<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 24, 1994
REGISTRATION NO. 33-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
------------------------
COMMUNITY HEALTH SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 8060 76-0137985
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
3707 FM 1960 WEST, SUITE 500
HOUSTON, TEXAS 77068
(713) 537-5230
Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
DEBORAH G. MOFFETT
VICE PRESIDENT, FINANCE
COMMUNITY HEALTH SYSTEMS, INC.
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
ALAN JACOBS, Esq. ROBERT W. MILLER, Esq.
McGlinchey Stafford Lang King & Spalding
2777 Stemmons Frwy., Suite 925 191 Peachtree Street
Dallas, Texas 75207 Atlanta, Georgia 30303
(214) 634-3939 (404) 572-4600
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
UPON THE EFFECTIVE TIME OF THE MERGER DESCRIBED IN THE ENCLOSED JOINT PROXY
STATEMENT/PROSPECTUS.
------------------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED (1) PER SHARE (2) OFFERING PRICE (2) FEE (3)
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per
share............................... 3,564,085 $20.592 $73,392,686 $10,423.12
</TABLE>
(1) Based upon the estimated maximum number of shares of Community Common Stock
to be issued pursuant to the Merger, which is equal to (a) .97 shares times
the number of shares of Hallmark Common Stock issued and outstanding at the
Effective Time, as defined herein, (assuming the exercise of all outstanding
exercisable stock options), plus (b) 5.4 shares times the number of shares
of Hallmark Preferred Stock issued and outstanding at the Effective Time.
(2) Estimated solely for the purpose of calculating the registration fee,
pursuant to Rule 457(f).
(3) Net of offset amount of $14,885.07, pursuant to Rule 0-11(a)(2), previously
paid in connection with the filing of preliminary proxy materials on July 7,
1994.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
COMMUNITY HEALTH SYSTEMS, INC.
CROSS-REFERENCE SHEET BETWEEN JOINT PROXY STATEMENT/PROSPECTUS
AND ITEMS IN FORM S-4
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
FORM S-4 LOCATION IN
ITEM NUMBER AND CAPTION JOINT PROXY STATEMENT/PROSPECTUS
- ------------------------------------------------------------- --------------------------------------------------------
<C> <S> <C>
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus................... Forepart of Registration Statement; Outside Front Cover
Page of Joint Proxy Statement/ Prospectus
2. Inside Front and Outside Back Cover Page of
Prospectus....................................... Inside Front Cover Page of Joint Proxy
Statement/Prospectus; Available Information;
Incorporation of Certain Documents by Reference; Table
of Contents
3. Risk Factors, Ratio of Earnings to Fixed Charges
and Other Information............................ Summary; Investment Considerations; Otherwise Not
Applicable
4. Terms of the Transaction.......................... Outside Front Cover Page of Joint Proxy
Statement/Prospectus; Summary; Background of the Merger
and Related Matters; Recommendations of the Boards of
Directors and Reasons for the Merger; The Merger
5. Pro Forma Financial Information................... Summary; Pro Forma Financial Information
6. Material Contacts with the Company Being
Acquired......................................... Background of the Merger; The Merger
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters.... Not Applicable
8. Interests of Named Experts and Counsel............ Summary; Background of the Merger and Related Matters;
Experts; Legal Opinions
9. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities... Not Applicable
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3 Registrants....... Available Information; Incorporation of Certain
Documents by Reference; Summary
11. Incorporation of Certain Information by
Reference........................................ Available Information; Incorporation of Certain
Documents by Reference
12. Information with Respect to S-2 or S-3
Registrants...................................... Not Applicable
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
FORM S-4 LOCATION IN
ITEM NUMBER AND CAPTION JOINT PROXY STATEMENT/PROSPECTUS
- ------------------------------------------------------------- --------------------------------------------------------
<C> <S> <C>
13. Incorporation of Certain Information by
Reference........................................ Not Applicable
14. Information with Respect to Registrants Other Than
S-2 or S-3 Registrants........................... Not Applicable
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3 Companies......... Not Applicable
16. Information with Respect to S-2 or S-3
Companies........................................ Not Applicable
17. Information with Respect to Companies Other Than
S-2 or S-3 Companies............................. Summary; Hallmark Managements' Discussion and Analysis
of Financial Condition and Results of Operations;
Hallmark's Business; Directors and Executive Officers
of Hallmark who will become Directors of Community
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or Authorizations
are to be Solicited.............................. Outside Front Cover Page of Joint Proxy
Statement/Prospectus; Available Information;
Incorporation of Certain Documents by Reference;
Summary; Introduction; The Merger
19. Information if Proxies, Consents or Authorizations
are not to be Solicited or in an Exchange
Offer............................................ Not Applicable
</TABLE>
ii
<PAGE>
August 26, 1994
To the Stockholders of Community Health Systems, Inc.:
You are cordially invited to attend a Special Meeting of Stockholders (the
"Community Special Meeting") of Community Health Systems, Inc. ("Community") to
be held on October 5, 1994, at 10:00 a.m., local time, at the Ritz-Carlton
Hotel, 181 Peachtree Street, N.E., Atlanta, Georgia 30303.
At the Community Special Meeting, you will be asked to consider and vote on
a proposal providing for the merger (the "Merger") of Hallmark Healthcare
Corporation ("Hallmark") with and into Community Acquisition Corp., a
wholly-owned subsidiary of Community ("Acquisition Corp."), which will succeed
to all of Hallmark's business and properties, pursuant to the terms of an
Amended and Restated Agreement and Plan of Merger, dated as of June 10, 1994, by
and among Community, Acquisition Corp. and Hallmark (the "Merger Agreement").
Under the terms of the Merger Agreement, holders of Hallmark Class A Common
Stock and Hallmark Class B Common Stock owned as of the effective time of the
Merger will receive .97 shares of Community Common Stock for each share owned
and holders of Hallmark Preferred Stock owned as of the effective time of the
Merger will receive 5.4 shares of Community Common Stock for each share owned.
Details of the proposal are set forth in the accompanying Joint Proxy
Statement/Prospectus, which you should read carefully.
AFTER CAREFUL CONSIDERATION, THE BOARD OF DIRECTORS OF COMMUNITY HAS
UNANIMOUSLY APPROVED THE MERGER AND RELATED MERGER AGREEMENT AS IN THE BEST
INTERESTS OF COMMUNITY AND ITS STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT ALL
STOCKHOLDERS VOTE FOR ITS ADOPTION. THE BOARD OF DIRECTORS OF COMMUNITY HAS BEEN
ADVISED BY LEHMAN BROTHERS, INC. THAT, IN ITS OPINION, THE CONSIDERATION TO BE
PAID BY COMMUNITY IN THE MERGER IS FAIR, FROM A FINANCIAL POINT OF VIEW, TO
COMMUNITY AS OF THE DATE OF SUCH OPINION.
All stockholders are invited to attend the Community Special Meeting in
person. The affirmative vote of a majority of the outstanding shares of
Community Common Stock will be necessary for approval and adoption of the
proposal.
IN ORDER THAT YOUR SHARES MAY BE REPRESENTED AT THE COMMUNITY SPECIAL
MEETING, YOU ARE URGED TO PROMPTLY COMPLETE, SIGN, DATE AND RETURN THE
ACCOMPANYING PROXY IN THE ENCLOSED ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND
THE COMMUNITY SPECIAL MEETING. If you attend the Community Special Meeting in
person you may, if you wish, vote personally on all matters brought before the
Community Special Meeting even if you have previously returned your Proxy.
<TABLE>
<S> <C>
Sincerely,
Richard E. Ragsdale E. Thomas Chaney
CHAIRMAN OF THE BOARD PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
YOUR VOTE IS IMPORTANT
PLEASE SIGN, DATE AND RETURN YOUR PROXY
<PAGE>
COMMUNITY HEALTH SYSTEMS, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 5, 1994
To the Stockholders of Community Health Systems, Inc.:
Notice is hereby given that a Special Meeting of Stockholders (the
"Community Special Meeting") of Community Health Systems, Inc., a Delaware
corporation ("Community"), will be held on October 5, 1994, at 10:00 a.m., local
time, at the Ritz-Carlton Hotel, 181 Peachtree Street, N.E., Atlanta, Georgia
30303, for the following purposes:
(1) To consider and vote on a proposal to approve and adopt an Amended and
Restated Agreement and Plan of Merger, dated as of June 10, 1994 (the
"Merger Agreement"), by and among Community, Community Acquisition
Corp., a Delaware corporation ("Acquisition Corp."), and Hallmark
Healthcare Corporation, a Delaware corporation ("Hallmark"), and, as
contemplated thereby, the merger of Hallmark with and into Acquisition
Corp. (the "Merger"), in connection with which (i) each outstanding
share of Hallmark's Class A Common Stock, $.05 par value per share, and
Class B Common Stock, $.05 par value per share, will be converted into
the right to receive .97 shares of Community's Common Stock, $.01 par
value per share ("Community Common Stock"); and (ii) each outstanding
share of Hallmark's 25% Participating Cumulative Convertible Redeemable
Preferred Stock, $5 par value per share, will be converted into the
right to receive 5.4 shares of Community Common Stock, as more fully
described in the accompanying Joint Proxy Statement/ Prospectus; and
(2) To transact such other business as may properly come before the
Community Special Meeting or any adjournment thereof.
In connection with proposal (1) above, Community and Hallmark reserve the
right to change the structure of the Merger so that Acquisition Corp. would
merge into Hallmark rather than Hallmark merging into Acquisition Corp.
Stockholder approval of the Merger Agreement shall be deemed to include approval
of this alternative structure of the Merger, as described in the Joint Proxy
Statement/Prospectus.
The Board of Directors of Community has fixed the close of business on
August 26, 1994, as the record date for the determination of stockholders
entitled to notice of and to vote at the Community Special Meeting, and only
stockholders of record at such time will be entitled to notice of and to vote at
the Community Special Meeting. A list of Community stockholders entitled to vote
at the Meeting will be available for examination, during ordinary business
hours, at the principal offices of Community Health Systems, Inc., 3707 FM 1960
West, Suite 500, Houston, Texas 77068, for ten days prior to the Community
Special Meeting.
A form of Proxy and Joint Proxy Statement/Prospectus containing more
detailed information with respect to the matters to be considered at the
Community Special Meeting accompany this notice.
You are cordially invited and urged to attend the Community Special Meeting
in person, but if you are unable to do so, please complete, sign, date and
promptly return the enclosed Proxy in the enclosed, self-addressed, stamped
envelope. If you attend the Community Special Meeting and desire to revoke your
Proxy and vote in person you may do so. In any event, a Proxy may be revoked at
any time before it is voted.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE IN FAVOR OF THE ABOVE
PROPOSAL.
IN ORDER TO ASSURE YOUR REPRESENTATION AT THE MEETING, PLEASE COMPLETE,
SIGN, DATE AND MAIL PROMPTLY THE ENCLOSED PROXY, WHICH IS BEING SOLICITED BY THE
BOARD OF DIRECTORS, WHETHER OR NOT YOU PLAN TO ATTEND THE COMMUNITY SPECIAL
MEETING. AN ADDRESSED ENVELOPE WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED
STATES IS ENCLOSED FOR THAT PURPOSE.
By Order of the Board of Directors,
Linda K. Parsons
SECRETARY
Houston, Texas
August 26, 1994
<PAGE>
[HALLMARK HEALTHCARE CORPORATION LETTERHEAD]
August 26, 1994
Dear Stockholder:
We cordially invite you to attend an important Special Meeting of the
Stockholders of Hallmark Healthcare Corporation ("Hallmark") to be held on
Wednesday, October 5, 1994, at 10:00 a.m., local time, at 191 Peachtree Street,
50th Floor, Atlanta, Georgia 30303.
At this important meeting, you will be asked to consider and vote upon the
proposed merger of Hallmark into a wholly-owned subsidiary of Community Health
Systems, Inc. ("Community"). If the merger is consummated, Hallmark will be
merged with and into a wholly-owned subsidiary of Community, which will succeed
to all of Hallmark's business and properties. Following the merger, the
stockholders of Hallmark will own approximately 22.5% of the then outstanding
shares of Community Common Stock.
The Amended and Restated Agreement and Plan of Merger, dated as of June 10,
1994 (the "Merger Agreement"), provides for an exchange ratio of .97 shares of
Community Common Stock for each share of Hallmark Common Stock and 5.4 shares of
Community Common Stock for each share of Hallmark Preferred Stock. The
accompanying Joint Proxy Statement/Prospectus contains additional information
regarding the proposed merger.
THE HALLMARK BOARD OF DIRECTORS HAS UNANIMOUSLY CONCLUDED THAT THE PROPOSED
MERGER IS IN THE BEST INTERESTS OF HALLMARK AND ITS STOCKHOLDERS AND RECOMMENDS
THAT YOU VOTE FOR THE PROPOSAL TO APPROVE THE MERGER. MABON SECURITIES CORP. HAS
ADVISED THE BOARD OF DIRECTORS THAT, IN ITS OPINION, BASED ON MARKET AND
ECONOMIC CONDITIONS PREVAILING ON THE DATE OF SUCH OPINION, THE MERGER IS FAIR
TO THE HOLDERS OF OUR COMMON STOCK FROM A FINANCIAL POINT OF VIEW. MABON
SECURITIES CORP. DID NOT RENDER AN OPINION REGARDING THE FAIRNESS OF THE MERGER
TO THE HOLDERS OF OUR PREFERRED STOCK. HOWEVER, AT THE BOARD'S REQUEST, MABON
SECURITIES CORP. ADVISED THE BOARD OF DIRECTORS OF THE RESULTS OF VALUING OUR
PREFERRED STOCK USING SEVERAL METHODOLOGIES COMMONLY USED TO VALUE SIMILAR
SECURITIES. THE WORK DONE BY MABON WITH REFERENCE TO THE HALLMARK PREFERRED
STOCK WAS LIMITED IN SCOPE AND DID NOT ADDRESS THE FAIRNESS OF THE MERGER, FROM
A FINANCIAL POINT OF VIEW, TO THE HOLDERS OF HALLMARK PREFERRED STOCK. YOUR
BOARD OF DIRECTORS CONSIDERED SUCH ANALYSIS, AS WELL AS OTHER FACTORS, IN
DECIDING TO RECOMMEND THE MERGER TO THE HOLDERS OF OUR PREFERRED STOCK. THE
BOARD OF DIRECTORS OF HALLMARK HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND
UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS OF HALLMARK VOTE FOR THE PROPOSAL TO
APPROVE AND ADOPT THE MERGER AND THE MERGER AGREEMENT.
The enclosed Joint Proxy Statement/Prospectus contains detailed information
concerning the Special Meeting and the merger. Please give this information your
careful attention.
Your vote is very important to Hallmark.
It is important that your shares be represented at the Special Meeting
either in person or by proxy. To ensure such representation, please complete,
sign and date the enclosed Proxy Card and return it in the enclosed stamped and
addressed envelope, whether or not you plan to attend the Special Meeting. If
you attend the Special Meeting, you may vote in person if you wish, even if you
have previously returned your Proxy Card. Your prompt cooperation will be
greatly appreciated.
Sincerely,
James T. McAfee, Jr.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
<PAGE>
HALLMARK HEALTHCARE CORPORATION
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD OCTOBER 5, 1994
To the Stockholders of Hallmark Healthcare Corporation:
Notice is hereby given that a Special Meeting of Stockholders (the
"Meeting") of Hallmark Healthcare Corporation, a Delaware corporation
("Hallmark"), will be held at 191 Peachtree Street, 50th Floor, Atlanta, Georgia
30303, on October 5, 1994, at 10:00 a.m., local time.
The purpose of the Meeting is as follows:
1. APPROVAL OF MERGER. To consider and vote upon the approval and adoption
of the Amended and Restated Agreement and Plan of Merger, dated as of June 10,
1994 (the "Merger Agreement"), by and among Hallmark, Community Acquisition
Corp., a Delaware corporation ("Acquisition Corp."), and Community Health
Systems, Inc., a Delaware corporation ("Community"). Pursuant to the Merger
Agreement, (i) Hallmark will be merged with and into Acquisition Corp. (the
"Merger"); (ii) each outstanding share of Hallmark's Class A Common Stock, $.05
par value per share ("Hallmark Class A Common Stock"), and Class B Common Stock,
$.05 par value per share, will be converted into the right to receive .97 shares
of Community's Common Stock, $.01 par value per share ("Community Common
Stock"); and (iii) each outstanding share of Hallmark's 25% Participating
Cumulative Convertible Redeemable Preferred Stock, $5 par value per share
("Hallmark Preferred Stock"), will be converted into the right to receive 5.4
shares of Community Common Stock. Cash will be paid in lieu of any fractional
shares of Community Common Stock otherwise issuable in the Merger.
2. OTHER BUSINESS. To transact such other business as may properly come
before the Meeting or any adjournment or adjournments thereof.
In connection with proposal 1 above, Community and Hallmark reserve the
right to change the structure of the Merger so that Acquisition Corp. would
merge into Hallmark rather than Hallmark merging into Acquisition Corp.
Stockholder approval of the Merger Agreement shall be deemed to include approval
of this alternative structure of the Merger, as described in the Joint Proxy
Statement/Prospectus.
Only holders of Hallmark Class A Common Stock and Hallmark Preferred Stock
of record at the close of business on August 26, 1994 ("Hallmark Stockholders")
will be entitled to vote at the Meeting or any adjournment or adjournments. A
list of Hallmark Stockholders entitled to vote at the Meeting will be available
for examination, during normal business hours, at the principal offices of
Hallmark, 300 Galleria Parkway, Suite 650, Atlanta, Georgia 30339 for ten days
prior to the Meeting.
UPON COMPLIANCE WITH THE PROVISIONS OF THE DELAWARE GENERAL CORPORATION LAW
REGARDING APPRAISAL RIGHTS, HOLDERS OF HALLMARK PREFERRED STOCK ARE ENTITLED TO
DISSENT FROM THE MERGER AND RECEIVE THE STATUTORY FAIR VALUE OF THEIR SHARES.
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND IN PERSON, WE
REQUEST THAT YOU COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD USING
THE ENCLOSED PRE-ADDRESSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE
UNITED STATES. YOUR PROXY IS BEING SOLICITED BY THE BOARD OF DIRECTORS OF
HALLMARK.
THE BOARD OF DIRECTORS OF HALLMARK UNANIMOUSLY RECOMMENDS THAT HALLMARK
STOCKHOLDERS VOTE TO APPROVE AND ADOPT THE MERGER AGREEMENT. SEE "BACKGROUND OF
THE MERGER AND RELATED MATTERS -- RECOMMENDATIONS OF THE BOARD OF DIRECTORS" IN
THE ENCLOSED JOINT PROXY STATEMENT/PROSPECTUS.
By Order of the Board of Directors
Maria Robinson
SECRETARY
Atlanta, Georgia
August 26, 1994
<PAGE>
PROSPECTUS
COMMUNITY HEALTH SYSTEMS, INC.
HALLMARK HEALTHCARE CORPORATION
------------------
JOINT PROXY STATEMENT
------------------------
FOR SPECIAL MEETINGS OF THEIR RESPECTIVE STOCKHOLDERS
TO BE HELD ON OCTOBER 5, 1994
------------------------
This Joint Proxy Statement/Prospectus is being furnished to the stockholders
of Community Health Systems, Inc., a Delaware corporation ("Community"), in
connection with the solicitation of proxies by the Board of Directors of
Community from holders of outstanding shares of Community Common Stock, par
value $.01 per share (the "Community Common Stock"), for use at the special
meeting of stockholders of Community to be held on Wednesday, October 5, 1994 at
10:00 a.m., local time, at the Ritz-Carlton Hotel, 181 Peachtree Street, N.E.,
Atlanta, Georgia 30303, and at any and all adjournments thereof (the "Community
Special Meeting") for the purposes set forth below and in the accompanying
notice. This Joint Proxy Statement/Prospectus is also being furnished to the
stockholders of Hallmark Healthcare Corporation, a Delaware corporation
("Hallmark"), in connection with the solicitation of proxies by the Board of
Directors of Hallmark from holders of outstanding shares of Hallmark Class A
Common Stock, par value $.05 per share (the "Hallmark Class A Common Stock"),
and from the holders of outstanding shares of Hallmark 25% Participating
Cumulative Convertible Redeemable Preferred Stock, $5 par value per share (the
"Hallmark Preferred Stock") (the Hallmark Class A Common Stock and the Hallmark
Preferred Stock are referred to collectively as the "Hallmark Voting Stock"),
for use at the special meeting of stockholders of Hallmark scheduled to be held
on Wednesday, October 5, 1994, at 10:00 a.m., local time, at 191 Peachtree
Street, 50th Floor, Atlanta, Georgia and at any and all adjournments thereof
(the "Hallmark Special Meeting") (the Community Special Meeting and the Hallmark
Special Meeting are hereinafter referred to collectively as the "Special
Meetings"). This Joint Proxy Statement/Prospectus will first be mailed to
stockholders of Community and Hallmark on or about September 2, 1994.
This Joint Proxy Statement/Prospectus relates to the proposed merger (the
"Merger") of Hallmark into Community Acquisition Corp., a Delaware corporation
("Acquisition Corp."), a newly formed, wholly-owned subsidiary of Community. If
the Merger is consummated, each outstanding share of Hallmark Class A Common
Stock and each outstanding share of Hallmark Class B Common Stock, par value
$.05 per share (the "Hallmark Class B Common Stock") (the Hallmark Class A
Common Stock and the Hallmark Class B Common Stock are referred to collectively
as the "Hallmark Common Stock"), will be converted into the right to receive .97
shares of Community Common Stock and each outstanding share of Hallmark
Preferred Stock (other than shares held by stockholders who perfect their
appraisal rights under Delaware law and do not subsequently withdraw, lose or
forfeit such rights) will be converted into the right to receive 5.4 shares of
Community Common Stock. The exchange ratios are fixed and will not increase or
decrease by reason of fluctuations in the market price of Community Common Stock
or Hallmark Common Stock.
Community has filed a registration statement on Form S-4 (herein, together
with all amendments and exhibits thereto referred to as the "Registration
Statement") under the Securities Act of 1933 (the "Securities Act") with the
Securities and Exchange Commission (the "Commission") covering the shares of
Community Common Stock to be issued in connection with the Merger. This Joint
Proxy Statement/Prospectus also constitutes the Prospectus of Community filed as
part of the Registration Statement related to the 3,564,085 shares of Community
Common Stock to be issued pursuant to the Amended and Restated Agreement and
Plan of Merger, dated as of June 10, 1994, by and among Community, Acquisition
Corp. and Hallmark. THERE ARE CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN
COMMUNITY COMMON STOCK. FOR A DISCUSSION OF SUCH RISKS, SEE "INVESTMENT
CONSIDERATIONS."
No person has been authorized to give any information or to make any
representation other than as contained in this Joint Proxy Statement/Prospectus
in connection with the offer of Community Common Stock to be issued in
connection with the Merger, and, if given or made, such information or
representation must not be relied upon as having been authorized by Community or
Hallmark. This Joint Proxy Statement/Prospectus does not constitute an offer to
sell or a solicitation of an offer to purchase such stock in any jurisdiction in
which such offer or solicitation is not authorized or in which the person making
such offer or solicitation is not qualified to do so or to any person to whom it
would be unlawful. Neither the delivery of this Joint Proxy Statement/Prospectus
nor any distribution of such stock shall, under any circumstances, create any
implication that the information contained herein is correct as of any time
subsequent to the date hereof.
THE SHARES OF COMMUNITY COMMON STOCK TO BE ISSUED IN THE MERGER HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS IS AUGUST 26, 1994.
<PAGE>
AVAILABLE INFORMATION
Both Community and Hallmark are subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, file reports, proxy statements and other information with
the Commission. Copies of such material can be obtained from the Public
Reference Section of the Commission, at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, at prescribed rates. In addition, such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities referred to above and at Regional Offices of the Commission
located at Room 1400, Northwestern Atrium Center, 500 West Madison Street,
Chicago, Illinois 60661 and Seven World Trade Center, New York, New York 10048.
Community has filed with the Commission the Registration Statement under the
Securities Act. This Joint Proxy Statement/Prospectus does not contain all of
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission. For
further information, reference is hereby made to the Registration Statement.
Statements contained in this Joint Proxy Statement/Prospectus as to the contents
of any contract or other document referred to are not necessarily complete and
in each instance reference is made to the copy of such contract or document
included as an Appendix to this Joint Proxy Statement/ Prospectus or filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference.
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF THESE DOCUMENTS
(OTHER THAN EXHIBITS TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE INTO SUCH DOCUMENTS) ARE AVAILABLE WITHOUT CHARGE,
UPON WRITTEN OR ORAL REQUEST, FROM LINDA K. PARSONS, SECRETARY, COMMUNITY HEALTH
SYSTEMS, INC., 3707 FM 1960 WEST, SUITE 500, HOUSTON, TEXAS 77068-5704;
TELEPHONE NO. (713) 537-5230. IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS PRIOR TO THE COMMUNITY SPECIAL MEETING, ANY SUCH REQUEST SHOULD BE
MADE BY SEPTEMBER 26, 1994.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following Community documents are incorporated by reference herein:
1. Annual Report on Form 10-K for the year ended December 31, 1993 (the
"1993 Community 10-K").
2. The portions of the Proxy Statement for the Annual Meeting of
Stockholders held April 28, 1994 that have been incorporated by
reference in the 1993 Community 10-K.
3. Quarterly Report on Form 10-Q for the quarter ended March 31, 1994.
4. Quarterly Report on Form 10-Q for the quarter ended June 30, 1994.
5. The description of the Community Common Stock contained in the
Registration Statement on Form 8-A of Community, dated March 1, 1991.
All documents filed by Community with the Commission pursuant to Sections
13(a), 13(c), 14 and 15(d) of the Exchange Act after the date hereof and prior
to the date of the Community Special Meeting shall be deemed to be incorporated
by reference herein and shall be a part hereof from the date of filing of such
documents. Any statements contained in a document incorporated by reference
herein or contained in this Joint Proxy Statement/Prospectus shall be deemed to
be modified or superseded for purposes hereof to the extent that a statement
contained herein (or in any other subsequently filed document which also is
incorporated by reference herein) modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed to constitute a part
hereof except as so modified or superseded.
2
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TABLE OF CONTENTS
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AVAILABLE INFORMATION...................................................................................... 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................................................ 2
SUMMARY.................................................................................................... 5
General.................................................................................................. 5
The Companies............................................................................................ 6
The Stockholders' Meetings............................................................................... 6
The Merger............................................................................................... 7
Accounting Treatment..................................................................................... 10
Exchange of Certificates................................................................................. 10
Federal Income Tax Consequences.......................................................................... 10
Appraisal Rights......................................................................................... 10
Selected Consolidated Historical Financial and Operating Information..................................... 11
Selected Unaudited Pro Forma Combined Financial Information.............................................. 15
Comparative Per Share Information........................................................................ 17
Recent Stock Prices...................................................................................... 18
Recent Developments...................................................................................... 19
INVESTMENT CONSIDERATIONS.................................................................................. 20
Healthcare Reform........................................................................................ 20
Reimbursement and Regulatory Matters..................................................................... 20
Dependence on Healthcare Professionals................................................................... 21
Expansion through Acquisition............................................................................ 22
Competition.............................................................................................. 22
Liability Insurance...................................................................................... 22
Leverage................................................................................................. 22
INTRODUCTION............................................................................................... 23
General.................................................................................................. 23
Voting and Proxies....................................................................................... 24
BACKGROUND OF THE MERGER AND RELATED MATTERS............................................................... 26
Background of the Merger................................................................................. 26
Reasons for the Merger................................................................................... 27
Recommendations of the Boards of Directors............................................................... 28
Opinions of Financial Advisors........................................................................... 30
Interests of Certain Persons in the Merger............................................................... 37
THE MERGER................................................................................................. 39
General.................................................................................................. 39
Merger Consideration..................................................................................... 39
Effective Time of the Merger............................................................................. 40
Exchange of Hallmark Stock Certificates.................................................................. 40
No Fractional Shares..................................................................................... 41
Treatment of Hallmark Stock Options...................................................................... 41
Conditions to the Merger................................................................................. 42
Amendment of the Merger Agreement; Waiver of Conditions.................................................. 42
Alternative Merger Structure............................................................................. 43
Termination.............................................................................................. 43
Fees and Expenses........................................................................................ 44
Certain Covenants........................................................................................ 45
Representations and Warranties........................................................................... 46
Tender Offer for the Senior Subordinated Notes........................................................... 46
Resale of Community Common Stock......................................................................... 46
Accounting Treatment..................................................................................... 47
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Certain Regulatory Matters............................................................................... 47
Indemnification and Insurance............................................................................ 47
Delisting of Hallmark Common Stock....................................................................... 48
Federal Income Tax Consequences.......................................................................... 48
Appraisal Rights......................................................................................... 49
Comparison of Rights of Holders of Community Common Stock and Hallmark Common Stock...................... 52
Comparison of Rights of Holders of Community Common Stock and Hallmark Preferred Stock................... 55
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS................................................ 57
HALLMARK MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 63
Overview................................................................................................. 63
Results of Operations.................................................................................... 65
Tax Matters.............................................................................................. 68
Liquidity and Capital Resources.......................................................................... 68
HALLMARK'S BUSINESS........................................................................................ 70
General.................................................................................................. 70
Industry Overview........................................................................................ 70
Business Strategy........................................................................................ 71
Patient Services......................................................................................... 72
Sources of Revenue....................................................................................... 73
Managed Care and Marketing............................................................................... 74
Facilities............................................................................................... 74
Competition.............................................................................................. 75
Employees and Medical Staffs............................................................................. 76
Reimbursement and Regulatory Matters..................................................................... 76
Liability Insurance...................................................................................... 81
History of Hallmark...................................................................................... 81
Other.................................................................................................... 82
STOCK OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT OF HALLMARK....................................... 83
DIRECTORS AND EXECUTIVE OFFICERS OF HALLMARK WHO WILL BECOME DIRECTORS OF COMMUNITY........................ 84
General.................................................................................................. 84
Executive Compensation................................................................................... 84
Employment Contract...................................................................................... 86
Directors' Fees and Compensation......................................................................... 87
Compensation Committee Interlocks and Insider Participation.............................................. 88
Certain Transactions..................................................................................... 88
EXPERTS.................................................................................................... 88
LEGAL OPINIONS............................................................................................. 88
DATES FOR SUBMISSION OF STOCKHOLDER PROPOSALS.............................................................. 89
INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1
APPENDIX A: MERGER AGREEMENT.............................................................................. A-1
APPENDIX B: SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW........................................... B-1
APPENDIX C: FAIRNESS OPINION OF LEHMAN BROTHERS........................................................... C-1
APPENDIX D: FAIRNESS OPINION OF MABON SECURITIES CORP. ................................................... D-1
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SUMMARY
THE FOLLOWING IS A BRIEF SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE
IN THIS JOINT PROXY STATEMENT/PROSPECTUS. THIS SUMMARY IS NOT INTENDED TO BE
COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, AND SHOULD BE READ IN
CONJUNCTION WITH, THE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING
ELSEWHERE OR INCORPORATED BY REFERENCE IN THIS JOINT PROXY STATEMENT/PROSPECTUS.
STOCKHOLDERS ARE URGED TO REVIEW THE ENTIRE JOINT PROXY STATEMENT/PROSPECTUS,
INCLUDING THE APPENDICES.
GENERAL
This Joint Proxy Statement/Prospectus relates to the proposed Merger of
Hallmark with and into Acquisition Corp. If the Merger is consummated,
Acquisition Corp. will be the surviving entity and will succeed to all of
Hallmark's business and properties. The Merger will be effected pursuant to an
Amended and Restated Agreement and Plan of Merger, dated as of June 10, 1994
(the "Merger Agreement"), by and among Community, Acquisition Corp. and
Hallmark. The Merger Agreement provides that Community and Hallmark may mutually
agree to change the structure of the Merger so that Acquisition Corp. would
merge with and into Hallmark, with the result that Hallmark would be the
surviving entity in the Merger. Any such change in the merger structure would
have no effect on the exchange ratios or other material provisions of the Merger
Agreement. See "The Merger -- Alternative Merger Structure." A copy of the
Merger Agreement is attached hereto as Appendix A. See "The Merger."
If the Merger is consummated, each outstanding share of Hallmark Common
Stock will be converted into the right to receive .97 shares of Community Common
Stock and each outstanding share of Hallmark Preferred Stock (other than shares
held by stockholders who perfect their appraisal rights under Delaware law and
do not subsequently withdraw, lose or forfeit such rights) will be converted
into the right to receive 5.4 shares of Community Common Stock. The exchange
ratios are fixed and will not increase or decrease by reason of fluctuations in
the market price of Community Common Stock or Hallmark Common Stock. Fractional
shares will not be issued in the Merger, but, in lieu thereof, cash will be paid
in respect of a fraction of a share of Community Common Stock.
In connection with the Merger, cash payments in the aggregate amount of
$4,071,330 will be payable by Community pursuant to certain rights on the part
of certain of Hallmark's executive officers and directors to severance payments,
bonuses and benefits and to stipends. In addition, Community or an affiliate of
Community will be required to make a tender offer for any or all of Hallmark's
10 5/8% Senior Subordinated Notes due 2003 (the "Senior Subordinated Notes") in
the aggregate principal amount of $80,000,000, which could involve a total cash
outlay of approximately $81,000,000. Community or Hallmark may also be subject
to an additional cash outlay in respect of approximately 32,301 shares of
Hallmark Preferred Stock, if holders of such shares exercise their appraisal
rights. The exact amount of this cash outlay cannot be ascertained, and could be
more than, the same as, or less than the value of the merger consideration such
holders of Hallmark Preferred Stock would otherwise be entitled to receive
pursuant to the Merger Agreement. If the fair value of such shares of Hallmark
Preferred Stock was determined to be equal to the value of the merger
consideration computed as of August 15, 1994, and if all holders of Hallmark
Preferred Stock exercise their appraisal rights, such cash outlay would be
approximately $3,700,000. See "Background of the Merger and Related Matters --
Interests of Certain Persons in the Merger" and "The Merger -- Tender Offer for
Hallmark Notes" and "-- Appraisal Rights."
As of August 15, 1994, the unpaid and accumulated dividends on the Hallmark
Preferred Stock amounted to approximately $686,000 or $21.25 per share of
Hallmark Preferred Stock outstanding on such date. Upon consummation of the
Merger, any right that holders of Hallmark Preferred Stock may have had to
receive such unpaid and accumulated dividends, upon redemption of the Hallmark
Preferred Stock or otherwise, will terminate. Following the Effective Time (as
defined herein), shares of Hallmark Preferred Stock will represent only the
right to receive shares of Community Common Stock at the exchange ratio set
forth above. Holders of Hallmark Preferred Stock are entitled to appraisal
rights pursuant to Delaware law. See "The Merger -- Appraisal Rights."
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Assuming the Merger is consummated and no holder of Hallmark Preferred Stock
perfects appraisal rights, the outstanding shares of Hallmark Common Stock and
Hallmark Preferred Stock as of the Effective Time will be converted into the
right to receive an aggregate of approximately 3,321,000 shares of Community
Common Stock, representing approximately 22.5% of the outstanding shares. As a
result of the Merger, Hallmark's assets, equity, net operating revenues and
income from continuing operations as of and for the six months ended June 30,
1994 will represent 35.8%, 27.3%, 41.1% and 19.0%, respectively, of Community's
total assets, stockholders' equity, net operating revenues and income from
continuing operations on a pro forma basis for such period. See "The Merger."
THE COMPANIES
COMMUNITY HEALTH SYSTEMS, INC. Community is a healthcare services company
that is primarily engaged in owning and operating full-service acute-care
hospitals that provide primary healthcare services in communities generally
located outside urban areas. At June 30, 1994, Community operated 19 general
acute-care and one psychiatric hospitals, with a total of 1,836 licensed beds in
12 states, primarily in the southeastern and southwestern United States. Of the
20 hospitals currently operated, 13 are owned, three are leased and four are
managed.
Community's principal executive offices are located at 3707 FM 1960 West,
Suite 500, Houston, Texas 77068, and its telephone number at such address is
(713) 537-5230.
HALLMARK HEALTHCARE CORPORATION. Hallmark is a hospital management company
engaged in the business of providing a broad range of healthcare services
primarily to patients in non-urban communities. As of June 30, 1994, Hallmark
operated 17 hospitals with an aggregate capacity of 1,405 licensed beds.
Hallmark's hospitals are located in non-urban communities in eight states,
primarily in the southern United States. Of Hallmark's 17 hospitals, 15 are
owned and two are leased. Hallmark also manages one acute-care hospital,
operates one nursing home, owns another nursing home, and, through a
majority-owned subsidiary, manages pain treatment centers in hospitals owned by
other companies.
From its organization in 1981 through late 1986, Hallmark experienced rapid
growth, primarily through acquisitions of existing hospitals. During this
period, Hallmark acquired 32 hospitals and eight nursing homes. The expansion
was funded primarily by public equity and debt offerings and bank borrowings. By
late 1986, Hallmark was having operating and financial problems due to its rapid
growth and financial leverage and, in late 1987, failed to make required
payments on certain of its debt. Beginning in 1987, Hallmark employed new senior
management to address its operational and financial problems. Under new senior
management, Hallmark completed the restructuring of its public debt and, between
1989 and 1993, repaid approximately $34,900,000 of its bank debt; since 1987,
sold or otherwise disposed of 15 hospitals and six nursing homes; and
established improved operational and financial controls. In November 1993,
Hallmark refinanced its bank and subordinated debt by issuing the Senior
Subordinated Notes in principal amount of $80,000,000 and entered into a new
$25,000,000 senior credit agreement. No borrowings have been made under the new
credit agreement.
Hallmark is a Delaware corporation and was incorporated in 1981. Hallmark
began operating under its present name in 1992. Prior to that time, it operated
under the name National Healthcare, Inc. Hallmark's principal executive offices
are located at 300 Galleria Parkway, Suite 650, Atlanta, Georgia 30339 and its
telephone number is (404) 933-5500.
THE STOCKHOLDERS' MEETINGS
COMMUNITY. The Community Special Meeting will be held on Wednesday, October
5, 1994, at 10:00 a.m., local time, at the Ritz-Carlton Hotel, 181 Peachtree
Street, N.E., Atlanta, Georgia 30303. At the Community Special Meeting, holders
of shares of Community Common Stock will consider and vote upon a proposal to
approve the Merger and the Merger Agreement. See "Introduction -- General." The
record date for stockholders of Community entitled to notice of and to vote at
the Community Special Meeting is as of the close of business on August 26, 1994.
Voting rights for Community are vested in the holders of the Community Common
Stock, with each share of Community Common Stock entitled to one vote on each
matter coming before the stockholders. As of
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August 26, 1994, there were 11,442,496 shares of Community Common Stock
outstanding and approximately 68 holders of record of Community Common Stock.
The favorable vote of the holders of a majority of the outstanding shares of
Community Common Stock is required for the approval of the Merger and the Merger
Agreement. As of August 26, 1994, directors, executive officers and affiliates
of Community were beneficial owners of approximately 10.1% of the outstanding
shares of Community Common Stock. Such directors, executive officers and
affiliates of Community have indicated that they intend to vote for approval of
the Merger and the Merger Agreement.
HALLMARK. The Hallmark Special Meeting will be held on Wednesday, October
5, 1994, at 10:00 a.m., local time at 191 Peachtree Street, 50th Floor, Atlanta,
Georgia 30303. At the Hallmark Special Meeting, holders of shares of Hallmark
Class A Common Stock and Hallmark Preferred Stock will consider and vote upon a
proposal to approve and adopt the Merger and the Merger Agreement. See
"Introduction -- General." All holders of Hallmark Common Stock and Hallmark
Preferred Stock are entitled to notice of the Hallmark Special Meeting; however,
only holders of Hallmark Voting Stock at the close of business on August 26,
1994 will be entitled to vote at the Hallmark Special Meeting. As of such date,
there were [3,179,764] shares of Hallmark Class A Common Stock outstanding held
by approximately 800 holders of record and 32,301 shares of Hallmark Preferred
Stock outstanding held by approximately 1,500 holders of record. Holders of
Hallmark Voting Stock of record on the record date are entitled to one vote per
share on any matter that may properly come before the Hallmark Special Meeting.
Approval and adoption of the Merger and the Merger Agreement requires the
affirmative vote of the holders of a majority of the shares of Hallmark Class A
Common Stock and Hallmark Preferred Stock outstanding on the record date, voting
together as a single class. As of the record date, Hallmark's executive officers
and directors (as a group) owned and had the right to vote an aggregate of
383,053 shares of Hallmark Class A Common Stock and an aggregate of 2,026 shares
of Hallmark Preferred Stock. The shares of Hallmark Class A Common Stock and
Hallmark Preferred Stock owned by Hallmark's executive officers and directors
represented approximately 11.8% of the shares of Hallmark Voting Stock
outstanding on the record date. Assuming that Hallmark's Board of Directors has
not withdrawn or modified its recommendation that holders of Hallmark Voting
Stock vote for approval of the Merger and the Merger Agreement as of the date of
the Hallmark Special Meeting, each such director and executive officer is
obligated to vote his shares of Hallmark Voting Stock to approve the Merger and
the Merger Agreement.
THE MERGER
BACKGROUND OF THE MERGER. In March 1994, representatives of Community and
Hallmark held preliminary meetings to discuss the possible advantages to each
corporation of the Merger. Such meetings continued in April and May 1994 and
culminated in the negotiation from June 8 through June 10, 1994 of definitive
terms and agreements. The Boards of Directors of Community and Hallmark approved
the Merger on June 10, 1994. See "Background of the Merger and Related Matters
- -- Background of the Merger."
REASONS FOR THE MERGER; RECOMMENDATIONS OF THE BOARDS OF
DIRECTORS. Community's Board of Directors believes the Merger is in the best
interests of Community and its stockholders. In reaching its decision, the
Community Board considered, among other things, the operating results and
markets of Hallmark's hospitals, the opportunity to achieve certain economies of
scale and operating efficiencies that should result from the Merger, and the tax
and accounting treatment to be accorded the transaction. Community's Board also
considered the advice of its financial advisor, Lehman Brothers Inc. ("Lehman
Brothers") regarding the fairness, from a financial point of view, to Community
of the consideration to be paid by Community in the Merger.
FOR THE REASONS SET FORTH ABOVE, COMMUNITY'S BOARD OF DIRECTORS VOTED
UNANIMOUSLY TO APPROVE THE MERGER AND RECOMMENDS THAT HOLDERS OF COMMUNITY'S
COMMON STOCK VOTE FOR THE APPROVAL OF THE MERGER AND THE MERGER AGREEMENT. SEE
"BACKGROUND OF THE MERGER AND RELATED MATTERS -- REASONS FOR THE MERGER" AND "--
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS."
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Hallmark's Board of Directors believes that the Merger is in the best
interests of holders of Hallmark Common Stock and Hallmark Preferred Stock.
Community has a larger market capitalization and a more active market for its
shares, which will provide holders of Hallmark Common Stock and Hallmark
Preferred Stock with greater liquidity. The Merger will also allow Hallmark
stockholders to own shares in a larger company. In addition, the market value of
the Community Common Stock offered in exchange for the Hallmark Common Stock
represents a substantial premium over the book value of Hallmark Common Stock,
and as of the date Hallmark's Board of Directors approved the transaction, a
substantial premium over the then-current market value of Hallmark Class A
Common Stock and a smaller premium over the highest prices at which Hallmark
Class A Common Stock has traded during the last five years. The market value of
the Community Common Stock offered in exchange for the Hallmark Preferred Stock
represents a substantial premium over recent trading prices of Hallmark
Preferred Stock, a premium over the conversion value of the Hallmark Preferred
Stock and approximates the liquidation preference of the Hallmark Preferred
Stock, without giving regard to any accumulated dividends on the Hallmark
Preferred Stock. Hallmark's Board also considered the advice of its financial
advisor, Mabon Securities Corp. ("Mabon"), that the Merger is fair to holders of
Hallmark Common Stock from a financial point of view. Mabon did not render any
opinion regarding the fairness of the Merger to holders of Hallmark Preferred
Stock. However, at the Board's request, Mabon advised the Board of the results
of valuing the Hallmark Preferred Stock using several methodologies commonly
used to value similar securities. The work done by Mabon with reference to the
Hallmark Preferred Stock was limited in scope and did not address the fairness
of the Merger, from a financial point of view, to the holders of Hallmark
Preferred Stock. The Board of Directors believed that such analysis indicated
that the value of the shares of Community Common Stock to be received by holders
of Hallmark Preferred Stock exceeded the current market value of Hallmark
Preferred Stock on the date of the analysis. For a discussion of this analysis
see "Background of the Merger and Related Matters -- Reasons for the Merger."
The Board considered such analysis, as well as other factors, in deciding to
recommend the Merger to holders of Hallmark Preferred Stock.
FOR THE REASONS SET FORTH ABOVE, HALLMARK'S BOARD OF DIRECTORS VOTED
UNANIMOUSLY TO APPROVE THE MERGER AND RECOMMENDS THAT HOLDERS OF HALLMARK VOTING
STOCK VOTE FOR THE APPROVAL AND ADOPTION OF THE MERGER AND THE MERGER AGREEMENT.
SEE "BACKGROUND OF THE MERGER AND RELATED MATTERS -- RECOMMENDATIONS OF THE
BOARDS OF DIRECTORS."
OPINIONS OF FINANCIAL ADVISORS
Community has engaged Lehman Brothers to act as its financial advisor in
connection with the Merger and to render its opinion with respect to the
fairness, from a financial point of view, to Community of the consideration to
be paid by Community in the Merger. On June 10, 1994, in connection with the
Community Board of Directors' consideration of the Merger, Lehman Brothers made
a presentation to the Community Board with respect to the Merger and rendered
its written opinion that, as of the date of such opinion, and subject to the
assumptions, factors and limitations set forth in such opinion, the
consideration to be paid by Community in the Merger is fair, from a financial
point of view, to Community. Lehman Brothers had not been requested to opine as
to, and its opinion does not in any manner address, Community's underlying
business decision to proceed with or effect the Merger. A copy of the opinion of
Lehman Brothers, dated June 10, 1994, is attached as Appendix C to this Joint
Proxy Statement/Prospectus and should be read in its entirety. In rendering its
opinion, Lehman Brothers relied upon the accuracy and completeness of the
financial and other information used by it in arriving at its opinion without
independent verification (including the information provided by Hallmark) and
further relied upon assurances of the management of Community that such
management was not aware of any facts that would make such information
inaccurate or misleading. Lehman Brothers did not conduct a physical inspection
of the properties and facilities of Community and Hallmark and did not make or
obtain any evaluations or appraisals of the assets or liabilities of Community
or Hallmark. Lehman Brothers' opinion is based upon market, economic,
legislative, regulatory and other conditions as they existed on and could be
evaluated as of the date of such opinion.
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Hallmark retained Mabon to act as its financial advisor with respect to the
Merger. In this capacity, Mabon has rendered to Hallmark's Board of Directors an
opinion that the Merger is fair to holders of Hallmark Common Stock from a
financial point of view. Mabon delivered its opinion, dated June 10, 1994, in
connection with the Board's approval of the Merger Agreement. A copy of the
opinion is attached as Appendix D to this Joint Proxy Statement/Prospectus and
should be read in its entirety. The opinion states that, as of the date thereof,
on the basis of matters and subject to the limitations to which the opinion
refers, in the opinion of Mabon, the Merger, as described in the Merger
Agreement, is fair to holders of Hallmark Common Stock from a financial point of
view. In rendering its opinion, Mabon relied upon the accuracy of the Merger
Agreement, the published financial data reviewed by Mabon and other information
furnished to it by Hallmark and Community or otherwise obtained by Mabon. Mabon
did not attempt independently to verify such information or independently to
evaluate any assets of Hallmark or Community.
INTERESTS OF CERTAIN PERSONS IN THE MERGER. In considering the Merger,
holders of Hallmark Voting Stock should be aware that the Hallmark directors and
certain members of Hallmark management have an interest in the Merger, as
described below.
Community has agreed that, if the Merger is consummated, it will cause James
T. McAfee, Jr., the Chairman of the Board and Chief Executive Officer of
Hallmark, and Kay W. Slayden, a Hallmark Director, to be elected to the Board of
Directors of Community for terms expiring in 1997 and 1996, respectively.
Messrs. James T. McAfee, Jr. and Robert M. Thornton, Jr., who is the
President, Chief Operating Officer and Chief Financial Officer of Hallmark,
currently have employment agreements with Hallmark that provide for certain
severance payments if, following a "change in control" of Hallmark (such term,
as defined in such agreements, includes the Merger), such officers resign from
their positions with Hallmark. In addition, upon such resignation, Messrs.
McAfee and Thornton are entitled to full vesting of all benefits, options and
bonuses, the latter being prorated to the date of resignation. Messrs. McAfee
and Thornton have opted to tender their resignations upon consummation of the
Merger. As a result, Mr. McAfee will be entitled to severance payments of
$1,640,000, bonuses of approximately $719,000 and benefits of $233,570, and to
vesting of options to acquire 22,606 shares of Hallmark Class A Common Stock (to
be converted in the Merger into options to acquire 21,927 shares of Community
Common Stock); and Mr. Thornton will be entitled to severance payments of
$720,000, bonuses of approximately $345,000 and benefits of $110,760, and to
vesting of options to acquire 13,564 shares of Hallmark Class A Common Stock (to
be converted in the Merger into options to acquire 13,157 shares of Community
Common Stock). The severance payments and bonuses will be paid from existing
cash balances by the surviving corporation. Community has reached an
understanding with Messrs. McAfee and Thornton pursuant to which each such
officer of Hallmark will enter into a two year consulting agreement providing
for post-closing transition services. See "Background of the Merger and Related
Matters -- Interests of Certain Persons in the Merger."
EFFECTIVE TIME OF THE MERGER. It is presently contemplated that the Merger
will become effective as soon as practicable after the requisite approvals of
the Community Stockholders and the Hallmark Stockholders have been obtained and
all of the other conditions have been satisfied or waived. The parties
thereafter will cause a Certificate of Merger to be filed with the Secretary of
State of the State of Delaware. The Merger will become effective upon the filing
of the Certificate of Merger with the Secretary of State of the State of
Delaware (the "Effective Time"). It is presently contemplated that such filing
will be made on or about October 5, 1994. See "The Merger -- Effective Time of
the Merger."
TREATMENT OF HALLMARK STOCK OPTIONS. All options outstanding immediately
prior to the Effective Time under Hallmark's stock option plans shall, by virtue
of the Merger and without any further action on the part of Hallmark or the
holder of any such Hallmark options, be assumed by Community. Each Hallmark
option assumed by Community shall be exercisable upon the same terms and
conditions as under the applicable Hallmark stock option plan and the applicable
option agreement issued
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thereunder, except that (i) each such Hallmark option shall be exercisable for
that whole number of shares of Community Common Stock (rounded to the nearest
whole share) into which the number of shares of Hallmark Common Stock subject to
such Hallmark option immediately prior to the Effective Time would be converted
pursuant to the Merger and (ii) the option price per share of Community Common
Stock shall be an amount equal to the option price per share of Hallmark Common
Stock subject to such Hallmark option in effect immediately prior to the
Effective Time divided by .97 (the price per share, as so determined, being
rounded down to the nearest full cent).
CONDITIONS TO THE MERGER; AGREEMENT; TERMINATION. Consummation of the
Merger is subject to the satisfaction of various conditions. In addition to the
approval of the Merger Agreement by the holders of Community Common Stock and
the holders of Hallmark Class A Common Stock and Hallmark Preferred Stock,
voting together as a single class, there are other conditions to the obligations
of the parties to consummate the Merger. These conditions may be waived or
modified. See "The Merger -- Conditions to the Merger."
The Merger Agreement may be amended by Community, Acquisition Corp. and
Hallmark at any time before or after approval of the Merger by the stockholders
of Community and Hallmark. After such approval, no amendment that by law
requires the further approval of the stockholders of Community or Hallmark may
be made without such approval. See "The Merger -- Amendment of the Merger
Agreement; Waiver of Conditions."
The Merger Agreement may be terminated at any time prior to the Effective
Time, before or after approval of the Merger Agreement by the stockholders of
Community and Hallmark, by the mutual consent of Community and Hallmark. Either
Community or Hallmark may also terminate the Merger Agreement if the Merger has
not been consummated by December 31, 1994 and for certain other reasons. See
"The Merger -- Termination."
ACCOUNTING TREATMENT
Community intends to account for the Merger as a pooling of interests. See
"The Merger -- Accounting Treatment."
EXCHANGE OF CERTIFICATES
As soon as practicable after the Effective Time, First Union National Bank
of North Carolina (the "Exchange Agent") will furnish transmittal materials to
each holder of shares of Hallmark Common Stock and Hallmark Preferred Stock
issued and outstanding at the Effective Time. The transmittal materials will
contain instructions with respect to the surrender of certificates representing
shares of Hallmark Common Stock and Hallmark Preferred Stock, and the
distribution of certificates representing shares of Community Common Stock.
HALLMARK STOCKHOLDERS SHOULD NOT FORWARD THEIR HALLMARK COMMON STOCK AND
HALLMARK PREFERRED STOCK CERTIFICATES TO THE EXCHANGE AGENT UNTIL AFTER RECEIPT
OF THE TRANSMITTAL MATERIALS.
FEDERAL INCOME TAX CONSEQUENCES
Community and Hallmark will receive opinions of their respective counsel
that the Merger will constitute a "reorganization," within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
and that the holders of Hallmark Common Stock or Hallmark Preferred Stock will
not recognize gain or loss for federal income tax purposes upon the conversion
of Hallmark Common Stock or Hallmark Preferred Stock into Community Common
Stock. Holders of Hallmark Common Stock or Hallmark Preferred Stock will
recognize gain or loss with respect to any cash paid in lieu of fractional
shares of Community Common Stock or, in the case of Hallmark Preferred Stock, in
respect of the exercise of dissenters' rights. See "The Merger -- Federal Income
Tax Consequences."
APPRAISAL RIGHTS
Holders of Hallmark Preferred Stock are entitled to appraisal rights and, if
the Merger is consummated, to receive payment in cash for the fair value of
their shares (excluding any element of value arising from the accomplishment or
expectation of the Merger), upon compliance with the
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provisions of Section 262 of the Delaware General Corporation Law ("DGCL"). In
order to perfect these rights, a stockholder must not vote in favor of the
Merger and must deliver to Hallmark a written demand for appraisal of his shares
prior to the vote on the Merger at the Hallmark Special Meeting. The delivery of
a proxy or vote against the Merger will not constitute such a demand. Failure to
follow any of these or other applicable procedures may result in the loss of
statutory appraisal rights. Holders of Community Common Stock and Hallmark
Common Stock will not have appraisal rights in connection with the Merger. See
"The Merger --Appraisal Rights" and Appendix B.
SELECTED CONSOLIDATED HISTORICAL FINANCIAL AND OPERATING INFORMATION
COMMUNITY. The selected consolidated financial and operating information of
Community as of December 31, 1989, 1990, 1991, 1992 and 1993, and for each of
the years in the five-year period ended December 31, 1993, except for ratios and
selected hospital statistics, has been derived from Community's audited
consolidated financial statements. The consolidated balance sheets of Community
as of December 31, 1992 and 1993, and the consolidated statements of income and
cash flows for each of the years in the three-year period ended December 31,
1993, together with the notes thereto and the related report of Arthur Andersen
& Co., independent public accountants, are included in the 1993 Community 10-K,
which is incorporated herein by reference. The selected consolidated financial
information for the six months ended June 30, 1993 and 1994 has been derived
from unaudited consolidated financial statements included in Community's
Quarterly Reports on Form 10-Q for the quarter ended June 30, 1994, which is
incorporated herein by reference, and for the quarter ended June 30, 1993, and,
in the opinion of the management of Community, includes all adjustments
(consisting only of normal recurring adjustments) that are necessary for a fair
presentation of the operating results for such interim periods. Results for the
interim periods are not necessarily indicative of the results for the full year.
The selected financial and operating information set forth below should be read
in conjunction with the Consolidated Financial Statements of Community, the
notes thereto and the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in the 1993 Community 10-K.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------------- ----------------------
1989 1990 1991 1992 1993 1993 1994
-------- --------- --------- --------- --------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL RESULTS
Net operating revenues................. $107,931 $ 130,390 $ 138,093 $ 176,778 $ 235,850 $ 111,578 $ 137,577
Operating expenses..................... (84,308) (100,755) (106,119) (138,907) (183,862) (87,178) (103,966)
Capital costs (a)...................... (21,866) (23,805) (20,586) (20,968) (30,438) (12,490) (19,707)
Gain from hospital sales............... -- -- 3,403 256 -- -- --
-------- --------- --------- --------- --------- ---------- ----------
Income before income taxes and
extraordinary loss.................... 1,757 5,830 14,791 17,159 21,550 11,910 13,904
Provision for income taxes............. (804) (2,289) (5,425) (6,562) (8,961) (4,650) (5,369)
-------- --------- --------- --------- --------- ---------- ----------
Income before extraordinary loss....... 953 3,541 9,366 10,597 12,589 7,260 8,535
Extraordinary loss..................... -- -- (330) -- -- -- --
-------- --------- --------- --------- --------- ---------- ----------
Net income............................. $ 953 $ 3,541 $ 9,036 $ 10,597 $ 12,589 $ 7,260 $ 8,535
-------- --------- --------- --------- --------- ---------- ----------
-------- --------- --------- --------- --------- ---------- ----------
Income (loss) per share --
Before extraordinary loss............ $ 0.16 $ 0.57 $ 0.93(b) $ 0.95(b) $ 1.10(b) $ 0.64 $ 0.72
Extraordinary loss................... -- -- (0.03) -- -- -- --
-------- --------- --------- --------- --------- ---------- ----------
Net income per share................... $ 0.16 $ 0.57 $ 0.90 $ 0.95 $ 1.10 $ 0.64 $ 0.72
-------- --------- --------- --------- --------- ---------- ----------
-------- --------- --------- --------- --------- ---------- ----------
Weighted average shares outstanding
(c)................................... 6,066 6,236 10,062 11,139 11,479 11,387 11,809
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------------- ----------------------
1989 1990 1991 1992 1993 1993 1994
-------- --------- --------- --------- --------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital........................ $ 11,612 $ 9,063 $ 19,412 $ 18,173 $ 57,302 $ 21,149 $ 64,885
Total assets........................... 143,818 137,006 160,248 196,811 301,510 241,905 309,769
Long-term debt (d)..................... 100,382 91,849 69,164 87,307 169,958 120,365 168,610
Stockholders' equity................... 786 4,327 50,131 61,919 76,003 69,876 87,620
Book value per share................... $ 0.14 $ 0.77 $ 4.65 $ 5.62 $ 6.82 $ 6.31 $ 7.66
RATIOS
Operating margin (e)................... 21.9% 22.7% 23.2% 21.4% 22.0% 21.9% 24.4%
Current ratio.......................... 1.42:1 1.35:1 1.90:1 1.57:1 2.66:1 1.60:1 3.01:1
Long-term debt to total capitalization
(d)(f)................................ 99.2% 95.5% 58.0% 58.5% 69.1% 63.3% 65.8%
Return on stockholders'
equity before nonrecurring
items (g)............................. 307.9% 122.3% 18.8% 18.8% 18.9% 22.0% 20.7%
Return on stockholders'
equity(h)............................. 307.9% 122.3% 23.6% 18.9% 18.2% 22.0% 20.7%
SELECTED HOSPITAL STATISTICS
Total number of hospitals.............. 10 10 13 16 20 19 20
Total licensed beds.................... 989 996 1,254 1,437 1,836 1,716 1,836
Owned or leased hospitals
Number............................... 10 10 9 12 16 15 16
Licensed beds........................ 989 996 947 1,130 1,529 1,409 1,529
Patient days......................... 115,630 120,518 118,115 144,120 186,932 90,226 107,517
Inpatient admissions................. 21,099 22,694 22,237 23,293 32,103 14,769 18,728
Average length of stay
(days).............................. 5.5 5.3 5.3 6.2 5.8 6.1 5.7
Equivalent patient days (i).......... 150,448 166,401 168,704 206,763 268,609 127,901 154,805
Managed hospitals
Number............................... -- -- 4 4 4 4 4
Licensed beds........................ -- -- 307 307 307 307 307
<FN>
- ------------------------------
(a) Capital costs include interest, depreciation, amortization and rent
expense.
(b) Includes gains of $0.21 and $0.01 per share related to sales of hospitals
in 1991 and 1992, respectively, and a $0.04 per share one-time non-cash
charge to deferred taxes for U.S. corporate tax rate increase in 1993.
