursuant to Section 12.9. "Agent's Office" means the office of the Agent specified in or determined in accordance with the provisions of Section 13.1. "Aggregate Commitment" means the aggregate amount of the Lenders' Commitments hereunder, as such amount may be reduced or modified at any time or from time to time pursuant to the terms hereof. On the Closing Date, the Aggregate Commitment shall be Eight Hundred Fifty Million Dollars ($850,000,000). "Agreement" means this Credit Agreement, as amended or modified from time to time. "Applicable Law" means all applicable provisions of constitutions, statutes, laws, rules, treaties, regulations and orders of all Governmental Authorities and all orders and decrees of all courts and arbitrators. "Application" means an application, in the form specified by the Issuing Lender from time to time, requesting the Issuing Lender to issue a Letter of Credit. "Assignment and Acceptance" shall have the meaning assigned thereto in Section 13.10. "Base Rate" means, at any time, the higher of (a) the Prime Rate or (b) the Federal Funds Rate plus 1/2 of 1%; each change in the Base Rate shall take effect simultaneously with the corresponding change or changes in the Prime Rate or the Federal Funds Rate. "Base Rate Loan" means any Revolving Credit Loan bearing interest at a rate based upon the Base Rate. "Borrower" means Quorum Health Group, Inc. in its capacity as borrower hereunder. "Business Day" means (a) for all purposes other than as set forth in clause (b) below, any day other than a Saturday, Sunday or legal holiday on which banks in Charlotte, North Carolina and New York, New York, are open for the conduct of their commercial banking business, and (b) with respect to all notices and determinations in connection with, and payments of principal and interest on, any LIBOR Loan or LIBOR Competitive Loan, any day that is a Business Day described in clause (a) and that is also a day for trading by and between banks in Dollar deposits in the London interbank market. - 2 - 8 "Capital Expenditure" means any cost by the Borrower or any of the Consolidated Entities for the purpose of acquiring or constructing any real property, plant and equipment or other fixed assets, or acquiring any existing business or part thereof, including any such cost incurred under a title retention agreement or capital lease, and any such cost incurred for goodwill of a business or for any noncompetition covenant or under any earn-out or other deferred payment arrangement in connection with the acquisition of a business, and any other expenditure or liability (excluding capitalized loan costs or other amortized acquisition costs, to the extent properly so classified in accordance with GAAP) that is properly charged to a capital account or otherwise capitalized on the Borrower's consolidated balance sheet in accordance with GAAP. "Capital Lease" means, with respect to the Borrower and the Consolidated Entities, any lease of any property that should, in accordance with GAAP, be classified and accounted for as a capital lease on a Consolidated balance sheet of the Borrower and the Consolidated Entities. "Carolinas Hospital System Facility" means the medical surgical acute care hospital facility and related facilities being constructed to replace a portion of the existing physical plant of Carolinas Hospital System. "Change in Control" shall have the meaning assigned thereto in Section 11.1(g). "Closing Date" means the date of this Agreement or such later Business Day upon which each condition described in Article V shall be satisfied or waived in all respects in a manner acceptable to the Agent, in its sole discretion. "Code" means the Internal Revenue Code of 1986, and the rules and regulations thereunder, each as amended or supplemented from time to time. "Commitment" means, as to any Lender, the obligation of such Lender to make Loans to and issue or participate in Letters of Credit issued for the account of the Borrower hereunder in an aggregate principal or face amount at any time outstanding not to exceed the amount set forth opposite such Lender's name on Schedule 1 hereto, as the same may be reduced or modified at any time or from time to time pursuant to the terms hereof. "Commitment Percentage" means, as to any Lender at any time, the ratio of (a) the amount of the Commitment of such Lender to (b) the Aggregate Commitment of all of the Lenders. - 3 - 9 "Committed Extensions of Credit" means, as to any Lender at any time, an amount equal to the sum of (a) the aggregate principal amount of all Revolving Credit Loans made by such Lender then outstanding and (b) such Lender's Commitment Percentage of the L/C Obligations then outstanding. "Competitive Bid" means an offer by a Lender to make a Competitive Bid Loan pursuant to Section 2.4. "Competitive Bid Accept/Reject Letter" means the acceptance or rejection by the Borrower of Competitive Bids pursuant to Section 2.4. "Competitive Bid Invitation" means the notice of a Competitive Bid Request provided by the Agent to the Lenders pursuant to Section 2.4 (b). "Competitive Bid Loan" means a Loan from a Lender to the Borrower pursuant to the bidding procedure described in Section 2.4. Each Competitive Bid Loan shall be a LIBOR Competitive Loan or an Absolute Rate Loan. "Competitive Bid Notes" means the separate Competitive Bid Notes made by the Borrower payable to the order of each of the Lenders, substantially in the form of Exhibit A-2 hereto evidencing the Competitive Bid Loans, and any amendments and supplements thereto, any substitutes therefor, and any replacements, restatements, renewals or extension thereof, in whole or in part. "Competitive Bid Rate" means, as to any Competitive Bid made by a Lender pursuant to Section 2.4, (a) in the case of a LIBOR Competitive Loan, the LIBOR Rate adjusted by the Competitive Margin, and (b) in the case of an Absolute Rate Loan, the fixed rate of interest offered by the Lender making such Competitive Bid. "Competitive Bid Request" shall have the meaning assigned thereto in Section 2.4. "Competitive Margin" means, as to any LIBOR Competitive Loan, the margin (expressed as a percentage rate per annum in the form of a decimal to no more than 4 decimal places) to be added to or subtracted from the LIBOR Rate in order to determine the interest rate applicable to such Loan, as specified in the Competitive Bid relating to such Loan. "Consolidated" means, when used with reference to financial statements or financial statement items of the Borrower and the Consolidated Entities, such statements or items on a consolidated basis in accordance with applicable principles of consolidation under GAAP. - 4 - 10 "Consolidated Entity" means any Person the financial statements of which are appropriately consolidated with the Borrower's financial statements under GAAP. "Consolidated Net Income" means, for any period, the net income (or deficit) (exclusive of non-cash losses, non-cash interest accruing under the Shareholder Securities, costs associated with early extinguishment of Debt, non-cash adjustments under FAS 121, the effect of any gain resulting from any asset sale, or, to the extent not resulting from an asset sale, any unusual, extraordinary or other non-recurring gain) of the Borrower and its Consolidated Entities, determined on a consolidated basis in accordance with GAAP. "Consolidated Net Worth" means, as of any date, the sum of (a) the total shareholder's equity (including capital stock, additional paid-in capital and retained earnings after deducting treasury stock) and (b) the Shareholder Securities, in each case in the amount which would appear on a Consolidated balance sheet of the Borrower and the Consolidated Entities prepared as of such date in accordance with GAAP. "Contingent Obligation" means, with respect to the Borrower and its Consolidated Entities, without duplication, any obligation, contingent or otherwise, of any such Person pursuant to which such Person has directly or indirectly guaranteed any Debt or other monetary obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of any such Person (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation (whether arising by virtue of partnership arrangements, by agreement to keep well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement condition or otherwise) or (b) entered into for the purpose of assuring in any other manner the obligee of such Debt or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided, that the term Contingent Obligation shall not include the following items, to the extent that such items are not required to be included as Debt on the balance sheet of such Person prepared in accordance with GAAP: (i) endorsements for collection or deposit in the ordinary course of business, (ii) guaranty obligations or direct obligations relating to indemnities or covenants arising out of the purchase or sale of Facilities or any assets substantially related to or supportive of a Facility, (iii) physician guaranties and similar arrangements with physicians entered into in the ordinary course of business, - 5 - 11 (iv) obligations by guaranty or otherwise related to master lease agreements (or similar arrangements having like effect) of medical office buildings or like properties which are utilized by or which directly support a Facility so long as such arrangements relate reasonably to the expected utilization of such medical office building in support of the Facilities, and (v) obligations arising under Letters of Credit. "Controlled Company" means a limited liability company in which the Borrower or a Consolidated Entity owns at least fifty-one percent (51%) of the membership interest, controls the right to manage such limited liability company and to make distributions and is entitled to receive distributions of cash in an amount proportionate with its equity interest in such company, other than any preferred cash distribution arrangement approved by the Required Lenders in writing. "Controlled Partnership" means a general partnership of which the Borrower or a Consolidated Entity is a general partner, or a limited partnership whose sole general partner or sole general partners are the Borrower or a Consolidated Entity and with respect to which partnership (whether general or limited) the Borrower or a Consolidated Entity is entitled to receive any distributions of cash made to the partners thereof in an amount proportionate with its equity interest in such partnership, other than any preferred cash distribution arrangement approved by the Required Lenders in writing. "Credit Facility" means the collective reference to the credit facility established pursuant to Article II and the L/C Facility. "Debt" means, with respect to the Borrower and the Consolidated Entities at any date and without duplication, the sum of the following calculated in accordance with GAAP: (a) all indebtedness for money borrowed, including current maturities of all long-term debt, (b) all obligations to pay the deferred purchase price of property or services of any such Person (other than trade payables, deferred employee compensation and like accrued liabilities arising in the ordinary course of business), (c) all obligations of any such Person as lessee under Capital Leases, (d) Contingent Obligations of any such Person, - 6 - 12 (e) any obligations arising from any agreement for the sale of accounts receivable or interests therein, to the extent permitted hereunder, and (f) all obligations, contingent or otherwise, of any such Person relative to the face amount of letters of credit, whether or not drawn, including without limitation any Reimbursement Obligation, and banker's acceptances issued for the account of any such Person; provided that the term "Debt" shall not include (x) any obligations arising under any Hedging Agreement so long as such obligations are not in default or (y) the Shareholder Securities. "Default" means any of the events specified in Section 11.1 which with the passage of time, the giving of notice or any other condition, would constitute an Event of Default. "Dollars" or "$" means, unless otherwise qualified, dollars in lawful currency of the United States. "EBITDA" means, for any period, the Consolidated Net Income of the Borrower and its Consolidated Entities for such period, plus the sum of the following to the extent deducted in the determination of Consolidated Net Income: (i) Interest Expense, (ii) income and franchise taxes, and (iii) amortization, depreciation and other non-cash charges (including amortization of goodwill, and other intangible assets). For purposes of calculating EBITDA: (a) Pro forma effect will be given for acquisitions by the Borrower. Historical cash flows for acquired businesses or Facilities will be included in the Borrower's historical cash flows, subject to receipt by the Agent and the Lenders, with respect to any acquisition in which the aggregate consideration (including cash payments, deferred purchase price, earn-outs and assumed debt) exceeds $50,000,000, of (i) financial information audited (as of a date not more than 15 months prior to the receipt by the Lenders) by certified public accountants acceptable to the Required Lenders and accompanied by an opinion of such accountants acceptable to the Required Lenders, unless the Required Lenders approve unaudited financial information; and (ii) any available unaudited financial information for the quarterly fiscal periods ended since the date of the most recent audited statements. (b) In addition, for purposes of such calculation, the Borrower may elect to make pro forma income statement adjustments at the time of the effective date of such acquisition as follows, subject to the receipt and approval of any financial information, required to be delivered pursuant to subsection (a), above: - 7 - 13 (i) With the prior written approval of the Agent, adjustments to reflect the elimination of that portion of salary and employee benefit expenses, duplicative administrative expenses and other objectively-determined, non-recurring expenses that as a consequence of such acquisition will no longer be incurred by the Person so acquired on an on-going basis following the acquisition; and (ii) With the prior written approval of the Required Lenders, adjustments to reflect any other savings and expenses which will be realized by such Person so acquired as a consequence of such acquisition; provided, however, that any such adjustment shall be reduced to zero on a straight line basis over the period of the four fiscal quarters immediately following the closing of the related acquisition. (c) Retroactive effect will be given for dispositions of businesses or Facilities by the Borrower by excluding all historical earnings before interest, taxes, depreciation and amortization attributable to businesses or Facilities that are disposed of in determining EBITDA at any time after the date of disposition. (d) In computing (i) historical cash flows for acquired businesses or Facilities to be included in the Borrower's historical cash flows and (ii) cash flows for businesses or Facilities that are disposed of to be excluded under clause (b) of this definition, such cash flows to be included or excluded, as the case may be, shall be equal to the cash flows for the immediately preceding period of twelve months; provided, however, that if the information required to determine cash flows as set out above is not readily available, the cash flows to be included or excluded, as the case may be, shall be the average of the cash flows for the immediately preceding two (2) fiscal years. "Eligible Assignee" means, with respect to any assignment of the rights, interest and obligations of a Lender hereunder, a Person that at the time of such assignment is (a) a commercial bank organized under the laws of the United States or any state thereof, having combined capital and surplus in excess of $500,000,000, (b) a finance company, insurance company or other financial institution which in the ordinary course of business extends credit of the type extended hereunder and that has total assets in excess of $1,000,000,000, (c) already a Lender hereunder (whether as an original party to this Agreement or as the assignee of another Lender), (d) the successor (whether by transfer of assets, merger or otherwise) to all or substantially all of the commercial lending business of the assigning Lender, or (e) any other - 8 - 14 Person that has been approved in writing as an Eligible Assignee by the Agent. "Employee Benefit Plan" means any employee benefit plan within the meaning of Section 3(3) of ERISA which (a) is maintained for employees of the Borrower or any ERISA Affiliate or (b) has at any time within the preceding six years been maintained for the employees of the Borrower or any current or former ERISA Affiliate. "Environmental Laws" means any and all federal, state and local laws, statutes, ordinances, rules, regulations, permits, licenses, approvals, interpretations and orders of courts or Governmental Authorities, relating to the protection of human health or the environment, including, but not limited to, requirements pertaining to the manufacture, processing, distribution, use, treatment, storage, disposal, transportation, handling, reporting, licensing, permitting, investigation or remediation of Hazardous Materials. "ERISA" means the Employee Retirement Income Security Act of 1974, and the rules and regulations thereunder, each as amended or modified from time to time. "ERISA Affiliate" means any Person who together with the Borrower is treated as a single employer within the meaning of Section 414(b), (c), (m) or (o) of the Code or Section 4001(b) of ERISA. "Eurodollar Reserve Percentage" means, for any day, the percentage (expressed as a decimal and rounded upwards, if necessary, to the next higher 1/100th of 1%) which is in effect for such day as prescribed by the Federal Reserve Board (or any successor) for determining the maximum reserve requirement (including without limitation any basic, supplemental or emergency reserves) in respect of Eurocurrency liabilities or any similar category of liabilities for a member bank of the Federal Reserve System in New York City. "Event of Default" means any of the events specified in Section 11.1, provided that any requirement for passage of time, giving of notice, or any other condition, has been satisfied. "Extensions of Credit" means, as to any Lender at any time, an amount equal to the sum of (a) the aggregate principal amount of all Loans made by such Lender then outstanding and (b) such Lender's Commitment Percentage of the L/C Obligations then outstanding. "Facility" means an acute care hospital, skilled nursing facility, medical office building, primary care center, diagnostic center or other health care-related facility, with all buildings and improvements associated therewith, that is owned or leased, in whole or in part, by the Borrower or any Consolidated Entity. - 9 - 15 "Facility Fee Rate" shall have the meaning assigned thereto in Section 4.3(a). "FDIC" means the Federal Deposit Insurance Corporation, or any successor thereto. "Federal Funds Rate" means, the rate per annum (rounded upwards, if necessary, to the next higher 1/100th of 1%) representing the daily effective federal funds rate as quoted by the Agent and confirmed in Federal Reserve Board Statistical Release H.15 (519) or any successor or substitute publication selected by the Agent. If, for any reason, such rate is not available, then "Federal Funds Rate" shall mean a daily rate which is determined, in the opinion of the Agent, to be the rate at which federal funds are being offered for sale in the national federal funds market at 9:00 a.m. (Charlotte time). Rates for weekends or holidays shall be the same as the rate for the most immediate preceding Business Day. "First Union" means First Union National Bank of North Carolina, a national banking association, and its successors. "Fiscal Year" means the fiscal year of the Borrower and its Consolidated Entities ending on June 30. "GAAP" means generally accepted accounting principles, as recognized by the American Institute of Certified Public Accountants and the Financial Accounting Standards Board, consistently applied and maintained on a consistent basis for the Borrower and the Consolidated Entities throughout the period indicated and consistent with the prior financial practice of the Borrower and the Consolidated Entities. "Governmental Approvals" means all authorizations, consents, approvals, licenses and exemptions of, registrations and filings with, and reports to, all Governmental Authorities. "Governmental Authority" means any nation, province, state or political subdivision thereof, and any government or any Person exercising executive, legislative, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "Guarantor" means each Wholly-Owned Entity party to the Guaranty Agreement. "Guaranty Agreement" means the collective reference to the Guaranty Agreement dated as of the Closing Date executed by the Guarantors party thereto in favor of the Agent for the ratable benefit of the Agent and the Lenders substantially in the form of Exhibit H hereto, and each - 10 - 16 supplement to the Guaranty Agreement delivered after the Closing Date pursuant to Section 8.11, as each such Guaranty Agreement may be amended or supplemented. "Hazardous Materials" means any substances or materials (a) which are or become defined as hazardous wastes, hazardous substances, pollutants, contaminants, chemical substances or mixtures or toxic substances under any Environmental Law, (b) which are toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic or otherwise harmful to human health or the environment and are or become regulated by any Governmental Authority, (c) the presence of which require investigation or remediation under any Environmental Law or common law, (d) the discharge or emission or release of which requires a permit or license under any Environmental Law or other Governmental Approval, (e) which are deemed to constitute a nuisance, a trespass or pose a health or safety hazard to persons or neighboring properties, (f) which are materials consisting of underground or aboveground storage tanks, whether empty, filled or partially filled with any substance, or (g) which contain, without limitation, asbestos, polychlorinated biphenyls, urea formaldehyde foam insulation, petroleum hydrocarbons, petroleum derived substances or waste, crude oil, nuclear fuel, natural gas or synthetic gas. "Hedging Agreement" means any agreement with respect to an interest rate swap, collar, cap, floor or a forward rate agreement or other agreement regarding the hedging of interest rate risk exposure executed in connection with hedging the interest rate exposure of the Borrower and any confirming letter executed pursuant to such hedging agreement, all as amended, restated or otherwise modified. "Interest Expense" means, for any period, the interest expense (including, without limitation, interest expense attributable to Capital Leases and without duplication all net obligations or benefits pursuant to any Hedging Agreement) (but excluding all non-cash interest under the Shareholder Securities) of the Borrower or any Consolidated Entity, for such period on a Consolidated basis in accordance with GAAP. "Interest Period" shall have the meaning assigned thereto in Section 4.1(b). "Investment" means, with respect to any Person (a) any loan, advance or extension of credit to any other Person, (b) the ownership of any shares of stock, Partnership Interests, Other Equity Interests, obligations or other securities of any other Person or (c) any joint venture or partnership with, or any capital contribution to, or other investment in, any other Person; and any of the foregoing shall be considered an Investment, whether acquired by purchase, exchange, issuance of stock or other securities, merger, reorganization or any other method. - 11 - 17 "Issuing Lender" means First Union, in its capacity as issuer of any Letter of Credit, or any successor thereto. "Issuing Lender's Office" means the office of the Issuing Lender specified in or determined in accordance with the provisions of Section 13.1(d). "Joint Venture" means any Consolidated Entity (a) that is not wholly-owned, directly or indirectly, by the Borrower and (b) that is formed to provide healthcare related services or to own, operate, lease or manage a Facility. "L/C Commitment" means One Hundred Million Dollars ($100,000,000). "L/C Facility" means the letter of credit facility established pursuant to Article III hereof. "L/C Obligations" means at any time, an amount equal to the sum of (a) the aggregate undrawn and unexpired amount of the then outstanding Letters of Credit and (b) the aggregate amount of drawings under Letters of Credit which have not then been reimbursed pursuant to Section 3.5. "L/C Participants" means the collective reference to all the Lenders other than the Issuing Lender. "Lender" means each Person executing this Agreement as a Lender set forth on the signature pages hereto and each Person that hereafter becomes a party to this Agreement as a Lender pursuant to Section 13.10. "Lending Office" means, with respect to any Lender, the office of such Lender maintaining such Lender's Commitment Percentage of the Loans. "Letters of Credit" shall have the meaning assigned thereto in Section 3.1. "LIBOR" means the rate for deposits in Dollars for a period equal to the Interest Period selected which appears on the Telerate Page 3750 at approximately 11:00 a.m. London time, two (2) Business Days prior to the commencement of the applicable Interest Period. If, for any reason, such rate is not available, then "LIBOR" shall mean the rate per annum at which, as determined by the Agent, Dollars in the amount of $5,000,000 are being offered to leading banks at approximately 11:00 a.m. London time, two (2) Business Days prior to the commencement of the applicable Interest Period for settlement in immediately available funds by leading banks in the London interbank market for a period equal to the Interest Period selected. - 12 - 18 "LIBOR Competitive Loan" means any Competitive Bid Loan denominated in Dollars and bearing interest at a rate determined by reference to the LIBOR Rate in accordance with the provisions of Article II. "LIBOR Loan" means any Revolving Credit Loan bearing interest at a rate based upon the LIBOR Rate. "LIBOR Margin" means the margin (expressed as a percentage) to be used in determining the LIBOR Rate and shall, from the Closing Date until the receipt of the initial Margin Certificate, be 0.425% and for each fiscal quarter ending after the Closing Date shall be determined by reference to the Total Leverage Ratio set forth in the most recently delivered Margin Certificate as follows:
Total Leverage Ratio LIBOR Margin (%) -------------------- ---------------- Less than 1.5 to 1.0 0.2500 Equal to or greater than 1.5 to 1.0 but 0.3125 less than 2.0 to 1.0 Equal to or greater than 2.0 to 1.0 but 0.4250 less than 2.5 to 1.0 Equal to or greater than 2.5 to 1.0 but 0.5000 less than 3.0 to 1.0 Equal to or greater than 3.0 to 1.0 0.7500
"LIBOR Rate" means a rate per annum (rounded upwards, if necessary, to the next higher 1/100th of 1%) determined by the Agent pursuant to the following formula: LIBOR Rate = LIBOR ---------------------------------- 1.00-Eurodollar Reserve Percentage "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset. For the purposes of this Agreement, a Person shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, Capital Lease or other title retention agreement relating to such asset. - 13 - 19 "Line of Business" shall have the meaning assigned thereto in Section 10.14. "Loan" means any Revolving Credit Loan, Competitive Bid Loan or Swingline Loan made to the Borrower hereunder and all such Loans collectively as the context requires. "Loan Documents" means, collectively, this Agreement, the Notes, the Guaranty, any Hedging Agreement executed by any Lender, the Applications and each other document, instrument and agreement executed and delivered in connection with this Agreement or otherwise referred to herein or contemplated hereby, all as may be amended, restated or otherwise modified. "Maintenance Capital Expenditures" means Capital Expenditures other than (a) Capital Expenditures relating to the construction of the Carolinas Hospital System Facility; provided that all Capital Expenditures relating to such construction in excess of $82,400,000 shall be included in the determination of Maintenance Capital Expenditures, and (b) Acquisition Capital Expenditures. "Margin Certificate" shall have the meaning assigned thereto in Section 7.1(c). "Material Adverse Effect" means a material adverse effect on the properties, business, prospects, operations or condition (financial or otherwise) of the Borrower or any Consolidated Entity taken as a whole or on the ability of the Borrower and its Consolidated Entities to perform its obligations under the Loan Documents in each case to which it is a party. "Multiemployer Plan" means a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA to which the Borrower or any ERISA Affiliate is making, or is accruing an obligation to make, contributions within the preceding six years. "Net Income Available for Debt Service" means, for any period, the sum of (i) EBITDA for such period minus (ii) the aggregate amount of all Maintenance Capital Expenditures of the Borrower and its Consolidated Entities for such period plus (iii) Operating Lease Payments for such period plus (iv) minority interests. "1995 Indenture" means the Indenture dated as of November 1, 1995 between the Borrower and United States Trust Company of New York, as trustee, pursuant to which the 1995 Senior Subordinated Notes were issued. - 14 - 20 "1995 Senior Subordinated Notes" means the $150,000,000 8-3/4% Senior Subordinated Notes due November 1, 2005 issued by the Borrower under the 1995 Indenture. "1992 Indenture" means the Indenture dated as of December 15, 1992, between the Borrower and United States Trust Company of New York, as trustee, pursuant to which the Senior Subordinated Notes were issued. "1992 Senior Subordinated Notes" means the $100,000,000 11-7/8% Senior Subordinated Notes due December 15, 2002, issued by the Borrower under the 1992 Indenture. "Notes" means the separate Revolving Credit Notes, Competitive Bid Notes or the Swingline Note, or any combination thereof, and "Note" means any of such Notes. "Notice of Account Designation" shall have the meaning assigned thereto in Section 5.2(e)(i). "Notice of Borrowing" shall have the meaning assigned thereto in Section 2.3(a). "Notice of Conversion/Continuation" shall have the meaning assigned thereto in Section 4.2. "Obligations" means, in each case, whether now in existence or hereafter arising: (a) the principal of and interest on (including interest accruing after the filing of any bankruptcy or similar petition) the Loans, (b) the L/C Obligations, (c) all payment and other obligations owing by the Borrower to any Lender or an Affiliate of a Lender or the Agent under any Hedging Agreement to which a Lender or an Affiliate of a Lender is a party and (d) all other fees and commissions (including attorney's fees), charges, indebtedness, loans, liabilities, financial accommodations, obligations, covenants and duties owing by the Borrower to the Lenders or the Agent, of every kind, nature and description, direct or indirect, absolute or contingent, due or to become due, contractual or tortious, liquidated or unliquidated, and whether or not evidenced by any note, and whether or not for the payment of money under or in respect of this Agreement, any Note, any Letter of Credit or any of the other Loan Documents. "Officer's Compliance Certificate" shall have the meaning assigned thereto in Section 7.1(d). "Operating Lease Payments" means all expenses under any lease or rental agreement (other than obligations under Capital Leases) during the period in question. - 15 - 21 "Other Equity Interests" means all membership interests in any Person that is a limited liability company, and all equity and other similar interests in any other Person that is not a corporation, a partnership or a limited liability company. "Other Taxes" shall have the meaning assigned thereto in Section 4.11(b). "Partnership Interests" means all partner interests, and rights to distributions payable with respect to such interests, in any partnership. "PBGC" means the Pension Benefit Guaranty Corporation or any successor agency. "Pension Plan" means any Employee Benefit Plan, other than a Multiemployer Plan, which is subject to the provisions of Title IV of ERISA or Section 412 of the Code and which (a) is maintained for employees of the Borrower or any ERISA Affiliates or (b) has at any time within the preceding six years been maintained for the employees of the Borrower or any of their current or former ERISA Affiliates. "Permitted Investments" means: (1) direct obligations of, or obligations the payment of which is guaranteed by, the United States of America or an interest in any trust or fund that invests solely in such obligations or repurchase agreements, properly secured, with respect to such obligations; (2) direct obligations of agencies or instrumentalities of the United States of America having a rating of A or higher by Standard & Poor's Ratings Services or A2 or higher by Moody's Investors Service, Inc.; (3) certificates of deposit issued by, or other interest-bearing deposits with, a bank having its principal place of business in the United States of America and having equity capital of not less than $250,000,000; (4) certificates of deposit issued by, or other interest-bearing deposits with, any other bank organized under the laws of the United States of America or any state thereof, provided that such deposit is either (i) insured by the Federal Deposit Insurance Corporation or (ii) properly secured by such bank by pledging direct obligations of the United States of America having a market value not less than the face amount of such, deposit; (5) prime commercial paper maturing within 270 days of the acquisition thereof and, at the time of acquisition, having a rating of - 16 - 22 A-1 or higher by Standard & Poor's Ratings Services, or P-1 or higher by Moody's Investors Service, Inc.; (6) eligible banker's acceptances, repurchase agreements and tax-exempt municipal bonds having a maturity of less than one year and in each case having a rating, or being the full recourse obligation of a person whose senior debt has a rating, of A or higher by Standard & Poor's Ratings Services or A2 or higher by Moody's Investors Service, Inc.; and (7) other Investments made with the express prior written approval of the Required Lenders. "Person" means an individual, corporation, partnership, limited liability company, association, trust, business trust, joint venture, joint stock company, pool, syndicate, sole proprietorship, unincorporated organization, Governmental Authority or any other form of entity or group thereof. "Prime Rate" means, at any time, the rate of interest per annum publicly announced from time to time by First Union as its prime rate. Each change in the Prime Rate shall be effective as of the opening of business on the day such change in the Prime Rate occurs. The parties hereto acknowledge that the rate announced publicly by First Union as its Prime Rate is an index or base rate and shall not necessarily be its lowest or best rate charged to its customers or other banks. "Register" shall have the meaning assigned thereto in Section 13.10(d). "Reimbursement Obligation" means the obligation of the Borrower to reimburse the Issuing Lender pursuant to Section 3.5 for amounts drawn under Letters of Credit. "Required Lenders" means, at any date, any combination of holders of at least fifty-one percent (51%) of the aggregate unpaid principal amount of the Revolving Credit Notes, or if no amounts are outstanding under the Revolving Credit Notes, any combination of Lenders whose Commitment Percentages aggregate at least fifty-one percent (51%). "Revolving Credit Loans" means the revolving credit loans made by the Lenders to the Borrower pursuant to Section 2.1(a). "Revolving Credit Note" means the separate Revolving Credit Notes made by the Borrower payable to the order of each Lender, substantially in the form of Exhibit A-1 hereto, evidencing the Revolving Credit Loans, and any amendments and supplements thereto, any substitutes therefor, and any replacements, restatements, renewals or extension thereof, in whole or in part. - 17 - 23 "Senior Debt" means all Debt that is not Subordinated Debt. "Shareholder Securities" means debt securities issued by the Borrower and distributed to holders of the Borrower's common stock; provided that such debt securities: (a) are made expressly subordinate to all other indebtedness of the Borrower; (b) provide for the payment of principal thereof and interest thereon solely in additional debt securities, which comply with this definition, or in stock of the Borrower until a date no earlier than the day following the Termination Date; and (c) do not contain terms and conditions more restrictive on the Borrower than those set forth in this Agreement. "Solvent" means, as to the Borrower and the Consolidated Entities on a particular date, that any such Person (a) has capital sufficient to carry on its business and transactions and all business and transactions in which it is about to engage and is able to pay its debts as they mature, (b) owns property having a value, both at fair valuation and at present fair saleable value, greater than the amount required to pay its probable liabilities (including contingencies), and (c) does not believe that it will incur debts or liabilities beyond its ability to pay such debts or liabilities as they mature. "Subordinated Debt" means the collective reference to Debt on Schedule 6.1(t) hereof designated as Subordinated Debt (including, without limitation, the 1992 Senior Subordinated Notes and the 1995 Senior Subordinated Notes) and any other Debt of the Borrower or any Subsidiary subordinated in right and time of payment to the Obligations on terms satisfactory to the Required Lenders and approved in writing by the Agent. "Subsidiary" means, as to any Person, any corporation, partnership or joint venture, whether now existing or hereafter organized or acquired: (a) in the case of a corporation, of which at least a majority of the outstanding shares of stock having by the terms thereof ordinary voting power to elect a majority of the board of directors of such corporation (other than stock having such voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by such Person and/or one or more of its Subsidiaries or (b) in the case of a partnership or joint venture, in which such Person or a Subsidiary of such Person is a general partner or joint venturer. "Swingline Commitment" means Twenty Million Dollars ($20,000,000). - 18 - 24 "Swingline Lender" means First Union in its capacity as swingline lender hereunder. "Swingline Loan" means the swingline loans made by the Swingline Lender to the Borrower pursuant to Section 2.2. "Swingline Note" means the Swingline Note made by the Borrower payable to the order of the Swingline Lender, substantially in the form of Exhibit A-3 hereto, evidencing the Swingline Facility, and any amendments and supplements thereto, any substitutes therefor, and any replacements, restatements, renewals or extension thereof, in whole or in part. "Swingline Rate" means, for any day, a rate per annum equal to the Base Rate minus 0.50%. "Swingline Termination Date" means the earlier to occur of (a) the resignation of First Union as Agent in accordance with Section 12.9 and (b) the Termination Date. "Taxes" shall have the meaning assigned thereto in Section 4.11(a). "Termination Date" means the earliest of the dates referred to in Section 2.8. "Termination Event" means: (a) a "Reportable Event" described in Section 4043 of ERISA, or (b) the withdrawal of the Borrower or any ERISA Affiliate from a Pension Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, or (c) the termination of a Pension Plan, the