(c) Reflects the effects of the four-for-three and three-for-two stock splits
effected in the form of stock dividends in 1992 and 1993, respectively.
(d) Includes current maturities of long-term debt.
(e) Derived by subtracting operating expenses (excluding rent) from net
operating revenues and dividing the remainder by net operating revenues.
(f) Total capitalization represents the sum of long-term debt, current
maturities of long-term debt and total stockholders' equity.
(g) Based on average stockholders' equity and excludes a one-time, non-cash
charge to deferred taxes for U.S. corporate tax rate increase, gains from
hospital sales and an extraordinary loss from the early extinguishment of
debt.
(h) Based on average stockholders' equity.
(i) Represents inpatient days adjusted to reflect outpatient utilization.
</TABLE>
12
<PAGE>
HALLMARK. The selected consolidated financial and operating information of
Hallmark as of June 30, 1990, 1991, 1992, 1993 and 1994, and for each of the
years in the five-year period ended June 30, 1994, except for ratios and
selected hospital statistics, has been derived from Hallmark's audited
consolidated financial statements. The consolidated financial statements of
Hallmark as of June 30, 1993 and 1994, and for each of the years in the
three-year period ended June 30, 1994, together with the notes thereto and the
related report of Arthur Andersen & Co., independent public accountants, are
included elsewhere in this Joint Proxy Statement/Prospectus. The selected
financial and operating information set forth below should be read in
conjunction with the Consolidated Financial Statements of Hallmark, the notes
thereto and "Hallmark Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Joint Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------------------------------------
1990 1991 1992 1993 1994
--------- --------- --------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
FINANCIAL RESULTS
Net operating revenues.............................. $ 159,138 $ 161,268 $ 170,005 $ 179,237 $ 191,544
Operating expenses.................................. (133,449) (136,467) (145,225) (154,464) (162,712)
Capital costs (a)................................... (26,475) (21,347) (19,647) (17,772) (22,104)
Credit from restructuring transactions (b).......... 4,086 -- 2,133 -- --
Gain from a hospital sale........................... -- -- -- 752 --
--------- --------- --------- --------- ----------
Income before income taxes, extraordinary items and
cumulative effect of accounting change............. 3,300 3,454 7,266 7,753 6,728
Provision for income taxes.......................... (346) (1,966) (3,261) (3,303) (2,826)
--------- --------- --------- --------- ----------
Income before extraordinary items and cumulative
effect of accounting change........................ 2,954 1,488 4,005 4,450 3,902
Extraordinary items................................. 4,918 12,460 2,764 5,931 19,784
Cumulative effect of accounting change.............. -- -- -- -- 805
--------- --------- --------- --------- ----------
Net income.......................................... $ 7,872 $ 13,948 $ 6,769 $ 10,381 $ 24,491
Accretion of preferred stock redemption
requirement........................................ (74) (223) (244) (329) (413)
--------- --------- --------- --------- ----------
Net income applicable to common stock............... $ 7,798 $ 13,725 $ 6,525 $ 10,052 $ 24,078
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Income per share --
Before extraordinary items and cumulative effect
of accounting change............................. $ 0.92(c) $ 0.44 $ 1.19(c) $ 1.29(c) $ 1.06
Extraordinary items............................... 1.52 3.68 0.83 1.72 5.37
Cumulative effect of accounting change............ -- -- -- -- 0.22
--------- --------- --------- --------- ----------
Net income per share................................ $ 2.44 $ 4.12 $ 2.02 $ 3.01 $ 6.65
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Weighted average shares outstanding (d)............. 3,232 3,387 3,358 3,450 3,681
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------------------------------------
1990 1991 1992 1993 1994
--------- --------- --------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital (deficit) (e)....................... $ (2,472) $ 5,248 $ 468 $ 1,383 $ 29,541
Total assets........................................ 173,487 176,950 169,865 159,877 173,020
Long-term debt and capital lease obligations (e).... 130,213 104,168 97,731 80,487 87,821
Redeemable preferred stock.......................... 604 672 821 1,095 1,303
Stockholders' equity (deficit)...................... (26,647) (11,839) (5,200) 4,953 31,586
Book value per share (f)............................ $ (9.64) $ (3.61) $ (1.40) $ 1.91 $ 10.24
RATIOS
Operating margin (g)................................ 16.1% 15.4% 14.6% 13.8% 15.1%
Current ratio....................................... 0.93:1 1.16:1 1.01:1 1.04:1 2.16:1
Long-term debt to total capitalization (e)(h)....... 125.0% 112.0% 104.7% 93.0% 72.8%
SELECTED HOSPITAL STATISTICS (I)
Total number of hospitals........................... 20 19 19 18 18
Total licensed beds................................. 1,800 1,757 1,757 1,635 1,635
Owned or leased hospitals
Number............................................ 19 18 18 17 17
Licensed beds..................................... 1,570 1,527 1,527 1,405 1,405
Patient days...................................... 219,295 176,906 153,705 156,689 164,643
Inpatient admissions.............................. 40,964 32,976 29,403 27,502 28,911
Average length of stay (days)..................... 5.4 5.4 5.2 5.7 5.7
Equivalent patient
days (j)......................................... 282,938 238,847 221,334 225,512 235,698
Managed hospitals
Number............................................ 1 1 1 1 1
Licensed beds..................................... 230 230 230 230 230
<FN>
- ------------------------
(a) Capital costs include interest, depreciation, amortization and rent
expense. For the fiscal years ended June 30, 1990, 1991, 1992 and 1993, the
long-term debt retirements in connection with Hallmark's financial
restructuring were accounted for under Statement of Financial Accounting
Standards No. 15. The unrecognized gain from such transactions was deferred
and was classified on Hallmark's balance sheets as a deferred debt
restructuring credit. Amortization of the deferred credit had the effect of
reducing interest expense by $859,000, $4,162,000, $6,164,000, $6,034,000
and $2,072,000 for the fiscal years ended June 30, 1990, 1991, 1992, 1993
and 1994, respectively. In November 1993, such debt was refinanced and the
unamortized deferred credit was recognized as an extraordinary gain.
Accordingly, in future periods, no similar reduction of interest expense
will occur. See Note 4 of Notes to Hallmark's Consolidated Financial
Statements as of June 30, 1994 contained elsewhere in this Joint Proxy
Statement/Prospectus.
(b) Reflects the reduction of restructuring reserves previously provided in
fiscal 1989 related to certain third party reimbursement items.
(c) Includes $1.26 and $0.38 per share related to credit from restructuring
transactions in 1990 and 1992, respectively, and a gain of $0.13 per share
related to sale of a hospital in 1993.
(d) Reflects the effect of the one-for-five reverse stock split in November
1992.
(e) Includes current maturities of long-term debt and long-term debt in default
(including related accrued interest) classified as a current liability at
June 30, 1990, 1991 and 1992.
(f) Assumes the conversion of each share of redeemable preferred stock into
five shares of Hallmark Common Stock.
(g) Derived by subtracting operating expenses (excluding rent) from net
operating revenues and dividing the remainder by net operating revenues.
(h) Total capitalization represents the sum of long-term debt and capital lease
obligations, current maturities of long-term debt, redeemable preferred
stock and total stockholders' equity.
(i) Statistics for the year ended June 30, 1990 include six hospital facilities
held for disposal or disposed of, consisting of 516 beds, 36,694 patient
days, 6,474 admissions and 45,807 equivalent patient days.
(j) Represents inpatient days adjusted to reflect outpatient utilization.
</TABLE>
14
<PAGE>
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following selected unaudited pro forma combined financial information is
presented assuming the Merger will be accounted for as a pooling of interests
and reflects the combination of the historical consolidated financial statements
of Community and Hallmark. The pro forma combined financial results and balance
sheet data assume the Merger was consummated at January 1, 1991 and June 30,
1994, respectively. The unaudited pro forma combined financial information does
not reflect expenses expected to be incurred by Community and Hallmark in
connection with the Merger or the redemption of Hallmark's Senior Subordinated
Notes which may be tendered to Community pursuant to the indenture. In addition,
the following financial information does not reflect any anticipated cost
savings, which may be realized by Community after consummation of the Merger.
The pro forma information does not purport to represent what Community's and
Hallmark's combined results of operations actually would have been if the Merger
had occurred as of the date indicated or will be for any future periods. The
selected unaudited pro forma financial information should be read in conjunction
with the Unaudited Pro Forma Condensed Combined Financial Statements and the
notes thereto, included elsewhere in this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------- ----------------------
1991 1992 1993 1993 1994
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
FINANCIAL RESULTS (A)
Net operating revenues.......................... $ 299,361 $ 346,783 $ 425,198 $ 205,662 $ 233,857
Operating expenses (b).......................... (242,586) (284,132) (345,250) (166,143) (184,256)
Capital costs (c)............................... (46,095) (46,779) (54,047) (24,455) (32,237)
Amortization of deferred debt restructuring
credits (d).................................... 4,162 6,164 4,967 2,896 --
Credit from restructuring transactions (e)...... -- 2,133 -- -- --
Gain from hospital sales........................ 3,403 256 -- -- --
---------- ---------- ---------- ---------- ----------
Income from continuing operations before income
taxes (f)...................................... 18,245 24,425 30,868 17,960 17,364
Provision for income taxes...................... (7,391) (9,823) (12,718) (7,034) (6,822)
---------- ---------- ---------- ---------- ----------
Income from continuing operations (d)(f)........ $ 10,854 $ 14,602 $ 18,150 $ 10,926 $ 10,542
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Income per share from continuing operations
(d)(f)......................................... $ 0.81 $ 1.01 $ 1.20 $ 0.74 $ 0.69
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Weighted average shares outstanding............. 13,365 14,413 15,135 14,735 15,382
SELECTED HOSPITAL STATISTICS (G)
Total number of hospitals....................... 32 34 38 37 38
Total licensed beds............................. 3,011 3,095 3,471 3,351 3,471
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
1994
----------
<S> <C>
BALANCE SHEET DATA
Working capital..................................................................................... $ 94,426
Total assets........................................................................................ 482,789
Long-term debt...................................................................................... 256,431
Stockholders' equity................................................................................ 120,509
Book value per share................................................................................ $ 8.27
RATIOS
Current ratio....................................................................................... 2.63:1
Long-term debt to total capitalization.............................................................. 68.0%
<FN>
- --------------------------
(a) Hallmark's operating results for the fiscal years ended June 30, 1991 and
1992 were combined with Community's operating results for the years ended
December 31, 1991 and 1992 to prepare the pro forma combined financial
information for the years ended December 31, 1991 and 1992, respectively.
The unaudited pro forma combined financial information for the year ended
December 31, 1993 was prepared by combining Community's 1993 operating
results with Hallmark's 1993 operating results, which were restated to a
calendar year basis. Accordingly, Hallmark's historical operating results
for
</TABLE>
15
<PAGE>
<TABLE>
<S> <C>
the six months ended December 31, 1992 were excluded from the unaudited pro
forma combined statements of income for the periods presented. Hallmark's
net revenues and income from continuing operations for that six month
period were $85,153,000 and $784,000, respectively.
(b) Significant nonrecurring charges resulting from the Merger, which will be
included in Community's statement of income for the year ended December 31,
1994, are estimated as follows:
</TABLE>
<TABLE>
<S> <C> <C>
- -- Merger costs (including financial advisor, legal and accounting
fees, severance costs, etc.)...................................... $ 13,500,000
- -- Premium costs on redemption of Hallmark's Senior Subordinated
Notes, assuming 100% redemption................................... 800,000
- -- Write-off of deferred financing costs associated with the original
issuance of Hallmark's Senior Subordinated Notes.................. 2,600,000
- -- Tender offer costs associated with the redemption of Hallmark's
Senior Subordinated Notes......................................... 200,000
- -- Income tax benefits related to the above transactions which would
be deductible for tax purposes at the 35% federal statutory
rate.............................................................. (4,050,000)
------------
Estimated after-tax nonrecurring charge resulting from the Merger............ $ 13,050,000
------------
------------
</TABLE>
Of the $13,050,000 estimated charge to net income, or $0.85 per share based
on the pro forma combined number of weighted average shares outstanding for
the six months ended June 30, 1994, $2,340,000, or $0.15 per share, will be
recorded as an extraordinary loss from early extinguishment of debt. The
foregoing summary is based on the assumption that all of Hallmark's Senior
Subordinated Notes will be tendered to Community.
If all of Hallmark's Senior Subordinated Notes are redeemed after the
Merger, Community will fund the total cash outlay of $81,000,000 (comprised
of $80,000,000 in principal, $800,000 in premium and approximately $200,000
in tender offer costs) through existing cash balances and its available
credit facilities. Full redemption of Hallmark's Senior Subordinated Notes
would result in an annual decrease in interest expense of approximately
$2,500,000, or $0.16 per share on a pro forma basis.
Community or Hallmark may also be subject to an additional cash outlay of
approximately $3,700,000 in respect of approximately 32,301 shares of
Hallmark Preferred Stock, assuming all holders of such shares exercise their
appraisal rights. The $3,700,000 cash outlay is estimated based on the
assumption that all holders of the 32,301 shares exercise their appraisal
rights, and that the fair value of a share of Hallmark Preferred Stock is
equal to the closing price of $21.125 of Community Common Stock on August
15, 1994, multiplied by the exchange ratio of 5.4 for each share of Hallmark
Preferred Stock. The exact amount of this cash outlay cannot be ascertained,
and could be more than, the same as, or less than the value of the merger
consideration such holders of Hallmark Preferred Stock would otherwise be
entitled to receive pursuant to the Merger Agreement. Community or Hallmark
will fund such payment from existing cash balances and/or its available
credit facilities. If payments in respect of the Hallmark Preferred Stock
are made using funds drawn from available credit facilities, long-term debt
would increase by approximately $3,700,000, common stock and additional
paid-in capital would decrease by approximately $1,300,000 and retained
earnings would be reduced by approximately $2,400,000. Net income applicable
to common stockholders would be reduced by approximately $2,400,000 which
would be a one-time charge, and earnings per share applicable to common
stockholders would be $0.16 lower.
(c) Capital costs include interest, depreciation, amortization and rent expense.
(d) For Hallmark's fiscal years ended June 30, 1991, 1992 and 1993, the
long-term debt retirements in connection with Hallmark's financial
restructuring were accounted for under Statement of Financial Accounting
Standards No. 15. The unrecognized gain from such transactions was deferred
and was classified on Hallmark's balance sheets as a deferred debt
restructuring credit. In Hallmark's historical financial statements,
amortization of the deferred credit had the effect of reducing reported
interest expense. For purposes of this pro forma presentation, interest
expense is included in capital costs at its gross amount and the
amortization of the deferred credit is shown as a separate line item. In
November 1993, such debt was refinanced and the unamortized deferred credit
was recognized as an extraordinary gain. Accordingly, in future periods, no
similar reduction of interest expense will occur. See Note 4 of Notes to
Hallmark's Consolidated Financial Statements as of June 30, 1994 contained
elsewhere in this Joint Proxy Statement/Prospectus. The pro forma income and
income per share from continuing operations for the years ended December 31,
1991, 1992 and 1993 and the six months ended
16
<PAGE>
June 30, 1993 include after-tax credits of $2,497,000, $3,698,000,
$2,980,000 and $1,738,000, or $0.19, $0.26, $0.20 and $0.12 per share,
respectively, related to the amortization of the deferred debt restructuring
credit recognized during each of the periods.
(e) Reflects the reduction of restructuring reserves previously provided by
Hallmark in 1989 related to certain third party reimbursement items.
(f) Includes nonrecurring items consisting of after-tax gains of $2,146,000 and
$104,000, or $0.16 and $0.01 per share, realized by Community related to
sales of hospitals in 1991 and 1992, respectively, and after-tax income of
$1,280,000 or $0.09 per share realized by Hallmark related to credits
resulting from restructuring transactions in 1992.
(g) Includes five managed hospitals with a total of 537 licensed beds. Total
number of hospitals and licensed beds are as of the end of the periods
presented.
COMPARATIVE PER SHARE INFORMATION
The following table sets forth (1) certain historical per common share
information for Community and Hallmark, (2) certain unaudited pro forma per
common share information for Community after giving effect to the Merger on a
pooling of interests accounting basis, assuming the Merger had been effective
during the period presented, and (3) Hallmark equivalent unaudited pro forma per
share data attributable to the number of shares of Community Common Stock that
will be received by Hallmark stockholders for each share of Hallmark Common
Stock. No cash dividends have ever been declared or paid on the Community Common
Stock, the Hallmark Common Stock or the Hallmark Preferred Stock. The historical
per share information for Community and Hallmark has been adjusted to reflect,
in the case of Community, the four-for-three and the three-for-two stock splits
in December 1992 and November 1993, respectively, and, in the case of Hallmark,
the one-for-five reverse stock split in November 1992. This data should be read
in conjunction with the historical consolidated financial statements and the
notes thereto of Community and Hallmark and the Unaudited Pro Forma Condensed
Combined Financial Statements and the notes thereto included elsewhere or
incorporated by reference in this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
HISTORICAL UNAUDITED PRO FORMA
-------------------------- -----------------------------
COMMUNITY HALLMARK COMBINED(1) HALLMARK(2)
------------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
Income per common and common equivalent share before
extraordinary items and cumulative effect of an accounting
change:
Fiscal years ended (3)
1991....................................................... $ 0.93(4) $ 0.44 $ 0.81(5) $ 0.79
1992....................................................... 0.95(4) 1.19 (4) 1.01(5) 0.98
1993....................................................... 1.10 1.29 1.20 1.16
1994....................................................... -- 1.06 -- --
Latest unaudited interim period ended June 30,
1994....................................................... 0.72 -- 0.69 0.67
Book value per share (6):
December 31, 1993.......................................... 6.82 9.33 7.42 7.20
June 30, 1994.............................................. 7.66 10.24 8.27 8.02
<FN>
- --------------------------
(1) Unaudited pro forma combined per share information is based on the combined
average number of common and common equivalent shares of Community and
Hallmark giving effect to the exchange ratios for Hallmark Common Stock and
Hallmark Preferred Stock. It reflects Community historical results combined
with Hallmark historical results. Pre-tax expenses expected to be incurred
by Community and Hallmark in connection with the Merger are estimated to
total approximately $13,500,000. These costs have not been reflected in the
pro forma financial information, but will be reflected in the combined
statement of income upon consummation of the Merger. After consummation of
the Merger, a certain portion or all of Hallmark's Senior Subordinated
Notes may be tendered to Community for redemption pursuant to the
indenture; however, costs associated with such redemption will depend on
the amount of notes tendered. See "The Merger -- Tender Offer for Senior
Subordinated Notes."
(2) Hallmark equivalent pro forma per share amounts are calculated by
multiplying the respective combined pro forma per share amounts by the
exchange ratio for Hallmark Common Stock.
</TABLE>
17
<PAGE>
<TABLE>
<S> <C>
(3) Historical per share information for Hallmark is for the fiscal years ended
June 30, 1991, 1992, 1993 and 1994. All other per share information
presented is for the calendar years ended December 31, 1991, 1992 and 1993
as described in the Notes to the Unaudited Pro Forma Condensed Combined
Financial Statements.
(4) Includes gains of $0.21 and $0.01 per share realized by Community related
to sales of hospitals in 1991 and 1992, respectively, and income of $0.38
per share realized by Hallmark related to credits resulting from
restructuring transactions in 1992.
(5) Includes gains of $0.16 and $0.01 per share realized by Community related
to sales of hospitals in 1991 and 1992, respectively, and income of $0.09
per share realized by Hallmark related to credits resulting from
restructuring transactions in 1992.
(6) Book value amounts are computed based on the number of shares outstanding
assuming the conversion of each share of Hallmark Preferred Stock into five
shares of Hallmark Common Stock (or assumed to be outstanding after giving
effect to the exchange ratio for Hallmark Preferred Stock in the case of
pro forma amounts) at the end of the respective periods.
</TABLE>
RECENT STOCK PRICES
The Community Common Stock has been traded on The Nasdaq Stock Market under
the symbol CHSI since its initial public offering on March 7, 1991. The Hallmark
Class A Common Stock has been traded on The Nasdaq Stock Market under the symbol
HMHC since May 17, 1993. Prior to that time, Hallmark Class A Common Stock was
traded over the counter by certain dealers who made a market in Hallmark Class A
Common Stock. The table below sets forth, for the calendar quarters indicated,
the high and low sales prices per share as reported by The Nasdaq Stock Market
for the Community Common Stock and the Hallmark Class A Common Stock since May
17, 1993. Stock prices prior to May 17, 1993 for Hallmark Class A Common Stock
represent high and low bids as reported to and compiled by the National
Quotation Bureau by market makers in Hallmark Class A Common Stock. Such bids
represent quotations between dealers and do not include retail mark-ups,
mark-downs, commissions or other adjustments and may not represent actual
transactions. There is no trading market for Hallmark Class B Common Stock
because it is automatically converted to Hallmark Class A Common Stock upon sale
by the holder to whom it was originally issued.
No active trading market for the Hallmark Preferred Stock exists and the
Hallmark Preferred Stock has not been listed on any exchange. The Hallmark
Preferred Stock is traded over the counter by certain dealers who from time to
time are willing to effect transactions in the Hallmark Preferred Stock. Such
trading in the Hallmark Preferred Stock is, however, extremely limited and
sporadic. Quotation of securities that are not actively traded, such as the
Hallmark Preferred Stock, may differ from actual trading prices and should be
viewed as approximations. With respect to the Hallmark Preferred Stock, the
following table sets forth the high and low bids for Hallmark Preferred Stock as
reported to and compiled by the National Quotation Bureau by market makers in
Hallmark Preferred Stock. Such bids represent quotations between dealers and do
not include retail mark-ups, mark-downs or commissions. Such bids do not
necessarily reflect actual transactions and may not reflect transactions not
reported to the National Quotation Bureau.
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Community stock prices have been adjusted for the four-for-three and the
three-for-two stock splits in December 1992 and November 1993, respectively.
Hallmark stock prices have been adjusted for the one-for-five reverse stock
split in November 1992.
<TABLE>
<CAPTION>
COMMUNITY COMMON HALLMARK CLASS A HALLMARK PREFERRED
STOCK COMMON STOCK STOCK
--------------------- --------------------- ---------------------
HIGH LOW HIGH LOW HIGH LOW
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
1992:
First Quarter..... $13 1/3 $ 9 1/2 $ 9 11/16 $ 4 3/8 $25 $ 7 1/2
Second Quarter.... 10 1/12 7 1/12 8 1/8 2 1/2 25 7 1/2
Third Quarter..... 11 7 1/2 4 17/32 1 1/4 17 1/2 7 1/2
Fourth Quarter.... 13 5/6 9 1/3 5 2 1/2 18 3/4 8 3/4
1993:
First Quarter..... $16 1/2 $ 9 3/4 $ 4 5/8 $ 2 3/4 $22 $11
Second Quarter.... 14 3/4 10 3/8 8 7/8 3 1/2 32 11
Third Quarter..... 16 1/4 12 1/2 12 1/8 8 1/8 37 11
Fourth Quarter.... 19 1/4 15 1/2 17 1/2 9 5/8 40 11
1994:
First Quarter..... $26 $17 1/2 $17 1/4 $11 1/4 $40 $11
Second Quarter.... 24 1/4 20 21 1/2 9 1/2 75 11
Third Quarter
(August 19)...... 23 20 1/4 21 1/4 18 3/4 85 70
</TABLE>
The last reported sale prices per share of Community Common Stock and
Hallmark Class A Common Stock on June 10, 1994, the last trading day preceding
public announcement of the Merger, were $24.00 and $13.25, respectively. On
August 19, 1994, the closing sale prices per share of Community Common Stock and
Hallmark Class A Common Stock were $22.00 and $20.25, respectively. Hallmark
believes, based on information obtained from an entity that makes a market in
Hallmark Preferred Stock, that a sale of Hallmark Preferred Stock occurred on
June 6, 1994, at a price of $45.00 per share.
Because the exchange ratios for Hallmark Common Stock and Hallmark Preferred
Stock are fixed and because the market prices of Community Common Stock and
Hallmark Common Stock are subject to fluctuation, the market value of the shares
of Community Common Stock that holders of Hallmark Common Stock and Hallmark
Preferred Stock will receive in the Merger may increase or decrease prior to and
following the Merger. STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS
FOR THE COMMUNITY COMMON STOCK, THE HALLMARK CLASS A COMMON STOCK AND HALLMARK
PREFERRED STOCK.
As of August 26, 1994, there were approximately 800 holders of record of
Hallmark Common Stock and approximately 1,500 holders of record of Hallmark
Preferred Stock.
No dividends have ever been declared or paid on the Community Common Stock,
the Hallmark Common Stock or the Hallmark Preferred Stock. Community's and
Hallmark's ability to pay dividends is limited by covenants in their various
debt agreements. As of August 15, 1994, the unpaid and accumulated dividends on
the Hallmark Preferred Stock amounted to approximately $686,000, or $21.25 per
share. No dividends can be declared or paid on the Hallmark Common Stock until
such accumulated dividends on the Hallmark Preferred Stock have been paid or set
aside for payment.
RECENT DEVELOPMENTS
On August 24, 1994, Community entered into a new Amended and Restated Credit
Agreement (the "Credit Facility") which provides for a revolving credit facility
in the amount of $200,000,000. The Credit Facility, which is available for
working capital purposes, to fund acquisitions, and for the issuance of letters
of credit to support Community's taxable and non-taxable bond issues, consists
of a $150,000,000 six-year reducing revolving line of credit and a $50,000,000
364-day revolving line of credit. Borrowings under the Credit Facility bear
interest, at Community's option, at (i) LIBOR plus a margin ranging from .875%
to 1.625% or (ii) the prime rate plus a margin ranging from zero to .125%.
Letters of credit issued under the Credit Facility require annual fees ranging
from 1.075% to 1.825% of the outstanding amount of the letters of credit. As of
August 24, 1994, Community had available approximately $135,000,000 under the
Credit Facility after consideration of approximately $65,000,000 in letters of
credit issued in support of its bond issues.
The $150,000,000 line of credit is subject to semi-annual mandatory
reductions in the amount of $15,000,000 beginning January 1, 1997 and ending
January 1, 2000. A final payment in the amount of $45,000,000 is due August 22,
2000. The $50,000,000 line of credit may, at Community's option, be converted to
a two-year term loan, payable in two equal annual installments at the end of its
revolving period.
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<PAGE>
INVESTMENT CONSIDERATIONS
THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY BY THE STOCKHOLDERS OF
COMMUNITY AND HALLMARK IN CONNECTION WITH VOTING UPON THE MERGER.
HEALTHCARE REFORM
In late 1993, President Clinton submitted to Congress proposed comprehensive
healthcare reform legislation. Several other comprehensive reform proposals have
been and are expected to be introduced in the Congress, and comprehensive
alternatives to the President's proposal have recently been introduced by the
House and Senate majority leaders. Healthcare reform legislation is also pending
in some states. Among the proposals under consideration are cost controls on
hospitals, insurance market reform to increase the availability of group health
insurance to small businesses, requirements that all businesses offer health
insurance coverage to their employees and the creation of a single government
health insurance plan that would cover all citizens. Key elements in the
President's proposal include various insurance market reforms, the requirement
that businesses provide health insurance coverage for their full-time and
part-time employees, significant reductions in future Medicare and Medicaid
payments to providers, and stringent government cost controls that would
directly control insurance premiums and indirectly affect the fees of hospitals,
physicians and other healthcare providers.
Certain aspects of the President's proposed legislation, such as reductions
in Medicare payments and the elimination of Medicaid disproportionate share
payments to hospitals, and increased reliance on managed competition, if
adopted, could adversely affect the businesses of Community and Hallmark. Other
aspects of the President's proposed legislation, such as universal health
insurance coverage, could have a positive impact on the businesses of Community
and Hallmark by reducing the amount of uncompensated care provided by their
respective hospitals. It is not possible at this time to predict what, if any,
reforms will be adopted by the Congress or various state legislatures, or when
such reforms will be adopted or implemented. No assurance can be given that any
such reforms will not have a material adverse impact on the revenues and
earnings of Community and Hallmark. See "-- Reimbursement and Regulatory
Matters."
REIMBURSEMENT AND REGULATORY MATTERS
Community and Hallmark, and the healthcare industry generally, are subject
to extensive federal, state and local governmental regulation relating to
licensure, conduct of operations, construction of new facilities, expansion or
acquisition of existing facilities and the offering of new services. Failure to
comply with applicable laws and regulations could result in, among other things,
the imposition of fines, temporary suspension of admission of new patients to
the facility or, in extreme circumstances, exclusion from participation in
government healthcare reimbursement programs such as Medicare and Medicaid or
the revocation of facility licenses. There can be no assurance that future
regulatory changes will not have an adverse impact on the combined operations of
Community and Hallmark.
During its years ended December 31, 1991, 1992 and 1993, Community received
42.0%, 46.6% and 48.4%, respectively, of net operating revenues from the federal
Medicare program and state Medicaid programs. For its fiscal years ended June
30, 1992, 1993 and 1994, Hallmark received 55.5%, 61.6% and 62.4%, respectively,
from such federal and state programs. Hallmark believes that the percentage of
its revenues attributable to such federal and state programs has increased
because (i) the population is aging, which results in more patients being
covered by the Medicare program, (ii) Hallmark has implemented geriatric
psychiatric Medicare programs, (iii) Hallmark receives revenue from the Medicaid
disproportionate-share program, (iv) private patients are more likely to use
less expensive outpatient treatment for many services, and (v) competition has
increased for private-pay patients.
Following the Merger, Community will continue to derive a substantial
portion of its revenue from such programs. Funds received by Community and
Hallmark from these programs are subject to audit, which can result in
retroactive adjustments to such payments. Such programs are highly regulated and
subject to frequent and, in certain cases, substantial changes. Recent changes
designed to reduce healthcare costs have resulted in pressure on hospitals and
other healthcare providers to
20
<PAGE>
reduce their costs, and in reduced levels of reimbursement for a substantial
portion of hospital procedures and costs. In addition, certain expected changes
are likely to result in further reductions in reimbursement levels.
A number of Hallmark's hospitals qualify for "geographic reclassification"
or have been qualified as "disproportionate share" or "small dependent"
hospitals under the Medicare and/or Medicaid programs. These hospitals are
reimbursed at a more favorable rate than similar hospitals not receiving such
designation and contribute a significant amount of revenue to Hallmark's
operations. There can be no assurance that Hallmark will be able to retain these
favorable designations in the future for all, or any, of these hospitals, that
these programs will continue or that any programs intended to replace such
programs will be as financially advantageous to Hallmark as the existing
programs. The loss of such designations or programs could have a material
adverse effect on Hallmark's operations. See "Hallmark Management's Discussion
and Analysis of Financial Conditions and Results of Operations -- Overview" and
"Hallmark's Business -- Reimbursement and Regulatory Matters."
Community and Hallmark each typically receives a higher rate for services
provided to private-pay patients than for services provided to patients eligible
for assistance under Medicare and Medicaid programs. While Community and
Hallmark each has operated profitably under the Medicare and Medicaid statutes
and regulations now in effect, changes in such statutes and regulations (or in
the interpretation of current regulations and procedures), substantial changes
in the number of private-pay patients or changes among different private-pay
sources could significantly affect the profitability of the combined operations
of Community and Hallmark.
Federal law prohibits the knowing and willful payment, receipt or offer of
remuneration by healthcare providers, such as Community and Hallmark, with
respect to any person, including a physician, to induce referrals of patients or
in exchange for such referrals (the "Anti-Kickback Law"). An individual or
entity could be excluded from participation in the Medicare and Medicaid
programs if it is determined that the party has violated the Anti-Kickback Law.
Community and Hallmark each recruits physicians to become members of the medical
staffs of their respective hospitals and to establish private practices in the
communities in which Community's and Hallmark's hospitals are located. Community
and Hallmark each employs a limited number of physicians who admit patients to
their respective hospitals. Community and Hallmark have each entered into
various relationships and compensation arrangements in connection with physician
recruitment which may be subject to the Anti-Kickback Law. Although Community
and Hallmark each believes that their respective arrangements are lawful, no
"safe harbor" provisions apply to physician recruitment arrangements not
involving physician employment, and evolving interpretations of the
Anti-Kickback Law or the adoption of new federal or state laws or regulations
could make it necessary for Community or Hallmark to restructure certain of
their respective arrangements. The operations of Community and Hallmark are also
subject to a number of state laws regulating relationships and compensation
arrangements among healthcare providers.
From time to time, federal and state governments as well as insurers and
others have conducted and may conduct inquiries or investigations into
businesses in the healthcare industry. Neither Community nor Hallmark can
predict the occurrence or outcome of any such investigations or whether any such
investigations would lead to sanctions under existing laws or regulations,
changes in, or in the interpretation of, existing laws or regulations or
legislation imposing additional regulations on healthcare providers. Each of
Community and Hallmark believes that it conducts its business in an ethical
manner and in compliance with applicable law.
DEPENDENCE ON HEALTHCARE PROFESSIONALS
Community's and Hallmark's hospitals are dependent upon the physicians
practicing in the communities served by the hospitals. A small number of
physicians accounts for a significant portion of patient admissions at some of
Community's and Hallmark's hospitals. The competition for physicians in some
specialty areas, including primary care, is intense. Reforms affecting the
healthcare industry may increase the competition for physicians specializing in
primary care. Community is also dependent upon the ability and experience of its
executive officers and key employees. There can be no assurance that
21
<PAGE>
Community will be able to retain all such personnel or, despite their vigorous
physician recruitment efforts, that the hospitals of Community and Hallmark will
be able to recruit physicians successfully or to retain the loyalty of the
physicians whose patient admissions are important to the hospitals.
EXPANSION THROUGH ACQUISITION
A key element of Community's growth to date and of Community's strategy for
the future is expansion through the acquisition of general acute care hospitals.
There can be no assurance that future suitable acquisition candidates will be
located, that acquisitions can be consummated or that added facilities can be
operated profitably or integrated successfully into Community's operations.
Growth through acquisition entails certain risks in that the acquired facilities
could be subject to unanticipated business or regulatory uncertainties or
liabilities, including uncertainties relating to the interpretation of certain
Medicare depreciation recapture regulations, for which Community provides
indemnification in various acquisitions. Although Community does not believe
that it will have any liability with respect to such indemnification
undertakings, there can be no assurance that such will be the case, or that
indemnification payments, if required, would not have a material adverse impact
on earnings in the period when made.
The Merger with Hallmark is a part of Community's acquisition program. Among
the factors considered by the Board of Directors of Community in connection with
its approval of the Merger and the Merger Agreement were the opportunities for
certain cost savings and operating efficiencies that should result from the
Merger. Failure to achieve the expected savings resulting from the planned
closure of Hallmark's corporate offices, elimination of other corporate general
and administrative expenses and combined purchasing power of the two companies
could adversely affect the combined company's earnings, assets and prospects.
COMPETITION
Competition among hospitals and other healthcare providers for patients has
intensified in recent years. During this period, hospital occupancy rates in the
U.S. have declined as a result of cost containment pressures, changing
technology, changes in regulations and reimbursement, changes in practice
patterns from inpatient to outpatient treatment and other factors. In certain
areas in which Community and Hallmark operate, there are other hospitals or
facilities that provide inpatient or outpatient services comparable to those
offered by Community's and Hallmark's hospitals. Certain of these hospitals may
have greater financial resources than Community's and Hallmark's hospitals and
may offer a wider range of services than Community's and Hallmark's hospitals.
Even in communities in which Community's and Hallmark's hospitals are the sole
or dominant providers of general acute care hospital services, Community and
Hallmark may face competition from hospitals and other healthcare providers in
nearby communities. The competitive position of Community's and Hallmark's
hospitals also has been, and in all likelihood will continue to be, affected by
the increased initiatives undertaken during the past several years by federal
and state governments and other major purchasers of healthcare, including
insurance companies and employers, to revise payment methodologies and monitor
healthcare expenditures in order to contain healthcare costs. In addition,
hospitals owned by governmental agencies or other tax-exempt entities benefit
from endowments, charitable contributions and tax-exempt financing, which
advantages are not enjoyed by Community's and Hallmark's hospitals.
LIABILITY INSURANCE
Because of the nature of their businesses, Community and Hallmark are
subject to professional malpractice and other liability claims with the
attendant risk of substantial damage awards. Hallmark maintained professional
malpractice insurance for certain occurrences prior to February 1988 and after
June 1992, but is self insured for all occurrences between February 1988 and
June 1992. Although each of Community and Hallmark believes that its insurance
and loss reserves are adequate, there can be no assurance that its insurance and
loss reserves will cover all potential claims that may be asserted against the
combined business of Community and Hallmark after consummation of the Merger.
LEVERAGE
In connection with the Merger, Community will assume approximately
$87,821,000 of long-term debt and capital lease obligations of Hallmark,
increasing Community's total long-term debt to
22
<PAGE>
approximately $256,431,000 and increasing its long-term debt to total
capitalization ratio from 65.8% to 68.0%. As a result of such additional debt,
Community's ratio of earnings to fixed charges will decrease from 1.86x for the
twelve months ended June 30, 1994 to 1.70x on a pro forma basis assuming the
Merger was effective on July 1, 1993 and no Hallmark Senior Subordinated Notes
were tendered to Community and no holders of the Hallmark Preferred Stock
exercise their appraisal rights. See "The Merger -- Appraisal Rights." Community
has also recently increased its Credit Facility by approximately $65,000,000
with the result that a total of $135,000,000 is available for general corporate
purposes, including working capital needs and acquisitions of other hospitals.
See "Summary -- Recent Developments." While Community believes that the
additional leverage from the Merger and its new Credit Facility, when and if
drawn upon, will not violate the financial and operating covenants of its funded
debt, impair its operations or effect its ability to pursue other strategic
acquisitions in the future, such increased levels of debt could (i) make
Community more vulnerable to economic downturns and limit its ability to
withstand competitive pressures, (ii) require a greater portion of Community's
cash flow to pay debt service and/or (iii) limit Community's ability to obtain
additional financing in the future without substantial dilution to its
stockholders.
INTRODUCTION
GENERAL
This Joint Proxy Statement/Prospectus relates to the Merger. The Merger will
be effected pursuant to an Amended and Restated Agreement and Plan of Merger,
dated as of June 10, 1994, among Community, Acquisition Corp. and Hallmark. A
copy of the Merger Agreement is attached hereto as Appendix A. See "The Merger."
This Joint Proxy Statement/Prospectus is being furnished to the stockholders
of Community in connection with the solicitation of proxies by the Board of
Directors of Community from the holders of outstanding shares of Community
Common Stock for use at the Community Special Meeting. At the Community Special
Meeting, the holders of Community Common Stock will be asked to consider and
vote upon a proposal to approve the Merger and the Merger Agreement.
Consummation of the Merger will require approval of the Merger and the Merger
Agreement by the holders of a majority of the outstanding shares of Community
Common Stock entitled to vote thereon.
This Joint Proxy Statement/Prospectus is also being furnished to the
stockholders of Hallmark in connection with the solicitation of proxies by the
Board of Directors of Hallmark from the holders of outstanding shares of
Hallmark Voting Stock for use at the Hallmark Special Meeting. At the Hallmark
Special Meeting, the holders of Hallmark Voting Stock will be asked to consider
and vote upon a proposal to approve and adopt the Merger and the Merger
Agreement. Delaware law and the Hallmark Certificate of Incorporation require
that the Merger and the Merger Agreement be approved and adopted by the holders
of a majority of the outstanding shares of Hallmark Class A Common Stock and
Hallmark Preferred Stock, voting together as a single class.
If the Merger is consummated, each outstanding share of Hallmark Common
Stock will be converted into the right to receive .97 shares of Community Common
Stock and each outstanding share of Hallmark Preferred Stock (other than shares
held by stockholders who perfect their appraisal rights under Delaware law and
do not subsequently withdraw, lose or forfeit such rights) will be converted
into the right to receive 5.4 shares of Community Common Stock. The exchange
ratios are fixed and will not increase or decrease by reason of fluctuations in
the market price of Community Common Stock or Hallmark Common Stock. Fractional
shares of Community Common Stock will be converted into the right to receive
cash. As a result of the Merger, Hallmark will be merged with and into
Acquisition Corp., which will succeed to all of Hallmark's business and
properties. See "The Merger -- Alternative Merger Structure."
As of August 15, 1994, the unpaid and accumulated dividends on the Hallmark
Preferred Stock amounted to approximately $686,000, or $21.25 per share of
Hallmark Preferred Stock outstanding on such date. Upon consummation of the
Merger, any right that holders of Hallmark Preferred Stock may have had to
receive such unpaid and accumulated dividends, upon redemption of the Hallmark
23
<PAGE>
Preferred Stock or otherwise, will terminate. Following the Effective Date,
shares of Hallmark Preferred Stock will represent only the right to receive
shares of Community Common Stock at the exchange ratio set forth above. Holders
of Hallmark Preferred Stock are entitled to appraisal rights pursuant to
Delaware law. See "The Merger -- Appraisal Rights."
Assuming the Merger is consummated and no holder of Hallmark Preferred Stock
perfects appraisal rights, the outstanding shares of Hallmark Common Stock and
Hallmark Preferred Stock as of the Effective Time will be converted into the
right to receive an aggregate of approximately 3,321,000 shares of Community
Common Stock, representing approximately 22.5% of the outstanding shares.
This Joint Proxy Statement/Prospectus also constitutes the prospectus of
Community with respect to the shares of Community Common Stock to be issued in
the Merger. The information in this Joint Proxy Statement/Prospectus with
respect to Community has been supplied by Community, and the information with
respect to Hallmark has been supplied by Hallmark.
VOTING AND PROXIES
COMMUNITY. Only holders of record of Community Common Stock at the close of
business on August 26, 1994 will be entitled to notice of and to vote at the
Community Special Meeting or any adjournment thereof. At such date, there were
11,442,496 shares of Community Common Stock outstanding held by approximately 68
holders of record.
Stockholders of record on the record date are entitled to one vote per share
on any matter which may properly come before the Community Special Meeting. The
presence, in person or by proxy, of the holders of a majority of the shares of
Community Common Stock outstanding on the record date is necessary to constitute
a quorum at the Community Special Meeting. The affirmative vote of the holders
of a majority of the outstanding shares of Community Common Stock on the record
date is required to approve the Merger and the Merger Agreement. Any stockholder
present in person or by proxy (including broker non-votes) at the Community
Special Meeting, but who abstains from voting, will be counted for purposes of
determining whether a quorum exists. With respect to matters considered at the
Community Special Meeting, abstentions (or broker non-votes) will have the same
effect as a vote against the proposal.
Shares of Community Common Stock represented by properly executed proxies
will be voted in accordance with the instructions indicated on such proxies,
unless such proxies have been previously revoked. If no instructions are
indicated, such shares will be voted in favor of the proposal to approve the
Merger and the Merger Agreement. Any stockholder who has given a proxy may
revoke it at any time before it is voted by filing with the Secretary of
Community, at the address of Community set forth above, written notice of
revocation or a duly executed proxy bearing a later date, or by attending the
Community Special Meeting and voting in person (although attendance at the
Community Special Meeting will not in and of itself constitute revocation of a
proxy).
If the Community Special Meeting is adjourned for any purpose, at any
subsequent reconvening of the Community Special Meeting, to the extent permitted
by law, all proxies will be voted in the same manner as such proxies would have
been voted at the original meeting (except for any proxies which have
theretofore effectively been revoked or withdrawn).
The cost of soliciting proxies from holders of Community Common Stock will
be borne by Community. Such solicitation will be made by mail, but may also be
made by telephone or in person by the directors, officers, or employees of
Community. Such directors, officers and employees will not receive additional
compensation for such solicitation, but may be reimbursed for out-of-pocket
expenses incurred in connection therewith. In addition, Community has retained
Morrow & Co. to assist in such solicitation and to provide proxy materials to
custodians, nominees and fiduciaries. For such services, Community will pay
Morrow & Co. a fee of $6,500, plus reasonable out-of-pocket expenses. Community
will also reimburse banks, brokerage houses and other custodians, nominees and
fiduciaries for their reasonable expenses in forwarding any proxy soliciting
materials to their principals.
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<PAGE>
Other than the proposal relating to the Merger and the Merger Agreement,
Community does not know of any matters which are to come before the Community
Special Meeting. Should any other business properly come before the Community
Special Meeting, the proxy holders will have discretionary authority to vote the
shares of Community Common Stock represented by duly executed proxies on such
matters in accordance with their best judgment.
HALLMARK. Only holders of record of Hallmark Common Stock and Hallmark
Preferred Stock as of the close of business on August 26, 1994 are entitled to
notice of the Hallmark Special Meeting. Only holders of record of Hallmark
Voting Stock as of such date are entitled to vote at the Hallmark Special
Meeting or any adjournment thereof. At such date, there were [3,179,764] shares
of Hallmark Class A Common Stock outstanding held by approximately 800 holders
of record and [32,301] shares of Hallmark Preferred Stock outstanding held by
approximately 1,500 holders of record.
Stockholders of record on the record date are entitled to one vote per share
on any matter which may properly come before the Hallmark Special Meeting. The
presence, either in person or by proxy, of the holders of a majority of the
shares of Hallmark Voting Stock outstanding on the record date is necessary to
constitute a quorum at the Hallmark Special Meeting. The affirmative vote of the
holders of a majority of the shares of Hallmark Class A Common Stock and
Hallmark Preferred Stock outstanding on the record date, voting together as a
single class, is required to approve and adopt the Merger and the Merger
Agreement. Any stockholder present in person or by proxy (including broker
non-votes) at the Hallmark Special Meeting, but who abstains from voting, will
be counted for purposes of determining whether a quorum exists. Abstentions (or
broker non-votes) will be counted in determining the minimum of affirmative
votes required for approval of the Merger and the Merger Agreement at the
Hallmark Special Meeting and, accordingly, will have the effect of a vote
against such matters.
Shares of Hallmark Voting Stock represented by properly executed proxies
will be voted in accordance with the instructions indicated on such proxies,
unless such proxies have been previously revoked. If no instructions are
indicated, such shares will be voted in favor of the proposal to approve and
adopt the Merger and the Merger Agreement. Any Stockholder who has given a proxy
may revoke it at any time before it is voted by filing with the Secretary of
Hallmark, at the address of Hallmark set forth above, written notice of
revocation or a duly executed proxy bearing a later date, or by attending the
Hallmark Special Meeting and voting in person (although attendance at the
Hallmark Special Meeting will not in and of itself constitute revocation of a
proxy).
If the Hallmark Special Meeting is adjourned for any purpose, at any
subsequent reconvening of the Hallmark Special Meeting, to the extent permitted
by law, all proxies will be voted in the same manner as such proxies would have
been voted at the original meeting (except for any proxies which have
theretofore effectively been revoked or withdrawn).
The cost of soliciting proxies from holders of Hallmark Common Stock will be
borne by Hallmark. Such solicitation will be made by mail, but may also be made
by telephone or in person by the directors, officers or employees of Hallmark.
Such directors, officers and employees will not receive additional compensation
for such solicitation, but may be reimbursed for out-of-pocket expenses incurred
in connection therewith. In addition, Hallmark has retained Corporate Investor
Communications, Inc. to assist in such solicitation and to provide proxy
materials to custodians, nominees and fiduciaries. For such services, Hallmark
will pay Corporate Investor Communications, Inc. a fee of $5,500, plus
reasonable out-of-pocket expenses. Hallmark will also reimburse banks, brokerage
houses and other custodians, nominees and fiduciaries for their reasonable
expenses in forwarding any proxy soliciting materials to their principals.
Other than the proposal relating to the Merger and the Merger Agreement,
Hallmark does not know of any matters which are to come before the Hallmark
Special Meeting. Should any other business properly come before the Hallmark
Special Meeting, the proxy holders will have discretionary authority to vote the
shares of Hallmark Voting Stock represented by duly executed proxies on such
matters in accordance with their best judgment.
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BACKGROUND OF THE MERGER AND RELATED MATTERS
BACKGROUND OF THE MERGER
On March 18, 1994, James T. McAfee, Jr., Chairman of the Board of Directors
and Chief Executive Officer of Hallmark, and Robert M. Thornton, Jr., President,
Chief Operating Officer and Chief Financial Officer of Hallmark, were in Houston
and visited with E. Thomas Chaney, President and Chief Executive Officer of
Community. Mr. McAfee, Mr. Chaney and Richard E. Ragsdale, Chairman of the Board
of Directors of Community, had all worked together as employees of Hospital
Affiliates International, Inc. in the 1970s. The discussion centered around the
past and current operating issues in the healthcare industry. The possibility of
a business combination between Community and Hallmark was also discussed
generally at that meeting. On March 25, 1994, Community and Hallmark agreed to a
confidentiality agreement and shortly thereafter exchanged limited, confidential
financial information concerning their respective companies as a preliminary
means of exploring a transaction between the companies.
After study, on March 30, 1994, Mr. McAfee and Mr. Thornton met in Nashville
at Community's offices with Mr. Chaney, Mr. Ragsdale and approximately five
other officers of Community. At this meeting, both parties expressed interest in
exploring a business combination between Community and Hallmark, particularly in
light of their common business strategies of operating non-urban hospitals. The
Executive Committee of Hallmark's Board of Directors, which consists of Messrs.
McAfee and Thornton and two outside Directors, met on April 19, 1994 to discuss
Hallmark's future and alternatives to enhance stockholder value. At that
meeting, the Executive Committee unanimously authorized senior management to
engage an investment banking firm to advise Hallmark with respect to a possible
business combination with Community and other matters. On April 21, 1994,
Messrs. McAfee and Thornton met with Messrs. Chaney and Ragsdale to continue
their discussions regarding a possible business combination at the offices of
King & Spalding in Atlanta. On March 18, 1994, Community retained Lehman
Brothers as its financial advisor and on April 22, 1994, Hallmark retained Mabon
as its financial advisor.
On May 23, 1994, Mr. McAfee, Mr. Thornton and representatives of Mabon met
with Mr. Chaney, Mr. Ragsdale, Ms. Deborah G. Moffett, Vice President, Finance
of Community, and representatives of Lehman Brothers in Atlanta to discuss a
possible business combination. At that meeting, Mabon made a presentation to
Community and its advisors concerning the potential value of Hallmark. In a
meeting in New York on May 25, 1994, Messrs. McAfee, Thornton, Chaney and
Ragsdale agreed tentatively to pursue a stock transaction to combine Community
and Hallmark, to undertake further due diligence reviews and to commence
negotiations on a definitive merger agreement.
From May 30 through June 10, 1994, Hallmark and Community conducted due
diligence investigations of each other and exchanged drafts of a proposed merger
agreement. On June 1, 1994, the Board of Directors of Hallmark held a special
meeting, at which representatives of Mabon made a presentation concerning their
preliminary analysis of the proposed merger. Detailed negotiations concerning
the merger agreement occurred between June 8 and June 10, 1994.
On June 10, 1994, the Boards of Directors of each of Community and Hallmark
held concurrent special meetings in Atlanta. At such meetings, members of each
company's senior management, together with their legal and financial advisors,
reviewed the background of the proposed merger, the strategic rationale for the
proposed merger, a summary of due diligence findings, financial and valuation
analyses of the transaction, the terms of the merger agreement and the potential
risks and benefits of the merger. Lehman Brothers delivered its written opinion
to Community's Board of Directors that, as of such date, the consideration to be
paid by Community in the Merger was fair to Community from a financial point of
view. Mabon delivered its written opinion to the Board of Directors of Hallmark
that, as of such date, the Merger was fair to the holders of Hallmark Common
Stock from a financial point of view. At the request of Hallmark's Board of
Directors, Mabon also advised the Hallmark Board at such meeting of the results
of valuing the Hallmark Preferred Stock using several methodologies commonly
used to value similar securities. The work done by Mabon with
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reference to the Hallmark Preferred Stock was limited in scope and did not
address the fairness of the Merger, from a financial point of view, to the
holders of Hallmark Preferred Stock. Hallmark's Board of Directors, after
discussing the advice received from Mabon, as well as other factors, concluded
that the proposed merger was fair to holders of Hallmark Preferred Stock.
REASONS FOR THE MERGER
Community's Board of Directors believes that the Merger is in the best
interests of Community and its stockholders. Hallmark's business strategy of
operating non-urban acute-care hospitals is consistent with Community's
operating philosophy. In addition, the hospitals owned and operated by Hallmark,
being in the same geographic region of the United States, complement those
operated by Community and offer Community the opportunity to expand its
operating base with limited changes in its supervisory and corporate structure
and staff. Although there can be no assurances, Community expects to achieve
certain economies of scale and operating efficiencies in connection with the
Merger, which would result in annual savings of approximately $10,000,000. It is
anticipated that these savings will occur as a result of the reduction of
redundant overhead costs, the reduction or elimination of certain purchased
services and hospital personnel and the implementation of, and compliance with,
system-wide supply contracts. Based on the relative earnings of both companies
and the exchange ratios, Community's Board of Directors believes the acquisition
of Hallmark should be accretive to Community's current stockholders, assuming
these economies of scale and operating efficiencies are achieved. Community's
Board of Directors also believes that the issuance of Community Common Stock in
the Merger will significantly enlarge its retail and institutional stockholder
base and provide a more liquid and efficient market for its common stock.
FOR THE REASONS SET FORTH ABOVE, COMMUNITY'S BOARD OF DIRECTORS VOTED
UNANIMOUSLY TO APPROVE THE MERGER AND RECOMMENDED THAT HOLDERS OF COMMUNITY'S
COMMON STOCK VOTE FOR THE APPROVAL OF THE MERGER AND THE MERGER AGREEMENT.
Hallmark's Board of Directors believes that the Merger is in the best
interests of holders of Hallmark Common Stock and Hallmark Preferred Stock.
Community has a larger market capitalization and a more active market for its
shares, which will provide holders of Hallmark Common Stock and Hallmark
Preferred Stock with greater liquidity. The Merger will also allow Hallmark
stockholders to own shares in a larger company. In addition, the market value of
the Community Common Stock offered in exchange for the Hallmark Common Stock
represents a substantial premium over the book value of Hallmark Common Stock,
and as of the date Hallmark's Board of Directors approved the transaction, a
substantial premium over the then-current market value of Hallmark Class A
Common Stock and a smaller premium over the highest prices at which Hallmark
Class A Common Stock has traded during the last five years.
Based on the market value of Community Common Stock on June 10, 1994, the
value of the Community Common Stock offered in exchange for the Hallmark
Preferred Stock exceeded what the Board believed to be the last reported trading
price of the Preferred Stock prior to the public announcement of the Merger by
$52.10 per share. The valuation performed by Mabon also considered that each
share of Hallmark Preferred Stock may be converted into five shares of Hallmark
Class A Common Stock. Assuming a holder of one share of Hallmark Preferred Stock
exercised the conversion right on June 10, 1994 and received five shares of
Hallmark Class A Common Stock (a value of $65.00 based on the closing sale price
of Hallmark Class A Common Stock on June 9, 1994) and further assuming that the
Hallmark Preferred Stock carried a 30% preferred stock seniority premium
($19.50), the value of a share of Hallmark Preferred Stock would have been
$84.50. Pursuant to the Merger, the holder of one share of Hallmark Preferred
Stock would have received 5.4 shares of Community Common Stock with a value of
$129.60. Therefore, the value of such Community Common Stock exceeded the per
share value of the Hallmark Preferred Stock by $45.10, when the Hallmark
Preferred Stock was valued based on the conversion ratio of five shares of
Hallmark Class A Common Stock for each share of Hallmark Preferred Stock, plus
an assumed 30% preferred stock seniority premium. The Board of Directors also
considered the value of the Hallmark Preferred Stock
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based on the conversion rights alone of the Hallmark Preferred Stock (five
shares of Hallmark Class A Common Stock, or an indicated value of $115 per
share, based on an assumed transaction value of $23.00 per share used by Mabon
for the basis of its opinion on the Hallmark Common Stock) and the value of the
Hallmark Preferred Stock based on a discounted cash flow analysis using the
mandatory redemption dates for the Hallmark Preferred Stock contained in
Hallmark's Certificate of Incorporation and assuming the payment of accrued
dividends. Based on the discount rates used (ranging from 10% to 15%), the value
of the Hallmark Preferred Stock under this approach was between $94.34 and
$115.96, compared to a value of approximately $129.60 of Community Common Stock
(based on the closing price of $24.00 per share of Community Common Stock on
June 10, 1994) offered under the Merger Agreement. The Board of Hallmark also
considered that, if the outstanding shares of Hallmark Preferred Stock were to
be redeemed on June 10, 1994, a holder of Hallmark Preferred Stock would receive
$146.25 per share assuming the redemption price included cumulative and unpaid
dividends through March 31, 1994. However, with respect to the redemption price,
the Board considered the following factors: (i) Hallmark has no intention of
effecting an optional redemption of the Hallmark Preferred Stock for the
foreseeable future and (ii) the indenture for Hallmark's Senior Subordinated
Notes imposes limitations on Hallmark's ability to redeem the Hallmark Preferred
Stock. The Board noted that the Hallmark Preferred Stock is subject to mandatory
redemption at such price, in installments in 1995 (approximately 13% of the
liquidation preference outstanding on such date), 1999 (approximately 53% of the
liquidation preference outstanding on such date) and 2000 (all shares
outstanding on such date). The Board concluded that it was in the best interests
of a holder of Hallmark Preferred Stock to receive 5.4 shares of Community
Common Stock in the Merger rather than bear the risks, and the loss of the
time-value of funds, associated with waiting until as late as 2000 to receive
the redemption price. In this regard, the Board considered that the discounted
cash flow from the mandatory redemption of a share of Hallmark Preferred Stock,
assuming the payment of accrued dividends, was as noted above, between $94.34
and $115.96 per share. See "-- Recommendations of the Boards of Directors --
Hallmark's Board Recommendation."
FOR THE REASONS SET FORTH ABOVE, HALLMARK'S BOARD OF DIRECTORS VOTED
UNANIMOUSLY TO APPROVE THE MERGER AND RECOMMENDED THAT HOLDERS OF HALLMARK
VOTING STOCK VOTE FOR THE APPROVAL OF THE MERGER AND THE MERGER AGREEMENT.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
COMMUNITY BOARD'S RECOMMENDATION. Community's Board of Directors, at a
meeting held on June 10, 1994, determined that the Merger is advisable and is in
the best interests of Community and its stockholders, and unanimously approved
the Merger. The Board of Directors of Community unanimously recommends that the
holders of Community Common Stock vote FOR the proposal to approve the Merger
and the Merger Agreement. Community's Board of Directors believes that the
Merger is in the best interests of Community for the reasons set forth above.
In reaching its decision, Community's Board of Directors considered a number
of factors, including, among others, those set forth above and (i) the operating
results and markets of Hallmark's acute-care and psychiatric hospitals, (ii) the
financial condition, results of operations, cash flows, business and prospects
of Hallmark, and the opportunities to consolidate, improve and expand Hallmark's
business and operations, other than through the closure of any Hallmark hospital
facilities, (iii) the increased stockholder base and the effects on the market
for Community's Common Stock that would result from the Merger, (iv) the pro
forma effect of the Merger on the financial condition, results of operations and
cash flows of Community, including cash outlays for severence payments, bonuses
and other employee benefits, stipends to directors and the tender offer for
Hallmark's Senior Subordinated Notes, (v) the tax-free structure of the
transaction and the accounting treatment that would be accorded the Merger, (vi)
the terms of the Merger Agreement and the likelihood of closing the transactions
contemplated thereby, (vii) the price paid in comparable transactions in the
healthcare industry, and (viii) the written opinion of Lehman Brothers that the
consideration to be paid by Community in the Merger is fair, as of the date of
such opinion, to Community from a financial point of view. See "-- Opinions of
Financial Advisors."
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Community's Board also considered a number of potentially negative factors
in its deliberations concerning the Merger, including: (i) the substantial
charges expected to be incurred in connection with the Merger, primarily in the
first quarter following the closing of the Merger; (ii) the risk that the market
price of Community Common Stock might be adversely affected by the public
announcement of the Merger; (iii) the risk that the anticipated benefits of the
Merger might not be fully realized; and (iv) the limitation on the use of
Hallmark's net operating loss carryforwards caused by the change in ownership
resulting from the Merger. In the Community Board's view, these considerations
were not sufficient, either individually or collectively, to outweigh the
advantages of the proposed combination in the manner in which it was proposed.
In view of the wide variety of factors considered in connection with its
evaluation of the proposed Merger, Community's Board of Directors did not find
it practicable to, and did not, quantify or otherwise attempt to assign relative
weights to the specific factors considered in reaching its determination.
HALLMARK BOARD'S RECOMMENDATION. At the June 10, 1994 meeting of the Board
of Directors, Hallmark's Directors determined that, taking into account current
market conditions and the potential benefits of the combination of Community and
Hallmark, the Merger is advisable and in the best interests of Hallmark and its
stockholders, and unanimously approved the Merger. The Board of Directors of
Hallmark unanimously recommends that holders of Hallmark Voting Stock vote FOR
the proposal to approve and adopt the Merger and the Merger Agreement. The
Hallmark Board believes that the Merger is in the best interests of holders of
Hallmark Common Stock and Hallmark Preferred Stock for the reasons set forth
above.
In reaching its conclusions, the Hallmark Board considered a number of
factors, including, among others, the factors set forth above and (i) an
analysis of the potential value of Hallmark's Common Stock based on "growth
case" and "base case" projections of 1995 fiscal year earnings, (ii) the
premiums paid over the pre-announcement stock prices of acquired companies in
hospital management company acquisitions during the past two years, (iii) a
written opinion that the Merger is fair, as of the date of such opinion, to the
holders of Hallmark Common Stock from a financial point of view, (iv) the
existing and historical financial conditions, results of operations, assets,
liabilities, management, operations and business of each company, as well as
assessments of the earnings potential and future values of Community and
Hallmark, separately and as a combined enterprise, (v) the historical market
prices of Community Common Stock, Hallmark Common Stock and Hallmark Preferred
Stock and recent trends in the market prices of shares of publicly traded
companies in general, (vi) certain financial information concerning publicly
traded companies deemed similar to Hallmark or Community, (vii) factors relating
to the Hallmark Preferred Stock, as discussed below, and (viii) the growth and
earnings potential of the respective businesses of Hallmark and Community. See
"-- Opinions of Financial Advisors."
Mabon did not render an opinion regarding the fairness of the Merger from a
financial point of view to holders of Hallmark Preferred Stock. However, at the
Board's request, Mabon advised the Board of the results of valuing the Hallmark
Preferred Stock using several methodologies commonly used to value similar
securities. The work done by Mabon with reference to the Hallmark Preferred
Stock was limited in scope and did not address the fairness of the Merger, from
a financial point of view, to the holders of Hallmark Preferred Stock. The four
methods of valuing the Preferred Stock were (a) conversion at the then current
market price for the Hallmark Class A Common Stock plus an assumed 30% preferred
stock seniority premium (indicated value of $84.50 per share); (b) discounted
cash flow from mandatory redemption dates assuming the payment of accrued
dividends ($94.34 to $115.96 per share, depending on the discount rate used,
which rates ranged from 10% to 15% per annum); (c) conversion into five shares
of Hallmark Common Stock as provided by the Hallmark Certificate of Designation
and assuming a Merger value of $23.00 per share of Hallmark Common Stock ($115
per share); and (d) assumed optional redemption by Hallmark on June 10, 1994
($125 per
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share, or $146.25 per share if cumulative and unpaid dividends through March 31,
1994 are paid upon optional redemption). The Board considered Mabon's analysis,
as well as other factors, in deciding to recommend the Merger to holders of
Hallmark Preferred Stock.
OPINIONS OF FINANCIAL ADVISORS
OPINION OF COMMUNITY'S FINANCIAL ADVISOR. Community has engaged Lehman
Brothers to act as its financial advisor in connection with the Merger and to
render its opinion with respect to the fairness, from a financial point of view,
to Community of the consideration to be paid by Community in the Merger.
On June 10, 1994, in connection with the Community Board of Directors'
consideration of the Merger, Lehman Brothers made a presentation to the
Community Board with respect to the Merger and rendered its written opinion
that, as of the date of such opinion, and subject to assumptions, factors and
limitations set forth in such opinion as described below, the consideration to
be paid by Community in the Merger is fair, from a financial point of view, to
Community.
THE FULL TEXT OF THE WRITTEN OPINION OF LEHMAN BROTHERS, DATED JUNE 10,
1994, WHICH SETS FORTH ASSUMPTIONS MADE, FACTORS CONSIDERED AND LIMITATIONS ON
THE REVIEW UNDERTAKEN BY LEHMAN BROTHERS, IS INCLUDED AS APPENDIX C TO THIS
JOINT PROXY STATEMENT/PROSPECTUS. COMMUNITY'S STOCKHOLDERS ARE URGED TO READ
SUCH OPINION CAREFULLY AND IN ITS ENTIRETY.
No limitations were imposed by Community on the scope of Lehman Brothers'
investigation or the procedures to be followed by Lehman Brothers in rendering
its opinion. Lehman Brothers was not requested to and did not make any
recommendation to the Board of Directors of Community as to the form or amount
of consideration to be paid by Community in the Merger, which was determined
through arm's-length negotiations between the parties in which Lehman Brothers
assisted Community. In arriving at its opinion, Lehman Brothers did not ascribe
a specific range of value to Hallmark, but made its determination as to the
fairness, from a financial point of view, of the consideration to be paid by
Community in the Merger on the basis of the financial and comparative analyses
referenced below. Lehman Brothers' opinion is directed to the Board of Directors
of Community only and does not constitute a recommendation to any stockholder of
Community as to how such stockholder should vote at the Community Special
Meeting. Lehman Brothers was not requested to opine as to, and its opinion does
not in any manner address, Community's underlying business decision to proceed
with or effect the Merger.
In arriving at its opinion, Lehman Brothers reviewed and analyzed the Merger
Agreement and certain other information concerning Community and Hallmark.
Lehman Brothers reviewed and analyzed the following items concerning Hallmark:
(1) publicly available information concerning Hallmark which Lehman Brothers
believed to be relevant to its inquiry, including Hallmark's Annual Report on
Form 10-K for the year ended June 30, 1993, its Quarterly Report on Form 10-Q
for the quarter ended March 31, 1994, its Proxy Statement for the Annual Meeting
of Stockholders held November 23, 1993, and its Prospectus, dated November 5,
1993, related to the public offering of the Senior Subordinated Notes, (2) a
trading history of Hallmark Class A Common Stock from June 1991 to the date of
such opinion and a comparison of that trading history with those of other
companies which Lehman Brothers deemed relevant, (3) a comparison of the
historical financial results and present financial condition of Hallmark with
those of other companies which Lehman Brothers deemed relevant and (4) a
comparison of the financial terms of the Merger with the financial terms of
certain other transactions which Lehman Brothers deemed relevant. In addition,
Lehman Brothers had discussions with the management of Hallmark concerning its
business, operations, assets, financial condition and prospects and undertook
such other studies, analyses and investigations as Lehman Brothers deemed
appropriate.
Lehman Brothers reviewed and analyzed the following items concerning
Community: (1) publicly available information concerning Community which Lehman
Brothers believed to be relevant to its inquiry, including Community's Annual
Report on Form 10-K for the year ended December 31, 1993,
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its Quarterly Report on Form 10-Q for the quarter ended March 31, 1994, and its
Prospectus, dated August 4, 1993, related to the public offering of $100,000,000
principal amount of 10 1/4% Senior Subordinated Debentures due 2003, (2)
financial and operating information with respect to the business, operations and
prospects of Community furnished to Lehman Brothers by Community, (3) a trading
history of Community Common Stock from June 1991 to the date of such opinion and
a comparison of that trading history with those of other companies which Lehman
Brothers deemed relevant, (4) a comparison of the historical financial results
and present financial condition of Community with those of other companies which
Lehman Brothers deemed relevant and (5) the pro forma effect of the Merger on
the financial statements of Community. In addition, Lehman Brothers had
discussions with the management of Community concerning Community's business,
operations, assets, financial condition and prospects, and undertook such other
studies, analyses and investigations as Lehman Brothers deemed appropriate.
In connection with its review, Lehman Brothers assumed and relied upon the
accuracy and completeness of the financial and other information used by it in
arriving at its opinion without independent verification (including the
information provided by Hallmark) and further relied upon the assurances of the
management of Community that such management was not aware of any facts that
would make such information inaccurate or misleading. With respect to the
financial projections of Community, including those relating to a range of
potential synergies that may result from the Merger, upon advice of Community,
Lehman Brothers assumed that such projections were reasonably prepared on a
basis reflecting the best currently available estimates and judgments of the
management of Community as to the future financial performance of Community, and
Lehman Brothers relied on such projections in arriving at its opinion. However,
in connection with its review and analysis of Hallmark, Lehman Brothers did not
have any access to Hallmark's financial projections and strategic plans for 1994
and subsequent years. In arriving at its opinion, Lehman Brothers did not
conduct a physical inspection of the properties and facilities of Community or
Hallmark and did not make nor obtain any evaluations or appraisals of the assets
or liabilities of Community or Hallmark. Lehman Brothers' opinion was
necessarily based upon market, economic, legislative, regulatory (including
current reimbursement practices under Medicare and Medicaid programs) and other
conditions as they exist on, and can be evaluated as of, the date thereof. Upon
advice of Community and its accounting advisors, Lehman Brothers assumed that
the Merger will qualify for pooling of interests accounting treatment.
In connection with its presentation to the Board of Directors of Community
and advising the Community Board of its opinion on June 10, 1994, Lehman
Brothers performed certain financial and comparative analyses, including those
described below. All material factors that Lehman Brothers considered and all
material financial and comparative analyses that Lehman Brothers performed are
described herein. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of those methods to the particular circumstances,
and therefore such an opinion is not readily susceptible to summary description.
Furthermore, in arriving at its fairness opinion, Lehman Brothers did not
attribute any particular weight to any analysis or factor considered by it, but
rather made qualitative judgments as to the significance and relevance of each
analysis and factor. Accordingly, Lehman Brothers believes that its analyses
must be considered as a whole and that considering any portions of such analyses
and of the factors considered, without considering all analyses and factors,
could create a misleading or incomplete view of the process underlying the
opinion. In its analyses, Lehman Brothers made numerous assumptions with respect
to industry performance, general business and economic conditions and other
matters, many of which are beyond the control of Community and Hallmark. Any
estimates contained in these analyses are not necessarily indicative of actual
values or predictive of future results or values, which may be significantly
more or less favorable than as set forth therein. In addition, analyses relating
to the value of businesses do not purport to be appraisals or to reflect the
prices at which businesses actually may be sold.
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PURCHASE PRICE RATIO ANALYSIS. Based on the closing prices of Community
Common Stock and Hallmark Class A Common Stock on June 8, 1994 of $23.50 and
$13.00 per share, respectively, an assumed transaction value of $23.00 per share
used by Lehman Brothers for the basis of its opinion represented a premium of
76.9% over the June 8, 1994 closing price of Hallmark Class A Common Stock.
COMPARABLE COMPANY ANALYSIS. Using publicly available information, Lehman
Brothers compared selected financial data of Community and Hallmark with similar
data of selected publicly traded companies engaged in businesses considered by
Lehman Brothers to be comparable to those of Community and Hallmark.
Specifically, Lehman Brothers included in its review American Medical Holdings,
Inc., Columbia/HCA Healthcare Corporation, Health Management Associates, Inc.,
Healthtrust Inc. -- The Hospital Company, OrNda Healthcorp, Quorum Health Group,
Inc., and Universal Health Services, Inc. (the "Comparable Universe"). Lehman
Brothers calculated, among other things, current market price per share as a
multiple of the latest reported twelve months ("LTM") earnings per share
("EPS"), estimated 1994 EPS and estimated 1995 EPS. The 1994 and 1995 EPS
estimates were based on the mean of publicly available earnings estimates made
by research analysts as provided by First Call Investor Service and
calendarized. Lehman Brothers also calculated current market value plus net debt
as a multiple of LTM revenues, earnings before interest and taxes ("EBIT") and
EBIT plus depreciation and amortization expenses ("EBITDA"). The result of these
calculations were used to impute a range of values for a share of Hallmark
Common Stock by applying the multiples derived from the calculation to
Hallmark's financial data. The analysis yielded a range of values for a share of
Hallmark Common Stock of $13.90 to $58.00. During its oral presentation, Lehman
Brothers focused on multiples of EBITDA, which are the most used measures of
valuation in the hospital industry and are typically used for highly leveraged
companies such as Hallmark. Based on the mean and median LTM EBITDA multiples
(which were equal), the analysis yielded a value for a share of Hallmark stock
of $31.34. Because of the inherent differences between the business, operations
and prospects of Hallmark and the businesses, operations and prospects of the
companies included in the Comparable Universe, Lehman Brothers believed that it
was inappropriate to, and therefore did not, rely solely on the quantitative
results of the analysis, and accordingly also made qualitative judgments
concerning differences between the financial and operating characteristics of
Hallmark and the companies included in the Comparable Universe that would affect
the public trading values of Hallmark and such comparable companies.
COMPARABLE TRANSACTION ANALYSIS. Using publicly available information,
Lehman Brothers compared selected financial data (including total equity
transaction value as a multiple of LTM net income and total equity transaction
value plus net debt as a multiple of LTM revenues, LTM EBIT and LTM EBITDA) for
Hallmark with similar data for 15 selected transactions in the hospital
management industry. Using the same methodology as in the analysis of comparable
companies, the multiples derived from this analysis were used to impute a range
of control values for a share of Hallmark Common Stock. The analysis yielded a
range of control values for a share of Hallmark Common Stock of $11.72 to
$41.40. During its oral presentation, Lehman Brothers again focused on multiples
of EBITDA. Based on the mean and median EBITDA multiples, the analysis yielded a
range of values for a share of Hallmark Common Stock of $22.36 to $23.55.
Because the reasons for and the circumstances surrounding each of the
transactions analyzed were specific to each transaction and because of the
inherent differences between the business, operations and prospects of Hallmark
and the businesses, operations and prospects of the selected acquired companies
analyzed, Lehman Brothers believed that it was inappropriate to, and therefore
did not, rely solely on the quantitative results of the analysis, and
accordingly also made qualitative judgments concerning differences between the
characteristics of these transactions and the Merger that would affect the
acquisition value of Hallmark and such acquired companies.
PRO FORMA CONTRIBUTION ANALYSIS. Lehman Brothers analyzed the contributions
of each of Community and Hallmark to net operating revenues, EBIT, EBITDA,
interest expense and income before extraordinary items based on LTM financial
results for each company. The analysis indicated
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that Community and Hallmark would contribute respectively 56.7% and 43.3% of net
operating revenues, 71.2% and 28.8% of EBIT, 67.9% and 32.1% of EBITDA, 66.8%
and 33.2% of interest expense, and 73.7% and 26.3% of income before
extraordinary items. Upon consummation of the Merger, the shareholders of
Community and Hallmark would own 75.6% and 24.4%, respectively, of the combined
entity on a fully diluted basis. Lehman Brothers compared this relative
ownership of the combined entity by Community's and Hallmark's shareholders with
the operating contributions set forth above.
STOCK PRICE PERFORMANCE. Lehman Brothers examined the trading history of
the Community Common Stock and the Hallmark Class A Common Stock in terms of
both price and volume during the period from June 7, 1991 to June 7, 1994. This
analysis showed that over the latest twelve month period, the common stock of
Community and Hallmark traded at levels higher than historical levels. For that
period, Hallmark Class A Common Stock traded in a range of $6.75 to $17.50 per
share and Community Common Stock traded in a range of $13.00 to $25.75 per
share. In addition, Lehman Brothers compared the prices of Community Common
Stock and Hallmark Class A Common Stock from June 7, 1993 to June 7, 1994 with
the Standard & Poor's Corporation ("S&P") Index of 400 Industrial Companies (the
"S&P 400").
PRO FORMA ANALYSIS. Lehman Brothers analyzed certain pro forma effects
resulting from the Merger for 1994, 1995 and 1996. This analysis was based on
(i) Community's projected financial performance through 1996 as provided to
Lehman Brothers by Community's management, (ii) projections for Hallmark based
on its historical growth rates and margins, and (iii) a range of potential
synergies that may result from the Merger as provided by Community's management.
Lehman Brothers calculated the pro forma projected financial statements for the
combined company for 1994, 1995 and 1996 which indicated that, under certain
assumed levels of cost savings and other operating efficiencies, including,
among other things, reduction of overhead costs, supply costs savings and the
reduction or elimination of purchased services and hospital personnel, the
Merger would be accretive to Community's stand-alone earnings per share, as
estimated by Community's management, over the period. In addition, Lehman
Brothers calculated the pro forma debt and coverage ratios for the combined
company over the period which indicated that the Merger would cause a slight
increase in debt ratios and a decrease in coverage ratios that would then be
expected to improve over the period. Lehman Brothers also calculated the pro
forma earnings per share for the combined company in 1995 and 1996 based on a
range of cost savings and other operating efficiencies, including those
described above, which showed that the Merger ranges from at least slightly
accretive to significantly accretive to Community's stand-alone earnings per
share in 1995 and 1996.
Lehman Brothers is an internationally recognized investment banking firm
and, as part of its investment banking activities, is regularly engaged in the
evaluations of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements, and
valuations for corporate and other purposes. The Board of Directors of Community
selected Lehman Brothers because of its expertise, reputation and familiarity
with Community (including familiarity gained in acting as lead underwriter of
Community's public debt offering described above) and the hospital management
industry in general.
Pursuant to Lehman Brothers' engagement letter, Community agreed to pay
Lehman Brothers an initial retainer of $100,000, a fee of $300,000 upon delivery
of the fairness opinion described above, and a fee of $1,350,000, payable at the
closing of an acquisition of Hallmark. In addition, in connection with the
rendering of financial advisory services to Community with respect to the
Merger, Community has agreed to reimburse Lehman Brothers for reasonable
expenses incurred by Lehman Brothers, and to indemnify Lehman Brothers against
certain liabilities, including liabilities under federal securities laws.
Lehman Brothers has performed various investment banking services for
Community in the past (including as lead underwriter for Community's public debt
offering described above) and has received
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customary fees for such services. In the ordinary course of its business, Lehman
Brothers may trade in the debt and equity securities of Community and Hallmark
for its own account and for the accounts of its customers, and, accordingly, may
at any time hold a long or short position in such securities.
OPINION OF HALLMARK'S FINANCIAL ADVISOR. Hallmark engaged Mabon on April
22, 1994, to act as its financial advisor with respect to the Merger. In this
capacity, Mabon has rendered to Hallmark's Board of Directors an opinion that
the Merger is fair to holders of Hallmark Common Stock from a financial point of
view. Mabon delivered its written opinion, dated June 10, 1994, in connection
with the Board's approval of the Merger Agreement. Mabon's opinion states that,
as of the date of such opinion and based upon the review described therein, the
Merger is fair to the holders of Hallmark Common Stock from a financial point of
view. The opinion states that Mabon has not independently verified the
information furnished to it by Hallmark or Community and that is has assumed and
relied upon the accuracy and completeness of such information.
THE FULL TEXT OF THE WRITTEN OPINION OF MABON, DATED JUNE 10, 1994, WHICH
INCLUDES THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND CERTAIN LIMITATIONS ON
SCOPE OF ACTIVITIES, IS ATTACHED AS APPENDIX D TO THIS JOINT PROXY
STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. HALLMARK
STOCKHOLDERS ARE URGED TO READ THIS OPINION CAREFULLY IN ITS ENTIRETY. MABON'S
OPINION IS DIRECTED ONLY TO THE FAIRNESS OF THE EXCHANGE RATIO FOR HALLMARK
COMMON STOCK FROM A FINANCIAL POINT OF VIEW AND HAS BEEN PROVIDED SOLELY FOR THE
USE OF THE HALLMARK BOARD OF DIRECTORS IN ITS EVALUATION OF THE MERGER, DOES NOT
ADDRESS ANY OTHER ASPECTS OF THE MERGER OR RELATED TRANSACTIONS, AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY HALLMARK STOCKHOLDER AS TO HOW SUCH
STOCKHOLDER SHOULD VOTE AT THE HALLMARK SPECIAL MEETING. THE SUMMARY OF THE
OPINION OF MABON SET FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In arriving at its opinion, Mabon, among other things, with respect to
Hallmark: (a) reviewed, from a financial point of view, the Merger Agreement and
the appendices thereto; (b) studied the Annual Report to Stockholders and Annual
Reports on Form 10-K for the years ended June 30, 1991 through 1993 and its
interim reports on Form 10-Q and Form 8-K filed since June 30, 1993; (c)
reviewed certain financial and operating data relating to Hallmark's business
and prospects, which information and data management of Hallmark has represented
to Mabon as being accurate and, with respect to the prospects of Hallmark, as
being reasonable evaluations of Hallmark's prospects; (d) reviewed financial
information (both historical and forecast), certain contracts and agreements
relating to the business of Hallmark and discussed such financial information
and the business and prospects of Hallmark with management of Hallmark; (e)
reviewed the reported historical and recent market prices and trading volumes of
Hallmark Class A Common Stock; (f) compared the financial, operating and stock
price performance of Hallmark with certain other companies deemed comparable;
(g) reviewed the financial terms, to the extent publicly available, of certain
other acquisition transactions deemed comparable; and (h) made such other
analyses and examinations as Mabon deemed necessary or appropriate. With respect
to Community, Mabon, among other things: (1) studied the Annual Reports to
Stockholders and Annual Reports on Form 10-K for the years ended December 31,
1991 through 1993 and its interim reports on Form 10-Q and Form 8-K filed since
December 31, 1993; (2) reviewed certain financial and operating data relating to
Community's business and prospects, which information and data management of
Community has represented to Mabon as being accurate and, with respect to the
prospects of Community, as being reasonable evaluations of Community's
prospects; (3) reviewed historical financial information, certain contracts and
agreements relating to the business of Community and discussed such financial
information and the business and prospects of Community with management of
Community; (4) reviewed the reported historical and recent market prices and
trading volumes of Community Common Stock; (5) compared the financial, operating
and stock price performance of Community with certain other companies deemed
comparable; and (6) made such other analyses and examinations as Mabon deemed
necessary or appropriate.
Mabon also took into account its assessment of economic, market and
financial conditions generally and within the industry in which Hallmark and
Community are engaged.
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With the permission of the Hallmark Board, Mabon did not independently
verify the information concerning Hallmark and Community or other data
considered in its review, and for purposes of its opinion, Mabon assumed and
relied upon the accuracy and completeness of all such information and data.
Mabon did not undertake an independent appraisal of any of Hallmark's assets or
those of Community. With respect to the financial forecasts and prospects of
each of Hallmark and Community, Mabon relied on information provided by the
respective managements of Hallmark and Community to the effect that certain
publicly available forecasts are reasonable and that (i) as to the respective
forecasts, they are unaware of any facts that would make such information
incomplete or misleading and (ii) there have been no material adverse
developments in the business conditions (financial or otherwise) or prospects of
either of Hallmark or Community since each company's most recent fiscal year
end. Mabon's opinion is necessarily based on economic, market and other
conditions as they existed as of the date of its opinion, and the information
made available to Mabon, as of such date.
Mabon also assumed that the Merger will be treated as a pooling of interests
in accordance with generally accepted accounting principles and as a tax-free
reorganization for federal income tax purposes. Mabon's opinion relates to the
relative values of Hallmark and Community. Mabon did not express any opinion as
to what the value of the Community Common Stock actually will be when issued to
Hallmark stockholders pursuant to the Merger or the price at which the Community
Common Stock will trade subsequent to the Merger.
Hallmark did not ask Mabon to analyze, and Mabon's opinion does not present
a discussion of, the relative merits of the Merger as compared to any other
business plan or opportunity that might be presented to Hallmark or the effect
of any other arrangement in which Hallmark might engage, and Mabon was not
authorized to solicit, and did not solicit, any third-party indications of
interests for the acquisition of all or any other part of Hallmark.
The following is a brief summary of the report presented by Mabon to the
Hallmark Board of Directors on June 10, 1994.
COMPARABLE COMPANY ANALYSIS. As part of its analysis, Mabon reviewed the
recent stock market performance of Hallmark and compared it to the stock market
performances of seven other companies, including Community, which operate
hospitals. These other companies consisted of American Medical Holdings, Inc.,
Columbia/HCA Healthcare Corporation, Community, Health Management Associates,
Inc., Healthtrust, Inc. - The Hospital Company, OrNda HealthCorp and Universal
Health Services, Inc. (collectively, the "Industry Comparables"). Mabon compared
market values as multiples of, among other things, publicly reported latest 12
months ("LTM") net income, current calendar year estimated earnings per share
and calendar 1995 estimated earnings per share. In addition, Mabon compared
market capitalization as multiples, among other things, of publicly reported LTM
earnings before interest and taxes ("EBIT"), publicly reported LTM earnings
before interest, taxes, depreciation and amortization ("EBITDA") and publicly
reported LTM revenues. In connection with the issuance of its opinion on June
10, 1994, Mabon determined that these multiples of market value to (i) LTM net
income ranged from 14.3x to 29.3x (with a mean of 20.4x); (ii) current calendar
year's estimated earnings per share ranged from 13.5x to 26.2x (with a mean of
17.9x); (iii) estimated calendar year 1995 estimated earnings per share ranged
from 11.9x to 21.4x (with a mean of 15.5x); and market capitalization to (iv)
LTM EBIT ranged from 9.0x to 16.0x (with a mean of 11.0x); (v) LTM EBITDA ranged
from 5.2x to 13.4x (with a mean of 7.8x); and (vi) LTM revenues ranged from 0.6x
to 3.0x (with a mean of 1.5x).
Mabon then calculated per share equity values for Hallmark by applying
Hallmark's LTM financial results to the mean multiples derived from its analysis
of the Industry Comparables described above. Using these multiples of LTM EBIT,
LTM EBITDA and LTM net income, which were considered most relevant by Mabon,
Mabon calculated per share imputed equity values of Hallmark ranging from $15.08
to $29.68, with a mean of $22.22. Given Hallmark's characteristics of high
leverage,
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difficult financial history and lack of experience in growth through
acquisitions, which differentiated it from the Industry Comparables, Mabon
believed that it would be appropriate to apply some discount to the quantitative
result of the analysis.
SELECTED COMPARABLE TRANSACTIONS ANALYSIS. Mabon, utilizing publicly
available information, analyzed the purchase price and imputed transaction
multiples and values on the following selected merger and acquisition
transactions (the "Acquisition Comparables") each of which was completed or
reported within the last two years: Healthtrust, Inc. -The Hospital Company/EPIC
Holdings, Inc.; OrNda HealthCorp/Summit Health Ltd.; OrNda HealthCorp/American
Healthcare Management, Inc.; Columbia Healthcare Corporation/HCA-Hospital
Corporation of America; Quorum, Inc./Charter Medical Corporation; Columbia
Healthcare Corporation/Galen Health Care, Inc.; and Columbia Hospital
Corporation/Basic American Medical, Inc. Mabon compared the equity value (based
on the closing price on the last full day of trading prior to the announcement
of such transactions) as a multiple of publicly available LTM net income and
publicly available LTM cash flow (defined as net income plus depreciation and
amortization) and compared the total consideration (defined as equity value of
transaction plus debt less cash) as multiples of LTM EBITDA, LTM EBIT and LTM
revenues. The multiples of LTM net income and LTM cash flow were between the
following ranges: (i) LTM net income ranged from 12.3x to 18.1x (with a mean of
14.4x); and (ii) LTM cash flow ranged from 5.4x to 21.0x (with a mean of 9.4x).
The range of total considerations as multiples of LTM EBITDA, LTM EBIT and LTM
revenues, respectively, were: (a) LTM EBITDA: 5.4x to 8.6x (with a mean of
6.5x); (b) LTM EBIT: 7.9x to 14.5x (with a mean of 9.8x); and (c) LTM revenues:
0.7x to 1.5x (with a mean of 1.0x).
Mabon calculated per share equity values for Hallmark by applying Hallmark's
actual LTM financial results to the mean multiples derived from its analysis of
the Acquisition Comparables described above. Using the multiples of LTM EBIT,
LTM EBITDA, LTM net income and LTM cash flow, which were considered most
relevant by Mabon, Mabon calculated per share imputed equity values of Hallmark
ranging from $10.64 to $31.14, with a mean of $20.02. Given Hallmark's
characteristics of high leverage, difficult financial history and lack of
experience in growth through acquisitions, which differentiated it from the
Acquisition Comparables, Mabon believed that it would be appropriate to apply
some discount to the quantitative result of the analysis.
No company, transaction or business used by Mabon in the comparable company
and comparable transactions analyses as a comparison should be viewed as nearly
identical to Hallmark or Community. Accordingly, an analysis of the results of
the foregoing is not entirely mathematical; rather, it involves complex
considerations and judgements concerning differences in financial and operating
characteristics and other factors that could affect the acquisition or public
trading value of the comparable companies or the business segment or company to
which they are being compared.
DISCOUNTED CASH FLOW ANALYSIS. Mabon performed a discounted cash flow
analysis of the projected free cash flow of Hallmark for the calendar year ended
December 31, 1994 through calendar year 1998, assuming, among other things,
discount rates of 10.0%, 12.5% and 15.0% and terminal multiples of cash flow
from operations (defined for this purpose as net income plus depreciation and
amortization plus deferred taxes) of 6.0x, 7.0x, 8.0x and 9.0x. Mabon performed
this analysis based on two different sets of operating projections approved by
Hallmark management, a "Growth Case" reflecting the initiation of an acquisition
strategy and a "Base Case" reflecting the continued operation of existing
hospitals. These analyses resulted in the following ranges of values per share
of the Hallmark Common Stock: (i) Growth Case: $14.47 to $33.16 (with a mean of
$23.05); and (ii) Base Case: $16.80 to $28.24 (with a mean of $22.10).
CONTRIBUTION ANALYSIS. Mabon analyzed the relative contribution of each of
Hallmark and Community to the pro forma combined entity resulting from the
Merger. Such analysis indicated Hallmark's contribution to the latest twelve
months ended March 31, 1994 pro forma combined entity would be 32.1% of EBITDA,
28.8% of EBIT, 16.7% of net income (excluding gain on sale of healthcare
facility and amortization of deferred debt restructuring credits), 35.5% of
total assets and 26.6% of book value.
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OTHER FACTORS AND COMPARATIVE ANALYSES. In rendering its opinion, Mabon
considered certain other factors and conducted certain other comparative
analyses, including, among other things, a review of (i) the history of trading
prices for Hallmark Class A Common Stock and Community Common Stock, and the
relationship between movements of such securities, movements of the common stock
of the Industry Comparables and movements in the S&P 500 Index; (ii) the pro
forma ownership of the combined company, (iii) the pro forma effects of the
Merger on earnings per share of Community; and (iv) the premium paid in the
Merger and premiums paid in comparable transactions.
The terms of Mabon's engagement provide that Hallmark will pay Mabon a
retention fee of $50,000 (paid upon the commencement of the engagement) and a
transaction fee equal to 1.0% of the "purchase price" up to $155,000,000 plus
2.0% of the "purchase price" in excess of $155,000,000 (payable upon the closing
of the transaction). As used in the engagement letter, the term "purchase price"
means the sum of the aggregate fair market value of any securities issued, and
any cash consideration paid in connection with the transaction, plus the amount
of any long-term debt, including the current portion thereof, and any capital
lease obligations of Hallmark that are assumed, directly or indirectly, by
Community. For purposes of such calculation, the fair market value of the
Community Common Stock to be issued in the merger was deemed to be $24.00 per
share, resulting in a total transaction fee of approximately $1,900,000. In
addition, Hallmark paid Mabon $150,000 for rendering its fairness opinion.
Mabon may also receive certain fees if the Merger Agreement is terminated or
if Hallmark receives another offer from a third-party. In addition to any such
fees payable to Mabon, Hallmark will reimburse Mabon for its out-of-pocket
expenses incurred in connection with its engagement. Hallmark has also agreed to
indemnify Mabon against certain liabilities and expenses (including liabilities
under the federal securities laws).
Hallmark engaged Mabon because it is a nationally recognized investment
banking firm with experience in transactions similar to the Merger and because
it is familiar with Hallmark and its business through acting as co-managing
underwriter for the offering of the Senior Subordinated Notes. As part of its
investment banking business, Mabon is regularly engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes.
Mabon has in the past provided investment banking services to Hallmark for
which Mabon has received customary compensation.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the Merger, holders of Hallmark Voting Stock should be aware
that the Hallmark directors and certain members of Hallmark management have an
interest in the Merger, as described below.
Community has agreed that, if the Merger is consummated, it will cause James
T. McAfee, Jr., the Chairman of the Board and Chief Executive Officer of
Hallmark, and Kay W. Slayden, a Hallmark director, to be elected to the Board of
Directors of Community for terms expiring in 1997 and 1996, respectively.
Messrs. James T. McAfee, Jr. and Robert M. Thornton, Jr., who is the
President, Chief Operating Officer and Chief Financial Officer of Hallmark,
currently have employment agreements with Hallmark that provide for certain
severance payments if, following a "change in control" of Hallmark (such term,
as defined in such agreements, includes the Merger), such officers resign from
their positions with Hallmark. In addition, upon such resignation, Messrs.
McAfee and Thornton are entitled to full vesting of all benefits, options and
bonuses, the latter being prorated to the date of resignation. Messrs. McAfee
and Thornton have opted to tender their resignations upon consummation of the
Merger. As a result, Mr. McAfee will be entitled to severance payments of
$1,640,000, bonuses of approximately $719,000 and benefits of $233,570, and to
vesting of options to acquire 22,606 shares of Hallmark Class A Common Stock (to
be converted in the Merger into options to acquire 21,928 shares of Community
Common Stock); and Mr. Thornton will be entitled to severance
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payments of $720,000, bonuses of approximately $345,000 and benefits of
$110,760, and to vesting of options to acquire 13,564 shares of Hallmark Class A
Common Stock (to be converted in the Merger into options to acquire 13,157
shares of Community Common Stock). The severance payments, bonuses and benefits
will be paid from existing cash balances by the surviving corporation.
Community has reached an understanding with Messrs. McAfee and Thornton
pursuant to which each such officer of Hallmark will enter into a two year
consulting agreement providing for post-closing transition services. Although no
definitive written agreements have been executed, the parties have tentatively
agreed that Mr. McAfee and Mr. Thornton will receive, in consideration for such
services, amounts totalling $270,000 and $150,000, per annum, respectively. Such
arrangements will be subject to the execution of definitive agreements and the
approval of Community's Board of Directors.
Non-employee members of the Board of Directors of Hallmark are entitled to
receive stipends under the Hallmark Healthcare Corporation Emeritus Director
Stipend Plan (the "Emeritus Director Plan") upon retirement from the Board if
such persons have served as a director at least 60 months or, in any event, on
termination of service as a member of the Board of Directors within one year
after a "change of control" of Hallmark (such term, as defined in the Emeritus
Director Plan, includes the Merger). The monthly stipends payable under the
Emeritus Director Plan are equal to the highest monthly base director's fee paid
by Hallmark to non-employee directors during such former director's period of
service as a non-employee director. Such directors are entitled to one monthly
payment under the Emeritus Director Plan for each complete month of service as a
member of the Board of Directors of Hallmark. As a result of the Emeritus
Director Plan, four directors of Hallmark will be entitled to receive monthly
payments of $1,500 per director totaling $303,000 for all four directors.
As of the record date, the executive officers and directors of Hallmark (as
a group) owned and had the right to vote an aggregate of 383,053 shares of
Hallmark Class A Common Stock and an aggregate of 2,026 shares of Hallmark
Preferred Stock. All such shares will be treated in the Merger in the same
manner as the shares of Hallmark Class A Common Stock and Hallmark Preferred
Stock held by other stockholders of Hallmark. See "The Merger -- Merger
Consideration" and "Stock Ownership of Principal Stockholders and Management of
Hallmark."
As of the record date, the executive officers and directors of Hallmark (as
a group) also held options to purchase an aggregate of 185,466 shares of
Hallmark Class A Common Stock pursuant to the Hallmark Option Plans, including
options to purchase an aggregate of 65,000 shares of Hallmark Class A Common
Stock held by non-employee directors. Such options, to the extent not exercised
prior to the Merger, together with all other outstanding Hallmark stock options,
shall, by virtue of the Merger and without any further action on the part of
Hallmark or the holder of any such Hallmark Options, be assumed by Community.
See "The Merger -- Treatment of Hallmark Stock Options."
From and after the Effective Time, Acquisition Corp. has agreed to
indemnify, to the same extent provided under the Certificate of Incorporation
and/or Bylaws of Community as in effect on June 10, 1994, each former officer
and director of Hallmark against all losses, claims, damages, liabilities, costs
or expenses (including reasonable attorneys' fees) based upon or arising from
acts or omissions by them in their capacities as such officers or directors, and
not to amend for a period of five years such provisions of its Certificate of
Incorporation and Bylaws in any respect that would diminish such parties' rights
of indemnification thereunder, unless required by applicable law or by
Acquisition's Corp.'s then existing directors' and officers' liability insurance
carriers. Community has also agreed to maintain director and officer liability
insurance in an amount equal to or greater than $15,000,000 covering any of the
officers and directors for a period of five years after the Effective Time.
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THE MERGER
GENERAL
Community and Hallmark have executed and delivered the Merger Agreement,
pursuant to which, subject to the requisite approvals of the stockholders of
Community and Hallmark, Hallmark will be merged with and into Acquisition Corp.
at the Effective Time. The separate corporate existence of Hallmark will cease
at the Effective Time. The Merger Agreement also sets forth certain covenants,
representations and warranties of Community and Hallmark, and certain other
provisions relating to the consummation of the Merger. The following description
is a summary of certain provisions of the Merger Agreement and does not purport
to be complete. Such summary is qualified in its entirety by reference to the
Merger Agreement, a copy of which is attached hereto as Appendix A. The terms of
the Merger Agreement are the results of arms-length negotiations between
representatives of Community and Hallmark.
MERGER CONSIDERATION
If the Merger is consummated, each outstanding share of Hallmark Common
Stock will be converted into the right to receive .97 shares of Community Common
Stock and each share of Hallmark Preferred Stock will be converted into the
right to receive 5.4 shares of Community Common Stock. The exchange ratios for
Hallmark Common Stock and Hallmark Preferred Stock are fixed and will not
increase or decrease by reason of fluctuations in the market price of Community
Common Stock or Hallmark Common Stock.
As of August 15, 1994, the unpaid and accumulated dividends on the Hallmark
Preferred Stock amounted to approximately $686,000, or $21.25 per share of
Hallmark Preferred Stock outstanding on such date. Upon consummation of the
Merger, any right that holders of Hallmark Preferred Stock may have had to
receive such unpaid and accumulated dividends, upon redemption of the Hallmark
Preferred Stock or otherwise, will terminate. Following the Effective Date,
shares of Hallmark Preferred Stock will represent only the right to receive
shares of Community Common Stock at the exchange ratio set forth above. Holders
of Hallmark Preferred Stock who do not wish to accept shares of Community Common
Stock in exchange for their shares of Hallmark Preferred Stock and who comply
with the provisions of Delaware law regarding appraisal rights have the right to
have the fair value of their shares judicially determined and paid to them in
cash by Community. Holders of Community Common Stock and Hallmark Common Stock
will not have appraisal rights in connection with the Merger. See "The Merger --
Appraisal Rights."
Assuming the Merger is consummated and no holder of Hallmark Preferred Stock
perfects appraisal rights, the outstanding shares of Hallmark Common Stock and
Hallmark Preferred Stock as of the Effective Time will, by virtue of the Merger,
be converted into the right to receive an aggregate of approximately 3,321,000
shares of Community Common Stock. Based on the 11,442,496 shares of Community
Common Stock outstanding on the record date, the converted shares of Hallmark
Common Stock and Hallmark Preferred Stock will represent approximately 22.5% of
the outstanding shares of Community Common Stock, if the Merger is consummated.
Each share of Hallmark Common Stock and Hallmark Preferred Stock held in the
treasury of Hallmark at the Effective Time will cease to be outstanding and will
be cancelled and retired in the Merger, without any conversion thereof or
payment of any consideration therefor. Each share of Community Common Stock
outstanding at the Effective Time will remain outstanding and unchanged by
reason of the Merger. Each share of common stock of Acquisition Corp. that is
issued and outstanding immediately prior to the Effective Time will remain
outstanding, all of which shares following consummation of the Merger will be
owned by Community.
For a description of the differences between the rights of holders of
Hallmark Common Stock, Hallmark Preferred Stock and Community Common Stock, see
"The Merger -- Comparison of Rights of Holders of Community Common Stock and
Hallmark Common Stock" and "-- Comparison of Rights of Holders of Community
Common Stock and Hallmark Preferred Stock."
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EFFECTIVE TIME OF THE MERGER
It is presently contemplated that the Merger will become effective as soon
as practicable after the requisite approvals of the stockholders of Community
and Hallmark have been obtained and all of the other conditions have been
satisfied or waived. The parties thereafter will cause a Certificate of Merger
to be filed with the Secretary of State of the State of Delaware. The Merger
will become effective upon the filing of the Certificate of Merger with the
Secretary of State of the State of Delaware (the "Effective Time"). It is
presently contemplated that such filing will be made on or about October 5,
1994.
EXCHANGE OF HALLMARK STOCK CERTIFICATES
Instructions with regard to the surrender of Hallmark stock certificates,
together with a letter of transmittal to be used for this purpose, will be
mailed to Hallmark stockholders promptly after the Effective Time. In order to
receive certificates evidencing shares of Community Common Stock, stockholders
of Hallmark will be required to surrender their stock certificates after the
Effective Time, together with a duly completed and executed letter of
transmittal and such other documents as may reasonably be required, to First
Union National Bank of North Carolina, which will act as Exchange Agent (the
"Exchange Agent") in connection with the Merger. Upon receipt of such stock
certificates, letter of transmittal and other documents as required, the
Exchange Agent will issue a stock certificate evidencing shares of Community
Common Stock to the registered holder or his transferee for the number of shares
of Community Common Stock such person is entitled to receive as a result of the
Merger, together with cash in lieu of any fractional share. No interest will be
paid or accrued on the value of shares of Community Common Stock or cash payable
upon the surrender of Hallmark stock certificates.
HALLMARK STOCKHOLDERS SHOULD NOT SUBMIT THEIR STOCK CERTIFICATES FOR
EXCHANGE UNTIL THE INSTRUCTIONS AND LETTER OF TRANSMITTAL ARE RECEIVED.
If any certificate for shares of Community Common Stock is to be issued or
any cash payment for a fractional share is to be made to a person other than the
person in whose name the certificate for shares of Hallmark Common Stock or
Hallmark Preferred Stock, as the case may be, surrendered in exchange therefor
is registered, it will be a condition of such issuance or payment that the stock
certificate so surrendered be properly endorsed and otherwise in proper form for
transfer, and that the person requesting such issuance or payment (i) pay in
advance any transfer or other taxes required by reason of the issuance of
certificates for shares of Community Common Stock or a check representing cash
for a fractional share to a person other than the registered holder of the
Hallmark stock certificate surrendered or (ii) establish to the satisfaction of
the Exchange Agent that such tax has been paid or is not applicable.
After the Effective Time, there will be no further transfers on the stock
transfer books of Hallmark of shares of Hallmark Common Stock or shares of
Hallmark Preferred Stock that were outstanding immediately prior to the
Effective Time. If a certificate representing such shares is presented for
transfer, subject to compliance with the requisite transmittal procedures, it
will be cancelled and exchanged for the appropriate number of shares of
Community Common Stock and cash in lieu of fractional shares thereof.
Each certificate representing shares of Hallmark Common Stock or Hallmark
Preferred Stock, as the case may be, outstanding immediately prior to the
Effective Time (other than shares held by holders of Hallmark Preferred Stock
who perfect their appraisal rights under Delaware law and do not subsequently
withdraw, lose or forfeit such rights) will, at the Effective Time, be deemed
for all purposes to represent only the right to receive the number of whole
shares of Community Common Stock (and the right to receive cash in lieu of any
fraction of a share of Community Common Stock) into which the shares of Hallmark
Common Stock or Hallmark Preferred Stock, as the case may be, represented by
such certificate were converted in the Merger.
Until a certificate which formerly represented shares of Hallmark Common
Stock or Hallmark Preferred Stock, as the case may be, is actually surrendered
for exchange and received by the Exchange Agent, the holder thereof will not be
entitled to vote or receive any dividends or other
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distributions with respect to Community Common Stock payable to holders of
record after the Effective Time. Subject to applicable law, upon such surrender
of Hallmark stock certificates, such dividends or other distributions will be
remitted (without interest) to the record holder of certificates for shares of
Community Common Stock issued in exchange therefor. All dividends or other
distributions with respect to Community Common Stock payable to holders of
record after the Effective Time which otherwise would be payable to holders of
Hallmark stock certificates not theretofore surrendered and exchanged will be
paid or delivered by Community to the Exchange Agent, in trust, for the benefit
of such holders. All such dividends or other distributions held by the Exchange
Agent which remain unclaimed at the end of one year after the Effective Time
will be repaid or redelivered by the Exchange Agent to Community, after which
time any holder of a stock certificate will, subject to applicable law, be
entitled to look as a general creditor only to Community for payment or delivery
of such dividends or other distributions, as the case may be. Any certificates
for shares of Community Common Stock and cash sufficient to pay for fractional
shares delivered or made available to the Exchange Agent and not exchanged for
Hallmark stock certificates within one year after the Effective Time will also
be returned by the Exchange Agent to Community, which will thereafter act as
Exchange Agent. None of Community, Hallmark or the Exchange Agent will be liable
to a holder of Hallmark Common Stock or Hallmark Preferred Stock, as the case
may be, for any Community Common Stock, dividends or other distributions thereon
or cash in lieu of fractional shares delivered to a public official pursuant to
applicable abandoned property, escheat or similar laws.
NO FRACTIONAL SHARES
No fractional shares of Community Common Stock will be issued in connection
with the Merger, but, in lieu thereof, each holder of Hallmark Common Stock or
Hallmark Preferred Stock, as the case may be, who would otherwise be entitled to
receive a fraction of a share of Community Common Stock will, upon surrender of
his certificate, receive an amount in cash equal to the "Average Price"
multiplied by the fraction of a share of Community Common Stock that such
stockholder would otherwise have received. Except for such payment, no such
stockholder will be entitled to any dividends or other distributions or other
rights of stockholders with respect to any fractional interest. The "Average
Price" of a share of Community Common Stock shall be the average of the closing
sales prices thereof as reported on The Nasdaq Stock Market or on such other
principal exchange on which the Community Common Stock is listed (as reported by
THE WALL STREET JOURNAL or, if not reported thereby, by another authoritative
source) over the ten business days immediately preceding the date the Merger is
consummated. See "--Federal Income Tax Consequences."
TREATMENT OF HALLMARK STOCK OPTIONS
As of August 15, 1994, an aggregate of 498,255 shares of Hallmark Common
Stock were reserved for issuance upon exercise of outstanding options granted
under Hallmark's 1993 Stock Option Plan, Long-Term Stock Incentive Plan -- 1989,
Stock Incentive Performance Plan -- 1991, 1991 Directors' Stock Option Plan, as
amended, and certain stock options granted under severance arrangements
(collectively, the "Hallmark Stock Option Plans"). As of August 15, 1994, the
options were held by 49 individuals, including all executive officers and all of
the directors of Hallmark and have exercise prices ranging from $0.70 to $16.75
per share.
All options outstanding immediately prior to the Effective Time under the
Hallmark Stock Option Plans shall, by virtue of the Merger and without any
further action on the part of Hallmark or the holder of any such Hallmark
options, be assumed by Community. Each Hallmark option assumed by Community
shall be exercisable upon the same terms and conditions as under the applicable
Hallmark Stock Option Plan and the applicable option agreement issued
thereunder, except that (i) each such Hallmark option shall be exercisable for
that whole number of shares of Community Common Stock (rounded to the nearest
whole share) into which the number of shares of Hallmark Common Stock subject to
such Hallmark option immediately prior to the Effective Time would be converted
pursuant to the Merger and (ii) the option price per share of Community Common
Stock
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shall be an amount equal to the option price per share of Hallmark Common Stock
subject to such Hallmark option in effect immediately prior to the Effective
Time divided by .97 (the price per share, as so determined, being rounded down
to the nearest full cent).
CONDITIONS TO THE MERGER
In addition to the requisite approvals of the stockholders of Community and
Hallmark, the obligations of Community, Hallmark and Acquisition Corp. to
consummate the Merger are subject to the satisfaction or, where permitted,
waiver of certain other conditions, including (i) that no injunction or any
order shall have been issued to any party by a court of competent jurisdiction
to the effect that the transaction contemplated by the Merger Agreement may not
be consummated, (ii) that the Registration Statement shall have become effective
and no stop order with respect thereto shall be in effect, (iii) the receipt
from Arthur Andersen & Co. of an opinion that the Merger will be treated as a
pooling of interests transaction under applicable accounting standards, and (iv)
that all consents, authorizations, orders and approvals of (or filings or
registrations with) any governmental commission, board or other regulatory body
required in connection with the execution, delivery and performance of the
Merger Agreement shall have been obtained or made, except for filings in
connection with the Merger and any other documents required to be filed after
the Effective Time and except where the failure to have obtained or made any
such consent, authorization, order, approval, filing or registration would not
have a material adverse effect on the business of Community and Hallmark (and
their respective subsidiaries), taken as a whole, following the Effective Time.
Community's obligation to effect the Merger is subject to various additional
conditions, including, but not limited to, (i) Hallmark having performed its
agreements contained in the Merger Agreement and the representations and
warranties of Hallmark contained in the Merger Agreement and in any document
delivered in connection therewith being true and correct (subject to certain
materiality standards), (ii) the receipt of satisfactory legal opinions, (iii)
the absence of any change in the financial condition, business or operations of
Hallmark that would have or would be reasonably likely to have a material
adverse effect on Hallmark other than any such change that affects both Hallmark
and Community in a substantially similar manner, and (iv) the receipt from not
less than 75% by value of the participants in Hallmark's 1993 Long-Term
Incentive Plan of an executed consent to the termination of such plan and
Hallmark's 1995 annual incentive bonus plan.
Hallmark's obligation to effect the Merger is also subject to various
additional conditions, including (i) Community having performed its agreements
contained in the Merger Agreement and the representations and warranties of
Community and Acquisition Corp. contained in the Merger Agreement and in any
document delivered in connection therewith being true and correct (subject to
certain materiality standards), (ii) the receipt of satisfactory legal opinions,
and (iii) any change in the financial condition, business or operations of
Community that would have or would be reasonably likely to have a material
adverse effect on Community other than any such change that affects both
Hallmark and Community in a substantially similar manner.
AMENDMENT OF THE MERGER AGREEMENT; WAIVER OF CONDITIONS
The respective Boards of Directors of Community, Acquisition Corp. and
Hallmark may, by written agreement, at any time before or after the approval of
matters presented in connection with the Merger by the stockholders of Community
and Hallmark, amend the Merger Agreement, provided that after such stockholder
approval no amendment may be made which by law requires the further approval of
stockholders without obtaining such approval. See "Introduction -- Voting and
Proxies."
Each party may, by action taken by its Board of Directors, to the extent
legally allowed, extend the time for the performance of any of the obligations
or other acts of any other party to the Merger Agreement, waive any inaccuracies
in the representations and warranties made to such party contained in the Merger
Agreement or any document delivered pursuant thereto, or waive compliance or
performance by any other party with any agreements or conditions for the benefit
of such party contained in the Merger Agreement.
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ALTERNATIVE MERGER STRUCTURE
The Merger Agreement provides that Community and Hallmark may mutually agree
to change the structure of the Merger so that Acquisition Corp. would merge with
and into Hallmark, rather than Hallmark merging with and into Acquisition Corp.,
with the result that Hallmark would be the surviving entity in the Merger. In
this event, stockholder approval of the Merger Agreement and the Merger shall be
deemed to include approval of this alternative structure of the Merger. Any such
change in the structure of the Merger would not have any effect on the exchange
ratios or other material provisions of the Merger Agreement, and, in any event,
would not be made unless Community and Hallmark are each satisfied that such
change would not result in less favorable tax consequences to any of the parties
to the Merger or stockholders of Hallmark or affect the qualification of the
Merger as a pooling of interests.
TERMINATION
The Merger Agreement may be terminated and the Merger abandoned, at any time
prior to the Effective Time, whether before or after the requisite stockholder
approvals, (i) by the mutual consent of Community and Hallmark, (ii) by action
of the Board of Directors of either Community or Hallmark if (a) the Merger
shall not have been consummated by December 31, 1994, (b) the approval of
Hallmark's stockholders shall not have been obtained, or (c) the approval of
Community's stockholders shall not have been obtained, or (d) a United States
federal or state court of competent jurisdiction or United States federal or
state governmental, regulatory or administrative agency or commission shall have
issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the transactions contemplated by
the Merger Agreement and such order, decree, ruling or other action shall have
become final and nonappealable; provided, that the party seeking to terminate
the Merger Agreement shall have used all reasonable efforts to remove such
injunction, order or decree; and further provided, in the case of a termination
by Community or Hallmark if the Merger is not consummated by December 31, 1994,
that the terminating party shall not have breached in any material respect its
obligations under the Merger Agreement in a manner that shall have proximately
contributed to the occurrence of the failure to consummate the Merger by such
date, (iii) by action of the Board of Directors of Hallmark, if (a) in the
exercise of its good faith judgment as to its fiduciary duties to its
stockholders the Board of Directors of Hallmark shall have withdrawn or modified
its recommendation or approval of the transactions contemplated by the Merger
Agreement, or (b) there has been a breach by Community or Acquisition Corp. of
any representation or warranty contained in the Merger Agreement which would
have or would be reasonably likely to have a material adverse effect on
Community, or (c) there has been a material breach of any of the covenants or
agreements set forth in the Merger Agreement on the part of Community, which
breach is not curable or, if curable, is not cured within 30 days after written
notice of such breach is given by Hallmark to Community, or (d) there has been a
breach by Community of its covenant to recommend approval of the Merger
Agreement and the transactions contemplated thereby, (iv) by action of the Board
of Directors of Community, if (a) there has been a breach by Hallmark of any
representation or warranty contained in the Merger Agreement which would have or
would be reasonably likely to have a material adverse effect on Hallmark, or (b)
there has been a material breach of any of the covenants or agreements set forth
in the Merger Agreement on the part of Hallmark, which breach is not curable or,
if curable, is not cured within 30 days after written notice of such breach is
given by Community to Hallmark, or (c) another entity, person, or group (as
defined in Section 13(d)(3) of the Exchange Act) commences a public offer to
acquire at least 990,136 shares of Hallmark Common Stock at a price per share in
excess of $23.00 per share and, in fact, acquires pursuant to said offer or
otherwise at least 990,136 shares of Hallmark Common Stock or it shall be
publicly disclosed or Community shall learn that any entity, person, or group
shall have acquired at least 990,136 shares of Hallmark Common Stock, or shall
have been granted any option or right, conditional or otherwise, to acquire at
least 990,136 shares of Hallmark Common Stock, or (d) Hallmark enters into an
agreement providing for a business combination whereby Hallmark, or at least
990,136 shares of Hallmark Common Stock, or all or substantially all of
Hallmark's assets are to be acquired by, or Hallmark is to be consolidated with,
a person or entity other than Community or a
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subsidiary or affiliate of Community, or (e) there has been a material breach by
Hallmark of the nonsolicitation provisions of the Merger Agreement or a breach
of such provisions of the Merger Agreement resulting in an acquisition proposal,
or a breach of its covenant in the Merger Agreement to recommend approval of the
Merger Agreement and the transactions contemplated thereby.
In the event of the termination of the Merger Agreement by either Community
or Hallmark as provided above, the Merger Agreement will become void, and there
will be no liability on the part of any party or its officers, directors or
stockholders, except for liabilities and obligations arising out of the breach
by a party of any covenant or agreement contained in the Merger Agreement and
except as otherwise described under "Fees and Expenses" below.
FEES AND EXPENSES
If the Board of Directors of Hallmark terminates the Merger Agreement by
withdrawing or modifying its recommendation for approval of the transaction
contemplated by the Merger Agreement in the exercise of its good faith judgment
as to its fiduciary duties to Hallmark stockholders, or if the Board of
Directors of Community terminates the Merger Agreement because (i) another
entity, person, or group (as defined in Section 13(d)(3) of the Exchange Act)
commences a public offer to acquire at least 990,136 shares of Hallmark Common
Stock at a price per share in excess of $23.00 per share and, in fact, acquires
pursuant to said offer or otherwise at least 990,136 shares of Hallmark Common
Stock or it shall be publicly disclosed or Community shall learn that any
entity, person, or group shall have acquired at least 990,136 shares of Hallmark
Common Stock, or shall have been granted any option or right, conditional or
otherwise, to acquire at least 990,136 shares of Hallmark Common Stock; (ii)
Hallmark enters into an agreement providing for a business combination whereby
Hallmark, or at least 990,136 shares of Hallmark Common Stock, or all or
substantially all of Hallmark's assets are to be acquired by, or Hallmark is to
be consolidated with, a person or entity other than Community or a subsidiary or
affiliate of Community; or (iii) there has been a material breach by Hallmark of
the nonsolicitation provisions of the Merger Agreement or a breach of such
provisions of the Merger Agreement that results in an acquisition proposal being
made to Hallmark, or a breach of Hallmark's covenant in the Merger Agreement to
recommend approval of the Merger Agreement and the transactions contemplated
thereby; and, as of the date of such termination, (x) there has been no breach
by Community of a representation or warranty which would have or would be
reasonably likely to have a material adverse effect on Community, or (y) there
has been no material breach of any of the covenants or agreements set forth in
the Merger Agreement on the part of Community, then immediately, but in any
event not later than five business days after such termination, Hallmark shall
pay to Community an amount in cash equal to $8,000,000, plus actual out of
pocket expenses incurred by Community and Acquisition Corp. in connection with
the transactions contemplated hereby (including, but not limited to, fees and
disbursements of counsel, fees and expenses of investment bankers, accountants
and lenders, and printing costs) in an amount not exceeding $1,500,000
(collectively, the "Community Fee").
If Hallmark terminates the Merger Agreement because Community or Acquisition
Corp. has breached any representation or warranty in the Merger Agreement, or if
Community terminates the Merger Agreement because Hallmark has breached a
representation or warranty in the Merger Agreement, then immediately, but in any
event not later than five business days after such termination, the
non-terminating party shall pay to the terminating party an amount equal to such
terminating party's actual out of pocket expenses incurred by the terminating
party in connection with the transactions contemplated by the Merger Agreement
(including, but not limited to, fees and disbursements of counsel, fees and
expenses of investment bankers, accountants and lenders, and printing costs) in
an amount not exceeding $2,000,000 (the "Termination Fee"); provided, however,
that the Termination Fee shall not be payable if, as of the date of such
termination, (x) there has been a breach by the terminating party of a
representation or warranty which would have or would be reasonably likely to
have a material adverse effect on either Community or Hallmark, as the case may
be, or (y) there has been a material breach of any of the covenants or
agreements set forth in the Merger Agreement on the part of the terminating
party.
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In addition, if any non-breaching party has received the Termination Fee,
such fee shall constitute liquidated damages and the non-breaching party shall
have no right to pursue any other remedy; and in the event Community has
received the Community Fee, it shall not (i) assert or pursue in any manner,
directly or indirectly, any claim or cause of action based in whole or in part
upon alleged tortious or other interference with rights under the Merger
Agreement against any entity or person submitting an acquisition proposal or
(ii) assert or pursue in any manner, directly or indirectly, any claim or cause
of action against Hallmark or any of its officers or directors based in whole or
in part upon its or their receipt, consideration, recommendation, or approval of
an acquisition proposal or Hallmark's exercise of its right of termination in
the exercise of good faith judgment as to its fiduciary duties due its
stockholders. In the event either party is required to file suit to seek any
fee, and it ultimately succeeds on the merits, it shall be entitled to all
expenses, including attorneys' fees, which it has incurred in enforcing its
rights hereunder.
Except as provided above, whether or not the Merger is consummated, all
costs and expenses incurred in connection with the Merger Agreement and the
transactions contemplated thereby shall be paid by the party incurring such
expenses except as set forth above and except that (a) the filing fee in
connection with the Hart-Scott-Rodino Act (as defined below) filing, (b) the
filing fee in connection with the filing of the Registration Statement with the
Commission, (c) the filing fees and counsel fees and expenses incurred by
Community in connection with obtaining the necessary state securities or "Blue
Sky" law permits and approvals, (d) the expenses incurred in connection with
printing and mailing the Registration Statement and this Joint Proxy
Statement/Prospectus, and (e) any expenses incurred to perform environmental
assessments or surveys of real property owned or leased by Hallmark, shall be
shared equally by Hallmark and Community.