filing of a notice of intent to terminate a Pension Plan or the treatment of a Pension Plan amendment as a termination under Section 4041 of ERISA, or (d) the institution of proceedings to terminate, or the appointment of a trustee with respect to, any Pension Plan by the PBGC, or (e) any other event or condition which would constitute grounds under Section 4042(a) of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan, or (f) the partial or complete withdrawal of the Borrower or any ERISA Affiliate from a Multiemployer Plan, or (g) the imposition of a Lien pursuant to Section 412 of the Code or Section 302 of ERISA, or (h) any event or condition which results in the reorganization or insolvency of a Multiemployer Plan under Sections 4241 or 4245 of ERISA, or (i) any event or condition which results in the termination of a Multiemployer Plan under Section 4041A of ERISA or the institution by PBGC of proceedings to terminate a Multiemployer Plan under Section 4042 of ERISA. "Total Capitalization" means, as of any date of determination, without duplication, the sum of Total Debt plus Consolidated Net Worth. - 19 - 25 "Total Consolidated Assets" means, as of any date of determination, the assets of the Borrower and the Consolidated Entities, determined on a consolidated basis in accordance with GAAP. "Total Debt" means, as of any date of determination, the aggregate amount of Debt of the Borrower and the Consolidated Entities determined on a Consolidated basis. "Total Leverage Ratio" shall have the meaning assigned thereto in Section 9.1. "UCC" means the Uniform Commercial Code as in effect in the State of North Carolina. "Uniform Customs" the Uniform Customs and Practice for Documentary Credits (1994 Revision), International Chamber of Commerce Publication No. 500. "United States" means the United States of America. "Wholly-Owned Entity" means a Person all of the shares of capital stock or other ownership interests of which are owned by the Borrower and/or one or more of its Wholly-Owned Entities. SECTION 1.2 General. Unless otherwise specified, a reference in this Agreement to a particular section, subsection, Schedule or Exhibit is a reference to that section, subsection, Schedule or Exhibit of this Agreement. Wherever from the context it appears appropriate, each term stated in either the singular or plural shall include the singular and plural, and pronouns stated in the masculine, feminine or neuter gender shall include the masculine, the feminine and the neuter. Any reference herein to "Charlotte time" shall refer to the applicable time of day in Charlotte, North Carolina. SECTION 1.3 Other Definitions and Provisions. (a) Use of Capitalized Terms. Unless otherwise defined therein, all capitalized terms defined in this Agreement shall have the defined meanings when used in this Agreement, the Notes and the other Loan Documents or any certificate, report or other document made or delivered pursuant to this Agreement. (b) Miscellaneous. The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. - 20 - 26 ARTICLE II CREDIT FACILITY SECTION 2.1 Revolving Credit and Competitive Bid Loans. (a) Revolving Credit Loans. Subject to the terms and conditions of this Agreement, each Lender severally agrees to make Revolving Credit Loans to the Borrower from time to time from the Closing Date to but not including the Termination Date as requested by the Borrower in accordance with the terms of Section 2.3; provided, that (i) the aggregate principal amount of all outstanding Revolving Credit Loans (after giving effect to any amount requested) shall not exceed the Aggregate Commitment less the sum of the aggregate principal amount of all outstanding Competitive Bid Loans and Swingline Loans (excluding Swingline Loans simultaneously being repaid with the proceeds of such Revolving Credit Loans) and the L/C Obligations and (ii) the principal amount of outstanding Committed Extensions of Credit from any Lender to the Borrower shall not at any time exceed such Lender's Commitment. Each Revolving Credit Loan by a Lender shall be in a principal amount equal to such Lender's Commitment Percentage of the aggregate principal amount of Revolving Credit Loans requested on such occasion. Subject to the terms and conditions hereof, the Borrower may borrow, repay and reborrow Revolving Credit Loans hereunder until the Termination Date. (b) Competitive Bid Loans. Subject to the terms and conditions of this Agreement, the Borrower may, prior to the Termination Date and pursuant to the procedures set forth in Section 2.4, request the Lenders to make offers to make Competitive Bid Loans; provided, that the aggregate principal amount of all outstanding Competitive Bid Loans (after giving effect to any amount requested) shall not exceed the lesser of (i) $225,000,000 or (ii) the Aggregate Commitment less the sum of the aggregate principal amount of all outstanding Loans and the L/C Obligations. The Lenders may, but shall have no obligation to, make such offers and the Borrower may, but shall have no obligation to, accept any such offers in the manner set forth in Section 2.4. Each Lender acknowledges that the aggregate principal amount of all such outstanding Competitive Bid Loans made by such Lender, when taken together with the aggregate principal amount of all outstanding Revolving Credit Loans (and as to the Swingline Lender, Swingline Loans) made by such Lender and such Lender's Commitment Percentage of the L/C Obligations, may exceed such Lender's Commitment. SECTION 2.2 Swingline Loans. (a) Availability. Subject to the terms and conditions of this Agreement, the Swingline Lender agrees to make Swingline Loans to the Borrower from time to time from the Closing Date to but not including - 21 - 27 the Swingline Termination Date; provided, that the aggregate principal amount of all outstanding Swingline Loans (after giving effect to any amount requested), shall not exceed the lesser of (i) the Aggregate Commitment less the sum of the aggregate principal amount of all outstanding Revolving Credit Loans (excluding any Revolving Credit Loans, the proceeds of which will be used to repay Swingline Loans), Competitive Bid Loans and the L/C Obligations and (ii) the Swingline Commitment. Each Lender acknowledges that the aggregate principal amount of all outstanding Swingline Loans made by the Swingline Lender, when taken together with the aggregate principal of all outstanding Revolving Credit Loans and the Competitive Bid Loans made by such Lender and such Lender's Commitment Percentage of the L/C Obligations, may exceed such Lender's Commitment. (b) Refunding. (i) Swingline Loans shall be reimbursed fully by the Lenders on demand by the Swingline Lender. Such reimbursements shall be made by the Lenders in accordance with their respective Commitment Percentages and shall thereafter be reflected as Revolving Credit Loans of the Lenders on the books and records of the Agent. Each Lender shall fund its respective Commitment Percentage of Revolving Credit Loans as required to repay Swingline Loans outstanding to the Swingline Lender upon demand by the Swingline Lender but in no event later than 3:00 p.m. (Charlotte time) on the date such demand is made if made on or before 1:00 p.m. (Charlotte time) on such date and no later than 12:00 noon (Charlotte time) on the next succeeding Business Day if demand therefor is made after 1:00 p.m. (Charlotte time). (ii) The Borrower shall pay to the Swingline Lender on demand the amount of such Swingline Loans to the extent amounts received from the Lenders are not sufficient to repay in full the outstanding Swingline Loans requested or required to be refunded. In addition, the Borrower hereby authorizes the Agent to charge any account maintained by it with the Swingline Lender (up to the amount available therein) in order to immediately pay the Swingline Lender the amount of such Swingline Loans to the extent amounts received from the Lenders are not sufficient to repay in full the outstanding Swingline Loans requested or required to be refunded. If any portion of any such amount paid to the Swingline Lender shall be recovered by or on behalf of the Borrower from the Swingline Lender in bankruptcy or otherwise, the loss of the amount so recovered shall be ratably shared among all the Lenders in accordance with their respective Commitment Percentages. (iii) Each Lender acknowledges and agrees that its obligation to refund Swingline Loans in accordance with the terms of this Section 2.2(b) is absolute and unconditional and shall not - 22 - 28 be affected by any circumstance whatsoever; provided, that if prior to the refunding of any outstanding Swingline Loans pursuant to this Section 2.2(b), one of the events described in Section 11.1(h) or (i) shall have occurred, each Lender will, on the date the applicable Revolving Credit Loan would have been made, purchase an undivided participating interest in the Swingline Loan to be refunded in an amount equal to its Commitment Percentage of the aggregate amount of such Swingline Loan. Each Lender will immediately transfer to the Swingline Lender, in immediately available funds, the amount of its participation and upon receipt thereof the Swingline Lender will deliver to such Lender a certificate evidencing such participation dated the date of receipt of such funds and for such amount. Whenever, at any time after the Swingline Lender has received from any Lender such Lender's participating interest in a Swingline Loan, the Swingline Lender receives any payment on account thereof, the Swingline Lender will distribute to such Lender its participating interest in such amount (appropriately adjusted, in the case of interest payments, to reflect the period of time during which such Lender's participating interest was outstanding and funded). SECTION 2.3 Procedure for Advances of Revolving Credit and Swingline Loans. (a) Requests for Borrowing. The Borrower shall give the Agent irrevocable prior written notice in the form attached hereto as Exhibit B (a "Notice of Borrowing") not later than 11:00 a.m. (Charlotte time) (i) on the same Business Day as each Base Rate Loan or Swingline Loan and (ii) at least three (3) Business Days before each LIBOR Loan, of its intention to borrow, specifying (A) the date of such borrowing, which shall be a Business Day, (B) the amount of such borrowing, which shall be (1) with respect to Base Rate Loans in an aggregate principal amount of $3,000,000 or a whole multiple of $1,000,000 in excess thereof, (2) with respect to LIBOR Loans in an aggregate principal amount of $10,000,000 or a whole multiple of $1,000,000 in excess thereof and (3) with respect to Swingline Loans in an aggregate principal amount of $300,000 or a whole multiple of $100,000 in excess thereof, (C) whether such loans are to be Revolving Credit Loans or Swingline Loans, (D) in the case of a Revolving Credit Loan, whether the Loans are to be LIBOR Loans or Base Rate Loans and (E) in the case of a LIBOR Loan, the duration of the Interest Period applicable thereto. Notices received after 11:00 a.m. (Charlotte time) shall be deemed received on the next Business Day. The Agent shall promptly notify the Lenders of each Notice of Borrowing. (b) Disbursement of Loans. Not later than 2:00 p.m. (Charlotte time) on the proposed borrowing date, (i) each Lender will make available to the Agent, for the account of the Borrower, at the office of the Agent in funds immediately available to the Agent, such Lender's - 23 - 29 Commitment Percentage of the Revolving Credit Loans to be made on such borrowing date and (ii) the Swingline Lender will make available to the Agent, for the account of the Borrower, at the office of the Agent in funds immediately available to the Agent, the Swingline Loans to be made to the Borrower on such borrowing date. The Borrower hereby irrevocably authorizes the Agent to disburse the proceeds of each borrowing requested pursuant to this Section 2.3 in immediately available funds by crediting such proceeds to a deposit account of the Borrower maintained with the Agent or by wire transfer to such account as may be agreed upon by the Borrower and the Agent from time to time. Subject to Section 4.7 hereof, the Agent shall not be obligated to disburse the portion of the proceeds of any Revolving Credit Loan requested pursuant to this Section 2.3 to the extent that any Lender has not made available to the Agent its Commitment Percentage of such Revolving Credit Loan. Revolving Credit Loans to be made for the purpose of refunding Swingline Loans shall be made by the Lenders as provided in Section 2.2(b) hereof. SECTION 2.4 Procedure for Advances of Competitive Bid Loans. (a) Competitive Bid Request. To request Competitive Bids, the Borrower shall deliver to the Agent a duly completed Competitive Bid Request in the form of Exhibit C-1 hereto (a "Competitive Bid Request") to be received by the Agent (i) not later than 11:00 a.m. (Charlotte time) five (5) Business Days before a proposed borrowing of LIBOR Competitive Loans and (ii) not later than 11:00 a.m. (Charlotte time) two (2) Business Days before a proposed borrowing of Absolute Rate Loans; provided that the Borrower shall not submit a Competitive Bid Request within five (5) Business Days after the date of any previous Competitive Bid Request. A Competitive Bid Request that does not conform substantially to the form of Exhibit C-1 may be rejected in the Agent's sole discretion, and the Agent shall promptly notify the Borrower of such rejection by telephone promptly confirmed by telecopy. Such request shall in each case refer to this Agreement and specify (i) whether the borrowing then being requested is to be a LIBOR Competitive Loan or an Absolute Rate Loan, (ii) the date of such borrowing (which shall be a Business Day), (iii) the aggregate principal amount of such borrowing which shall be in a minimum principal amount of $10,000,000 or a whole multiple of $5,000,000 in excess thereof and (iv) the Interest Period with respect to each LIBOR Competitive Loan and each Absolute Rate Loan, which Interest Periods may not expire on a date later than the first (1st) Business Day prior to the Termination Date; provided that the Borrower may not request bids for more than three (3) different durations of Interest Periods in the same Competitive Bid Request. Promptly after its receipt of a Competitive Bid Request that is not rejected as aforesaid, the Agent shall invite by telecopier (in the form set forth in Exhibit C-2 hereto) the Lenders to bid, on the terms and conditions of this Agreement, to make Competitive Bid Loans pursuant to the Competitive Bid Request. - 24 - 30 (b) Competitive Bids. (i) Each Lender may make, in its sole discretion, up to three (3) Competitive Bids to the Borrower responsive to a Competitive Bid Request. Each Competitive Bid by a Lender must be received by the Agent via telecopier, in the form of Exhibit C-3, (i) not later than 10:30 a.m., Charlotte time, three (3) Business Days before any proposed LIBOR Competitive Loan and (ii) not later than 10:30 a.m., Charlotte time, on the same Business Day of any proposed Absolute Rate Loan. Multiple bids shall be accepted by the Agent. Competitive Bids that do not conform substantially to the format of Exhibit C-3 may be rejected by the Agent after conferring with, and upon the instruction of, the Borrower, and the Agent shall notify the Lender making such nonconforming bid of such rejection as soon as practicable. Each Competitive Bid shall refer to this Agreement and specify (x) the principal amount (which shall be in a minimum principal amount of $5,000,000 and in an integral multiple of $1,000,000 and which may equal the entire principal amount of the Competitive Bid Loan requested by the Borrower) of the Competitive Bid Loan or Loans that the Lender is willing to make to the Borrower, (y) the Competitive Bid Rate or Rates at which the Lender is prepared to make the Competitive Bid Loan or Loans and (z) the Interest Period applicable to each such Loan and the last day thereof. A Competitive Bid submitted by a Lender pursuant to this Section 2.4(b) shall be irrevocable. (ii) The Agent shall promptly notify the Borrower by telecopier, (A) not later than 11:00 a.m., Charlotte time, three (3) Business Days before a proposed LIBOR Competitive Loan and (B) not later than 11:00 a.m., Charlotte time, on the same Business Day of each proposed Absolute Rate Loan, of all the Competitive Bids made, the Competitive Bid Rate and the principal amount of each Competitive Bid Loan in respect of which a Competitive Bid was made and the identity of the Lender that made each bid. The Agent shall send a copy of all Competitive Bids to the Borrower for its records as soon as practicable after completion of the bidding process set forth in this Section. (iii) The Borrower may, in its sole and absolute discretion, subject only to the provisions of this Section 2.4(b)(iii), accept or reject any Competitive Bid referred to in Section 2.4(b)(ii). The Borrower shall notify the Agent by telephone, confirmed by telecopier in the form of a Competitive Bid Accept/Reject Letter substantially in the form set forth in Exhibit C-4, whether and to what extent it has decided to accept or reject any of or all the bids referred to section 2.4(b)(ii), (y) not later than 11:30 a.m., Charlotte time, three Business Days before a proposed LIBOR Competitive Loan and (z) not later than 11:30 a.m., Charlotte time, on the same Business Day of a proposed - 25 - 31 Absolute Rate Loan; provided, however, that (i) the failure by the Borrower to give such notice shall be deemed to be a rejection of all the bids referred to in Section 2.4(b)(ii), (ii) the acceptance of bids by the Borrower shall be made on the basis of ascending (from lowest to highest) bids for LIBOR Competitive Loans or Absolute Rate Loans within each Interest Period and the Borrower shall not accept a bid made at a particular Competitive Bid Rate for a particular Interest Period if the Borrower has decided to reject a bid made at a lower Competitive Bid Rate for such Interest Period, (iii) if two or more Lenders submit bids at the same Competitive Bid Rate, the principal amount of the bids accepted by the Borrower shall be allocated by the Borrower (after consultation with the Agent) on a pro rata basis in whole multiples of $1,000,000, (iv) the aggregate amount of the Competitive Bids accepted by the Borrower shall not exceed the principal amount specified in the Competitive Bid Request, and (v) except pursuant to clause (iii) above, no bid shall be accepted as a Competitive Bid Loan unless such Competitive Bid Loan is in a minimum principal amount of $5,000,000 and an integral multiple of $1,000,000. A notice given by the Borrower pursuant to this Section 2.4 shall be irrevocable. (iv) The Agent shall promptly notify each bidding Lender whether or not its Competitive Bid has been accepted (and if so, in what amount and at what Competitive Bid Rate) by telecopier sent by the Agent, and each successful bidder shall thereupon become bound, subject to the other applicable conditions hereof, to make the Competitive Bid Loan in respect of which its bid has been accepted. (v) If the Agent shall elect to submit a Competitive Bid in its capacity as a Lender, it shall submit such bid directly to the Borrower one-quarter hour earlier than the earliest time at which the other Lenders are required to submit their bids to the Agent pursuant to Section 2.4. (vi) All notices required by this Section shall be given in accordance with Section 13.1. (c) Disbursement of Competitive Bid Loans. Not later than 2:00 p.m. (Charlotte time) on the proposed borrowing date, each Lender whose Competitive Bid was accepted will make available to the Agent, for the account of the Borrower, at the office of the Agent in funds immediately available to the Agent, such Lender's Competitive Bid Loan to be made on such borrowing date. The Borrower hereby irrevocably authorizes the Agent to disburse the proceeds of each borrowing accepted pursuant to Section 2.4(b) in immediately available funds by crediting such proceeds, not later than 3:30 p.m. (Charlotte time) on the proposed borrowing date, to a deposit account of the Borrower maintained with the - 26 - 32 Agent or by wire transfer to such account as may be designated by the Borrower from time to time. The Agent shall not be obligated to disburse the proceeds of any Competitive Bid Loan accepted pursuant to Section 2.4(b) until each applicable Lender shall have made available to the Agent its Competitive Bid Loan. SECTION 2.5 Repayment of Loans. (a) Repayment. The Borrower shall repay the outstanding principal amount of (i) all Revolving Credit Loans on the Termination Date, if not sooner repaid, (ii) each Competitive Bid Loan on the expiration of the Interest Period applicable thereto and (iii) all Swingline Loans in accordance with Section 2.2(b), together, in each such case, with all accrued but unpaid interest thereon to but not including the date of repayment. The Borrower shall have the right at any time and from time to time to repay the Swingline Loans, each repayment to be in the principal amount of not less than $300,000 or a whole multiple of $100,000 in excess thereof. (b) Mandatory Repayment of Excess Loans. If at any time the outstanding principal amount of all Loans (excluding Swingline Loans simultaneously being repaid with the proceeds of Revolving Loans) plus the L/C Obligations exceeds the Aggregate Commitment, the Borrower shall repay immediately upon notice from the Agent, by payment to the Agent for the account of the Lenders, Loans in an amount equal to such excess with each such repayment applied first to the principal amount of outstanding Swingline Loans (excluding Swingline Loans simultaneously being repaid with the proceeds of Revolving Loans), then to the principal amount of outstanding Revolving Credit Loans, and then to the principal amount of outstanding Competitive Bid Loans, in the inverse order of maturity of such Competitive Bid Loans. (c) Limitation on Repayment of Certain Loans. The Borrower may not repay any LIBOR Loan or any Competitive Bid Loan on any day other than on the last day of the Interest Period applicable thereto unless such repayment is accompanied by any amount required to be paid pursuant to Section 4.9 hereof. SECTION 2.6 Notes. (a) Revolving Credit Notes. Each Lender's Revolving Credit Loans and the obligation of the Borrower to repay such Loans shall be evidenced by a Revolving Credit Note executed by the Borrower payable to the order of such Lender representing the Borrower's obligation to pay such Lender's Commitment or, if less, the aggregate unpaid principal amount of all Revolving Credit Loans made by such Lender to the Borrower hereunder, plus interest and all other fees, charges and other amounts due thereon. Each Revolving Credit Note shall be dated the Closing Date (or, in the case of any Revolving Credit Note issued pursuant to Section - 27 - 33 13.10, dated the effective date of the relevant Assignment and Acceptance) and shall bear interest on the unpaid principal amount thereof at the applicable interest rate per annum specified in Section 4.1(a). (b) Competitive Bid Notes. Each Lender's Competitive Bid Loans and the obligation of the Borrower to repay such Competitive Bid Loans shall be evidenced by a Competitive Bid Note executed by the Borrower payable to the order of such Lender in a principal amount up to $225,000,000 or, if less, the aggregate unpaid principal amount of all Competitive Bid Loans made by such Lender to the Borrower hereunder, plus interest on such principal amounts and all other fees, charges and other amounts due thereon. Each Competitive Bid Note shall be dated the Closing Date and shall bear interest on the unpaid principal amount thereof at the applicable interest rate per annum specified in Section 4.1(a). (c) Swingline Note. The Swingline Loans and the obligation of the Borrower to repay such Swingline Loans shall be evidenced by a Swingline Note executed by the Borrower payable to the order of the Swingline Lender representing the Borrower's obligation to pay the Swingline Lender's Swingline Commitment or, if less, the aggregate unpaid principal amount of all Swingline Loans made by the Swingline Lender to the Borrower hereunder, plus interest on such principal amounts and all other fees, charges and other amounts due thereon. The Swingline Note shall be dated the Closing Date and shall bear interest on the unpaid principal amount thereof at the applicable Swingline Rate. SECTION 2.7 Permanent Reduction of the Aggregate Commitment. (a) The Borrower shall have the right at any time and from time to time, upon at least five (5) Business Days prior written notice to the Agent, to permanently reduce, in whole at any time or in part from time to time, without premium, the Aggregate Commitment in an aggregate principal amount not less than $10,000,000 or any whole multiple in excess thereof. (b) Each permanent reduction permitted pursuant to this Section 2.7 shall be accompanied by a payment of principal sufficient to reduce the aggregate outstanding Extensions of Credit of the Lenders after such reduction to the Aggregate Commitment as so reduced. Any reduction of the Aggregate Commitment to zero shall be accompanied by payment of all outstanding Obligations (and furnishing of cash collateral satisfactory to the Agent for all L/C Obligations) and, if such reduction is permanent, termination of the Commitments and Credit Facility. Such cash collateral shall be applied in accordance with Section 11.2(b). If the reduction of the Aggregate Commitment requires the repayment of any LIBOR Rate Loan or Competitive Bid Loan, such reduction may be made - 28 - 34 only on the last day of the then current Interest Period applicable thereto unless such repayment is accompanied by any amount required to be paid pursuant to Section 4.9 hereof. SECTION 2.8 Termination and Extension of Credit Agreement. The Credit Facility shall terminate on the earliest of (a) April 22, 2002 (as such date may be extended pursuant to this Section 2.8, the "Termination Date"), (b) the date of termination by the Borrower pursuant to Section 2.7(a), and (c) the date of termination by the Agent on behalf of the Lenders pursuant to Section 11.2(a); provided, that not earlier than the thirtieth (30th) day prior to and not later than the thirtieth (30th) day after each of the first and second anniversaries of the Closing Date, the Borrower may, by written notice (an "Extension Request") given to the Agent, request that the Termination Date be extended in each such instance to a date that is 364 days after the Termination Date then in effect; provided, however, that the Termination Date shall not thereby be extended beyond April 22, 2004. The Agent shall promptly advise each Lender of its receipt of any Extension Request and furnish each Lender with a copy thereof. Each Lender may, in its sole discretion, consent to a requested extension by giving written notice thereof to the Agent not later than the Business Day (the "Extension Confirmation Date") immediately preceding the date which is thirty-one (31) days after the date of the Extension Request. No Lender shall be under any obligation or commitment to extend any Termination Date and no such obligation or commitment on the part of any Lender shall be inferred from the provisions of this Section 2.8. Failure on the part of any Lender to respond to an Extension Request by the applicable Extension Confirmation Date shall be deemed to be a denial of such request by such Lender. The requested extension shall not be granted unless Lenders holding 100% of the Aggregate Commitment as of the date the Extension Request is given shall have consented in writing to such extension. Promptly following the applicable Extension Confirmation Date and in any event within five (5) Business Days, the Agent shall provide notice to the Borrower in writing as to whether the requested extension has been granted (an "Extension Confirmation Notice"). If granted, such extension shall become effective upon the date of issuance of such Extension Confirmation Notice. The Agent shall promptly thereafter provide a copy of such Extension Confirmation Notice to each Lender. SECTION 2.9 Use of Proceeds. The Borrower shall use the proceeds of the Loans (a) to repay in full the existing Debt under the Credit Agreement between Quorum Health Group, Inc., et al as Borrowers, AmSouth Bank of Alabama as Agent and the Lenders party thereto dated as of May 22, 1995, as amended, (b) the investment in and acquisition of Facilities and other assets to the extent permitted hereunder, (c) to redeem or solicit the tender of the 1992 Senior Subordinated Notes pursuant to the terms of the 1992 Indenture, and (d) for working capital and other general corporate requirements of the Borrower and the - 29 - 35 Consolidated Entities, including the payment of certain fees and expenses incurred in connection with the transactions contemplated hereby. SECTION 2.10 Guaranty Agreement. Pursuant to the terms and conditions of the Guaranty Agreement, payment and performance of the Obligations shall be unconditionally guaranteed by each Wholly-Owned Entity. ARTICLE III LETTER OF CREDIT FACILITY SECTION 3.1 L/C Commitment. Subject to the terms and conditions hereof, the Issuing Lender, in reliance on the agreements of the other Lenders set forth in Section 3.4(a), agrees to issue standby letters of credit ("Letters of Credit") for the account of the Borrower on any Business Day from the Closing Date through but not including the Termination Date in such form as may be approved from time to time by the Issuing Lender; provided, that the Issuing Lender shall have no obligation to issue any Letter of Credit if, after giving effect to such issuance, (a) the L/C Obligations would exceed the L/C Commitment or (b) the Committed Extensions of Credit would exceed such Lender's Commitment or (c) the aggregate principal amount of all outstanding Loans plus the L/C Obligations would exceed the Aggregate Commitment. Each Letter of Credit shall (i) be denominated in Dollars in a minimum amount of $500,000, (ii) be a standby letter of credit issued to support obligations of the Borrower or any of its Subsidiaries, contingent or otherwise, incurred in the ordinary course of business, (iii) have a term of not more than one (1) year, (iv) expire on a date which shall be no later than thirty (30) days prior to the Termination Date and (v) be subject to the Uniform Customs and, to the extent not inconsistent therewith, the laws of the State of North Carolina. The Issuing Lender shall not at any time be obligated to issue any Letter of Credit hereunder if such issuance would conflict with, or cause the Issuing Lender or any L/C Participant to exceed any limits imposed by, any Applicable Law. References herein to "issue" and derivations thereof with respect to Letters of Credit shall also include extensions or modifications of any existing Letters of Credit, unless the context otherwise requires. SECTION 3.2 Procedure for Issuance of Letters of Credit. The Borrower may from time to time request that the Issuing Lender issue a Letter of Credit by delivering to the Issuing Lender at the Issuing Lender's Office an Application therefor, completed to the satisfaction of the Issuing Lender, and such other certificates, documents and other - 30 - 36 papers and information as the Issuing Lender may request. Upon receipt of any Application, the Issuing Lender shall process such Application and the certificates, documents and other papers and information delivered to it in connection therewith in accordance with its customary procedures and shall, subject to Section 3.1 and Article V hereof, promptly issue the Letter of Credit requested thereby (but in no event shall the Issuing Lender be required to issue any Letter of Credit earlier than three Business Days after its receipt of the Application therefor and all such other certificates, documents and other papers and information relating thereto) by issuing the original of such Letter of Credit to the beneficiary thereof or as otherwise may be agreed by the Issuing Lender and the Borrower. The Issuing Lender shall furnish to the Borrower a copy of such Letter of Credit and furnish to each Lender a copy of such Letter of Credit and the amount of each Lender's L/C Participation therein, all promptly following the issuance of such Letter of Credit. SECTION 3.3 Commissions and Other Charges. (a) The Borrower shall pay to the Agent, for the account of the Issuing Lender and the L/C Participants, a non-refundable letter of credit commission with respect to each Letter of Credit in an amount equal to the product of (i) the LIBOR Margin (on a per annum basis) and (ii) the face amount of such Letter of Credit. Such commission shall be payable quarterly in arrears on the first Business Day of each calendar quarter of the Borrower and on the Termination Date. The Agent shall, promptly following its receipt thereof, distribute to the Issuing Lender and the L/C Participants all commissions received by the Agent in accordance with their respective Commitment Percentages. (b) In addition to the foregoing commission, the Borrower shall pay the Issuing Lender for its account an issuance fee of one-eighth of one percent (0.125%) per annum on the face amount of each Letter of Credit, payable quarterly in arrears on the first Business Day of each calendar quarter and on the Termination Date, together with the Issuing Lender's standard and customary documentation and other fees. SECTION 3.4 L/C Participations. (a) The Issuing Lender irrevocably agrees to grant and hereby grants to each L/C Participant, and, to induce the Issuing Lender to issue Letters of Credit hereunder, each L/C Participant irrevocably agrees to accept and purchase and hereby accepts and purchases from the Issuing Lender, on the terms and conditions hereinafter stated, for such L/C Participant's own account and risk an undivided interest equal to such L/C Participant's Commitment Percentage in the Issuing Lender's obligations and rights under each Letter of Credit issued hereunder and the amount of each draft paid by the Issuing Lender thereunder. Each L/C Participant unconditionally and irrevocably agrees with the Issuing - 31 - 37 Lender that, if a draft is paid under any Letter of Credit for which the Issuing Lender is not reimbursed in full by the Borrower in accordance with the terms of this Agreement, such L/C Participant shall pay to the Issuing Lender upon demand at the Issuing Lender's address for notices specified herein an amount equal to such L/C Participant's Commitment Percentage of the amount of such draft, or any part thereof, which is not so reimbursed. (b) Upon becoming aware of any amount required to be paid by any L/C Participant to the Issuing Lender pursuant to Section 3.4(a) in respect of any unreimbursed portion of any payment made by the Issuing Lender under any Letter of Credit, the Issuing Lender shall notify each L/C Participant of the amount and due date of such required payment and such L/C Participant shall pay to the Issuing Lender the amount specified on the applicable due date. If any such amount is paid to the Issuing Lender after the date such payment is due, such L/C Participant shall pay to the Issuing Lender on demand, in addition to such amount, the product of (i) such amount, times (ii) the daily average Federal Funds Rate as determined by the Agent during the period from and including the date such payment is due to the date on which such payment is immediately available to the Issuing Lender, times (iii) a fraction the numerator of which is the number of days that elapse during such period and the denominator of which is 360. A certificate of the Issuing Lender with respect to any amounts owing under this Section shall be conclusive in the absence of manifest error. With respect to payment to the Issuing Lender of the unreimbursed amounts described in this Section 3.4(b), if the notice that any such payment is due is received by the L/C Participants (A) prior to 1:00 p.m. (Charlotte time) on any Business Day, such payment shall be due that Business Day, and (B) after 1:00 p.m. (Charlotte time) on any Business Day, such payment shall be due on the following Business Day. (c) Whenever, at any time after the Issuing Lender has made payment under any Letter of Credit and has received from any L/C Participant its Commitment Percentage of such payment in accordance with this Section 3.4, the Issuing Lender receives any payment related to such Letter of Credit (whether directly from the Borrower or otherwise, or any payment of interest on account thereof, the Issuing Lender will distribute to such L/C Participant its pro rata share thereof; provided, that in the event that any such payment received by the Issuing Lender shall be required to be returned by the Issuing Lender, such L/C Participant shall return to the Issuing Lender the portion thereof previously distributed by the Issuing Lender to it. SECTION 3.5 Reimbursement Obligation of the Borrower. The Borrower agrees to reimburse the Issuing Lender on each date on which the Issuing Lender notifies the Borrower of the date and amount of a draft paid under any Letter of Credit for the amount of (a) such draft so paid and (b) any taxes, fees, charges or other costs or expenses - 32 - 38 incurred by the Issuing Lender in connection with such payment. Each such payment shall be made to the Issuing Lender at its address for notices specified herein in lawful money of the United States and in immediately available funds. Interest shall be payable on any and all amounts remaining unpaid by the Borrower under this Article III from the date such amounts become payable (whether at stated maturity, by acceleration or otherwise) until payment in full at the rate which would be payable on any outstanding Base Rate Loans which were then overdue. If the Borrower fails to timely reimburse the Issuing Lender on the date the Borrower receives the notice referred to in this Section 3.5, the Borrower shall be deemed to have timely given a Notice of Borrowing hereunder to the Agent requesting the Lenders to make a Base Rate Loan on such date in an amount equal to the amount of such drawing and, subject to the satisfaction or waiver of the conditions precedent specified in Article V, the Lenders shall make Base Rate Loans in such amount, the proceeds of which shall be applied to reimburse the Issuing Lender for the amount of the related drawing and costs and expenses. SECTION 3.6 Obligations Absolute. The Borrower's obligations under this Article III (including without limitation the Reimbursement Obligation) shall be absolute and unconditional under any and all circumstances and irrespective of any set-off, counterclaim or defense to payment which the Borrower may have or have had against the Issuing Lender or any beneficiary of a Letter of Credit. The Borrower also agrees with the Issuing Lender that the Issuing Lender shall not be responsible for, and the Borrower's Reimbursement Obligation under Section 3.5 shall not be affected by, among other things, the validity or genuineness of documents or of any endorsements thereon, even though such documents shall in fact prove to be invalid, fraudulent or forged, or any dispute between or among the Borrower and any beneficiary of any Letter of Credit or any other party to which such Letter of Credit may be transferred or any claims whatsoever of a Borrower against any beneficiary of such Letter of Credit or any such transferee. The Issuing Lender shall not be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit, except for errors or omissions caused by the Issuing Lender's gross negligence or willful misconduct. The Borrower agrees that any action taken or omitted by the Issuing Lender under or in connection with any Letter of Credit or the related drafts or documents, if done in the absence of gross negligence or willful misconduct and in accordance with the standards of care specified in the Uniform Customs and, to the extent not inconsistent therewith, the UCC shall be binding on the Borrower and shall not result in any liability of the Issuing Lender to the Borrower. The responsibility of the Issuing Lender to the Borrower in connection with any draft presented for payment under any Letter of Credit shall, in addition to any payment obligation expressly provided for in such Letter of Credit, be limited to determining that the documents (including each draft) delivered under such Letter of Credit in - 33 - 39 connection with such presentment are in conformity with such Letter of Credit. SECTION 3.7 Effect of Application. To the extent that any provision of any Application related to any Letter of Credit is inconsistent with the provisions of this Article III, the provisions of this Article III shall apply. ARTICLE IV GENERAL LOAN PROVISIONS SECTION 4.1 Interest. (a) Interest Rate Options. Subject to the provisions of this Section 4.1, at the election of the Borrower in accordance with Article II, the unpaid principal balance of (i) any Revolving Credit Loan shall bear interest at (A) the Base Rate or (B) the LIBOR Rate plus the LIBOR Margin, (ii) any Competitive Bid Loan shall bear interest at the applicable Competitive Bid Rate established pursuant to Section 2.4 and (iii) any Swingline Loan shall bear interest at the Swingline Rate. Any Revolving Credit Loan as to which the Borrower has not duly specified an interest rate as provided herein shall be deemed a Base Rate Loan. (b) Interest Periods. (i) In connection with each LIBOR Loan, the Borrower, by giving notice at the times described in Sections 2.3 and 4.2, shall elect an interest period (each, an "Interest Period") to be applicable to such Loan, which Interest Period shall be a period of one (1), two (2), three (3), or six (6) months; provided that: (A) each Interest Period shall commence on the date of advance of or conversion to any LIBOR Loan and, in the case of immediately successive Interest Periods, each successive Interest Period shall commence on the date on which the next preceding Interest Period expires; (B) if any Interest Period would otherwise expire on a day that is not a Business Day, such Interest Period shall expire on the next succeeding Business Day; provided, that if any Interest Period would otherwise expire on a day that is not a Business Day but is a day of the month after which no further Business Day occurs in such month, such Interest Period shall expire on the next preceding Business Day; - 34 - 40 (C) any Interest Period that begins on the last 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 end on the last Business Day of the relevant calendar month at the end of such Interest Period; and (D) no Interest Period shall extend beyond the Termination Date. (ii) In connection with each Competitive Bid Loan, the Borrower, by giving notice at the times described in Section 2.4, shall elect an Interest Period to be applicable to such Loan, which Interest Period shall be a period of such duration as accepted by the Borrower pursuant to Section 2.4(b); provided that: (A) the Interest Period for any Absolute Rate Loan shall not be less than seven (7) days nor more than one hundred eighty (180) days; (B) the Interest Period for any LIBOR Competitive Loan shall be a period of one (1), two (2), three (3), or six (6) months; (C) if any Interest Period would otherwise expire on a day that is not a Business Day, such Interest Period shall expire on the next succeeding Business Day; and (D) no Interest Period shall extend beyond the Termination Date. (iii) With respect LIBOR Rate Loans and LIBOR Competitive Loans in the aggregate, there shall be no more than eight (8) Interest Periods in effect at any time. (c) LIBOR Margin. Adjustments, if any, in the LIBOR Margin shall be made by the Agent on the fifth (5th) Business Day after receipt by the Agent of quarterly financial statements for the Borrower and its Subsidiaries and the accompanying Officer's Compliance Certificate setting forth the Total Leverage Ratio of the Borrower and its Consolidated Entities as of the most recent fiscal quarter end. Subject to Section 4.1(d), in the event the Borrower fails to deliver such financial statements and certificate within the time required by Section 7.1(c) hereof, the LIBOR Margin shall be the highest LIBOR Margin until five (5) Business Days after receipt by the Agent of such financial statements and certificate. - 35 - 41 (d) Default Rate. Upon the occurrence and during the continuance of an Event of Default, (i) the Borrower shall no longer have the option to request LIBOR Loans, (ii) all outstanding LIBOR Loans may at the option of the Agent and shall at the direction of the Required Lenders bear interest at a rate per annum which shall be two percent (2%) in excess of the rate then applicable to LIBOR Loans, as applicable, until the end of the applicable Interest Period and thereafter at a rate equal to two percent (2%) in excess of the rate then applicable to Base Rate Loans, and (iii) all outstanding Base Rate Loans shall bear interest at a rate per annum equal to two percent (2%) in excess of the rate then applicable to Base Rate Loans. Interest shall continue to accrue on the Notes after the filing by or against the Borrower of any petition seeking any relief in bankruptcy or under any act or law pertaining to insolvency or debtor relief, whether state, federal or foreign. (e) Interest Payment and Computation. Interest on each Base Rate Loan shall be payable in arrears on the first Business Day of each calendar quarter for the immediately preceding quarter, commencing on July 1, 1997; interest on each LIBOR Loan and Competitive Bid Loan shall be payable on the last day of each Interest Period applicable thereto, and if such Interest Period extends over three (3) months, at the end of each three (3) month interval during such Interest Period. All interest rates, fees and commissions provided hereunder shall be computed on the basis of a 360-day year and assessed for the actual number of days elapsed. (f) Maximum Rate. In no contingency or event whatsoever shall the aggregate of all amounts deemed interest hereunder or under any of the Notes charged or collected pursuant to the terms of this Agreement or pursuant to any of the Notes exceed the highest rate permissible under any Applicable Law which a court of competent jurisdiction shall, in a final determination, deem applicable hereto. In the event that such a court determines that the Lenders have charged or received interest hereunder in excess of the highest applicable rate, the rate in effect hereunder shall automatically be reduced to the maximum rate permitted by Applicable Law and the Lenders shall at the Agent's option promptly refund to the Borrower any interest received by Lenders in excess of the maximum lawful rate or shall apply such excess to the principal balance of the Obligations. It is the intent hereof that the Borrower not pay or contract to pay, and that neither the Agent nor any Lender receive or contract to receive, directly or indirectly in any manner whatsoever, interest in excess of that which may be paid by the Borrower under Applicable Law. SECTION 4.2 Notice and Manner of Conversion or Continuation of Revolving Credit Loans. Provided that no Event of Default has occurred and is then continuing, the Borrower shall have the option to (a) convert at any time all or any portion of its outstanding Base Rate Loans in a principal amount equal to $10,000,000 or any whole multiple - 36 - 42 of $1,000,000 in excess thereof into one or more LIBOR Loans, and (b) upon the expiration of any Interest Period, (i) convert all or any part of its outstanding LIBOR Loans in a principal amount equal to $3,000,000 or a whole multiple of $1,000,000 in excess thereof into Base Rate Loans or (ii) continue such LIBOR Loans as LIBOR Loans. Whenever the Borrower desires to convert or continue Loans as provided above, the Borrower shall give the Agent irrevocable prior written notice in the form attached as Exhibit D (a "Notice of Conversion/ Continuation") not later than 11:00 a.m. (Charlotte time) three (3) Business Days before the day on which a proposed conversion or continuation of such Loan is to be effective specifying (A) the Loans to be converted or continued, and, in the case of any LIBOR Loan to be converted or continued, the last day of the Interest Period therefor, (B) the effective date of such conversion or continuation (which shall be a Business Day), (C) the principal amount of such Loans to be converted or continued, and (D) the Interest Period to be applicable to such converted or continued LIBOR Loan. The Agent shall promptly notify the Lenders of such Notice of Conversion/Continuation. SECTION 4.3 Fees. (a) Facility Fees. Commencing on the Closing Date, the Borrower shall pay to the Agent, for the account of the Lenders, a non-refundable facility fee at a rate (the "Facility Fee Rate") per annum equal to the product of (i) the Facility Fee Rate set forth below and (ii) the amount of the Aggregate Commitment, whether used or unused. The Facility Fee Rate, from the Closing Date until the receipt of the initial Margin Certificate, shall be 0.20% and thereafter shall be determined by reference to the Total Leverage Ratio of the Borrower and its Consolidated Entities set forth in the most recently delivered Margin Certificate as follows:
Total Leverage Ratio Facility Fee Rate (%) -------------------- --------------------- Less than 1.5 to 1.0 0.1750 Equal to or greater than 1.5 to 1.0 0.1875 but less than 2.0 to 1.0 Equal to or greater than 2.0 to 1.0 but 0.2000 less than 2.5 to 1.0 Equal to or greater than 2.5 to 1.0 but 0.2500 less than 3.0 to 1.0 Equal to or greater than 3.0 to 1.0 0.2500
- 37 - 43 Adjustments, if any, in the Facility Fee Rate shall be made by the Agent on the fifth Business Day after receipt by the Agent of quarterly financial statements for the Borrower and the Consolidated Entities and the accompanying Officer's Compliance Certificate setting forth the Total Leverage Ratio of the Borrower and its Subsidiaries as of the most recent fiscal quarter end. In the event the Borrower fails to deliver such financial statements and certificate within the time required by Section 7.1 hereof, the Facility Fee Rate shall be the highest Facility Fee Rate until five (5) Business Days after receipt by the Agent of such financial statements and certificate. The Facility Fee shall be payable in arrears on the first Business Day of each fiscal quarter of the Borrower during the term of this Agreement commencing July 1, 1997, and on the Termination Date. Such fee shall be distributed by the Agent to the Lenders pro rata in accordance with the Lenders' respective Commitment Percentages. (b) Agent's and Other Fees. The Borrower agrees to pay to the Agent, for its account, the fees set forth in the separate fee letter agreement executed by the Borrower and the Agent dated March 21, 1997. SECTION 4.4 Manner of Payment. Each payment by the Borrower on account of the principal of or interest on the Loans or of any fee, commission or other amounts (including the Reimbursement Obligation) payable to the Lenders under this Agreement or any Note shall be made not later than 1:00 p.m. (Charlotte time) on the date specified for payment under this Agreement to the Agent at the Agent's Office for the account of the Lenders (other than as set forth below) pro rata in accordance with their respective Commitment Percentages, in Dollars, in immediately available funds and shall be made without any set-off, counterclaim or deduction whatsoever. Any payment received after such time but before 2:00 p.m. (Charlotte time) on such day shall be deemed a payment on such date for the purposes of Section 11.1, but for all other purposes shall be deemed to have been made on the next succeeding Business Day. Any payment received after 2:00 p.m. (Charlotte time) shall be deemed to have been made on the next succeeding Business Day for all purposes. Promptly upon receipt by the Agent of each such payment, the Agent shall distribute to each Lender at its address for notices set forth herein its pro rata share of such payment in accordance with such Lender's Commitment Percentage and shall wire advice of the amount of such credit to each Lender. Each payment to the Agent of the Issuing Lender's fees or L/C Participants' commissions shall be made in like manner, but for the account of the Issuing Lender or the L/C Participants, as the case may be. Each payment to the Agent of Agent's fees or expenses shall be made for the account of the Agent and any amount payable to any Lender under Sections 4.8, 4.9, 4.10, 4.11 or 13.2 shall be paid to the Agent for the account of the applicable Lender. - 38 - 44 SECTION 4.5 Crediting of Payments and Proceeds. In the event that the Borrower shall fail to pay any of the Obligations when due and the Obligations have been accelerated pursuant to Section 11.2, all payments received by the Lenders upon the Notes and the other Obligations and all net proceeds from the enforcement of the Obligations shall be applied first to all expenses then due and payable by the Borrower hereunder, then to all indemnity obligations then due and payable by the Borrower hereunder, then to all Agent's and Issuing Lender's fees then due and payable, then to all commitment and other fees and commissions then due and payable, then to accrued and unpaid interest on the Swingline Note, then to the principal amount outstanding under the Swingline Note, then to accrued and unpaid interest on the Revolving Credit Notes and any termination payments due in respect of a Hedging Agreement with any Lender (pro rata in accordance with all such amounts due), then to the principal amount outstanding under the Revolving Credit Notes, then to accrued and unpaid interest on the Competitive Bid Notes, then to the principal amount outstanding under the Competitive Bid Notes and then to the cash collateral account described in Section 11.2(b) hereof to the extent of any L/C Obligations then outstanding, in that order. SECTION 4.6 Adjustments. If any Lender (a "Benefitted Lender") shall at any time receive any payment of all or part of its Extensions of Credit, or interest thereon, or if any Lender shall at any time receive any collateral in respect to its Extensions of Credit (whether voluntarily or involuntarily, by set-off or otherwise) in a greater proportion than any such payment to and collateral received by any other Lender, if any, in respect of such other Lender's Extensions of Credit, or interest thereon, such Benefitted Lender shall purchase for cash from the other Lenders such portion of each such other Lender's Extensions of Credit, or shall provide such other Lenders with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such Benefitted Lender to share the excess payment or benefits of such collateral or proceeds ratably with each of the Lenders; provided, that if all or any portion of such excess payment or benefits is thereafter recovered from such Benefitted Lender, such purchase shall be rescinded, and the purchase price and benefits returned to the extent of such recovery, but without interest. The Borrower agrees that each Lender so purchasing a portion of another Lender's Extensions of Credit may exercise all rights of payment (including, without limitation, rights of set-off) with respect to such portion as fully as if such Lender were the direct holder of such portion. SECTION 4.7 Nature of Obligations of Lenders Regarding Extensions of Credit; Assumption by the Agent. The obligations of the Lenders under this Agreement to make the Loans and issue or participate in Letters of Credit are several and are not joint or joint and several. Unless the Agent shall have received notice from a Lender prior to a - 39 - 45 proposed borrowing date that such Lender will not make available to the Agent such Lender's ratable portion of the amount to be borrowed on such date (which notice shall not release such Lender of its obligations hereunder), the Agent may assume that such Lender has made such portion available to the Agent on the proposed borrowing date in accordance with Section 2.3(b) and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If such amount is made available to the Agent on a date after such borrowing date, such Lender shall pay to the Agent on demand an amount, until paid, equal to the product of (a) the amount of such Lender's Commitment Percentage of such borrowing, times (b) the daily average Federal Funds Rate during such period as determined by the Agent, times (c) a fraction the numerator of which is the number of days that elapse from and including such borrowing date to the date on which such Lender's Commitment Percentage of such borrowing shall have become immediately available to the Agent and the denominator of which is 360. A certificate of the Agent with respect to any amounts owing under this Section shall be conclusive, absent manifest error. If such Lender's Commitment Percentage of such borrowing is not made available to the Agent by such Lender within three (3) Business Days of such borrowing date, the Agent shall be entitled to recover such amount made available by the Agent with interest thereon at the rate per annum applicable to Base Rate Loans hereunder, on demand, from the Borrower. The failure of any Lender to make its Commitment Percentage of any Revolving Credit Loan available shall not relieve it or any other Lender of its obligation, if any, hereunder to make its Commitment Percentage of such Loan available on such borrowing date, but no Lender shall be responsible for the failure of any other Lender to make its Commitment Percentage of such Loan available on the borrowing date. SECTION 4.8 Changed Circumstances. (a) Circumstances Affecting LIBOR Rate Availability. If with respect to any Interest Period the Agent or any Lender (after consultation with Agent) shall determine that, by reason of circumstances affecting the foreign exchange and interbank markets generally, deposits in eurodollars, in the applicable amounts are not being quoted via Telerate Page 3750 or offered to the Agent or such Lender for such Interest Period, then the Agent shall forthwith give notice thereof to the Borrower. Thereafter, until the Agent notifies the Borrower that such circumstances no longer exist, the obligation of the Lenders to make LIBOR Loans and the right of the Borrower to convert any Loan to or continue any Loan as a LIBOR Loan shall be suspended, and the Borrower shall repay in full (or cause to be repaid in full) the then outstanding principal amount of each such LIBOR Loans together with accrued interest thereon, on the last day of the then current Interest Period applicable to such LIBOR Loan or convert the then outstanding principal amount of each such LIBOR Loan to a Base Rate Loan as of the last day of such Interest Period. - 40 - 46 (b) Laws Affecting LIBOR Rate Availability. If, after the date hereof, the introduction of, or any change in, any Applicable Law or any change in the interpretation or administration thereof by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or any of their respective Lending Offices) with any request or directive (whether or not having the force of law) of any such Authority, central bank or comparable agency, shall make it unlawful or impossible for any of the Lenders (or any of their respective Lending Offices) to honor its obligations hereunder to make or maintain any LIBOR Loan, such Lender shall promptly give notice thereof to the Agent and the Agent shall promptly give notice to the Borrower and the other Lenders. Before giving any notice to the Agent, such Lender shall designate a different Lending Office if such designation will avoid the need for giving such notice and will not, in the judgment of such Lender, be otherwise disadvantageous to such Lender. Thereafter, until the Agent notifies the Borrower that such circumstances no longer exist, (i) the obligations of the Lenders to make LIBOR Loans and the right of the Borrower to convert any Loan or continue any Loan as a LIBOR Loan shall be suspended and thereafter the Borrower may select only Base Rate Loans hereunder, and (ii) if any of the Lenders may not lawfully continue to maintain a LIBOR Loan to the end of the then current Interest Period applicable thereto as a LIBOR Loan, the applicable LIBOR Loan shall immediately be converted to a Base Rate Loan for the remainder of such Interest Period, and (iii) thereafter, such Lender shall make only Base Rate Loans and Absolute Rate Loans hereunder. (c) Increased Costs. If, after the date hereof, the introduction of, or any change in, any Applicable Law, or in the interpretation or administration thereof by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any of the Lenders (or any of their respective Lending Offices) with any request or directive (whether or not having the force of law) of such Authority, central bank or comparable agency: (i) shall subject any of the Lenders (or any of their respective Lending Offices) to any tax, duty or other charge with respect to any Note, Letter of Credit or Application or shall change the basis of taxation of payments to any of the Lenders (or any of their respective Lending Offices) of the principal of or interest on any Note, Letter of Credit or Application or any other amounts due under this Agreement in respect thereof (except for changes in the rate of tax on the overall net income of any of the Lenders or any of their respective Lending Offices imposed by the jurisdiction in which such Lender is organized or is or should be qualified to do business or such Lending Office is located); or (ii) shall impose, modify or deem applicable any reserve (including, without limitation, any imposed by the Board of - 41 - 47 Governors of the Federal Reserve System), special deposit, insurance or capital or similar requirement against assets of, deposits with or for the account of, or credit extended by any of the Lenders (or any of their respective Lending Offices) or shall impose on any of the Lenders (or any of their respective Lending Offices) or the foreign exchange and interbank markets any other condition affecting any Note; and the result of any of the foregoing is to increase the costs to any of the Lenders of maintaining any LIBOR Loan, as applicable, or issuing or participating in Letters of Credit or to reduce the yield or amount of any sum received or receivable by any of the Lenders under this Agreement or under the Notes in respect of a LIBOR Loan or Letter of Credit or Application, then such Lender shall promptly notify the Agent, and the Agent shall promptly notify the Borrower of such fact and demand compensation therefor and, within fifteen (15) days after such notice by the Agent, the Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender or Lenders for such increased cost or reduction. The Agent will promptly notify the Borrower of any event of which it has knowledge which will entitle such Lender to compensation pursuant to this Section 4.8(c); provided, that the Agent shall incur no liability whatsoever to the Lenders or the Borrower in the event it fails to do so. The amount of such compensation shall be determined, in the applicable Lender's sole discretion, based upon the assumption that such Lender funded its Commitment Percentage of the LIBOR Loans in the London interbank or domestic certificate of deposit market, as applicable, and using any reasonable attribution or averaging methods which such Lender deems appropriate and practical. A certificate of such Lender setting forth the basis for determining such amount or amounts necessary to compensate such Lender shall be forwarded to the Borrower through the Agent and shall be conclusively presumed to be correct save for manifest error. SECTION 4.9 Indemnity. The Borrower hereby indemnifies each of the Lenders against any loss or expense which may arise or be attributable to each Lender's obtaining, liquidating or employing deposits or other funds acquired to effect, fund or maintain any Loan (a) as a consequence of any failure by the Borrower to make any payment when due of any amount due hereunder in connection with a LIBOR Loan, (b) due to any failure of the Borrower to borrow on a date specified therefor in a Notice of Borrowing, Notice of Continuation/Conversion or Competitive Bid Accept/Reject Letter or (c) due to any payment, prepayment or conversion of any LIBOR Loan or Competitive Bid Loan on a date other than the last day of the Interest Period therefor. The amount of such loss or expense shall be determined, in the applicable Lender's sole discretion, based upon the assumption that such Lender funded its Commitment Percentage of the LIBOR Loans in the London interbank or domestic certificate of deposit market, as applicable, and - 42 - 48 using any reasonable attribution or averaging methods which such Lender deems appropriate and practical. A certificate of such Lender setting forth the basis for determining such amount or amounts necessary to compensate such Lender shall be forwarded to the Borrower through the Agent and shall be conclusively presumed to be correct save for manifest error. SECTION 4.10 Capital Requirements. If either (a) the introduction of, or any change in, or in the interpretation of, any Applicable Law or (b) compliance with any guideline or request from any central bank or comparable agency or other Governmental Authority (whether or not having the force of law), has or would have the effect of reducing the rate of return on the capital of, or has affected or would affect the amount of capital required to be maintained by, any Lender or any corporation controlling such Lender as a consequence of, or with reference to the Commitments and other commitments of this type, below the rate which the Lender or such other corporation could have achieved but for such introduction, change or compliance, then within five (5) Business Days after written demand by any such Lender, the Borrower shall pay to such Lender from time to time as specified by such Lender additional amounts sufficient to compensate such Lender or other corporation for such reduction. A certificate as to such amounts submitted to the Borrower and the Agent by such Lender, shall, in the absence of manifest error, be presumed to be correct and binding for all purposes. SECTION 4.11 Taxes. (a) Payments Free and Clear. Any and all payments by the Borrower hereunder or under the Notes or the Letters of Credit shall be made free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholding, and all liabilities with respect thereto excluding, (i) in the case of each Lender and the Agent, income and franchise taxes imposed by the jurisdiction under the laws of which such Lender or the Agent (as the case may be) is organized or is or should be qualified to do business or any political subdivision thereof and (ii) in the case of each Lender, income and franchise taxes imposed by the jurisdiction of such Lender's Lending Office or any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under any Note or Letter of Credit to any Lender or the Agent, (A) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 4.11) such Lender or the Agent (as the case may be) receives an amount equal to the amount such party would have received had no such deductions been made, (B) the Borrower shall make such deductions, (C) - 43 - 49 the Borrower shall pay the full amount deducted to the relevant taxing authority or other authority in accordance with applicable law, and (D) the Borrower shall deliver to the Agent evidence of such payment to the relevant taxing authority or other authority in the manner provided in Section 4.11(d). (b) Stamp and Other Taxes. In addition, the Borrower shall pay any present or future stamp, registration, recordation or documentary taxes or any other similar fees or charges or excise or property taxes, levies of the United States or any state or political subdivision thereof or any applicable foreign jurisdiction which arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Agreement, the Loans, the Letters of Credit, the other Loan Documents, or the perfection of any rights or security interest in respect thereto (hereinafter referred to as "Other Taxes"). (c) Indemnity. The Borrower shall indemnify each Lender and the Agent for the full amount of Taxes and Other Taxes (including, without limitation, any Taxes and Other Taxes imposed by any jurisdiction on amounts payable under this Section 4.11) paid by such Lender or the Agent (as the case may be) and any liability (including penalties, 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 within thirty (30) days from the date such Lender or the Agent (as the case may be) makes written demand therefor. (d) Evidence of Payment. Within thirty (30) days after the date of any payment of Taxes or Other Taxes, the Borrower shall furnish to the Agent, at its address referred to in Section 13.1, the original or a certified copy of a receipt evidencing payment thereof or other evidence of payment satisfactory to the Agent. (e) Delivery of Tax Forms. Each Lender organized under the laws of a jurisdiction other than the United States or any state thereof shall deliver to the Borrower, with a copy to the Agent, on the Closing Date or concurrently with the delivery of the relevant Assignment and Acceptance, as applicable, (i) two United States Internal Revenue Service Forms 4224 or Forms 1001, as applicable (or successor forms) properly completed and certifying in each case that such Lender is entitled to a complete exemption from withholding or deduction for or on account of any United States federal income taxes, and (ii) an Internal Revenue Service Form W-8 or W-9 or successor applicable form, as the case may be, to establish an exemption from United States backup withholding taxes. Each such Lender further agrees to deliver to the Borrower, with a copy to the Agent, a Form 1001 or 4224 and Form W-8 or W-9, or successor applicable forms or manner of certification, as the case may be, on or before the date that any such form expires or becomes - 44 - 50 obsolete or after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Borrower, certifying in the case of a Form 1001 or 4224 that such Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes (unless in any such case an event (including without limitation any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders such forms inapplicable or the exemption to which such forms relate unavailable and such Lender notifies the Borrower and the Agent that it is not entitled to receive payments without deduction or withholding of United States federal income taxes) and, in the case of a Form W-8 or W-9, establishing an exemption from United States backup withholding tax. (f) Survival. Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in this Section 4.11 shall survive the payment in full of the Obligations and the termination of the Commitments. SECTION 4.12 Replacement of Lenders. If deposits in eurodollars shall not be available to any Lender, as determined in accordance with Section 4.8(a), or it shall be unlawful or impossible for any Lender to make or maintain any LIBOR Loan, as determined in accordance with Section 4.8(b), the Borrower shall have the right, if no Default or Event of Default exists or will exist immediately after giving effect to the respective replacement, to replace such affected Lender (the "Replaced Lender"), upon ten (10) days' written notice to the Agent, with one or more other Eligible Assignee or Assignees reasonably acceptable to the Agent in accordance with Section 13.10 (collectively, the "Replacement Lender"); provided, that no assignment shall be required if the consummation of such assignment conflicts with any Applicable Law. Neither the Agent nor any Lender shall be obligated to assist the Borrower in identifying any Eligible Assignees that are willing to become a Replacement Lender. At the time of any replacement pursuant to this Section 4.12, the Replacement Lender shall enter into an Assignment and Acceptance (with all fees payable pursuant to Section 13.10 to be paid by the Replacement Lender) pursuant to which the Replacement Lender shall acquire all of the Commitment and outstanding Extensions of Credit of the Replaced Lender and in connection therewith, shall pay on the effective date of the corresponding Assignment and Acceptance to the Replaced Lender an amount equal to the sum of (i) the principal of, and all accrued interest on, all outstanding Loans of the Replaced Lender and (ii) all accrued but unpaid fees owing to the Replaced Lender pursuant to Sections 3.3 and 4.3 and (iii) all other obligations of the Borrower owing to the Replaced Lender. Upon the execution of such Assignment and Acceptance, the payment of amounts referred to in clauses (i), (ii) and (iii) above and delivery to the Replacement Lender of new Notes executed by the Borrower, the Replacement Lender shall become a Lender hereunder and the Replaced - 45 - 51 Lender shall cease to constitute a Lender hereunder, except with respect to the indemnification provisions under this Agreement (including, without limitation, Sections 4.9, 4.11(c), 8.7, 12.7, 13.2, and 13.14), which shall survive as to such Replaced Lender and in the case of a replacement of a Replaced Lender with an existing Lender, the Commitment Percentage of such Lender shall be automatically adjusted at such time to give effect to such replacement. ARTICLE V CLOSING; CONDITIONS OF CLOSING AND BORROWING SECTION 5.1 Closing. The closing shall take place at the offices of Kennedy Covington Lobdell & Hickman, L.L.P. at 10:00 a.m. on April 22, 1997, or on such other date as the parties hereto shall mutually agree. SECTION 5.2 Conditions to Closing and Initial Extensions of Credit. The obligation of the Lenders to close this Agreement and to make the initial Loan or issue the initial Letter of Credit is subject to the satisfaction of each of the following conditions: (a) Executed Loan Documents. This Agreement, the Notes and each of the Loan Documents shall have been duly authorized, executed and delivered to the Agent by the parties thereto, shall be in full force and effect and no default shall exist thereunder, and the Borrower shall have delivered original counterparts thereof to the Agent. (b) Closing Certificates; etc. (i) Officers's Certificate of the Borrower. The Agent shall have received a certificate from the chief executive officer, chief operating officer, chief financial officer, treasurer or controller of the Borrower, in form and substance satisfactory to the Agent, to the effect that all representations and warranties of the Borrower contained in this Agreement and the other Loan Documents are true, correct and complete; that the Borrower is not in violation of any of the covenants contained in this Agreement and the other Loan Documents; that, after giving effect to the transactions contemplated by this Agreement, no Default or Event of Default has occurred and is continuing; and that the Borrower has satisfied each of the closing conditions. (ii) Certificate of Secretary of the Borrower. The Agent shall have received a certificate of the secretary or assistant secretary of the Borrower certifying that attached thereto is a true and complete copy of the articles of incorporation of the - 46 - 52 Borrower and all amendments thereto, certified as of a recent date by the appropriate Governmental Authority in its jurisdiction of incorporation; that attached thereto is a true and complete copy of the bylaws of the Borrower as in effect on the date of such certification; that attached thereto is a true and complete copy of resolutions duly adopted by the Board of Directors of the Borrower authorizing the borrowings contemplated hereunder and the execution, delivery and performance of this Agreement and the other Loan Documents to which it is a party; and as to the incumbency and genuineness of the signature of each officer of the Borrower executing Loan Documents to which it is a party. (iii) Certificate of Secretary of the Guarantors. The Agent shall have received a certificate of the secretary or assistant secretary of each Guarantor certifying that attached thereto is a true and complete copy of the organizational documents of such Guarantor and all amendments thereto, certified as of a recent date by the appropriate Governmental Authority in its jurisdiction of formation; that attached thereto is a true and complete copy of resolutions duly adopted by the governing body of such Guarantor authorizing the execution, delivery and performance of the Loan Documents to which it is a party; and as to the incumbency and genuineness of the signature of each Person executing the Loan Documents on behalf of such Guarantor; provided, however, that, with respect to the Guarantors listed on Schedule 5.2(b), the Agent shall receive the foregoing certificates and related attachments not later than thirty (30) days following the Closing Date. (iv) Certificates of Good Standing. The Agent shall have received long-form certificates as of a recent date of the good standing of the Borrower under the laws of its jurisdiction of organization and each other jurisdiction where the Borrower is qualified to do business. (v) Opinion of Counsel. The Agent shall have received a favorable opinion of counsel to the Borrower addressed to the Agent and the Lenders with respect to the Borrower, the Guarantors, the Loan Documents and such other matters as the Lenders shall request. (vi) Tax Forms. The Agent shall have received copies of the United States Internal Revenue Service forms required by Section 4.11(e) hereof. (c) Consents; Defaults. (i) Governmental and Third Party Approvals. All necessary approvals, authorizations and consents, if any be required, of any - 47 - 53 Person and of all Governmental Authorities and courts having jurisdiction with respect to the transactions contemplated by this Agreement and the other Loan Documents shall have been obtained. (ii) No Injunction, Etc. No action, proceeding, investigation, regulation or legislation shall have been instituted, threatened or proposed before any Governmental Authority to enjoin, restrain, or prohibit, or to obtain substantial damages in respect of, or which is related to or arises out of this Agreement or the other Loan Documents or the consummation of the transactions contemplated hereby or thereby, or which, in the Agent's discretion, would make it inadvisable to consummate the transactions contemplated by this Agreement and such other Loan Documents. (iii) No Event of Default. No Default or Event of Default shall have occurred and be continuing. (d) Financial Matters. (i) Financial Statements. The Agent shall have received the most recent annual audited and quarterly unaudited Consolidated financial statements of the Borrower and the Consolidated Entities required by this Agreement. (ii) Financial Condition Certificate. The Borrower shall have delivered to the Agent a certificate, in form and substance satisfactory to the Agent, and certified as accurate by the chief executive officer, chief operating officer, chief financial officer, treasurer or controller of the Borrower, that (A) the Borrower and each of the Consolidated Entities is Solvent and (B) attached thereto is an unaudited balance sheet of the Borrower and the Consolidated Entities for the quarter ending March 31, 1997 evidencing compliance by the Borrower and its Consolidated Entities with the covenants contained in Articles IX and X hereof. (iii) Payment at Closing; Fee Letters. There shall have been paid by the Borrower to the Agent and the Lenders the fees set forth or referenced in Section 4.3 and any other accrued and unpaid fees or commissions due hereunder (including, without limitation, legal fees and expenses), and to any other Person such amount as may be due thereto in connection with the transactions contemplated hereby, including all taxes, fees and other charges in connection with the execution, delivery, recording, filing and registration of any of the Loan Documents. The Agent shall have received duly authorized and executed copies of the fee letter agreement referred to in Section 4.3(b). (e) Miscellaneous. - 48 - 54 (i) Notice of Borrowing. The Agent shall have received a Notice of Borrowing from the