CERTAIN COVENANTS
The Merger Agreement provides that Hallmark agrees (a) that it will not
initiate, solicit or encourage any inquiries or the making or implementation of
any proposal or offer (including, without limitation, any proposal or offer to
its stockholders) with respect to a merger, acquisition, consolidation or
similar transaction involving, or any purchase of all or any significant portion
of the assets or equity securities of, Hallmark (an "acquisition proposal") or
engage in any negotiations concerning, or provide any confidential information
or data to, or have any discussions with, any person relating to an acquisition
proposal, or otherwise facilitate any effort or attempt to make or implement an
acquisition proposal; (b) that it will immediately cease and cause to be
terminated any existing activities, discussions or negotiations with any parties
conducted heretofore with respect to any of the foregoing; and (c) that it will
notify Community immediately of the identity of the potential acquiror and the
terms of such person's or entity's proposal if any such inquiries or proposals
are received by, any such information is requested from, or any such
negotiations or discussions are sought to be initiated or continued with, it;
provided, however, that the Board of Directors of Hallmark is not prohibited
from (i) furnishing information to or entering into discussions or negotiations
with, any person or entity that makes an unsolicited written proposal to acquire
Hallmark pursuant to a merger, consolidation, share exchange, purchase of a
substantial portion of the assets, business combination or other similar
transaction, if, and only to the extent that, (A) the Board of Directors of
Hallmark determines in good faith that such action is required for the Board of
Directors to comply with its fiduciary duties to stockholders, (B) prior to
furnishing such information to, or entering into discussions or negotiations
with, such person or entity, Hallmark provides written notice to Community, and
(C) subject to any confidentiality agreement with such person or entity (which
Hallmark determined in good faith was required to be executed in order for the
Board of Directors to comply with its fiduciary duties to stockholders),
Hallmark keeps Community informed of the status of any such discussions or
negotiations; and (ii) to the extent applicable, complying with Rule 14e-2
promulgated under the Exchange Act with regard to an acquisition proposal.
Each of Community and Hallmark have agreed to take all action necessary in
accordance with applicable law and its Certificate of Incorporation and Bylaws
to convene a meeting of its stockholders as promptly as practicable to consider
and vote upon the approval of the Merger Agreement and the
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transactions contemplated hereby and to take all lawful action to solicit such
approval; provided, however, that such recommendation or solicitation is subject
to any action taken by, or upon authority of, the Board of Directors of
Community or Hallmark, as the case may be, in the exercise of its good faith
judgment as to its fiduciary duties to its stockholders.
Community shall promptly prepare and submit to The Nasdaq Stock Market or
such other national securities exchange on which the Community Common Stock is
listed a listing application covering the shares of Community Common Stock
issuable in the Merger, and shall use its best efforts to obtain, prior to the
Effective Time, approval for the listing of such Community Common Stock for
trading on The Nasdaq Stock Market or such other national securities exchange.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties
relating to, among other things: (a) the due organization, power and standing of
Community and Hallmark; (b) the authorization, execution, delivery, validity and
enforceability of the Merger Agreement; (c) the capital structures of Community
and Hallmark; (d) subsidiaries of Community and Hallmark; (e) other investment
interests of Community and Hallmark; (f) conflicts under charters or bylaws,
violations of any instruments or law and required covenants or approvals; (g)
certain documents filed by each of Community and Hallmark with the Commission
and the accuracy of information contained therein; (h) litigation; (i) conduct
of business in the ordinary course and the absence of certain changes or
material adverse effects on Community or Hallmark; (j) qualification for
"pooling of interests" accounting treatment; (k) broker's and finder's fees with
respect to the Merger; (l) retirement and other employee benefit plans of
Community and Hallmark; (m) labor matters; (n) title to respective assets; (o)
insurance policies; (p) environmental matters and compliance; (q) intellectual
property rights; (r) receipt of fairness opinions; (s) licenses and permits for
hospitals and other healthcare facilities; (t) Medicare/Medicaid compliance; (u)
in the case of Hallmark, ownership of Community Common Stock; and (v) in the
case of Community, due authorization and valid issuance of Community Common
Stock to be issued and delivered in the Merger.
TENDER OFFER FOR THE SENIOR SUBORDINATED NOTES
The consummation of the Merger will constitute a change in control, as
defined in the indenture relating to Hallmark's Senior Subordinated Notes. As a
result, Community or an affiliate of Community, will be required to make a
tender offer for any or all such Senior Subordinated Notes at a price of 101% of
the face amount of the Senior Subordinated Notes. Community intends to finance
such tender offer through the use of existing cash balances and its Credit
Facility. If all of the outstanding Senior Subordinated Notes are tendered,
Community will be required to pay approximately $81,000,000 in principal,
premium and costs. In addition, Community will be required to write off
approximately $2,600,000 of deferred financing costs associated with the
original issuance of the Senior Subordinated Notes.
RESALE OF COMMUNITY COMMON STOCK
Shares of Community Common Stock to be issued stockholders of Hallmark in
connection with the Merger will be freely transferrable under the Securities
Act, except for shares issued to any person who, at the time of the Hallmark
Special Meeting, may be deemed to be an "affiliate" of Hallmark within the
meaning of Rule 145 under the Securities Act. In general, affiliates of Hallmark
include its executive officers and directors and any other person or entity who
controls, is controlled by or is under common control with Hallmark. Rule 145,
among other things, imposes certain restrictions upon the resale of securities
received by affiliates in connection with certain reclassifications, mergers,
consolidations or asset transfers. Community Common Stock received by affiliates
of Hallmark in the Merger will be subject to the applicable resale limitations
of Rule 145.
In the Merger Agreement, Hallmark has agreed to deliver to Community a
letter identifying all persons who are, at the time of the Hallmark Special
Meeting, affiliates within the meaning of Rule 145 under the Securities Act. In
addition, Hallmark shall cause each such affiliate to deliver to Community,
prior to the Effective Time, a written statement to the effect that such person
will not
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offer, sell, transfer or otherwise dispose of any shares of Community Common
Stock received in the Merger by such affiliate (i) except in accordance with the
applicable provisions of the Securities Act and the rules and regulations of the
Commission thereunder and (ii) except as otherwise provided in the Commission's
accounting rules for pooling of interests transactions, until such time as
financial results covering at least 30 days of combined operations of Community
and Hallmark have been published. Community may place legends on certificates
representing shares of Community Common Stock which are issued to affiliates of
Hallmark in the Merger to restrict such transfers. As of the record date,
383,053 shares of Hallmark Class A Common Stock and 2,026 shares of Hallmark
Preferred Stock (representing approximately 12.0% and 6.3% of the outstanding
shares of such shares, respectively) were owned by affiliates of Hallmark.
ACCOUNTING TREATMENT
Community intends to account for the Merger under the pooling of interests
method of accounting. Under the pooling of interests method, Community's
historical financial statements will be restated to include the assets,
liabilities, stockholders' equity and results of operations of Hallmark, as
reflected in Hallmark's historical financial statements, subject to appropriate
adjustments, if any, to conform the accounting principles of the two companies.
See "Unaudited Pro Forma Condensed Combined Financial Statements." Under the
Merger Agreement, neither Community nor Hallmark is obligated to consummate the
Merger if Community and Hallmark do not each receive an opinion from Arthur
Andersen & Co. to the effect that the Merger will qualify for pooling of
interests accounting treatment if consummated in accordance with the terms of
the Merger Agreement. See "-- Conditions to the Merger."
CERTAIN REGULATORY MATTERS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "Hart-Scott-Rodino Act"), and the rules promulgated thereunder by the
Federal Trade Commission (the "FTC"), certain acquisition transactions,
including the Merger, may not be consummated unless notification has been given
and certain information has been furnished to the FTC and the Antitrust Division
of the Department of Justice (the "Antitrust Division") and certain waiting
period requirements have been satisfied. Pursuant to the Hart-Scott-Rodino Act,
on June 23, 1994, Community and Hallmark each filed a Notification and Report
Form with the FTC and the Antitrust Division for review in connection with the
Merger. The FTC granted early termination of the applicable waiting period on
July 13, 1994. Notwithstanding the termination of the Hart-Scott-Rodino Act
waiting period, at any time before or after the Effective Time, the FTC, the
Antitrust Division or private parties and state attorneys general could take
action under the antitrust laws, including seeking to enjoin the consummation of
the Merger or seeking the divestiture by Community of all or any part of the
stock or assets of Hallmark. Although Community and Hallmark know of no grounds
for such injunction or divestiture, there can be no assurance that a challenge
to the Merger on antitrust grounds will not be made or that, if such a challenge
is made, it would not be successful.
INDEMNIFICATION AND INSURANCE
Acquisition Corp. has agreed to indemnify and advance expenses to each
person who immediately prior to the Effective Time was an officer or director of
Hallmark or any subsidiary thereof ("Indemnified Parties"), to the same extent
provided under the Certificate of Incorporation and/or Bylaws of Community,
against all losses, claims, damages, liabilities, costs or expenses (including
reasonable attorneys' fees) based upon or arising from acts or omissions, or
alleged acts or omissions, by them in their capacities as officers or directors
of Hallmark. In addition, Acquisition Corp. has agreed, for a period of five
years after the Effective Time not to amend the provisions of its Certificate of
Incorporation and Bylaws providing for exculpation of director and officer
liability and indemnification in any respect that would diminish the Indemnified
Parties' rights of indemnification thereunder, unless required by applicable law
or by Acquisition Corp.'s then existing directors' and officers' liability
insurance carriers.
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For a period of five years after the Effective Time, Community agreed to
maintain director and officer liability insurance in an amount equal to or
greater than $15,000,000 covering any of the Indemnified Parties.
Community shall pay all expenses, including reasonable attorneys' fees, that
may be incurred by any of the Indemnified Parties in enforcing the indemnity and
other obligations referred to above. The foregoing rights to indemnification and
advancement of expenses are exclusive and each Indemnified Party has released
Community and Acquisition Corp., effective as of the Effective Time, from any
obligations that either of them may have otherwise to indemnify him.
DELISTING OF HALLMARK COMMON STOCK
After the Merger is consummated, all of the then outstanding Hallmark Common
Stock and Hallmark Preferred Stock will be cancelled and public trading of
Hallmark Class A Common Stock and Hallmark Preferred Stock will cease.
Accordingly, Hallmark Class A Common Stock will, at such time, be delisted from
The Nasdaq Stock Market.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion describes the material federal income tax
consequences that may be expected to result from the Merger.
Community and Hallmark expect the Merger to be a tax-free reorganization for
federal income tax purposes so that no gain or loss will be recognized by
Hallmark stockholders, except in respect of cash received in lieu of fractional
shares or payments received by stockholders exercising appraisal rights.
Hallmark's obligation to consummate the Merger is conditioned upon receipt of an
opinion from its counsel to the effect that (i) the Merger will be treated as a
"reorganization" within the meaning of Section 368(a) of the Code and (ii) the
exchange in the Merger of Hallmark Common Stock and Hallmark Preferred Stock for
Community Common Stock will not give rise to gain or loss to the Hallmark
stockholders. Community's obligation to consummate the Merger is conditioned
upon receipt of an opinion from its counsel to the effect that (i) the Merger
will be treated as a "reorganization" within the meaning of Section 368(a) of
the Code and (ii) Community and Hallmark will each be a party to that
reorganization within the meaning of Section 368(b) of the Code.
In connection with their tax opinions, counsel to Community and Hallmark
will make such factual assumptions as are customary in similar tax opinions, and
such factual assumptions will be confirmed by certificates signed by appropriate
officers of Community and Hallmark. The tax opinions cannot be relied upon if
any such factual assumption is, or later becomes, inaccurate. No ruling from the
Internal Revenue Service concerning the tax consequences of the Merger has been
requested, and the tax opinions will not be binding upon the Internal Revenue
Service or the courts. If the Merger is consummated, and it is later determined
that the Merger did not qualify as a tax-free reorganization under the Code,
Hallmark stockholders would recognize taxable gain or loss in the Merger equal
to the difference between the fair market value of the Community Common Stock
they received and their basis in their Hallmark Common Stock or Hallmark
Preferred Stock, as the case may be.
Cash received in the Merger by a Hallmark stockholder in lieu of a
fractional share of Community Common Stock will be treated under Section 302 of
the Code as having been received by the Hallmark stockholder in exchange for
such fractional share, and the Hallmark stockholder generally will recognize
capital gain or loss in such exchange equal to the difference between the cash
received and the Hallmark stockholder's basis allocable to the fractional share.
A Hallmark stockholder who perfects his appraisal rights under the laws of
Delaware and who receives payment in cash for the "fair value" of his Hallmark
Preferred Stock will be treated as having received such payment in redemption of
the Hallmark Preferred Stock subject to the provisions of Section 302 of the
Code. If a dissenting Hallmark stockholder owns only Hallmark Preferred Stock,
he will recognize capital gain or loss measured by the difference between the
amount of cash received by such Hallmark stockholder
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in payment for his Hallmark Preferred Stock and the basis of such stockholder's
Hallmark Preferred Stock. However, if a dissenting stockholder also owns
Hallmark Common Stock, he may be required to report all amounts received in
payment for his Hallmark Preferred Stock as ordinary income.
The Merger will result in an "ownership change" with respect to Hallmark
under Section 382 of the Code. As a result of the "ownership change," the
ability to deduct Hallmark's net operating loss ("NOL") carryforwards against
future taxable income will be limited. Hallmark's NOL carryforwards at June 30,
1994 were approximately $24,000,000, although such carryforwards may be reduced
as a result of certain previous transactions. See "Hallmark Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Tax
Matters."
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY. HALLMARK STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO THEM, INCLUDING
INCOME TAX RETURN REPORTING REQUIREMENTS AND THE APPLICABILITY AND EFFECT OF
STATE, LOCAL AND OTHER TAX LAWS.
APPRAISAL RIGHTS
Holders of Hallmark Preferred Stock are entitled to appraisal rights under
Section 262 of the DGCL. A person having a beneficial interest in shares of
Hallmark Preferred Stock held of record in the name of another person, such as a
broker or nominee, must act promptly to cause the record holder to follow the
steps summarized below properly and in a timely manner to perfect whatever
appraisal rights the beneficial owner may have.
The following discussion is not a complete statement of the law pertaining
to appraisal rights under the DGCL and is qualified in its entirety by the full
text of Section 262 which is reprinted in its entirety as Appendix B to this
Joint Proxy Statement/Prospectus. All references in Section 262 and in this
summary to a "stockholder" are to the record holder of the shares of Hallmark
Preferred Stock as to which appraisal rights are asserted.
Under the DGCL, holders of shares of Hallmark Preferred Stock who follow the
procedures set forth in Section 262 will be entitled to have their shares of
Hallmark Preferred Stock appraised by the Delaware Court of Chancery and to
receive payment of the "fair value" of such shares, exclusive of any element of
value arising from the accomplishment or expectation of the Merger, together
with a fair rate of interest, if any, as determined by such court.
Under Section 262, where a merger is to be submitted for approval at a
meeting of stockholders, as in the case of the Hallmark Special Meeting, the
corporation, not less than 20 days prior to the meeting, must notify each of its
stockholders who was a stockholder on the record date of the meeting with
respect to shares for which appraisal rights are available that such appraisal
rights are available and include in such notice a copy of Section 262. This
Joint Proxy Statement/Prospectus shall constitute such notice to the holders of
shares of Hallmark Preferred Stock and the applicable statutory provisions of
the DGCL are attached to this Joint Proxy Statement/Prospectus as Appendix B.
Any stockholder who wishes to exercise such appraisal rights or who wishes to
preserve his right to do so should review the following discussion and Appendix
B carefully because failure to timely and properly comply with the procedures
specified will result in the loss of appraisal rights under the DGCL.
A holder of shares of Hallmark Preferred Stock wishing to exercise his
appraisal rights must deliver to Hallmark, before the vote on the Merger
Agreement at the Hallmark Special Meeting, a written demand for appraisal of his
shares of Hallmark Preferred Stock and must not vote in favor of adoption of the
Merger Agreement. Because a proxy which does not contain voting instructions
will, unless revoked, be voted for adoption of the Merger Agreement, a holder of
shares of Hallmark Preferred Stock who votes by proxy and who wishes to exercise
his appraisal rights must (i) vote against adoption of the Merger Agreement or
(ii) abstain from voting on adoption of the Merger Agreement. A vote against
adoption of the Merger Agreement, in person or by proxy, will not in and of
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itself constitute a written demand for appraisal satisfying the requirements of
Section 262. In addition, a holder of shares of Hallmark Preferred Stock wishing
to exercise his appraisal rights must hold of record such shares on the date the
written demand for appraisal is made and must continue to hold such shares until
the Effective Time.
Only a holder of record of shares of Hallmark Preferred Stock is entitled to
assert appraisal rights for the shares of Hallmark Preferred Stock registered in
that holder's name. A demand for appraisal should be executed by or on behalf of
the holder of record, fully and correctly, as his name appears on his stock
certificates. If the shares of Hallmark Preferred Stock are owned of record in a
fiduciary capacity, such as by a trustee, guardian or custodian, execution of
the demand should be made in that capacity, and if the shares of Hallmark
Preferred Stock are owned of record by more than one person, as in a joint
tenancy or tenancy in common, the demand should be executed by or on behalf of
all joint owners. An authorized agent, including one or more joint owners, may
execute a demand for appraisal on behalf of a holder of record; however, the
agent must identify the record owner or owners and expressly disclose the fact
that, in executing the demand, the agent is agent for such owner or owners. A
record holder such as a broker who holds shares of Hallmark Preferred Stock as
nominee for several beneficial owners may exercise appraisal rights with respect
to the shares of Hallmark Preferred Stock held for one or more beneficial owners
while not exercising such rights with respect to the shares of Hallmark
Preferred Stock held for other beneficial owners; in such case, the written
demand should set forth the number of shares of Hallmark Preferred Stock as to
which appraisal is sought, and where no number of shares of Hallmark Preferred
Stock is expressly mentioned, the demand will be presumed to cover all shares of
Hallmark Preferred Stock held in the name of the record owner. Stockholders who
hold their shares of Hallmark Preferred Stock in brokerage accounts or other
nominee forms and who wish to exercise appraisal rights are urged to consult
with their brokers to determine the appropriate procedures for the making of a
demand for appraisal by such a nominee. All written demands for appraisal should
be sent or delivered to Hallmark at 300 Galleria Parkway, Suite 650, Atlanta,
Georgia 30339, Attention: Robert M. Thornton, Jr., President.
Within ten days after the Effective Time, Acquisition Corp., as the
surviving corporation in the Merger, must send a notice as to the effectiveness
of the Merger to each person who has satisfied the appropriate provisions of
Section 262 and did not vote for approval and adoption of the Merger Agreement.
Within 120 days after the Effective Time, but not thereafter, Acquisition Corp.
or any stockholder entitled to appraisal rights under Section 262 may file a
petition in the Delaware Court of Chancery demanding a determination of the fair
value of the shares of Hallmark Preferred Stock. Acquisition Corp. is under no
obligation to and has no present intention to file a petition with respect to
the appraisal of the fair value of the shares of Hallmark Preferred Stock.
Accordingly, it is the obligation of the stockholders to initiate all necessary
action to perfect their appraisal rights within the time prescribed in Section
262.
Within 120 days after the Effective Time, any stockholder who has complied
with the requirements for exercise of appraisal rights will be entitled, upon
written request, to receive from Acquisition Corp. a statement setting forth the
aggregate number of shares of Hallmark Preferred Stock not voted in favor of
adoption of the Merger Agreement and with respect to which demands for appraisal
have been received and the aggregate number of holders of such shares. Such
statements must be mailed within ten days after a written request therefor has
been received by Acquisition Corp.
If a petition for an appraisal is timely filed, after a hearing on such
petition, the Delaware Court of Chancery will determine which stockholders are
entitled to appraisal rights and thereafter will appraise the shares of Hallmark
Preferred Stock owned by such stockholders, determining the fair value of such
shares of Hallmark Preferred Stock, exclusive of any element of value arising
from the accomplishment or expectation of the Merger, together with a fair rate
of interest to be paid, if any, upon the amount determined to be the fair value.
In determining fair value, the Delaware Court of Chancery is to take into
account all relevant factors. In WEINBERGER V. UOP INC., ET AL. the Delaware
Supreme Court discussed factors that could be considered in determining fair
value in an appraisal proceeding, stating that "proof of value by any techniques
or methods which are generally considered
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<PAGE>
acceptable in the financial community and otherwise admissible in court" should
be considered and that "[f]air price obviously requires consideration of all
relevant factors involving the value of a company." The Delaware Supreme Court
stated that in making this determination of fair value the court must consider
"market value, asset value, dividends, earnings prospects, the nature of the
enterprise and any other facts which were known or which could be ascertained as
of the date of merger which throw any light on future prospects of the merged
corporation......................................................." The Delaware
Supreme Court has construed Section 262 to mean that "elements of future value,
including the nature of the enterprise, which are known or susceptible of proof
as of the date of the merger and not the product of speculation, may be
considered." However, the court noted that Section 262 provides that fair value
is to be determined "exclusive of any element of value arising from the
accomplishment or expectation of the merger."
Hallmark stockholders considering seeking appraisal rights should be aware
that the fair value of their shares of Hallmark Preferred Stock determined under
Section 262 could be more than, the same as, or less than the value of the
merger consideration they will be entitled to receive pursuant to the Merger
Agreement if they do not seek appraisal of their shares of Hallmark Preferred
Stock, and that opinions of investment banking firms as to fairness from a
financial point of view are not necessarily opinions as to fair value under
Section 262. The cost of the appraisal proceeding may be determined by the
Delaware Court of Chancery and taxed upon the parties as the Delaware Court of
Chancery deems equitable in the circumstances. Upon application of a dissenting
stockholder, the Delaware Court of Chancery may order that all or a portion of
the expenses incurred by any dissenting stockholder in connection with the
appraisal proceeding, including, without limitation, reasonable attorneys' fees
and the fees and expenses of experts, be charged pro rata against the value of
all shares of Hallmark Preferred Stock entitled to appraisal. In the absence of
such a determination or assessment, each party bears its own expenses.
Any holder of Hallmark Preferred Stock who has duly demanded an appraisal in
compliance with Section 262 will not, after the Effective Time, be entitled to
vote the shares of Hallmark Preferred Stock subject to such demand for any
purpose or be entitled to the payment of dividends or other distributions on
those shares (except dividends or other distributions payable to holders of
record of shares of Hallmark Preferred Stock as of a date prior to the Effective
Time).
If any stockholder who demands appraisal of his shares of Hallmark Preferred
Stock under Section 262 fails to perfect, or effectively withdraws or loses, his
right to appraisal, as provided in the DGCL, the shares of Hallmark Preferred
Stock of such stockholder will be converted into the right to receive the merger
consideration. A stockholder will fail to perfect, or effectively lose or
withdraw, his right to appraisal if no petition for appraisal is filed within
120 days after the Effective Time, or if the stockholder delivers to Hallmark or
Acquisition Corp. a written withdrawal of his demand for appraisal and
acceptance of the Merger, except that any such attempt to withdraw made more
than 60 days after the Effective Time will require the written approval of
Hallmark or Acquisition Corp. as the surviving corporation.
Failure to follow any of the steps required by Section 262 of the DGCL for
perfecting appraisal rights may result in the loss of such rights (in which
event a stockholder will be entitled to receive the merger consideration). In
view of the complexity of these provisions of the Delaware Law, stockholders who
are considering dissenting from the approval and adoption of the Merger
Agreement and exercising their rights under Section 262 should consult their
legal advisors.
Holders of Community Common Stock and Hallmark Common Stock will not have
appraisal rights in connection with the Merger.
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COMPARISON OF RIGHTS OF HOLDERS OF COMMUNITY COMMON STOCK AND
HALLMARK COMMON STOCK
COMPARISON OF THE RIGHTS OF HOLDERS
The following is a summary of material differences between the rights of
holders of Community Common Stock and the rights of holders of Hallmark Common
Stock. As each of Community and Hallmark is organized under the laws of
Delaware, these differences arise from various provisions of the Amended and
Restated Certificate of Incorporation and Bylaws of Community and the Amended
and Restated Certificate of Incorporation and Bylaws of Hallmark.
The following summary does not purport to be a complete statement of the
rights of Community stockholders under the Amended and Restated Certificate of
Incorporation and Bylaws of Community as compared with the rights of Hallmark
stockholders under the Amended and Restated Certificate of Incorporation and
Bylaws of Hallmark. The identification of specific differences is not meant to
indicate that other differences do not exist. The summary is qualified in its
entirety by reference to the above organizational documents of Community and
Hallmark and to the DGCL, to which both corporations are subject.
VOTING RIGHTS GENERALLY
The Amended and Restated Certificate of Incorporation of Community (the
"Community Certificate") provides that each holder of Community Common Stock
shall have one vote for each share of stock held.
Pursuant to the Amended and Restated Certificate of Incorporation of
Hallmark (the "Hallmark Certificate"), Hallmark Class A Common Stock has full
voting powers and all of the rights and privileges of common stock under the
DGCL; Hallmark Class B Common Stock, in contrast, has all of the rights and
privileges of Hallmark Class A Common Stock, except the right to vote. Shares of
Hallmark Class B Common Stock are non-voting for so long as such shares are held
by or for the benefit of an initial holder of such stock. Otherwise, shares of
Hallmark Class B Common Stock automatically convert into shares of Hallmark
Class A Common Stock upon sale or disposition. Each holder of Hallmark Class A
Common Stock has one vote for each share held.
STOCKHOLDER VOTE REQUIRED FOR CERTAIN TRANSACTIONS
CERTAIN BUSINESS COMBINATIONS. The Community Certificate requires the
affirmative vote of 75% of the voting power of the issued and outstanding
capital stock of Community present in person or by proxy at the meeting at which
such matters are voted upon (excluding all Voting Securities (as defined
therein) owned beneficially by an Acquiring Entity (as defined therein)), to
approve any Business Combination (as defined therein, which term includes a
merger or consolidation, or sale of all or substantially all of Community's
assets, and similar extraordinary corporate transactions), between Community and
any entity which is the beneficial owner of 10% or more of the outstanding
Voting Securities of Community, unless (i) Community's Board of Directors
unanimously approves the Business Combination with 75% of the members of the
entire Board of Directors voting in favor of such Business Combination; or (ii)
the Business Combination: (a) does not change any Voting Security holder's
percentage ownership of Voting Securities in any successor to Community from the
percentage owned by such holder in Community, (b) provides for the provisions
related to a Business Combination in the Community Certificate to apply to any
successor of Community, and (c) does not transfer all or substantially all of
Community's assets, other than to a wholly-owned subsidiary of Community.
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Hallmark's Bylaws provide that Hallmark shall be subject to the provisions
of Section 203 of the DGCL, which governs business combinations with interested
stockholders. As a general matter, Section 203 prohibits a corporation from
engaging in any Business Combination (as defined therein, which term includes a
merger or consolidation, or a sale of corporate assets which have an aggregate
market value equal to or greater than 10% of the aggregate market value of all
the assets of the corporation) with any Interested Stockholder (as defined
therein, which term includes the owner of 15% or more of the outstanding voting
stock of the corporation) for a period of three years following the date that
such stockholder becomes an Interested Stockholder, unless (i) prior to such
date the Board of Directors of the corporation approved either the Business
Combination or the transaction which resulted in the stockholder becoming an
Interested Stockholder, (ii) upon consummation of the transaction which resulted
in the stockholder becoming an Interested Stockholder, the Interested
Stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, (iii) on or subsequent to
such date the Business Combination is approved by the Board of Directors and
authorized at an annual or special meeting of stockholders by the affirmative
vote of at least 66.67% of the outstanding voting stock which is not owned by
the Interested Stockholder; or (iv) any of certain other limited exclusions from
coverage apply.
REMOVAL OF DIRECTORS. The Community Certificate provides that any director
may be removed from office for cause by the affirmative vote of the holders of
75% or more of the combined voting power of the then outstanding shares of stock
entitled to vote generally in the election of directors, voting together as a
single class.
The Hallmark Certificate provides that any director may be removed from
office only for "Cause" and only by the affirmative vote of the holders of a
majority of the combined voting power of the then outstanding shares of Voting
Stock (as defined therein), voting together as a single class. "Cause" is
defined as the willful and continuous failure of a director to substantially
perform such director's duties to Hallmark (other than any such failure
resulting from incapacity due to physical or mental illness) or the willful
engaging by a director in gross misconduct materially and demonstrably injurious
to Hallmark.
VACANCIES ON THE BOARDS OF DIRECTORS. The Community Certificate provides
that: (i) newly created directorships resulting from any increase in the number
of directors; and (ii) any vacancies on the Board of Directors resulting from
death, resignation, disqualification, removal or other cause, must be filled by
the affirmative vote of a majority of the remaining directors then in office,
even though less than a quorum of the Board of Directors. The Community
Certificate further provides that any director so elected shall hold office for
the remainder of the full term of the class of directors in which the new
directorship was created or the vacancy occurred, as applicable, and until such
director's successor shall have been elected and qualified.
The Hallmark Certificate and Bylaws similarly provide that newly created
directorships resulting from any increase in the number of directors may be
filled by a majority vote of the directors then in office (though less than a
quorum), or by a sole remaining director. In addition, any vacancies on the
Board of Directors resulting from death, resignation, removal or other cause
shall only be filled by the affirmative vote of the majority of the remaining
directors then in office (though less than a quorum), or by a sole remaining
director. Any director so elected is required to hold office for the remainder
of the full term of the class of directors in which the new directorship was
created or the vacancy occurred, as applicable, and until such director's
successor shall have been elected and qualified.
AMENDMENTS TO CERTIFICATE OF INCORPORATION. Pursuant to the Community
Certificate, Community reserves the right to amend, alter, change or repeal any
provision contained therein in any manner prescribed by statute or, as
applicable, by the Community Certificate. The affirmative vote of the holders of
at least 75% of the voting power of all shares of Community entitled to vote in
the election of directors, voting together as a single class, is required to
amend certain provisions in the Community Certificate regarding the number,
election, terms and removal of directors, and actions by shareholders and
special stockholder meetings. In addition, the affirmative vote of 75% of the
voting
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power of the issued and outstanding capital stock of Community (excluding all
Voting Securities owned beneficially by any Acquiring Entity) is required to
amend Article IX of the Community Certificate, which governs Business
Combinations.
The Hallmark Certificate and Bylaws do not contain any similar provisions
regarding amendments to the Hallmark Certificate.
AMENDMENTS TO BYLAWS. The Community Certificate provides that any Bylaws
adopted by Community's Board of Directors may be amended or repealed by either
the directors or by the stockholders. Provisions in the Bylaws regulating the
number, qualification and election of directors, newly created directorships and
vacancies, removal of directors, and election of directors may not be amended or
repealed, and no provision inconsistent with provisions regulating such matters
may be adopted, without the affirmative vote of the holders of at least 75% of
the voting power of all the shares of Community entitled to vote generally in
the election of directors, voting together as a single class. Additionally, the
affirmative vote of the holders of at least 75% of the voting power of all the
shares of Community entitled to vote generally in the election of directors,
voting together as a single class, is required to alter, amend, or adopt any
provision inconsistent with Article XII of the Bylaws, which governs the
amendment of the Bylaws.
Hallmark's Bylaws may be amended by the vote of a majority of the entire
Board of Directors, or, alternatively, by the affirmative vote of the holders of
80% or more of the combined voting power of the outstanding shares of Voting
Stock (as defined in the Hallmark Certificate) voting together as a single
class. Notwithstanding the foregoing, Article VI of the Bylaws, which governs
Business Combinations with Interested Shareholders, may be amended only by the
affirmative vote of a majority of Hallmark's stockholders entitled to vote on
such matter, except as may otherwise be permitted by the DGCL.
SPECIAL MEETINGS OF STOCKHOLDERS; STOCKHOLDER ACTION BY WRITTEN CONSENT
The Community Certificate and the Hallmark Certificate provide that
stockholder action may be taken only at a duly called annual or special meeting
of the stockholders and may not be affected by any consent in writing by the
stockholders. Further, special meetings of stockholders may be called only by
the Board of Directors pursuant to a resolution approved by a majority of the
entire Board of Directors.
NOTICE OF STOCKHOLDER NOMINATIONS OF DIRECTORS
Community's Bylaws provide that, with respect to nominations by stockholders
for the election of directors, timely advance notice must be given in writing to
the secretary of Community. To be timely, a stockholder's notice must be
delivered to or mailed and received at Community's principal executive offices
not less than 60 days, nor more than 90 days, prior to the stockholders' meeting
for the election of directors; provided, however, that in the event that less
than 70 days' notice or prior public disclosure of the date of the meeting is
given or made to stockholders, notice by the stockholder to be timely must be
received not later than the close of business on the tenth day following the day
on which such notice of the date of the meeting was mailed or such public
disclosure was made. The notice must contain: (i) as to each person whom the
stockholder proposes to nominate for election or re-election as a director: the
name, age, business address and residential address of such person, the
principal occupation or employment of such person, the class and number of
shares of Community which are beneficially owned by such person, and any other
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required
pursuant to Regulation 14A under the Exchange Act; and (ii) as to the
stockholder giving the notice: the name and record address of such stockholder,
and the class and number of shares of Community which are beneficially owned by
such stockholder.
Hallmark's Bylaws similarly require advance notice of nominations by
shareholders for the election of directors. Hallmark's Bylaws require that
written notice of a stockholder's intention to nominate an individual for
election to the Board of Directors be received by the secretary of Hallmark
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not later than the later of (i) the close of business on the seventh calendar
day following the date on which notice of the meeting of stockholders for the
election of directors is first given to stockholders (which notice of meeting of
stockholders may not be given earlier than the record date for the meeting of
stockholders) and (ii) a date 90 days prior to the meeting of stockholders. Each
such notice is required to include the following: (i) the name and address of
both the stockholder who intends to make the nomination and of the person(s) to
be nominated; (ii) a representation that the stockholder is a holder of record
of stock of Hallmark entitled to vote at such meeting and that such stockholder
intends to appear in person or by proxy at the meeting to nominate the person(s)
specified in the notice; (iii) a description of all arrangements or
understandings between the stockholders and each nominee and any other person(s)
(naming such person(s)) pursuant to which the nomination or nominations are to
be made by the stockholder; (iv) such other information regarding each nominee
proposed by such stockholder as would have been required to be included in a
proxy statement filed pursuant to the proxy rules of the Commission had each
nominee been nominated by the Board of Directors; and (v) the consent of each
nominee to serve as a director of Hallmark if so elected. The notification must
be signed by the nominating stockholder and must include a signed written
consent by each proposed nominee to be named for election as a director.
COMPARISON OF RIGHTS OF HOLDERS OF COMMUNITY COMMON STOCK
AND HALLMARK PREFERRED STOCK
The following is a summary of material differences between the rights of
holders of Community Common Stock and the rights of holders of Hallmark
Preferred Stock. These differences arise primarily from various provisions of
the Community Certificate and the Bylaws of Community and the Certificate of
Designation related to the Hallmark Preferred Stock (the "Hallmark Certificate
of Designation") and the Bylaws of Hallmark.
The following summary does not purport to be a complete statement of the
rights of Community stockholders under the Amended and Restated Certificate of
Incorporation and Bylaws of Community as compared with the rights of holders of
Hallmark Preferred Stock under the Hallmark Certificate of Designation and
Bylaws of Hallmark. The identification of specific differences is not meant to
indicate that other differences do not exist. The summary is qualified in its
entirety by reference to the above organizational documents of Community and
Hallmark and to the DGCL, to which both corporations are subject.
VOTING RIGHTS
The Community Certificate provides that each holder of Community Common
Stock shall have one vote for each share of stock held by them.
The Hallmark Certificate of Designation provides that holders of Hallmark
Preferred Stock are entitled to vote, one vote per share, with Hallmark Class A
Common Stock as a single class on all matters in which holders of Class A Common
Stock are entitled to vote, other than the election of directors. For a
comparison of the voting rights of holders of Community Common Stock and
Hallmark Common Stock with respect to certain transactions, see "Comparison of
Rights of Holders of Community Common Stock and Holders of Hallmark Common Stock
- -- Stockholder Vote Required for Certain Transactions."
In addition, holders of Hallmark Preferred Stock are entitled to vote, with
one vote per share, as a separate class on any amendment to the Hallmark
Certificate of Designation. Approval of any amendment to the Hallmark
Certificate of Designation requires the vote of the majority of the shares of
Hallmark Preferred Stock outstanding, voting as a separate class.
REDEMPTION
The Community Certificate and Bylaws do not contain any provisions regarding
the redemption of Community Common Stock.
The Hallmark Certificate of Designation provides that Hallmark Preferred
Stock is subject to both optional and mandatory redemption. Hallmark Preferred
Stock is redeemable at the option of
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Hallmark, in whole or in part, upon not less than thirty days' notice; provided,
however, that such redemption can only be made from funds legally available for
that purpose and to the extent then permitted by applicable restrictions in any
of Hallmark's loan agreements and indentures, and in the provisions of the
Hallmark Certificate. Hallmark is required to redeem, but only out of funds
legally available for that purpose and only to the extent then permitted by
applicable restrictions in any of its loan agreements and indentures and the
provisions of the Hallmark Certificate, the following amount of Preferred Stock
on the following dates (expressed in terms of a percentage of the aggregate
liquidation preference of Hallmark Preferred Stock outstanding on the redemption
date): (i) February 12, 1995 -- 13.33%; (ii) February 12, 1999 -- 53.33%; and
(iii) February 12, 2000 -- 100%. In the event that Hallmark does not have funds
legally available for, or Hallmark is not then permitted to make, any of the
mandatory redemptions described above, the obligation is carried forward and
must be fulfilled as soon as practicable after such funds are legally available
and Hallmark is permitted to do so. The redemption price is $125.00 per share,
reduced by the amount of certain dividends that have been paid.
DIVIDEND PREFERENCE
Holders of Community Common Stock are not entitled to any dividend
preference.
Holders of Hallmark Preferred Stock are entitled to aggregate dividends in
an amount equal to the product of (i) Net Income (as defined below) and (ii) .25
multiplied by a fraction, the numerator of which is the number of shares of
Hallmark Preferred Stock outstanding and the denominator of which is 60,000.
"Net Income" is defined as net income, after tax and after payment of dividends
on any senior series of preferred stock, determined in accordance with generally
accepted accounting principles. The maximum dividend payable in any year is
limited to 10% of the aggregate liquidation preference of the shares of Hallmark
Preferred Stock outstanding. Unpaid dividends on the Hallmark Preferred Stock
are cumulative to a limited extent; such limit is expressed in terms of certain
percentages of the aggregate liquidation preference of Hallmark Preferred Stock.
The Hallmark Certificate of Designation, with certain limited exceptions,
prohibits the payment of dividends on, or any distributions with respect to, or
any purchase, redemption or other acquisition of Hallmark Common Stock, if, at
the time of such payment, distribution or purchase, Hallmark has not paid or
declared and set apart for payment all accumulated dividends on the Hallmark
Preferred Stock.
LIQUIDATION PREFERENCE
Holders of Community Common Stock are not entitled to any liquidation
preference.
Upon any liquidation, dissolution or winding up of Hallmark, after payment
of any Hallmark obligations ranking senior to the Hallmark Preferred Stock, the
holders of Hallmark Preferred Stock are entitled to receive a liquidation
preference of $125.00 per share, reduced by the amount of certain dividends paid
on the Hallmark Preferred Stock, before any payment or other distribution of
assets can be made to the holders of Hallmark Common Stock.
CONVERSION
Each share of Hallmark Preferred Stock may be converted into five shares of
Hallmark Class A Common Stock (or such lesser or greater number of shares of
Hallmark Class A Common Stock as may result from adjustments to the rate of
conversion as provided in the Hallmark Certificate of Designation). For a
comparison of the rights of holders of Community Common Stock and Hallmark
Common Stock, see "-- Comparison of Rights of Holders of Community Common Stock
and Holders of Hallmark Common Stock."
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UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
are presented assuming the Merger will be accounted for as a pooling of
interests and reflect the combination of the historical consolidated financial
statements of Community and Hallmark. The pro forma condensed combined
statements of income and balance sheet assume the Merger was consummated at
January 1, 1991 and June 30, 1994, respectively. The unaudited pro forma
condensed combined financial statements do not reflect expenses expected to be
incurred by Community and Hallmark in connection with the Merger or the
redemption of Hallmark's Senior Subordinated Notes which may be tendered to
Community pursuant to the indenture. In addition, the following financial
statements do not reflect any anticipated cost savings, which may be realized by
Community after consummation of the Merger.
The pro forma information does not purport to represent what Community's and
Hallmark's combined results of operations actually would have been if the Merger
had occurred as of the date indicated or will be for any future periods. The pro
forma condensed combined financial statements should be read in conjunction with
the historical financial statements and the notes thereto of Community and
Hallmark contained elsewhere or incorporated by reference in this Joint Proxy
Statement/Prospectus.
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENTS OF INCOME(1)(2)
<TABLE>
<CAPTION>
FOR THE
FOR THE YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------------- ------------------------
1991 1992 1993 1993 1994
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net operating revenues.......................... $ 299,361 $ 346,783 $ 425,198 $ 205,662 $ 233,857
----------- ----------- ----------- ----------- -----------
Costs and expenses:
Salaries and benefits (3)..................... 117,101 135,785 168,072 80,278 93,518
Other operating expenses (3).................. 125,485 148,347 177,178 85,865 90,738
Interest expense (4).......................... 19,397 17,152 19,182 7,997 11,892
Amortization of deferred debt restructuring
credits (4).................................. (4,162) (6,164) (4,967) (2,896) --
Depreciation and amortization................. 16,533 18,529 22,316 10,128 13,539
Rent.......................................... 10,165 11,098 12,549 6,330 6,806
Credit from restructuring
transactions................................. -- (2,133) -- -- --
----------- ----------- ----------- ----------- -----------
Total costs and expenses.................... 284,519 322,614 394,330 187,702 216,493
Gain from hospital sales........................ 3,403 256 -- -- --
----------- ----------- ----------- ----------- -----------
Income from continuing operations before income
taxes (5)...................................... 18,245 24,425 30,868 17,960 17,364
Provision for income taxes...................... 7,391 9,823 12,718 7,034 6,822
----------- ----------- ----------- ----------- -----------
Income from continuing operations (5)........... $ 10,854 $ 14,602 $ 18,150 $ 10,926 $ 10,542
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Income per share from continuing operations
(5)............................................ $ 0.81 $ 1.01 $ 1.20 $ 0.74 $ 0.69
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Weighted average shares
outstanding (6)................................ 13,365 14,413 15,135 14,735 15,382
</TABLE>
57
<PAGE>
UNAUDITED PRO FORMA CONDENSED
COMBINED BALANCE SHEET
JUNE 30, 1994
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
-------------------------
COMMUNITY HALLMARK ADJUSTMENTS COMBINED
----------- ----------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 35,094 $ 19,757 $ -- $ 54,851
Patient accounts receivable, net of allowance............. 46,996 20,396 -- 67,392
Other current assets...................................... 15,118 14,844 -- 29,962
----------- ----------- ----------- ------------
Total current assets.................................... 97,208 54,997 -- 152,205
----------- ----------- ----------- ------------
Property and equipment...................................... 236,539 166,242 -- 402,781
Less: Accumulated depreciation and amortization............. (43,495) (62,222) -- (105,717)
----------- ----------- ----------- ------------
Net property and equipment.............................. 193,044 104,020 -- 297,064
----------- ----------- ----------- ------------
Other assets................................................ 19,517 14,003 -- 33,520
----------- ----------- ----------- ------------
Total assets................................................ $ 309,769 $ 173,020 $ -- $ 482,789
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 4,191 $ 247 $ -- $ 4,438
Accounts payable.......................................... 11,327 9,634 -- 20,961
Accrued liabilities....................................... 16,805 15,575 -- 32,380
----------- ----------- ----------- ------------
Total current liabilities............................... 32,323 25,456 -- 57,779
----------- ----------- ----------- ------------
Long-term debt and capital lease obligations................ 164,419 87,574 -- 251,993
Deferred income taxes (7)................................... 18,785 9,653 -- 28,438
Deferred credits and other long-term liabilities............ 6,622 17,448 -- 24,070
Redeemable preferred stock.................................. -- 1,303 (1,303)(8) --
Stockholders' equity:
Common stock.............................................. 114 152 (120)(8) 146
Additional paid-in capital................................ 48,375 54,469 1,423(8) 104,267
Retained earnings (deficit)............................... 39,131 (23,035) -- 16,096
----------- ----------- ----------- ------------
Total stockholders' equity.............................. 87,620 31,586 1,303 120,509
----------- ----------- ----------- ------------
Total liabilities and stockholders' equity.................. $ 309,769 $ 173,020 $ -- $ 482,789
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
</TABLE>
58
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
(1) Hallmark's statements of income for the fiscal years ended June 30, 1991
and 1992 were combined with Community's statements of income for the years ended
December 31, 1991 and 1992 to prepare the pro forma condensed combined
statements of income for the years ended December 31, 1991 and 1992,
respectively. The unaudited pro forma condensed combined statement of income for
the year ended December 31, 1993 was prepared by combining Community's 1993
operating results with Hallmark's 1993 operating results, which were restated to
a calendar year basis from previously reported results of operations.
Accordingly, Hallmark's historical operating results for the six months ended
December 31, 1992 were excluded from the unaudited pro forma combined statements
of income for the periods presented. Hallmark's net revenues and income from
continuing operations for that six month period were $85,153,000 and $784,000,
respectively.
(2) The table below sets forth a detailed breakdown by company of the
components of certain unaudited pro forma combined statements of income data for
the years ended December 31, 1991, 1992, and 1993, and for the six months ended
June 30, 1993 and 1994. Such information is presented as if the Merger had taken
place at January 1, 1991.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------- --------------------
1991 1992 1993 1993 1994
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net operating revenues:
Community................................................. $138,093 $176,778 $235,850 $111,578 $137,577
Hallmark.................................................. 161,268 170,005 189,348 94,084 96,280
-------- -------- -------- -------- --------
Pro forma combined...................................... $299,361 $346,783 $425,198 $205,662 $233,857
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Income from continuing operations:
Community................................................. $ 9,366 $ 10,597 $ 12,589 $ 7,260 $ 8,535
Hallmark.................................................. 1,488 4,005 5,561 3,666 2,007
-------- -------- -------- -------- --------
Pro forma combined...................................... $ 10,854 $ 14,602 $ 18,150 $ 10,926 $ 10,542
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Income per share from continuing operations:
Community................................................. $ 0.93 $ 0.95 $ 1.10 $ 0.64 $ 0.72
Hallmark.................................................. 0.44 1.19 1.48 1.06 0.54
Pro forma combined........................................ 0.81 1.01 1.20 0.74 0.69
Weighted average shares:
Community................................................. 10,062 11,139 11,479 11,387 11,809
Hallmark.................................................. 3,387 3,358 3,756 3,452 3,684
Pro forma combined........................................ 13,365 14,413 15,135 14,735 15,382
</TABLE>
(3) Significant nonrecurring charges resulting from the Merger, which will
be included in Community's statement of income for the year ended December 31,
1994, are estimated as follows:
<TABLE>
<S> <C> <C>
- -- Merger costs (including financial advisor, legal and accounting
fees, severance costs, etc.)...................................... $ 13,500,000
- -- Premium costs on redemption of Hallmark's Senior Subordinated
Notes, assuming 100% redemption................................... 800,000
- -- Write-off of deferred financing costs associated with the original
issuance of Hallmark's Senior Subordinated Notes.................. 2,600,000
- -- Tender offer costs associated with the redemption of Hallmark's
Senior Subordinated Notes......................................... 200,000
- -- Income tax benefits related to the above transactions which would
be deductible for tax purposes at the 35% federal statutory
rate.............................................................. (4,050,000)
------------
Estimated after-tax nonrecurring charge resulting from the Merger............ $ 13,050,000
------------
------------
</TABLE>
Of the $13,050,000 estimated charge to net income, or $0.85 per share based
on the pro forma combined number of weighted average shares outstanding for the
six months ended June 30, 1994,
59
<PAGE>
$2,340,000, or $0.15 per share, will be recorded as an extraordinary loss from
early extinguishment of debt. The foregoing summary is based on the assumption
that all of Hallmark's Senior Subordinated Notes will be tendered to Community.
If all of Hallmark's Senior Subordinated Notes are redeemed after the
Merger, Community will fund the total cash outlay of $81,000,000 (comprised of
$80,000,000 in principal, $800,000 in premium and approximately $200,000 in
tender offer costs) through existing cash balances and its available credit
facilities. Full redemption of Hallmark's Senior Subordinated Notes would result
in an annual decrease in interest expense of approximately $2,500,000, or $0.16
per share on a pro forma basis.
Community or Hallmark may also be subject to an additional cash outlay of
approximately $3,700,000 in respect of approximately 32,301 shares of Hallmark
Preferred Stock, assuming all holders of such shares exercise their appraisal
rights. The $3,700,000 cash outlay is estimated based on the assumption that all
holders of the 32,301 shares exercise their appraisal rights, and that the fair
value of a share of Hallmark Preferred Stock is equal to the closing price of
$21.125 of Community Common Stock on August 15, 1994, multiplied by the exchange
ratio of 5.4 for each share of Hallmark Preferred Stock. The exact amount of
this cash outlay cannot be ascertained, and could be more than, the same as, or
less than the value of the merger consideration such holders of Hallmark
Preferred Stock would otherwise be entitled to receive pursuant to the Merger
Agreement. Community or Hallmark will fund such payment from existing cash
balances and/or its available credit facilities. If payments in respect of the
Hallmark Preferred Stock are made using funds drawn from available credit
facilities, long-term debt would increase by approximately $3,700,000, common
stock and additional paid-in capital would decrease by approximately $1,300,000
and retained earnings would be reduced by approximately $2,400,000. Net income
applicable to common stockholders would be reduced by approximately $2,400,000
which would be a one-time charge, and earnings per share applicable to common
stockholders would be $0.16 lower.
(4) For Hallmark's fiscal years ended June 30, 1991, 1992 and 1993, the
long-term debt retirements in connection with Hallmark's financial restructuring
were accounted for under Statement of Financial Accounting Standards No. 15. The
unrecognized gain from such transactions was deferred and was classified on
Hallmark's balance sheets as a deferred debt restructuring credit. In Hallmark's
historical financial statements, amortization of the deferred credit had the
effect of reducing reported interest expense. For purposes of this pro forma
presentation, interest expense is shown at the gross amount and the amortization
of the deferred credit is shown as a separate line item. In November 1993, such
debt was refinanced and the unamortized deferred credit was recognized as an
extraordinary gain. Accordingly, in future periods, no similar reduction of
interest expense will occur. See Note 4 of Notes to Hallmark's Consolidated
Financial Statements as of June 30, 1994 contained elsewhere in this Joint Proxy
Statement/Prospectus. The pro forma income and income per share from continuing
operations for the years ended December 31, 1991, 1992 and 1993 and the six
months ended June 30, 1993 include after-tax credits of $2,497,000, $3,698,000,
$2,980,000 and $1,738,000, or $0.19, $0.26, $0.20 and $0.12 per share,
respectively, related to the amortization of the deferred debt restructuring
credit recognized during each of the periods.
(5) Includes nonrecurring items consisting of after-tax gains of $2,146,000
and $104,000, or $0.16 and $0.01 per share, realized by Community related to
sales of hospitals in 1991 and 1992, respectively, and after-tax income of
$1,280,000 or $0.09 per share realized by Hallmark related to credits resulting
from restructuring transactions in 1992.
(6) The pro forma income per share from continuing operations is computed on
the basis of the combined weighted average number of common and common
equivalent shares of Community and Hallmark for each period presented based upon
the exchange ratios for Hallmark Common Stock and Hallmark Preferred Stock.
(7) As a result of the Merger, Community will succeed to certain federal
income tax attributes of Hallmark, such as net operating loss carryforwards and
investment tax credit carryforwards, which
60
<PAGE>
may be available to reduce future federal income taxes payable. The utilization
of these tax carryforwards is limited to the extent of future income from
Hallmark's operations. Additionally, due to the change in ownership of Hallmark
resulting from the Merger, there will be annual limitations on the amount, if
any, of the Hallmark tax carryforwards available to be utilized by Community.
(8) Reflects the issuance of approximately 3,132,766 shares of Community
Common Stock in exchange for 2,982,482, 64,102 and 32,885 shares of Hallmark
Class A Common Stock, Class B Common Stock and Preferred Stock outstanding as of
June 30, 1994, respectively, based on the exchange ratios for Hallmark Common
Stock and Hallmark Preferred Stock. The difference between the par value of
Community and Hallmark Common Stock and the cancellation of Hallmark Preferred
Stock are reflected as an increase in additional paid-in capital. In addition to
the shares outstanding at June 30, 1994 as described above, Hallmark was
obligated to issue approximately 176,000 shares of common stock to various
officers and employees pursuant to Hallmark's Long-Term Cash Incentive Plan --
1990, as amended.
61
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
ADJUSTED FOR THE PURCHASE OF TWO HOSPITALS FROM GALEN HEALTH CARE
The following unaudited pro forma condensed combined statement of income for
the year ended December 31, 1993 reflects adjustments to the Unaudited Pro Forma
Condensed Combined Statement of Income for such period included elsewhere in
this Joint Proxy Statement/Prospectus, to include actual operating results for
the two hospitals purchased by Community from Galen Health Care (the "Galen
Hospitals") in May 1993 for the 1993 period during which they were operated by
the predecessor owner. Information below should be read in conjunction with the
Unaudited Pro Forma Condensed Combined Statements of Income included elsewhere
in this Joint Proxy Statement/Prospectus and the Current Report on Form 8-K,
dated May 27, 1993, as previously filed by Community with the Commission.
The pro forma information does not purport to represent what Community's and
Hallmark's combined results of operations actually would have been if the Merger
and the purchase of the Galen hospitals had occurred as of January 1, 1993 or
will be for any future periods.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
ADJUSTED FOR THE PURCHASE OF THE GALEN HOSPITALS
FOR THE YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
ADJUSTMENTS FOR ADJUSTED
PRO FORMA PURCHASE OF PRO FORMA
COMBINED GALEN HOSPITALS COMBINED
----------- --------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<S> <C> <C> <C>
Net Operating Revenues................................................. $ 425,198 $ 13,031 $ 438,229
----------- --------------- -----------
Costs and Expenses:
Salaries and benefits................................................ 168,072 5,235 173,307
Other operating expenses............................................. 177,178 5,282 182,460
Interest............................................................. 14,215 946(a) 15,161
Depreciation and amortization........................................ 22,316 1,086(b) 23,402
Rent................................................................. 12,549 193 12,742
----------- --------------- -----------
Total Costs and Expenses........................................... 394,330 12,742 407,072
----------- --------------- -----------
Income from continuing operations before income taxes.................. 30,868 289 31,157
Provision for income taxes............................................. 12,718 114 12,832
----------- --------------- -----------
Income from continuing operations...................................... $ 18,150 $ 175 $ 18,325
----------- --------------- -----------
----------- --------------- -----------
Income per share from continuing operations............................ $ 1.20 $ 1.21
----------- -----------
----------- -----------
Weighted average shares outstanding.................................... 15,135 15,135
<FN>
- ------------------------
(a) Includes interest expense incurred in association with amounts borrowed by
Community under its Revolving Credit Facility to finance the acquisition of
the Galen Hospitals, less interest on transactions between the Galen
Hospitals and their former parent company.
(b) Includes the increase in depreciation and amortization expense totaling
$469,000 applicable to Community's recorded amount of the Galen Hospitals'
assets and estimated additional capital expenditures associated with these
hospitals.
</TABLE>
62
<PAGE>
HALLMARK MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
As of June 30, 1992, Hallmark operated 18 hospitals with an aggregate
capacity of 1,527 licensed beds. Hallmark also operated one nursing home and
managed one acute-care hospital. During its fiscal year ended June 30, 1993,
Hallmark sold two hospitals having an aggregate of 99 licensed beds. Hallmark
recognized a gain of $752,000 from the sale of one of the facilities and no gain
or loss on the other. For fiscal 1993, the facilities that were sold had total
revenues of $974,000 and total expenses of $1,313,000 (excluding interest). For
fiscal 1992, the facilities that were sold had total revenues of $12,646,000 and
total expenses of $14,616,000 (excluding interest). As a result of such
dispositions and the separate licensing as two hospitals of a facility formerly
operated as one hospital, the number of hospitals operated by Hallmark at June
30, 1994 was 17.
A substantial portion of Hallmark's revenue is derived from the federal
Medicare program and state Medicaid programs. These programs have undergone
changes in recent years designed to reduce healthcare costs, resulting in
pressure on hospitals and other healthcare providers to reduce their costs and
limit the provision of services. These changes have had, and future changes in
such statutes and regulations may have, an adverse effect on Hallmark. For
information concerning the effect of Medicare and Medicaid legislation adopted
by Congress in August 1993 on reimbursement under these programs, see "Business
- -- Reimbursement and Regulatory Matters -- Reimbursement."
A number of Hallmark's hospitals qualify for "geographic reclassification"
or have been qualified as "disproportionate share" or "small dependent"
hospitals under the Medicare and/or Medicaid programs. See "Business --
Reimbursement and Regulatory Matters." These hospitals are reimbursed at a more
favorable rate than similar hospitals not receiving such designations. On a
periodic basis, federal and state regulatory authorities perform reviews of
participating hospitals to ensure continued compliance with program requirements
and, therefore, qualification for these designations. There can be no assurance
that Hallmark will be able to retain these favorable designations in the future
for all, or any, of these hospitals, that these programs will continue or that
any programs intended to replace such programs will be as financially
advantageous to Hallmark as the existing programs. The loss of such designations
or programs could have a material adverse effect on Hallmark's operations.
In late 1993, President Clinton submitted to Congress proposed comprehensive
healthcare reform legislation. Several other comprehensive reform proposals have
been introduced in the Congress, and comprehensive alternatives to the
President's proposal have recently been prepared and introduced by the majority
leaders in the House and Senate after taking into account the terms of several
bills which passed various congressional committees. Debate and a vote on these
bills is scheduled for late summer 1994, and action on other reform proposals is
possible if neither of the major proposals passes.
Certain aspects of each proposal offered by the majority leaders, such as
reductions in Medicare and Medicaid payments, if adopted, could adversely affect
Hallmark's business. In fiscal 1993 and 1994, Hallmark obtained 61.6% and 62.4%,
respectively, of its net patient service revenue from the Medicare and Medicaid
programs. Other aspects of the proposals by the majority leaders, such as
universal health insurance coverage, could have a positive impact on Hallmark's
business by reducing the amount of uncompensated care provided by Hallmark's
hospitals. No assurance can be given that any reform proposal will be adopted or
implemented or that any reform proposal which is ultimately adopted will not
have a material adverse effect on Hallmark's financial condition and results of
operations.
In addition to the federal reform initiatives, state legislatures also have
undertaken healthcare reform initiatives independent of federal reform. The
States of Maine, Florida, Tennessee, California and Washington have adopted
various types of reform legislation. It is not possible at this time to predict
what, if any, reforms will be adopted by the states, or when such reforms will
be adopted and implemented. No assurance can be given that any such reforms will
not have a material adverse effect upon Hallmark's revenues and earnings or upon
the demand for Hallmark's services.
63
<PAGE>
Hallmark's hospitals have historically operated at low occupancy levels
relative to hospitals in more urban environments. Accordingly, Hallmark has
sought to manage its operating expenses in such a way as to be a low-cost
provider. However, low occupancy levels can significantly impact Hallmark's
profitability due to the relatively high fixed-cost component of Hallmark's
overall cost structure. Hence, just as the implementation of revenue enhancing
programs can significantly improve profitability, any event that decreases
revenue can significantly erode Hallmark's financial performance. Despite
operating at low occupancy levels, all but one of Hallmark's hospitals generated
sufficient revenues to cover their expenses (before interest and allocation of
corporate home office overhead) in fiscal 1994. Hallmark's hospital in
Cleveland, Tennessee, which had an occupancy rate of 26.7% in fiscal 1994, did
not generate sufficient revenues to cover its expenses (before interest and
allocation of corporate home office overhead.) Hallmark believes that low
occupancy levels are a significant factor contributing to the Cleveland
facility's results of operations and that a return to profitability will require
continued efforts to minimize operating costs as well as increase occupancy
levels at the Cleveland facility.
Over the past three years, Hallmark has sought to increase its revenues by
qualifying for additional Medicaid reimbursement and by the addition of
inpatient and outpatient programs. In fiscal 1992 and 1993, Hallmark added
cardiac catheterization service at two hospitals, laparoscopic surgical
procedures at seven hospitals, endoscopic carpal tunnel surgery at two hospitals
and geriatric psychiatric programs at six of its hospitals. Hallmark also added
advanced diagnostic imaging procedures to its outpatient services at one or more
of its hospitals in fiscal 1992 and 1993. The benefits of such additional
services may not be fully realized, if at all, until future periods.