Borrower in accordance with Section 2.3(a), and a written notice in the form attached hereto as Exhibit G (a "Notice of Account Designation") specifying the account or accounts to which the proceeds of any Loans made after the Closing Date are to be disbursed. (ii) Proceedings and Documents. All opinions, certificates and other instruments and all proceedings in connection with the transactions contemplated by this Agreement shall be satisfactory in form and substance to the Lenders. The Lenders shall have received copies of all other instruments and other evidence as the Lender may reasonably request, in form and substance satisfactory to the Lenders, with respect to the transactions contemplated by this Agreement and the taking of all actions in connection therewith. (iii) Due Diligence and Other Documents. The Borrower shall have delivered to the Agent such other documents, certificates and opinions as the Agent reasonably requests, including without limitation copies of each document evidencing or governing the Subordinated Debt, certified by a secretary or assistant secretary of the Borrower as a true and correct copy thereof. SECTION 5.3 Conditions to All Loans and Letters of Credit. The obligations of the Lenders to make any Loan or issue any Letter of Credit is subject to the satisfaction of the following conditions precedent on the relevant borrowing or issue date, as applicable: (a) Continuation of Representations and Warranties. The representations and warranties contained in Article VI shall be true and correct in all material respects on and as of such borrowing or issuance date with the same effect as if made on and as of such date (except and to the extent that such representations and warranties relate to an earlier date, in which case such representations and warranties shall be true and correct as of such earlier date). (b) No Existing Default. No Default or Event of Default shall have occurred and be continuing hereunder (i) on the borrowing date with respect to such Loan or after giving effect to the Loans to be made on such date or (ii) on the issue date with respect to such Letter of Credit or after giving effect to such Letter of Credit on such date. (c) Officer's Compliance Certificate; Additional Documents. The Agent shall have received the current Officer's Compliance - 49 - 55 Certificate and each additional document, instrument, legal opinion or other item of information reasonably requested by it. ARTICLE VI REPRESENTATIONS AND WARRANTIES OF THE BORROWER SECTION 6.1 Representations and Warranties. To induce the Agent to enter into this Agreement and the Lenders to make the Loans or issue or participate in the Letters of Credit, the Borrower hereby represents and warrants to the Agent and Lenders that: (a) Organization; Power; Qualification. Each of the Borrower and the Consolidated Entities is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or formation, has the power and authority to own its properties and to carry on its business as now being and hereafter proposed to be conducted and is duly qualified and authorized to do business in each jurisdiction in which the character of its properties or the nature of its business requires such qualification and authorization. The jurisdictions in which the Borrower and the Consolidated Entities are organized and qualified to do business are described on Schedule 6.1(a). (b) Ownership. Each Consolidated Entity of the Borrower is listed on Schedule 6.1(b). The capitalization of the Borrower and the Consolidated Entities is described on Schedule 6.1(b). All outstanding shares of stock have been duly authorized and validly issued and are fully paid and nonassessable. The equity owners of the Consolidated Entities of the Borrower and the ownership interest of each is described on Schedule 6.1(b). There are no outstanding stock purchase warrants, subscriptions, options, securities, instruments or other rights of any type or nature whatsoever, which are convertible into, exchangeable for or otherwise provide for or permit the issuance of capital stock of the Borrower or the Consolidated Entities, except as described on Schedule 6.1(b). (c) Authorization of Agreement, Loan Documents and Borrowing. Each of the Borrower and the Wholly-Owned Entities has the right, power and authority and has taken all necessary corporate and other action to authorize the execution, delivery and performance of this Agreement and each of the other Loan Documents to which it is a party in accordance with their respective terms. This Agreement and each of the other Loan Documents have been duly executed and delivered by the duly authorized officers of the - 50 - 56 Borrower and each of the Wholly-Owned Entities party thereto, and each such document constitutes the legal, valid and binding obligation of the Borrower or its Subsidiary party thereto, enforceable in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar state or federal debtor relief laws from time to time in effect which affect the enforcement of creditors' rights in general and the availability of equitable remedies. (d) Compliance of Agreement, Loan Documents and Borrowing with Laws, Etc. The execution, delivery and performance by the Borrower and the Wholly-Owned Entities of the Loan Documents to which each such Person is a party, in accordance with their respective terms, the borrowings hereunder and the transactions contemplated hereby do not and will not, by the passage of time, the giving of notice or otherwise, (i) require any Governmental Approval or violate any Applicable Law relating to the Borrower or any of the Wholly-Owned Entities, (ii) conflict with, result in a breach of or constitute a default under the articles of incorporation, bylaws or other organizational documents of the Borrower or any of the Wholly-Owned Entities or any indenture, agreement or other instrument to which such Person is a party or by which any of its properties may be bound or any Governmental Approval relating to such Person, which conflict, breach or default could not reasonably be expected to have a Material Adverse Effect, or (iii) result in or require the creation or imposition of any Lien upon or with respect to any property now owned or hereafter acquired by such Person other than Liens arising under the Loan Documents. (e) Compliance with Law; Governmental Approvals. Each of the Borrower and the Consolidated Entities (i) has all Governmental Approvals required by any Applicable Law for it to conduct its business, each of which is in full force and effect, is final and not subject to review on appeal and is not the subject of any pending or, to the best of its knowledge, threatened attack by direct or collateral proceeding, and (ii) is in compliance with each Governmental Approval applicable to it and in compliance with all other Applicable Laws relating to it or any of its respective properties, except for such violations which could not reasonably be expected to have a Material Adverse Effect. (f) Tax Returns and Payments. Each of the Borrower and the Consolidated Entities has duly filed or caused to be filed all federal, state, local and other tax returns required by Applicable Law to be filed, and has paid, or made adequate provision for the payment of, all federal, state, local and other taxes, assessments and governmental charges or levies upon it and its property, - 51 - 57 income, profits and assets which are due and payable except for any taxes which are not federal income taxes and the failure to pay which could not reasonably be expected to have a Material Adverse Effect. No Governmental Authority has asserted any Lien or other claim against the Borrower or the Consolidated Entities with respect to unpaid taxes which has not been discharged or resolved or as to which the Borrower or Consolidated Entity is contesting and for which appropriate reserves have been established. The charges, accruals and reserves on the books of the Borrower and any of the Consolidated Entities in respect of federal, state, local and other taxes for all Fiscal Years and portions thereof since the organization of the Borrower and any of the Consolidated Entities are in the judgment of the Borrower adequate, and the Borrower does not anticipate any additional taxes or assessments for any of such years in excess of amounts reserved therefor. (g) Intellectual Property Matters. Each of the Borrower and the Consolidated Entities owns or possesses rights to use all franchises, licenses, copyrights, copyright applications, patents, patent rights or licenses, patent applications, trademarks, trademark rights, trade names, trade name rights, copyrights and rights with respect to the foregoing which are required to conduct its business, except where the failure could not reasonably be expected to have a Material Adverse Effect. No event has occurred which permits, or after notice or lapse of time or both would permit, the revocation or termination of any such rights, and neither the Borrower nor any of the Consolidated Entities is liable to any Person for infringement under Applicable Law with respect to any such rights as a result of its business operations. (h) Environmental Matters. Except as disclosed in the environmental assessment reports and the executive summaries of environmental assessment reports listed on Schedule 6.1(h): (i) The properties of the Borrower and the Consolidated Entities do not contain, and to their knowledge have not previously contained, any Hazardous Materials in amounts or concentrations which (A) constitute or constituted a violation of, or (B) could give rise to liability under, applicable Environmental Laws; (ii) Such properties and all operations conducted in connection therewith have been in compliance, at the time of the action in question, with all applicable Environmental Laws, except where such non-compliance could not reasonably be expected to have a Material Adverse Effect, and to the knowledge of the Borrower there is no contamination at or - 52 - 58 under such properties or such operations which could interfere with the continued operation of such properties or reasonably be expected to impair the fair saleable value thereof; (iii) Neither the Borrower nor any Consolidated Entity has received any notice of violation, alleged violation, non-compliance, liability or potential liability regarding environmental matters or compliance with Environmental Laws with regard to any of their properties or the operations conducted in connection therewith, nor does the Borrower or any Consolidated Entity have knowledge or reason to believe that any such notice will be received or is being threatened; (iv) To the knowledge of the Borrower, Hazardous Materials have not been transported or disposed of from the properties of the Borrower and the Consolidated Entities in violation of, or in a manner or to a location which could give rise to liability under, Environmental Laws, except where such liability could not reasonably be expected to have a Material Adverse Effect, nor to the knowledge of the Borrower have any Hazardous Materials been generated, treated, stored or disposed of at, on or under any of such properties in violation of, or in a manner that could give rise to liability under, any applicable Environmental Laws, except where such liability could not reasonably be expected to have a Material Adverse Effect; (v) No judicial proceedings or governmental or administrative action is pending, or, to the knowledge of the Borrower, threatened, under any Environmental Law to which the Borrower or any of the Consolidated Entities is or will be named as a party with respect to such properties or operations conducted in connection therewith, nor to the knowledge of the Borrower are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements outstanding under any Environmental Law with respect to such properties or such operations, which if adversely determined could reasonably be expected to have a Material Adverse Effect, individually or in the aggregate; and (vi) To the knowledge of the Borrower, there has been no release or threat of release of Hazardous Materials at or from such properties, in violation of or in amounts or in a manner that could give rise to liability under Environmental Laws. - 53 - 59 (i) ERISA. Except to the extent the following would not reasonably be expected to have a Material Adverse Effect: (i) Neither the Borrower nor any ERISA Affiliate maintains or contributes to, or has any obligation under, any Employee Benefit Plans other than those identified on Schedule 6.1(i); (ii) The Borrower and each ERISA Affiliate is in material compliance with all applicable provisions of ERISA and the regulations and published interpretations thereunder with respect to all Employee Benefit Plans except for any required amendments for which the remedial amendment period as defined in Section 401(b) of the Code has not yet expired. Each Employee Benefit Plan maintained by Borrower or an ERISA Affiliate that is intended to be qualified under Section 401(a) of the Code has been determined by the Internal Revenue Service to be so qualified, and each trust related to such plan has been determined to be exempt under Section 501(a) of the Code. No liability has been incurred by the Borrower or any ERISA Affiliate which remains unsatisfied for any taxes or penalties with respect to any Employee Benefit Plan or any Multiemployer Plan; (iii) No Pension Plan has any accumulated funding deficiency (as defined in Section 412 of the Code) been incurred (without regard to any waiver granted under Section 412 of the Code), nor has any funding waiver from the Internal Revenue Service been received or requested with respect to any Pension Plan, nor has the Borrower or any ERISA Affiliate failed to make any contributions or to pay any amounts due and owing as required by Section 412 of the Code, Section 302 of ERISA or the terms of any Pension Plan prior to the due dates of such contributions under Section 412 of the Code or Section 302 of ERISA, nor has there been any event requiring any disclosure under Section 4041(c)(3)(C) or 4063(a) of ERISA with respect to any Pension Plan; (iv) Neither the Borrower nor any ERISA Affiliate has: (A) engaged in a nonexempt prohibited transaction described in Section 406 of the ERISA or Section 4975 of the Code, (B) incurred any liability to the PBGC which remains outstanding other than the payment of premiums and there are no premium payments which are due and unpaid, (C) failed to make a required contribution or payment to a Multiemployer Plan, or (D) failed to make a required installment or other required payment under Section 412 of the Code; - 54 - 60 (v) No Termination Event has occurred or is reasonably expected to occur; and (vi) No proceeding, claim, lawsuit and/or investigation is existing or, to the best knowledge of the Borrower after due inquiry, threatened concerning or involving any (A) employee welfare benefit plan (as defined in Section 3(1) of ERISA) currently maintained or contributed to by the Borrower or any ERISA Affiliate, (B) Pension Plan or (C) Multiemployer Plan. (j) Margin Stock. Neither the Borrower nor any Consolidated Entity is engaged principally or as one of its activities in the business of extending credit for the purpose of "purchasing" or "carrying" any "margin stock" (as each such term is defined or used in Regulations G and U of the Board of Governors of the Federal Reserve System). No part of the proceeds of any of the Loans or Letters of Credit will be used for purchasing or carrying margin stock or for any purpose which violates, or which would be inconsistent with, the provisions of Regulation G, T, U or X of such Board of Governors. (k) Government Regulation. Neither the Borrower nor any Consolidated Entity is an "investment company" or a company "controlled" by an "investment company" (as each such term is defined or used in the Investment Company Act of 1940, as amended) and neither the Borrower nor any Subsidiary thereof is, or after giving effect to any Extension of Credit will be, subject to regulation under the Public Utility Holding Company Act of 1935 or the Interstate Commerce Act, each as amended, or any other Applicable Law which limits its ability to incur or consummate the transactions contemplated hereby. (l) Loans Constitute Senior Debt. The Loans constitute and will constitute "Senior Debt," as defined in the 1992 Indenture and the 1995 Indenture. (m) Employee Relations. Each of the Borrower and its Consolidated Entities has a stable work force in place and is not, except as set forth on Schedule 6.1(m), party to any collective bargaining agreement nor has any labor union been recognized as the representative of its employees. The Borrower knows of no pending, threatened or contemplated strikes, work stoppage or other collective labor disputes involving its employees or those of the Consolidated Entities. (n) Burdensome Provisions. Neither the Borrower nor any Consolidated Entity is a party to any indenture, agreement, lease or other instrument, or subject to any corporate or partnership - 55 - 61 restriction, Governmental Approval or Applicable Law which is so unusual or burdensome as in the foreseeable future could be reasonably expected to have a Material Adverse Effect. The Borrower and the Consolidated Entities do not presently anticipate that future expenditures needed to meet the provisions of any statutes, orders, rules or regulations of a Governmental Authority will be so burdensome as to have a Material Adverse Effect. (o) Financial Statements. The (i) Consolidated balance sheet of the Borrower and the Consolidated Entities as of June 30, 1996 and the related statements of income and stockholders equity and cash flows for the Fiscal Year then ended and (ii) unaudited Consolidated balance sheet of the Borrower and the Consolidated Entities as of December 31, 1996 and related unaudited interim statements of income and stockholders equity, copies of which have been furnished to the Agent and each Lender, are complete and correct and fairly present the assets, liabilities and financial position of the Borrower and the Consolidated Entities as at such dates, and the results of the operations and changes of financial position for the periods then ended. All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP. The Borrower and the Consolidated Entities have no Debt, obligation or other unusual forward or long-term commitment which is not fairly reflected in the foregoing financial statements or in the notes thereto. (p) No Material Adverse Change. Since December 31, 1996, there has been no material adverse change in the properties, business, operations, prospects, or condition (financial or otherwise) of the Borrower and the Consolidated Entities and no event has occurred or condition arisen that could reasonably be expected to have a Material Adverse Effect. (q) Solvency. As of the Closing Date and after giving effect to each Extension of Credit made hereunder, the Borrower and each of the Consolidated Entities will be Solvent. (r) Titles to Properties. Each of the Borrower and the Consolidated Entities has such title to the real property owned by it as is necessary or desirable to the conduct of its business and valid and legal title to all of its personal property and assets, to the extent failure to have such title to such real property or personal property could reasonably be expected to have a Material Adverse Effect, including, but not limited to, those reflected on the balance sheets of the Borrower and the Consolidated Entities delivered pursuant to Section 6.1(o), except those which have been disposed of by the Borrower or the Consolidated Entities subsequent to such date which dispositions have been in the - 56 - 62 ordinary course of business or as otherwise expressly permitted hereunder. (s) Liens. None of the properties and assets of the Borrower or any of the Consolidated Entities is subject to any Lien, except Liens permitted pursuant to Section 10.3. (t) Debt and Contingent Obligations. Schedule 6.1(t) is a complete and correct listing of all Debt and Contingent Obligations of the Borrower and the Consolidated Entities in excess of $2,000,000. The Borrower and the Consolidated Entities have performed and are in compliance with all of the terms of such Debt and Contingent Obligations and all instruments and agreements relating thereto, and no default or event of default, or event or condition which with notice or lapse of time or both would constitute such a default or event of default on the part of the Borrower or the Consolidated Entities exists with respect to any such Debt or Contingent Obligation. (u) Litigation. Except as set forth on Schedule 6.1(u), there are no actions, suits or proceedings pending nor, to the knowledge of the Borrower, threatened against or in any other way relating adversely to or affecting the Borrower or any of the Consolidated Entities or any of their respective properties in any court or before any arbitrator of any kind or before or by any Governmental Authority, which if adversely determined would have a Material Adverse Effect. (v) Absence of Defaults. No event has occurred or is continuing which constitutes a Default or an Event of Default, and, except to the extent such event would not have a Material Adverse Effect, no event has occurred and is continuing which constitutes, or which with the passage of time or giving of notice or both would constitute, a default or event of default by the Borrower or any of the Consolidated Entities under any material contract or judgment, decree or order to which the Borrower or the Consolidated Entities is a party or by which the Borrower or the Consolidated Entities or any of their respective properties may be bound or which would require the Borrower or the Consolidated Entities to make any payment thereunder prior to the scheduled maturity date therefor. (w) Accuracy and Completeness of Information. All written information, reports and other papers and data produced by or on behalf of the Borrower or any of the Consolidated Entities and furnished to the Lenders were, at the time the same were so furnished, complete and correct in all respects to the extent necessary to give the recipient a true and accurate knowledge of the subject matter. No document furnished or written statement - 57 - 63 made to the Agent or the Lenders by the Borrower or any of the Consolidated Entities in connection with the negotiation, preparation or execution of this Agreement or any of the Loan Documents contains or will contain any untrue statement of a fact material to the creditworthiness of the Borrower or the Consolidated Entities or omits or will omit to state a fact necessary in order to make the statements contained therein not misleading. The Borrower is not aware of any facts which it has not disclosed in writing to the Agent having a Material Adverse Effect, or insofar as the Borrower can now foresee, could reasonably be expected to have a Material Adverse Effect. (x) Reimbursement from Third Party Payors. The accounts receivable of the Borrower and its Consolidated Entities have been and will continue to be recorded in accordance with GAAP to reflect currently known reimbursement policies of third party payors such as Medicare, Medicaid, Blue Cross/Blue Shield, private insurance companies, health maintenance organizations, preferred provider organizations, alternative delivery systems, managed care systems and other third party payors. The recorded accounts receivable set forth in financial statements of the Borrower and its Consolidated Entities relating to such third party payors, in the aggregate, do not and shall not exceed amounts the Borrower and its Consolidated Entities reasonably expect to receive under any capitation arrangement, fee schedule, discount formula, cost-based reimbursement or other adjustment or limitation to the usual charges of such Person, except for inaccuracies in such amounts as would not reasonably be expected to have a Material Adverse Effect. (y) Fraud and Abuse. Neither the Borrower nor any Consolidated Entity, nor to the knowledge of the Borrower or any of its Consolidated Entities, any of its stockholders, officers or directors have engaged on behalf of the Borrower or any Consolidated Entity in any of the following: (i) knowingly and willfully making or causing to be made a false statement or representation of a material fact in any applications for any benefit or payment under the Medicare or Medicaid program; (ii) knowingly and willfully making or causing to be made any false statement or representation of a material fact for use in determining rights to any benefit or payment under the Medicare or Medicaid program; (iii) knowingly and willfully soliciting or receiving any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash or in kind or offering to pay such remuneration (a) in return for referring an individual to a Person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part by Medicare or Medicaid, or (b) in return for purchasing, leasing or ordering or arranging - 58 - 64 for or recommending the purchasing, leasing or ordering of any good, facility, service, or item for which payment may be made in whole or in part by Medicare or Medicaid to the extent that any such actions described above would reasonably be expected to have a Material Adverse Effect. For purposes of this subsection, "knowingly" and the like shall mean knowledge of the senior officers of the Borrower or a Consolidated Entity. With respect to this Section, knowledge by any senior officer of the Borrower or a Consolidated Entity of any of the events described in this Section shall not be imputed to the Borrower or such Consolidated Entity unless such knowledge was obtained or learned by a senior officer in his or her official capacity as a senior officer of the Borrower or such Consolidated Entity. No activity of the Borrower or any Consolidated Entity shall be considered to be a breach of this Section, except in the case of a knowing and willful violation thereof, until the Borrower or such Consolidated Entity has received notification, written or oral, by a Governmental Authority of competent jurisdiction as to any such violation; provided that receipt of such notice, in and of itself, shall not be deemed to breach this representation. SECTION 6.2 Survival of Representations and Warranties, Etc. All representations and warranties set forth in this Article VI and all representations and warranties contained in any certificate, or any of the Loan Documents (including but not limited to any such representation or warranty made in or in connection with any amendment thereto) shall constitute representations and warranties made under this Agreement. All representations and warranties made under this Agreement shall be made or deemed to be made at and as of the Closing Date, shall survive the Closing Date and shall not be waived by the execution and delivery of this Agreement, any investigation made by or on behalf of the Lenders or any borrowing hereunder. ARTICLE VII FINANCIAL INFORMATION AND NOTICES Until all the Obligations have been finally and indefeasibly paid and satisfied in full and the Commitments terminated, unless consent has been obtained in the manner set forth in Section 13.11 hereof, the Borrower will furnish or cause to be furnished to each of the Lenders at their respective addresses as set forth on Schedule 1.1(b), or such other office as may be designated by the Agent and Lenders from time to time: SECTION 7.1 Financial Statements. - 59 - 65 (a) Not later than 45 days after the end of the first three fiscal quarters of each year, a balance sheet and a statement of income of the Borrower and its Consolidated Entities on a consolidated basis for such quarter and for the period beginning on the first day of the fiscal year and ending on the last day of such quarter (in sufficient detail to indicate compliance by the Borrower and its Consolidated Entities with the financial covenants set forth in Article IX) and certified by the chief executive officer, chief operating officer, chief financial officer, treasurer or controller of the Borrower, and such other information and documentation as the Borrower regularly sends to its Board of Directors for each quarter (which information and documentation shall include, at a minimum, the information and documentation contained in the sample thereof delivered by the Borrower to the Agent prior to the Closing Date); each certificate provided pursuant to this clause (a) shall state that, except as disclosed in such certificate (i) on the date of such certificate the representations and warranties set forth in this Agreement and all the other Loan Documents are true and correct in all material respects on and as of such date with the same effect as though such representations and warranties had been made on such date (except as to any representation which by its terms relates to a different specific date) except to the extent any inaccuracy would not have a Material Adverse Effect, and (ii) no Default or Event of Default has occurred and is continuing as of such date or, if such certificate discloses that a Default or Event of Default has occurred and is continuing as of such date, such certificate shall describe such Default or Event of Default in reasonable detail and state what action, if any, the Borrower is taking or proposes to take with respect thereto; (b) Not later than 100 days after the end of each fiscal year, financial statements (including a balance sheet, a statement of income, a statement of changes in stockholders' equity and a statement of cash flows) of the Borrower and its Consolidated Entities on a consolidated basis for such fiscal year (in sufficient detail to indicate compliance by the Borrower and its Consolidated Entities with the financial covenants set forth in Article IX), together with statements in comparative form for the preceding fiscal year, and accompanied by an opinion of certified public accountants reasonably acceptable to the Required Lenders, which opinion shall state in effect that such financial statements (i) were audited using generally accepted auditing standards, (ii) were prepared in accordance with GAAP applied on a consistent basis and (iii) present fairly the financial condition and results of operations of the Borrower and its Consolidated Entities for the periods covered; (c) Not later than forty-five (45) days after the end of each fiscal quarter, a certificate duly signed by the chief executive officer, chief operating officer, chief financial officer, treasurer or controller of the Borrower setting forth the Total Leverage Ratio for - 60 - 66 the period of four consecutive fiscal quarters ending with such quarter-end and setting forth the computations employed in calculating the ratio ("Margin Certificate"); (d) At each time financial statements are delivered pursuant to Sections 7.1(a) or (b), a compliance certificate duly executed by the President, Treasurer, chief financial officer or Controller of the Borrower substantially in the form of Exhibit E attached hereto ("Officer's Compliance Certificate"); (e) Promptly upon written request by the Agent, copies of all reports, management letters and other documents submitted to the Borrower by independent accountants in connection with any annual or interim audit of the books of the Borrower or Consolidated Entity made by such accountants; (f) Promptly after the distribution thereof to the stockholders of the Borrower or the filing thereof with the Securities and Exchange Commission, as the case may be, copies of all statements, reports, notices and filings distributed by the Borrower to its stockholders or filed with the Securities and Exchange Commission (including reports on SEC Forms 10-K, 10-Q and 8-K); (g) Promptly after the Borrower knows or has reason to know of the occurrence of any "reportable event" under Section 4043 of ERISA applicable to the Borrower or other ERISA Affiliate, a certificate of the chief executive officer, chief operating officer, chief financial officer, treasurer or controller of the Borrower setting forth the details as to such "reportable event" and the action that the Borrower or other ERISA Affiliate has taken or will take with respect thereto, and promptly after the filing or receiving thereof, copies of all reports and notices respecting such reportable event that the Borrower or other ERISA Affiliate files under ERISA with the Internal Revenue Service, the Pension Benefit Guaranty Corporation or the United States Department of Labor; and (h) As soon as practicable, such other information regarding any Facility or the business affairs, financial condition or operations of the Borrower or its Consolidated Entities as the Agent or the Required Lenders shall reasonably request from time to time or at any time. SECTION 7.2 Notice of Litigation and Other Matters. Prompt (but in no event later than ten (10) days after an officer of the Borrower obtains knowledge thereof) written notice of: (a) the commencement of all proceedings and investigations by or before any Governmental Authority and all actions and proceedings in any court or before any arbitrator against or involving the Borrower or any Consolidated Entity or any of their - 61 - 67 respective properties, assets or businesses which, if adversely determined, would have a Material Adverse Effect; (b) any notice of any violation received by the Borrower or any Consolidated Entity from any Governmental Authority including, without limitation, any notice of violation of Environmental Laws which in any such case could reasonably be expected to have a Material Adverse Effect; (c) any labor controversy that has resulted in, or threatens to result in, a strike or other work action against the Borrower or any Consolidated Entity thereof which would have a Material Adverse Effect; (d) any attachment, lien, levy or order exceeding $500,000 that may be assessed against or threatened against the Borrower or any Consolidated Entity; (e) any Default or Event of Default, or any event which constitutes or which with the passage of time or giving of notice or both would constitute a default under any material contract to which the Borrower or any Consolidated Entity is a party or by which the Borrower or any Consolidated Entity or any of their respective properties may be bound if such default could be expected to have a Material Adverse Effect; (f) (i) any unfavorable determination letter from the Internal Revenue Service regarding the qualification of an Employee Benefit Plan under Section 401(a) of the Code (along with a copy thereof), (ii) all notices received by the Borrower or any ERISA Affiliate of the PBGC's intent to terminate any Pension Plan or to have a trustee appointed to administer any Pension Plan, (iii) all notices received by the Borrower or any ERISA Affiliate from a Multiemployer Plan sponsor concerning the imposition or amount of withdrawal liability pursuant to Section 4202 of ERISA and (iv) the Borrower obtaining knowledge or reason to know that the Borrower or any ERISA Affiliate has filed or intends to file a notice of intent to terminate any Pension Plan under a distress termination within the meaning of Section 4041(c) of ERISA; (g) the commencement of any investigation, action, suit or proceeding before any Governmental Authority involving the condemnation or taking under the power of eminent domain of any of its property or the property of any Consolidated Entity to the extent such condemnation or taking would have a Material Adverse Effect; and (h) any event which makes any of the representations set forth in Section 6.1 inaccurate in any respect, to the extent such - 62 - 68 inaccuracy could reasonably be expected to have a Material Adverse Effect. SECTION 7.3 Loss of Accreditation, Etc. Within 20 days of the receipt by the Borrower or any Consolidated Entity, copies of (A) all notices of loss of Joint Commission on Accreditation of Healthcare Organizations accreditation, loss of participation under any material governmental reimbursement program or loss of applicable material health care licenses at any Facility owned or leased by the Borrower or any Consolidated Entity; and (B) all other material deficiency notices, compliance orders or adverse reports issued by any Governmental Authority or accreditation commission having jurisdiction over licensing, accreditation or operation of a Facility or by any Governmental Authority, which, if not promptly complied with or cured, could result in the suspension or forfeiture of any license, certification, or accreditation necessary for the Facility to carry on its business as then conducted or the termination of any material governmental reimbursement program available to the Facility; SECTION 7.4 Accuracy of Information. All written information, reports, statements and other papers and data furnished by or on behalf of the Borrower to the Agent or any Lender (other than financial fore casts) whether pursuant to this Article VII or any other provision of this Agreement, or any of the Security Documents, shall be, at the time the same is so furnished, complete and correct in all material respects to the extent necessary to give the Agent or any Lender complete, true and accurate knowledge of the subject matter based on the Borrower's knowledge thereof. ARTICLE VIII AFFIRMATIVE COVENANTS Until all of the Obligations have been finally and indefeasibly paid and satisfied in full and the Commitments terminated, unless consent has been obtained in the manner provided for in Section 13.11, the Borrower will, and will cause each of its Consolidated Entities which is a Guarantor to: SECTION 8.1 Preservation of Existence and Related Matters. Except as permitted by Section 10.5, preserve and maintain its separate legal existence and all rights, franchises, licenses and privileges necessary to the conduct of its business, and qualify and remain qualified as a foreign corporation and authorized to do business in each jurisdiction in which the failure to so qualify would have a Material Adverse Effect. - 63 - 69 SECTION 8.2 Maintenance of Property. Protect and preserve all properties useful in and material to its business, including copyrights, patents, trade names and trademarks; maintain in good working order and condition all buildings, equipment and other tangible real and personal property, ordinary wear and tear excepted; and from time to time make or cause to be made all renewals, replacements and additions to such property necessary for the conduct of its business, so that the business carried on in connection therewith may be properly and advantageously conducted at all times. SECTION 8.3 Insurance. Maintain insurance with financially sound and reputable insurance companies against such risks and in such amounts as are customarily maintained by similar businesses and as may be required by Applicable Law, and on the Closing Date and from time to time thereafter deliver to the Agent upon its request a detailed list of the insurance then in effect, stating the names of the insurance companies, the amounts of the insurance, the dates of the expiration thereof and the properties and risks covered thereby. SECTION 8.4 Accounting Methods and Financial Records. Maintain a system of accounting, and keep such books, records and accounts (which shall be true and complete in all material respects) as may be required or as may be necessary to permit the preparation of financial statements in accordance with GAAP and in compliance with the regulations of any Governmental Authority having jurisdiction over it or any of its properties. SECTION 8.5 Payment and Performance of Obligations. Pay and perform all Obligations under this Agreement and the other Loan Documents, and pay or perform (a) all taxes, assessments and other governmental charges that may be levied or assessed upon it or any of its property, and (b) all other indebtedness, obligations and liabilities in accordance with customary trade practices; which if not paid would have a Material Adverse Effect; provided, that the Borrower or such Consolidated Entity may contest any item described in this Section 8.5 in good faith so long as