At June 30, 1991, Hallmark's long-term debt and capital lease obligations
totalled approximately $104,168,000. At June 30, 1993, Hallmark's long-term debt
and capital lease obligations totalled $80,487,000, a reduction of $23,681,000
over the course of two fiscal years. On November 15, 1993, Hallmark completed a
registered offering of $80,000,000 principal amount of 10 5/8% Senior
Subordinated Notes due 2003. The net proceeds from the offering were
approximately $77,600,000, of which approximately $62,100,000 was used to repay
Hallmark's then outstanding senior subordinated indebtedness and $10,700,000 to
redeem all of Hallmark's outstanding senior subordinated indebtedness (such bank
debt and senior subordinated indebtedness are referred to herein collectively as
the "Refinanced Debt"). If the Merger is not consummated, the remaining net
proceeds will be used for general corporate purposes and to fund certain capital
expenditures. At June 30, 1994, Hallmark's long-term debt and capital lease
obligations totalled $87,821,000.
64
<PAGE>
RESULTS OF OPERATIONS
The following table summarizes, for the periods indicated, changes in
selected operating indicators. During the periods indicated, Hallmark sold
several hospitals, which may have contributed to the percentage changes from
period to period. The discussion that follows should be read in conjunction with
Hallmark's Consolidated Financial Statements and the notes thereto appearing
elsewhere in this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------------------------------
PERCENTAGE INCREASE
(DECREASE) FROM
PERCENTAGE OF TOTAL REVENUES PRIOR YEAR
------------------------------------- ------------------------
1992 1993 1994 1993 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total revenues........................................ 100.0 % 100.0 % 100.0 % 5.4 % 6.8 %
Operating costs:
Salaries and benefits............................... 42.9 42.2 43.6 3.7 10.3
Supplies and other operating
expenses........................................... 38.5 40.7 37.4 11.5 (1.8 )
Provision for bad debts............................. 6.9 6.0 6.6 (8.3 ) 17.8
----- ----- -----
Total operating costs........................... 88.3 88.9 87.6 6.1 5.3
----- ----- -----
Operating margin.................................... 11.7 11.1 12.4 -- 18.9
----- ----- -----
Capital costs:
Interest............................................ 3.1 2.2 3.9 (27.4 ) 93.8
Depreciation and amortization....................... 5.6 5.0 5.0 (4.2 ) 4.5
----- ----- -----
Total capital costs............................. 8.7 7.2 8.9 (12.6 ) 31.3
----- ----- -----
Credit from restructuring transactions and sale of
hospital........................................... 1.3 0.4 -- (64.7 ) (100.0 )
Income before income taxes and extraordinary
items.............................................. 4.3 4.3 3.5 6.7 (13.2 )
Provision for income taxes.......................... 1.9 1.8 1.5 1.3 (14.4 )
----- ----- -----
Income before extraordinary items................... 2.4 % 2.5 % 2.0 % 11.1 % (12.3 )%
----- ----- -----
----- ----- -----
</TABLE>
The following table sets forth certain operating data for Hallmark on a
same-hospital basis, for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------
1992(1) 1993(1) 1994(1)
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Hospitals at year end (2).............................................. 16 17 17
Licensed beds at year end.............................................. 1,428 1,405 1,405
Average beds in service................................................ 1,229 1,217 1,205
Net patient services revenues:
Inpatient............................................................ $ 100,218 $ 114,987 $ 125,391
Outpatient........................................................... 44,308 48,968 48,858
Other................................................................ 5,947 7,434 8,539
----------- ----------- -----------
Total net patient services revenues.............................. $ 150,473 $ 171,389 $ 182,788
----------- ----------- -----------
----------- ----------- -----------
EBITDA................................................................. $ 21,015 $ 19,992 $ 23,660
Patient days........................................................... 141,690 156,616 164,643
Occupancy rate (3)..................................................... 31.6% 35.3% 37.4%
Equivalent patient days (4)............................................ 204,188 225,356 235,698
<FN>
- ------------------------
(1) Same hospital results exclude operating data for two hospitals sold in
1993.
(2) The number of hospitals increased because of the separate licensing as two
hospitals of a facility formerly operated as one hospital.
</TABLE>
65
<PAGE>
<TABLE>
<S> <C>
(3) Based on average beds in service.
(4) Represents inpatient days adjusted to reflect outpatient utilization.
</TABLE>
FISCAL 1994 COMPARED TO FISCAL 1993
Net patient service revenues, which are total patient service revenues less
the provision for contractual and other allowances, increased from $172,521,000
for the year ended June 30, 1993, to $182,788,000 for the year ended June 30,
1994, an increase of $10,267,000, or 6.0%, primarily due to a 5.1% increase in
admissions from 27,502 to 28,911 and a 5.1% increase in patient days from
156,689 to 164,643. The increased admissions resulted primarily from the
addition of new or expanded services in 1993 including geriatric psychiatric and
specialty Medicaid services. Net patient revenues for the years ended June 30,
1993 and 1994 included credits of approximately $2,079,000 and $2,308,000,
respectively, from reductions in the provision for contractual allowances
primarily as a result of favorable settlements of prior year cost reports with
program intermediaries. Other revenues increased from $6,716,000 in fiscal 1993
to $8,638,000 in fiscal 1994, an increase of 24.3%, representing primarily
increased revenues from one of Hallmark's majority-owned subsidiaries that
operates pain centers in hospitals owned by others.
Salaries and benefits increased $7,826,000, or 10.3%, in fiscal 1994 as
compared to fiscal 1993. Approximately 60% of the increase is due to an increase
in wage rates and benefits. Approximately 20% of the increase is due to the
replacement of contract services with full-time and part-time employees. The
remaining increase is due to volume increases at Hallmark's hospitals and at its
subsidiary which operates pain treatment centers.
Interest expense increased $3,631,000 in the year ended June 30, 1994, to
$7,502,000. The increase was primarily due to Hallmark's refinancing of its bank
debt and subordinated debt in November 1993. Prior to the refinancing, interest
expense on Hallmark's debt was significantly reduced by amortization of deferred
debt restructuring credits. As a result of the refinancing, the deferred debt
restructuring credits were eliminated and from the date of the refinancing
forward, interest expense was fully recognized at the effective interest rates
of Hallmark's debt. Interest expense was reduced by amortization of deferred
debt restructuring credits of $2,072,000 in the year ended June 30, 1994 and by
$6,034,000 for the year ended June 30, 1993. Interest expense, excluding
amortization of deferred debt restructuring credits, was $9,574,000 in the year
ended June 30, 1994 compared with $9,905,000 in 1993.
The following supplemental information represents pro forma results of
operations assuming the refinancing that occurred in the second quarter of
fiscal 1994 had occurred on July 1, 1992.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------
1993 1994
----------- -----------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Total revenues...................................................................... $ 179,237 $ 191,544
----------- -----------
Operating expenses.................................................................. 159,338 167,886
Interest expense.................................................................... 10,295 9,990
Depreciation expense................................................................ 9,027 9,428
----------- -----------
Total expenses.................................................................... 178,660 187,304
----------- -----------
Income from operations.............................................................. $ 577 $ 4,240
----------- -----------
----------- -----------
Income before extraordinary items and cumulative effect of accounting change........ $ 724 $ 2,459
----------- -----------
----------- -----------
Weighted average common and common equivalent shares outstanding.................... 3,450 3,681
----------- -----------
----------- -----------
Earnings per share before extraordinary items and cumulative effect of accounting
change............................................................................. $ 0.21 $ 0.67
----------- -----------
----------- -----------
</TABLE>
Provision for bad debts increased from $10,796,000 for the year ended June
30, 1993 to $12,713,000 for the year ended June 30, 1994, an increase of
$1,917,000, or 17.8%. The increase in the provision for bad debts was primarily
due to increased total revenues and increased reserves compared to prior years
in self-
66
<PAGE>
pay accounts as a result of the volume and aging of self-pay accounts.
Management maintains collection practices that recognize the aging and source of
payment of patient accounts. Management believes that increased volume,
especially as it relates to self-pay accounts, and slower payment patterns
generally lead to higher bad debt provisions.
Other operating expenses decreased $2,367,000, or 4.7%, for the year ended
June 30, 1994 to $47,564,000. The decrease was primarily the result of decreased
use of contract services in Hallmark's hospitals partially offset by an increase
in volume at Hallmark's hospitals. Other operating expenses for the years ended
June 30, 1994 and 1993 were net of reductions of Hallmark's general and
professional liability reserves of $1,323,000 and $1,266,000, respectively,
based on updated estimates of Hallmark's expected general and professional
liability losses.
Hallmark reported net income of $24,491,000, or $6.65 per share, for fiscal
1994, compared to net income of $10,381,000, or $3.01 per share, in fiscal 1993.
Net income for the year ended June 30, 1994 included a credit of $805,000, or
$0.22 per share, related to the cumulative effect of adoption of Statement of
Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes"
and an extraordinary gain on restructure of debt of $19,784,000, or $5.37 per
share (net of income tax effect of $2,170,000). Net income for fiscal 1993
included extraordinary gains of approximately $2,017,000 (net of income tax
effect of $1,344,000), or $0.59 per share, from the restructure or other
retirement of $3,463,000 principal amount of the 14 1/2% Subordinated Debentures
(the "14 1/2% Debentures") and $3,914,000, or $1.13 per share, resulting from
the utilization of tax net operating loss ("NOL") carryforwards.
FISCAL 1993 COMPARED TO FISCAL 1992
Net patient service revenues, which are total patient service revenues less
the provision for contractual and other allowances, increased from $164,605,000
in fiscal 1992 to $172,521,000 in fiscal 1993, an increase of $7,916,000, or
4.8%. This increase was primarily due to the addition of new or expanded
services, an increase in outpatient revenue and price and reimbursement
increases at Hallmark's operating hospitals. The increase was offset in part by
the sale of two facilities in fiscal 1993. Other revenues increased from
$5,400,000 in fiscal 1992 to $6,716,000 in fiscal 1993, an increase of 24.4%,
representing primarily increased revenues from one of Hallmark's majority-owned
subsidiaries that operates pain centers in hospitals owned by others. Hallmark's
total revenues were $179,237,000 for the year ended June 30, 1993 compared to
$170,005,000 in fiscal 1992, or an increase of 5.4%. On a same-hospital basis,
net patient service revenues increased $20,916,000, or 13.9% over fiscal 1992.
This increase was due primarily to the addition of 95 geriatric psychiatric beds
in fiscal 1992 and 1993, which accounted for approximately $11,500,000 of this
increase, and a $4,700,000 increase in outpatient revenues. The increase also
included $5,900,000 of disproportionate share payments, which represented 3.4%
of fiscal 1993 net patient service revenues on a same-hospital basis.
Salaries and benefits expense for fiscal 1993 increased $2,684,000, or 3.7%,
over fiscal 1992, primarily as a result of increased volume and wage increases.
Excluding the effect of the two facilities sold during the year, salaries and
benefits increased $8,627,000, or 13.0%, over fiscal 1992, due primarily to the
introduction of new services at certain of Hallmark's hospitals and general wage
increases. However, salaries and benefits as a percentage of total revenues on a
same-hospital basis declined slightly in 1993.
Other operating expenses increased $7,383,000 during fiscal 1993, or 17.4%
over fiscal 1992, offset in part by the sale of two facilities. Excluding the
effect of the sold facilities, other operating expenses increased $12,189,000,
or 32.7%. This increase was primarily due to higher utilization of outside
contract services and increased fees paid to outside medical specialists. The
higher utilization of outside contract services and fees paid to outside medical
specialists was primarily the result of an increase in services offered at
Hallmark's hospitals and efforts to attract physicians.
Interest expense decreased $1,463,000 in fiscal 1993 from $5,334,000 in
fiscal 1992. Such decrease was primarily due to a reduction of bank indebtedness
during fiscal 1993 and Hallmark's restructuring or other retirement of the
14 1/2% Debentures. Interest expense was also reduced by amortization of
deferred debt restructuring credits of $6,034,000 in fiscal 1993 and $6,164,000
in fiscal 1992.
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<PAGE>
Provision for bad debts as a percentage of total revenues decreased from
6.9% in fiscal 1992 to 6.0% for fiscal 1993 primarily as a result of decreased
days revenue in accounts receivable and an increase in the percentage of net
patient service revenues attributable to Medicare and Medicaid patients.
Depreciation and amortization decreased by $401,000 for fiscal 1993 compared
to fiscal 1992 primarily due to the sale of two facilities in fiscal 1993.
Hallmark reported net income of $10,381,000, or $3.01 per share, for fiscal
1993, compared to net income of $6,769,000, or $2.02 per share, in fiscal 1992.
Net income for fiscal 1993 included extraordinary gains of approximately
$2,017,000 (net of income tax effect of $1,344,000), or $0.59 per share, from
the restructure or other retirement of $3,463,000 principal amount of the
14 1/2% Debentures and $3,914,000, or $1.13 per share, resulting from the
utilization of NOL carryforwards. Net income for fiscal 1992 included an
extraordinary credit of $2,682,000, or $.80 per share, resulting from the
utilization of the NOL carryforwards. Pretax net income before extraordinary
items for fiscal 1993 was $7,753,000. Pretax net income before extraordinary
items for fiscal 1992 was $7,266,000, including a credit of approximately
$2,133,000 related to certain reimbursement items provided in fiscal 1989 in
restructuring reserves.
TAX MATTERS
At June 30, 1994, Hallmark had NOL carryforwards of approximately
$24,000,000, which expire in fiscal years 2002 through 2006. If the Merger is
not consummated, such NOL carryforwards may be available to offset future
taxable income of Hallmark, if any.
The Merger will result in an "ownership change" with respect to Hallmark
under Section 382 of the Code. As a result, after the Merger, income tax
deductions for Hallmark's NOL carryforwards existing at the time of the Merger
will be subject to an annual limitation equal to the pre-Merger value of the
Hallmark Common Stock and Hallmark Preferred Stock multiplied by the "long-term
tax-exempt rate" in effect for the month in which the ownership change occurs
(6.01% for ownership changes occurring in June 1994), increased by certain
"recognized built-in gains" that are recognized within five years after the
Merger.
During 1991, Hallmark issued 390,298 shares of Class B common stock in
exchange for $18,620,000 of previously outstanding bank debt. Hallmark believes,
based on consultation with outside tax and valuation advisors, that the exchange
qualified under the stock-for-debt exception to the recognition of income from
discharge of indebtedness which is available to insolvent corporations. There
can be no assurance, however, that the Internal Revenue Service will not
challenge Hallmark's position. If any such challenge by the Internal Revenue
Service was sustained, Hallmark's current NOL carryforwards could be reduced by
as much as $16,000,000.
During the fiscal year 1994, Hallmark adopted SFAS No. 109. SFAS No. 109
requires a change in accounting for income taxes to an asset and liability
approach under which deferred tax assets and liabilities are determined based on
the difference between the financial accounting and tax accounting basis of
assets and liabilities. Deferred tax assets or liabilities at the end of each
period are determined using the currently enacted tax rate expected to apply to
taxable income in the periods in which the deferred tax asset or liability is
expected to be realized. Hallmark recorded a credit of $805,000 to reflect the
cumulative effect of adopting such standard.
LIQUIDITY AND CAPITAL RESOURCES
OPERATIONAL ACTIVITIES. At present, Hallmark satisfies all of its working
capital and capital expenditure requirements from cash provided by operations.
Payments received by Hallmark from the Medicare and Medicaid programs are
Hallmark's single largest source of cash from operations. During fiscal 1994,
net revenue derived from the Medicare and Medicaid programs increased by
approximately $8,198,000 or 7.9% from the amount derived in fiscal 1993, due
primarily to the introduction of geriatric psychiatric services at certain of
Hallmark's hospitals in prior years.
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<PAGE>
During the year ended June 30, 1994, cash provided by operations increased
$4,465,000, compared to the same period a year earlier, primarily due to
increased operating income (excluding interest and depreciation) and decreased
interest paid during the period as a result of the semi-annual interest payment
terms of the Senior Subordinated Notes, offset in part by a reduction of
accounts payable.
INVESTMENT ACTIVITIES. Hallmark expended approximately $4,586,000, during
fiscal 1994 on capital expenditures. This represented a decrease of $1,789,000,
or 28.1%, from fiscal 1993. Capital expenditures during fiscal 1994 consisted
primarily of completion of an outpatient surgery center at one facility and
equipment purchases at various facilities. Hallmark anticipates that internally
generated cash flows and the remaining unused proceeds from the $80,000,000
senior subordinated note offering will be sufficient to fund capital
expenditures and working capital requirements through fiscal 1995.
FINANCING ACTIVITIES. In fiscal 1994, Hallmark completed the restructuring
of the Refinanced Debt upon the issuance of the Senior Subordinated Notes.
Hallmark believes that it increased its operational and financial flexibility by
refinancing the Refinanced Debt with the proceeds from the sale of the Senior
Subordinated Notes. Hallmark's debt service requirements during fiscal 1994 were
reduced from $13,118,000 to $10,594,000. Furthermore, the covenants contained in
the indenture pursuant to which the Senior Subordinated Notes were issued are
less restrictive than those previously in effect pursuant to the Refinanced
Debt.
During the quarter ended March 31, 1994, Hallmark obtained a letter of
credit with a commercial bank to secure Hallmark's obligation under one of its
capital leases. The lease had previously been secured by a collateral account
consisting of approximately $4,100,000 in cash and marketable securities. The
collateral account had previously been classified as Funds held by trustees in
the consolidated balance sheets. Upon obtaining this letter of credit by
Hallmark, the collateral account was released as security for the lease and
approximately $4,100,000 in cash and marketable securities became available for
general corporate purposes. In addition to this letter of credit, Hallmark
obtained three letters of credit totalling $2,883,000 in order to satisfy
certain security requirements of Hallmark's workers' compensation insurance
carrier. All letters of credit are secured by a security interest in Hallmark's
self-insurance trust funds in favor of the issuing bank.
During the quarter ended December 31, 1993, Hallmark entered into a credit
agreement with a financial institution pursuant to which Hallmark may borrow up
to $15,000,000 under a working capital facility and up to $10,000,000 under an
acquisition facility. Certain conditions must be satisfied prior to Hallmark
borrowing under the credit agreement, some of which had not been satisfied as of
June 30, 1994. Hallmark anticipates that it will satisfy the remaining
conditions to funding under its new credit agreement.
INFLATION. The healthcare industry is labor intensive. Wages and other
expenses are subject to rapid escalation, especially during periods of inflation
and when shortages occur in the marketplace. In addition, suppliers attempt to
pass along increases in their costs by charging Hallmark higher prices. In
general, Hallmark's revenue increases through price increases or changes in
reimbursement levels have not kept up with the cost increases. In light of cost
containment measures imposed by government agencies, private insurance companies
and managed-care plans, Hallmark is unable to predict its ability to offset or
control future cost increases.
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<PAGE>
HALLMARK'S BUSINESS
GENERAL
Hallmark is a hospital management company engaged in the business of
providing a broad range of healthcare services primarily to patients in
non-urban communities. As of June 30, 1994, Hallmark operated 17 hospitals, with
an aggregate capacity of 1,405 licensed beds, 200 of which were used to provide
psychiatric services. Hallmark's hospitals are located in non-urban communities
in eight states, primarily in the southern United States. Hallmark believes that
it is the sole provider of general acute-care hospital services in 10 of the 16
communities it serves, because its nearest competitor is at least fifteen miles
away or, in one case, there is no competing hospital located in the area
Hallmark considers to be its primary market. Of Hallmark's 17 hospitals, 15 are
owned and two are leased. Hallmark also manages one acute-care hospital,
operates one nursing home facility, owns another nursing home, and, through a
majority-owned subsidiary manages pain treatment centers in hospitals owned by
other companies.
INDUSTRY OVERVIEW
The Healthcare Financing Administration ("HCFA") of the United States
Department of Health and Human Services estimates that healthcare expenditures
in the United States increased to 14% of the gross domestic product in 1992,
compared to 13.2% in 1991. Total healthcare expenditures during 1992 are
estimated by HCFA at $839 billion. Hospitals, the largest sector in the
industry, accounted in 1992 for an estimated $323 billion, or 38.5% of all
healthcare expenditures. Although government programs, private insurance
companies, managed-care companies and self-insured employers have implemented
and will continue to implement various cost-containment measures, healthcare
expenditures are expected to continue to increase at a rate in excess of the
rate of increase in gross domestic product because of such factors as the aging
of the population, increased utilization as health coverage is expanded to
include previously uninsured populations, costs of technological advances and
general inflation.
Cost-containment measures have, in recent years, together with technological
advances, resulted in a significant shift from delivery of services on an
inpatient basis to outpatient care. Inpatient admissions have declined; and, due
to cost-containment pressures and technological advances, lengths of stay have
declined even though the typical inpatient is more ill and, accordingly, uses
more services than in the past.
Most cost-containment measures implemented in recent years by major
third-party payors for hospital services include changes in payment methods,
increased utilization review and pre-admission certification requirements. The
most significant of these is the change in payment methods. The Medicare program
has initiated a reimbursement system for hospital operating costs whereby a
hospital receives a fixed payment for an inpatient stay based on the patient's
diagnosis, without regard to the actual cost of delivery of care to that
patient. Certain private insurance companies, managed-care companies and
self-insured employers and state Medicaid programs have implemented payment
method changes that generally have the same effect as the Medicare diagnosis
related groups ("DRG") system. Accordingly, hospitals increasingly bear the risk
of not being fully reimbursed for their actual costs; and, in order to maintain
profitability, hospitals need to deliver inpatient care efficiently and to
control their costs of providing services.
On October 27, 1993, President Clinton submitted to Congress proposed
comprehensive healthcare reform legislation. Several other comprehensive reform
proposals have been and are expected to be introduced in the Congress, and
comprehensive alternatives to the Presidents' proposal have recently been
introduced by majority leaders in the house and senate. Healthcare reform
legislation is also pending in some state legislatures. See "-- Reimbursement
and Regulatory Matters." Hallmark cannot predict the effect such reforms may
have on its business or its future operations.
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<PAGE>
BUSINESS STRATEGY
Hallmark's business strategy is to be the sole or dominant provider of
healthcare services in the communities in which its hospitals are located.
Hallmark believes this business strategy provides the opportunity to establish
and maintain profitable operations in a rapidly changing industry for four
reasons. First, its non-urban acute care hospitals face less direct competition
from other hospitals than do urban hospitals and generally are the focal point
for the delivery of primary and specialty healthcare services in their
communities. Furthermore, Hallmark's hospitals generally face less direct
competition from specialty healthcare providers, such as outpatient surgery
centers, diagnostic centers and rehabilitation, mental health and substance
abuse inpatient and outpatient programs. Second, Hallmark's hospitals generally
provide primary care services and specialty care services in conjunction with
family-practice, internal-medicine and general practice physicians and general
surgeons. Hallmark believes the role of physicians and hospitals as
complementary providers of primary care services is being and will continue to
be enhanced as government, private third-party payors and employers utilize
primary care physicians as gatekeepers for specialized healthcare. Third,
Hallmark's hospitals, working together with primary care and specialty
physicians in the community, may reduce out-migration of community residents
seeking primary inpatient and outpatient hospital services and thereby improve
hospital operating performance. Fourth, Hallmark's position as the sole or
dominant provider of community healthcare services also lowers the competitive
pressure to provide expensive but under-utilized specialty services, allowing
Hallmark to operate on a cost-effective basis.
Hallmark has implemented its business strategy by (i) introducing new
specialty services; (ii) emphasizing improved and expanded outpatient services;
(iii) recruiting physicians to its communities, which generally have experienced
physician shortages; and (iv) assisting physicians in practice management so
they can devote more of their efforts to patient care. Each of Hallmark's
hospitals formulates individual business objectives designed to meet the
healthcare needs of the community it serves and to improve the hospital's
operating performance. In recent years Hallmark's ability to incur capital
expenditures to enhance inpatient and outpatient services has been limited, due
to restrictions in Hallmark's credit agreements and limited access to new
capital.
New inpatient services that have been established at Hallmark's hospitals,
based on local needs, include inpatient psychiatric treatment and substance
abuse treatment programs, skilled nursing units, specialized psychiatric
treatment programs for geriatric patients, home health services, laparoscopic
surgical procedures, and "swing bed" programs, which permit the use of hospital
beds as nursing home beds under certain conditions. For example, since July 1,
1991, Hallmark has converted 95 of its licensed beds to geriatric psychiatric
services and 23 of its licensed beds to skilled nursing beds. Furthermore in
fiscal 1993, one of Hallmark's hospitals qualified as a Medicaid
disproportionate share hospital and received significant revenue from the
program. Net inpatient revenues on a same-hospital basis increased $14,769,000
and $10,404,000 in 1993 and 1994, respectively, substantially as a result of the
addition of such services and payments received under the Medicaid
disproportionate share program.
Hallmark has increased its outpatient revenues in recent years with the
introduction of procedures that are the result of technological advances in the
industry, including mobile magnetic resonance imaging equipment, advanced
diagnostic imaging, vascular imaging and improvements in ultrasound and
mammography. These procedures are designed to enable Hallmark to reduce the out-
migration of community residents to tertiary hospitals and, together with other
factors, have increased net outpatient revenues on a same-hospital basis
approximately $7.2 million and $4.7 million in 1992 and 1993, respectively. Net
outpatient revenues in fiscal 1994 was substantially unchanged from fiscal 1993.
In fiscal 1994, Hallmark recruited 59 new physicians, including 46 specialty
physicians, to 14 of its hospitals. To recruit and retain qualified physicians,
Hallmark generally assists recruited physicians in establishing and managing
their private practices and provides office space proximate to most
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<PAGE>
of its hospitals to medical staff physicians. At most of its hospitals, Hallmark
is developing affiliations with physicians that involve offering combined
physician and hospital services to third-party payors and self-insured
employers. Hallmark also seeks to maintain a sound relationship with its
physicians through its Physician Leadership Council, established in April 1992.
The Physician Leadership Council members meet on a periodic basis to discuss
common issues with Hallmark's operations management.
In addition to recruiting and establishing affiliations with local
physicians, some of Hallmark's hospitals seek to improve care and to reduce the
extent of patient out-migration by establishing relationships with physicians
affiliated with tertiary care hospitals in nearby areas. These relationships
enable Hallmark's hospitals and local physicians to provide coordinated care to
community residents before and after their treatment at a tertiary care
hospital.
PATIENT SERVICES
Each of Hallmark's hospitals is operated by a wholly-owned subsidiary of
Hallmark and provides the inpatient and outpatient medical and surgical services
typically available in non-urban hospitals of small to medium size. Such
services, which vary by hospital, generally include operating and recovery
rooms, intensive care, diagnostic radiology facilities, pharmacies,
laboratories, outpatient facilities and emergency departments.
Hallmark devotes a total of 200 beds in ten of its hospitals to psychiatric
care and provides, in connection with its psychiatric services, inpatient and
outpatient treatment programs which include individual therapy, group therapy
and occupational and other adjunctive therapies to psychiatric and substance
abuse patients. At six of such hospitals, 95 of the psychiatric beds are used to
provide psychiatric services to geriatric mental health patients. Hallmark
believes that many of its geriatric mental health patients would not otherwise
receive mental healthcare and that, after treatment, these patients generally
have an improved quality of life.
Five of Hallmark's hospitals provide home health services, including, at
particular locations, physical therapy, respiratory therapy, medications and
other services to patients in their homes. One of Hallmark's hospitals operates
a 108-bed nursing home that adjoins the hospital. Six of Hallmark's hospitals
have portions of their licensed bed complements designated as "swing beds,"
which permits the use of these beds as skilled nursing home beds when needed.
The following table sets forth certain operating data and net revenues of
Hallmark on a same hospital basis, for all hospitals operated at June 30, 1994:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
1992 1993 1994
--------- --------- ---------
<S> <C> <C> <C>
Operating Data:
Hospitals at year-end (1)..................................... 16 17 17
Licensed beds at year-end..................................... 1,428 1,405 1,405
Average beds in service....................................... 1,229 1,217 1,205
Admissions.................................................... 26,920 27,486 28,911
Patient days.................................................. 141,690 156,616 164,643
Equivalent patient days (2)................................... 204,188 225,356 235,698
Average length of stay (days)................................. 5.3 5.7 5.7
Occupancy rate (3)............................................ 31.6% 35.3% 37.4%
Net patient service revenues:
Inpatient Services............................................ 66.6% 67.1% 68.6%
Outpatient Services........................................... 29.4% 28.6% 26.7%
Other Services................................................ 4.0% 4.3% 4.7%
--------- --------- ---------
Total Services.............................................. 100.0% 100.0% 100.0%
--------- --------- ---------
--------- --------- ---------
</TABLE>
72
<PAGE>
<TABLE>
<S> <C> <C> <C>
<FN>
- ------------------------
(1) The number of hospitals increased because of the separate licensing as two
hospitals of a facility formerly operated as one hospital.
(2) Represents inpatient days adjusted to reflect outpatient utilization.
(3) Based on average beds in service. Occupancy based on licensed beds was
27.2%, 30.5% and 32.1% for 1992, 1993 and 1994, respectively.
</TABLE>
Occupancy rates at hospital facilities are affected by many factors
including, among others, the hospital's relationship with its medical staff, the
service area, population size and general economic conditions within the
hospital's service area, the level of medical and surgical services offered,
outpatient use of hospital services, marketing efforts, treatment availability
at competing facilities and types of payor plans available in the area.
Generally, Hallmark's hospitals experience a seasonal increase in occupancy
during the quarters ending March 31. Declining hospital admissions generally
have been an industry-wide trend since the Federal Medicare program began basing
hospital operating cost reimbursement on DRGs. This industry-wide trend has had
a significant effect on Hallmark's admissions, patient days and occupancy rates.
Hallmark believes the average occupancy rates for its hospital facilities in the
three-year period were also adversely affected by payor pressures which
encourage treatment other than inpatient treatment and the residual effects of
the operational and financial difficulties experienced by Hallmark. See "--
History." Such industry-wide trends and payor pressures were offset to some
extent in fiscal 1993 and 1994 by the addition of new inpatient programs,
principally geriatric psychiatric Medicare programs and by the receipt of
disproportionate-share Medicaid revenue. The addition of geriatric psychiatric
programs and the increased number of patients under the Medicaid program also
had the effect of increasing the average length of stay for fiscal 1993 and
fiscal 1994. Although outpatient volume has increased over the period covered,
outpatient services as a percentage of net patient service revenues declined in
fiscal 1993 and 1994 because inpatient revenue increased more rapidly, primarily
as a result of geriatric psychiatric Medicare programs and receipt of
disproportionate-share Medicaid revenue.
SOURCES OF REVENUE
Hallmark receives payment for services rendered to patients from (i) the
federal government under the Medicare program; (ii) each of the states in which
its facilities are located under the Medicaid or similar programs; and (iii)
private insurers, other contractual arrangements and self-pay patients. The
following table sets forth, on a same-hospital basis, the approximate percentage
of net patient service revenues derived by Hallmark's hospitals from various
payment sources for the last three fiscal years:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------
1992 1993 1994
------ ------ ------
<S> <C> <C> <C>
Medicare................................................... 44.6% 47.3% 48.7%
Medicaid................................................... 10.9% 14.3% 13.7%
Private and other (primarily commercial insurance)......... 44.5% 38.4% 37.6%
------ ------ ------
Total.................................................... 100.0% 100.0% 100.0%
------ ------ ------
------ ------ ------
</TABLE>
Increases in the percentage of net patient service revenues from Medicare
and Medicaid generally result in increased contractual adjustments and a
reduction in net patient service revenues per admission. As a result, Hallmark
has designated case managers to maintain efficient utilization of hospital
resources, to maintain the delivery of appropriate patient care, to improve the
accuracy of diagnosis coding, to review the progression of treatment and to
coordinate the education of physicians in coding and billing. In addition,
Hallmark seeks to control its operating costs by flexible staffing based on the
volume and acuity of patients, making available to its hospitals the option of
participating in a large purchasing group, establishing wellness programs for
its employees, and continuous evaluation of the cost/benefits of contract
services.
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<PAGE>
Hallmark believes the decline in the percentage of revenues from private
sources for the three-year period is due to (i) the aging population, which is
bringing more patients under the Medicare program, (ii) Hallmark's
implementation of geriatric psychiatric Medicare programs, (iii) the receipt of
disproportionate share Medicaid revenue, (iv) the industry-wide trend toward the
increased use of less expensive outpatient treatment for many services which, in
general, are more likely to be used by non-Medicare patients, and (v) increased
competition for private patients. See "-- Reimbursement and Regulatory Matters."
MANAGED CARE AND MARKETING
In the markets in which Hallmark's hospitals are located, "managed care"
most often involves negotiated discounts and utilization review procedures
between a hospital and self-insured or partially self-insured employers and
insurance companies and Medicare and Medicaid cost-containment and utilization
review measures. Health maintenance organizations, preferred provider
organizations and similar managed care programs, which often establish capitated
payment arrangements, have not to date been significant factors in Hallmark's
markets. Hallmark believes its hospitals can compete effectively for the type of
managed care business that exists in Hallmark's markets by being cost-efficient
providers of quality primary care services. As part of Hallmark's efforts to
obtain additional managed care revenues, Hallmark intends to make certain
capital expenditures to enhance its ability to offer the mix of services desired
by these payors.
Each hospital has a marketing program based on local needs and
opportunities. The programs are designed to establish and enhance relationships
with medical staff physicians, with employers and other third-party payors, and
with physicians associated with tertiary care hospitals in nearby areas that are
utilized by local residents. Physician relationships include recruiting, leasing
of medical office building space, practice management and, more recently,
affiliating with physicians in offering hospital and physician services to
employers and other third-party payors. Relationships with specialty physicians
affiliated with tertiary hospitals provide for coordinated care of local
residents who are treated both in the community and at a tertiary hospital and
are designed to reduce the extent of out-migration of patients from Hallmark's
service area.
FACILITIES
The following table sets forth the name, location, type, number of licensed
beds and number of beds in service in the hospitals operated by Hallmark at June
30, 1994. The number of licensed beds represent the number of beds permitted in
the facility under its state license. The number of beds in service in a
hospital is generally less than the number of licensed beds for various reasons,
including removal of beds from service due to low occupancy, to permit
alternative use of such space, and to permit renovation.
<TABLE>
<CAPTION>
BEDS IN SERVICE
LICENSED --------------------------
HOSPITAL BEDS ACUTE PSYCHIATRIC TOTAL
- ------------------------------------------------------------------------------------------ -------- ----- ----------- -----
<S> <C> <C> <C> <C>
Woodland Community Hospital (1)
Cullman, Alabama 100 80 20 100
Parkway Medical Center
Decatur, Alabama 120 94 -- 94
L.V. Stabler Memorial Hospital
Greenville, Alabama 74 74 -- 74
Hartselle Medical Center
Hartselle, Alabama 150 119 -- 119
Harris Hospital (1)
Newport, Arkansas 132 79 17 96
Randolph County Medical Center (1)(2)
Pocahontas, Arkansas 50 40 10 50
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
BEDS IN SERVICE
LICENSED --------------------------
HOSPITAL BEDS ACUTE PSYCHIATRIC TOTAL
- ------------------------------------------------------------------------------------------ -------- ----- ----------- -----
<S> <C> <C> <C> <C>
Doctors Memorial Hospital (2)
Bonifay, Florida 34 34 -- 34
Berrien County Hospital (3)
Nashville, Georgia 71 61 -- 61
Crossroads Community Hospital (1)
Mt. Vernon, Illinois 55 55 -- 55
Byrd Regional Hospital (1)
Leesville, Louisiana 70 43 22 65
NorthGate Hospital -- Many Campus
Many, Louisiana 68 52 -- 52
NorthGate Hospital -- Pineville Campus (4)
Pineville, Louisiana 33 14 19 33
RiverNorth Treatment Center (4)
Pineville, Louisiana 66 -- 35 35
Cleveland Community Hospital (1)
Cleveland, Tennessee 100 55 30 85
White County Community Hospital
Sparta, Tennessee 60 50 10 60
Hill Regional Hospital
Hillsboro, Texas 69 47 17 64
Scenic Mountain Medical Center
Big Spring, Texas 153 108 20 128
-------- ----- --- -----
Total 1,405 1,005 200 1,205
-------- ----- --- -----
-------- ----- --- -----
<FN>
- ------------------------
(1) The number of licensed beds in these facilities includes swing beds which
are hospital beds licensed to serve as nursing home beds under certain
conditions.
(2) These facilities are operated under long-term capitalized leases.
(3) Hallmark also operates a 108-bed nursing home that adjoins this hospital.
The nursing home is leased under a long-term capitalized lease.
(4) These hospitals are separately licensed hospitals located in the same
building.
</TABLE>
Hallmark owns 15 and leases 12 medical office and clinic buildings. These
buildings are generally located adjacent to or proximate to a Hallmark hospital,
have an aggregate of approximately 138,000 square feet, and house an aggregate
of approximately 200 physicians and other healthcare professionals.
Hallmark's corporate offices occupy approximately 15,000 square feet of
office space at 300 Galleria Parkway, Suite 650, Atlanta, Georgia. The office
space is leased by Hallmark for a term which expires in September, 1996.
COMPETITION
In ten of the communities in which Hallmark's hospitals are located,
comprising 58.7% of its available beds, the nearest competitor hospital is at
least fifteen miles away or, in one case, there is no competitor hospital in the
area Hallmark considers to be its primary market. In such communities, as well
as in communities with direct competition, however, Hallmark's facilities face
competition from larger regional hospitals or medical centers in the same
geographic area to which patients may be referred for treatment of conditions
requiring specialized treatment or care or which patients or
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<PAGE>
physicians may prefer for elective admissions. As a response to these
competitive pressures, certain of Hallmark's hospitals have agreements with
physicians at larger regional hospitals to provide services on a periodic basis
to patients in the local community.
Seven of Hallmark's hospitals, which represent 41.3% of its available beds,
face direct competition from one or more general hospitals in the same
community. The competing facilities are operated by major hospital management
companies, by government entities supported by tax revenues, or by nonprofit
corporations which may be supported by endowments and charitable contributions.
Forms of support such as tax revenues, endowments and charitable contributions
are generally not available to Hallmark's hospitals. Some of Hallmark's
hospitals also face direct competition from specialized facilities (for example,
substance abuse, psychiatric or freestanding surgery facilities) or facilities
exclusively devoted to specialized populations (for example, military hospitals)
in the same or a nearby community.
All of Hallmark's hospitals may face competition in the future from newly
constructed facilities, particularly in those states not having certificate of
need laws as well as from alternative methods of delivering healthcare services.
Hallmark's management believes that Hallmark's ability to compete
successfully with other hospital facilities is influenced principally by the
number and quality of physicians on the hospitals' medical staffs and the
hospitals' ability to participate in reimbursement, insurance and managed-care
programs. Staff physicians initiate virtually all admissions and many outpatient
referrals to acute-care facilities. Although a physician may at any time
terminate his or her affiliation with a hospital, Hallmark seeks to attract and
retain qualified doctors of varied specializations on its hospital staffs.
Hospitals also compete through rate structures and services. Hallmark seeks to
encourage its hospital managing directors and facility staffs to evaluate
periodically rates and services and to structure charges and services in its
facilities to be competitive with those of other local or regional facilities.
Hallmark's ability to add services is limited by certificate of need laws, its
financial condition and its physicians and employees.
EMPLOYEES AND MEDICAL STAFFS
As of June 30, 1994, Hallmark had approximately 2,100 full-time and 200
part-time employees, including 32 corporate staff employees whose primary
purpose is to assist the administrative staffs of the individual facilities.
Approximately 44.8% of these employees were nursing personnel (registered or
licensed vocational nurses). Hallmark's employees are not represented by any
labor union. Hallmark believes its relations with its employees are generally
satisfactory.
As of June 30, 1994, approximately 680 physicians were members of the
medical staffs of Hallmark's hospitals, of whom fewer than ten were employees of
Hallmark.
Competition in the recruitment of personnel in the healthcare industry is
substantial. Many hospital markets are facing shortages of nursing and
professional medical personnel and it is expected that such shortages will
continue.
REIMBURSEMENT AND REGULATORY MATTERS
REIMBURSEMENT. A significant portion of Hallmark's revenues is derived from
patients covered by government and private contractual health programs. Payments
under these programs are made based on cost, a negotiated rate, or at a
predetermined rate based upon the patient's diagnosis, plus, in some programs,
capital costs and other factors. Revenues from such government programs are
recorded based on established billing rates less allowances and estimated
adjustments for patients covered by such programs and are subject to audit and
final settlement.
The principal sources of Hallmark's contractual payments are Medicare,
Medicaid, Blue Cross and private insurance programs (including health
maintenance organizations). Medicare is a federal program that provides certain
hospital and medical insurance benefits to persons age 65 and over and to some
disabled persons. Medicaid is a federal-state medical assistance program
administered by the
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<PAGE>
states and provides hospital assistance to certain individuals defined as
"medically indigent." Blue Cross is a private healthcare program that provides
hospital benefits to subscribers through numerous independent plans varying by
state. All of Hallmark's hospitals are certified as providers of Medicare and
Medicaid and participate to varying degrees in other reimbursement programs.
Amounts received under Medicare, Medicaid, Blue Cross programs and various
health maintenance organizations are generally less than the hospital's
customary charges for the services covered. Patients are generally not
responsible for any difference between customary hospital charges and amounts
reimbursed under Medicare, Medicaid and Blue Cross programs or by health
maintenance organizations for such services, but are responsible to the extent
of any noncovered services, deductibles or co-insurance.
Under the Prospective Payment System ("PPS"), Medicare payment for operating
costs is made at a predetermined, specific rate for each hospital inpatient
based on the patient's diagnosis under the DRG classification system. Currently,
all of Hallmark's hospitals are reimbursed through the PPS system for general
acute care services. Hallmark's inpatient psychiatric services are not
reimbursed through the PPS system. The Medicare program reimburses Hallmark for
psychiatric services on a reasonable cost basis, subject to the provisions of
the Tax Equity and Fiscal Responsibility Act ("TEFRA"). Under TEFRA,
reimbursement for reasonable costs is limited by a hospital's base year costs
per discharge, as updated by the Medicare program.
In fiscal 1992 to 1994, four of Hallmark's hospitals received supplemental
Medicare reimbursement for operating costs due to geographic reclassification
adjustments relating to the salaries and wages component of PPS payments. This
adjustment is available to certain non-urban hospitals that are located close to
urban areas and reflects the effect on such hospitals' salaries and wages
expense of proximity to an urban area. In fiscal 1992 to 1994, one of Hallmark's
hospitals received supplemental Medicare reimbursement for operating costs due
to its qualification as a Medicare dependent hospital. This supplement is paid
by Medicare to rural hospitals having less than 100 beds that provide a specific
volume of services to Medicare patients. Hallmark cannot predict whether these
types of supplemental Medicare reimbursement will be available to hospitals
after fiscal 1994.
In addition to the Medicare PPS payment described above, certain capital
related costs (e.g., interest associated with capital expenditures,
depreciation, property taxes and rental payments) were historically reimbursed
on a reasonable cost basis subject to certain limitations. Federal legislation
reduced reimbursement of such costs to 85% effective October 1, 1988, subject to
certain adjustments. In 1991 HCFA issued final regulations that incorporated
capital costs into PPS effective for Medicare cost reporting periods beginning
on or after October 1, 1991. The incorporation of capital cost into PPS, which
does not affect Hallmark's freestanding psychiatric hospital, includes a
ten-year transition period. Hallmark has determined that the change in
reimbursement method should not have a materially adverse effect on Hallmark's
existing operations in the early years. If Hallmark replaces or rebuilds any
hospital, such hospital would be subject to limitations in the PPS capital
reimbursement methodology, which would result in reimbursement limitations on
certain new capital invested in such new or replacement facility. In addition to
hospital inpatient and ancillary service payments, the Medicare program provides
reimbursement to hospitals for outpatient services. Previously, such services
were reimbursed on the basis of 100% of reasonable cost. For cost reporting
periods beginning October 1, 1987, Medicare payments for certain outpatient
surgery services were reduced to the lower of (i) a percentage of hospital
costs, (ii) a percentage of customary charges, or (iii) a prospective payment
rate based upon the hospital's historical costs and the rates paid by Medicare
for similar procedures performed in freestanding surgical centers. Further
limits of Medicare payments for outpatient radiology services became effective
October 1, 1988. Radiology and imaging services are paid at the lower of (i)
reasonable costs, (ii) customary charges or (iii) a blend of costs and adjusted
physician charges. Hallmark's level of reimbursement for outpatient services has
decreased as a result of these changes and Hallmark expects its percentage of
reimbursed cost for such services to further decrease. The extent of such
decrease will be dependent upon the volume of such outpatient services rendered
to Medicare program patients.
77
<PAGE>
A number of states also utilize a prospective payment system or have
established a program to negotiate payment levels at individual hospitals for
their state Medicaid programs. Additionally, many states have become more
aggressive in obtaining federal matching funds for their Medicaid programs,
particularly for "disproportionate share" hospitals. A hospital qualifies as a
"disproportionate share" hospital on the basis of the percentage of its patients
who are Medicaid or other indigent patients and so qualifies if its percentage
of such patients exceeds a percentage level fixed by the applicable state
Medicaid program. Eleven of Hallmark's hospitals received
"disproportionate-share" revenue in fiscal 1994. Several states have enacted, or
plan to enact, a service tax based on a percentage of hospitals' net revenue.
Historically, such taxes collected by the states have been subsequently remitted
to hospitals through various reimbursement methodologies; however, there is no
assurance any such state program will continue to remit such tax revenue to
hospitals or that the amounts remitted will approximate the tax paid.
In 1991, Congress adopted a law that limits the amounts that state Medicaid
programs can pay to "disproportionate-share" hospitals in excess of amounts
payable to other hospitals for services to Medicaid patients. Subject to certain
exceptions, no more than 12% of total Medicaid spending can be used to provide
"disproportionate-share" additional payments to hospitals. These limitations
expire in 1996, if Congress adopts certain new maximum Medicaid payment rules by
that time. Subject to certain exceptions, the 1991 law also limits a state's
share of Medicaid funds that may come from provider taxes.
In August 1993, HCFA published final regulations which loosened national and
state limits on disproportionate share payments to hospitals by interpreting the
statute as setting target percentage goals, rather than as establishing an
absolute cap on disproportionate share expenditures. The effect of these
regulations was to increase the percentage of the federal government's fiscal
year ("FY") 1993 Medicaid expenditures for disproportionate share hospitals from
12% to 13.7%.
In recent years, Congress has attempted to control the rising costs of the
Medicare and Medicaid programs by a variety of means, including limitations and
reductions of payments that otherwise would have been made to providers. In
August 1993, Congress enacted the Omnibus Reconciliation Act of 1993 ("OBRA
'93") which included reductions in updates to prospective payments to hospitals
which would reduce total Medicare payments to hospitals by $21.1 billion from
the federal government's FY 1994 through FY 1998 budgets. Reductions in update
factors contained in OBRA '93 are: for FY 1995, market basket minus 2.5
percentage points (urban hospitals) and market basket minus one percentage point
(rural hospitals); for FY 1995, market basket minus 2.5 percentage points (urban
hospitals) and the amount necessary to equalize the rural and other urban
standardized amounts (rural hospitals); for FY 1996, for all hospitals, market
basket minus two percentage points; for 1997, for all hospitals, market basket
minus 0.5 percentage points; for FY 1998, for all hospitals, the percentage
increase in the hospital market basket. The hospital market basket is an annual
estimate of the increase in price of goods and services purchased by hospitals.
For FY 1994, the hospital market basket is 4.3%. Under OBRA '93, 13 of
Hallmark's acute-care hospitals are classified as rural hospitals and three are
classified as urban hospitals.
In addition, OBRA '93 reduced the federal rate for hospital capital expenses
by 7.4% for discharges occurring after FY 1993. Outpatient capital reimbursement
was reduced by 10% from FY 1996 through 1998.
OBRA '93 requires that, in order to qualify for Medicaid reimbursement as a
disproportionate share hospital, a hospital must have a Medicaid inpatient
utilization rate of at least one percent. For state fiscal years beginning in
1995, disproportionate share hospital payment adjustments to private hospitals
are limited to no more than the costs of providing inpatient and outpatient
services to Medicaid and uninsured patients, less payments received from
Medicaid (other than disproportionate share adjustments) and uninsured patients.
OBRA '93 did not have a material adverse effect on Hallmark's fiscal 1994
revenue from the Medicare and Medicaid programs; and Hallmark does not believe
that OBRA '93 will have a material
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<PAGE>
adverse effect on its fiscal 1995 revenue from such programs. The OBRA '93
limitation on Medicaid disproportionate share reimbursement has not to date
significantly affected Hallmark's hospitals; and the combined effect of the
limited increase in Medicare prospective payments and the reduction in the
reimbursement rate for capital expenses has resulted in a small increase in the
level of Medicare reimbursement.
The Medicare and Medicaid programs are subject to statutory and regulatory
changes. Also, there are substantial areas subject to administrative rulings,
interpretation, governmental funding restrictions and requirements for
utilization and quality review. Such matters may significantly reduce payments
made under either or both federal programs to Hallmark's hospitals. Because the
requirements for certification under Medicare, Medicaid and similar
reimbursement programs are subject to change, it may be necessary for Hallmark
to make changes in its services, equipment, facilities and personnel to remain
qualified for such programs. Although management intends to take all reasonable
steps necessary to maintain Hallmark's ability to participate in available
reimbursement programs, there can be no assurance that Hallmark will continue to
be able to qualify for participation in such programs. Furthermore, annual cost
reports required under these programs are subject to audit which may result in
significant downward adjustments to the amounts originally estimated to be due
Hallmark under these reimbursement programs. These audits often require several
years to reach the final determination of amounts earned under the programs.
Management believes that adequate provision has been made for retroactive
adjustments that might result from such audits.
In all states in which Hallmark has facilities, Blue Cross pays hospitals
for covered services at their established hospital charges, at a percentage
thereof at rates negotiated between Blue Cross and the hospital or at a
combination thereof. Other private insurance carriers also reimburse their
policyholders or make direct payments to hospitals for covered hospital services
at established hospital charges or a percentage thereof. Private payors have
increased and are increasing their cost containment measures through the
implementation of various procedures including but not limited to pre-admission
qualification and utilization review. The privately-insured patient is generally
responsible to the hospital for any difference between the insurance proceeds
and the total charges.
In late 1993, President Clinton submitted to Congress proposed comprehensive
healthcare reform legislation. Several other comprehensive reform proposals have
been introduced in the Congress, and comprehensive alternatives to the
President's proposal have recently been prepared and introduced by the majority
leaders in the House and Senate after taking into account the terms of several
bills which passed various congressional committees. Debate and a vote on these
bills is scheduled for the month of August 1994, and action on other reform
proposals is possible if neither of the major proposals passes.
Certain aspects of each proposal offered by the majority leaders, such as
reductions in Medicare and Medicaid payments, if adopted, could adversely affect
Hallmark's business. In fiscal 1993 and 1994, Hallmark obtained 61.6% and 62.4%,
respectively, of its net patient service revenue from the Medicare and Medicaid
programs. Other aspects of the proposals by the majority leaders, such as
universal health insurance coverage, could have a positive impact on Hallmark's
business by reducing the amount of uncompensated care provided by Hallmark's
hospitals. No assurance can be given that any reform proposal will be adopted or
implemented or that any reform proposal which is ultimately adopted will not
have a material adverse effect on Hallmark's financial condition and results of
operations.
In addition to the federal reform initiatives, state legislatures also have
undertaken healthcare reform initiatives independent of federal reform. The
States of Maine, Florida, Tennessee, California and Washington have adopted
various types of reform legislation. It is not possible at this time to predict
what, if any, reforms will be adopted by the states, or when such reforms will
be adopted and implemented. No assurance can be given that any such reforms will
not have a material adverse effect upon Hallmark's revenues and earnings or upon
the demand for Hallmark's services.
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<PAGE>
REGULATION. Hallmark's hospitals and the healthcare industry generally are
subject to extensive federal, state and local governmental regulation relating
to licensure, conduct of operations, construction of new facilities, expansion
of existing facilities and the offering of new services. Failure to comply with
applicable laws and regulations could result in, among other things, the
imposition of fines, temporary suspension of admission of new patients to the
facility or, in extreme circumstances, exclusion from participation in
government healthcare reimbursement programs such as Medicare and Medicaid or
the revocation of facility licenses. There can be no assurance that future
regulatory changes will not have an adverse impact on Hallmark.
The federal Anti-Kickback Law prohibits the knowing and willful payment,
receipt or offer of remuneration by healthcare providers, such as Hallmark, with
respect to any person, including a physician, to induce referrals of patients or
in exchange for such referrals. In addition to or in lieu of criminal penalties,
an individual or entity can be excluded from participation in the Medicare and
Medicaid programs for violation of the Anti-Kickback Law. Hallmark recruits
physicians to become members of the medical staffs of its hospitals and to
establish private practices in the communities in which Hallmark's hospitals are
located. A limited number of the physicians who admit patients to Hallmark's
hospitals are employed by Hallmark. Hallmark has entered into various
relationships and compensation arrangements in connection with physician
recruitment which may be subject to the Anti-Kickback Law. Although Hallmark
believes that these arrangements are lawful, no "safe harbor" provisions apply
to physician recruitment arrangements not involving physician employment, and
evolving interpretations of the Anti-Kickback Law or the adoption of new federal
or state laws or regulations could make it necessary for Hallmark to restructure
certain of its arrangements. The Office of Inspector General of the Department
of Health and Human Services has proposed a "safe harbor" under the
Anti-Kickback Law that, if adopted, would provide a "safe harbor" from violation
of such law for many of Hallmark's recruiting arrangements with physicians.
Hallmark's operations are also subject to a number of state laws regulating
relationships and compensation arrangements among healthcare providers.
Healthcare facilities must comply with federal, state and local laws related
to, among others, the adequacy of medical care, equipment, personnel, operating
policies and procedures, fire prevention, rate setting, building codes and
environmental protection. Facilities are subject to periodic inspection by
governmental and other authorities to assure continued compliance with the
various standards necessary to maintain licensure and participation in the
Medicare and Medicaid programs. Management believes that Hallmark's facilities
are in substantial compliance with applicable federal, state, local and
independent review body regulations and standards necessary for the operations
of such facilities as conducted.
In certain instances, governmental or other inspections may result in
notification to a facility of certain deficiencies. Failure to correct such
deficiencies can result in termination of a facility's Medicare and Medicaid
program certification or its operating license. In such instances, Hallmark
initiates steps to correct cited deficiencies and to comply with the
requirements for maintaining such agreements and licenses.
Most of Hallmark's hospitals are accredited by the Joint Commission on
Accreditation of Healthcare Organizations. The Joint Commission is a private
organization that establishes standards relating to the physical plant,
administration, quality of care, and medical staffs of hospitals.
Because regulations and standards are subject to interpretation and change,
there can be no assurance that Hallmark's facilities will be able to maintain
their licenses, certification or accreditation status. Future changes in such
legal, regulatory and independent review body requirements could necessitate
substantial capital expenditures in order to comply with such requirements and
there is no assurance that, if called upon to do so, Hallmark would be able to
fund such capital expenditures.
Federal law contains numerous provisions designed to insure that services
rendered by hospitals to Medicare and Medicaid patients are medically necessary
and are of quality which meets professionally recognized standards and to insure
that claims for reimbursement under the Medicare and Medicaid
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programs are properly filed. Among other things, services provided at Hallmark's
hospitals are subject to periodic review by Peer Review Organizations ("PRO's").
All hospitals which participate in the Medicare program are subject to review by
PRO's. PRO activities include reviews of (i) selected elective admissions, (ii)
admissions which occur within seven days of a discharge from a general hospital,
(iii) certain transfers of patients from one hospital to another, (iv) validity
of diagnostic related group classifications of patients, (v) admissions and
services to determine medical necessity and (vi) admissions and services to
determine whether quality of care meets professionally recognized standards.
PRO's have the authority to recommend to the U.S. Department of Health and Human
Services that a provider who is in substantial noncompliance with the medical
necessity and quality of care standards of a PRO or who has grossly and
flagrantly violated an obligation to render quality care be excluded from
participation in the Medicare program or be required to reimburse the federal
government for certain payments previously made to the provider under the
Medicare program.
A hospital is subject to civil monetary penalties if it makes claims for
payment for services which were not rendered or were rendered by a person or
entity not properly licensed under state law.
Except for Louisiana and Texas, all of the states in which Hallmark's
healthcare facilities are located have in effect certificate of need or
equivalent laws which generally require that the appropriate state agency
approve certain acquisitions and determine that a need for additional beds, new
services and certain capital expenditures exists prior to additional beds and
new services being added, or the proposed capital expenditure (above a specified
level) being spent. State approvals often are issued for a specified period of
time. Failure to obtain necessary state approval can result in the inability to
complete an acquisition, addition or renovation, the imposition of civil or, in
some cases, criminal sanctions and the revocation of the facility's license.
From time to time, federal and state governments as well as insurers and
others have conducted and may conduct inquiries or investigations into
businesses in the healthcare industry. Hallmark cannot predict the occurrence or
outcome of any such investigations or whether any such investigations would lead
to sanctions under existing laws or regulations, changes in, or in the
interpretation of, existing laws or regulations or legislation imposing
additional regulations on healthcare providers. Hallmark believes that it
conducts its business in compliance with applicable laws.
LIABILITY INSURANCE
Hallmark maintains hospital professional and commercial general liability
insurance coverage for occurrences after June 30, 1992 with maximum coverage of
$25,000,000, subject to a self-insured retention of $2,000,000 per occurrence
and $6,000,000 annual aggregate for hospital professional liability and
$1,000,000 per occurrence and $3,000,000 annual aggregate for commercial general
liability. Hallmark maintained professional malpractice insurance for certain
occurrences prior to February 1988 but is self-insured for all occurrences
between February 1988 and June 1992. The liability Hallmark has recorded for
losses incurred and claims made is based upon individual case estimates for
losses reported, and upon estimates on the basis of past experience for incurred
but not reported losses. These estimates are based on actuarial reports obtained
annually by Hallmark. Although Hallmark believes that its insurance policies and
reserves are adequate, there can be no assurance that its insurance and loss
reserves will cover all potential claims that may be asserted against Hallmark.
Hallmark is subject to claims and legal actions by patients and others in the
ordinary course of business. In management's opinion, the ultimate resolution of
such claims will not have a material effect on Hallmark's financial position or
results of operations.
HISTORY OF HALLMARK
Hallmark was incorporated in 1981 under the laws of the State of Delaware.
Hallmark began doing business under its present name in fiscal 1992. Prior to
that time, it did business under the name National Healthcare, Inc. Hallmark
experienced rapid growth from 1981 through late 1986. During this period,
Hallmark acquired 32 hospitals having an aggregate of 2,495 licensed beds and
eight nursing homes having an aggregate of 515 licensed beds. The expansion was
funded primarily with the proceeds of public debt (approximately $28,000,000)
and equity offerings (approximately $42,000,000) and borrowings (approximately
$120,000,000) from certain banks (the "Banks") totalling approximately
$190,000,000.
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<PAGE>
Hallmark experienced financial difficulties as a result of its rapid growth.
In January 1987, Hallmark was named as a defendant in a purported class action
lawsuit on behalf of certain purchasers of Hallmark's common stock and the
14 1/2% Debentures. In November 1987, Hallmark defaulted in the payment of
interest on the 14 1/2% Debentures and, in December 1987, defaulted in the
payment of principal and interest on its bank credit facility.
Hallmark commenced restructuring negotiations with the Banks and settlement
negotiations with the plaintiffs in the purported class-action lawsuit in 1987.
In December 1987, Hallmark entered into a settlement with the plaintiffs in the
class-action lawsuit pursuant to which defendants other than Hallmark paid
members of the settlement class approximately $9,925,000 in cash and Hallmark
issued approximately 60,000 shares of Hallmark Preferred Stock to members of the
settlement class. In January 1989, Hallmark and the Banks entered into a credit
agreement, pursuant to which $112.4 million of principal outstanding under the
previous credit facility, together with approximately $21.1 million of unpaid
interest and fees, was converted into three series of notes totalling $133.5
million. Also in January 1989, Hallmark's Common Stock was declared ineligible
for trading on the NASDAQ automated quotation system.
In December 1989, Hallmark consummated a cash tender offer for a portion of
the 14 1/2% Debentures. As a result of the tender offer and a private purchase,
Hallmark purchased $10,441,000 principal amount of the 14 1/2% Debentures for
approximately $902,000. Hallmark consummated an exchange offer for a portion of
the remaining 14 1/2% Debentures in June 1990. In the exchange offer, Hallmark
exchanged $9,795,000 principal amount of 14 1/2% Debentures for $9,795,000
aggregate principal amount of a new series of debentures, plus cash in the
amount of approximately $294,000. During fiscal 1993, Hallmark retired or
restructured the balance of the 14 1/2% Debentures.
Since June 30, 1987, Hallmark has sold or otherwise disposed of 15 hospitals
and six nursing homes. Hallmark applied the cash received from such dispositions
to retire or refinance certain indebtedness, including the application of
approximately $34.9 million to reduce indebtedness, including $26.1 million of
prepayments pursuant to the credit agreement included in the Refinanced Debt. In
May 1991, the Banks agreed to exchange $18.6 million principal amount of
indebtedness outstanding pursuant to such credit agreement for approximately
390,000 shares of Hallmark's Class B Common Stock. In May 1993, Hallmark Class A
Common Stock was listed for trading on The Nasdaq Stock Market. By June 30,
1993, Hallmark had reduced the principal amount of such indebtedness to $64.2
million.
During fiscal 1994, Hallmark completed its financial restructuring with the
issuance of its Senior Subordinated Notes. The net proceeds of the offering were
used to repay in full the indebtedness outstanding under Hallmark's formerly
outstanding bank credit agreement as well as all of Hallmark's subordinated
indebtedness.
Hallmark experienced certain operational difficulties during fiscal 1987
through fiscal 1989 as a result of its financial difficulties during such
period. The operational difficulties included (i) focus of management attention
on the restructuring; (ii) reduction of management and employee morale; and
(iii) erosion of support for Hallmark's hospitals by members of their medical
staffs. Hallmark believes that its competitors sought to use its financial
difficulties as means of attracting physicians and other referral sources.
Furthermore, Hallmark believes certain third-party payors were reluctant to
enter into agreements with Hallmark's hospitals or otherwise refer patients to
Hallmark's hospitals during this period. Hallmark believes that its process of
financial restructuring is complete.
OTHER
Hallmark manages a 230-bed general acute-care hospital owned by an unrelated
party under a management agreement that expires in February 1995. Hallmark is
also the majority owner of Pain Care, Inc. Pain Care, Inc. operates and develops
centers for the treatment of pain. Pain Care, Inc. does not operate any
treatment centers in hospitals operated by Hallmark. This business is not
material to Hallmark's revenues or earnings.
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STOCK OWNERSHIP OF PRINCIPAL STOCKHOLDERS
AND MANAGEMENT OF HALLMARK
The following table sets forth as of August 15, 1994, certain information
with respect to ownership of the outstanding Hallmark Class A Common Stock, by
(i) all persons known by Hallmark to own beneficially more than 5% of the
outstanding Hallmark Class A Common Stock, (ii) each director of Hallmark and
(iii) all directors and executive officers of Hallmark, as a group.
<TABLE>
<CAPTION>
SHARES OF HALLMARK
COMMON STOCK PERCENT
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED (1) OF CLASS
- ---------------------------------------------- ---------------------- --------
<S> <C> <C>
James T. McAfee, Jr. (2) 381,891 11.7
Robert M. Thornton, Jr. (3) 78,488 2.5
Kay W. Slayden (4)(5) 14,000 *
Rolland A. Maxwell (5) 4,000 *
James E. Martin (5)(6) 5,100 *
J. Randolph Seckman (5) 11,000 *
All executive officers and directors as a
group (6 persons) (7) 494,479 15.0
<FN>
- ------------------------
* less than 1%
(1) Unless otherwise indicated, the named individual has sole voting and
investment power with respect to all shares and the information pertains
only to Hallmark Class A Common Stock. For each beneficial owner, the
number of shares outstanding and the percentage of stock ownership includes
the number of common and all common equivalent shares (including options
exercisable within 60 days) owned by such individual at August 15, 1994.
(2) Includes 84,296 shares which Mr. McAfee has the right to acquire pursuant
to options exercisable within 60 days.
(3) Includes 1,000 shares owned by Mr. Thornton's spouse, of which Mr. Thornton
disclaims beneficial ownership.
(4) Based on 2,000 shares of Hallmark Preferred Stock owned by Mr. Slayden
which are convertible at a ratio of one share of Hallmark Preferred Stock
into five shares of Hallmark Class A Common Stock at any time.
(5) Includes 4,000 shares which the named director has the right to acquire
pursuant to options exercisable within 60 days.
(6) Includes 200 shares owned by Dr. Martin's spouse.
(7) Includes 100,296 shares which the members of the group have the right to
acquire pursuant to options exercisable within 60 days and takes into
account 2,000 shares of Hallmark Preferred Stock owned by Mr. Slayden,
which are convertible at a ratio of one share of Hallmark Preferred Stock
into five shares of Hallmark Class A Common Stock at any time.
</TABLE>
As of August 15, 1994 all persons known by Hallmark to own beneficially more
than 5% of the outstanding shares of Hallmark Preferred Stock were: (i) Alliance
Capital Management Corporation, 1345 Avenue of the Americas, New York, New York
10105-0099, which is the owner of 3,424 shares of Hallmark Preferred Stock,
representing 10.6% of the voting power of the Hallmark Preferred Stock; (ii) Kay
W. Slayden, a director of the Company, who is the owner of 2,000 shares of
Hallmark Preferred Stock, representing 6.2% of the voting power of Hallmark
Preferred Stock and (iii) Executive Life Insurance, 11444 W. Olympic Blvd., West
Los Angeles, California 90064, which is the owner of 1,925 shares of Hallmark
Preferred Stock, representing 6.0% of the voting power of Hallmark Preferred
Stock. Each of the above holders of Hallmark Preferred Stock holds less than one
half of one percent of the combined voting power of the Hallmark Class A Common
Stock and the Hallmark Preferred Stock.
83
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS OF
HALLMARK WHO WILL BECOME DIRECTORS OF COMMUNITY
GENERAL
Community has agreed that, if the Merger is consummated, it will cause James
T. McAfee, Jr., the Chairman of the Board and Chief Executive Officer of
Hallmark, and Kay W. Slayden, a Hallmark Director, to be elected to the Board of
Directors of Community. The following table sets forth certain information
regarding the directors and executive officers of Hallmark who will become
directors of Community:
<TABLE>
<CAPTION>
AGE CURRENT POSITION WITH HALLMARK
--- --------------------------------------------------------
<S> <C> <C>
James T. McAfee, Jr. 55 Chairman of the Board and Chief Executive Officer
Kay W. Slayden 59 Director
</TABLE>
James T. McAfee, Jr. was elected a Director of Hallmark in September 1987,
has been Chief Executive Officer of Hallmark since September 1987, and has been
Chairman of the Board since October 1987. Mr. McAfee's current term as a
Director of Hallmark expires in 1995. From 1980 to September 1987, Mr. McAfee
served as Executive Vice President, Hospital Operations, and as a Director of
Charter Medical Corporation. Prior to 1980, Mr. McAfee served as Senior Vice
President of Hospital Affiliates International.
Kay W. Slayden was elected a Director of Hallmark in March 1989. Mr.
Slayden's current term as a Director of Hallmark expires in 1995. Mr. Slayden is
the Vice Chairman of Jackson & Coker, a physician recruiting company in Atlanta,
Georgia. From 1986 to 1990, Mr. Slayden was President and Chief Operating
Officer of Norrell Healthcare and a member of the Board of Directors of Norrell
Corporation. From 1982 to 1985, Mr. Slayden was President and Chief Executive
Officer of PGA Tour Properties, Inc., and from 1978 to 1980, he was President,
Chief Operating Officer and a member of the Board of Directors of Fuqua
Industries. From 1980 to 1988, Mr. Slayden served as a member of the Board of
Directors of Charter Medical Corporation.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
to James T. McAfee, Jr., the Chief Executive Officer of Hallmark, Hallmark's
only executive officer who will become a director of Community:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------- ALL OTHER
-------------------- LTIP COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) PAYOUTS($)(1) ($)(2)
- ---------------------------------------- --------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
James T. McAfee, Jr. 1992 405,000 227,813 445,085 --
Chief Executive Officer and Chairman of 1993 450,000 392,175 153,830 13,102
the Board 1994 500,000 468,752 -- 13,406
<FN>
- ------------------------
(1) Represents payments under Hallmark's 1990 Milestone Bonus Plan, pursuant to
which Mr. McAfee was eligible for a cash bonus upon Hallmark's achievement
of certain elements of its financial restructuring. The conditions to
payment of such bonuses were satisfied in fiscal 1991, and the bonuses were
paid in fiscal 1992 and 1993.
(2) Represents term-life insurance premiums paid by Hallmark.
</TABLE>
84
<PAGE>
OPTION GRANTS DURING FISCAL 1994
The following table shows all grants of stock options made to Mr. McAfee
during the last fiscal year:
OPTION GRANTS TABLE
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------ POTENTIAL REALIZABLE VALUE
NUMBER OF AT ASSUMED ANNUAL RATES
SECURITIES OF STOCK PRICE APPRECIATION
UNDERLYING % OF TOTAL FOR OPTION TERM
OPTIONS OPTIONS GRANTED EXERCISE OR ---------------------------------------------
GRANTED TO EMPLOYEES IN BASE PRICE EXPIRATION
NAME (#) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
- --------------------------------- ------------ --------------- ----------- ----------------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
James T. McAfee, Jr. 22,606(1) 17.5% $ 13.00 November 23, 2003 478,795 762,274
<FN>
- ------------------------
(1) The options granted above vest and are exercisable at the rate of 25% of
the shares covered by the option on each of the first four anniversary
dates of the grant of the option (November 23, 1993).
</TABLE>
OPTION EXERCISES DURING, AND VALUE OF OPTIONS AT END OF, FISCAL 1994
Mr. McAfee did not exercise any stock options during fiscal 1994. The
following table sets forth certain information regarding the number and value of
the unexercised stock options held by Mr. McAfee at June 30, 1994:
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SHARES UNDERLYING IN-THE-MONEY OPTIONS
UNEXERCISED OPTIONS AT JUNE 30, 1994(1)
AT JUNE 30, 1994 ------------------------------
---------------------------- VALUE OF VALUE OF
NUMBER NUMBER EXERCISABLE NON-EXERCISABLE
NAME EXERCISABLE NON-EXERCISABLE OPTIONS OPTIONS
- ---------------------------------------- ----------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
James T. McAfee, Jr. 84,296 22,606 $ 1,542,617 $ 135,636
- ------------------------
(1) The value for the in-the-money options was calculated based on the positive
spread between the exercise price of such options and the last reported
sale price of Hallmark Class A Common Stock on June 30, 1994, which was
$19.
</TABLE>
LONG-TERM INCENTIVE PLAN AWARDS DURING FISCAL 1994
The following table shows all long-term incentive plan awards made to Mr.
McAfee during the last fiscal year:
LONG-TERM INCENTIVE PLANS -- AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
ESTIMATED FUTURE
PAYOUTS UNDER
NON-STOCK
NUMBER OF PERFORMANCE PRICE-BASED PLANS
SHARES, OR OTHER (3)(4)
UNITS OR PERIOD UNTIL --------------------
OTHER RIGHTS MATURATION THRESHOLD MAXIMUM
NAME (#)(1) OR PAYOUT(2) ($) ($)
- ------------------------------------------------- --------------- ------------- --------- ---------
<S> <C> <C> <C> <C>
James T. McAfee, Jr. -- 3 Years 250,000 500,000
<FN>
- ------------------------
(1) Participants are not awarded a number of units. Rather, awards are
expressed as a percentage of base salary.
(2) The performance period until payout of the award began to run on the date
that the long-term incentive plan award was granted. In fiscal year 1994,
the named executive officer received his award on July 1, 1993 subject to
stockholder approval, which was obtained on November 23, 1993.
(3) Awards under the LTIP are based upon two factors, including (i) the
achievment of a target debt to total capitalization ratio and (ii) a target
return on assets, both as approved by the Compensation Committee and as
defined in the plan.
</TABLE>
85
<PAGE>
<TABLE>
<S> <C>
(4) In the discretion of the Compensation Committee, payment of vested awards
shall be in shares of Hallmark's Class A Common Stock, cash or a
combination of cash and shares of Class A Common Stock, provided that, if
any portion of a payment is in cash, cash shall constitute not less than
35% of such payment.
</TABLE>
EMPLOYMENT CONTRACT
Hallmark entered into an Employment Agreement with Mr. James T. McAfee, Jr.,
in 1989, which was subsequently amended in 1994 and expires on September 30,
1996 (the "Employment Agreement"). Pursuant to the terms of the Employment
Agreement, the employment of Mr. McAfee is terminable by either party upon six
months' prior written notice, provided that such notice is given in the
designated notice period. Unless notice is given, the terms of the Employment
Agreement automatically extend at the end of their term for an additional term
of one year. The Employment Agreement also provides that Hallmark may terminate
the Employment Agreement for "just and substantial cause," as defined therein,
but only after Hallmark provides Mr. McAfee with written notice specifying the
cause of such action and grants Mr. McAfee the opportunity to appear before the
Board of Directors.
Under the terms of the Employment Agreement, Mr. McAfee is entitled to
receive a base salary of not less than $500,000. The Employment Agreement also
provides Mr. McAfee with health, accident and dental insurance for Mr. McAfee
and his dependents; long-term disability insurance; term life insurance in an
amount equal to four times his base annual salary up to $1,500,000 in coverage;
an annual executive allowance fund of $20,000; and an annual automobile
allowance of $20,000. The Employment Agreement also provides for the payment of
reasonable initiation fees for business and/ or social organizations up to
$35,000.
Under the terms of the Employment Agreement, Hallmark will indemnify Mr.
McAfee from all liability and costs incurred as a consequence of claims
resulting from or growing out of his status as, or as a result of his having
been, a Director and/or officer of Hallmark. The terms, provisions and
conditions of the indemnity are the same as those provided for under the
Hallmark Certificate and the Bylaws of Hallmark and cannot be changed without
the consent of Mr. McAfee regardless of any future amendments to the Hallmark
Certificate or Bylaws. Hallmark's agreement to indemnify Mr. McAfee will survive
the termination of the employment contract, regardless of the cause of the
termination. The Employment Agreement also provides for the reimbursement of
reasonable legal fees and disbursements incurred by Mr. McAfee in connection
with enforcement of the Employment Agreement, provided he prevails in such
enforcement proceeding.
In addition to the termination provisions outlined above, Hallmark may
terminate the Employment Agreement with Mr. McAfee for any reason upon 90 days'
written notice. Mr. McAfee also has the right to terminate the Employment
Agreement upon 90 days' written notice if the Board of Directors fails to
reappoint him as Chief Executive Officer or Chairman of the Board of Hallmark,
or materially changes his duties and responsibilities under the Employment
Agreement. In each case, Hallmark will provide a severance package to Mr.
McAfee, consisting of monthly severance pay for a period of three years, each
payment equal to the highest monthly rate of base salary paid to Mr. McAfee at
any time under the Employment Agreement; all unpaid bonuses which have vested,
together with that prorated portion of any bonus for the current fiscal year;
restricted shares and stock options which have vested; and other benefits
payable thereunder. In the event Mr. McAfee terminates the Employment Agreement
during the designated notice period, he shall be entitled to receive all vested
bonuses, stock options and restricted stock.
Further, the Employment Agreement provides that upon a "Change of Control,"
as defined below, that occurs prior to September 30, 1996, Mr. McAfee has the
right to terminate his employment under his employment agreement (i) by
resignation on not less than ninety days' prior written notice given within six
calendar months after the occurrence of such Change of Control or (ii) by
resignation on not less than ninety days' prior written notice given within
eighteen calendar months after such Change of Control, and within six months
after the occurrence of any of the following: (a) failure to appoint
86
<PAGE>
Mr. McAfee as Chairman of the Board, (b) the making of any material change by
Hallmark in Mr. McAfee's function, duties or responsibilities with Hallmark
which would cause Mr. McAfee's position to become of less dignity,
responsibility, importance or scope or (c) any material breach of the Employment
Agreement.
For the purposes of the Employment Agreement, a "Change of Control" will be
deemed to have occurred if (a) any "Person" (as defined in Sections 13(d) and
14(d)(2) of the Exchange Act), either alone or in conjunction with its
"affiliates" (as defined in Rule 405 of the General Rules and Regulations under
the Securities Act), or other group of persons, corporations, partnerships or
other entities who are not affiliates but who are acting in concert with any
person, acquire ownership, whether of record or beneficially, of that number of
shares of outstanding stock of Hallmark which would allow such person or entity
and/or its affiliates, or others acting in concert, to elect a majority of the
Board of Directors of Hallmark.
A Change of Control does not include any acquisition of control (i) by any
of Hallmark's then five most senior officers (as of the date the Employment
Agreement was entered into) whether acting alone or in concert with each other,
or (ii) pursuant to which such executive officer or former executive officer
accepts equity securities of Hallmark or any entity with or into which Hallmark
is merged or consolidated, or which controls or is controlled by Hallmark or any
such entity except for equity securities received by such person (a) in his
capacity as a stockholder and (b) pursuant to stock options and other benefits
not materially in excess of those typically available to officers of other
publicly held for-profit healthcare companies not subject to a Change of
Control.
Upon the occurrence of a Change of Control and an election by Mr. McAfee to
terminate his employment, Hallmark shall pay Mr. McAfee or his designee
severance pay equal to the highest monthly rate of base salary paid to Mr.
McAfee at any time under the Employment Agreement, but not more than $34,166.66
per month for a period of four years or, at the election of Mr. McAfee, Hallmark
shall fund a trust by cash or annuity in form and substance satisfactory to Mr.
McAfee in an amount sufficient to permit the trust to make the monthly payments
over the prescribed period or any unpaid portion thereof or Hallmark shall make
a lump sum cash payment equal to the sum of the monthly installments without
discount to present value, provided, however, such lump sum payment shall not
exceed $1,640,000. Mr. McAfee shall also be entitled to (i) vesting of options
to acquire 22,606 shares of Hallmark Class A Common Stock at an exercise price
of $13.00 per share pursuant to the 1993 Stock Option Plan, (ii) a pro rated
bonus of $93,750 under Hallmark's annual bonus plan for the period from July 1,
1994 through September 30, 1994, (iii) a pro rated bonus of $125,000 under
Hallmark's 1993 Long-Term Incentive Plan for the period from July 1, 1994
through September 30, 1994, (iv) such bonus which is due under Hallmark's 1993
Long-Term Incentive Plan for the year ended June 30, 1994 based on the audited
financial statements of Hallmark without regard to non-recurring costs
associated with the proposed merger of Hallmark with a subsidiary of Community,
and (v) a payment of $233,570 in lieu of continuance in any benefit plans of
Hallmark. Payments of base salary shall be offset by any payments made pursuant
to any other Hallmark paid disability or salary continuance program. All such
payments and amounts to which Mr. McAfee is entitled are subject to the
limitation set forth in Section 280G of the Code, and will be reduced (but not
below zero) until no portion of such payments would be subject to the excise tax
imposed by Section 4999 of the Code.
Under the terms of the Change of Control Provisions of the Employment
Agreement, approximately $2,593,000 will be payable to Mr. McAfee, including the
value of Mr. McAfee's salary, bonus and employment benefits.
DIRECTORS' FEES AND COMPENSATION
Each Director who is not an employee of Hallmark, which includes Mr.
Slayden, is paid for his services on the Board of Directors: (i) a retainer at
the rate of $18,000 per annum; (ii) an additional $1,200 for each Board meeting
attended; and (iii) $1,200 per committee meeting attended if not connected with
a concurrent Board meeting or $1,000 per committee meeting attended if connected
with a concurrent Board Meeting. Hallmark also reimburses all of the Directors'
company-related and
87
<PAGE>
company-approved travel and entertainment expenses, including their expenses in
attending meetings of the Board or its Committees. Under the Directors' Stock
Option Plan established in 1991, as amended in 1993, each non-employee Director
was granted an option in fiscal 1992 to purchase 10,000 shares of Hallmark Class
A Common Stock and an option in fiscal 1994 to purchase an additional 6,250
shares of Hallmark Class A Common Stock.
In addition to the above compensation, non-employee members of the Board of
Directors of Hallmark are entitled to receive stipends under the Hallmark
Healthcare Corporation Emeritus Director Stipend Plan (the "Emeritus Director
Plan") upon retirement from the Board if such persons have served as directors
at least 60 months or, in any event, on termination of service as a member of
the Board of Directors within one year after a "Change of Control" of Hallmark
(such term, as defined in the Emeritus Director Plan, includes the Merger). The
monthly stipends payable under the Emeritus Director Plan are equal to the
highest monthly base director's fee paid by Hallmark to non-employee directors
during such former director's period of service as a non-employee director. Such
directors are entitled to one monthly payment under the Emeritus Director Plan
for each complete month of service as a member of the Board of Directors of
Hallmark. As a result of the Emeritus Director Plan, four directors of Hallmark
(including Mr. Slayden) will be entitled to receive monthly payments of $1,500
per director for varying periods. Aggregate payments to the four directors total
$303,000.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Since November 23, 1993, Hallmark's executive compensation program has been
administered by the Compensation Committee of the Board of Directors. Such
committee consists of Messrs. Slayden, James E. Martin and J. Randolph Seckman.
Prior to November 23, 1993, the program was administered by the Audit and
Compensation Committee, consisting of Messrs. Slayden, Martin, Seckman and
Rolland A. Maxwell. See "-- Certain Transactions."
CERTAIN TRANSACTIONS
In fiscal 1994, Hallmark paid Jackson & Coker, of which Mr. Slayden is Vice
Chairman of the Board of Directors, fees and reimbursed expenses totalling
approximately $227,000 for services rendered in the recruitment of physicians,
including approximately $89,000 for the recruitment of six physicians to four of
Hallmark's hospitals, approximately $1,000 for the services of locum tenens
physicians, which included compensation to the physicians and brokerage fees,
and approximately $137,000 for services in connection with physician searches
for which no recruitment has yet occurred. Hallmark believes that Jackson &
Coker is one of the nation's leading physician search firms. The amounts paid to
Jackson & Coker during fiscal 1994 by Hallmark, which were computed at Jackson &
Coker's customary rates, were comparable to the rates Hallmark paid to other
physician search firms for similar services during fiscal 1994.
EXPERTS
The audited financial statements and schedules of Community, incorporated by
reference in this Joint Proxy Statement/Prospectus, have been audited by Arthur
Andersen & Co., independent public accountants, as indicated in their reports
with respect thereto, and are incorporated herein by reference in reliance upon
the authority of said firm as experts in giving said reports.
The audited financial statements of Hallmark included in this Joint Proxy
Statement/Prospectus have been audited by Arthur Andersen & Co., independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said report.
LEGAL OPINIONS
The legality of the shares of Community Common Stock to be issued pursuant
to the terms of the Merger Agreement and certain federal tax consequences of the
Merger will be passed upon for
88
<PAGE>
Community by McGlinchey Stafford Lang, A Law Corporation, Dallas, Texas. Certain
federal tax consequences of the Merger and certain other legal matters in
connection with the Merger will be passed upon for Hallmark by King & Spalding,
Atlanta, Georgia.
DATES FOR SUBMISSION OF STOCKHOLDER PROPOSALS
As described in Community's proxy statement relating to its 1994 Annual
Meeting of Stockholders, any proposals that stockholders of Community intend to
have presented at the 1995 Annual Meeting of Stockholders must be received by
Community at its principal executive offices no later than December 2, 1994 to
be considered for inclusion in the proxy statement relating to the 1995 Annual
Meeting of Stockholders.
As described in Hallmark's proxy statement relating to its 1993 Annual
Meeting of Stockholders, in order for proposals of stockholders to be considered
for inclusion in the proxy statement for the 1994 Annual Meeting of Stockholders
of Hallmark (if the Merger is not consummated), such proposals must have been
received by the Secretary of Hallmark by July 2, 1994. No such proposals were
received by Hallmark's Secretary by such date.
89
<PAGE>
HALLMARK HEALTHCARE CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Report of independent public accountants.................................................................. F-2
Consolidated balance sheets at June 30, 1993 and 1994..................................................... F-3
Consolidated statements of income for the years ended June 30, 1992, 1993 and 1994........................ F-4
Consolidated statements of redeemable preferred stock and common stockholders' equity for the years ended
June 30, 1992, 1993 and 1994............................................................................. F-5
Consolidated statements of cash flows for the years ended June 30, 1992, 1993 and 1994.................... F-6
Notes to consolidated financial statements................................................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and the Stockholders
of Hallmark Healthcare Corporation:
We have audited the accompanying consolidated balance sheets of Hallmark
Healthcare Corporation (a Delaware corporation) and subsidiaries as of June 30,
1993 and 1994, and the related consolidated statements of income, redeemable
preferred stock and common stockholders' equity and cash flows for each of the
three years in the period ended June 30, 1994. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hallmark Healthcare
Corporation and subsidiaries as of June 30, 1993 and 1994, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1994, in conformity with generally accepted accounting
principles.
As discussed in Note 9, effective July 1, 1993, the Company changed its
method of accounting for income taxes.
ARTHUR ANDERSEN & CO.
Atlanta, Georgia
August 12, 1994
F-2
<PAGE>
HALLMARK HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1993 1994
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................... $ 4,899 $ 19,757
Patient accounts receivable, less allowance for doubtful accounts of $4,135 and $4,083
at June 30, 1993 and 1994, respectively................................................ 19,767 20,396
Other accounts receivable (net)......................................................... 2,212 3,502
Inventories............................................................................. 4,103 4,212
Other current assets.................................................................... 2,301 2,373
Deferred tax asset...................................................................... -- 4,757
---------- ----------
Total current assets................................................................ 33,282 54,997
Property and equipment:
Land and improvements................................................................... 7,277 7,555
Buildings and improvements.............................................................. 98,887 101,798
Equipment............................................................................... 53,296 56,202
Construction in progress................................................................ 2,227 687
---------- ----------
161,687 166,242
Less: accumulated depreciation and amortization......................................... (53,452) (62,222)
---------- ----------
Net property and equipment............................................................ 108,235 104,020
Funds held by trustees.................................................................... 13,308 8,172
Other assets.............................................................................. 5,052 5,831
---------- ----------
Total assets........................................................................ $ 159,877 $ 173,020
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................ $ 11,819 $ 9,634
Current portion of long-term debt and capital lease obligations......................... 5,306 247
Accrued payroll, vacation and related taxes............................................. 4,056 3,651
Other accrued liabilities............................................................... 10,718 11,924
---------- ----------
Total current liabilities........................................................... 31,899 25,456
Long-term debt and capital lease obligations.............................................. 75,181 87,574
Long-term portion of accrued general and professional liability risks..................... 10,795 10,549
Other long-term liabilities............................................................... 6,853 6,899
Deferred income taxes..................................................................... 2,060 9,653
Deferred debt restructuring credits....................................................... 27,041 --
---------- ----------
Total liabilities................................................................... 153,829 140,131
---------- ----------
Commitments and contingencies
Redeemable preferred stock................................................................ 1,095 1,303
---------- ----------
Common stockholders' equity:
Common stock:
Class A, $.05 par value, authorized 25,000,000 shares;
issued and outstanding 2,585,457 and 2,982,482 shares at
June 30, 1993 and 1994, respectively................................................. 129 149
Class B, $.05 par value, authorized 2,500,000 shares;
issued and outstanding 390,298 and 64,102 shares at June 30, 1993
and 1994, respectively............................................................... 19 3
Additional paid-in capital.............................................................. 52,331 54,469
Accumulated deficit..................................................................... (47,526) (23,035)
---------- ----------
Total common stockholders' equity................................................... 4,953 31,586
---------- ----------
Total liabilities and stockholders' equity.......................................... $ 159,877 $ 173,020
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
F-3
<PAGE>
HALLMARK HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------
1992 1993 1994
------------- ------------- -------------
<S> <C> <C> <C>
Net patient service revenues......................................... $ 164,605 $ 172,521 $ 182,788
Other revenues....................................................... 5,400 6,716 8,756
------------- ------------- -------------
Total revenues................................................. 170,005 179,237 191,544
------------- ------------- -------------
Expenses:
Salaries and benefits.............................................. 72,957 75,641 83,467
Supplies........................................................... 22,832 22,970 24,022
Provision for bad debts............................................ 11,775 10,796 12,713
Other operating expenses........................................... 42,548 49,931 47,684
Interest........................................................... 5,334 3,871 7,502
Depreciation and amortization...................................... 9,426 9,027 9,428
Credit from restructuring transactions............................. (2,133) -- --
------------- ------------- -------------
Total expenses................................................. 162,739 172,236 184,816
Income from operations............................................. 7,266 7,001 6,728
Gain on sale of healthcare facility................................ -- 752 --
------------- ------------- -------------
Income before income taxes, extraordinary items and cumulative
effect of accounting change....................................... 7,266 7,753 6,728
Provision for income taxes........................................... 3,261 3,303 2,826
Income before extraordinary items and cumulative effect of
accounting change............................................. 4,005 4,450 3,902
Extraordinary items:
Gain on restructure of debt, net of income tax effect of $42,
$1,344 and $2,170 at June 30, 1992, 1993 and 1994, respectively... 82 2,017 19,784
Credit resulting from utilization of net operating loss
carryforwards..................................................... 2,682 3,914 --
------------- ------------- -------------
Income before cumulative effect of accounting change............... $ 6,769 $ 10,381 $ 23,686
Cumulative effect of accounting change............................. -- -- 805
------------- ------------- -------------
Net income........................................................... $ 6,769 $ 10,381 $ 24,491
Accretion of preferred stock redemption requirement.................. 244 329 413
------------- ------------- -------------
Net income applicable to common stock................................ $ 6,525 $ 10,052 $ 24,078
------------- ------------- -------------
------------- ------------- -------------
Weighted average common and common equivalent shares outstanding..... 3,358,491 3,449,752 3,681,410
------------- ------------- -------------
Net income per common and common equivalent share:
Income before extraordinary items and cumulative effect of
accounting change................................................. $ 1.19 $ 1.29 $ 1.06
Extraordinary items:
Gain on restructure of debt, net of income tax effect............ .03 .59 5.37
Credit resulting from utilization of net operating loss
carryforwards................................................... .80 1.13 --
Cumulative effect of accounting change........................... -- -- 0.22
------------- ------------- -------------
Net income per common and common equivalent share.................... $ 2.02 $ 3.01 $ 6.65
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
HALLMARK HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCKHOLDERS' EQUITY
------------------------------------------------------------------
REDEEMABLE CLASS A CLASS B
PREFERRED STOCK COMMON STOCK COMMON STOCK
------------------ ----------------- ------------------- ADDITIONAL
NUMBER OF NUMBER OF NUMBER OF PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
--------- ------ --------- ------ --------- ------ ---------- -----------
Balance June 30, 1991................... 45,720 $ 672 2,478,072 $124 390,298 $19 $52,694 $(64,676)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock under employee
stock option plans..................... -- -- 20,150 1 -- -- 18 --
Issuance of common stock in exchange for
preferred stock........................ (3,739) (95) 18,697 1 -- -- 94 --
Accretion of preferred stock redemption
requirement............................ -- 244 -- -- -- -- (244) --
Net income.............................. -- -- -- -- -- -- -- 6,769
--------- ------ --------- ------ --------- ------ ---------- -----------
Balance June 30, 1992................... 41,981 821 2,516,919 126 390,298 19 52,562 (57,907)
Issuance of common stock under employee
stock option plans..................... -- -- 56,479 2 -- -- 44 --
Issuance of common stock in exchange for
preferred stock........................ (2,412) (55) 12,059 1 -- -- 54 --
Accretion of preferred stock redemption
requirement............................ -- 329 -- -- -- -- (329) --
Net income.............................. -- -- -- -- -- -- -- 10,381
--------- ------ --------- ------ --------- ------ ---------- -----------
Balance June 30, 1993................... 39,569 1,095 2,585,457 129 390,298 19 52,331 (47,526)
Issuance of common stock under employee
stock option plans..................... -- -- 38,950 2 -- -- 114 --
Issuance of common stock in exchange for
preferred stock........................ (6,382) (204) 31,910 2 -- -- 202 --
Issuance of Class A common stock in
exchange for Class B common stock...... -- -- 326,191 16 (326,191) (16) -- --
Accretion of preferred stock redemption
requirement............................ -- 413 -- -- -- -- (413) --
Accrual for the issuance of Class A
common stock under a long-term
incentive plan......................... -- -- -- -- -- -- 1,341 --
Fractional shares retired pursuant to
reverse stock split.................... (302) (1) (26) -- (5) -- -- --
Income tax effect of employee stock
options and long-term incentive plan... -- -- -- -- -- -- 894 --
Net income.............................. -- -- -- -- -- -- -- 24,491
--------- ------ --------- ------ --------- ------ ---------- -----------
Balance June 30, 1994................... 32,885 $1,303 2,982,482 $149 64,102 $ 3 $54,469 $(23,035)
--------- ------ --------- ------ --------- ------ ---------- -----------
--------- ------ --------- ------ --------- ------ ---------- -----------
</TABLE>
See accompanying notes.
F-5
<PAGE>
HALLMARK HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------
1992 1993 1994
--------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................................. $ 6,769 $ 10,381 $ 24,491
--------- ---------- ----------
Adjustments to reconcile net income to net cash provided by operating
activities:
Extraordinary items:
Gain on restructure of debt............................................ (82) (2,017) (19,784)
Credit resulting from utilization of net operating loss
carryforwards......................................................... (2,682) (3,914) --
Cumulative effect of accounting change................................... -- -- (805)
Depreciation and amortization............................................ 9,426 9,027 9,428
Provision for deferred taxes............................................. 480 345 2,238
Gain on sale of healthcare facility...................................... -- (752) --
Amortization of deferred debt restructuring credits...................... (6,164) (6,034) (2,072)
Change in allowance for doubtful accounts................................ (388) (188) (52)
Credit from restructuring transactions................................... (2,133) -- --
Change in assets and liabilities, net of effects of healthcare facilities
sold:
Patient accounts receivable.............................................. 4,272 (1,797) (1,177)
Other accounts receivable................................................ (527) 189 233
Other assets............................................................. 1,351 15 593
Accounts payable......................................................... 153 1,987 (2,185)
Accrued interest......................................................... 938 (2,335) 651
Other liabilities........................................................ 3,993 4,492 2,305
--------- ---------- ----------
Total adjustments.................................................. 8,637 (982) (10,627)
--------- ---------- ----------
Net cash provided by operating activities................................ 15,406 9,399 13,864
Cash flows from investing activities:
Proceeds from sales of healthcare facilities............................. -- 9,336 --
Purchases of property and equipment, net................................. (7,230) (6,375) (4,586)
--------- ---------- ----------
Net cash (used in) provided by investing activities...................... (7,230) 2,961 (4,586)
--------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt................................. -- -- 80,000
Costs of issuance of long-term debt...................................... -- -- (2,400)
Principal payments on long-term debt and capital lease obligations....... (8,278) (15,210) (75,980)
Release of funds held by trustees........................................ -- -- 3,960
--------- ---------- ----------
Net cash (used in) provided by financing activities...................... (8,278) (15,210) 5,580
--------- ---------- ----------
(Decrease) Increase in cash and cash equivalents............................. (102) (2,850) 14,858
Cash and cash equivalents at beginning of year............................... 7,851 7,749 4,899
--------- ---------- ----------
Cash and cash equivalents at end of year..................................... $ 7,749 $ 4,899 $ 19,757
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
See accompanying notes.
F-6
<PAGE>
HALLMARK HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED JUNE 30, 1994
NOTE 1. -- SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Hallmark Healthcare Corporation (the "Company") is a Delaware corporation
which began doing business under its present name during the first quarter of
fiscal 1992. The Company is engaged primarily in the ownership and management,
through subsidiaries, of hospitals and other healthcare related enterprises.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned and majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
INVENTORIES
Inventories consist primarily of medical supplies and pharmaceuticals and
are stated at the lower of cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at historical cost. Expenditures which
increase capacity or extend the useful life of an asset are capitalized and
depreciated over the remaining estimated useful life of such asset. Maintenance,
repairs, and minor replacements are expensed as incurred. Depreciation and
amortization are computed at rates estimated by management to amortize the cost
of the various assets over the periods of expected use or, in the case of
capital leases, over the lives of such leases, if shorter. Depreciation and
amortization have been provided on the straight-line method using useful lives
ranging from 20 to 45 years for buildings and improvements and 3 to 20 years for
equipment.
GOODWILL
At June 30, 1993 and 1994, the net unamortized balance of consolidated
goodwill was $1,262,000 and $865,000, respectively, and is included in the
accompanying consolidated balance sheets under the caption "Other assets". These
costs are amortized on a straight-line basis over periods ranging from 5 to 40
years.
FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, patient accounts receivable, other accounts receivable, funds held
by trustees, accounts payable, long-term debt and capital lease obligations and
redeemable preferred stock. The carrying amounts of cash and cash equivalents,
patient accounts receivable, other accounts receivable, and accounts payable
approximate their fair value because of the short maturities of those
instruments. The carrying amount of funds held by trustees, which consist
primarily of short term governmental securities and investment grade commercial
paper, approximates the fair value of such funds because of the short maturities
of the securities. The carrying amount of the Company's 10 5/8% Senior
Subordinated Notes due 2003 (the "Notes") is $80,000,000. The market value of
such Notes is approximately $77,100,000 based on the last reported sales price
of the Notes on June 30, 1994. The carrying amounts of capital lease obligations
approximate their fair value because in management's opinion the carrying
amounts of these instruments reflect terms substantially equivalent to
prevailing market terms. The carrying
F-7
<PAGE>
HALLMARK HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED JUNE 30, 1994
NOTE 1. -- SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
value of the Company's redeemable preferred stock is $1,303,000 at June 30,
1994. The market value of such instruments is $3,124,000 based on quoted market
prices of the Company's common stock into which the preferred stock is
convertible at the holder's option.
GENERAL AND PROFESSIONAL LIABILITY
The Company is self-insured against a portion of its general and
professional liability risks. The reserves for losses within its self-insured
retention limits, including loss adjustment expenses, are based on actuarial
estimates using the Company's historical claims experience adjusted for current
industry trends. The reserve for unpaid claims is adjusted, as such claims
mature, to reflect revised actuarial estimates based on actual experience. Of
such reserves, $1,300,000 and $1,350,000 at June 30, 1993 and 1994,
respectively, are included in the accompanying consolidated balance sheets in
"Other accrued liabilities" and represent the estimated amount of claims and
loss adjustment expenses to be paid within the following twelve months. The
balance of such reserves is classified as "Long-term portion of accrued general
and professional liability risks." For the fiscal years ended June 30, 1992,
1993 and 1994, the Company recorded as an expense for self-insurance reserves
$896,000, $1,401,000 and $1,197,000, respectively. The Company does not discount
its reserves for losses and related expenses to their present value.
OTHER ACCRUED LIABILITIES
Other accrued liabilities includes amounts related to the Company's
self-insured employee group medical coverage of $1,583,000 and $1,472,000 at
June 30, 1993 and 1994, respectively.
NET PATIENT SERVICE REVENUES
The Company's hospitals serve a significant number of patients under
government and privately sponsored insurance programs for which payment is made
(i) based on cost as defined under the program, (ii) at a predetermined rate
based upon the diagnosis, plus, in certain cases, capital costs and other
adjustments or (iii) at negotiated rates based on a discount from the Company's
usual charges.
Net patient service revenues are presented based on established billing
rates less allowances and discounts for patients covered by Medicare, Medicaid
and other contractual programs. Payments received under these programs are
generally less than the established billing rates of the Company's hospitals,
and the differences are recorded as contractual allowances or discounts. Such
allowances have been deducted from accounts receivable pending final audit and
settlement. Provision for contractual allowances and discounts for the fiscal
years ended June 30, 1992, 1993 and 1994 were $86,935,000, $94,212,000 and
$104,360,000, respectively. In management's opinion, the allowances provided are
adequate to cover any liabilities that may result from final settlements.
It is the Company's policy to collect compensation for all services
performed; however, in the ordinary course of business, the Company renders
certain services in its facilities to patients who are financially unable to pay
for hospital care, without the expectation of payment and for which the Company
does not pursue collection (charity care). The amount of such charity care is
not material to the Company's consolidated results of operations.
OTHER REVENUES
Other revenues include income from non-patient hospital activities such as
cafeteria sales, interest income, rental income and other related services as
well as revenues from one of the Company's majority-owned subsidiaries that
operates pain centers in hospitals owned by others.
F-8
<PAGE>
HALLMARK HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED JUNE 30, 1994
NOTE 1. -- SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
INCOME TAXES
Income taxes are provided by applying the applicable statutory federal and
state tax rates to book income before income taxes, adjusted for permanent
differences between book and tax income. Deferred income taxes are provided at
the enacted marginal rates on the difference between the financial statement and
income tax bases of assets and liabilities. Deferred income tax provisions or
benefits are based on the change in the deferred tax assets and liabilities from
period to period.
NOTE 2. -- PROPOSED MERGER
On June 10, 1994, the Company entered into a definitive merger agreement
with Community Health Systems, Inc. ("Community") under which Community will
acquire all of the outstanding shares of the Company's Class A common stock,
Class B common stock, and Redeemable preferred stock. The agreement calls for
Community to exchange 0.97 shares of its common stock for each share of the
Company's Class A and Class B common stock and 5.4 shares of its common stock
for each share of the Company's Redeemable preferred stock. The merger is
subject to conditions including, but not limited to, the approval of both
companies' stockholders and all appropriate regulatory approvals. The Company
anticipates that the merger, subject to the satisfaction of those and other
conditions, will be consummated in the Company's fiscal year 1995.
NOTE 3. -- CHANGE IN OPERATIONS
During 1993, the Company divested substantially all of the assets of two
subsidiaries that operated a 63 bed hospital in McMinnville, Tennessee and a 36
bed hospital in Cumming, Georgia for approximately $9,400,000 in cash. The
Company recognized a gain of $752,000 from the sale of the McMinnville hospital
in the quarter ended September 30, 1992. No gain or loss was recognized on the
sale of the Cumming hospital. Of the net proceeds of approximately $8,500,000,
approximately $7,000,000 was applied as prepayments on amounts outstanding under
the former Bank Credit Agreement. The Company utilized the remaining $1,500,000
of the proceeds to acquire a portion of the Company's 14 1/2% Subordinated
Debentures (the "14 1/2% Debentures"). The accompanying consolidated statements
of income include no revenues and expenses for the McMinnville facility for 1993
and include revenues and expenses for the Cumming facility through November 30,
1992. For the year ended June 30, 1992, the facilities had total revenues of
$12,646,000 and total expenses of $14,616,000 (excluding interest). For the year
ended June 30, 1993, the facilities had total revenues of $974,000 and total
expenses of $1,313,000.
F-9
<PAGE>
HALLMARK HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED JUNE 30, 1994
NOTE 4. -- LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1993 JUNE 30, 1994
------------- -------------
<S> <C> <C>
Senior Subordinated Notes due November 15, 2003, interest at 10 5/8% per annum
payable semi-annually beginning May 15, 1994, redeemable at the Company's option at
a redemption price of 105.3125% of principal on or after November 15, 1998,
declining to 102.6563% on November 15, 1999 and 100% on November 15, 2000.......... $ -- $ 80,000
Amended and Restated Bank Credit Agreement dated as of January 1, 1989, as amended,
("Bank Credit Agreement").......................................................... 64,244 --
Senior Subordinated Debentures due 1999, interest at 7%............................. 6,238 --
Senior Subordinated Notes due 1999, interest at 7%.................................. 1,098 --
Senior Subordinated Notes due 1993 through 1995, interest at 8% or 9%............... 959 --
Notes collateralized by property and equipment and other indebtedness at various
interest rates ranging from 8% to 9% per annum, payable in various amounts through
1999............................................................................... 547 454
------------- -------------
73,086 80,454
Less current portion................................................................ (5,206) (97)
------------- -------------
Long-term debt...................................................................... $ 67,880 $ 80,357
------------- -------------
------------- -------------
</TABLE>
On November 15, 1993, the Company completed a public offering of $80,000,000
principal amount of 10 5/8% Senior Subordinated Notes due 2003. The Notes are
senior subordinated obligations of the Company, and, as such, are subordinated
to all existing and future senior indebtedness of the Company. The net proceeds
from the offering were approximately $77,600,000, of which approximately
$62,100,000 was used to repay in full the indebtedness outstanding under the
Bank Credit Agreement and approximately $10,700,000 was used to redeem all of
the Company's outstanding subordinated indebtedness. The remaining proceeds of
approximately $4,800,000 will be used for general corporate purposes.
The indenture contains certain covenants which limit or restrict, among
other items, (i) additional indebtedness, including subordinated debt; (ii)
liens; (iii) issuance of preferred stock by the Company's subsidiaries; (iv)
transactions with affiliates; (v) restricted payments, including, but not
limited to, cash dividends on the Company's equity securities; (vi) investments
and loans; (vii) application of the proceeds of certain asset sales; and (viii)
mergers, consolidations and the transfer of substantially all of the assets of
the Company to another person, all as defined in the indenture. The Company was
in compliance with these covenants at June 30, 1994. The indenture also contains
a provision that in the event of a change of control, as defined, the Company
shall make an offer to repurchase the Notes at a purchase price equal to 101% of
the principal amount thereof, plus accrued interest through the repurchase date.
The proposed merger with Community (Note 2), if consummated, would constitute a
change of control under the indenture and could result in up to $800,000 in
premium payments and the write-off of up to $2,600,000 in deferred loan costs.
During the quarter ended December 31, 1993, the Company entered into a
credit agreement with a financial institution (the "New Credit Agreement")
pursuant to which the Company may borrow up
F-10
<PAGE>
HALLMARK HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED JUNE 30, 1994
NOTE 4. -- LONG-TERM DEBT (CONTINUED)
to $25,000,000. The New Credit Agreement consists of (i) a working capital
facility in the principal amount of up to $15,000,000 and (ii) an acquisition
facility in the principal amount of up to $10,000,000 (collectively, the
"Facilities"). Borrowings under the working capital facility are secured by an
assignment by the Company of its patient accounts receivable to the lender. The
Company may not borrow pursuant to the acquisition facility until it is
activated by mutual agreement of the Company and the lender, which must be no
later than December 31, 1994; the acquisition facility had not been activated as
of June 30, 1994. Borrowing capacity under the working capital facility is based
on a percentage of the Company's eligible patient accounts receivable, as
defined. Certain conditions must be satisfied prior to the Company borrowing
under the Facilities, some of which have not yet been satisfied. There was no
borrowing availability at June 30, 1994.
Interest on the Facilities is payable monthly at a variable rate selected by
the Company, which will be either a published rate for thirty day dealer-placed
commercial paper, plus 3% or reserve-adjusted one, two or three month LIBOR,
plus 3%. The working capital facility terminates on December 31, 1998, at which
time the entire unpaid balance under the facility is due. Principal on the
acquisition facility is due in twelve monthly installments commencing on
December 31, 1997. The Facilities bear an unused line fee of 1/2 of 1% of the
average daily unused availability under the Facilities. No unused line fee is
charged for the acquisition facility until such line is activated.
Under the terms of the New Credit Agreement, the Company is required to meet
certain financial covenants, including, among others, a fixed charge coverage
ratio, a minimum interest coverage ratio, a minimum net worth level, an accounts
receivable turnover ratio and a minimum EBITDA level, as defined. In addition,
the New Credit Agreement contains limitations and/or restrictions on
acquisitions, investments, capital expenditures, dividends on the Company's
equity securities and incurrence of additional indebtedness. The Company was in
compliance with these covenants at June 30, 1994.
At June 30, 1994, the Company had four outstanding letters of credit
totalling $6,858,000 which were issued by a commercial bank and are used to
satisfy certain security requirements of the Company's workers' compensation
insurance carrier and a lease agreement related to one of the Company's
hospitals. To date, there have been no drawings under these letters of credit.
During Fiscal years 1990 through 1993, the Company, through a series of
transactions, underwent a restructuring of certain of its outstanding
indebtedness. The restructuring included modifications to its then outstanding
bank debt and the issuance of several series of senior subordinated notes and
debentures and payments of cash in exchange for certain of its 14 1/2%
Debentures. Pursuant to the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 15, "Accounting by Debtors and Creditors for Troubled
Debt Restructuring", the Company did not recognize any gain from the
modification of its bank debt or from certain transactions in the 14 1/2%
Debentures. The unrecognized gain from such transactions was deferred and
classified in the accompanying condensed consolidated balance sheets as
"Deferred debt restructuring credits". Such credits were amortized as a
reduction of interest expense during the period that the restructured debt
remained outstanding. During the years ended June 30, 1992, 1993, and 1994,
interest expense was reduced by $6,164,000, $6,034,000 and $2,072,000,
respectively, as a result of amortization of the deferred credits. During the
year ended June 30, 1994, the Company retired all remaining restructured debt
and recognized an extraordinary gain of $19,784,000(net of income tax effect of
$2,170,000) primarily from the write-off of the remaining balance of the
deferred credits.
F-11
<PAGE>
HALLMARK HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED JUNE 30, 1994
NOTE 4. -- LONG-TERM DEBT (CONTINUED)
In the course of restructuring its 14 1/2% Debentures, the Company issued
$9,895,000 principal amount of 7% Senior Subordinated Debentures due 1999,
$1,718,000 principal amount of 9% Senior Subordinated Notes due 1993, $800,000
principal amount of 8% Senior Subordinated Notes due 1995, $1,193,000 principal
amount of 7% Senior Subordinated Notes due 1999, and paid cash of $8,156,000 in
exchange for $30,000,000 of its 14 1/2% Debentures including all accrued
interest thereon. Pursuant to such restructuring transactions, the Company
recognized an extraordinary gain of approximately $82,000 (net of income tax
effect of $42,000) in 1992 and $2,017,000 (net of income tax effect of
$1,344,000) in 1993.
The following table sets forth the calculation of the extraordinary gain
recognized in 1992, 1993 and 1994, respectively (in thousands):
<TABLE>
<CAPTION>
1992 1993 1994
--------- --------- ---------
<S> <C> <C> <C>
Principal and accrued interest retired.................................... $ 129 $ 7,600 $ 70,416
Deferred credits retired.................................................. 57 2,312 24,969
--------- --------- ---------
Total restructured amounts............................................ 186 9,912 95,385
--------- --------- ---------
Cash payments............................................................. 62 5,683 72,831
New debt issued........................................................... -- 800 --
Future interest on new debt issued........................................ -- 68 --
--------- --------- ---------
Total consideration................................................... 62 6,551 72,831
--------- --------- ---------
Other costs of restructuring.............................................. -- -- 600
--------- --------- ---------
Pre-tax gain on debt restructuring........................................ $ 124 $ 3,361 $ 21,954
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following table sets forth the changes in the balances of the Deferred
Debt Restructuring Credits for the fiscal years ended June 30, 1992, 1993 and
1994 (in thousands):
<TABLE>
<CAPTION>
1992 1993 1994
---------- --------- ---------
<S> <C> <C> <C>
Beginning Balance................................................... $ 41,498 $ 35,298 $ 27,041
Additions resulting from debt restructuring transactions............ -- 68 --
Additions pursuant to issuance of payment-in-kind
notes.............................................................. 21 21 --
Reductions resulting from extinguishment of debt.................... (57) (2,312) (24,969)
Amortization credited to interest expense........................... (6,164) (6,034) (2,072)
---------- --------- ---------
Ending Balance...................................................... $ 35,298 $ 27,041 $ --
---------- --------- ---------
---------- --------- ---------
</TABLE>
Scheduled long-term debt principal payments at June 30, 1994 are as follows
(in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
- -----------------------------------------------------------------------------------
<S> <C>
1995............................................................................... $ 97
1996............................................................................... 0
1997............................................................................... 0
1998............................................................................... 179
1999............................................................................... 178
Thereafter......................................................................... 80,000
---------
$ 80,454
---------
---------
</TABLE>
F-12
<PAGE>
HALLMARK HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED JUNE 30, 1994
NOTE 5. -- LEASES
The Company leases certain facilities and equipment under operating and
capital lease agreements which expire on various dates and require the Company
to pay all maintenance and insurance costs. Rent expense under operating leases
was $4,887,000, $4,874,000 and $5,174,000 in fiscal years 1992, 1993, and 1994,
respectively.
Commitments for property and equipment subject to capital leases and
noncancellable operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1994
----------------------
FISCAL YEAR OPERATING CAPITAL
- ----------------------------------------------------------------------- ----------- ---------
<S> <C> <C>
1995................................................................... $ 1,126 $ 1,220
1996................................................................... 693 1,140
1997................................................................... 330 1,130
1998................................................................... 231 1,130
1999................................................................... 103 1,130
Thereafter............................................................. 45 16,689
----------- ---------
Total minimum future lease payments................................ $ 2,528 22,439
-----------
-----------
Less amount representing interest.................................. 15,072
---------
Present value of obligations under capital leases (interest rates range
from 9.2% to 15.9%)................................................... 7,367
Less current portion................................................... 150
---------
Long-term capital lease obligations.................................... $ 7,217
---------
---------
</TABLE>
Funds held by trustees include $4,035,000 as of June 30, 1993 of restricted
cash held by a trustee as collateral for the Company's obligation under a
capital lease for one hospital facility. During 1994, the Company replaced the
collateral with a letter of credit issued by a commercial bank in the amount of
$3,975,000.
Assets capitalized under the above capital leases follow (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1993 1994
--------- ---------
<S> <C> <C>
Buildings and improvements.............................................. $ 7,815 $ 7,815
Equipment............................................................... 799 921
--------- ---------
8,614 8,736
Less accumulated amortization........................................... (2,229) (2,638)
--------- ---------
Net assets capitalized under capital leases......................... $ 6,385 $ 6,098
--------- ---------
--------- ---------
</TABLE>
NOTE 6. -- 25% REDEEMABLE PREFERRED STOCK
The Company is authorized to issue 2,500,000 shares of preferred stock
(issuable in series) of which it had outstanding at June 30, 1993 and 1994,
39,569 and 32,885 shares, respectively, of $5 par value 25% Participating
Cumulative Convertible Redeemable Preferred Stock (the "25% Preferred"). The 25%
Preferred has a preference over common stockholders upon liquidation or
dissolution of the Company of $125 per share, minus certain dividends if
previously paid. Each 25% Preferred share is convertible, at any time, into five
shares of Class A common stock, subject to adjustment under certain conditions,
and is entitled to annual dividends equal to 25% of defined net income, if any,
subject to a
F-13
<PAGE>
HALLMARK HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED JUNE 30, 1994
NOTE 6. -- 25% REDEEMABLE PREFERRED STOCK (CONTINUED)
maximum annual payment of 10% of liquidation preference, when and if declared by
the Board of Directors of the Company out of funds legally available for such
dividends. Such dividends are cumulative and subject to certain maximums, limits
and other conditions. As of June 30, 1994, the maximum dividend payable to
preferred stockholders for fiscal 1994 was $411,000 (10% of liquidation
preference). If such dividend is not declared by the Board of Directors of the
Company, and it is probable it will not be, then the dividend is cumulative to
the extent of 5% of liquidation value ($206,000). The Company's Board of
Directors did not declare a dividend at December 31, 1993 (the dividend payment
date for fiscal 1993) and therefore such 1993 dividends were cumulative to the
extent of 5% of liquidation value ($206,000). In addition, 1990, 1991 and 1992
dividends are cumulative to the extent of 12% of liquidation value ($493,000).
To date, dividends are cumulative to the extent of an amount equal to 17% of
liquidation preference or $699,000. The holders of the 25% Preferred have voting
rights on all matters other than election of Directors. The 25% Preferred is
redeemable at any time prior to the required redemption at the Company's option.
Based on the current number of shares outstanding, the terms of the 25%
Preferred require redemption at a price of $125 per share, minus certain
dividends if previously paid, on February 12, 1995 of $548,000, on February 12,
1999 of $2,192,000, and on February 12, 2000 of $1,370,000 (for the remaining
shares). No accrual has been made for dividends on the 25% Preferred.
The 25% Preferred was recorded at issuance at $9.35 per share and is being
accreted to a redemption price of $125 per share through the redemption dates
utilizing the interest method. The accretion is charged to retained earnings, if
available, or additional paid-in capital.
During fiscal 1994, 6,382 shares of the 25% Preferred were converted to
31,910 shares of the Company's Class A common stock.
NOTE 7. -- EARNINGS PER SHARE
Earnings per share for the years ended June 30, 1992, 1993 and 1994,
respectively, are based on the weighted average number of shares of common stock
outstanding, adjusted to give effect to common stock equivalents consisting of
shares issuable upon conversion of the 25% Preferred (209,905, 197,845, and
164,425 shares, respectively), shares of Class B common stock issued to the
Company's Bank Debt Holders pursuant to the Bank Credit Agreement (390,298
shares for each of the two years ended June 30, 1992 and 1993 and 64,102 shares,
for the year ended June 30, 1994) and contingently issuable shares pursuant to
stock option plans and other contracts (250,951, 294,146, and 489,365 shares,
respectively). The number of shares used in the computation was 3,358,491,
3,449,752, and 3,681,410 for 1992, 1993 and 1994, respectively. Net income
available to common stockholders has been adjusted for the accretion of the
preferred stock redemption requirement applicable to the 25% Preferred.
NOTE 8. -- STOCKHOLDERS' EQUITY AND EMPLOYEE STOCK PLANS
In November 1992, the Company amended its Amended and Restated Certificate
of Incorporation to effect a recapitalization through a one-for-five reverse
stock split (the "Reverse Stock Split") pursuant to which on November 10, 1992
(the "Effective Date") every five shares of the Company's 25% Participating
Cumulative Convertible Redeemable Preferred Stock, par value $1.00 per share,
outstanding on the Effective Date became and are exchangeable for one new share
of 25% Preferred and pursuant to which every five shares of the Company's Common
Stock, par value $.01 per share, outstanding on the Effective Date became and
are exchangeable for one new share of Common Stock
F-14
<PAGE>
HALLMARK HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED JUNE 30, 1994
NOTE 8. -- STOCKHOLDERS' EQUITY AND EMPLOYEE STOCK PLANS (CONTINUED)
with par value of $.05 per share. The accompanying financial statements, and
management's discussion and analysis of results of operations and financial
condition, including all share and per share amounts (including, without
limitation, all amounts stated as of a specific historical date) and par values
have been adjusted to reflect this transaction.
In May 1991, the Class B common stock was issued to the holders of the
Company's formerly outstanding bank debt in exchange for $18,620,000 principal
amount of outstanding bank debt. The Class B stock is non-voting and generally
is automatically converted into Class A common stock upon its sale or
disposition.
The terms of the Company's note indenture and the New Credit Agreement
contain certain covenants which significantly limit and/or restrict the
Company's ability to declare and pay dividends on its common stock.
Under the Long-Term Stock Incentive Plan -- 1989 (the "1989 Plan"), as
amended, approximately 708,200 shares of Class A common stock were reserved for
issuance from which 195,735 options were outstanding at June 30, 1994. Exercise
prices of options outstanding are equal to fair market value of such shares on
the dates the options were granted. Options granted to executive officers are
fully vested and exercisable at June 30, 1994. Options issued to grantees other
than executive officers are exercisable at the rate of 25% per year commencing
on the date of grant and expire ten years from the date of grant.
The table below summarizes the activity in the Company's 1989 Plan for the
years ended June 30, 1992, 1993 and 1994:
<TABLE>
<CAPTION>
1992 1993 1994
--------- --------- ---------
<S> <C> <C> <C>
Options outstanding at beginning of period........................... 321,816 237,754 224,325
Granted ($3.10 per share in 1992 and prices ranging from $3.73 to
$7.00 per share in 1993)............................................ 1,000 60,600 --
Exercised ($0.90 in 1992; $.70 and $.90 per share in 1993; and $.90
to $5.26 per share in 1994)......................................... (20,150) (56,479) (18,390)
Canceled............................................................. (64,912) (17,550) (10,200)
--------- --------- ---------
Outstanding at end of period......................................... 237,754 224,325 195,735
--------- --------- ---------
--------- --------- ---------
Exercisable at end of period......................................... 175,604 146,925 155,375
--------- --------- ---------
--------- --------- ---------
</TABLE>
Under the Stock Incentive Performance Plan -- 1991 (the "Performance Plan"),
which was instituted in fiscal 1992, 200,000 shares of Class A common stock were
reserved for issuance at June 30, 1994. Options for the purchase of 159,525 of
such shares were outstanding at June 30, 1994. The exercise price of options
outstanding equals fair market value of such shares on the date the options were
granted. Options were issued to certain grantees other than executive officers
and are exercisable at the rate of 20% per year commencing one year from the
date of grant. Such options expire ten years from the date of grant.