adequate reserves are maintained with respect thereto in accordance with GAAP. SECTION 8.6 Compliance With Laws and Approvals. To the extent failure to do so would have a Material Adverse Effect, observe and remain in compliance with all Applicable Laws and maintain in full force and effect all Governmental Approvals, in each case applicable to the conduct of its business; keep in full force and effect all licenses, certifications or accreditations necessary for any Facility to carry on its business; and not permit the termination of any insurance or reimbursement program available to any Facility. SECTION 8.7 Environmental Laws. In addition to and without limiting the generality of Section 8.6, and to the extent failure to do - 64 - 70 so would have a Material Adverse Effect, (a) comply with, and ensure such compliance by all tenants and subtenants, if any, with, all applicable Environmental Laws and obtain and comply with and maintain, and ensure that all tenants and subtenants obtain and comply with and maintain, any and all licenses, approvals, notifications, registrations or permits required by applicable Environmental Laws, (b) conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required under Environmental Laws, and promptly comply with all lawful orders and directives of any Governmental Authority regarding Environmental Laws, and (c) defend, indemnify and hold harmless the Agent and the Lenders, and their respective parents, Subsidiaries, Affiliates, employees, agents, officers and directors, from and against any claims, demands, penalties, fines, liabilities, settlements, damages, costs and expenses of whatever kind or nature known or unknown, contingent or otherwise, arising out of, or in any way relating to the violation of, noncompliance with or liability under any Environmental Laws applicable to the operations of the Borrower or such Consolidated Entity, or any orders, requirements or demands of Governmental Authorities related thereto, including, without limitation, reasonable attorney's and consultant's fees, investigation and laboratory fees, response costs, court costs and litigation expenses, except to the extent that any of the foregoing directly result from the gross negligence or willful misconduct of the party seeking indemnification therefor. SECTION 8.8 Compliance with ERISA. In addition to and without limiting the generality of Section 8.6, (a) comply with all applicable provisions of ERISA and the regulations and published interpretations thereunder with respect to all Employee Benefit Plans, (b) not take any action or fail to take action the result of which could be a liability to the PBGC or to a Multiemployer Plan, (c) not participate in any prohibited transaction that could result in any civil penalty under ERISA or tax under the Code, (d) operate each Employee Benefit Plan in such a manner that will not incur any tax liability under Section 4980B of the Code or any liability to any qualified beneficiary as defined in Section 4980B of the Code and (e) furnish to the Agent upon the Agent's request such additional information about any Employee Benefit Plan as may be reasonably requested by the Agent. SECTION 8.9 Compliance With Agreements. Comply in all respects with each term, condition and provision of all leases, agreements and other instruments entered into in the conduct of its business to the extent failure to so comply would have a Material Adverse Effect; provided, that the Borrower or any Consolidated Entity may contest any such lease, agreement or other instrument in good faith through applicable proceedings so long as adequate reserves are maintained in accordance with GAAP. - 65 - 71 SECTION 8.10 Visits and Inspections. Provided that the Agent and the Lenders use reasonable efforts to minimize disruption to the business of the Borrower and the Consolidated Entities, permit representatives of the Agent or any Lender, from time to time, to visit and inspect its properties; inspect, audit and make extracts from its books, records and files, including, but not limited to, management letters prepared by independent accountants; and discuss with its principal officers, and its independent accountants, its business, assets, liabilities, financial condition, results of operations and business prospects. SECTION 8.11 Wholly-Owned Entities. Concurrently with the creation or acquisition of any Wholly-Owned Entity (a) cause it to execute and deliver to the Agent a supplement to the Guaranty Agreement delivered on the Closing Date substantially in the form of Exhibit A to such Guaranty Agreement and (b) cause to be delivered to the Agent such other documents as the Agent or Required Lenders shall reasonably request in connection therewith, including without limitation, officers' certificates, financial statements, opinions of counsel, resolutions, charter documents, certificates of existence and authority to do business and any other closing certificates and documents described in Section 5.2. SECTION 8.12 Further Assurances. Make, execute and deliver all such additional and further acts, things, deeds and instruments as the Agent or any Lender may reasonably require to document and consummate the transactions contemplated hereby and to vest completely in and insure the Agent and the Lenders their respective rights under this Agreement, the Notes, the Letters of Credit and the other Loan Documents. ARTICLE IX FINANCIAL COVENANTS Until all of the Obligations have been finally and indefeasibly paid and satisfied in full and the Commitments terminated, unless consent has been obtained in the manner set forth in Section 13.11 hereof, the Borrower and its Consolidated Entities on a Consolidated basis will not: SECTION 9.1 Total Leverage Ratio. As of any fiscal quarter end, permit the ratio of (i) Total Debt as of such date to (ii) EBITDA for the period of four (4) consecutive fiscal quarters ending on such date (the "Total Leverage Ratio"), to exceed 3.25 to 1.00. - 66 - 72 SECTION 9.2 Senior Leverage Ratio. As of any fiscal quarter end, permit the ratio of (i) Senior Debt as of such date to (ii) EBITDA, for the period of four (4) consecutive fiscal quarters ending on such date, to exceed 2.50 to 1.00. SECTION 9.3 Fixed Charge Coverage Ratio. As of any fiscal quarter end, permit the ratio of (i) Net Income Available for Debt Service for the period of four (4) consecutive fiscal quarters ending on such date to (ii) the sum of (x) for such four-quarter period (A) Operating Lease Payments, (B) Interest Expense and (C) minority interests plus (y) as of such quarter end, current maturities of long-term Debt to be less than 1.50 to 1.00. SECTION 9.4 Debt to Capital Ratio. As of any fiscal quarter end, permit the ratio of Total Debt to Total Capitalization to exceed (a) 0.60 to 1.00. SECTION 9.5 Consolidated Net Worth. As of any fiscal quarter end, permit Consolidated Net Worth to be less than the sum of (a) $450,000,000 plus (b) 80% of cumulative Consolidated Net Income (if positive) after the Closing Date plus (c) 90% of the proceeds from any equity offerings (net of offering and professional fees and expenses) and any other capital contributions since the Closing Date. ARTICLE X NEGATIVE COVENANTS Until all of the Obligations have been finally and indefeasibly paid and satisfied in full and the Commitments terminated, unless consent has been obtained in the manner set forth in Section 13.11 hereof, the Borrower will not and will not permit any of its Consolidated Entities to: SECTION 10.1 Limitations on Debt. Create, incur, assume or suffer to exist any Debt except: (a) the Obligations; (b) Subordinated Debt; (c) Debt existing on the Closing Date and not otherwise permitted under this Section 10.1, as set forth on Schedule 6.1(t) and the renewal and refinancing (but not the increase) thereof; - 67 - 73 (d) Debt arising under the endorsement of negotiable instruments in the ordinary course of business for collection; (e) Debt permitted under Section 10.4(c); (f) other Debt and Contingent Obligations not to exceed an aggregate of $75,000,000 (on a consolidated basis for the Borrower and its Consolidated Entities) at any time outstanding; and (g) Debt arising out of the recourse sale of certain of the accounts receivable of the Borrower and its Consolidated Entities to the extent otherwise permitted under this Agreement; provided, that none of the Debt permitted to be incurred by this Section shall restrict, limit or otherwise encumber (by covenant or otherwise) the ability of any Consolidated Entity of the Borrower to make any payment to the Borrower or any other Consolidated Entity (in the form of dividends, intercompany advances or otherwise) for the purpose of enabling the Borrower to pay the Obligations. SECTION 10.2 Limitations on Contingent Obligations. Create, incur, assume or suffer to exist any Contingent Obligations except as permitted under Section 10.1 above. SECTION 10.3 Limitations on Liens. Create, incur, assume or suffer to exist, any Lien on or with respect to any of its assets or properties (including without limitation shares of capital stock or other ownership interests), real or personal, whether now owned or hereafter acquired, except: (a) Liens for taxes, assessments and other governmental charges (excluding any Lien imposed pursuant to any of the provisions of ERISA or Environmental Laws) that are not delinquent or that are being contested in good faith by appropriate proceedings duly pursued, and adequate reserves for which have been established and are being maintained; (b) mechanics', materialmen's, contractor's, landlord's or other similar Liens arising in the ordinary course of business, securing obligations that are not delinquent or that are being contested in good faith by appropriate proceedings duly pursued, and adequate reserves for which have been established and are being maintained; (c) Liens constituting restrictions, exceptions, reservations, easements, conditions, space leases of a portion of a property limitations and other matters of record that do not - 68 - 74 materially adversely affect the value or utility of the property or the use to which the property is being put; (d) Liens (including Liens arising under leases, whether operating leases or Capital Leases) on equipment used in a Facility (a) that secure Debt that already existed when such equipment was purchased or acquired, or (b) that were created to secure loans, the proceeds of which were used in their entirety to pay the purchase price of such equipment or were created to acquire the right to use such equipment under leases, provided that such Liens attach only to the equipment so purchased or the use of which so acquired; (e) Liens consisting of deposits or pledges made in the ordinary course of business in connection with, or to secure payment of, obligations under workers' compensation, unemployment insurance or similar legislation or obligations under customer service contracts; (f) Liens in favor of landlords, the amount secured by which would not, in the aggregate, materially adversely affect the Borrower; (g) Liens not otherwise permitted by this Section 10.3 and in existence on the Closing Date and described on Schedule 10.3; (h) Liens on the property of a Consolidated Entity securing loans or advances made by the Borrower to such Consolidated Entity; (i) Liens securing Debt permitted under Section 10.1 in an aggregate amount not to exceed $25,000,000; provided however, that none of the Liens permitted hereunder may secure any Hedging Agreement; and (j) Liens and other matters approved in writing by the Agent and Required Lenders. SECTION 10.4 Limitations on Loans, Advances, Investments and Acquisitions. Purchase, own, invest in or otherwise acquire (including through swaps and exchanges), directly or indirectly, any capital stock, interests in any partnership or joint venture (including without limitation the creation or capitalization of any Subsidiary), evidence of Debt or other obligation or security, substantially all or a portion of the business or assets of any other Person or any other investment or interest whatsoever in any other Person, or make or permit to exist, directly or indirectly, any loans, advances or extensions of credit to, or any investment in cash or by delivery of property in, any Person, or - 69 - 75 enter into, directly or indirectly, any commitment or option in respect of the foregoing except: (a) Subject to Section 10.4(g), below, Investments in Consolidated Entities existing on the Closing Date and the other existing Investments described on Schedule 10.4; (b) Permitted Investments; (c) Loans or advances by: (i) the Borrower to (A) a Wholly-Owned Entity or (B) subject to the limitations of Section 10.4(g)(iii), any Consolidated Entity that is not a Wholly-Owned Entity; (ii) any Wholly-Owned Entity to (A) the Borrower, (B) any other Wholly-Owned Entity or (C) subject to the limitations of Section 10.4(g)(iii), any Consolidated Entity that is not a Wholly-Owned Entity; and (iii) any Consolidated Entity to (A) the Borrower, (B) any Wholly-Owned Entity or (C) subject to the limitations of Section 10.4(g)(iii), any other Consolidated Entity that is not a Wholly-Owned Entity. (d) Loans and advances to employees for reasonable travel and business expenses incurred in the ordinary course of business; (e) Accounts receivable created, and prepaid expenses incurred, in the ordinary course of business; (f) Loans, advances or other extensions of credit to tenants with whom the Borrower or a Subsidiary has a business relationship in an aggregate amount not to exceed $5,000,000 at any time outstanding; (g) The acquisition (including any swap or exchange), directly or through an Investment in a Joint Venture which makes such acquisition, of one or more Facilities and other assets not otherwise permitted by this Section 10.4 (whether by the acquisition of capital stock, assets or any combination thereof), subject to the following conditions: (i) if the aggregate consideration (including cash payments, deferred purchase price, earn-outs and assumed Debt) in connection with the acquisition of any Facility or other asset or the aggregate amount invested in a Joint Venture (including the Investment of both the Borrower and its Consolidated Entities) exceeds: - 70 - 76 (1) $50,000,000, the following items shall have been delivered to the Agent not later than five (5) Business Days prior to funding such Investment: (A) A description of the Facility or other asset to be acquired or of the Joint Venture in which the Investment is to be made; (B) Historical financial statements of the Facility or other asset to be acquired for the most recent two fiscal years available and for the latest available interim period since the most recent fiscal year-end; and (C) Written confirmation, supported by detailed calculations, demonstrating to the Agent pro forma compliance with each covenant contained in Article IX hereof as of the most recent fiscal quarter end for which financial statements are available and after giving effect to such Investment or acquisition; (2) Fifteen percent (15%) of Total Consolidated Assets as of the end of the immediately preceding fiscal year, the prior written consent of the Required Lenders shall be required as a condition to such Investment; (ii) no Default or Event of Default shall have occurred and be continuing both before and after giving effect to the Investment; (iii) not more than thirty percent (30%) of Total Consolidated Assets (determined at the time of any Investment and after giving effect to such Investment and thereafter quarterly on the basis of each Officer's Compliance Certificate) shall be invested in Joint Ventures at any time (including Investments in Joint Ventures existing on the Closing Date); and (iv) each Joint Venture shall be either a Controlled Partnership or a Controlled Company. (h) Subject to the limitations of Section 10.4(g), the swap or exchange of any Facility for a comparable facility or facilities, provided the following conditions are met: (i) The swap or exchange must be on commercially reasonable terms for like value, as determined by resolution - 71 - 77 of the Borrower's board of directors, taking into account, among other things, historical cash flows and other relevant financial and other factors. (ii) No Default or Event of Default shall exist immediately prior to or immediately after the consummation of the swap or exchange. (iii) The net cash proceeds, if any, received by the Borrower and the Consolidated Entities as a result of the swap or exchange shall be promptly applied to reduce the Obligations. (iv) The swap or exchange must not expose the Borrower or any of its Consolidated Entities to any material liability (other than liabilities for Debt expressly assumed as a part of the transaction, to the extent such Debt is permitted under this Agreement), including liabilities with respect to litigation, Hazardous Materials and adverse tax consequences. The Borrower and the Consolidated Entities must receive in connection with the swap or exchange appropriate representations and warranties with respect to such liabilities, as well as appropriate evidence of good title, and must exercise due diligence with respect to all such matters. (i) other Investments, in an aggregate amount not to exceed $50,000,000 at any time; provided that such Investments shall be within the Line of Business of the Borrower and its Consolidated Entities and provided further that neither the Borrower nor any of its Consolidated Entities shall own (individually or in the aggregate) fifty-one percent (51%) or more of the Person in which the Investment is made. SECTION 10.5 Limitations on Mergers and Liquidation. Merge, consolidate or enter into any similar combination with any other Person or liquidate, wind-up or dissolve itself (or suffer any liquidation or dissolution); provided that so long as immediately before and after giving effect to such merger, consolidation, other combination, liquidation or wind-up no Default or Event of Default exists, (a) any Consolidated Entity, whether now existing or hereafter created or acquired, may merge or consolidate with or into, or sell, lease, transfer or otherwise dispose of all or any portion of its business or assets to, the Borrower, so long as the entity which survives or results from any such merger or consolidation is the Borrower, (b) any Wholly-Owned Entity, whether now existing or hereafter created or acquired may merge or consolidate with or into, or sell, lease, transfer or otherwise dispose of all or any portion of its business to, any other Wholly-Owned Entity, and (c) any Wholly-Owned Entity may sell, lease, transfer or - 72 - 78 otherwise dispose of all or any portion of its business or assets to or merge or consolidate with or into any Person which is not a Wholly-Owned Entity, provided any such sale, lease, transfer, other disposition, merger or consolidation shall be treated as an Investment in a Joint Venture and shall be subject to the limitations of Section 10.4. SECTION 10.6 Limitations on Sale of Assets. Convey, sell, lease, assign, transfer, swap, exchange or otherwise dispose of any of its property, business or assets (including, without limitation, the sale of any receivables and leasehold interests and any sale-leaseback or similar transaction), whether now owned or hereafter acquired except: (a) the sale of inventory in the ordinary course of business; (b) the sale of obsolete assets no longer used or usable in the business of the Borrower or any of its Consolidated Entities; (c) the transfer of assets to the Borrower or any Consolidated Entity pursuant to Section 10.5; (d) the sale by the Borrower or any Consolidated Entity, on a term or revolving basis, of all or any part of its private pay receivables representing balances due from patients, including balances for deductibles, co-insurance or co-payments provided that the net cash proceeds of any disposition of such assets are immediately applied to reduce the Obligations; (e) the transfer of assets from a Consolidated Entity of the Borrower to the Borrower or another Consolidated Entity ; provided that, immediately after giving effect to such transfer, no Default or Event of Default would exist; and (f) any disposition of assets, including a disposition by means of a swap or exchange, not otherwise permitted hereunder provided (i) the gross proceeds from any single disposition shall not exceed $25,000,000 and (ii) the net cash proceeds of each disposition or exchange, if any, of such assets are promptly applied to reduce the Obligations. In addition, the Borrower and the Consolidated Entities will not sell, lease, transfer, swap, exchange or otherwise dispose of any Facility or any part thereof (or all or any part of the shares of stock of or partnership or other equity interest in the Consolidated Entity that owns such Facility) unless (a) the Borrower notifies the Agent of such sale, lease, transfer, swap, exchange or other disposition and advises the Agent as to the proposed terms thereof within 30 days prior to the consummation of such sale, lease, transfer, swap, exchange or other disposition and promptly notifies the Agent of any material changes in such terms, (b) no Default or Event of Default shall - 73 - 79 exist immediately prior to or after the consummation of the sale, lease, assignment, transfer, swap, exchange or other disposition, (c) any swap or exchange must (i) be on commercially reasonable terms for like value, as determined by resolution of the Borrower's board of directors, taking into account, among other things, historical cash flows and other relevant financial and other factors and (ii) not expose the Borrower or any of its Consolidated Entities to any material liability (other than liabilities for Debt expressly assumed as a part of the transaction, to the extent such Debt is permitted under this Agreement), including liabilities with respect to litigation, Hazardous Materials and adverse tax consequences, and (d) any sale, lease, transfer or other disposition (excluding swaps or exchanges) is made on commercially reasonable terms on an arms'-length basis for a purchase price at least 90% of which is payable in cash. SECTION 10.7 Limitations on Dividends, Distributions and Changes in Capital Structure. Declare or pay any dividends upon any of its capital stock; purchase, redeem, retire or otherwise acquire, directly or indirectly, any shares of its capital stock, or make any distribution of cash, property or assets among the holders of shares of its capital stock or other ownership interests, or make any change in its capital structure or amend any of its organizational documents if such change or amendment could reasonably be expected to have a Material Adverse Effect; provided that: (a) the Borrower or any Consolidated Entity may pay dividends in shares of its own capital stock in options or other rights to acquire its own capital stock or in Shareholder Securities; (b) any Consolidated Entity may pay cash dividends or make other distributions to the Borrower, another Consolidated Entity or to any other Person owning an equity interest in such Consolidated Entity; and the Borrower will not permit any Consolidated Entity to be or become subject to any restriction on the ability of such Consolidated Entity to pay dividends or to make partnership distributions. (c) the Borrower may purchase or redeem its capital stock pursuant to the terms of its Employee Stock Purchase Plan or Stock Option Plan or under the terms of the Borrower's 1989 stock offering to its employees. SECTION 10.8 Limitations on Exchange and Issuance of Capital Stock. Issue, sell or otherwise dispose of any class or series of capital stock that, by its terms or by the terms of any security into which it is convertible or exchangeable, is, or upon the happening of - 74 - 80 an event or passage of time would be, (a) convertible or exchangeable into Debt or (b) required to be redeemed or repurchased, including at the option of the holder, in whole or in part, or has, or upon the happening of an event or passage of time would have, a redemption or similar payment due. SECTION 10.9 Transactions with Affiliates. Except pursuant to the reasonable requirements of its business and upon fair and reasonable terms which are no less favorable to it than it would obtain in a comparable arm's length transaction with a Person not its Affiliate, directly or indirectly: (a) make any loan or advance to, or purchase or assume any note or other obligation to or from, any of its officers, directors, shareholders or other Affiliates, or to or from any member of the immediate family of any of its officers, directors, shareholders or other Affiliates, or subcontract any operations to any of its Affiliates, or (b) enter into, or be a party to, any transaction with any of its Affiliates. SECTION 10.10 Certain Accounting Changes. Change its Fiscal Year end. SECTION 10.11 Amendments; Payments and Prepayments of Subordinated Debt. Amend or modify (or permit the modification or amendment of) any of the terms or provisions of any Subordinated Debt, or cancel or forgive, make any voluntary or optional payment or prepayment on, or redeem or acquire for value (including without limitation by way of depositing with any trustee with respect thereto money or securities before due for the purpose of paying when due) any Subordinated Debt; provided that nothing herein shall be deemed to prevent the Borrower from taking action, to the extent that such action would not otherwise cause a Default or Event of Default hereunder, (a) to redeem or to solicit the tender of the 1992 Senior Subordinated Notes and, in connection therewith, to amend the terms of the 1992 Indenture on terms no less favorable to the Borrower than as presently set forth in the 1992 Indenture or (b) to redeem or solicit the tender of the 1995 Senior Subordinated Notes; provided that the Borrower shall, contemporaneously with such redemption or tender, replace such 1995 Senior Subordinated Notes with other Subordinated Debt on terms no less favorable to the Borrower than those set forth in the 1995 Indenture. SECTION 10.12 Restrictive Agreements. Enter into any Debt which contains any negative pledge on assets or any covenants more restrictive than the provisions of Articles VIII, IX and X hereof, or which restricts, limits or otherwise encumbers its ability to incur Liens on or with respect to any of its assets or properties other than the assets or properties securing such Debt. SECTION 10.13 Amendments and Prepayments of Other Debt. Except as provided in Section 10.11, amend or modify (or permit the - 75 - 81 modification or amendment of) any of the terms or provisions of any Debt (other than Debt arising hereunder), or make any voluntary or optional payment or prepayment of any Debt (other than Debt arising hereunder) to the extent that such amendment, modification, payment or prepayment would cause a Default or Event of Default hereunder. SECTION 10.14 Continuation of Current Business. Change its primary business ("Line of Business") of managing hospitals under contract, providing consulting and support services to hospitals, owning and operating acute care hospitals and related or supporting facilities and businesses and nursing homes and providing in-patient and out-patient services, including, without limitation, services provided through home health agencies, surgery centers, diagnostic centers and physicians offices. ARTICLE XI DEFAULT AND REMEDIES SECTION 11.1 Events of Default. Each of the following shall constitute an Event of Default, whatever the reason for such event and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment or order of any court or any order, rule or regulation of any Governmental Authority or otherwise: (a) Default in Payment of Loans, Fees and Reimbursement Obligations. The Borrower shall default in any payment, when and as due (whether at maturity, by reason of acceleration or otherwise), of (i) principal of or interest on any Loan, Revolving Credit Note, Competitive Bid Note or Reimbursement Obligation or (ii) any fees due hereunder. (b) Misrepresentation. Any representation or warranty made or deemed to be made by the Borrower or any of its Consolidated Entities under this Agreement, any Loan Document or any amendment hereto or thereto, shall at any time prove to have been incorrect or misleading in any material respect when made or deemed made. (c) Default in Performance of Certain Covenants. The Borrower shall default in the performance or observance of any covenant or agreement contained in Articles IX or X of this Agreement. (d) Default in Performance of Other Covenants and Conditions. The Borrower or any of its Consolidated Entities shall default in the performance or observance of any term, - 76 - 82 covenant, condition or agreement contained in this Agreement (other than as specifically provided for otherwise in this Section 11.1) or any other Loan Document and such default shall continue for a period of thirty (30) days after written notice thereof has been given to the Borrower by the Agent. (e) Debt Cross-Default. The Borrower or any of its Consolidated Entities shall (i) default in the payment of any Debt (other than the Notes or any Reimbursement Obligation) the aggregate outstanding amount of which Debt is in excess of $5,000,000 beyond the period of grace if any, provided in the instrument or agreement under which such Debt was created, or (ii) default in the observance or performance of any other agreement or condition relating to any Debt (other than the Notes or any Reimbursement Obligation) the aggregate outstanding amount of which Debt is in excess of $10,000,000 individually or $25,000,000 in the aggregate or contained in any instrument or agreement evidencing, securing or relating thereto or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such Debt (or a trustee or agent on behalf of such holder or holders) to cause, with the giving of notice if required, any such Debt to become due prior to its stated maturity (any applicable grace period having expired). (f) Other Cross-Defaults. The Borrower or any of its Consolidated Entities shall default in the payment when due, or in the performance or observance, of any obligation or condition of any Material Contract unless, but only as long as, the existence of any such default is being contested by the Borrower or such Consolidated Entity in good faith by appropriate proceedings and adequate reserves in respect thereof have been established on the books of the Borrower or such Consolidated Entity to the extent required by GAAP. (g) Change in Control. Either (i) any Person or any Persons acting together that would constitute a "group" (a "Group") for purposes of Section 13(d) of the Securities Exchange Act of 1934, or any successor provision thereto, together with any Affiliates or Related Persons thereof, other than any trust for the employee stock ownership plans of the Borrower or any of the Consolidated Entities, shall beneficially own (as defined in Rule 13d-3 of the Securities Exchange Act of 1934 or any successor provision thereto) at least 50% of the aggregate voting power of all classes of stock of the Borrower; or (ii) any Person or Group, together with any Affiliates or Related Persons thereof, shall succeed in having its or their nominees elected to the Board of Directors of the Borrower such that such nominees, when added to any existing director remaining on the Board of Directors of the Borrower after - 77 - 83 such election who is an Affiliate or Related Person of such Person or Group, shall constitute a majority of the Board of Directors of the Borrower. (As used herein, the term "Related Person" of any Person means any other Person owning (a) five percent (5%) or more of the outstanding common stock of such Person or (b) five percent (5%) or more of the voting stock of such Person.) (h) Voluntary Bankruptcy Proceeding. The Borrower or any Consolidated Entity shall (i) commence a voluntary case under the federal bankruptcy laws (as now or hereafter in effect), (ii) file a petition seeking to take advantage of any other laws, domestic or foreign, relating to bankruptcy, insolvency, reorganization, winding up or composition for adjustment of debts, (iii) consent to or fail to contest in a timely and appropriate manner any petition filed against it in an involuntary case under such bankruptcy laws or other laws, (iv) apply for or consent to, or fail to contest in a timely and appropriate manner, the appointment of, or the taking of possession by, a receiver, custodian, trustee, or liquidator of itself or of a substantial part of its property, domestic or foreign, (v) admit in writing its inability to pay its debts as they become due, (vi) make a general assignment for the benefit of creditors, or (vii) take any corporate action for the purpose of authorizing any of the foregoing. (i) Involuntary Bankruptcy Proceeding. A case or other proceeding shall be commenced against the Borrower or any Consolidated Entity in any court of competent jurisdiction seeking (i) relief under the federal bankruptcy laws (as now or hereafter in effect) or under any other laws, domestic or foreign, relating to bankruptcy, insolvency, reorganization, winding up or adjustment of debts, or (ii) the appointment of a trustee, receiver, custodian, liquidator or the like for the Borrower or any Consolidated Entity or for all or any substantial part of their respective assets, domestic or foreign, and such case or proceeding shall continue undismissed or unstayed for a period of sixty (60) consecutive days, or an order granting the relief requested in such case or proceeding (including, but not limited to, an order for relief under such federal bankruptcy laws) shall be entered. (j) Failure of Agreements. Any provision of this Agreement or of any other Loan Document shall for any reason cease to be valid and binding on the Borrower or Consolidated Entity party thereto or any such Person shall so state in writing, or this Agreement or any other Loan Document shall for any reason cease to create a valid and perfected first priority Lien on, or security interest in, any of the collateral purported to be covered - 78 - 84 thereby, in each case other than in accordance with the express terms hereof or thereof. (k) Termination Event. The occurrence of any of the following events: (i) the Borrower or any ERISA Affiliate fails to make full payment when due of all amounts which, under the provisions of any Pension Plan or Section 412 of the Code, the Borrower or any ERISA Affiliate is required to pay as contributions thereto, (ii) an accumulated funding deficiency in excess of $500,000 occurs or exists, whether or not waived, with respect to any Pension Plan, (iii) a Termination Event or (iv) the Borrower or any ERISA Affiliate as employers under one or more Multiemployer Plan makes a complete or partial withdrawal from any such Multiemployer Plan and the plan sponsor of such Multiemployer Plans notifies such withdrawing employer that such employer has incurred a withdrawal liability requiring payments in an amount exceeding $10,000,000. (l) Judgment. A judgment or order for the payment of money not covered by valid and collectible insurance which causes the aggregate amount of all such judgments to exceed $500,000 in any Fiscal Year shall be entered against the Borrower or any of its Consolidated Entities by any court and such judgment or order shall continue undischarged, unstayed or not be removed to bond for a period of more than thirty (30) days. (m) Execution or Attachment. Any writ of execution, attachment or garnishment for an amount in excess of $500,000 shall be assessed against the assets of the Borrower or any Consolidated Entity and such writ of execution, attachment or garnishment shall not be dismissed, discharged or quashed within thirty (30) days of issuance. SECTION 11.2 Remedies. Upon the occurrence of an Event of Default, with the consent of the Required Lenders, the Agent may, or upon the request of the Required Lenders, the Agent shall, by notice to the Borrower: (a) Acceleration; Termination of Facilities. Declare the principal of and interest on the Loans, the Notes and the Reimbursement Obligations at the time outstanding, and all other amounts owed to the Lenders and to the Agent under this Agreement or any of the other Loan Documents (including, without limitation, all L/C Obligations, whether or not the beneficiaries of the then outstanding Letters of Credit shall have presented the documents required thereunder) and all other Obligations, to be forthwith due and payable, whereupon the same shall immediately become due and payable without presentment, demand, protest or other notice of any kind, all of which are expressly waived, anything in this - 79 - 85 Agreement or the other Loan Documents to the contrary notwithstanding, and terminate the Credit Facility and any right of the Borrower to request borrowings or Letters of Credit thereunder; provided, that upon the occurrence of an Event of Default specified in Section 11.1(h) or (i) the Credit Facility shall be automatically terminated and all Obligations shall automatically become due and payable. (b) Letters of Credit. With respect to all Letters of Credit with respect to which presentment for honor shall not have occurred at the time of an acceleration pursuant to the preceding paragraph, require the Borrower at such time to deposit in a cash collateral account opened by the Agent an amount equal to the aggregate then undrawn and unexpired amount of such Letters of Credit. Amounts held in such cash collateral account shall be applied by the Agent to the payment of drafts drawn under such Letters of Credit, and the unused portion thereof after all such Letters of Credit shall have expired or been fully drawn upon, if any, shall be applied to repay the other Obligations. After all such Letters of Credit shall have expired or been fully drawn upon, the Reimbursement Obligation shall have been satisfied and all other Obligations shall have been paid in full, the balance, if any, in such cash collateral account shall be returned to the Borrower. (c) Rights of Collection. Exercise on behalf of the Lenders all of its other rights and remedies under this Agreement, the other Loan Documents and Applicable Law, in order to satisfy all of the Borrower's Obligations. SECTION 11.3 Rights and Remedies Cumulative; Non-Waiver; etc. The enumeration of the rights and remedies of the Agent and the Lenders set forth in this Agreement is not intended to be exhaustive and the exercise by the Agent and the Lenders of any right or remedy shall not preclude the exercise of any other rights or remedies, all of which shall be cumulative, and shall be in addition to any other right or remedy given hereunder or under the Loan Documents or that may now or hereafter exist in law or in equity or by suit or otherwise. No delay or failure to take action on the part of the Agent or any Lender in exercising any right, power or privilege shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or privilege preclude other or further exercise thereof or the exercise of any other right, power or privilege or shall be construed to be a waiver of any Event of Default. No course of dealing between the Borrower, the Agent and the Lenders or their respective agents or employees shall be effective to change, modify or discharge any provision of this Agreement or any of the other Loan Documents or to constitute a waiver of any Event of Default. - 80 - 86 ARTICLE XII THE AGENT SECTION 12.1 Appointment. Each of the Lenders hereby irrevocably designates and appoints First Union as Agent of such Lender under this Agreement and the other Loan Documents and each such Lender irrevocably authorizes First Union as Agent for such Lender, to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Agent by the terms of this Agreement and such other Loan Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement or such other Loan Documents, the Agent shall not have any duties or responsibilities, except those expressly set forth herein and therein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or the other Loan Documents or otherwise exist against the Agent. SECTION 12.2 Delegation of Duties. The Agent may execute any of its respective duties under this Agreement and the other Loan Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by the Agent with reasonable care. SECTION 12.3 Exculpatory Provisions. Neither the Agent nor any of its officers, directors, employees, agents, attorneys-in-fact, Subsidiaries or Affiliates shall be (a) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or the other Loan Documents (except for actions occasioned solely by its or such Person's own gross negligence or willful misconduct), or (b) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by the Borrower or any of its Subsidiaries or any officer thereof contained in this Agreement or the other Loan Documents or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or the other Loan Documents or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or the other Loan Documents or for any failure of the Borrower or any of its Subsidiaries to perform its obligations hereunder or thereunder. The Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement, or to - 81 - 87 inspect the properties, books or records of the Borrower or any of its Subsidiaries. SECTION 12.4 Reliance by the Agent. The Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Borrower), independent accountants and other experts selected by the Agent. The Agent may deem and treat the payee of any Note as the owner thereof for all purposes unless such Note shall have been transferred in accordance with Section 13.10 hereof. The Agent shall be fully justified in failing or refusing to take any action under this Agreement and the other Loan Documents unless it shall first receive such advice or concurrence of the Required Lenders (or, when expressly required hereby or by the relevant other Loan Document, all the Lenders) as it deems appropriate or it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action except for its own gross negligence or willful misconduct. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the Notes in accordance with a request of the Required Lenders (or, when expressly required hereby, all the Lenders), and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders and all future holders of the Notes. SECTION 12.5 Notice of Default. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless it has received notice from a Lender or the Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". In the event that the Agent receives such a notice, it shall promptly give notice thereof to the Lenders. The Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Lenders; provided that unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Lenders. SECTION 12.6 Non-Reliance on the Agent and Other Lenders. Each Lender expressly acknowledges that neither the Agent nor any of its respective officers, directors, employees, agents, attorneys-in-fact, Subsidiaries or Affiliates has made any representations or warranties to it and that no act by the Agent hereinafter taken, including any review of the affairs of the Borrower or any of its Subsidiaries, shall - 82 - 88 be deemed to constitute any representation or warranty by the Agent to any Lender. Each Lender represents to the Agent that it has, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Borrower and its Subsidiaries and made its own decision to make its Loans and issue or participate in Letter of Credit hereunder and enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Borrower and its Subsidiaries. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Agent hereunder or by the other Loan Documents, the Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, financial and other condition or creditworthiness of the Borrower or any of its Subsidiaries which may come into the possession of the Agent or any of its respective officers, directors, employees, agents, attorneys-in-fact, Subsidiaries or Affiliates. SECTION 12.7 Indemnification. The Lenders agree to indemnify the Agent in its capacity as such and (to the extent not reimbursed by the Borrower and without limiting the obligation of the Borrower to do so), ratably according to the respective amounts of their Commitment Percentages, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time (including, without limitation, at any time following the payment of the Notes or any Reimbursement Obligation) be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of this Agreement or the other Loan Documents, or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Agent under or in connection with any of the foregoing; provided that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting solely from the Agent's bad faith, gross negligence or willful misconduct. To the extent indemnity payments made by the Lenders pursuant to this Section 12.7 are subsequently recovered by the Agent, it promptly shall refund such previously paid indemnity amounts to the appropriate Lenders. The agreements in this Section 12.7 shall survive the payment of the Notes, any Reimbursement Obligation and - 83 - 89 all other amounts payable hereunder and the termination of this Agreement. SECTION 12.8 The Agent in Its Individual Capacity. The Agent and its respective Subsidiaries and Affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Borrower as though the Agent were not an Agent hereunder. With respect to any Loans made or renewed by it and any Note issued to it and with respect to any Letter of Credit issued by it or participated in by it, the Agent shall have the same rights and powers under this Agreement and the other Loan Documents as any Lender and may exercise the same as though it were not an Agent, and the terms "Lender" and "Lenders" shall include the Agent in its individual capacity. SECTION 12.9 Resignation of the Agent; Successor Agent. Subject to the appointment and acceptance of a successor as provided below, the Agent may resign at any time by giving notice thereof to the Lenders and the Borrower. Upon any such resignation, the Required Lenders shall have the right to appoint a successor Agent, which successor shall have minimum capital and surplus of at least $500,000,000. If no successor Agent shall have been so appointed by the Required Lenders and shall have accepted such appointment within thirty (30) days after the Agent's giving of notice of resignation, then the Agent may, on behalf of the Lenders, appoint a successor Agent, which successor shall have minimum capital and surplus of at least $500,000,000. 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 rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder, except for liabilities incurred prior thereto. After any retiring Agent's resignation hereunder as Agent, the provisions of this Section 12.9 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Agent. ARTICLE XIII MISCELLANEOUS SECTION 13.1 Notices. (a) Method of Communication. Except as otherwise provided in this Agreement, all notices and communications hereunder shall be in writing, or by telephone subsequently confirmed in writing. Any notice shall be effective if delivered by hand delivery or sent via telecopy, recognized overnight courier service or certified mail, return receipt - 84 - 90 requested, and shall be presumed to be received by a party hereto (i) on the date of delivery if delivered by hand or sent by telecopy, (ii) on the next Business Day if sent by recognized overnight courier service and (iii) on the third Business Day following the date sent by certified mail, return receipt requested. A telephonic notice to the Agent as understood by the Agent will be deemed to be the controlling and proper notice in the event of a discrepancy with or failure to receive a confirming written notice. (b) Addresses for Notices. Notices to any party shall be sent to it at the following addresses, or any other address as to which all the other parties are notified in writing. If to the Borrower: Quorum Health Group, Inc. 103 Continental Place Brentwood, Tennessee 37027 Attention: Steve B. Hewett Telephone No.: (615) 371-4760 Telecopy No.: (615) 371-4554 With copies to: Quorum Health Group, Inc. 103 Continental Place Brentwood, Tennessee 37027 Attention: General Counsel Telephone No.: (615) 371-4868 Telecopy No.: (615) 371-4788 If to First Union, First Union Capital Markets As Issuing Lender: Specialized Industries Division One First Union Center, DC-5 301 South College Street Charlotte, North Carolina 28288-0735 Attention: Healthcare Finance Group Telephone No.: (704) 374-7121 Telecopy No.: (704) 383-9144 If to any Lender: To the Address set forth on Schedule 1.1(b) hereto. If to First Union, First Union National Bank of As Agent: North Carolina One First Union Center, TW-10 301 South College Street Charlotte, North Carolina 28288-0608 Attention: Syndication Agency Services - 85 - 91 Telephone No.: (704) 383-0281 Telecopy No.: (704) 383-0288 With copies to: Kennedy Covington Lobdell & Hickman, L.L.P. 100 North Tryon Street, 42nd Floor Charlotte, North Carolina 28202 Attention: J. Donnell, Lassiter, Esq. Telephone No.: 704-331-7444 Telecopy No.: 704-331-7598 (c) Agent's Office. The Agent hereby designates its office located at the address set forth above, or any subsequent office which shall have been specified for such purpose by written notice to the Borrower and Lenders, as the Agent's Office referred to herein, to which payments due are to be made and at which Loans will be disbursed and Letters of Credit issued. (d) Issuing Lender's Office. The Issuing Lender hereby designates its office located at the address set forth above, or any subsequent office which shall have been specified for such purpose by written notice to the Borrower and Lenders, as the Issuing Lender's Office referred to herein, at which Letters of Credit will be issued. SECTION 13.2 Expenses; Indemnity. The Borrower will (a) pay all out-of-pocket expenses of the Agent in connection with: (i) the preparation, execution and delivery of this Agreement and each other Loan Document, whenever the same shall be executed and delivered, including without limitation all out-of-pocket syndication and due diligence expenses and reasonable fees and disbursements of counsel for the Agent, (ii) the preparation, execution and delivery of any waiver, amendment or consent by the Agent or the Lenders relating to this Agreement or any other Loan Document, including without limitation reasonable fees and disbursements of counsel for the Agent and (iii) the administration and enforcement of any rights and remedies of the Agent and Lenders under the Credit Facility, including consulting with appraisers, accountants, engineers, attorneys and other Persons concerning the nature, scope or value of any right or remedy of the Agent or any Lender hereunder or under any other Loan Document or any factual matters in connection therewith, which expenses shall include without limitation the reasonable fees and disbursements of such Persons, and (b) defend, indemnify and hold harmless the Agent and the Lenders, and their respective parents, Subsidiaries, Affiliates, employees, agents, officers and directors, from and against any losses, penalties, fines, liabilities, settlements, damages, costs and expenses, suffered by any such Person in connection with any claim, investigation, litigation or other proceeding (whether or not the Agent or any Lender is a party thereto) and the prosecution and defense thereof, arising out of or in any way connected with the Agreement, any other Loan Document or the Loans, including without limitation reasonable attorney's and - 86 - 92 consultant's fees, except to the extent that any of the foregoing directly result from the gross negligence or willful misconduct of the party seeking indemnification therefor. SECTION 13.3 Set-off. In addition to any rights now or hereafter granted under Applicable Law and not by way of limitation of any such rights, upon and after the occurrence of any Event of Default and during the continuance thereof, the Lenders and any assignee or participant of a Lender in accordance with Section 13.10 are hereby authorized by the Borrower at any time or from time to time, without notice to the Borrower or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and to apply any and all deposits (general or special, time or demand, including, but not limited to, indebtedness evidenced by certificates of deposit, whether matured or unmatured) and any other indebtedness at any time held or owing by the Lenders, or any such assignee or participant to or for the credit or the account of the Borrower against and on account of the Obligations irrespective of whether or not (a) the Lenders shall have made any demand under this Agreement or any of the other Loan Documents or (b) the Agent shall have declared any or all of the Obligations to be due and payable as permitted by Section 11.2 and although such Obligations shall be contingent or unmatured. SECTION 13.4 Governing Law. This Agreement, the Notes and the other Loan Documents, unless otherwise expressly set forth therein, shall be governed by, construed and enforced in accordance with the laws of the State of North Carolina, without reference to the conflicts or choice of law principles thereof. SECTION 13.5 Consent to Jurisdiction. The Borrower hereby irrevocably consents to the personal jurisdiction of the state and federal courts located in Mecklenburg County, North Carolina, in any action, claim or other proceeding arising out of any dispute in connection with this Agreement, the Notes and the other Loan Documents, any rights or obligations hereunder or thereunder, or the performance of such rights and obligations. The Borrower hereby irrevocably consents to the service of a summons and complaint and other process in any action, claim or proceeding brought by the Agent or any Lender in connection with this Agreement, the Notes or the other Loan Documents, any rights or obligations hereunder or thereunder, or the performance of such rights and obligations, on behalf of itself or its property, in the manner specified in Section 13.1. Nothing in this Section 13.5 shall affect the right of the Agent or any Lender to serve legal process in any other manner permitted by Applicable Law or affect the right of the Agent or any Lender to bring any action or proceeding against the Borrower or its properties in the courts of any other jurisdictions. - 87 - 93 SECTION 13.6 Binding Arbitration; Waiver of Jury Trial. (a) Binding Arbitration. Upon demand of any party, whether made before or after institution of any judicial proceeding, any dispute, claim or controversy arising out of, connected with or relating to the Notes or any other Loan Documents ("Disputes"), between or among parties to the Notes or any other Loan Document shall be resolved by binding arbitration as provided herein. Institution of a judicial proceeding by a party does not waive the right of that party to demand arbitration hereunder. Disputes may include, without limitation, tort claims, counterclaims, claims brought as class actions, claims arising from Loan Documents executed in the future, or claims concerning any aspect of the past, present or future relationships arising out of or connected with the Loan Documents. Arbitration shall be conducted under and governed by the Commercial Financial Disputes Arbitration Rules (the "Arbitration Rules") of the American Arbitration Association and Title 9 of the U.S. Code. All arbitration hearings shall be conducted in Charlotte, North Carolina. The expedited procedures set forth in Rule 51, et seq. of the Arbitration Rules shall be applicable to claims of less than $1,000,000. All applicable statutes of limitation shall apply to any Dispute. A judgment upon the award may be entered in any court having jurisdiction. The panel from which all arbitrators are selected shall be comprised of licensed attorneys. The single arbitrator selected for expedited procedure shall be a retired judge from the highest court of general jurisdiction, state or federal, of the state where the hearing will be conducted. Notwithstanding the foregoing, this paragraph shall not apply to any Hedging Agreement that is a Loan Document. (b) Jury Trial. TO THE EXTENT PERMITTED BY LAW, THE AGENT, EACH LENDER AND THE BORROWER HEREBY IRREVOCABLY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL WITH RESPECT TO ANY ACTION, CLAIM OR OTHER PROCEEDING ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS AGREEMENT, THE NOTES OR THE OTHER LOAN DOCUMENTS, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THEREUNDER, OR THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS. (c) Preservation of Certain Remedies. Notwithstanding the preceding binding arbitration provisions, the parties hereto and the other Loan Documents preserve, without diminution, certain remedies that such Persons may employ or exercise freely, either alone, in conjunction with or during a Dispute. Each such Person shall have and hereby reserves the right to proceed in any court of proper jurisdiction or by self help to exercise or prosecute the following remedies: (i) all rights to foreclose against any real or personal property or other security by exercising a power of sale granted in the Loan Documents or under applicable law or by judicial foreclosure and sale, (ii) all rights of self help including peaceful occupation of property and collection of rents, set off, and peaceful possession of property, (iii) obtaining provisional or ancillary remedies including injunctive relief, sequestration, garnishment, attachment, appointment of receiver and in - 88 - 94 filing an involuntary bankruptcy proceeding, and (iv) when applicable, a judgment by confession of judgment. Preservation of these remedies does not limit the power of an arbitrator to grant similar remedies that may be requested by a party in a Dispute. SECTION 13.7 Reversal of Payments. To the extent the Borrower makes a payment or payments to the Agent for the ratable benefit of the Lenders or the Agent receives any payment or proceeds of the collateral which payments or proceeds or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, state or federal law, common law or equitable cause, then, to the extent of such payment or proceeds repaid, the Obligations or part thereof intended to be satisfied shall be revived and continued in full force and effect as if such payment or proceeds had not been received by the Agent. SECTION 13.8 Injunctive Relief; Punitive Damages. (a) The Borrower recognizes that, in the event the Borrower fails to perform, observe or discharge any of its obligations or liabilities under this Agreement, any remedy of law may prove to be inadequate relief to the Lenders. Therefore, the Borrower agrees that the Lenders, at the Lenders' option, shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages. (b) The Agent, Lenders and Borrower (on behalf of itself and its Subsidiaries) hereby agree that no such Person shall have a remedy of punitive or exemplary damages against any other party to a Loan Document and each such Person hereby waives any right or claim to punitive or exemplary damages that they may now have or may arise in the future in connection with any Dispute, whether such Dispute is resolved through arbitration or judicially. (c) The parties agree that they shall not have a remedy of punitive or exemplary damages against any other party in any Dispute and hereby waive any right or claim to punitive or exemplary damages they have now or which may arise in the future in connection with any Dispute whether the Dispute is resolved by arbitration or judicially. SECTION 13.9 Accounting Matters. All financial and accounting calculations, measurements and computations made for any purpose relating to this Agreement, including, without limitation, all computations utilized by the Borrower or any Subsidiary thereof to determine compliance with any covenant contained herein, shall, except as otherwise expressly contemplated hereby or unless there is an express written direction by the Agent to the contrary agreed to by the Borrower, be performed in accordance with GAAP as in effect from time - 89 - 95 to time. In the event that changes in GAAP shall be mandated by the Financial Accounting Standards Board, or any similar accounting body of comparable standing, or shall be recommended by the Borrower's certified public accountants, to the extent that such changes would modify such accounting terms or the interpretation or computation thereof, such changes shall be followed in defining such accounting terms only from and after the date the Borrower and the Lenders shall have amended this Agreement to the extent necessary to reflect any such changes in the financial covenants and other terms and conditions of this Agreement. SECTION 13.10 Successors and Assigns; Participations. (a) Benefit of Agreement. This Agreement shall be binding upon and inure to the benefit of the Borrower, the Agent and the Lenders, all future holders of the Notes, and their respective successors and as signs, except that the Borrower shall not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of each Lender. (b) Assignment by Lenders. Each Lender may, with the consent of the Agent and, provided no Event of Default shall have occurred and be continuing, the consent of the Borrower, which consent shall not be unreasonably withheld, assign to one or more Eligible Assignees all or a portion of its interests, rights and obligations under this Agreement (including, without limitation, all or a portion of the Extensions of Credit at the time owing to it and the Notes held by it); provided that: (i) each such assignment shall be of a constant, and not a varying, percentage of all the assigning Lender's rights and obligations under this Agreement; (ii) if less than all of the assigning Lender's Commitment is to be assigned, the Commitment so assigned shall not be less than $10,000,000; (iii) the parties to each such assignment shall execute and deliver to the Agent, for its acceptance and recording in the Register, an Assignment and Acceptance in the form of Exhibit F attached hereto (an "Assignment and Acceptance"), together with any Note or Notes subject to such assignment; (iv) such assignment shall not, without the consent of the Borrower, require the Borrower to file a registration statement with the Securities and Exchange Commission or apply to or qualify the Loans or the Notes under the blue sky laws of any state; and (v) the assigning Lender shall pay to the Agent an assignment fee of $3,000 upon the execution by such Lender of the Assignment and Acceptance; provided that no such fee shall be payable upon any assignment by a Lender to an Affiliate thereof. - 90 - 96 Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five (5) Business Days after the execution thereof, (A) the assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Lender hereby and (B) the Lender thereunder shall, to the extent provided in such assignment, be released from its obligations under this Agreement. (c) Rights and Duties Upon Assignment. By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as set forth in such Assignment and Acceptance. (d) Register. The Agent shall maintain a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders and the amount of the Extensions of Credit with respect to each Lender from time to time (the "Register"). The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrower, the Agent and the Lenders may treat each person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or Lender at any reasonable time and from time to time upon reasonable prior notice. (e) Issuance of New Notes. Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an Eligible Assignee together with any Note or Notes subject to such assignment and the written consent to such assignment, the Agent shall, if such Assignment and Acceptance has been completed and is substantially in the form of Exhibit F: (i) accept such Assignment and Acceptance; (ii) record the information contained therein in the Register; (iii) give prompt notice thereof to the Lenders and the Borrower; and (iv) promptly deliver a copy of such Assignment and Acceptance to the Borrower. Within five (5) Business Days after receipt of notice, the Borrower shall execute and deliver to the Agent, in exchange for the surrendered Note or Notes, a new Note or Notes to the order of such Eligible Assignee in amounts equal to the Commitment assumed by it pursuant to such Assignment and Acceptance and a new Note or Notes to the order of the assigning Lender in an amount equal to the Commitment retained by - 91 - 97 it hereunder. Such new Note or Notes shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Note or Notes, shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form of the assigned Notes delivered to the assigning Lender. Each surrendered Note or Notes shall be canceled and returned to the Borrower. (f) Participations. Each Lender may sell participations to one or more banks or other entities in all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Extensions of Credit and the Notes held by it); provided that: (i) each such participation shall be in an amount not less than $5,000,000; (ii) such Lender's obligations under this Agreement (including, without limitation, its Commitment) shall remain unchanged; (iii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations; (iv) such Lender shall remain the holder of the Notes held by it for all purposes of this Agreement; (v) the Borrower, the Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement; (vi) such Lender shall not permit such participant the right to approve any waivers, amendments or other modifications to this Agreement or any other Loan Document other than waivers, amendments or modifications which would reduce the principal of or the interest rate on any Loan or Reimbursement Obligation, extend the term or increase the amount of the Commitment, reduce the amount of any fees to which such participant is entitled, extend any scheduled payment date for principal of any Loan or, except as expressly contemplated hereby or thereby, release substantially all of the Collateral; and (vii) any such disposition shall not, without the consent of the Borrower, require the Borrower to file a registration statement with the Securities and Exchange Commission to apply to qualify the Loans or the Notes under the blue sky law of any state. - 92 - 98 (g) Disclosure of Information; Confidentiality. The Agent and the Lenders shall hold all non-public information with respect to the Borrower obtained pursuant to the Loan Documents in accordance with their customary procedures for handling confidential information. Any Lender may, in connection with any assignment, proposed assignment, participation or proposed participation pursuant to this Section 13.10, disclose to the assignee, participant, proposed assignee or proposed participant, any information relating to the Borrower furnished to such Lender by or on behalf of the Borrower; provided, that prior to any such disclosure, each such assignee, proposed assignee, participant or proposed participant shall agree with the Borrower or such Lender to preserve the confidentiality of any confidential information relating to the Borrower received from such Lender. (h) Certain Pledges or Assignments. Nothing herein shall prohibit any Lender from pledging or assigning any Note to any Federal Reserve Bank in accordance with Applicable Law. SECTION 13.11 Amendments, Waivers and Consents. Except as set forth below, any term, covenant, agreement or condition of this Agreement or any of the other Loan Documents may be amended or waived by the Lenders, and any consent given by the Lenders, if, but only if, such amendment, waiver or consent is in writing signed by the Required Lenders (or by the Agent with the consent of the Required Lenders) and delivered to the Agent and, in the case of an amendment, signed by the Borrower; provided, that no amendment, waiver or consent shall (a) increase the amount or extend the time of the obligation of the Lenders to make Loans or issue or participate in Letters of Credit (including without limitation pursuant to Section 2.8) or decrease or forgive the principal of any Loan or Reimbursement Obligation, (b) extend the originally scheduled time or times of payment of the principal of any Loan or Reimbursement Obligation or the time or times of payment of interest on any Loan or Reimbursement Obligation, (c) reduce the rate of interest or fees payable on any Loan or Reimbursement Obligation, (d) permit any subordination of the principal or interest on any Loan or Reimbursement Obligation, or (e) amend the provisions of this Section 13.11 or the definition of Required Lenders, without the prior written consent of each Lender. In addition, no amendment, waiver or consent to the provisions of (a) Article XII shall be made without the written consent of the Agent and (b) Article III without the written consent of the Issuing Lender. SECTION 13.12 Performance of Duties. The Borrower's obligations under this Agreement and each of the Loan Documents shall be performed by the Borrower at its sole cost and expense. SECTION 13.13 All Powers Coupled with Interest. All powers of attorney and other authorizations granted to the Lenders, the Agent and any Persons designated by the Agent or any Lender pursuant to any - 93 - 99 provisions of this Agreement or any of the other Loan Documents shall be deemed coupled with an interest and shall be irrevocable so long as any of the Obligations remain unpaid or unsatisfied or the Credit Facility has not been terminated. SECTION 13.14 Survival of Indemnities. Notwithstanding any termination of this Agreement, the indemnities to which the Agent and the Lenders are entitled under the provisions of this Article XIII and any other provision of this Agreement and the Loan Documents shall continue in full force and effect and shall protect the Agent and the Lenders against events arising after such termination as well as before. SECTION 13.15 Titles and Captions. Titles and captions of Articles, Sections and subsections in this Agreement are for convenience only, and neither limit nor amplify the provisions of this Agreement. SECTION 13.16 Severability of Provisions. Any provision of this Agreement or any other Loan Document which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating the remainder of such provision or the remaining provisions hereof or thereof or affecting the validity or enforceability of such provision in any other jurisdiction. SECTION 13.17 Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and shall be binding upon all parties, their successors and assigns, and all of which taken together shall constitute one and the same agreement. SECTION 13.18 Term of Agreement. This Agreement shall remain in effect from the Closing Date through and including the date upon which all Obligations shall have been indefeasibly and irrevocably paid and satisfied in full. No termination of this Agreement shall affect the rights and obligations of the parties hereto arising prior to such termination. - 94 - 100 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers, all as of the day and year first written above. [CORPORATE SEAL] QUORUM HEALTH GROUP, INC. By: ___________________________________ Name: _____________________________ Title: ____________________________ FIRST UNION NATIONAL BANK OF NORTH CAROLINA, as Agent and Lender By: ___________________________________ Name: _____________________________ Title: ____________________________ - 95 - 101 SCHEDULE 1: LENDERS AND COMMITMENTS
COMMITMENT AND COMMITMENT LENDER PERCENTAGE - ------ ---------- First Union National Bank $__________ of North Carolina ____% One First Union Center, TW-10 301 South College Street Charlotte, North Carolina 28288-0608 Attention: Syndication Agency Services Telephone No.: (704) 383-0281 Telecopy No.: (704) 382-0288
EX-4.4.19 4 FIRST AMENDMENT TO CREDIT AGREEMENT 1 EXHIBIT 4.4.19 FIRST AMENDMENT TO CREDIT AGREEMENT This FIRST AMENDMENT TO CREDIT AGREEMENT (the "Amendment") dated June 30, 1997 is entered into by and among QUORUM HEALTH GROUP, INC., a corporation organized under the laws of Delaware (the "Borrower"), the LENDERS referred to in the Credit Agreement (the "Lenders") and FIRST UNION NATIONAL BANK as Agent for the Lenders (hereinafter defined the "Agent"). STATEMENT OF PURPOSE The Borrower, the Lenders and the Agent are parties to that certain Credit Agreement dated as of April 22, 1997 (such agreement, as amended from time to time, herein referred to as the "Credit Agreement") pursuant to which the Lenders have agreed to extend certain credit facilities to the Borrower. Capitalized terms used in this Amendment not otherwise defined herein have the respective meanings attributed to such terms in the Credit Agreement. The Borrower, the Lenders and the Agent wish to amend the Credit Agreement as hereinafter set forth. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the parties hereto, the Borrower, each of the Lenders and the Agent agree as follows: 1. AMENDED DEFINITION OF CONTROLLED COMPANY. The definition of "Controlled Company" is hereby deleted and the following inserted in lieu thereof: "Controlled Company" means a corporation or a limited liability company in which the Borrower or a Consolidated Entity owns at least fifty-one percent (51%) of the shares or membership interests, as applicable, controls the right to manage such corporation or limited liability company and to make distributions and is entitled to receive distributions of cash in an amount proportionate with its equity interest in such entity, other than in any other preferred cash distribution arrangement approved by the Required Lenders in writing. 2. AMENDMENT OF COVENANT LIMITING MERGER. In the eleventh (11th) line of Section 10.5, in subsection (c), the words "any Wholly-Owned Entity" shall be deleted and replaced with the words "any Consolidated Entity". 2 3. AMENDMENT OF COVENANTS LIMITING ACQUISITION OF CAPITAL STOCK. In Section 10.7, the following new subsection (d) shall be added: (d) subject to compliance by the Borrower with the provisions of Section 10.4(g) relating to acquisitions, any Consolidated Entity may purchase, redeem, retire or otherwise acquire, directly or indirectly, any shares of its capital stock or other ownership interests if done pursuant to contractual obligations, whether now or hereafter existing, which obligations arise from rights of first refusal, put rights, call rights or similar contractual obligations provided to minority investors in such Consolidated Entity. 4. AMENDMENT OF COVENANTS RESTRICTING EXCHANGE AND ISSUANCE OF CAPITAL STOCK. In Section 10.8, the following proviso shall be added as additional text at the end of such section: ; provided, however, a Consolidated Entity may issue such equity subject to put rights or other similar contractual obligations so long as the aggregate amount of such obligations outstanding, whether now of hereafter existing, determined as of the date of issuance of such obligations, of all Consolidated Entities, together with any Debt counted against the amount permitted under Section 10.1(f) does not exceed $75,000,000.00. 5. ADDITIONAL PROVISIONS REGARDING COMPETITIVE BID AND SWINGLINE LOANS. A new sub-section 2.5(d) shall be added to the Credit Agreement as follows: (d) Special Provisions Regarding Repayment of Certain Competitive Bid Loans and Swingline Loans. Upon the happening of any event or the existence of any condition which is the basis for assertion by the Lenders being requested to make a Loan or Loans to refinance a Competitive Bid Loan or Swingline Loan that a condition to making such Loan set forth in Section 5.3(a) or (b) has not been satisfied (other than a failure with respect to the financial covenants set forth in Article IX or an event of the type described in Subsections 11.1(a), 11.1(h), 11.1(i), 11.1(l), and 11.1(m)), notwithstanding the provisions of Section 11.2(a) to the contrary, the Borrower shall have the option of either (i) repaying such Competitive Bid Loan(s) or Swingline Loan(s) by using the Borrower's own funds or (ii) extending the maturity of such Loans to the Termination Date. In the event of extension of a Loan to the Termination Date, such Loan shall bear interest at the highest rate applicable to any Revolving 2 3 Credit Loan outstanding from time to time from the end of the applicable Interest Period until the Termination Date. The Borrower reserves the right to prepay such Loan at any time, subject to the limitations of Section 2.5(c). The rights of the Borrower to repay Competitive Bid Loans and Swingline Loans in accordance with these provisions shall not impair or otherwise prejudice the rights of the Lenders, if any, as a consequence of such asserted Event of Default, including, but not limited to, the right to accelerate and exercise any other rights and remedies under the Credit Agreement. 6. RATIFICATION; NO NOVATION. Notwithstanding anything to the contrary contained in this Amendment, all the Obligations under this Agreement shall remain in full force and effect and nothing contained in this Amendment shall be construed to constitute a novation of the Obligations or to release, discharge, terminate or otherwise affect of impair in any manner whatsoever the validity of the Obligations, the liability of the Borrower or any Guarantor now or hereafter liable under or on account of the Loan Documents relating to the Obligations. 7. REFERENCES TO CREDIT AGREEMENT. All references in the Loan Documents to "Credit Agreement" shall refer to the Credit Agreement as amended by this Amendment and as the Credit Agreement may be further amended from time to time. 8. EFFECTIVE DATE. This Amendment shall be effective as of April 22, 1997. 9. MISCELLANEOUS. Except as hereby amended, the Credit Agreement shall remain in full force and effect in full force and effect in accordance with its terms. This Amendment may be executed in one or more counterparts each of which shall be deemed to be an original and all of which, when taken together, shall constitute one and the same instrument and no single counterpart of this Amendment need be executed by all the parties hereto. The covenants and agreements contained in this Amendment shall apply to and inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. This Amendment shall be governed by the laws of the State of North Carolina. 