F-15
<PAGE>
HALLMARK HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED JUNE 30, 1994
NOTE 8. -- STOCKHOLDERS' EQUITY AND EMPLOYEE STOCK PLANS (CONTINUED)
The table below summarizes the activity in the Performance Plan for the
years ended June 30, 1992 and 1993, and 1994:
<TABLE>
<CAPTION>
1992 1993 1994
--------- --------- ---------
<S> <C> <C> <C>
Outstanding at beginning of period................................... -- 165,605 194,605
Granted (prices ranging from $5.40 to $9.70 per share in 1992; $3.15
to $4.58 per share in 1993 and $8.50 to $16.75 per share in 1994)... 197,205 106,400 40,800
Exercised ($3.15 to $5.40 per share in 1994)......................... -- -- (20,560)
Canceled............................................................. (31,600) (77,400) (55,320)
--------- --------- ---------
Outstanding at end of period......................................... 165,605 194,605 159,525
--------- --------- ---------
--------- --------- ---------
Exercisable at end of period......................................... -- 21,321 35,242
--------- --------- ---------
--------- --------- ---------
</TABLE>
Under the 1993 Stock Option Plan, which was instituted in fiscal 1994,
200,000 shares of Class A common stock were reserved for issuance at June 30,
1994. Options for the purchase of 82,939 of such shares were outstanding at June
30, 1994. The exercise price of options outstanding equals fair market value of
such shares on the date the options were granted. Options were issued to
executive officers and certain other employees of the Company and are
exercisable at the rate of 25% per year commencing one year from the date of
grant. Such options expire ten years from the date of grant.
The table below summarizes the activity in the 1993 Stock Option Plan for
the year ended June 30, 1994:
<TABLE>
<CAPTION>
1994
---------
<S> <C>
Granted (prices ranging from $12.13 to $13.00 per share)...................................... 88,500
Canceled...................................................................................... (5,561)
---------
Outstanding at end of period.................................................................. 82,939
---------
---------
Exercisable at end of period.................................................................. --
---------
---------
</TABLE>
At June 30, 1994, the Company had outstanding options to purchase 25,000
shares at $13.63 per share and 40,000 shares at $5.40 per share. Such options
were granted to non-employee directors under the 1991 Directors' Stock Option
Plan. The exercise price of options outstanding equals fair market value of such
shares on the date the options were granted and the options are exercisable at
the rate of 20% per year commencing one year from the date of grant. Such
options expire ten years from the date of grant. At June 30, 1994, 16,000 of
such options were exercisable.
At June 30, 1994, the Company had outstanding options to purchase 20,000
shares of Class A common stock at $7.50 per share. Such options were granted
pursuant to a termination agreement with a former executive officer of the
Company and expire in August, 1996.
The Company has a Long-Term Cash Incentive Plan -- 1990, as amended, for
certain executive officers and employees which provided for a cash bonus of
approximately $2,036,000 vesting in fiscal 1994 and 1995. During fiscal 1994 the
Board of Directors amended the plan providing for a cash bonus of approximately
$582,000 and a stock bonus of approximately 176,000 shares of the Company's
Class A Common Stock vesting in fiscal 1994 and payable in fiscal 1995. Pursuant
to such amendment, an accrual of $1,341,000 for shares to be issued under the
amended plan has been credited to Additional paid-in-capital in the accompanying
consolidated balance sheet as of June 30, 1994.
F-16
<PAGE>
HALLMARK HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED JUNE 30, 1994
NOTE 8. -- STOCKHOLDERS' EQUITY AND EMPLOYEE STOCK PLANS (CONTINUED)
During fiscal 1994, the Company adopted the 1993 Long-Term Incentive Plan
for certain executive officers and employees which provides for the payment of
certain bonuses in cash or a combination of cash and stock in future periods
conditional upon the attainment of certain financial goals and continued
employment through June 30, 1996. At June 30, 1994, the Company had accrued
$1,273,000 under such incentive plan.
NOTE 9. -- INCOME TAXES
The components of the provision for income taxes follow (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1992 1993 1994
--------- --------- ---------
<S> <C> <C> <C>
Current: Federal....................................................... $ 2,559 $ 2,567 $ 193
State.......................................................... 222 391 395
Deferred: Federal...................................................... -- -- 1,969
State......................................................... 480 345 269
--------- --------- ---------
Provision for income taxes before extraordinary items.................. 3,261 3,303 2,826
Extraordinary items:
Federal and state.................................................... 42 1,344 2,170
Credit resulting from utilization of net operating loss
carryforwards......................................................... (2,682) (3,914) --
--------- --------- ---------
Total tax provision................................................ $ 621 $ 733 $ 4,996
--------- --------- ---------
--------- --------- ---------
</TABLE>
A reconciliation between the tax provision computed using the Federal
statutory rate and the total tax provision follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------
1992 1993 1994
---------- ---------- ---------
<S> <C> <C> <C>
Federal income tax provision at statutory rate...................... $ 2,470 $ 2,636 $ 2,288
State income taxes, net of federal benefit.......................... 515 548 438
Recognition of differences in the book and tax basis of assets...... 245 216 --
Goodwill amortization............................................... 84 85 85
Other............................................................... (53) (182) 15
---------- ---------- ---------
Provision for income taxes before extraordinary items............... 3,261 3,303 2,826
Extraordinary items:
Gain on restructure of debt....................................... 42 1,344 2,170
Credit from utilization of net operating loss carryforwards....... (2,682) (3,914) --
---------- ---------- ---------
Total tax provision............................................. $ 621 $ 733 $ 4,996
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
During the fiscal year 1994, the Company adopted SFAS No. 109, "Accounting
for Income Taxes". SFAS No. 109 requires a change in accounting for income taxes
to an asset and liability approach under which deferred tax assets and
liabilities are determined based on the difference between the financial
accounting and tax accounting bases of assets and liabilities. Deferred tax
assets or liabilities
F-17
<PAGE>
HALLMARK HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED JUNE 30, 1994
NOTE 9. -- INCOME TAXES (CONTINUED)
at the end of each period are determined using the currently enacted tax rate
expected to apply to taxable income in the periods in which the deferred tax
asset or liability is expected to be realized. The Company recorded a credit of
$805,000 to reflect the cumulative effect of adopting such standard.
The tax effects of temporary differences and loss carryforwards representing
deferred tax assets and liabilities at June 30, 1994 were as follows (in
thousands):
<TABLE>
<CAPTION>
DEFERRED TAX ASSETS:
- ---------------------------------------------------------------------------------
<S> <C>
Operating loss carryforwards................................................. $ 13,899
General and professional liability risks..................................... 4,168
Accrued expenses............................................................. 2,521
Long-term liabilities........................................................ 2,802
Other........................................................................ 2,267
---------
Total deferred tax assets.................................................... 25,657
Valuation allowance.......................................................... (11,019)
---------
Deferred tax assets after valuation allowance................................ 14,638
---------
<CAPTION>
DEFERRED TAX LIABILITIES:
- ---------------------------------------------------------------------------------
<S> <C>
Property and depreciation.................................................... (13,459)
Long-term debt and interest.................................................. (6,075)
---------
Total deferred tax liabilities............................................... (19,534)
---------
Net deferred tax liabilities................................................. $ (4,896)
---------
---------
</TABLE>
The net deferred tax liability is classified as follows in the accompanying
June 30, 1994 consolidated balance sheet (in thousands):
<TABLE>
<S> <C>
Current assets............................................................... $ 4,757
Long-term liability.......................................................... (9,653)
---------
$ (4,896)
---------
---------
</TABLE>
At June 30, 1994, the Company had tax NOL carryforwards of approximately
$24,000,000 which expire in fiscal years 2002 through 2006. Such NOL
carryforwards may be available to offset future taxable income of the Company,
if any.
During 1991, the Company issued 390,298 shares of Class B common stock in
exchange for $18,620,000 of bank debt. The Company, based on consultation with
outside tax and valuation advisors, believes that the exchange qualified under
the stock-for-debt exception to the recognition of income from discharge of
indebtedness, which was available to insolvent corporations. There can be no
assurance, however, that the Internal Revenue Service will not challenge the
Company's position. If any such challenge by the Internal Revenue Service were
sustained, the Company's current NOL carryforwards could be reduced by as much
as $16,000,000.
The Internal Revenue Code (the "Code") contains provisions which limit the
use of NOL carryforwards following significant changes in ownership of a
corporation's stock. A significant change in ownership generally occurs when
persons holding 5% or more of the corporation's stock ("5% shareholders")
increase their percentage ownership of such stock, in the aggregate, by more
than 50% during any three year period. The Company believes that no significant
change in ownership has
F-18
<PAGE>
HALLMARK HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED JUNE 30, 1994
NOTE 9. -- INCOME TAXES (CONTINUED)
occurred that would limit the Company's use of the NOL carryforwards described
above. However, use of such NOL carryforwards could be limited in the future as
a result of, among other things, future purchases of the Company's stock by 5%
shareholders or the issuance of additional stock (including the issuance of
options under the Company's employee benefit plans). The proposed merger with
Community (Note 2), if consummated, would constitute a change of control under
the Code.
NOTE 10. -- COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is subject to claims and legal actions by patients and others in
the ordinary course of business. The Company believes that such claims will not
have a material adverse effect on the Company's financial position or results of
operations. The Company is self-insured against a portion of its general and
professional liability risks. The liability recorded for losses incurred and
claims made is based upon individual case estimates for losses reported and upon
estimates on the basis of past experience for incurred but not reported losses.
The Company has established and funded a trust fund to pay certain of its
general and professional liability losses. The balance of such trust fund was
$10,573,000 and $9,522,000 at June 30, 1993 and 1994, respectively. Of such
amounts, $1,300,000 and $1,350,000 at June 30, 1993 and 1994, respectively, is
classified in the accompanying consolidated balance sheets under the caption
"Other current assets" and represents the amount of claims and loss adjustment
expenses expected to be paid within the following twelve months. The remaining
balance in such trust fund is classified as "Funds held by trustees". Such
self-insurance funds have been pledged as collateral for four letters of credit
issued by a commercial bank totalling $6,858,000.
OTHER CONTINGENCIES
The Company has employment agreements with two executive officers which
provide for certain payments and benefits, including accelerated vesting of
unvested stock options and bonus payments, in the event of a "change in control"
of the Company, as defined. Change in control is generally defined as the
acquisition of that number of shares of the outstanding stock which would allow
such acquiring entity or a concerted group of entities to elect a majority of
the Company's Board of Directors. The employment agreements for two executive
officers were approved by the Board of Directors in 1989 and subsequently
amended in 1994. Pursuant to their terms, the agreements currently are for terms
which expire on September 30, 1996. Absent notice within designated periods,
such agreements automatically renew for additional one year terms. The maximum
contingent liability under the agreements is approximately $2,700,000. The
proposed merger with Community (Note 2), if consummated, would constitute a
change of control under the employment agreements.
NOTE 11. -- SUPPLEMENTAL INFORMATION TO CONSOLIDATED
STATEMENTS OF CASH FLOWS
The Company paid $9,796,000, $10,691,000, and $7,923,000 in interest on
various obligations in the fiscal years ended June 30, 1992, 1993, and 1994,
respectively.
The Company paid $458,000, $458,000, and $620,000, in income taxes in the
fiscal years ended June 30, 1992, 1993, and 1994, respectively.
F-19
<PAGE>
HALLMARK HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED JUNE 30, 1994
NOTE 12. -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL 1994 QUARTERS ENDED
------------------------------------------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
------------ ------------ --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Total revenues................................................ $ 47,328 $ 47,936 $ 48,805 $ 47,475
Income before income taxes, extraordinary items and cumulative
effect of accounting change.................................. 2,168 1,100 2,649 811
Income before extraordinary items and cumulative effect of
accounting change............................................ 1,257 638 1,536 471
Extraordinary gain on restructure of debt, net of income tax
effect of $2,170............................................. -- 19,784 -- --
Cumulative effect of accounting change........................ 805 -- -- --
------------ ------------ --------- ---------
Net income................................................ $ 2,062 $ 20,422 $ 1,536 $ 471
------------ ------------ --------- ---------
------------ ------------ --------- ---------
Net income per common and common equivalent share (1)
Income before extraordinary items and cumulative effect of
accounting change............................................ $ 0.34 $ 0.17 $ 0.42 $ 0.13
Extraordinary gain on restructure of debt, net of income tax
effect....................................................... -- 5.26 -- --
Cumulative effect of accounting change........................ 0.21 -- -- --
------------ ------------ --------- ---------
Net income per common and common equivalent share......... $ 0.55 $ 5.43 $ 0.42 $ 0.13
------------ ------------ --------- ---------
------------ ------------ --------- ---------
Weighted average common and common equivalent shares
outstanding.................................................. 3,728 3,760 3,676 3,684
------------ ------------ --------- ---------
------------ ------------ --------- ---------
<FN>
- ------------------------
(1) The sum of per share amounts does not equal the annual per share amount due
to quarterly fluctuations in weighted average common and common equivalent
shares outstanding.
</TABLE>
During the quarters ended September 30, 1993, December 31, 1993, March 31,
1994, and June 30, 1994, the Company recognized credits of $65,000, $347,000,
$549,000, and $1,347,000, respectively, from reductions to contractual reserves
primarily as a result of estimate changes and favorable settlements of prior
year cost reports with program intermediaries. Such amounts are reflected in the
accompanying consolidated statements of income as adjustments to net patient
service revenues.
F-20
<PAGE>
HALLMARK HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED JUNE 30, 1994
NOTE 12. -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
During the third quarter of fiscal 1994, the Company recognized a credit of
$1,323,000 due to a reduction in the Company's general and professional
liability reserves based on updated estimates of the Company's expected general
and professional liability losses.
<TABLE>
<CAPTION>
FISCAL 1993 QUARTERS ENDED
------------------------------------------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
------------ ------------ --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Total revenues................................................ $ 41,581 $ 43,572 $ 47,216 $ 46,868
Income before income taxes and extraordinary
items........................................................ 544 1,159 3,826 2,224
Income before extraordinary items............................. 211 573 2,341 1,325
Extraordinary items:
Gain on restructure of debt, net of income tax effect of
$253, $549 and $542, respectively.......................... -- 490 1,066 461
Credit resulting from utilization of net operating loss
carryforward............................................... 243 646 1,826 1,199
------------ ------------ --------- ---------
Net income................................................ $ 454 $ 1,709 $ 5,233 $ 2,985
------------ ------------ --------- ---------
------------ ------------ --------- ---------
Net income per common and common equivalent share (1)
Income before extraordinary items............................. $ .07 $ .17 $ .70 $ .38
Extraordinary items:
Gain on restructure of debt, net of income tax effect....... -- .15 .32 .13
Credit resulting from utilization of net operating loss
carryforward............................................... .07 .19 .54 .35
------------ ------------ --------- ---------
Net income per common and common equivalent share......... $ .14 $ .51 $ 1.56 $ .86
------------ ------------ --------- ---------
------------ ------------ --------- ---------
Weighted average common and common equivalent shares
outstanding.................................................. 3,343 3,346 3,350 3,453
------------ ------------ --------- ---------
------------ ------------ --------- ---------
<FN>
- ------------------------
(1) The sum of per share amounts does not equal the annual per share amount due
to quarterly fluctuations in weighted average common and common equivalent
shares outstanding.
</TABLE>
During the quarters ended September 30, 1992, December 31, 1992, March 31,
1993, and June 30, 1993, the Company recognized credits (charges) of $458,000,
$499,000, $1,135,000, and ($13,000), respectively, from reductions to (increases
in) contractual reserves primarily as a result of estimate changes and favorable
settlements of prior year cost reports with program intermediaries. Such amounts
are reflected in the accompanying consolidated statements of income as
adjustments to net patient service revenues.
During the third quarter of fiscal 1993, the Company recognized a credit of
$1,266,000 due to a reduction in the Company's general and professional
liability reserves based on updated estimates of the Company's expected general
and professional liability losses.
F-21
<PAGE>
APPENDIX A
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated
as of June 10, 1994, by and among COMMUNITY HEALTH SYSTEMS, INC., a Delaware
corporation ("CHS"), COMMUNITY ACQUISITION CORP., a Delaware corporation and a
wholly-owned subsidiary of CHS ("Merger Sub"), and HALLMARK HEALTHCARE
CORPORATION, a Delaware corporation ("Hallmark").
RECITALS
A. CHS, Merger Sub and Hallmark are parties to that certain Agreement and
Plan of Merger, dated as of June 10, 1994, and desire to amend such Agreement
and Plan of Merger, and to restate such agreement in its entirety as amended.
B. The Boards of Directors of CHS and Hallmark each have determined that a
business combination between CHS and Hallmark is in the best interests of their
respective companies and stockholders and, accordingly, have agreed to effect
the merger provided for herein upon the terms and subject to the conditions set
forth herein.
C. For federal income tax purposes, it is intended that the merger provided
for herein shall qualify as a reorganization within the meaning of Section 368
of the Internal Revenue Code of 1986, as amended (the "Code"), and, for
financial accounting purposes, shall be accounted for as a "pooling of
interests."
D. CHS and Hallmark have each received a fairness opinion as more fully
described herein.
E. CHS, Merger Sub and Hallmark desire to make certain representations,
warranties and agreements in connection with the merger.
NOW THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE 1
1. THE MERGER.
1.1. THE MERGER. Subject to the terms and conditions of this Agreement, at
the Effective Time (as defined in Section 1.3), Hallmark shall be merged with
and into Merger Sub (the "Merger") in accordance with this Agreement and the
separate corporate existence of Hallmark shall thereupon cease. Merger Sub shall
be the surviving corporation in the Merger (sometimes hereinafter referred to as
the "Surviving Corporation"). The Merger shall have the effects specified in the
Delaware General Corporation Law (the "DGCL").
1.2. THE CLOSING. Subject to the terms and conditions of this Agreement,
the closing of the Merger (the "Closing") shall take place (a) at the offices of
McGlinchey Stafford Lang, A Law Corporation, 643 Magazine Street, New Orleans,
Louisiana, at 10:00 a.m., local time, on the first business day immediately
following the day on which the last to be fulfilled or waived of the conditions
set forth in Article 8 shall be fulfilled or waived in accordance herewith or
(b) at such other time, date or place as CHS and Hallmark may agree. The date on
which the Closing occurs is hereinafter referred to as the "Closing Date."
1.3. EFFECTIVE TIME. If all the conditions to the Merger set forth in
Article 8 shall have been fulfilled or waived in accordance herewith and this
Agreement shall not have been terminated as provided in Article 9, the parties
hereto shall cause a Certificate of Merger meeting the requirements of Section
251 of the DGCL to be properly executed and filed in accordance with such
Section on the
A-1
<PAGE>
Closing Date. The Merger shall become effective at the time of filing of the
Certificate of Merger with the Secretary of State of the State of Delaware in
accordance with the DGCL or at such later time which the parties hereto shall
have agreed upon and designated in such filing as the effective time of the
Merger (the "Effective Time").
ARTICLE 2
2. CERTIFICATE OF INCORPORATION AND BYLAWS OF THE SURVIVING CORPORATION.
2.1. CERTIFICATE OF INCORPORATION. The Certificate of Incorporation of
Merger Sub in effect immediately prior to the Effective Time shall be the
Certificate of Incorporation of the Surviving Corporation, until duly amended in
accordance with applicable law.
2.2. BYLAWS. The Bylaws of Merger Sub in effect immediately prior to the
Effective Time shall be the Bylaws of the Surviving Corporation, until duly
amended in accordance with applicable law.
ARTICLE 3
3. DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION.
3.1. DIRECTORS. The directors of Merger Sub immediately prior to the
Effective Time shall be the directors of the Surviving Corporation as of the
Effective Time.
3.2. OFFICERS. The officers of Merger Sub immediately prior to the
Effective Time shall be the officers of the Surviving Corporation as of the
Effective Time.
ARTICLE 4
4. CONVERSION OF HALLMARK STOCK.
4.1. CONVERSION OF HALLMARK STOCK.
(a) At the Effective Time, each share of the Common Stock, $.01 par value,
of Merger Sub outstanding immediately prior to the Effective Time shall remain
outstanding and shall represent one share of Common Stock, $.01 par value, of
the Surviving Corporation.
(b) At the Effective Time, each share of Class A Common Stock, $.05 par
value, of Hallmark and each share of Class B Common Stock, $.05 par value, of
Hallmark (collectively, "Hallmark Common Stock"), issued and outstanding
immediately prior to the Effective Time shall, by virtue of the Merger and
without any action on the part of the holder thereof, be converted into the
right to receive .97 shares of Common Stock, $.01 par value ("CHS Common
Stock"), of CHS (the "Exchange Ratio").
(c) At the Effective Time, each share of 25% Participating Cumulative
Convertible Redeemable Preferred Stock, $5 par value ("Redeemable Preferred
Stock"), of Hallmark issued and outstanding immediately prior to the Effective
Time (other than those with respect to which the holder thereof has perfected
appraisal rights under the DGCL and has not subsequently lost, withdrawn or
forfeited such rights) shall, by virtue of the Merger and without any action on
the part of the holder thereof, be converted into the right to receive 5.4
shares of CHS Common Stock (the "Preferred Exchange Ratio").
(d) As a result of the Merger and without any action on the part of the
holder thereof, all shares of Hallmark Common Stock and all shares of Redeemable
Preferred Stock shall cease to be outstanding and shall be canceled and retired
and shall cease to exist, and each holder of a certificate (a "Certificate")
representing any shares of Hallmark Common Stock or any shares of Redeemable
Preferred Stock shall thereafter cease to have any rights with respect to such
shares of Hallmark Common Stock or Redeemable Preferred Stock, except the right
to receive, without interest, the CHS Common Stock and cash for fractional
shares of CHS Common Stock in accordance with Sections 4.1(b), 4.1(c) and 4.2(e)
upon the surrender of such Certificate.
A-2
<PAGE>
(e) Each share of Hallmark Common Stock and Redeemable Preferred Stock
issued and held in Hallmark's treasury at the Effective Time shall, by virtue of
the Merger, cease to be outstanding and shall be canceled and retired without
payment of any consideration therefor.
(f) All options (individually, a "Hallmark Option" and collectively, the
"Hallmark Options") outstanding immediately prior to the Effective Time under
Hallmark's 1993 Stock Option Plan, Long-Term Stock Incentive Plan -- 1989, Stock
Incentive Performance Plan -- 1991 and 1991 Directors' Stock Option Plan, as
amended (collectively, the "Hallmark Stock Option Plans"), and options set forth
in the Hallmark Disclosure Letter shall remain outstanding following the
Effective Time. At the Effective Time, such Hallmark Options shall, by virtue of
the Merger and without any further action on the part of Hallmark or the holder
of any such Hallmark Options, be assumed by CHS in such manner that CHS (i) is a
corporation "assuming a stock option in a transaction to which Section 424(a)
applied" within the meaning of Section 424 of the Internal Revenue Code of 1986,
as amended (the "Code"), or (ii) to the extent that Section 424 of the Code does
not apply to any such Hallmark Options, would be such a corporation were Section
424 applicable to such option. Each Hallmark Option assumed by CHS shall be
exercisable upon the same terms and conditions as under the applicable Hallmark
Stock Option Plan and the applicable option agreement issued thereunder, except
that (i) each such Hallmark Option shall be exercisable for that whole number of
shares of CHS Common Stock (to the nearest whole share) into which the number of
shares of Hallmark Common Stock subject to such Hallmark Option immediately
prior to the Effective Time would be converted under this Section 4.1, and (ii)
the option price per share of CHS Common Stock shall be an amount equal to the
option price per share of Hallmark Common Stock subject to such Hallmark Option
in effect immediately prior to the Effective Time divided by the Exchange Ratio
(the price per share, as so determined, being rounded down to the nearest full
cent). Within ten days after the Closing Date, CHS shall notify each holder of
an option under the Hallmark Stock Option Plans of the assumption of such
options by CHS and the revisions to the options effected thereby. No payment
shall be made for fractional interests. From and after the date of this
Agreement, no additional options shall be granted by Hallmark or its
Subsidiaries under the Hallmark Stock Option Plans or otherwise.
4.2. EXCHANGE OF CERTIFICATES REPRESENTING HALLMARK COMMON STOCK
AND REDEEMABLE PREFERRED STOCK.
(a) As of the Effective Time, CHS shall deposit, or shall cause to be
deposited, with CHS's Transfer Agent, as exchange agent (the "Exchange Agent"),
for the benefit of the holders of shares of Hallmark Common Stock and Redeemable
Preferred Stock, for exchange in accordance with this Article 4, certificates
representing the shares of CHS Common Stock and cash in lieu of fractional
shares (such cash and certificates for shares of CHS Common Stock being
hereinafter referred to as the "Exchange Fund") to be issued pursuant to Section
4.1 and paid pursuant to this Section 4.2 in exchange for outstanding shares of
Hallmark Common Stock and Redeemable Preferred Stock.
(b) Promptly after the Effective Time, CHS shall cause the Exchange Agent to
mail to each holder of record of a Certificate or Certificates (other than those
representing Redeemable Preferred Stock with respect to which the holder thereof
has perfected appraisal rights under the DGCL and has not subsequently lost,
withdrawn or forfeited such rights) (i) a letter of transmittal which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the Exchange
Agent and shall be in such form and have such other provisions as CHS may
reasonably specify and (ii) instructions for use in effecting the surrender of
the Certificates in exchange for certificates representing shares of CHS Common
Stock and cash in lieu of fractional shares. Upon surrender of a Certificate for
cancellation to the Exchange Agent together with such letter of transmittal,
duly executed and completed in accordance with the instructions thereto, the
holder of such Certificate shall be entitled to receive in exchange therefor (x)
a certificate representing that number of whole shares of CHS Common Stock and
(y) a check representing the amount of cash in lieu of fractional shares, if
any, which such holder has the right to receive in respect of the Certificate
surrendered pursuant to Section 4.1(b) or Section 4.1(c), after giving effect to
any required withholding tax, and the Certificate so surrendered shall forthwith
be canceled. No interest will be
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paid or accrued on the value of any CHS Common Stock or cash payable to holders
of Certificates. In the event of a transfer of ownership of Hallmark Common
Stock or Redeemable Preferred Stock which is not registered in the transfer
records of Hallmark, a certificate representing the proper number of shares of
CHS Common Stock, together with a check for the cash to be paid in lieu of
fractional shares, may be issued to such a transferee if the Certificate
representing such Hallmark Common Stock or Redeemable Preferred Stock is
presented to the Exchange Agent, accompanied by all documents required to
evidence and effect such transfer and to evidence that any applicable stock
transfer taxes have been paid.
(c) Notwithstanding any other provisions of this Agreement, no dividends on
CHS Common Stock shall be paid with respect to any shares of Hallmark Common
Stock or Redeemable Preferred Stock represented by a Certificate until such
Certificate is surrendered for exchange as provided herein. Subject to the
effect of applicable laws, following surrender of any such Certificate, there
shall be paid to the holder of the certificates representing whole shares of CHS
Common Stock issued in exchange therefor, without interest, (i) at the time of
such surrender, the amount of dividends or other distributions with a record
date after the Effective Time theretofore payable with respect to such whole
shares of CHS Common Stock and not paid, less the amount of any withholding
taxes which may be required thereon, and (ii) at the appropriate payment date,
the amount of dividends or other distributions with a record date after the
Effective Time but prior to surrender and a payment date subsequent to surrender
payable with respect to such whole shares of CHS Common Stock, less the amount
of any withholding taxes which may be required thereon.
(d) At or after the Effective Time, there shall be no transfers on the stock
transfer books of Hallmark of the shares of Hallmark Common Stock or Redeemable
Preferred Stock which were outstanding immediately prior to the Effective Time.
If, after the Effective Time, Certificates are presented to the Surviving
Corporation, they shall be canceled and exchanged for certificates for shares of
CHS Common Stock and cash in lieu of fractional shares, if any, deliverable in
respect thereof pursuant to this Agreement in accordance with the procedures set
forth in this Article 4. Certificates surrendered for exchange by any person
constituting an "affiliate" of Hallmark for purposes of Rule 145(c) under the
Securities Act of 1933 (the "Securities Act") shall not be exchanged until CHS
has received a written agreement from such person as provided in Section 7.10.
(e) No fractional shares of CHS Common Stock shall be issued pursuant
hereto. In lieu of the issuance of any fractional share of CHS Common Stock
pursuant to Section 4.1(b) or Section 4.1(c), cash adjustments will be paid to
holders in respect of any fractional share of CHS Common Stock that would
otherwise be issuable, and the amount of such cash adjustment shall be equal to
such fractional proportion of the "Average Price" of a share of CHS Common
Stock. The "Average Price" of a share of CHS Common Stock shall be the average
of the closing sales prices thereof as reported on The NASDAQ Stock Market
("NASDAQ") or on such other principal exchange on which the CHS Common Stock is
listed (as reported by The Wall Street Journal or, if not reported thereby, by
another authoritative source) over the ten business days immediately preceding
the Closing Date.
(f) Any portion of the Exchange Fund (including the proceeds of any
investments thereof and any shares of CHS Common Stock) that remains unclaimed
by the former stockholders of Hallmark one year after the Effective Time shall
be delivered to the Surviving Corporation. Any former stockholders of Hallmark
who have not theretofore complied with this Article 4 shall thereafter look only
to the Surviving Corporation for payment in respect of their shares, in any
event without any interest thereon.
(g) None of CHS, Hallmark, the Exchange Agent or any other person shall be
liable to any former holder of shares of Hallmark Common Stock or Redeemable
Preferred Stock for any amount properly delivered to a public official pursuant
to applicable abandoned property, escheat or similar laws.
(h) In the event any Certificate shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the person claiming such
Certificate to be lost, stolen or destroyed and, if
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required by the Surviving Corporation, the posting by such person of a bond in
such reasonable amount as the Surviving Corporation may direct as indemnity
against any claim that may be made against it with respect to such Certificate,
the Exchange Agent will issue in exchange for such lost, stolen or destroyed
Certificate the shares of CHS Common Stock and cash in lieu of fractional
shares, and unpaid dividends and distributions on shares of CHS Common Stock as
provided in Section 4.2(c), deliverable in respect thereof pursuant to this
Agreement.
4.3. ADJUSTMENT OF EXCHANGE RATIO. In the event that, subsequent to the
date of this Agreement but prior to the Effective Time, Hallmark or CHS changes
the number of shares of Hallmark Common Stock, Redeemable Preferred Stock or CHS
Common Stock, respectively, issued and outstanding as a result of a stock split,
reverse stock split, stock dividend, recapitalization or other similar
transaction, the Exchange Ratio or the Preferred Exchange Ratio, as the case may
be, shall be appropriately adjusted.
ARTICLE 5
5. REPRESENTATIONS AND WARRANTIES OF HALLMARK. Except as set forth in the
disclosure letter delivered at or prior to the execution hereof to CHS (the
"Hallmark Disclosure Letter"), Hallmark represents and warrants to CHS as of the
date of this Agreement as follows:
5.1. EXISTENCE; GOOD STANDING; CORPORATE AUTHORITY; COMPLIANCE WITH
LAW. Hallmark is a corporation duly incorporated, validly existing and in good
standing under the laws of its jurisdiction of incorporation. Hallmark is duly
licensed or qualified to do business as a foreign corporation and is in good
standing under the laws of any other state of the United States in which the
character of the properties owned or leased by it therein or in which the
transaction of its business makes such qualification necessary, except where the
failure to be so qualified would not have a material adverse effect on the
business, results of operations or financial condition of Hallmark and its
Subsidiaries (as defined in Section 10.14) taken as a whole (a "Hallmark
Material Adverse Effect"). Hallmark has all requisite corporate power and
authority to own, operate and lease its properties and carry on its business as
now conducted. Each of Hallmark's Significant Subsidiaries (as defined in
Section 10.14 hereof) is a corporation or partnership duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation or organization, has the corporate or partnership power and
authority to own its properties and to carry on its business as it is now being
conducted, and is duly qualified to do business and is in good standing in each
jurisdiction in which the ownership of its property or the conduct of its
business requires such qualification, except for jurisdictions in which such
failure to be so qualified or to be in good standing would not have a Hallmark
Material Adverse Effect. Neither Hallmark nor any of its Subsidiaries is in
violation of any order of any court, governmental authority or arbitration board
or tribunal, or any law, ordinance, governmental rule or regulation to which
Hallmark or any Hallmark Subsidiary or any of their respective properties or
assets is subject, where such violation would have a Hallmark Material Adverse
Effect. Hallmark and its Subsidiaries have obtained all licenses, permits and
other authorizations and have taken all action required by applicable law or
governmental regulations in connection with their business as now conducted,
where the failure to obtain any such item or to take any such action would have
a Hallmark Material Adverse Effect. The copies of Hallmark's Certificate of
Incorporation and Bylaws previously delivered to CHS are true and correct.
5.2. AUTHORIZATION, VALIDITY AND EFFECT OF AGREEMENTS. Hallmark has the
requisite corporate power and authority to execute and deliver this Agreement
and all agreements and documents contemplated hereby. Subject only to the
approval of this Agreement and the transactions contemplated hereby by the
holders of a majority of the combined voting power of the then outstanding
shares of Hallmark Common Stock and Redeemable Preferred Stock voting together
as a single class (the "Requisite Hallmark Approval"), the consummation by
Hallmark of the transactions contemplated hereby has been duly authorized by all
requisite corporate action. Subject to obtaining the
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Requisite Hallmark Approval, this Agreement constitutes, and all agreements and
documents contemplated hereby (when executed and delivered pursuant hereto) will
constitute, the valid and legally binding obligations of Hallmark, to the extent
it is a party thereto, enforceable in accordance with their respective terms,
subject to applicable bankruptcy, insolvency, moratorium or other similar laws
relating to creditors' rights and general principles of equity.
5.3. CAPITALIZATION. The authorized capital stock of Hallmark consists of
25,000,000 shares of Hallmark Common Stock, which may be issued and outstanding
as either Class A Common Stock or Class B Common Stock and 2,500,000 shares of
Preferred Stock, of which 60,000 shares have been designated as Redeemable
Preferred Stock and 2,440,000 shares of Preferred Stock are authorized having a
par value of $1.00 per share. As of June 10, 1994 there were 2,982,178 shares of
Class A Common Stock issued and outstanding, 64,102 shares of Class B Common
Stock issued and outstanding, and 32,966 shares of Redeemable Preferred Stock
issued and outstanding. Since such date, no additional shares of capital stock
of Hallmark have been issued, except (i) upon exercise of options outstanding
pursuant to the Hallmark Stock Option Plans, (ii) upon conversion of Class B
Common Stock into Class A Common Stock and (iii) upon conversion of Redeemable
Preferred Stock into Class A Common Stock. Hallmark has no outstanding bonds,
debentures, notes or other obligations the holders of which have the right to
vote (or which are convertible into or exercisable for securities having the
right to vote) with the stockholders of Hallmark on any matters. All such issued
and outstanding shares of Hallmark Common Stock and Redeemable Preferred Stock
are duly authorized, validly issued, fully paid, nonassessable and free of
preemptive rights. Other than as contemplated by this Agreement or as set forth
above, and except for the issuance by Hallmark prior to the Effective Time of up
to 176,000 shares of Hallmark Common Stock pursuant to the Long Term Cash
Incentive Plan-1990, there are not at the date of this Agreement any existing
options, warrants, calls, subscriptions, convertible securities, or other
rights, agreements or commitments which obligate Hallmark or any of its
Subsidiaries to issue, transfer or sell any shares of capital stock of Hallmark
or any of its Subsidiaries. After the Effective Time, the Surviving Corporation
will have no obligation to issue, transfer or sell any shares of capital stock
of Hallmark or the Surviving Corporation pursuant to any Hallmark Benefit Plan
(as defined in Section 5.11).
5.4. SUBSIDIARIES. Each of the outstanding shares of capital stock of each
of Hallmark's Subsidiaries is duly authorized, validly issued, fully paid and
nonassessable, and is owned, directly or indirectly, by Hallmark free and clear
of all liens, pledges, security interests, claims or other encumbrances other
than liens imposed by local law which are not material. The Hallmark Disclosure
Letter includes the following information for each Subsidiary of Hallmark: (i)
its name and jurisdiction of incorporation or organization; (ii) its authorized
capital stock or share capital; (iii) the number of issued and outstanding
shares of capital stock or share capital; and (iv) the number of shares of such
capital stock owned by Hallmark or any of its Subsidiaries.
5.5. OTHER INTERESTS. Except for interests in the Hallmark Subsidiaries,
neither Hallmark nor any Hallmark Subsidiary owns directly or indirectly any
interest or investment (whether equity or debt) in any corporation, partnership,
joint venture, business, trust or entity (other than investments in short-term
investment securities).
5.6. NO VIOLATION. Neither the execution and delivery by Hallmark of this
Agreement nor the consummation by Hallmark of the transactions contemplated
hereby in accordance with the terms hereof, will (i) conflict with or result in
a breach of any provisions of the Certificate of Incorporation or Bylaws of
Hallmark; (ii) except as disclosed in the Hallmark Reports (as defined in
Section 5.7) result in a breach or violation of, a default under, or the
triggering of any payment or other material obligations pursuant to, or
accelerate vesting under, any of its existing Hallmark Stock Option Plans, or
any grant or award made under any of the foregoing other than accelerated
vesting of outstanding options under stock option agreements and employment
agreements, in existence on the date hereof, with certain employees of Hallmark
by reason of, in whole or in part, the consummation of the Merger, (iii)
violate, or conflict with, or result in a breach of any provision of, or
constitute a default (or an event which, with notice or lapse of time or both,
would constitute a default) under, or result in the
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termination or in a right of termination or cancellation of, or accelerate the
performance required by, or result in the creation of any lien, security
interest, charge or encumbrance upon any of the material properties of Hallmark
or its Subsidiaries under, or result in being declared void, voidable, or
without further binding effect, any of the terms, conditions or provisions of
any note, bond, mortgage, indenture, deed of trust or any material license,
franchise, permit, lease, contract, agreement or other instrument, commitment or
obligation to which Hallmark or any of its Subsidiaries is a party, or by which
Hallmark or any of its Subsidiaries or any of their properties is bound or
affected, except for any of the foregoing matters which would not have a
Hallmark Material Adverse Effect; or (iv) other than the filings provided for in
Article 1, certain federal, state and local regulatory filings, filings required
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"),
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
Securities Act or applicable state securities and "Blue Sky" laws or filings in
connection with the maintenance of qualification to do business in other
jurisdictions (collectively, the "Regulatory Filings"), require any material
consent, approval or authorization of, or declaration, filing or registration
with, any domestic governmental or regulatory authority, the failure to obtain
or make which would have a Hallmark Material Adverse Effect.
5.7. SEC DOCUMENTS. Hallmark has delivered to CHS each registration
statement, report, proxy statement or information statement prepared by it since
December 31, 1991, including, without limitation, (i) its Annual Report on Form
10-K for the year ended June 30, 1993, (ii) its Quarterly Reports on Form 10-Q
for the periods ended September 30 and December 31, 1993, and March 31, 1994,
and (iii) its Proxy Statement for the Annual Meeting of Stockholders held
November 23, 1993, each in the form (including exhibits and any amendments
thereto) filed with the Securities and Exchange Commission (the "SEC")
(collectively, the "Hallmark Reports"). As of their respective dates, the
Hallmark Reports (i) were prepared in all material respects in accordance with
the applicable requirements of the Securities Act, the Exchange Act, and the
rules and regulations thereunder and (ii) did not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements made therein, in the light of the
circumstances under which they were made, not misleading. Each of the
consolidated balance sheets of Hallmark included in or incorporated by reference
into the Hallmark Reports (including the related notes and schedules) fairly
presents the consolidated financial position of Hallmark and the Hallmark
Subsidiaries as of its date and each of the consolidated statements of income,
shareholders' equity and cash flows of Hallmark included in or incorporated by
reference into the Hallmark Reports (including any related notes and schedules)
fairly presents the results of operations, shareholders' equity or cash flows,
as the case may be, of Hallmark and the Hallmark Subsidiaries, for the periods
set forth therein (subject, in the case of unaudited statements, to exceptions
to generally accepted accounting principles as permitted by SEC rules with
respect to unaudited quarterly financial statements) in each case in accordance
with generally accepted accounting principles consistently applied during the
periods involved, except as may be noted therein. Except as and to the extent
set forth on the consolidated balance sheet of Hallmark and the Hallmark
Subsidiaries at March 31, 1994, including all notes thereto, or as set forth in
the Hallmark Reports, neither Hallmark nor any of the Hallmark Subsidiaries has
any material liabilities or obligations of any nature (whether accrued,
absolute, contingent or otherwise) that would be required to be reflected on, or
reserved against in, a balance sheet of Hallmark or in the notes thereto,
prepared in accordance with generally accepted accounting principles
consistently applied, except liabilities arising in the ordinary course of
business since such date.
5.8. LITIGATION. Except as disclosed in the Hallmark Reports filed with
the SEC prior to the date hereof, there are no claims, actions, suits,
proceedings, arbitrations or investigations pending against Hallmark or the
Hallmark Subsidiaries or, to the actual knowledge of the executive officers of
Hallmark, threatened against Hallmark or the Hallmark Subsidiaries, at law or in
equity, or before or by any federal or state commission, board, bureau, agency
or instrumentality, that are reasonably likely to have a Hallmark Material
Adverse Effect, nor does any executive officer of Hallmark have actual knowledge
of any facts or circumstances that such executive officer believes would be
likely to form the basis for any such claims, actions, suits, proceedings,
arbitrations or investigations.
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5.9. ABSENCE OF CERTAIN CHANGES. Except as disclosed in the Hallmark
Reports filed with the SEC prior to the date hereof, since June 30, 1993,
Hallmark has conducted its business only in the ordinary course of such business
and there has not been (i) any Hallmark Material Adverse Effect; (ii) any
declaration, setting aside or payment of any dividend or other distribution with
respect to its capital stock; or (iii) any material change in its accounting
principles, practices or methods.
5.10. TAXES. Hallmark and each of its Subsidiaries (i) have timely filed
all material federal, state and foreign tax returns required to be filed by any
of them prior to the date of this Agreement or requests for extension have been
timely filed and any such request shall have been granted and not expired and
all such returns are complete in all material respects, (ii) have paid or
accrued all taxes shown to be due and payable on such returns, and (iii) have
properly accrued all such taxes for such periods subsequent to the periods
covered by such returns, and (iv) have not had any federal income tax returns
audited by the Internal Revenue Service (the "IRS").
5.11. EMPLOYEE BENEFIT PLANS. All employee benefit plans and other benefit
arrangements covering employees of Hallmark and the Hallmark Subsidiaries (the
"Hallmark Benefit Plans") are listed in the Hallmark Disclosure Letter, except
Hallmark Benefit Plans which are not material. True and complete copies of the
Hallmark Benefit Plans have been made available to CHS. To the extent
applicable, the Hallmark Benefit Plans comply, in all material respects, with
the requirements of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and the Code, and any Hallmark Benefit Plan intended to be
qualified under Section 401(a) of the Code has been determined by the IRS to be
so qualified. No Hallmark employee benefit plan covered by Title IV of ERISA or
Section 412 of the Code is now, or ever was, to the actual knowledge of the
executive officers of Hallmark, maintained by Hallmark or any Hallmark
Subsidiary, or any predecessors thereof. No Hallmark Benefit Plan nor Hallmark
has incurred any liability or penalty under Section 4975 of the Code or Sections
502(i) or 502(l) of ERISA. Each Hallmark Benefit Plan has been maintained and
administered in all material respects in compliance with its terms and with
ERISA and the Code to the extent applicable thereto. The Hallmark Benefit Plans
are, except by reason of possible non-compliance with Section 402(b) of ERISA,
terminable by Hallmark. To the actual knowledge of the executive officers of
Hallmark, there are no pending or anticipated material claims against or
otherwise involving any of the Hallmark Benefit Plans and no suit, action or
other litigation (excluding claims for benefits incurred in the ordinary course
of Hallmark Benefit Plan activities) has been brought against or with respect to
any such Hallmark Benefit Plan, except for any of the foregoing which would not
have a Hallmark Material Adverse Effect. All contributions required to be made
as of the date hereof to the Hallmark Benefit Plans have been made or provided
for. Since September 25, 1980, neither Hallmark nor any entity under "common
control" with Hallmark within the meaning of ERISA Section 4001 has contributed
to, or been required to contribute to, any "multi-employer plan" (as defined in
Section 3(37) and 4001(a)(3) of ERISA). Hallmark does not maintain or contribute
to any plan or arrangement which provides or has any liability (except as may be
required by law) to provide life insurance, medical or other employee welfare
benefits to any employee or former employee upon his retirement or termination
of employment and Hallmark has never represented, promised or contracted
(whether in oral or written form) to or with any employee or former employee
that such benefits would be provided. Except as disclosed in the Hallmark
Reports, the execution of, and performance of the transactions contemplated in,
this Agreement will not (either alone or upon the occurrence of any additional
or subsequent events) constitute an event under any benefit plan, policy,
arrangement or agreement or any trust or loan that will or may result in any
payment (whether of severance pay or otherwise), acceleration, forgiveness of
indebtedness, vesting, distribution, increase in benefits or obligations to fund
benefits with respect to any employee.
5.12. LABOR MATTERS. Neither Hallmark nor any of its Subsidiaries is a
party to, or bound by, any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor organization. There is no
unfair labor practice or labor arbitration proceeding pending or, to the actual
knowledge of the executive officers of Hallmark, threatened against Hallmark or
its Subsidiaries relating to their business, except for any such proceeding
which would not have a
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Hallmark Material Adverse Effect. To the actual knowledge of the executive
officers of Hallmark, there are no organizational efforts with respect to the
formation of a collective bargaining unit presently being made or threatened
involving employees of Hallmark or any of its Subsidiaries.
5.13. POOLING OF INTERESTS. To the actual knowledge of the executive
officers of Hallmark, Hallmark has not taken or failed to take any action which
would prevent the accounting for the Merger as a pooling of interests in
accordance with Accounting Principles Board Opinion No. 16, the interpretative
releases issued pursuant thereto, and the pronouncements of the SEC.
5.14. NO BROKERS. Hallmark has not entered into any contract, arrangement
or understanding with any person or firm which may result in the obligation of
Hallmark or CHS to pay any finder's fees, brokerage or agent's commission or
other like payments in connection with the negotiations leading to this
Agreement or the consummation of the transactions contemplated hereby, except
that Hallmark has retained Mabon Securities Corp. as its financial advisor, the
arrangements with which have been disclosed in writing to CHS prior to the date
hereof. Other than the foregoing arrangements, Hallmark is not aware of any
claim for payment of any finder's fees, brokerage or agent's commissions or
other like payments in connection with the negotiations leading to this
Agreement or the consummation of the transactions contemplated hereby.
5.15. CHS STOCK OWNERSHIP. Neither Hallmark nor any of its Subsidiaries
owns any shares of CHS Common Stock or other securities convertible into CHS
Common Stock.
5.16. AGREEMENTS. (a) Neither Hallmark nor any of its Subsidiaries is a
party to:
(i) any agreement, contract or commitment containing any covenant
limiting the freedom of Hallmark or any of its Subsidiaries to engage in any
line of business or to compete with any person in any line of business
permitted by its or their Certificate of Incorporation or by applicable law;
(ii) any written agreement, order or decree of or with any federal or
state regulatory agency except those listed in the Hallmark Disclosure
Letter; or
(iii) any obligation of guaranty or indemnity, except as provided in
Section 5.11, obligations of Subsidiaries guaranteed by Hallmark, and income
guarantees provided to recruit healthcare professionals.
(b) All material agreements, contracts or commitments (except those entered
into in the ordinary course of business) to which Hallmark or any of its
Subsidiaries is a party or which affects its or their business, operations or
assets are listed in the Hallmark Reports. Neither Hallmark nor any of its
Subsidiaries has in any material respect breached, nor is there any pending or
threatened claim that it or any of its Subsidiaries has materially breached, any
of the terms or conditions of any such agreements, contracts or commitments.
5.17. TITLE TO ASSETS. (a) On March 31, 1994, Hallmark and each of its
Subsidiaries had and, except with respect to assets disposed of for adequate
consideration in the ordinary course of business since such date, now has, good
and merchantable title to all real property and good and merchantable title to
all other material properties and assets reflected on the consolidated balance
sheet of Hallmark as of such date, and has good and merchantable title to all
real property and good and merchantable title to all other material properties
and assets acquired since such date, in each case free and clear of all
mortgages, liens, pledges, restrictions, security interests, charges and
encumbrances of any nature except for (i) mortgages and encumbrances which
secure indebtedness which is properly reflected in the aforesaid balance sheet;
(ii) liens for taxes accrued but not yet payable; (iii) liens arising as a
matter of law in the ordinary course of business with respect to obligations
incurred after the date of the aforesaid balance sheet, provided that the
obligations secured by such liens are not delinquent or are being contested in
good faith; (iv) such imperfections of title and encumbrances, if any, as do not
materially detract from the value or materially interfere with the present use
of any of such properties or assets or the pending sale of any of such owned
properties or assets; and (v) capital leases, if any,
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with third parties for fair and adequate consideration. Hallmark and each of its
Subsidiaries own, or have valid leasehold interests in, all material properties
and assets used in the conduct of their business. Any real property and other
material assets held under lease by Hallmark or any of its Subsidiaries are held
under valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made or proposed to be made by
Hallmark or any of its Subsidiaries of such property.
(b) With respect to each lease of any real property or a material amount of
personal property to which Hallmark or any of its Subsidiaries is a party, and
except for leases as lessor or sublessor to healthcare professionals, (i) such
lease is in full force and effect in accordance with its terms; (ii) all rents
and other monetary amounts that have become due and payable thereunder have been
paid; (iii) there exists no default, or event, occurrence, condition or act,
which with the giving of notice, the lapse of time or the happening of any
further event, occurrence, condition or act would become a default under such
lease; and (iv) the Merger will not constitute a breach under, or cause a
termination of, such lease. Notwithstanding anything to the contrary herein,
Hallmark shall have the right to supplement the Hallmark Disclosure Letter on or
before 5:00 p.m., Eastern Daylight Time, Monday, June 13, 1994, to report
exceptions to the representation and warranty contained in this Section
5.17(b)(iv).
(c) Neither Hallmark nor any of its Subsidiaries has any legal obligation,
absolute or contingent, to any other person to sell or otherwise dispose of any
substantial part of its assets; or to sell or dispose of any of its assets
except in the ordinary course of business consistent with past practices.
5.18. INSURANCE POLICIES. Hallmark and each of its Subsidiaries maintain
in force insurance policies and bonds in such amounts and against such
liabilities and hazards as are considered by it to be reasonable. A complete
list of all such insurance policies is contained in the Hallmark Disclosure
Letter. Neither Hallmark nor any of its Subsidiaries is now liable, nor will it
or any of them become liable, for any material retroactive premium adjustment
not recorded on its books or otherwise provided for. All policies are valid and
enforceable and in full force and effect, and neither Hallmark nor any of its
Subsidiaries has received any notice of a material premium increase or
cancellation with respect to any of its insurance policies or bonds. Within the
last three years, neither Hallmark nor any of its Subsidiaries has been refused
any basic insurance coverage sought or applied for, and Hallmark has no reason
to believe that its existing insurance coverage cannot be renewed as and when
same shall expire, upon terms and conditions standard in the market at the time
renewal is sought.
5.19. ENVIRONMENTAL MATTERS.
(a) (i) Hallmark and each of its Subsidiaries have obtained all material
permits, licenses and other authorizations that are required to be obtained by
it in connection with the operation of its businesses and ownership of its
properties (collectively, the "Hallmark Subject Properties") under any
applicable Environmental Law Requirements, as hereinafter defined, except for
such matters as would not have a Hallmark Material Adverse Effect;
(ii) Hallmark and each of its Subsidiaries are in compliance in all
respects with all terms and conditions of such permits, licenses and
authorizations and with all applicable Environmental Law Requirements,
except for such matters as would not have a Hallmark Material Adverse
Effect;
(iii) There are no past or present events, conditions, circumstances,
activities or plans by Hallmark or any of its Subsidiaries related in any
manner to Hallmark or any of its Subsidiaries or the Hallmark Subject
Properties that did or would violate or prevent compliance or continued
compliance with any of the Environmental Law Requirements or give rise to
any Environmental Liability, as hereinafter defined, except for such matters
as would not have a Hallmark Material Adverse Effect;
(iv) There is no civil, criminal or administrative action, suit, demand,
claim, order, judgment, hearing, notice or demand letter, notice of
violation, investigation or proceeding pending or to the
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actual knowledge of any executive officer of Hallmark threatened by any
person against Hallmark or any of its Subsidiaries, or any prior owner of
any of the Hallmark Subject Properties and relating to any of the Hallmark
Subject Properties, and relating in any way to any Environmental Law
Requirement or seeking to impose any Environmental Liability, except for
such matters as would not have a Hallmark Material Adverse Effect; and
(v) Neither Hallmark nor any of its Subsidiaries is subject to or
responsible for any Environmental Liability which is not set forth and
adequately reserved against on the March 31, 1994 consolidated balance sheet
of Hallmark.
(b) "Environmental Law Requirement" shall mean any court order or decree or
current law or current ordinance, rule or regulation, notice, plan or demand
letter relating to pollution or protection of the environment, including those
relating to emissions, discharges, releases, or threatened releases of
pollutants, contaminants, chemicals or industrial, toxic or hazardous substances
or wastes into the environment (including without limitation, ambient air,
surface water, ground water or land) or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of pollutants, contaminants, chemicals, or industrial, toxic or
hazardous substances or wastes.
(c) "Environmental Liability" shall mean (i) any liability or obligation
arising under any Environmental Law Requirement that has resulted in or is
reasonably likely to result in a Hallmark Material Adverse Effect, or (ii) any
liability or obligation under any other current theory of law or equity
(including, without limitation, any liability for personal injury, property
damage or remediation) that results from, or is based upon or related to, the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling, or the emission, discharge, release or threatened release
into the environment, of any pollutant, contaminant, chemical, or industrial,
toxic or hazardous substance or waste, which liability or obligation has
resulted in or is reasonably likely to result in a Hallmark Material Adverse
Effect.
5.20. INTELLECTUAL PROPERTY. Hallmark and each of its Subsidiaries owns or
has the legal right to use all trademarks, trade names, service marks, software
and other intellectual property that is material to the conduct of its or their
respective business.
5.21. OPINION OF FINANCIAL ADVISOR. Hallmark has received the opinion of
Mabon Securities Corp., to the effect that, as of the date hereof, the
consideration to be received by the holders of Hallmark Common Stock pursuant to
Section 4.1(b) is fair from a financial point of view.
5.22. LICENSES AND PERMITS. All of Hallmark's hospitals and other health
care facilities have all necessary licenses, permits, and authorizations
required to lawfully conduct their respective businesses as presently conducted,
including but not limited to all material licenses, certificates of need,
permits, certifications, provider and other third-party payor contracts and
regulatory authorizations required for the hospitals to operate as they
currently operate and in accordance with all applicable laws, rules,
regulations, ordinances, or orders of any governmental authority, and (a) no
such license, permit, or authorization is subject to revocation or forfeiture by
virtue of any existing circumstance, (b) there is no pending or threatened
proceeding to modify in any material respect or revoke any material license,
permit, or authorization, and (c) no such license, permit, or authorization is
subject to any outstanding order, decree, judgment, stipulation, or known
investigation that would materially affect such license, permit, or
authorization. All of Hallmark's hospitals and other health care facilities have
obtained accreditation by the Joint Commission on Accreditation of Healthcare
Organizations for the Hospital.
5.23. MEDICARE/MEDICAID COST REPORTS. Neither Hallmark nor any of its
Subsidiaries has filed any required terminating Medicare cost report on any
facility which Hallmark or any of its Subsidiaries has sold or no longer
operates, for which it has not received a Notice of Program Reimbursement.
Neither Hallmark nor any of its Subsidiaries has received any Notice of Program
Reimbursement (or similar document for Medicaid) with respect to any such
facility's cost reports, including cost reports
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for those facilities it has sold or no longer operates, which requires a
material refund to the government agency responsible for the Medicare or
Medicaid program and which either (a) has not been paid or (b) is not reflected
as a liability in the consolidated balance sheet of Hallmark and its
Subsidiaries at March 31, 1994.
5.24. COMPLIANCE WITH MEDICARE/MEDICAID PROGRAMS. Hallmark and its
Subsidiaries have filed all cost and other reports required to be filed in
connection with all state and federal Medicare and Medicaid programs due on or
before the date hereof, which are complete and correct in all material respects,
subject to adjustment upon audit. There are no claims, actions, payment reviews
or appeals pending or threatened before any commission, board or agency,
including, without limitation, any intermediary or carrier, the Administrator of
the Health Care Financing Administration, or any state agency, with respect to
any Medicare or Medicaid claims filed by Hallmark or any of its Subsidiaries on
or before the date hereof, which would have a Hallmark Material Adverse Effect
or materially adversely affect any of its hospitals, the operation or utility
thereof, or the consummation of the transactions contemplated hereby, except as
set forth on the Hallmark Disclosure Letter (and except for appeals of items
that are fully reserved in the Hallmark Reports) and no validation review or
program integrity review related to Hallmark, or any of its hospitals or
Subsidiaries has been conducted since January 1, 1991 by any commission, board
or agency in connection with the Medicare or Medicaid program, and to the actual
knowledge of the executive officers of Hallmark, no such reviews are scheduled,
pending or threatened against or affecting Hallmark, any of its hospitals or
Subsidiaries.
ARTICLE 6
6. REPRESENTATIONS AND WARRANTIES OF CHS AND MERGER SUB. Except as set
forth in the disclosure letter delivered at or prior to the execution hereof to
Hallmark (the "CHS Disclosure Letter"), CHS and Merger Sub represent and warrant
to Hallmark as of the date of this Agreement as follows:
6.1. EXISTENCE; GOOD STANDING; CORPORATE AUTHORITY; COMPLIANCE WITH
LAW. Each of CHS and Merger Sub is a corporation duly incorporated, validly
existing and in good standing under the laws of its jurisdiction of
incorporation. CHS is duly licensed or qualified to do business as a foreign
corporation and is in good standing under the laws of any other state of the
United States in which the character of the properties owned or leased by it
therein or in which the transaction of its business makes such qualification
necessary, except where the failure to be so qualified would not have a material
adverse effect on the business, results of operations or financial condition of
CHS and its Subsidiaries taken as a whole (a "CHS Material Adverse Effect"). CHS
has all requisite corporate power and authority to own, operate and lease its
properties and carry on its business as now conducted. Each of CHS's Significant
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation, has the corporate
power and authority to own its properties and to carry on its business as it is
now being conducted, and is duly qualified to do business and is in good
standing in each jurisdiction in which the ownership of its property or the
conduct of its business requires such qualification, except for jurisdictions in
which such failure to be so qualified or to be in good standing would not have a
CHS Material Adverse Effect. Neither CHS nor any CHS Subsidiary or any of their
respective properties or assets is in violation of any order of any court,
governmental authority or arbitration board or tribunal, or any law, ordinance,
governmental rule or regulation to which CHS or any of its Subsidiaries is
subject, where such violation would have a CHS Material Adverse Effect. CHS and
its Subsidiaries have obtained all licenses, permits and other authorizations
and have taken all actions required by applicable law or governmental
regulations in connection with their business as now conducted, where the
failure to obtain any such item or to take any such action would have a CHS
Material Adverse Effect. The copies of CHS's Certificate of Incorporation and
Bylaws previously delivered to Hallmark are true and correct.
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6.2. AUTHORIZATION, VALIDITY AND EFFECT OF AGREEMENTS. Each of CHS and
Merger Sub has the requisite corporate power and authority to execute and
deliver this Agreement and all agreements and documents contemplated hereby.
Subject only to the approval of this Agreement and the transactions contemplated
hereby by the holders of a majority of the outstanding shares of CHS Common
Stock and by the holders of a majority of the outstanding shares of Common
Stock, $.01 par value, of Merger Sub (the "Requisite CHS Approval"), the
consummation by CHS and Merger Sub of the transactions contemplated hereby has
been duly authorized by all requisite corporate action. Subject to obtaining the
Requisite CHS Approval, this Agreement constitutes, and all agreements and
documents contemplated hereby (when executed and delivered pursuant hereto) will
constitute, the valid and legally binding obligations of each of CHS and Merger
Sub, to the extent it is a party thereto, enforceable in accordance with their
respective terms, subject to applicable bankruptcy, insolvency, moratorium or
other similar laws relating to creditors' rights and general principles of
equity.
6.3. CAPITALIZATION. The authorized capital stock of CHS consists of
30,000,000 shares of CHS Common Stock, and 5,000,000 shares of preferred stock,
$.01 par value (the "CHS Preferred Stock"). As of May 31, 1994 there were
11,436,496 shares of CHS Common Stock issued and outstanding, and no shares of
CHS Preferred Stock issued and outstanding. Since such date, no additional
shares of capital stock of CHS have been issued, except pursuant to the exercise
of options outstanding under CHS stock option and employee stock purchase plans
(collectively, the "CHS Stock Option Plans"). CHS has no outstanding bonds,
debentures, notes or other obligations the holders of which have the right to
vote (or which are convertible into or exercisable for securities having the
right to vote) with the stockholders of CHS on any matter. All such issued and
outstanding shares of CHS Common Stock and CHS Preferred Stock are duly
authorized, validly issued, fully paid, nonassessable and free of preemptive
rights. Other than as contemplated by this Agreement or set forth in the CHS
Disclosure Letter, there are not at the date of this Agreement any existing
options, warrants, calls, subscriptions, convertible securities, or other
rights, agreements or commitments which obligate CHS or any of its Subsidiaries
to issue, transfer or sell any shares of capital stock of CHS or any of its
Subsidiaries.