3 4 IN WITNESS WHEREOF, the Borrower, the Lenders and the Agent have executed this First Amendment to Credit Agreement as of the date first written above. QUORUM HEALTH GROUP, INC. By:______________________ Name:____________________ Title:___________________ FIRST UNION NATIONAL BANK, AS AGENT AND LENDER By:______________________ Name:____________________ Title:___________________ ABN AMRO BANK N.V. By:______________________ Name:____________________ Title:___________________ 5 AMSOUTH BANK OF ALABAMA By:______________________ Name:____________________ Title:___________________ BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By:______________________ Name:____________________ Title:___________________ BANK OF TOKYO - MITSUBISHI TRUST COMPANY By:_______________________ Name:_____________________ Title:____________________ 6 BANK ONE, DAYTON, NA By:________________________ Name:______________________ Title:_____________________ BANQUE PARIBAS By:______________________ Name:____________________ Title:___________________ CITIBANK, N.A. By:______________________ Name:____________________ Title:___________________ 7 COMERICA BANK By:______________________ Name:____________________ Title:___________________ COOPERATIEVE CENTRALE RAIFFEISEN BOERENLEENBANK B.A. "RABOBANK NEDERLAND," NEW YORK BRANCH By:______________________ Name:____________________ Title:___________________ CORESTATES BANK, N.A. By:______________________ Name:____________________ Title:___________________ 8 CREDIT LYONNAIS NEW YORK BRANCH By:______________________ Name:____________________ Title:___________________ FIRST AMERICAN NATIONAL BANK By:______________________ Name:____________________ Title:___________________ FIRST TENNESSEE BANK NATIONAL ASSOCIATION By:______________________ Name:____________________ Title:___________________ 9 FLEET NATIONAL BANK By:______________________ Name:____________________ Title:___________________ THE FUJI BANK, LTD (ATLANTA AGENCY) By:______________________ Name:____________________ Title:___________________ KREDIETBANK N.V., GRAND CAYMAN BRANCH By:______________________ Name:____________________ Title:___________________ LTCB TRUST COMPANY By:______________________ Name:____________________ Title:___________________ 10 MELLON BANK, N.A. By:______________________ Name:____________________ Title:___________________ NATIONAL CITY BANK OF KENTUCKY By:______________________ Name:____________________ Title:___________________ 11 NATIONSBANK, N.A. By:______________________ Name:____________________ Title:___________________ THE SANWA BANK LIMITED, ATLANTA AGENCY By:_______________________ Name:_____________________ Title:____________________ SCOTIABANC INC. By:______________________ Name:____________________ Title:___________________ THE SUMITOMO BANK, LIMITED By:______________________ Name:____________________ Title:___________________ 12 THE SUMITOMO TRUST AND BANKING CO., LTD., NEW YORK BRANCH By:_____________________ Name:___________________ Title:__________________ SUNTRUST BANK, NASHVILLE, N.A. By:_____________________ Name:___________________ Title:__________________ TORONTO DOMINION (TEXAS), INC. By:_____________________ Name:___________________ Title:__________________ 13 UNION BANK OF CALIFORNIA, N.A. By:______________________ Name:____________________ Title:___________________ EX-10.6 5 MANAGEMENT AGREEMENT 1 EXHIBIT 10.6 MANAGEMENT AGREEMENT This Agreement is entered into this ____ day of ____________, 1997, by and between QUORUM HEALTH RESOURCES, INC., a Delaware corporation ("Quorum"), and ____________ (the "Hospital"), located in ____________, ________________. 1. TERM. The initial term of this Agreement shall be ____ years ("Initial Term") commencing _______, 199_, and terminating on __________, 199_. The Initial Term shall automatically be extended by successive renewal periods of _____ years each ("Renewal Term") unless either the Hospital or Quorum gives the other party notice of termination no less than 90 days prior to the expiration of the then current Term. The Initial Term and any Renewal Terms are herein together referred to as the "Term" of this Agreement. 2. RETENTION OF AUTHORITY BY HOSPITAL; REPRESENTATIONS AND WARRANTIES. (a) CONTROL RETAINED BY HOSPITAL. Throughout the Term of this Agreement, the Hospital, through its Board of Directors (the "Board"), shall retain all authority and shall exercise control over the business, policies, operation, and assets of the Hospital, in accordance with the Hospital's Charter and Bylaws. Quorum shall perform the services described in this Agreement in accordance with such of the policies and directives of the Hospital as may be from time to time provided to it. Quorum shall not be held responsible for any such policies or directives of which it has not been advised. By entering into this Agreement, the Hospital does not delegate to Quorum any of the powers, duties, and responsibilities vested in the Board by law or by the Hospital's Charter or Bylaws. (b) QUORUM RELIANCE ON BOARD POLICIES. The Board shall communicate all policies and directives to Quorum and Quorum shall rely on and assume the validity of communications from, and shall report to, the Board, the Chairman of the Board, or a designee of the Board. All matters requiring professional medical judgments shall remain the responsibility of the Hospital's Board, Medical Staff and allied health professionals. Quorum shall have no responsibility for such judgments. The relationship between Quorum and the Hospital created by this Agreement is one of principal and agent. The Hospital and Quorum are not partners, joint venturers, or independent contractors, and it is agreed that Quorum is acting solely as the agent of the Hospital in performing services to be provided by Quorum hereunder. (c) REPRESENTATIONS OF THE HOSPITAL. Except as disclosed in writing to Quorum prior to the date hereof, the Hospital represents the following to be true: 2 (i) This Agreement has been duly authorized, executed, and delivered by the Board as the governing body of the Hospital and represents the legal, valid, and binding agreement of the Hospital and is enforceable against the Hospital in accordance with its terms. (ii) The execution, delivery, and performance of this Agreement by Hospital and consummation by it of the transactions contemplated hereby do not: (A) require the consent, waiver, approval, license, or authorization of any person or public authority which has not heretofore been obtained; (B) violate any provision of law applicable to Hospital; (C) conflict with or result in a default under, or create, any lien upon any of the property or assets of Hospital pursuant to any agreement or instrument; or (D) violate any judicial or administrative decree, regulation, or any other restriction of any kind or character to which Hospital or Board is a party or by which Hospital or any of its assets may be bound. (iii) At the time of executing this Agreement, there are no actions, suits, or proceedings pending or threatened against Hospital, at law or in equity, or before or by any federal, state, municipal, or other governmental department, commission, board, bureau, agency or instrumentality, that would, if decided adversely, have a materially adverse effect on Hospital or its business. (iv) At the time of executing this Agreement, the assets and properties, including medical equipment ("Medical Equipment"), owned, operated, or leased by Hospital and used by Hospital in the provision of medical and related services are in a normal state of repair and operating condition, reasonable wear and tear excepted, and suitable for the uses for which they are intended. Hospital is in compliance in all material respects with all requirements of federal and state laws and regulations regarding asbestos and other toxic or hazardous materials. (v) At the time of executing this Agreement, Hospital has properly prepared and filed all reports required to be filed by Hospital relative to all regulated activities. Such reports and the information and data therein contained have been properly and accurately compiled and completed in accordance with the requirements of the regulatory authority with which they were filed and present fairly and accurately the information purported to be shown thereby. (vi) Hospital has made available to Quorum such of Hospital's business records as Quorum has requested including all relevant inspection and accreditation reports, patient or medical staff complaints or incident reports, insurance and governmental inspection reports, and all files relative to current, pending, or threatened litigation. (vii) At the time of executing this Agreement, to the best of the Hospital's knowledge after due inquiry, there is not currently pending any license revocation proceeding or investigation nor any pending or threatened medical malpractice claims relative to the Hospital, any employed nurse, any medical staff member, or any member of the allied health professional staff. 2 3 (viii) Hospital is in compliance with all requirements of state and federal wage and hour laws and other labor laws and has paid, in a timely manner, all required federal and state withholding taxes for its employees. Hospital has complied with all legal requirements relating to employee retirement plans and other employee benefit programs offered by the Hospital. 3. DUTIES OF QUORUM. Subject to the limitations set forth in Section 3(i) hereof and the Board's continuing control and direction, Quorum agrees to perform the administrative services described herein including responsibility for management of the day-to-day business affairs of the Hospital. Nothing in this Agreement is intended to alter, weaken, displace, or modify the responsibility of the Board for the Hospital's direction and control as set forth in Hospital's Charter and Bylaws. Quorum shall use all reasonable efforts to implement the Board's policies and directives with the goal of causing the Hospital to provide quality health care consistent with the policies and directives dictated by the Board, the financial resources available to the Hospital, the competitive marketplace in which the Hospital is located, and Medicare reimbursement and other laws. Quorum shall follow the policies and directives of the Board or any committee thereof in discharging its duties hereunder. Further, Quorum may rely on the recommendations of the Hospital's Medical Staff (and its designated committees and departmental chairmen (collectively "Medical Staff") relative to the quality of professional services provided by individuals with clinical privileges, and on the Board and the Medical Staff, or any jointly appointed or Board appointed committee or representative as to the adequacy and proper state of repair of all Medical Equipment and the professional competency, training, and requisite supervision of nurses, medical technicians, and other Medical Staff. Quorum shall have the following duties which shall be implemented as soon as reasonably possible, in accordance with priorities determined by Quorum and the Board. (a) PERSONNEL. Quorum shall provide the Hospital with the services of the Key Personnel specified in Section 4, "Key Personnel," and such Key Personnel shall be employees of Quorum. All other Hospital personnel shall be employees or independent contractors of the Hospital and shall be subject to the Hospital's personnel policies. Quorum, as agent for the Hospital, shall enforce and administer the personnel policies established by the Hospital in hiring, managing, and discharging Hospital employees; provided, however, that matters with respect to professional competency shall be determined with the assistance of the appropriate Hospital or Medical Staff committee. Furthermore, Quorum shall assist the Hospital and its personnel director (or, if a designated personnel director does not exist, the Hospital employee discharging substantially similar duties) in determining the number and qualifications of employees required for the efficient operation of the Hospital and in establishing and revising wage scales, employee benefit packages, in-service training programs, staffing schedules, and job 3 4 descriptions, all in order to accomplish the goals and objectives of the Hospital and in accordance with policies and procedures established by the Board. Quorum shall provide the Board and the appropriate Medical Staff or Hospital committee with a regular flow of information on these subjects, so as to assist the Board in establishing personnel-related policies and resolving related issues. (b) BUDGETS. Prior to the end of each fiscal year of the Hospital during the Term of this Agreement, in accordance with Board policies and procedures, Quorum shall submit to the Hospital for approval, disapproval, or modification by the Hospital an annual operating budget, annual capital expenditures budget (if appropriate), and annual cash flow projections, all designed to meet the goals and objectives of the Board. In addition, Quorum will supply any appropriate revisions to the foregoing to reflect material changes during the fiscal year. If applicable, Quorum shall also compile, subject to the review of the Board, any information the Hospital may be required to provide for the purpose of rate review. Once the Board approves said operating budget, Quorum shall be entitled to proceed with expenditures contemplated thereby without further Board approval; provided, however, that the Board may modify said budget from time to time by written resolution, which modification shall then become the new authorization for expenditures. (c) ACCOUNTING. Quorum shall supervise the Hospital's accounting system and shall supervise the preparation of monthly and annual balance sheets and statements of income and loss. Annual statements shall be due following the close of each fiscal year during the Term of this Agreement. Any fees charged by the Hospital's independent auditors shall be the responsibility of the Hospital. (d) CHARGES. Quorum shall supervise the issuance of bills and the collection of accounts, in accordance with charge schedules and collection policies established by the Board. Quorum shall be entitled to obtain on behalf of the Hospital the assistance of one or more collection agencies, as approved by the Board. Quorum shall carry out Board policy and exercise reasonable care in managing the accounts and available cash of the Hospital by maintaining accounts and/or certificates of deposit with a financial institution or institutions authorized by the Hospital and by informing the Hospital of the availability of any excess cash. The permitted investment of any excess cash shall be made by Quorum only upon the written direction of the Board. (e) PAYMENTS. Quorum shall exercise reasonable care in applying the Hospital's funds to the timely payment of Hospital's liabilities and other obligations. It is specifically agreed and understood, however, that Quorum's obligations under this paragraph are subject to availability of funds to make such payments. Nothing contained herein shall obligate Quorum to make any such payments from its own funds or resources or to advance any monies whatsoever to the Hospital. Quorum may utilize Hospital personnel to carry out the functions described in 4 5 this paragraph. Quorum shall not be liable either primarily or as guarantor for debts of the Hospital. (F) EXPENDITURES. Quorum may reasonably rely on recommendations given to Quorum by the Board or its designee as to the ordering of Medical Equipment and Supplies used in the diagnosis and treatment of patients. Under purchasing policies established by the Board, Quorum shall have the authority to commit the Hospital's funds for the purchase or lease of supplies, goods, and services reasonably necessary to the operation of the Hospital and to cause the Hospital to negotiate, enter into, administer, and terminate contracts therefor. (G) GROUP PURCHASING PROGRAMS. (i) ACCESS. Quorum will offer the Hospital access to the volume purchasing programs in which Quorum participates or arranges for (the "Purchasing Programs"), subject to the requirements of the Purchasing Programs. Under the Purchasing Programs, participating hospitals have access to discounted prices on goods and services. The Hospital may choose to participate in a Purchasing Program or not, but if the Hospital chooses to participate in a Purchasing Program, the Hospital may be required to execute a written letter of understanding with the Purchasing Program under which the Hospital agrees to the requirements of the Purchasing Program. (ii) ADMINISTRATIVE FEES. The Hospital acknowledges that Quorum may receive administrative fees from vendors in connection with certain products that are purchased, licensed or leased by Hospital under the Purchasing Programs, including, without limitation, administrative fees for providing marketing, distribution and promotion services to the Hospital. Quorum shall disclose to the Hospital in writing, on an annual basis, and to the Secretary of Health and Human Services upon his or her request, the administrative fees Quorum receives as a result of Hospital's purchases. (iii) LIMITATION OF WARRANTIES. QUORUM MAKES NO AND HEREBY DISCLAIMS ANY WARRANTIES WHATSOEVER, AND EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES INCLUDING WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, WITH REGARD TO ANY GOODS OR SERVICES PURCHASED OR USED BY THE HOSPITAL UNDER THE PURCHASING PROGRAMS. (h) MANAGEMENT PLAN AND REPORT. Quorum shall submit to the Board for its review and approval an annual management plan (the "Management Plan") designed to implement the goals and objectives of the Hospital which will set forth the efforts, methods, and resources to be used by Quorum and the timetable to be observed to achieve such goals and objectives. Upon acceptance of any Management Plan, the Board hereby agrees to use its best efforts, and to cause the Medical Staff to use their best efforts, to take or cooperate with the actions recommended (to the extent such actions are within the control of the Hospital, the 5 6 Board, or the Medical Staff and not wholly within the control of Quorum). The initial Management Plan shall be due no later than 90 days following the date the permanent chief executive officer commences work on site at the Hospital, and subsequent plans shall be due no later than the last day of each fiscal year of the Hospital. Furthermore, Quorum shall deliver to the Hospital a written annual report on the completion of the goals and objectives set forth in the Management Plan approved by the Board. (i) LIMITATIONS ON QUORUM'S DUTIES. Quorum shall not have the authority to: (i) enter into or terminate contracts with physicians on behalf of the Hospital, except as the Board may specifically authorize from time to time, but Quorum shall have the authority on behalf of the Hospital to negotiate and administer such contracts. (ii) enter into or terminate contracts with outside consultants on behalf of the Hospital, except as the Board may specifically authorize from time to time, but Quorum shall have the authority on behalf of the Hospital to negotiate and administer such contracts. (iii) purchase capital assets without the prior approval of the Board unless such approval is deemed granted as part of an approved annual budget or within Board policies and procedures. (iv) enter into any leases of capital assets which, if purchased, would be described in iii. above without the prior approval of the Board unless such approval is deemed granted as part of an approved annual budget. (v) enter into any leases which extend beyond the then current initial or renewal term of this Agreement without the prior approval of the Board unless such approval is deemed granted as part of an approved annual budget. (vi) negotiate or enter into collective bargaining agreements covering or purporting to cover employees of the Hospital. Absent a specific agreement to the contrary, Quorum's services shall not include such items as legal services, audit services, cost report preparation, data processing fees, architectural, engineering, MSO, or facility planning services, feasibility studies, certificate of need applications related to major capital projects, and similar items; nor shall Quorum perform the functions of a certified public accounting firm. In addition, the services included in the management fee do not include those specialized programs developed and made available by Quorum on a hospital by hospital basis pursuant to the terms of a separate agreement. 6 7 4. KEY PERSONNEL. (a) OBLIGATION TO PROVIDE. Quorum shall provide the Hospital with the services of a hospital administrator and a controller, each of whom shall be acceptable to the Hospital on a continuing basis. In addition, Quorum may, with the Board's permission, provide the service of other hospital management personnel (for example, the chief operating officer). All persons employed by Quorum whose services are furnished to the Hospital under this section are referred to as "Key Personnel." All Key Personnel shall be employees of Quorum throughout the Term of this Agreement. Quorum shall determine the amount and nature of and shall pay compensation (as hereinafter described) to the Key Personnel for all services rendered by them in connection with this Agreement. Nevertheless, the selection of Key Personnel and their replacements shall be subject to the Board's approval, which shall not be unreasonably withheld. (b) COVENANT NOT TO HIRE. The Hospital will not, and will not permit any of its Affiliates to, employ or offer to employ any Key Personnel until one year following the termination or expiration of the Term of this Agreement unless (i) such Key Personnel were employees of the Hospital immediately prior to their becoming Key Personnel or (ii) Quorum gives its written consent thereto. Likewise, Quorum will not, and will not permit any of its Affiliates to, employ or offer to employ any Hospital personnel until one year following the termination or expiration of the Term of this Agreement unless the Hospital gives its written consent thereto. The parties recognize and agree that monetary damages are not an adequate remedy for a breach by a party of this covenant not to hire employees of the other party. The parties agree that irreparable damage will result to a party and its business from a breach of this covenant by the other party and that in the event of a breach or a threatened breach of this covenant, in addition to monetary damages, the injured party shall be entitled to an injunction enjoining the other party from violating this covenant. (c) REIMBURSEMENT OF COMPENSATION. In addition to Quorum's management fee hereunder, the Hospital shall, upon receipt of invoice, reimburse Quorum for the costs and expenses associated with Quorum's provision of the Key Personnel, including their salaries, taxes, fringe benefits, and business expenses. The amount of salary reimbursable hereunder shall be subject to the Board's approval, which shall not be withheld if the salary is within the range for similar hospitals covered by the Quorum compensation program. The term "fringe benefits" as used herein shall include all fringe benefits which are or may become standard for administrative or managerial personnel of Quorum (such as health insurance, disability insurance, life insurance, retirement plans and, with respect to the administrator, automobile and automobile expenses). The Hospital shall also reimburse Quorum for relocation expenses, severance expenses, and interim living expenses related to the Key Personnel. It is specifically understood and agreed that reimbursable compensation for Key Personnel shall be considered a payroll obligation 7 8 of the Hospital for purposes of setting priorities for payments of Hospital obligations as described in Paragraph 3(e) hereof. Except as specifically provided elsewhere in this Agreement, or as otherwise agreed to by the Board, Quorum shall bear the expense relating to the salaries, compensation, travel, lodging and out-of-pocket expenses of its corporate staff necessary to carry out the terms and provisions of this Agreement, and Quorum's sole compensation shall be the management fees and reimbursable expenses described in this Agreement. 5. MANAGEMENT FEE. (a) AMOUNT. The Hospital shall pay Quorum a management fee of $___________ for the first year of this Agreement. The annual management fee thereafter shall be calculated as set forth in subsection (b) below. (b) ADJUSTMENT. The management fee set forth in subsection (a) above shall be adjusted annually as set forth herein to reflect changes in the Medical Care Component of the Consumer Price Index for Urban Wage Earners and Clerical Workers, U.S. All City Average Report, published by the United States Department of Labor (hereinafter referred to as the "CPI"). If such an index shall no longer be published on an anniversary date, the substitute index (or comparable if no substitute) shall be utilized. On each yearly contract anniversary date, the management fee shall be increased or decreased by a percentage equal to the percentage increase or decrease in the CPI over the twelve (12) months up to and including the previous month of ___________. (c) WHEN DUE. The management fee in each year of the Term shall be paid in equal monthly installments in advance, payable on the first day of each month. The first and last monthly payment shall be prorated in accordance with the number of days during those months. The Hospital agrees to pay Quorum interest, at the rate of twelve percent (12%) per annum, on all management fees and reimbursable expenses not paid when due, said interest to accrue from the date originally due until payment is made. The Hospital agrees to be responsible for payment of all legal fees and collection fees incurred by Quorum for collection of all past due management fees and reimbursable expenses. 6. DUTY TO COOPERATE. The parties acknowledge that the parties' mutual cooperation is critical to the ability of Quorum to perform its duties hereunder successfully and efficiently. Accordingly, each party agrees to cooperate with the other fully in formulating and implementing goals and objectives which are in the Hospital's best interest. 7. OWNERSHIP OF INFORMATION; CONFIDENTIALITY. (a) QUORUM SYSTEMS - OWNERSHIP. Quorum retains all ownership and other rights in all systems, manuals, computer software, materials, and other information, in whatever form, provided by or developed by Quorum in the performance of its obligations hereunder (hereinafter 8 9 collectively referred to as "Systems"); and nothing contained in this Agreement shall be construed as a license or transfer of such Systems or any portion thereof, either during the Term of this Agreement or thereafter. Upon the termination or expiration of this Agreement, Quorum shall have the right to retain all such Systems, and the Hospital shall upon request deliver to Quorum all such Systems in its possession. Notwithstanding the foregoing, any Systems specifically tailored or designed for Hospital may be retained by the Hospital upon the termination or expiration of this Agreement. (b) QUORUM SYSTEMS-CONFIDENTIALITY. The Hospital acknowledges that Quorum has invested a significant amount of its resources in developing and maintaining the Systems and that the value to Quorum of these Systems may be diminished or destroyed if the Hospital discloses information concerning the Systems or any portion thereof to a third party. Accordingly, the Hospital shall maintain the confidentiality of the Systems. The Hospital shall not duplicate or permit the duplication of any portion of the Systems and shall not permit access to the Systems by the Hospital's personnel or any third party other than on a strict "need-to-know" basis and in the ordinary course of business. The Hospital shall take at least those steps that it would take to protect its own confidential information. The Hospital shall not loan, lease, or otherwise permit the use of any of the Systems by any other person or entity, regardless of its relationship to the Hospital. The Hospital shall notify Quorum of any suspected or actual breach of these confidentiality requirements. The provisions of this section shall survive any termination or expiration of this Agreement. (c) QUORUM PURCHASING PROGRAMS. The Hospital will not disclose the terms or prices of any agreement under the Quorum Purchasing Program to any third party unless specifically authorized to do so by Quorum. (d) HOSPITAL INFORMATION. During the Term of this Agreement the Hospital shall give Quorum full access to the Hospital, its facilities, and its records. Quorum shall maintain the confidentiality of patient records, Hospital charges, wages, marketing strategies, and other confidential information regarding the Hospital, except to the extent that disclosure is required by law. 8. LICENSING; ACCREDITATION. The Hospital shall take all steps reasonably necessary to keep the Hospital fully licensed and, if eligible, duly accredited by the Joint Commission for Accreditation of Healthcare Organizations, and Quorum shall cooperate in said endeavors. The Hospital shall do nothing willful to jeopardize Medicare, Medicaid, or other third-party reimbursement arrangements. Both the Hospital and Quorum shall abide by all relevant laws, ordinances, rules, and regulations of state, local, or federal governments. 9. INSURANCE. 9 10 (a) HOSPITAL. The Hospital has and shall maintain throughout the Term of this Agreement the following minimum insurance coverage: Worker's Compensation Statutory amount Employer's Liability $ 100,000 Comprehensive General $1,000,000 per occurrence Liability $3,000,000 aggregate Hospital Professional $1,000,000 per occurrence Liability $3,000,000 aggregate Automobile Liability $1,000,000 Directors' and Officers' Liability $1,000,000 Fidelity Bond $ 500,000 Property Insurance Insurable Value Property damage insurance shall insure against loss or direct physical damage to Hospital buildings, furnishings, equipment, machinery, and boiler under standard all-risk coverage (including but not limited to fire, smoke, lightning, windstorm, explosion, aircraft or vehicle damage, riot, civil commotion, vandalism, and malicious mischief) and shall also include damage due to flood and earthquake unless waived by Quorum. Quorum, its parent company, and their agents, servants, employees, officers, and directors shall be named as additional insureds, with respect to this Agreement, under the comprehensive general and hospital professional liability policies. Their rights to invoke the protection of such policies shall be severable from and independent of the Hospital's rights, and these policies shall not be terminable or non-renewable except upon thirty (30) days prior written notice to Quorum. No later than thirty (30) days following the execution of this Agreement and thirty (30) days following the end of each policy year, the Hospital shall give to Quorum a copy of the endorsements naming Quorum and its parent company as additional insureds. Such insurance policies shall also contain endorsements which reflect the primary liability of the Hospital's insurance carrier for all covered losses provided for in this Section 9, notwithstanding any insurance which may be maintained by Quorum or any Affiliate thereof covering such loss. The Hospital hereby waives any right of contribution with respect to a loss covered under such policies (or their deductibles) against Quorum or any of Quorum's insurance carriers. (b) QUORUM. Quorum has and shall maintain throughout the Term of this Agreement Fidelity Insurance in an amount no less than $500,000 insuring against dishonesty and other wrongdoing by its employees, officers and directors. 10 11 10. ACCESS TO BOOKS AND RECORDS. Upon the written request of the Secretary of Health and Human Services, the Comptroller General, or any of their duly authorized representatives, Quorum will make available those contracts, books, documents, and records necessary to certify the nature and extent of the costs of providing services under this Agreement. Such inspection shall be available up to 4 years after the rendering of such services. If Quorum carries out any of the duties of this Agreement through a subcontract with a value of $10,000 or more over a 12-month period with a related individual or organization, Quorum agrees to include this requirement in any such subcontract. This section is included pursuant to and is governed by the requirements of Public Law 96-499, Sec. 952, and the regulations promulgated thereunder. 11. CONFLICT OF INTEREST. Any member of the Hospital's Board or Medical Staff having any direct or indirect financial interest or investment in the Hospital, any department thereof, or any contractor providing goods or services to the Hospital shall disclose such relationship in writing to Quorum in order to enable Quorum to discharge its duties under this Agreement effectively and efficiently. 12. BREACH. In the event of a breach of any obligation or covenant under this Agreement, other than the obligation to pay money, the nonbreaching party may give the breaching party written notice of the specifics of the breach, and the breaching party shall have 60 days (the "Cure Period") in which to cure the breach. Only if the breach is not cured within said Cure Period shall the nonbreaching party be entitled to pursue any remedies it may have by reason of the breach. A waiver of any breach of this Agreement shall not constitute a waiver of any future breaches of this Agreement, whether of a similar or dissimilar nature. 13. TERMINATION OF AGREEMENT. This Agreement may be terminated prior to the expiration of the Term only as follows, and any such termination shall not affect any rights or obligations arising prior to the effective date of termination: (A) BREACH. In the event of a material breach of this Agreement which is not cured within the Cure Period set forth in Section 12, "Breach," or in the event of a breach as to which no Cure Period is provided by this Agreement, the nonbreaching party may terminate this Agreement upon no less than 30 days' notice; provided that notice of termination must be given no later than 30 days after the expiration of the Cure Period if one is applicable. This remedy shall be in addition to any other remedy available at law or in equity. Failure to terminate this Agreement shall not waive any breach of this Agreement. 11 12 (b) CASUALTY. In the event that the physical plant housing the Hospital is destroyed or is so damaged that it is reasonably anticipated that the Hospital will not within 90 days commence repair or reconstruction with a view toward resuming full operation, then either party may terminate this Agreement upon no less than 30 days notice, provided that such notice is given within 30 days following the destruction or damage. (c) INSOLVENCY. Quorum may terminate this Agreement upon 30 days notice in the event the Hospital becomes insolvent or fails to pay, or admits in writing its inability to pay, its debts as they mature; or a trustee, receiver or other custodian is appointed for the Hospital for all or a substantial part of the Hospital's property and is not discharged within 30 days; or any bankruptcy reorganization, debt, arrangement, or other proceeding under any bankruptcy or insolvency law or any dissolution or liquidation proceeding is instituted by or against the Hospital and if instituted against the Hospital is consented to or acquiesced in by the Hospital or remains for 60 days undismissed; or any warrant or attachment is issued against any substantial portion of the property of the Hospital which is not released within 30 days of service. (d) REORGANIZATION. In the event that the Hospital undergoes a reorganization which materially alters Quorum's duties or is reasonably anticipated to have a material effect on Quorum's ability to perform satisfactorily its duties hereunder, then Quorum may terminate this Agreement upon no less than 30 days notice given no later than 60 days following the effective date of the reorganization. (e) REPRESENTATIONS. Quorum may terminate this Agreement upon 30 days written notice in the event any representation made by the Hospital or the Board herein is found to be untrue in any respect which would have a material adverse effect upon the financial condition or business operations of the Hospital, or would have a material adverse effect upon the ability of the Hospital or Quorum to perform under this Agreement. (f) LITIGATION. Quorum may terminate this Agreement upon 30 days written notice in the event there is entered against the Hospital one or more judgments or decrees which would have a material adverse effect upon the financial condition or business operations of the Hospital or the Hospital's ability to perform under this Agreement. (g) LICENSES. Quorum may terminate this Agreement upon 30 days written notice in the event any material license or certification required by Hospital to operate cannot be obtained or is suspended, terminated, or revoked. 14. EFFECTS OF TERMINATION. In the event of the termination of this Agreement Quorum shall immediately be paid all management fees theretofore earned and reimbursed for all expenses incurred for which reimbursement is required under this Agreement and otherwise. This remedy shall be in addition to any other 12 13 remedy available at law or in equity. The termination of this Agreement for any reason shall be without prejudice to any payments or obligations which may have accrued or become due hereunder prior to the date of termination or which may become due after such termination. If either party commences legal action alleging any violation of this Agreement, the non-prevailing party shall pay all costs and reasonable attorneys' fees incurred by the prevailing party in connection with such action. 15. INDEMNIFICATION AND HOLD HARMLESS. The provisions of this Section 15 shall survive the termination or expiration of this Agreement. (a) INDEMNIFICATION BY HOSPITAL. Hospital agrees to indemnify and hold harmless Quorum, its Affiliates, and each of their shareholders, directors, officers, employees, and agents ("Quorum Indemnified Party") from and against any and all losses, claims, damages, liabilities, costs, and expenses (including reasonable attorneys' fees and expenses related to the defense of any claims), joint or several, which may be asserted against any of the Quorum Indemnified Parties or for which they may now or hereafter become subject arising in connection with the activity of the Hospital ("Quorum Claim"), including but not limited to: (i) alleged or actual failure by the Board to perform any of its duties hereunder, (ii) any pending or threatened medical malpractice or other tort claims asserted against Quorum; (iii) any action against Quorum brought by any of the Hospital's current or former employees or Medical Staff members; (iv) any act or omission by any Hospital employee, Medical Staff member, or other personnel; and (v) any violation of any requirement applicable to Hospital under any federal, state, or local environmental, hazardous waste or similar law or regulation; provided that such claims have not been caused by the gross negligence or willful or wanton misconduct of the Quorum Indemnified Party seeking indemnification pursuant to this Agreement. (b) INDEMNIFICATION BY QUORUM. Quorum agrees to indemnify and hold harmless the Hospital and its shareholders, directors, officers or trustees ("Hospital Indemnified Party") from and against all losses, claims, damages, liabilities, costs and expenses (including reasonable attorneys fees and expenses related to the defense of any claims), joint or several, which may be asserted against any Hospital Indemnified Party ("Hospital Claim"), as a result of (1) any personnel or other action brought against any Hospital Indemnified Party by any Key Person relating to any acts performed by such Key Person within the scope of his or her employment by Quorum; or (2) the sole negligence of Quorum outside the scope of its employment under this Agreement; provided that such Hospital Claims have not been caused by the gross negligence or willful or wanton misconduct of the Hospital Indemnified Party seeking indemnification pursuant to this Agreement. (c) NOTICE AND DEFENSE OF CLAIMS. The Hospital and Quorum agree to notify each other promptly of commencement of or indication that any Claim may be asserted against any Indemnified Party or of any litigation or proceedings which could give rise to a Claim by any Indemnified Party. The Indemnitor shall be entitled to participate in the defense of any such action at Indemnitor's own expense, but such defense shall be 13 14 conducted by counsel of recognized standing and satisfactory to the Indemnified Party. Unless the Indemnitor timely assumes the defense thereof, the Indemnified Party may through its own or independent counsel defend such Claim(s). Each Indemnitor agrees that no settlement of any Claim involving its Indemnified Party will be made without the consent of such Indemnified Party. Likewise, each Indemnified Party agrees that it will not settle any Claim without the consent of its Indemnitor. The Indemnitor will furnish to the Indemnified Party copies of all pleadings in any action hereunder, permit the Indemnified Party to be an observer therein, and apprise the Indemnified Party of all developments therein, all at the Indemnitor's expense. (d) PAYMENT OF CLAIMS. Each Indemnitor covenants that, immediately upon demand, it will pay its Indemnified Parties any and all sums of money which any or all of such Indemnified Parties shall pay or become liable to pay by reason of the Claim(s), including any and all costs incurred in connection with the investigation or defense of any Claim (whether successful or unsuccessful) including attorneys fees and costs incurred by reason of any litigation (including any appeals or the cost of other action taken in connection with judgments or orders rendered in any such litigation). In the event judgment is rendered against any Indemnified Party in any such litigation or in the event a settlement is made , its Indemnitor shall pay the full amount of such judgment or settlement sum together with any interest, attorneys fees and other costs due or payable by the Indemnified Party in connection therewith to the party in whose favor the judgment is rendered within thirty (30) days of the date of the final adjudication ("Final Adjudication") or, as to an Indemnified Party with whom a settlement is made, on or before the date for payment under the settlement agreement. "Final Adjudication" as used herein shall mean the decision of the trial court, but in the event of appeal then it shall mean the decision of the Appellate Court after petition for re-hearing has been denied or the time for filing such petition (or for the filing of further appeal) has expired (provided that as to an appeal the Indemnitor hereby agrees at its sole cost and expense to post the requisite bond to stay enforcement of the judgment). (e) NON-PAYMENT OF CLAIMS. In the event an Indemnitor fails to pay, timely and fully, any amounts due relative to any Claims, its Indemnified Party may pay such Claim to a third party. In such event, such Indemnified Party may recover from its Indemnitor in addition to the amount so paid, interest on the amount claimed at the higher of 12% per annum or such maximum amount of interest as is permitted by law and also recover the costs of such Indemnified Party's reasonable attorneys fees in connection with the enforcement of this Agreement. 16. NOTICES. All notices permitted or required by this Agreement shall be deemed given when in writing and delivered personally or deposited in the United States mail, postage prepaid, return receipt requested, addressed to the other party at the address set forth below or such other address as the party may designate in writing: 14 15 TO QUORUM: Quorum Health Resources, Inc. 105 Continental Place Brentwood, Tennessee 37027 Attn.: President TO THE HOSPITAL: Attn.: 17. AFFILIATES. As used in this Agreement the term "Affiliate" means any corporation owning 50% or more of the voting stock of Quorum or the Hospital, any subsidiary corporation of which Quorum or the Hospital owns 50% or more of the voting stock, and any subsidiary of a parent corporation (owning 50% or more of the voting stock of Quorum or the Hospital) of which the parent corporation owns 50% or more of the voting stock. 18. BINDING EFFECT. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their heirs, executors, administrators, assigns, subtenants, successors in interest, and successors in ownership, operation, or control of the Hospital. 19. LIMITATION OF LIABILITY. Quorum's liability, if any, for loss or damages arising out of any breach by Quorum of the provisions hereof shall in no event exceed the aggregate management fees paid Quorum by Hospital hereunder. 20. WAIVER OF TRIAL BY JURY. Each party hereto hereby irrevocably waives any and all rights it may have to demand that any action, proceeding or counterclaim arising out of or in any way related to this Agreement or the relationships of the parties hereto be tried by jury. This waiver extends to any and all rights to demand a trial by jury arising form any source including, but not limited to, the Constitution of the United States or any state therein, common law or any applicable statute or regulations. Each party hereto acknowledges that it is knowingly and voluntarily waiving its right to demand trial by jury. 21. CONFIDENTIALITY OF AGREEMENT. Quorum and the Hospital agree that the terms and conditions of this Agreement shall remain confidential. Neither Quorum nor the Hospital shall distribute this Agreement, or any part thereof, to any third party unless required by law to do so. 22. MISCELLANEOUS. 15 16 (a) HEADINGS. Section headings are for convenience of reference only and shall not be used to construe the meaning of any provision of this Agreement. (b) COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original, and all of which shall together constitute one agreement. (c) SEVERANCE. Should any part of this Agreement be invalid or unenforceable, such invalidity or unenforceability shall not affect the validity and enforceability of the remaining portions. (d) AUTHORITY. Each individual signing this Agreement warrants that such execution has been duly authorized by the party for which he or she is signing. The execution and performance of this Agreement by each party has been duly authorized by all applicable laws and regulations and all necessary corporate action, and this Agreement constitutes the valid and enforceable obligation of each party in accordance with its terms. (e) LAW. This Agreement shall be construed in accordance with the laws of the State of _____________. (f) AMENDMENT. This Agreement may not be modified except in a written document executed by the party to be charged. (g) ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of the parties hereto and supersedes all prior agreements and representations with respect to the subject matter hereof. ATTEST: HOSPITAL By:_________________________ By:_________________________ Title: _____________________ Name:_______________________ Chairman, Board of Directors QUORUM HEALTH RESOURCES, INC. By:_________________________ By:_________________________ Assistant Secretary Name:_______________________ Vice President - Marketing By:_________________________ By:_________________________ Assistant Secretary Sheldon L. Krizelman Executive Vice President - Marketing 16 EX-10.31 6 1ST AMENDMENT TO GPOP AGREEMENT 1 EXHIBIT 10.31 FIRST AMENDMENT TO GROUP PURCHASING ORGANIZATION PARTICIPATION AGREEMENT THIS FIRST AMENDMENT (this "First Amendment") to the Group Purchasing Organization Participation Agreement (the "Agreement") dated November 30, 1995 by and between Quorum Health Group, Inc. ("Quorum"), a Delaware corporation, and Premier Purchasing Partners, L.P., f/k/a APS Healthcare Purchasing Partners, L.P. (the "Partnership"), a California limited partnership, is made and entered into as of June 1, 1997. WITNESSETH WHEREAS, Quorum and the Partnership entered into the Agreement pursuant to which Member Facilities of Quorum would have access to the Partnership Group Purchasing Programs; WHEREAS, certain issues have arisen with respect to the implementation and interpretation of the Agreement; and WHEREAS, the parties desire to amend the Agreement as set forth herein so as to resolve such issues. NOW THEREFORE, Quorum and the Partnership, in consideration of the terms, conditions, covenants, and agreements set forth herein, and other good and valuable consideration, and intending to be legally bound, mutually agree as follows: 1. Definitions. 1.1 APS Plans. Subsequent to the execution of the Agreement, APS Healthcare Plans, Inc. changed its name to Premier Plans, Inc., and shall be known hereinafter as Premier Plans. The definition of APS Plans set forth in Section 1.2 of the Agreement shall be clarified insofar as references to APS Plans shall mean Premier Plans. 1.2 APS. Subsequent to the execution of the Agreement, APS Healthcare Systems changed its name to Premier, Inc. and shall be known hereinafter as Premier. The definition of APS set forth in Section 1.3 of the Agreement shall be clarified insofar as references to APS shall mean Premier. 1.3 Member Facilities. Section 1.5 of the Agreement shall be amended by deleting the existing Section 1.5 in its entirety and inserting in its place the following new Section 1.5: 1.5 "Member Facilities" whether used in the singular or plural, means those hospitals and other health care 2 facilities and/or providers (other than Quorum Physicians) that are owned, managed, operated, leased or otherwise affiliated with Quorum, now and in the future, which have been approved by the Partnership and Premier and granted access to Partnership's Group Purchasing Program. Facilities "managed" by Quorum shall include any facility having a contract calling for Quorum to manage or provide management service(s) or other purchasing services to such facility. The current list of Member Facilities as of the date of this First Amendment is contained in Exhibit A to this First Amendment. From time to time, Quorum may request in writing that Premier and the Partnership consider approving additional hospitals and other health care facilities and providers as Member Facilities and adding any approved new Member Facility to Exhibit A. Premier and the Partnership shall consider, pursuant to their respective policies and procedures, any such written request of Quorum, and shall decide, in their sole discretion, upon any such requests within a reasonable period of time, not to exceed sixty (60) days from the date of the receipt of Quorum's written request. 1.4 Contract Year. Article 1 of the Agreement shall be amended to include the following new Section 1.7: 1.7 "Contract Year" means the initial thirteen (13) month period beginning on November 30, 1995, and ending on December 31, 1996, and thereafter each twelve (12) month period beginning on January 1 and ending on December 31 of the same calendar year. A specific Contract Year will be designated by the calendar year of commencement, except that the first Contract Year which begins on November 30, 1995, shall be Contract Year 1996. 1.5 Applicant Facilities. Article 1 of the Agreement shall be amended to include the following new Section 1.8: 1.8 "Applicant Facilities" are those hospitals and other health care facilities and/or providers that are owned, managed, operated, leased or otherwise affiliated with Quorum which are not listed on Exhibit A hereto (as it may be amended from time to time) and which Quorum has requested, in writing, that Premier and the Partnership approve as Member Facilities. Quorum shall not submit such a written request with respect to any such potential Applicant Facility until such time as Quorum has entered into a binding arrangement with that potential Applicant Facility. Once an Applicant Facility has been approved as a Member Facility, it will cease to be an Applicant Facility. Once an Applicant Facility has been denied Membership Status, it will cease to be an Applicant Facility and will be an Overlap Provider. 3 1.6 Overlap Providers. Article 1 of the Agreement shall be amended to include the following new Section 1.9: 1.9 "Overlap Provider," whether used in the singular or plural, means a hospital or other health care facility or provider that is owned, managed, operated, leased or otherwise affiliated with Quorum, now and in the future, which Quorum has requested be approved as a Member Facility and has been denied by Premier or the Partnership for reasons including, but not limited to, an objection by a Premier owner or Partnership member located within fifty (50) miles of such Quorum hospital or other health care facility. 1.7 Quorum Physicians. Article 1 of the Agreement shall be amended to include the following new Section 1.10: 1.10 "Quorum Physician," whether used in the singular or plural, means any physician or physician practice affiliated with Quorum, a Member Facility, or an Overlap Provider and designated by Quorum as a Quorum Physician. "Quorum Physician" shall not include corporations, partnerships, organizations or other business entities that employ, manage, contract on behalf of, or otherwise affiliate with, physicians or physician practices. Quorum Physicians shall not be Member Facilities or Overlap Providers, as such terms are defined herein. Periodically or upon the Partnership's request, Quorum shall provide the Partnership with an updated list of Quorum Physicians. Quorum may add or delete physicians or physician practices from the list of Quorum Physicians without the approval of Premier or the Partnership. 1.8 Purchase Volume. Article 1 of the Agreement shall be amended to include the following new Section 1.11: 1.11 "Purchasing Volume" means for any portion of Contract Year 1996 the total dollar volume of purchases made by Member Facilities and Overlap Providers during that time period under group purchasing agreements of the Partnership or its predecessor American Healthcare Systems Purchasing Partners, L.P., that pay Group Purchasing Fees. For any Contract Year after Contract 1996, "Purchasing Volume" means the total volume of purchases made by Member Facilities and Overlap Providers during the applicable Contract Year under group purchasing agreements of the Partnership that pay Group Purchasing Fees. Notwithstanding the foregoing sentence, the volume of purchases made by Member Facilities and Overlap Providers pursuant to any agreement between the Partnership and a distributor shall only be included in Purchasing Volume in the same proportion 4 as the Group Purchasing Fee under such distribution agreement as compared to the average Group Purchasing Fee received by the Partnership pursuant to all of its group purchasing agreements. By way of example only, if the Group Purchasing Fee under such distribution agreement were 1.1% and the Partnership's average Group Purchasing Fee were 2.2%, the applicable proportion would be fifty percent (50%) and fifty percent (50%) of Quorum's purchases under such distribution agreement would be included in the applicable Purchasing Volume. 1.9 Group Purchasing Fees and Administrative Fees. The parties acknowledge and agree that, as defined and used in the Agreement and this First Amendment, Administrative Fees constitute that portion of Group Purchasing Fees that vendors will be obligated to pay directly to Quorum and other eligible owners and affiliates of Premier pursuant to group purchasing agreements between the Partnership and such vendors. Administrative Fees do not include that portion of the Group Purchasing Fees paid by the vendors directly to the Partnership. The parties acknowledge that such Administrative Fees were sometimes referred to by the Partners and its predecessor, American Healthcare Systems Purchasing Partners, L.P., as system payments. 2. Duties and Responsibilities of Partnership. Article 4 of the Agreement shall be amended to include the following new Section 4.3: 4.3 During the term of the Agreement, the Partnership shall make available to Quorum Physicians the Partnership's existing group purchasing contracts for physicians and physician offices for health related supplies, equipment, and services that are currently known as the "Premier Docs" program. Quorum shall require all Quorum Physicians to comply with all policies, procedures and terms of the Premier Docs program. Quorum acknowledges and agrees that the Partnership may, in its sole discretion, alter or discontinue the Premier Docs program or its policies, procedures, and terms regarding participation of Quorum Physicians without amending this Agreement or causing a breach hereof; provided, however, that the Partnership will give Quorum the same notice of any discontinuation of the Premier Docs program that the Partnership gives any other participant in the program. Unless otherwise agreed to in writing by Premier, no Quorum Physician shall be considered a Member Facility or Overlap Provider or have access to the Partnership's group purchasing contracts that are accessed by Member Facilities and Overlap Facilities. Notwithstanding the foregoing, purchases of the Quorum Physicians pursuant to the Premier Docs program during a Contract Year shall be included in Quorum's Purchase Volume for that Contract Year for the sole purpose of determining whether Quorum achieved the Participant Benchmark for that Contract Year. 5 3. Regional Materials Managers Compensation. Section 7.1 of the Agreement shall be amended by adding the following to the end of the existing Section 7.1: Where the Participant Benchmark (as defined hereinafter) is not reached for any Contract Year, the amount of reimbursement due to Quorum from the Partnership pursuant to this Section 7.1 shall be reduced in the same proportion as the shortfall between the actual Purchasing Volume for the applicable time period and the applicable Participant Benchmark expressed as a percentage of the Participant Benchmark. On or before the last day of each calendar quarter of a Contract Year, the Partnership shall make an estimated payment of the amount of such reimbursement pursuant to this Section 7.1 for that calendar quarter. Within one hundred and fifty (150) days of the last day of each Contract Year, the Partnership and Quorum shall reconcile the amount of such estimated payments with the actual amount of reimbursement due pursuant to this Section 7.1. If either party owes the other party any amount based on such reconciliation, that party shall pay the other party such amount within thirty (30) days of the date of the reconciliation, such date not to be later than one hundred and eighty (180) days after the last day of the applicable Contract Year. 4. Guarantee of Administrative Fees. 4.1 Contract Year 1996. The parties agree and acknowledge that, as of the date of this First Amendment, the Purchasing Volume for Contract Year 1996 has not been finally determined and reconciled to the satisfaction of both parties. Further, Quorum acknowledges and agrees that, for Contract Year 1996, it has received as of the date of this First Amendment five hundred thousand dollars ($500,000) from the Partnership pursuant to Section 7.1 of the Agreement, approximately five hundred thousand dollars ($500,000) in Administrative Fees directly from vendors, approximately eight hundred thousand dollars ($800,000) in Administrative Fees directly from Johnson & Johnson, and three million dollars ($3,000,000) from the Partnership pursuant to Section 7.3.1 of the Agreement. To resolve and settle outstanding issues regarding Contract Year 1996, including without limitation the amount of Purchasing Volume and whether the guarantee in Section 7.3.1 of the Agreement was triggered, the parties agree as follows: (a) Quorum may retain for its own use approximately eight hundred thousand dollars ($800,000) in Administrative Fee payments it recently received directly from Johnson & Johnson and attributable to purchases by Member Facilities during Contract Year 1996; (b) Premier shall pay to Quorum eight hundred thousand dollars ($800,000) within three (3) business days of the date of execution of this First Amendment by Quorum; 6 and (c) Premier shall pay to Quorum an additional Five Hundred Thousand Dollars ($500,000) within three (3) business days of the date of execution of this First Amendment by Quorum. Said amount shall represent an estimate of Administrative Fees earned by Quorum for purchases by Member Facilities from Johnson & Johnson during Contract Year 1996. On or before June 30, 1997, the parties shall determine the actual Administrative Fees earned by Quorum for purchases by Member Facilities from Johnson & Johnson during Contract Year 1996 and a corresponding reconciliation payment shall be made. 4.1.1 Quorum hereby agrees that if it provides notice of termination pursuant to Section 6.2 of the Agreement, as amended hereby, prior to January 1, 1999, Quorum shall, prior to the effective date of such termination, repay to the Partnership the eight hundred thousand dollars ($800,000) paid to Quorum pursuant to subsection (b) above, except as otherwise provided in Section 4.1.4 hereof. Further, if the Partnership terminates the Agreement pursuant to Section 6.3 of the Agreement as a result of Quorum's breach thereof prior to January 1, 1999, Quorum shall repay, except as otherwise provided in Section 4.1.4 hereof, to the Partnership such eight hundred thousand dollars ($800,000) prior to the effective date of such termination. If, however, the Partnership terminates the Agreement pursuant to Section 6.2 thereof, Quorum shall not be required to repay to the Partnership such eight hundred thousand dollars ($800,000). 4.1.2 The Partnership and Quorum acknowledge and agree that Baxter Healthcare (the predecessor to Baxter and Allegiance) did not pay Group Purchasing Fees or other similar fees to either the Partnership or Quorum for purchases from Baxter by Quorum and its Member Facilities during all or a portion of Contract Year 1996 ("Unpaid Baxter Group Purchasing Fees"). Quorum hereby agrees that it will cooperate and work closely with the Partnership for the purpose of attempting to collect from Baxter and/or Allegiance such Unpaid Baxter Group Purchasing Fees. Quorum shall direct Baxter and Allegiance to pay any Unpaid Baxter Group Purchasing Fees or other similar fees to the Partnership, and Quorum shall notify the Partnership in writing of any payments of Unpaid Baxter Group Purchasing Fees that Quorum receives directly from Baxter or Allegiance. 4.1.3 The Partnership shall have the right to retain as its own and for its own use the first eight hundred thousand dollars ($800,000) of Unpaid Baxter Group Purchasing Fees that are paid by Baxter or Allegiance directly to the Partnership or to Quorum. Quorum hereby assigns all of its rights, title and interests in and to such first eight hundred thousand dollars ($800,000) to the Partnership, and agrees to pay promptly to the 7 Partnership any Unpaid Baxter Group Purchasing Fees paid to Quorum which comprise any part of such first eight hundred thousand dollars ($800,000). To the extent that the Partnership collects any amount of Unpaid Baxter Group Purchasing Fees in excess of the first eight hundred thousand dollars ($800,000), the Partnership shall pay to Quorum any such amount up to but not to exceed the amount necessary to cause Quorum to receive a total of six million nine hundred thousand dollars ($6.9 million) from the Partnership or directly as Administrative Fees from vendors for Contract year 1996. To the extent that the Partnership collects any amount of Unpaid Baxter Group Purchasing Fees in excess of such amount payable to Quorum, the Partnership and Quorum shall share equally any such excess amount. 4.1.4 The obligation of Quorum to repay the eight hundred thousand dollars ($800,000) to the Partnership pursuant to Section 4.1.1 hereof shall be reduced on a dollar for dollar basis by the amount of any Unpaid Baxter Group Purchasing Fees paid to the Partnership subsequent to the Effective Date of this First Amendment. 4.2 Annual Administrative Fee Guarantee. Commencing with Contract Year 1997 and for each Contract Year hereafter, the Partnership shall guarantee that Quorum receive Administrative Fees from vendors for Purchasing Volume made during the applicable Contract Year in the amount of Six Million Four Hundred Thousand Dollars ($6,400,000), so long as the Purchasing Volume for the applicable Contract Year equals or exceeds the applicable Participant Benchmark set forth in Section 4.4 below. If the applicable Participant Benchmark is not satisfied, the guarantee of Administrative Fees set forth in this Section 4.2 shall be reduced in the same proportion as the shortfall between the actual Purchasing Volume for the applicable Contract Year and the applicable Participant Benchmark expressed as a percentage of the Participant Benchmark. For example only, if the Purchasing Volume for Contract Year 1997 is $200,000,000 (50% of the Participant Benchmark for that Contract Year), the Administrative Fee guarantee shall be reduced by fifty percent (50%) to $3,200,000 (50% of $6,400,000). If the Agreement is terminated before its annual anniversary date, the guarantee regarding Administrative Fees under this Section 4.2 shall be prorated for the period of time during which the Agreement was in effect during such Contract Year. Any amount of Administrative Fees owed by the Partnership to Quorum for a particular Contract Year pursuant to this Section 4.2 shall be reduced and offset by those Administrative Fees paid by the vendors directly to Quorum for such Contract Year's Purchasing Volume. In the event the Purchasing Volume exceeds the Participant Benchmark for any Contract Year, Quorum will be entitled to any Administrative Fees generated by such excess Purchasing Volume only to the extent Administrative Fees actually received by Quorum directly from vendors and/or from the Partnership exceed six million four hundred thousand dollars ($6.4 million) in any Contract year. No later than one hundred and twenty (120) days after the end of a Contract Year (except Contract Year 1996), the 8 Partnership will furnish Quorum with a full accounting of the Purchasing Volume for that Contract Year, by Member Facility and Overlap Provider and by vendor contract, and of the Group Purchasing Fees, including Administrative Fees paid by each vendor as a result of the purchases of each Member Facility and Overlap Provider. Within ninety (90) days after the end of each Contract Year, Quorum shall provide the Partnership with a written report setting forth the amounts and sources of all Administrative Fees paid to Quorum and due to be paid to Quorum by vendors for such Contract Year Purchasing Volume. The Partnership shall provide Quorum with reasonable access to its books and records for the sole purpose of verifying the Purchasing Volume for a Contract Year and the amount of Administrative Fees to which Quorum is entitled for that Contract Year. Quorum shall provide the Partnership with reasonable access to its books and records for the sole purpose of verifying the Purchasing Volume for a Contract Year and the amount of Administrative Fees paid to Quorum by vendors for that Contract Year Purchasing Volume. 4.3 Guarantee in Section 7.3.1 of the Amendment. The payments provided for in Section 4.1 above are in lieu of any payment or claim for payment under Section 7.3.1 of the Agreement and, once payments have been made pursuant to Section 4.1 (b) and (c) above, the Partnership has hereby satisfied any obligation arising out of or related to such Section 7.3.1. Once payments have been made pursuant to Section 4.1 (b) and (c) above, Quorum hereby waives and releases any right, claim, action, or cause of action against the Partnership related to or arising out of Section 7.3.1 of the Agreement. 4.4 Participant Benchmarks. For the purpose of this First Amendment, the Participant Benchmarks shall be as follows for the specified time period and Contract Years: 4.4.1 For Contract Year 1997, the Participant Benchmark shall be Four Hundred Million Dollars ($400,000,000) of Purchasing Volume; 4.4.2 For Contract Year 1998, the Participant Benchmark shall be Four Hundred Forty Million Dollars ($440,000,000) of Purchasing Volume; 4.4.3 For Contract Year 1999, the Participant Benchmark shall be Four Hundred Eighty-Four Million Dollars ($484,000,000) of Purchasing Volume; and 4.4.4 For Contract Year 2000, the Participant Benchmark shall be Five Hundred Thirty-Two Million Four Hundred Thousand Dollars ($532,400,000) of Purchasing Volume. 9 5. Rebate Guarantee. Quorum hereby acknowledges and agrees that the Partnership has fully satisfied any and all obligations arising out of or related to Section 7.4.1 of the Agreement for Contract Year 1996. Section 7.4.1.3 of the Agreement is hereby deleted in its entirety, and the Partnership shall not provide, and has not provided, any guarantee with respect to Member Facility rebates for any time period after Contract Year 1996. Further, Quorum hereby waives and releases any right, claim, action, or cause of action against the Partnership related to or arising out of Section 7.4.1 of the Agreement. Notwithstanding the foregoing, the Member Facilities and the Overlap Facilities shall be entitled to rebates paid by vendors to the same extent that other Premier-affiliated facilities are entitled to rebates paid by vendors. 6. Applicant Facilities. Commencing forty-five (45) days after the Partnership's receipt of written notice from Quorum with respect to an Applicant Facility, such Applicant Facility shall have access to the Partnership's group purchasing contracts for health related supplies, equipment, and services including without limitation pharmaceuticals, dietary, medical-surgical, and capital equipment items, subject to any and all of the Partnership's current and future requirements, policies, and procedures, including without limitation its compliance policy. If any such Applicant Facility is not accepted as a Member Facility, Quorum shall include all of such Applicant Facility's purchases under the Partnership's group purchasing contracts in the calculation of the Annual Overlap Fee, as described in Section 7 hereof. 7. Overlap Providers. Any Overlap Provider shall have access to the Partnership's group purchasing contracts for health related supplies, equipment, and services including without limitation pharmaceuticals, dietary, medical-surgical, and capital equipment items, subject to any and all of the Partnership's current and future requirements, policies, and procedures, including without limitation its compliance policy. For each Overlap Provider that has access to the Partnership's group purchasing contracts, Quorum shall pay the Partnership an annual fee in an amount equal to four percent (4%) of the value of purchases made by such Overlap Providers under such contracts during the subject Contract Year ("Annual Overlap Fee(s)"). Quorum shall pay the Annual Overlap Fees for all Overlap Providers applicable to a Contract Year within one hundred twenty (120) days of the end of that Contract Year. The Annual Overlap Fee shall not exceed One Hundred Fifty Thousand Dollars ($150,000) for any one Overlap Provider per Contract Year, and the total Annual Overlap Fees for all Overlap Providers regardless of their number shall not exceed One Million Dollars ($1,000,000) per Contract Year. The Partnership use reasonable efforts to work with Quorum to minimize the number of Overlap Providers. Upon approval of any Overlap Facility as a Member Facility, purchases of such facility shall not be subject to the Annual Overlap Fee. Within ninety (90) days of the end of each Contract Year, Quorum shall provide the Partnership with a written 10 report setting forth the amount of purchases under the Partnership's contracts for that Contract Year and the amounts of Annual Overlap Fees owed to the Partnership by Quorum. Quorum shall provide the Partnership with reasonable access to its books and records for the sole purpose of verifying such purchases and the amount of Annual Overlap Fees owed to the Partnership. 8. Access to Partnership's Group Purchasing Program. Quorum agrees that it will not, without Partnership's prior written consent, contract or otherwise agree to make access to the Partnership's Group Purchasing Programs or any group purchasing contract of the Partnership available on any basis, including without limitation a wholesale, nationwide, or regional basis, to any corporation, partnership, limited partnership, joint venture, organization, association, system, network, or other entity which currently engages in any health care related business on a nationwide, regional, or statewide basis, including without limitation entities that provide physician practice management services. Notwithstanding the foregoing, Quorum may submit to the Partnership for consideration as potential Member Facilities individual locations, members, or participants in any such nationwide company or other entity. 9. Term and Termination. 9.1 Section 6.1 of the Agreement is hereby deleted in its entirety and the following new Section 6.1 shall be inserted in lieu thereof: 6.1 This Agreement shall become effective as of the Effective Date and shall continue thereafter to and including December 31, 2000, and for successive one year terms thereafter. Upon termination of this Agreement for any reason, the ability of each Member Facility and Overlap Provider to purchase through the Partnership's contracts shall immediately cease. 9.2 Section 6.2 of the Agreement is hereby deleted in its entirety and the following new Section 6.2 shall be inserted in lieu thereof: 6.2 Either Party may terminate the Agreement, without cause, upon twelve (12) months' prior written notice to the other Party. 9.3 Section 6.4.2 and subsections 6.4.2.1, 6.4.2.2, and 6.4.2.3 are deleted in their entirety and the following new Section 6.4.2 and subsections shall be inserted in lieu thereof: 6.4.2 To remove a Member Facility or Overlap Provider from participation in any Group Purchasing Program; however, prior to such removal, the Partnership shall immediately notify Quorum of the issue that warrants removal of the Member Facility or Overlap Provider. Quorum shall have a period of sixty (60) days from receipt of notice from 11 the Partnership in which to use its best efforts to correct the problem that causes potential removal. Written notice of removal shall be sent to Quorum. Removal shall be effective upon Quorum's receipt of such notice. Reasons for possible removal of Quorum or a Member Facility or Overlap Provider for cause under this Section 6.4.2 shall include, but not be limited to, the following: 6.4.2.1 An attempt by Quorum, a Member Facility or an Overlap Provider to manipulate, alter or use as a "levering device" or negotiating tactic, any purchasing contract between the Partnership, or Premier, and vendors. 6.4.2.2 Quorum negotiates or solicits contracts covering items covered in the Group Purchasing Program without the knowledge or consent of the Partnership. 6.4.2.3 Quorum is, or a Member Facility or Overlap Provider becomes a member of, or participates in, a national purchasing program providing purchasing contracts with vendors similar to the type provided by the Partnership, and Quorum is unable, after a reasonable time, to eliminate the unacceptable arrangement. 10. Notices. Quorum's address in Section 9 of the Agreement shall be amended as follows: Quorum Health Group, Inc. 103 Continental Place Brentwood, Tennessee 37027 Attn: President 11. Capitalized Terms. All capitalized terms that are not defined in this First Amendment shall have the same meaning as such terms in the Agreement. 12. Other Terms and Conditions. Except as specifically modified or amended by this First Amendment, the terms and conditions of the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this First Amendment as of the day and year first above written. PREMIER PURCHASING PARTNERS, L.P. BY ITS GENERAL PARTNER PREMIER PLANS, INC. By:____________________________________ Alan Weinstein Chairman 12 QUORUM HEALTH GROUP, INC. By:____________________________________ Name:__________________________________ Title:___________________________________ EX-11 7 COMPUTATION OF EARNINGS 1 QUORUM HEALTH GROUP, INC. AND SUBSIDIARIES EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE
YEAR ENDED JUNE 30 --------------------------------- 1997 1996 1995 -------- -------- -------- (In thousands, except per share data) PRIMARY Average shares outstanding 73,442 72,191 70,865 Net effect of dilutive stock options based on the treasury stock method using average market price 2,484 2,448 2,872 -------- -------- -------- Totals 75,926 74,639 73,737 ======== ======== ======== Income before extraordinary item $ 84,082 $ 69,232 $ 55,955 Extraordinary charges (8,197) -- -- -------- -------- -------- Net income $ 75,885 $ 69,232 $ 55,955 ======== ======== ======== Per share amounts: Income before extraordinary item $ 1.11 $ 0.93 $ 0.76 Extraordinary charges (0.11) -- -- -------- -------- -------- Net income $ 1.00 $ 0.93 $ 0.76 ======== ======== ======== FULLY DILUTED Average shares outstanding 73,442 72,191 70,865 Net effect of dilutive stock options based on the treasury stock method using the higher of ending or average market price 2,622 2,505 2,917 -------- -------- -------- Totals 76,064 74,696 73,782 ======== ======== ======== Income before extraordinary item $ 84,082 $ 69,232 $ 55,955 Extraordinary charges (8,197) -- -- -------- -------- -------- Net income $ 75,885 $ 69,232 $ 55,955 ======== ======== ======== Per share amounts: Income before extraordinary item $ 1.11 $ 0.93 $ 0.76 Extraordinary charges (0.11) -- -- -------- -------- -------- Net income $ 1.00 $ 0.93 $ 0.76 ======== ======== ========
EX-21 8 SUBSIDIARIES OF COMPANY 1 EXHIBIT 21 DIRECT AND INDIRECT SUBSIDIARIES OF QUORUM HEALTH GROUP, INC. Name State of - ---- Organization ------------ Barberton Health System LLC Delaware (d/b/a Barberton Citizens Hospital) Carolinas Medical Alliance, Inc. South Carolina Clinton County Health System LLC Delaware (d/b/a Clinton County Hospital) Desert Physicians Network, Inc. Nevada Desert Surgery Center Limited Partnership Nevada Frankfort Health Partner, Inc. Indiana Gadsden Regional Primary Care, Inc. Alabama Health Systems Associates, Inc. Tennessee Hospital Management Professionals, Inc. Tennessee IOM Health System, L.P. Indiana (d/b/a Lutheran Hospital of Indiana) Macon Industrial Medicine Center, Inc. Georgia Mary Black Health System LLC Delaware (d/b/a Mary Black Memorial Hospital) Mary Black Holding Co., Inc. South Carolina Massillon Health System LLC Delaware (d/b/a Doctors Hospital of Stark County) Middle Georgia MOB, Inc. Georgia Midlands Medical Associates, L.P. Nebraska (d/b/a Midlands Community Hospital) NC-CNH, Inc. Georgia (d/b/a Macon Northside Hospital) NC-CSH, Inc. California NC-DSH, Inc. Nevada (d/b/a Desert Springs Hospital) NC-MGH, Inc. Georgia (d/b/a Middle Georgia Hospital) NC-SCHI, Inc. Georgia (d/b/a Abilene Regional Medical Center) Northside MOB, Inc. Georgia Northside VL, Inc. Georgia Pee Dee Family Practice, Inc. South Carolina Plaza Surgery Center Limited Partnership Nevada QHG of Alabama, Inc. Alabama (d/b/a Flowers Hospital) 2 QHG of Barberton, Inc. Ohio QHG of Clinton County, Inc. Indiana QHG of Enterprise, Inc. Alabama (d/b/a Medical Center Enterprise) QHG of Forrest County, Inc. Mississippi QHG of Fort Wayne, Inc. Indiana QHG of Gadsden, Inc. Alabama (d/b/a Gadsden Regional Medical Center) QHG of Indiana, Inc. Indiana QHG of Jacksonville, Inc. Alabama (d/b/a Jacksonville Hospital) QHG of Lake City, Inc. South Carolina (d/b/a Carolinas Hospital System - Lake City) (d/b/a Carolinas Hospital System - Kingstree) QHG of Massillon, Inc. Ohio QHG of Nebraska, Inc. Nebraska QHG of Ohio, Inc. Ohio (d/b/a Park Medical Center) QHG of South Carolina, Inc. South Carolina (d/b/a Carolinas Hospital System) QHG of Spartanburg, Inc. South Carolina QHG of Texas, Inc. Texas QHR of Delaware, Inc. Delaware Quorum Health Group of Vicksburg, Inc. Tennessee Quorum Health Resources, Inc. Delaware Quorum Health Services, Inc. Delaware Quorum, Inc. Delaware River Region Medical Corporation Mississippi (d/b/a ParkView Regional Medical Center) Software Sales Corp. Tennessee Spartanburg Physician Services, Inc. South Carolina Summit Medical Group, Inc. Nevada Vicksburg Clinic, Inc. Mississippi EX-23 9 CONSENT OF ERNST & YOUNG L.L.P. 1 Exhibit 23 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements on Form S-8 pertaining to the Quorum Health Group, Inc. Stock Option and Restated Stock Purchase Plan (No. 33-38817), the Employee Stock Purchase Plan (No. 33-44474), the Directors Stock Option Plan (No. 33-46542), the Directors Stock Option Plan (No. 33-89272), the Restated Stock Option Plan (No. 33-54868), the Restated Stock Option Plan (No. 33-73288), the Restated Stock Option Plan (No. 33-89274), the Non-qualified Employee Stock Purchase Plan (No. 333-384) and the Restated Stock Option Plan (No. 333-24339), of our report dated August 4, 1997, except for Note 12, as to which the date is August 19, 1997, with respect to the consolidated financial statements and the schedule of Quorum Health Group, Inc. included in the Annual Report (Form 10-K) the year ended June 30, 1997. /s/ Ernst & Young LLP Nashville, Tennessee September 26, 1997 EX-27 10 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED CONSOLIDATED BALANCE SHEET AT JUNE 30, 1997 AND THE AUDITED CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR JUN-30-1997 JUL-01-1996 JUN-30-1997 19,008 0 304,092 55,360 31,622 331,101 870,477 183,705 1,278,991 150,619 519,940 0 0 741 517,374 1,278,991 0 1,413,946 0 1,063,112 75,875 89,919 45,601 139,439 55,357 84,082 0 (8,197) 0 75,885 1.00 1.00 EPS-PRIMARY and EPS-DILUTED before extraordinary item are $1.11
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