6.4. SUBSIDIARIES. (a) Each of the outstanding shares of capital stock of
each of CHS's Subsidiaries is duly authorized, validly issued, fully paid and
nonassessable, and is owned, directly or indirectly, by CHS free and clear of
all liens, pledges, security interests, claims or other encumbrances other than
liens imposed by local law which are not material. The following information for
each Subsidiary of CHS has been previously provided to Hallmark: (i) its name
and jurisdiction of incorporation or organization; (ii) its authorized capital
stock or share capital; (iii) the number of issued and outstanding shares of
capital stock or share capital; and (iv) the number of shares of such capital
stock owned by CHS or any of its Subsidiaries.
(b) The authorized capital stock of Merger Sub consists, or will consist
prior to the Closing, of 10,000 shares of Common Stock, $.01 par value, all of
which shares are, or will be prior to the Closing, issued and outstanding and
owned by CHS. Merger Sub has not engaged in any activities other than in
connection with the transactions contemplated by this Agreement.
6.5. OTHER INTERESTS. Except for interests in the CHS Subsidiaries,
neither CHS nor any CHS Subsidiary owns directly or indirectly any interest or
investment (whether equity or debt) in any corporation, partnership, joint
venture, business, trust or entity (other than investments in short-term
investment securities).
6.6. NO VIOLATION. Neither the execution and delivery by CHS and Merger
Sub of this Agreement nor the consummation by CHS and Merger Sub of the
transactions contemplated hereby in accordance with the terms hereof, will (i)
conflict with or result in a breach of any provisions of the Certificate of
Incorporation or Bylaws of CHS or Merger Sub; (ii) except as disclosed in the
CHS Reports, result in a breach or violation of, a default under, or the
triggering of any payment or other material obligations pursuant to, or
accelerate vesting under, any of the CHS Stock Option Plans, or any grant or
award made under any of the foregoing, (iii) violate, or conflict with, or
result in a breach of any provision of, or constitute a default (or an event
which, with notice or lapse of time or both,
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would constitute a default) under, or result in the termination or in a right of
termination or cancellation of, or accelerate the performance required by, or
result in the creation of any lien, security interest, charge or encumbrance
upon any of the material properties of CHS or its Subsidiaries under, or result
in being declared void, voidable, or without further binding effect, any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, deed of
trust or any material license, franchise, permit, lease, contract, agreement or
other instrument, commitment or obligation to which CHS or any of its
Subsidiaries is a party, or by which CHS or any of its Subsidiaries or any of
their properties is bound or affected, except for any of the foregoing matters
which would not have a CHS Material Adverse Effect; or (iv) other than the
Regulatory Filings, require any material consent, approval or authorization of,
or declaration, filing or registration with, any domestic governmental or
regulatory authority, the failure to obtain or make which would have a CHS
Material Adverse Effect.
6.7. SEC DOCUMENTS. CHS has delivered to Hallmark each registration
statement, report, proxy statement or information statement prepared by it since
December 31, 1991, including, without limitation, (i) its Annual Report on Form
10-K for the year ended December 31, 1993, (ii) its Quarterly Report on Form
10-Q for the period ended March 31, 1994, and (iii) its Proxy Statement for the
Annual Meeting of Stockholders held April 28, 1994, each in the form (including
exhibits and any amendments thereto) filed with the SEC (collectively, the "CHS
Reports"). As of their respective dates, the CHS Reports (i) were prepared in
all material respects in accordance with the applicable requirements of the
Securities Act, the Exchange Act, and the rules and regulations thereunder and
(ii) did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
made therein, in the light of the circumstances under which they were made, not
misleading. Each of the consolidated balance sheets of CHS included in or
incorporated by reference into the CHS Reports (including the related notes and
schedules) fairly presents the consolidated financial position of CHS and the
CHS Subsidiaries as of its date and each of the consolidated statements of
income, retained earnings and cash flows included in or incorporated by
reference into the CHS Reports (including any related notes and schedules)
fairly presents the results of operations, retained earnings or cash flows, as
the case may be, of CHS and the CHS Subsidiaries, for the periods set forth
therein (subject, in the case of unaudited statements, to exceptions to
generally accepted accounting principles as permitted by SEC rules with respect
to unaudited quarterly financial statements), in each case in accordance with
generally accepted accounting principles consistently applied during the periods
involved, except as may be noted therein. Except as and to the extent set forth
on the consolidated balance sheet of CHS and the CHS Subsidiaries at March 31,
1994, including all notes thereto, or as set forth in the CHS Reports, neither
CHS nor any of the CHS Subsidiaries has any material liabilities or obligations
of any nature (whether accrued, absolute, contingent or otherwise) that would be
required to be reflected on, or reserved against in, a balance sheet of CHS or
in the notes thereto, prepared in accordance with generally accepted accounting
principles consistently applied, except liabilities arising in the ordinary
course of business since such respective dates.
6.8. LITIGATION. Except as disclosed in the CHS Reports filed with the SEC
prior to the date hereof, there are no claims, actions, suits, proceedings,
arbitrations or investigations pending against CHS or the CHS Subsidiaries or,
to the actual knowledge of the executive officers of CHS, threatened against CHS
or the CHS Subsidiaries, at law or in equity, or before or by any federal or
state commission, board, bureau, agency or instrumentality, that are reasonably
likely to have a CHS Material Adverse Effect, nor does any executive officer of
CHS have actual knowledge of any facts or circumstances that such executive
officer believes would be likely to form the basis for any such claims, actions,
suits, proceedings, arbitrations or investigations.
6.9. ABSENCE OF CERTAIN CHANGES. Except as disclosed in the CHS Reports
filed with the SEC prior to the date hereof, since December 31, 1993, CHS has
conducted its business only in the ordinary course of such business and there
has not been (i) any CHS Material Adverse Effect; (ii) any declaration, setting
aside or payment of any dividend or other distribution with respect to its
capital stock; or (iii) any material change in its accounting principles,
practices or methods.
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6.10. POOLING OF INTERESTS. To the actual knowledge of the executive
officers of CHS, CHS has not taken or failed to take any action which would
prevent the accounting for the Merger as a pooling of interests in accordance
with Accounting Principles Board Opinion No. 16, the interpretative releases
issued pursuant thereto, and the pronouncements of the SEC.
6.11. NO BROKERS. CHS has not entered into any contract, arrangement or
understanding with any person or firm which may result in the obligation of
Hallmark or CHS to pay any finder's fees, brokerage or agent's commissions or
other like payments in connection with the negotiations leading to this
Agreement or the consummation of the transactions contemplated hereby, except
that CHS has retained Lehman Brothers as its financial advisor, the arrangements
with which have been disclosed in writing to Hallmark prior to the date hereof.
Other than the foregoing arrangements, CHS is not aware of any claim for payment
of any finder's fees, brokerage or agent's commissions or other like payments in
connection with the negotiations leading to this Agreement or the consummation
of the transactions contemplated hereby.
6.12. CHS COMMON STOCK. The issuance and delivery by CHS of shares of CHS
Common Stock in connection with the Merger and this Agreement have been duly and
validly authorized by all necessary corporate action on the part of CHS except
for the approval of its stockholders contemplated by this Agreement. The shares
of CHS Common Stock to be issued in connection with the Merger and this
Agreement, when issued in accordance with the terms of this Agreement, will be
validly issued, fully paid and nonassessable.
6.13. OPINION OF FINANCIAL ADVISOR. CHS has received the opinion of Lehman
Brothers, to the effect that, as of the date hereof, the consideration to be
paid by CHS in the Merger to the holders of Hallmark Common Stock and the
holders of Redeemable Preferred Stock pursuant to Section 4.1(b) and Section
4.1(c), respectively, is fair to CHS from a financial point of view.
6.14. TAXES. CHS and each of its Subsidiaries (i) have timely filed all
material federal, state and foreign tax returns required to be filed by any of
them prior to the date of this Agreement or requests for extension have been
timely filed and any such request shall have been granted and not expired and
all such returns are complete in all material respects, (ii) have paid or
accrued all taxes shown to be due and payable on such returns, and (iii) have
properly accrued all such taxes for such periods subsequent to the periods
covered by such returns, and (iv) have "open" years for federal income tax
returns only as set forth in the CHS Disclosure Letter.
6.15. EMPLOYEE BENEFIT PLANS. All employee benefit plans and other benefit
arrangements covering employees of CHS and the CHS Subsidiaries (the "CHS
Benefit Plans") are listed in the CHS Disclosure Letter, except CHS Benefit
Plans which are not material. True and complete copies of the CHS Benefit Plans
have been made available to Hallmark. To the extent applicable, the CHS Benefit
Plans comply, in all material respects, with the requirements of ERISA, and the
Code, and any CHS Benefit Plan intended to be qualified under Section 401(a) of
the Code has been determined by the IRS to be so qualified. No CHS employee
benefit plan covered by Title IV of ERISA or Section 412 of the Code is now, or
ever was, to the actual knowledge of the executive officers of CHS, maintained
by CHS or any CHS Subsidiary, or any predecessors thereof. No CHS Benefit Plan
nor CHS has incurred any liability or penalty under Section 4975 of the Code or
Sections 502(i) or 502(l) of ERISA. Each CHS Benefit Plan has been maintained
and administered in all material respects in compliance with its terms and with
ERISA and the Code to the extent applicable thereto. The CHS Benefit Plans are,
except by reason of possible non-compliance with Section 402(b) of ERISA,
terminable by CHS. To the actual knowledge of the executive officers of CHS,
there are no pending or anticipated material claims against or otherwise
involving any of the CHS Benefit Plans and no suit, action or other litigation
(excluding claims for benefits incurred in the ordinary course of CHS Benefit
Plan activities) has been brought against or with respect to any such CHS
Benefit Plan, except for any of the foregoing which would not have a CHS
Material Adverse Effect. All contributions required to be made as of the date
hereof to the CHS Benefit Plans have been made or provided for. Since September
25, 1980, neither CHS nor any entity under "common control" with CHS within the
meaning of ERISA Section 4001
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has contributed to, or been required to contribute to, any "multi-employer
plan". CHS does not maintain or contribute to any plan or arrangement which
provides or has any liability (except as may be required by law) to provide life
insurance, medical or other employee welfare benefits to any employee or former
employee upon his retirement or termination of employment and CHS has never
represented, promised or contracted (whether in oral or written form) to or with
any employee or former employee that such benefits would be provided. Except as
disclosed in the CHS Reports, the execution of, and performance of the
transactions contemplated in, this Agreement will not (either alone or upon the
occurrence of any additional or subsequent events) constitute an event under any
benefit plan, policy, arrangement or agreement or any trust or loan that will or
may result in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligations to fund benefits with respect to any employee.
6.16. LABOR MATTERS. Neither CHS nor any of its Subsidiaries is a party
to, or bound by, any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor organization. There is no
unfair labor practice or labor arbitration proceeding pending or, to the actual
knowledge of the executive officers of CHS, threatened against CHS or its
Subsidiaries relating to their business, except for any such proceeding which
would not have a CHS Material Adverse Effect. To the actual knowledge of the
executive officers of CHS, there are no organizational efforts with respect to
the formation of a collective bargaining unit presently being made or threatened
involving employees of CHS or any of its Subsidiaries.
6.17. AGREEMENTS. (a) Neither CHS nor any of its Subsidiaries is a party
to:
(i) any agreement, contract or commitment containing any covenant
limiting the freedom of CHS or any of its Subsidiaries to engage in any line
of business or to compete with any person in any line of business permitted
by its or their Certificate of Incorporation or by applicable law;
(ii) any written agreement, order or decree of or with any federal or
state regulatory agency except those listed in the CHS Disclosure Letter; or
(iii) any obligation of guaranty or indemnity, except as provided in
Section 6.15, obligations of Subsidiaries guaranteed by CHS, and income
guarantees provided to recruit healthcare professionals.
(b) All material agreements, contracts or commitments (except those entered
into in the ordinary course of business) to which CHS or any of its Subsidiaries
is a party or which affects its or their business, operations or assets are
listed in the CHS Reports. Neither CHS nor any of its Subsidiaries has in any
material respect breached, nor is there any pending or threatened claim that it
or any of its Subsidiaries has materially breached, any of the terms or
conditions of any such agreements, contracts or commitments.
6.18. TITLE TO ASSETS. (a) On March 31, 1994, CHS and each of its
Subsidiaries had and, except with respect to assets disposed of for adequate
consideration in the ordinary course of business since such date, now has, good
and merchantable title to all real property and good and merchantable title to
all other material properties and assets reflected on the consolidated balance
sheet of CHS as of such date, and has good and merchantable title to all real
property and good and merchantable title to all other material properties and
assets acquired since such date, in each case free and clear of all mortgages,
liens, pledges, restrictions, security interests, charges and encumbrances of
any nature except for (i) mortgages and encumbrances which secure indebtedness
which is properly reflected in the aforesaid balance sheet; (ii) liens for taxes
accrued but not yet payable; (iii) liens arising as a matter of law in the
ordinary course of business with respect to obligations incurred after the date
of the aforesaid balance sheet, provided that the obligations secured by such
liens are not delinquent or are being contested in good faith; (iv) such
imperfections of title and encumbrances, if any, as do not materially detract
from the value or materially interfere with the present use of any of such
properties or assets or the pending sale of any of such owned properties or
assets; and (v) capital leases, if any, with third parties for fair and adequate
consideration. CHS and each of its Subsidiaries own, or have
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valid leasehold interests in, all material properties and assets used in the
conduct of their business. Any real property and other material assets held
under lease by CHS or any of its Subsidiaries are held under valid, subsisting
and enforceable leases with such exceptions as are not material and do not
interfere with the use made or proposed to be made by CHS or any of its
Subsidiaries of such property.
(b) With respect to each lease of any real property or a material amount of
personal property to which CHS or any of its Subsidiaries is a party, and except
for leases as lessor or sublessor to healthcare professionals, (i) such lease is
in full force and effect in accordance with its terms; (ii) all rents and other
monetary amounts that have become due and payable thereunder have been paid;
(iii) there exists no default, or event, occurrence, condition or act, which
with the giving of notice, the lapse of time or the happening of any further
event, occurrence, condition or act would become a default under such lease; and
(iv) the Merger will not constitute a breach under, or cause a termination of,
such lease.
(c) Neither CHS nor any of its Subsidiaries has any legal obligation,
absolute or contingent, to any other person to sell or otherwise dispose of any
substantial part of its assets; or to sell or dispose of any of its assets
except in the ordinary course of business consistent with past practices.
6.19. INSURANCE POLICIES. CHS and each of its Subsidiaries maintain in
force insurance policies and bonds in such amounts and against such liabilities
and hazards as are considered by it to be reasonable. A complete list of all
such insurance policies is contained in the CHS Disclosure Letter. Neither CHS
nor any of its Subsidiaries is now liable, nor will it or any of them become
liable, for any material retroactive premium adjustment not recorded on its
books or otherwise provided for. All policies are valid and enforceable and in
full force and effect, and neither CHS nor any of its Subsidiaries has received
any notice of a material premium increase or cancellation with respect to any of
its insurance policies or bonds. Within the last three years, neither CHS nor
any of its Subsidiaries has been refused any basic insurance coverage sought or
applied for, and CHS has no reason to believe that its existing insurance
coverage cannot be renewed as and when same shall expire, upon terms and
conditions standard in the market at the time renewal is sought.
6.20. ENVIRONMENTAL MATTERS.
(a) CHS and each of its Subsidiaries have obtained all material permits,
licenses and other authorizations that are required to be obtained by it in
connection with the operation of its businesses and ownership of its properties
(collectively, the "CHS Subject Properties") under any applicable Environmental
Law Requirements, except for such matters as would not have a CHS Material
Adverse Effect;
(b) CHS and each of its Subsidiaries are in compliance in all respects with
all terms and conditions of such permits, licenses and authorizations and with
all applicable Environmental Law Requirements, except for such matters as would
not have a CHS Material Adverse Effect;
(c) There are no past or present events, conditions, circumstances,
activities or plans by CHS or any of its Subsidiaries related in any manner to
CHS or any of its Subsidiaries or the CHS Subject Properties that did or would,
in any respect, violate or prevent compliance or continued compliance with any
of the Environmental Law Requirements or give rise to any Environmental
Liability, except for such matters as would not have a CHS Material Adverse
Effect;
(d) There is no civil, criminal or administrative action, suit, demand,
claim, order, judgment, hearing, notice or demand letter, notice of violation,
investigation or proceeding pending or to the actual knowledge of any executive
officer of CHS or any of its Subsidiaries threatened by any person against CHS,
or any prior owner of any of the CHS Subject Properties and relating to any of
the CHS Subject Properties, and relating in any way to any Environmental Law
Requirement or seeking to impose any Environmental Liability, except for such
matters as would not have a CHS Material Adverse Effect; and
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(e) Neither CHS nor any of its Subsidiaries is subject to or responsible for
any Environmental Liability which is not set forth and adequately reserved
against on the March 31, 1994 consolidated balance sheet of CHS.
6.21. INTELLECTUAL PROPERTY. CHS and each of its Subsidiaries owns or has
the legal right to use all trademarks, trade names, service marks, software and
other intellectual property that is material to the conduct of its or their
respective business.
6.22. LICENSES AND PERMITS. All of CHS's hospitals and other health care
facilities have all necessary licenses, permits, and authorizations required to
lawfully conduct their respective businesses as presently conducted, including
but not limited to all material licenses, certificates of need, permits,
certifications, provider and other third-party payor contracts and regulatory
authorizations required for the hospitals to operate as they currently operate
and in accordance with all applicable laws, rules, regulations, ordinances, or
orders of any governmental authority, and (a) no such license, permit, or
authorization is subject to revocation or forfeiture by virtue of any existing
circumstance, (b) there is no pending or threatened proceeding to modify in any
material respect or revoke any material license, permit, or authorization, and
(c) no such license, permit, or authorization is subject to any outstanding
order, decree, judgment, stipulation, or known investigation that would
materially affect such license, permit, or authorization. All of CHS's hospitals
and other health care facilities have obtained accreditation by the Joint
Commission on Accreditation of Healthcare Organizations for the Hospital, other
than Pinellas Community Hospital.
6.23. MEDICARE/MEDICAID COST REPORTS. Neither CHS nor any of its
Subsidiaries has filed any required terminating Medicare cost report on any
facility which CHS or any of its Subsidiaries has sold or no longer operates,
for which it has not received a Notice of Program Reimbursement. Neither CHS nor
any of its Subsidiaries has received any Notice of Program Reimbursement (or
similar document for Medicaid) with respect to any of its facility's cost
reports, including cost reports for those facilities it has sold or no longer
operates, which requires a material refund to the government agency responsible
for the Medicare or Medicaid program and which either (a) has not been paid or
(b) is not reflected as a liability in the consolidated balance sheet of CHS and
its Subsidiaries at March 31, 1994.
6.24. COMPLIANCE WITH MEDICARE/MEDICAID PROGRAMS. CHS and its Subsidiaries
have filed all cost and other reports required to be filed in connection with
all state and federal Medicare and Medicaid programs due on or before the date
hereof, which are complete and correct in all material respects, subject to
adjustment upon audit. There are no claims, actions, payment reviews or appeals
pending or threatened before any commission, board or agency, including, without
limitation, any intermediary or carrier, the Administrator of the Health Care
Financing Administration, or any state agency, with respect to any Medicare or
Medicaid claims filed by CHS or any of its Subsidiaries on or before the date
hereof, which would have a CHS Material Adverse Effect or materially adversely
effect, any of its hospitals, the operation or utility thereof, or the
consummation of the transactions contemplated hereby, except as set forth on the
CHS Disclosure Letter (and except for appeals of items that are fully reserved
in the CHS Reports) and no validation review or program integrity review related
to CHS, or any of its hospitals or Subsidiaries has been conducted since January
1, 1991 by any commission, board or agency in connection with the Medicare or
Medicaid program, and to the actual knowledge of the executive officers of CHS,
no such reviews are scheduled, pending or threatened against or affecting CHS,
any of its hospitals or Subsidiaries.
ARTICLE 7
7. COVENANTS.
7.1. ACQUISITION PROPOSALS. Prior to the Effective Time, Hallmark agrees
(a) that neither it nor any of its Subsidiaries shall, and Hallmark shall direct
and use its best efforts to cause its respective officers, directors, employees,
agents and representatives (including, without limitation, any investment
banker, attorney or accountant retained by it or any of its Subsidiaries) not
to, initiate, solicit or encourage, directly or indirectly, any inquiries or the
making or implementation of any proposal or
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offer (including, without limitation, any proposal or offer to its stockholders)
with respect to a merger, acquisition, consolidation or similar transaction
involving, or any purchase of all or any significant portion of the assets or
equity securities of, Hallmark or any of its Significant Subsidiaries (any such
proposal or offer being hereinafter referred to as an "Acquisition Proposal") or
engage in any negotiations concerning, or provide any confidential information
or data to, or have any discussions with, any person relating to an Acquisition
Proposal, or otherwise facilitate any effort or attempt to make or implement an
Acquisition Proposal; (b) that it will immediately cease and cause to be
terminated any existing activities, discussions or negotiations with any parties
conducted heretofore with respect to any of the foregoing and Hallmark will take
the necessary steps to inform the individuals or entities referred to above of
the obligations undertaken in this Section 7.1; and (c) that it will notify CHS
immediately of the identity of the potential acquiror and the terms of such
person's or entity's proposal if any such inquiries or proposals are received
by, any such information is requested from, or any such negotiations or
discussions are sought to be initiated or continued with, it; provided, however,
that nothing contained in this Section 7.1 shall prohibit the Board of Directors
of Hallmark from (i) furnishing information to or entering into discussions or
negotiations with, any person or entity that makes an unsolicited written
proposal to acquire Hallmark pursuant to a merger, consolidation, share
exchange, purchase of a substantial portion of the assets, business combination
or other similar transaction, if, and only to the extent that, (A) the Board of
Directors of Hallmark determines in good faith that such action is required for
the Board of Directors to comply with its fiduciary duties to stockholders (B)
prior to furnishing such information to, or entering into discussions or
negotiations with, such person or entity, Hallmark provides written notice to
CHS to the effect that it is furnishing information to, or entering into
discussions or negotiations with, such person or entity, and (C) subject to any
confidentiality agreement with such person or entity (which Hallmark determined
in good faith was required to be executed in order for the Board of Directors to
comply with its fiduciary duties to stockholders), Hallmark keeps CHS informed
of the status of any such discussions or negotiations; and (ii) to the extent
applicable, complying with Rule 14e-2 promulgated under the Exchange Act with
regard to an Acquisition Proposal. Nothing in this Section 7.1 shall (x) permit
Hallmark to terminate this Agreement (except as specifically provided in Article
9 hereof), (y) permit Hallmark to enter into any agreement with respect to an
Acquisition Proposal during the term of this Agreement (it being agreed that
during the term of this Agreement, Hallmark shall not enter into any agreement
with any person that provides for, or in any way facilitates, an Acquisition
Proposal (other than a confidentiality agreement in customary form)), or (z)
affect any other obligation of any party under this Agreement.
7.2. CONDUCT OF BUSINESS. (a) Prior to the Effective Time, except as set
forth in the Hallmark Disclosure Letter or as contemplated by any other
provision of this Agreement, unless CHS has consented in writing thereto,
Hallmark:
(i) Shall, and shall cause each of its Subsidiaries to, conduct its
operations according to its usual, regular and ordinary course in
substantially the same manner as heretofore conducted;
(ii) Shall use its best efforts, and shall cause each of its
Subsidiaries to use its best efforts, to preserve intact its business
organizations and goodwill, keep available the services of its officers and
employees and maintain satisfactory relationships with those persons having
business relationships with it;
(iii) Shall confer on a bi-weekly basis with one or more representatives
of CHS to report on operational matters and performance, and any proposal to
acquire any business, hospital, physician practice or other material assets,
or to engage in any other material transaction;
(iv) Shall not amend its Certificate of Incorporation or Bylaws;
(v) Shall promptly notify CHS of any material emergency or other
material change in the condition (financial or otherwise), business,
properties, assets, liabilities, prospects or the normal course of its
businesses or in the operation of its properties, any material litigation or
material governmental complaints, investigations or hearings (or
communications indicating that the
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same may be contemplated), or the occurrence of any event, circumstance or
transaction that would constitute a breach of any representation or warranty
contained herein as if such representation or warranty was being made as of
the date of such event, circumstance or transaction;
(vi) Shall promptly deliver to CHS true and correct copies of any report,
statement or schedule filed with the SEC subsequent to the date of this
Agreement, any internal monthly operating report(s) prepared for or
delivered to Hallmark's Board of Directors and the monthly consolidating
financial statements for Hallmark and its Subsidiaries for and as of each
month end subsequent to the date of this Agreement;
(vii) Shall not (A) except pursuant to the exercise of options, warrants,
conversion rights and other contractual rights existing on the date hereof
and disclosed pursuant to this Agreement, issue any shares of its capital
stock, effect any stock split or otherwise change its capitalization as it
existed on the date hereof, (B) grant, confer or award any option, warrant,
conversion right or other right not existing on the date hereof to acquire
any shares of its capital stock, (C) increase any compensation or enter into
or amend any employment agreement with any of its present or future officers
or directors, except for normal increases consistent with past practices and
the payment of cash bonuses to officers pursuant to and consistent with
existing plans or programs, or (D) adopt any new employee benefit plan
(including any stock option, stock benefit or stock purchase plan) or amend
any existing employee benefit plan in any material respect;
(viii) Shall not (A) declare, set aside or pay any dividend or make any
other distribution or payment with respect to any shares of its capital
stock or (B) except in connection with the use of shares of capital stock to
pay the exercise price or tax withholding in connection with stock-based
employee benefit plans of Hallmark, directly or indirectly redeem, purchase
or otherwise acquire any shares of its capital stock or capital stock of any
of its Subsidiaries, or make any commitment for any such action; and
(ix) Shall not, and shall not permit any of its Subsidiaries to sell,
lease or otherwise dispose of any of its assets (including capital stock of
Subsidiaries) which are material, individually or in the aggregate, except
in the ordinary course of business.
(b) Prior to the Effective Time, except as set forth in the CHS Disclosure
Letter or as contemplated by any other provision of this Agreement, unless
Hallmark has consented in writing thereto, CHS:
(i) Shall, and shall cause each of its Subsidiaries to, conduct its
operations according to its usual, regular and ordinary course in
substantially the same manner as heretofore conducted;
(ii) Shall use its best efforts, and shall cause each of its
Subsidiaries to use its best efforts, to preserve intact its business
organizations and goodwill, keep available the services of its officers and
employees and maintain satisfactory relationships with those persons having
business relationships with it;
(iii) Shall promptly notify CHS of any material emergency or other
material change in the condition (financial or otherwise), business,
properties, assets, liabilities, prospects or the normal course of its
businesses or in the operation of its properties, any material litigation or
material governmental complaints, investigations or hearings (or
communications indicating that the same may be contemplated), or the
occurrence of any event, circumstance or transaction that would constitute a
breach of any representation or warranty contained herein as if such
representation or warranty was being made as of the date of such event,
circumstance or transaction;
(iv) Shall not amend its Certificate of Incorporation to affect its
capitalization;
(v) Shall promptly deliver to CHS true and correct copies of any report,
statement or schedule filed with the SEC subsequent to the date of this
Agreement and its internal consolidated monthly operating statements for
each month end subsequent to the date of this Agreement;
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(vi) Shall not declare, set aside or pay any dividend or make any other
distribution or payment with respect to any shares of its capital stock; and
(vii) Shall not, and shall not permit any of its Subsidiaries to sell,
lease or otherwise dispose of any of its assets (including capital stock of
Subsidiaries) which are material, individually or in the aggregate, except
in the ordinary course of business.
7.3. MEETINGS OF STOCKHOLDERS. Each of CHS and Hallmark will take all
action necessary in accordance with applicable law and its Certificate of
Incorporation and Bylaws to convene a meeting of its stockholders as promptly as
practicable to consider and vote upon the approval of this Agreement and the
transactions contemplated hereby. The Board of Directors of each of CHS and
Hallmark shall recommend such approval and CHS and Hallmark shall each take all
lawful action to solicit such approval; including, without limitation, timely
mailing the Proxy Statement/Prospectus (as defined in Section 7.7); provided,
however, that such recommendation or solicitation is subject to any action taken
by, or upon authority of, the Board of Directors of CHS or Hallmark, as the case
may be, in the exercise of its good faith judgment as to its fiduciary duties to
its stockholders. CHS and Hallmark shall coordinate and cooperate with respect
to the timing of such meetings and shall use their best efforts to hold such
meetings on the same day. It shall be a condition to CHS's obligation to mail
the Proxy Statement/ Prospectus that CHS shall have received (a) an opinion of
Lehman Brothers, dated the date of the Proxy Statement/Prospectus, to the effect
that, as of the date thereof, the consideration to be paid by CHS pursuant to
the Merger is fair to CHS from a financial point of view and (b) a "comfort"
letter from Arthur Andersen & Co., independent public accountants for Hallmark,
dated the date of the Proxy Statement/Prospectus, with respect to the financial
statements of Hallmark included in the Proxy Statement/Prospectus, substantially
in the form described in Section 8.3(c). It shall be a condition to Hallmark's
obligation to mail the Proxy Statement/Prospectus that Hallmark shall have
received (a) an opinion of Mabon Securities Corp., dated the date of the Proxy
Statement/ Prospectus, to the effect that, as of the date thereof, the
consideration to be received by the holders of Hallmark Common Stock and the
holders of Redeemable Preferred Stock pursuant to Section 4.1(b) and Section
4.1(c), respectively, is fair to such stockholders from a financial point of
view and (b) a "comfort" letter from Arthur Andersen & Co., independent public
accountants for CHS, dated the date of the Proxy Statement/Prospectus, with
respect to the financial statements of CHS included in the Proxy
Statement/Prospectus, substantially in the form described in Section 8.2(c).
7.4. FILINGS; OTHER ACTION. Subject to the terms and conditions herein
provided, Hallmark and CHS shall: (a) promptly make their respective filings and
thereafter make any other required submissions under the HSR Act with respect to
the Merger; (b) use their best efforts to cooperate with one another in (i)
determining which filings are required to be made prior to the Effective Time
with, and which consents, approvals, permits or authorizations are required to
be obtained prior to the Effective Time from, governmental or regulatory
authorities of the United States, the several states and foreign jurisdictions
in connection with the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby and (ii) timely making all
such filings and timely seeking all such consents, approvals, permits or
authorizations; and (c) use their best efforts to take, or cause to be taken,
all other action and do, or cause to be done, all other things necessary, proper
or appropriate to consummate and make effective the transactions contemplated by
this Agreement. If at any time after the Effective Time, any further action is
necessary or desirable to carry out the purpose of this Agreement, the proper
officers and directors of CHS and Hallmark shall take all such necessary action.
7.5. INSPECTION OF RECORDS. From the date hereof to the Effective Time,
each party hereto shall allow all designated officers, attorneys, accountants
and other representatives of the other parties access at all reasonable times to
the records (except patient medical records) and files, correspondence, audits
and properties, as well as to all information relating to commitments,
contracts, titles and financial position, or otherwise pertaining to the
business and affairs, of such party and its Subsidiaries.
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7.6. PUBLICITY. The initial press release relating to this Agreement shall
be a joint press release and thereafter Hallmark and CHS shall, subject to their
respective legal obligations (including requirements of stock exchanges and
other similar regulatory bodies), consult with each other, and use reasonable
efforts to agree upon the text of any press release, before issuing any such
press release or otherwise making public statements with respect to the
transactions contemplated hereby and in making any filings with any federal or
state governmental or regulatory agency or with any national securities exchange
with respect thereto.
7.7. REGISTRATION STATEMENT. CHS and Hallmark shall cooperate and promptly
prepare and CHS shall file with the SEC as soon as practicable a Registration
Statement on Form S-4 (the "Form S-4") under the Securities Act, with respect to
the CHS Common Stock issuable in the Merger, a portion of which Registration
Statement shall also serve as the joint proxy statement with respect to the
meetings of the stockholders of Hallmark and of CHS in connection with the
Merger (the "Proxy Statement/Prospectus"). The respective parties will cause the
Proxy Statement/Prospectus and the Form S-4 to comply as to form in all material
respects with the applicable provisions of the Securities Act, the Exchange Act
and the rules and regulations thereunder. CHS shall use all reasonable efforts,
and Hallmark will cooperate with CHS, to have the Form S-4 declared effective by
the SEC as promptly as practicable. CHS shall use its best efforts to obtain,
prior to the effective date of the Form S-4, all necessary state securities law
or "Blue Sky" permits or approvals required to carry out the transactions
contemplated by this Agreement. CHS agrees that the Proxy Statement/Prospectus
and each amendment or supplement thereto at the time of mailing thereof and at
the time of the respective meetings of stockholders of CHS and Hallmark, or, in
the case of the Form S-4 and each amendment or supplement thereto, at the time
it is filed or becomes effective, will not include an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading; provided, however that the foregoing shall
not apply to the extent that any such untrue statement of a material fact or
omission to state a material fact was made by CHS in reliance upon and in
conformity with information concerning Hallmark furnished to CHS by Hallmark or
its officers, directors, or other agents or affiliates specifically for use in
the Proxy Statement/ Prospectus. Hallmark agrees that the information provided
by it for inclusion in the Proxy Statement/Prospectus and each amendment or
supplement thereto, at the time of mailing thereof and at the time of the
respective meetings of stockholders of CHS and Hallmark, or, in the case of
information provided by Hallmark for inclusion in the Form S-4 or any amendment
or supplement thereto, at the time it is filed or becomes effective, will not
include an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. CHS will
advise Hallmark, promptly after it receives notice thereof, of the time when the
Form S-4 has become effective or any supplement or amendment has been filed, the
issuance of any stop order, the suspension of the qualification of the CHS
Common Stock issuable in connection with the Merger for offering or sale in any
jurisdiction, or any request by the SEC for amendment of the Proxy
Statement/Prospectus or the Form S-4 or comments thereon and responses thereto
or requests by the SEC for additional information.
7.8. LISTING APPLICATION. CHS shall promptly prepare and submit to NASDAQ
or such other national securities exchange on which the CHS Common Stock is
listed a listing application covering the shares of CHS Common Stock issuable in
the Merger, and shall use its best efforts to obtain, prior to the Effective
Time, approval for the listing of such CHS Common Stock for trading on its
National Market System.
7.9. FURTHER ACTION. Each party hereto shall, subject to the fulfillment
at or before the Effective Time of each of the conditions of performance set
forth herein or the waiver thereof, perform such further acts and execute such
documents as may be reasonably required to effect the Merger.
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7.10. AGREEMENTS BY AFFILIATED STOCKHOLDERS.
(a) At least 30 days prior to the Closing Date, Hallmark shall deliver to
CHS a list of names and addresses of those persons who were or are anticipated
to be, in Hallmark's reasonable judgment, at the time the Merger is submitted to
a vote of the stockholders of Hallmark, "affiliates" (each such person, an
"Affiliate") of Hallmark within the meaning of Rule 145 of the rules and
regulations promulgated under the Securities Act ("Rule 145"). Hallmark shall
provide CHS such information and documents as CHS shall reasonably request for
purposes of reviewing such list. Hallmark shall use all reasonable efforts to
deliver or cause to be delivered to CHS, prior to the Closing Date, from each of
the Affiliates of Hallmark identified in the foregoing list, an Affiliate Letter
in the form attached hereto as Exhibit A. CHS shall be entitled to place legends
as specified in such Affiliate Letters on the certificates evidencing any CHS
Common Stock to be received by such Affiliates pursuant to the terms of this
Agreement, and to issue appropriate stock transfer instructions to the transfer
agent for the CHS Common Stock, consistent with the terms of such Letters.
(b) At least 30 days prior to the Closing Date, CHS shall deliver to
Hallmark a list of names and addresses of those persons who were or are
anticipated to be, in CHS's reasonable judgment, at the time the Merger is
submitted to a vote of the stockholders of CHS, Affiliates of CHS within the
meaning of Rule 145. CHS shall provide Hallmark such information and documents
as Hallmark shall reasonably request for purposes of reviewing such list. CHS
shall use all reasonable efforts to deliver or cause to be delivered to Hallmark
prior to the Closing Date, from each of the Affiliates of CHS identified in the
foregoing list, an Affiliate Letter in the form attached hereto as Exhibit B.
7.11. EXPENSES. Whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses except as
set forth in Section 9.5 hereof and except that (a) the filing fee in connection
with the HSR Act filing, (b) the filing fee in connection with the filing of the
Form S-4 or Proxy Statement/Prospectus with the SEC, (c) the filing fees and
counsel fees and expenses incurred by CHS in connection with obtaining the
necessary state securities or "Blue Sky" law permits and approvals, (d) the
expenses incurred in connection with printing and mailing the Form S-4 and the
Proxy Statement/Prospectus, and (e) any expenses incurred to perform
environmental assessments or surveys of real property owned or leased by
Hallmark, shall be shared equally by Hallmark and CHS.
7.12. INDEMNIFICATION AND INSURANCE. (a) From and after the Effective
Time, Surviving Corporation shall indemnify, defend and hold harmless to the
same extent provided under the Certificate of Incorporation and/or Bylaws of CHS
as such documents were in effect on the date of this Agreement, each person who
as of the date immediately prior to the Effective Time was an officer or
director of Hallmark or any Subsidiary thereof (individually, an "Indemnified
Party" and collectively, the "Indemnified Parties"), against all losses, claims,
damages, liabilities, costs or expenses (including reasonable attorneys' fees)
based upon or arising from his acts or omissions as an officer or director of
Hallmark; provided, however, that the indemnification provided herein shall not
apply to any claim against an Indemnified Person if such Indemnified Person had
actual knowledge of the existence of the claim and failed to make a good faith
effort to require Hallmark to notify its existing directors and officers
liability insurance carriers of the existence of such claim prior to the Closing
Date; provided, however, that the immediately preceding clause shall not
preclude the advancement of expenses in accordance with the Certificate of
Incorporation and/or Bylaws of CHS, subject to an Indemnified Party's obligation
to repay such advances if it shall ultimately be determined that he is not
entitled to be indemnified by CHS.
(b) For a period of five years after the Effective Time, the Surviving
Corporation shall not amend the provisions of its Certificate of Incorporation
and Bylaws providing for exculpation of director and officer liability and
indemnification, as such documents were in effect on the date of this Agreement,
in any respect that would diminish or otherwise jeopardize the Indemnified
Parties' rights of indemnification thereunder, unless required by law or by the
Surviving Corporation's then existing directors and officers liability insurance
carriers.
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(c) For a period of five years after the Effective Time, CHS shall cause to
be maintained director and officer liability insurance in an amount equal to or
greater than $15,000,000 covering any of the Indemnified Parties.
(d) CHS shall pay all expenses, including reasonable attorneys' fees, that
may be incurred by any Indemnified Parties in enforcing the indemnity and other
obligations provided for in this Section 7.12.
(e) Each Indemnified Party hereby releases, effective at the Effective Time
of the Merger, CHS and the Surviving Corporation from any obligation that either
of them may have (including any obligation as successor to Hallmark) to
indemnify such Indemnified Party for acts taken by such Indemnified Party as an
officer and/or director and/or employee of Hallmark and/or any of its
Subsidiaries, except to the extent set forth in this Section 7.12.
7.13. CERTAIN BENEFITS.
(a) From and after the Effective Time, subject to applicable law, and except
as contemplated hereby with respect to the Hallmark Stock Option Plans and the
termination of Hallmark's 1993 Long-Term Incentive Plan and 1990 Long-Term Cash
Incentive Plan for Non-Executive Officers and Other Key Employees (Fiscal 1993
Awards), CHS and its Subsidiaries will honor in accordance with their terms, all
Hallmark Benefit Plans listed in the Hallmark Disclosure Letter; provided,
however, that nothing herein shall preclude any change effected on a prospective
basis in any such Hallmark Benefit Plan that is permitted pursuant to the
following sentence of this Section 7.13. For a period of not less than one year
following the Effective Time, subject to applicable law, CHS and its
Subsidiaries will provide benefits (or cash compensation in lieu of such
benefits), other than severance arrangements, to Hallmark employees who become
employees of CHS and its Subsidiaries which will under the aforesaid Hallmark
Benefit Plans or under the CHS Benefit Plans or any combination thereof (it
being expressly acknowledged that different Hallmark employees may be covered
under different combinations of benefit plans and arrangements at any given
time); provided that CHS shall have the right to revise coverage under the CHS
Benefit Plans during the one-year period as long as such revisions do not cause
a material reduction in the Hallmark employees' overall benefits packages on an
aggregate basis as compared to coverage provided under the aforesaid Hallmark
Benefit Plans on the Closing Date. With respect to the CHS Benefit Plans, CHS
and the Surviving Corporation shall grant all Hallmark employees from and after
the Effective Time credit for all service with Hallmark and its affiliates and
predecessors prior to the Effective Time for all purposes for which such service
was recognized by Hallmark. To the extent CHS Benefit Plans provide medical or
dental welfare benefits after the Effective Time, such plans shall allow a
credit for all employee service for Hallmark and its affiliates for any
preexisting conditions and shall provide that any expenses incurred on or before
the Effective Time shall be taken into account under CHS Benefit Plans for
purposes of satisfying applicable deductible, coinsurance and maximum
out-of-pocket provisions.
(b) CHS agrees to employ at the Effective Time all employees of Hallmark and
its Subsidiaries who are employed on the Closing Date on terms consistent with
Hallmark's current employment practices and at comparable levels of compensation
and positions. Such employment shall be at will and CHS shall be under no
obligation to continue to employ any individuals.
(c) For purposes of this Section 7.13, the term "employees" shall mean all
current employees of Hallmark and its Subsidiaries (including those on lay-off,
disability or leave of absence, paid or unpaid).
7.14. POOLING; REORGANIZATION. From and after the date hereof and until
the Effective Time, neither CHS nor Hallmark nor any of their respective
subsidiaries or other affiliates shall (i) knowingly take any action, or
knowingly fail to take any action, that would jeopardize the treatment of the
Merger as a "pooling of interests" for accounting purposes; (ii) knowingly take
any action, or knowingly fail to take any action, that would jeopardize
qualification of the Merger as a reorganization within the meaning of Section
368(a) of the Code; or (iii) enter into any contract, agreement, commitment or
arrangement with respect to either of the foregoing. Following the Effective
Time,
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CHS shall use its best efforts to conduct its business in a manner that would
not jeopardize the characterization of the Merger as a "pooling of interests"
for accounting purposes and as a reorganization within the meaning of Section
368(a) of the Code.
7.15. GOVERNANCE. CHS's Board of Directors shall take all action necessary
to cause the directors comprising the full Board of Directors of CHS at the
Effective Time to be comprised of eight directors, consisting of all of the
current directors of CHS (the "CHS Designees") and Messrs. James McAfee and Kay
Sladen (the "Hallmark Designees"). If, prior to the Effective Time, any of the
CHS Designees or the Hallmark Designees shall decline or be unable to serve as a
director, Hallmark (if such person was a Hallmark Designee) or CHS (if such
person was a CHS Designee) shall designate another person to serve in such
person's stead, which person shall be reasonably acceptable to the
non-designating party.
7.16. STOCKHOLDER COMMITMENTS. Simultaneously with the execution of this
Agreement, each of the executive officers and directors of Hallmark shall
execute and deliver to CHS a Stockholder's Commitment in the form attached
hereto as Exhibit C.
7.17. RESTRUCTURING OF MERGER. Upon the mutual agreement of CHS and
Hallmark, the Merger shall be restructured in the form of a reverse triangular
merger of Merger Sub into Hallmark, with Hallmark being the surviving
corporation. In such event, this Agreement shall be deemed appropriately
modified to reflect such form of merger.
ARTICLE 8
8. CONDITIONS.
8.1. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligation of each party to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions:
(a) This Agreement and the transactions contemplated hereby shall have
been approved in the manner required by applicable law or by applicable
regulations of any stock exchange or other regulatory body by the holders of
the issued and outstanding shares of capital stock of Hallmark and CHS
entitled to vote thereon.
(b) The waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated.
(c) Neither of the parties hereto shall be subject to any order or
injunction of a court of competent jurisdiction which prohibits the
consummation of the transactions contemplated by this Agreement. In the
event any such order or injunction shall have been issued, each party agrees
to use its reasonable efforts to have any such injunction lifted.
(d) The Form S-4 shall have become effective and no stop order with
respect thereto shall be in effect.
(e) CHS and Hallmark shall have received from Arthur Andersen & Co. an
opinion that the Merger will be treated as a "pooling of interests" under
applicable accounting standards.
(f) All consents, authorizations, orders and approvals of (or filings or
registrations with) any governmental commission, board or other regulatory
body required in connection with the execution, delivery and performance of
this Agreement shall have been obtained or made, except for filings in
connection with the Merger and any other documents required to be filed
after the Effective Time and except where the failure to have obtained or
made any such consent, authorization, order, approval, filing or
registration would not have a material adverse effect on the business of CHS
and Hallmark (and their respective Subsidiaries), taken as a whole,
following the Effective Time.
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<PAGE>
8.2. CONDITIONS TO OBLIGATION OF HALLMARK TO EFFECT THE MERGER. The
obligation of Hallmark to effect the Merger shall be subject to the fulfillment
at or prior to the Closing Date of the following conditions:
(a) CHS shall have performed its agreements contained in this Agreement
required to be performed on or prior to the Closing Date and the
representations and warranties of CHS and Merger Sub contained in this
Agreement and in any document delivered in connection herewith shall be true
and correct as of the Closing Date, and Hallmark shall have received a
certificate of the Chairman and President of CHS, dated the Closing Date,
certifying to such effect; provided however, that notwithstanding anything
herein to the contrary, this Section 8.2(a) shall be deemed to have been
satisfied even if such representations or warranties are not true and
correct, unless the failure of any of the representations or warranties to
be so true and correct would have or would be reasonably likely to have a
CHS Material Adverse Effect.
(b) Hallmark shall have received the opinion of King and Spalding, dated
the Closing Date, to the effect that the Merger will be treated for Federal
income tax purposes as a reorganization within the meaning of Section 368(a)
of the Code, and that the conversion in the Merger of Hallmark Common Stock
and Redeemable Preferred Stock into CHS Common Stock will not result in gain
or loss to the holders thereof.
(c) Hallmark shall have received a "comfort" letter from Arthur Andersen
& Co., of the kind contemplated by the Statement of Auditing Standards with
respect to Letters to Underwriters promulgated by the American Institute of
Certified Public Accountants (the "AICPA Statement"), dated the Closing
Date, in form and substance reasonably satisfactory to Hallmark, in
connection with the procedures undertaken by them with respect to the
financial statements of CHS and its Subsidiaries contained in the Form S-4,
and the other matters contemplated by the AICPA Statement and customarily
included in comfort letters relating to transactions similar to the Merger.
(d) From the date of this Agreement through the Effective Time, there
shall not have occurred any change in the financial condition, business or
operations of CHS and its Subsidiaries, taken as a whole, that would have or
would be reasonably likely to have a CHS Material Adverse Effect other than
any such change that affects both Hallmark and CHS in a substantially
similar manner; provided, however, that any determination with respect to
the occurrence of a CHS Material Adverse Effect shall exclude the effect of
expenses incurred by CHS in connection with this Agreement.
(e) Hallmark shall have received an opinion from McGlinchey Stafford
Lang, A Law Corporation, special counsel to CHS, dated as of the Closing
Date, in form and substance reasonably satisfactory to Hallmark.
8.3. CONDITIONS TO OBLIGATION OF CHS AND MERGER SUB TO EFFECT THE
MERGER. The obligations of CHS and Merger Sub to effect the Merger shall be
subject to the fulfillment at or prior to the Closing Date of the following
conditions:
(a) Hallmark shall have performed its agreements contained in this
Agreement required to be performed on or prior to the Closing Date and the
representations and warranties of Hallmark contained in this Agreement and
in any document delivered in connection herewith shall be true and correct
as of the Closing Date, and CHS shall have received a certificate of the
Chairman and President of Hallmark, dated the Closing Date, certifying to
such effect; provided, however, that notwithstanding anything herein to the
contrary, this Section 8.3(a) shall be deemed to have been satisfied even if
such representations or warranties are not true and correct, unless the
failure of any of the representations or warranties to be so true and
correct would have or would be reasonably likely to have a Hallmark Material
Adverse Effect.
(b) CHS shall have received the opinion of McGlinchey Stafford Lang, A
Law Corporation, special counsel to CHS, dated the Closing Date, to the
effect that the Merger will be treated for
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<PAGE>
Federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Code, and that CHS and Hallmark will each be a party
to that reorganization within the meaning of Section 368(b) of the Code.
(c) CHS shall have received a "comfort" letter from Arthur Andersen &
Co., of the kind contemplated by the AICPA Statement, dated the Closing
Date, in form and substance reasonably satisfactory to CHS, in connection
with the procedures undertaken by them with respect to the financial
statements and other financial information of Hallmark and its Subsidiaries
contained in the Form S-4 and the other matters contemplated by the AICPA
Statement and customarily included in comfort letters relating to
transactions similar to the Merger.
(d) From the date of this Agreement through the Effective Time, there
shall not have occurred any change in the financial condition, business or
operations of Hallmark and its Subsidiaries, taken as whole, that would have
or would be reasonably likely to have a Hallmark Material Adverse Effect,
other than any such change that affects both Hallmark and CHS in a
substantially similar manner; provided, however, that any determination with
respect to the occurrence of a Hallmark Material Adverse Effect shall
exclude the effect of expenses incurred by Hallmark in connection with this
Agreement.
(e) CHS and Merger Sub shall have received an opinion from King &
Spalding, special counsel to Hallmark, dated as of the Closing Date, in form
and substance reasonably satisfactory to CHS and Merger Sub.
(f) CHS shall have received from not less than 75% by value of the
participants in Hallmark's 1993 Long-Term Incentive Plan an executed Consent
to the termination of such plan in the form attached hereto as Exhibit D.
ARTICLE 9
9. TERMINATION.
9.1. TERMINATION BY MUTUAL CONSENT. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval of this Agreement by the stockholders of Hallmark or CHS, by
the mutual consent of CHS and Hallmark.
9.2. TERMINATION BY EITHER CHS OR HALLMARK. This Agreement may be
terminated and the Merger may be abandoned by action of the Board of Directors
of either CHS or Hallmark if (a) the Merger shall not have been consummated by
December 31, 1994, or (b) the approval of Hallmark's stockholders required by
Section 8.1(a) shall not have been obtained at a meeting duly convened therefor
or at any adjournment thereof, or (c) the approval of CHS' stockholders required
by Section 8.1(a) shall not have been obtained at a meeting duly convened
therefor or at any adjournment thereof, or (d) a United States federal or state
court of competent jurisdiction or United States federal or state governmental,
regulatory or administrative agency or commission shall have issued an order,
decree or ruling or taken any other action permanently restraining, enjoining or
otherwise prohibiting the transactions contemplated by this Agreement and such
order, decree, ruling or other action shall have become final and nonappealable;
provided, that the party seeking to terminate this Agreement pursuant to this
clause (d) shall have used all reasonable efforts to remove such injunction,
order or decree; and further provided, in the case of a termination pursuant to
clause (a) above, that the terminating party shall not have breached in any
material respect its obligations under this Agreement in a manner that shall
have proximately contributed to the occurrence of the failure referred to in
said clause.
9.3. TERMINATION BY HALLMARK. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or after
the adoption and approval by the stockholders of Hallmark referred to in Section
8.1(a), by action of the Board of Directors of Hallmark, if (a) in the exercise
of its good faith judgment as to its fiduciary duties to its stockholders the
Board of Directors of Hallmark shall have failed to recommend or shall have
withdrawn or modified its
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<PAGE>
recommendation or approval of the transactions contemplated by this Agreement,
or (b) there has been a breach by CHS or Merger Sub of any representation or
warranty contained in this Agreement which would have or would be reasonably
likely to have a CHS Material Adverse Effect, or (c) there has been a material
breach of any of the covenants or agreements set forth in this Agreement on the
part of CHS, which breach is not curable or, if curable, is not cured within 30
days after written notice of such breach is given by Hallmark to CHS or (d)
there has been a breach by CHS of its covenant in Section 7.3 hereof to
recommend approval of this Agreement and the transactions contemplated thereby.
9.4. TERMINATION BY CHS. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time, before or after the
adoption and approval by the stockholders of CHS referred to in Section 8.1(a),
by action of the Board of Directors of CHS, if (a) there has been a breach by
Hallmark of any representation or warranty contained in this Agreement which
would have or would be reasonably likely to have a Hallmark Material Adverse
Effect; or (b) there has been a material breach of any of the covenants or
agreements set forth in this Agreement on the part of Hallmark, which breach is
not curable or, if curable, is not cured within 30 days after written notice of
such breach is given by CHS to Hallmark; or (c) another entity, person, or group
(as defined in Section 13(d)(3) of the Exchange Act) commences a public offer to
acquire at least 990,136 shares of Hallmark Common Stock at a price per share in
excess of $23.00 per share and, in fact, acquires pursuant to said offer or
otherwise at least 990,136 shares of Hallmark Common Stock or it shall have been
publicly disclosed or CHS shall have learned that any entity, person, or group
shall have acquired at least 990,136 shares of Hallmark Common Stock, or shall
have been granted any option or right, conditional or otherwise, to acquire at
least 990,136 shares of Hallmark Common Stock; or (d) Hallmark enters into an
agreement providing for a business combination whereby Hallmark, or at least
990,136 shares of Hallmark Common Stock, or all or substantially all of
Hallmark's assets are to be acquired by, or Hallmark is to be consolidated with,
a person or entity other than CHS or a Subsidiary or affiliate of CHS; or (e)
there has been a material breach by Hallmark of any of the covenants contained
in Section 7.1 hereof or a breach of such Section resulting in an Acquisition
Proposal, or a breach of its covenant in Section 7.3 hereof to recommend
approval of this Agreement and the transactions contemplated thereby.
9.5. EFFECT OF TERMINATION AND ABANDONMENT.
(a) If (i) Hallmark terminates this Agreement pursuant to Section 9.3(a), or
(ii) CHS terminates this Agreement pursuant to Sections 9.4(c), 9.4(d), or
9.4(e), and as of the date of such termination, (x) there has been no breach by
CHS of a representation or warranty which would have or would be reasonably
likely to have a CHS Material Adverse Effect, or (y) there has been no material
breach of any of the covenants or agreements set forth in this Agreement on the
part of CHS, then immediately, but in any event not later than five business
days after such termination, Hallmark shall pay to CHS an amount in cash equal
to $8,000,000, plus actual out of pocket expenses incurred by CHS and Merger Sub
in connection with the transactions contemplated hereby (including but not
limited to fees and disbursements of counsel, fees and expenses of investment
bankers, accountants and lenders, and printing costs) in an amount not exceeding
$1,500,000 (collectively, the "CHS Fee").
(b) If (i) Hallmark terminates this Agreement pursuant to Section 9.3(b), or
(ii) CHS terminates this Agreement pursuant to Section 9.4(a), then immediately,
but in any event not later than five business days after such termination, the
non-terminating party shall pay to the terminating party an amount equal to such
terminating party's actual out of pocket expenses incurred by the terminating
party in connection with the transactions contemplated hereby (including but not
limited to fees and disbursements of counsel, fees and expenses of investment
bankers, accountants and lenders, and printing costs) in an amount not exceeding
$2,000,000 (the "Termination Fee"); provided, however, that the Termination Fee
shall not be payable if, as of the date of such termination, (x) there has been
a breach by the terminating party of a representation or warranty which would
have or would be
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<PAGE>
reasonably likely to have, a CHS Material Adverse Effect or Hallmark Material
Adverse Effect, as the case may be, or (y) there has been a material breach of
any of the covenants or agreements set forth in this Agreement on the part of
the terminating party.
(c) In the event of termination of this Agreement and the abandonment of the
Merger pursuant to this Article 9, all obligations of the parties hereto shall
terminate, except the obligations of the parties pursuant to this Section 9.5
and Section 7.11 and except for the provisions of Sections 10.3, 10.4, 10.6,
10.8, 10.9, 10.12, 10.13 and 10.14. In the event of termination of this
Agreement pursuant to Sections 9.3 or 9.4, nothing herein shall prejudice the
ability of the non-breaching party from seeking damages from any other party for
any breach of this Agreement, including without limitation, attorneys' fees and
the right to pursue any remedy at law or in equity unless such non-breaching
party has received the Termination Fee, in which event, such fee shall
constitute liquidated damages and the non-breaching party shall have no right to
pursue any other remedy; and provided further, that in the event CHS has
received the CHS Fee, it shall not (i) assert or pursue in any manner, directly
or indirectly, any claim or cause of action based in whole or in part upon
alleged tortious or other interference with rights under this Agreement against
any entity or person submitting an Acquisition Proposal or (ii) assert or pursue
in any manner, directly or indirectly, any claim or cause of action against
Hallmark or any of its officers or directors based in whole or in part upon its
or their receipt, consideration, recommendation, or approval of an Acquisition
Proposal or Hallmark's exercise of its right of termination under Section
9.3(a). Notwithstanding the foregoing, in the event either party is required to
file suit to seek any such fee, and it ultimately succeeds on the merits, it
shall be entitled to all expenses, including attorneys' fees, which it has
incurred in enforcing its rights hereunder.
9.6. EXTENSION; WAIVER. At any time prior to the Effective Time, any party
hereto, by action taken by its Board of Directors, may, to the extent legally
allowed, (a) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (b) waive any inaccuracies in the
representations and warranties made to such party contained herein or in any
document delivered pursuant hereto and (c) waive compliance with any of the
agreements or conditions for the benefit of such party contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.
ARTICLE 10
10. GENERAL PROVISIONS.
10.1. NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. All
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall be deemed to the extent
expressly provided herein to be conditions to the Merger and shall not survive
the Merger, provided, however, that the agreements contained in Article 4 and in
Sections 7.12, 7.13, 7.14 and 7.15 and this Article 10, and the agreements
delivered pursuant to this Agreement shall survive the Merger.
10.2. NOTICES. Any notice required to be given hereunder shall be
sufficient if in writing, and sent by facsimile transmission and by courier
service (with proof of service), hand delivery or certified or registered mail
(return receipt requested and first-class postage prepaid), addressed as
follows:
<TABLE>
<S> <C>
If to CHS or Merger Sub: If to Hallmark:
3707 FM 1960 West, Suite 500 300 Galleria Parkway, Suite 650
Houston, TX 77068 Atlanta, GA 30339
Attn: E. Thomas Chaney Attn: Robert M. Thornton, Jr.
President President
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
With a copy to: With a copy to:
McGlinchey Stafford Lang King & Spalding
2777 Stemmons Freeway, Ste. 925 191 Peachtree Street
Dallas, Texas 75207 Atlanta, Georgia 30303
Attn: Alan Jacobs, Esq. Attn: Robert Miller, Esq.
</TABLE>
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
telecommunicated, personally delivered or mailed.
10.3. ASSIGNMENT; BINDING EFFECT; BENEFIT. Neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned by any of
the parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns. Notwithstanding anything
contained in this Agreement to the contrary, except for the provisions of
Article 4 and Sections 7.12 and 7.13, nothing in this Agreement, expressed or
implied, is intended to confer on any person other than the parties hereto or
their respective heirs, successors, executors, administrators and assigns any
rights, remedies, obligations or liabilities under or by reason of this
Agreement.
10.4. ENTIRE AGREEMENT. This Agreement, the Exhibits, the Hallmark
Disclosure Letter, the CHS Disclosure Letter, the Confidentiality Agreement,
dated April 12, 1994, between Hallmark and CHS and any documents delivered by
the parties in connection herewith constitute the entire agreement among the
parties with respect to the subject matter hereof and supersede all prior
agreements and understandings among the parties with respect hereto. No addition
to or modification of any provision of this Agreement shall be binding upon any
party hereto unless made in writing and signed by all parties hereto.
10.5. AMENDMENT. This Agreement may be amended by the parties hereto, by
action taken by their respective Boards of Directors, at any time before or
after approval of matters presented in connection with the Merger by the
stockholders of Hallmark and CHS, but after any such stockholder approval, no
amendment shall be made which by law requires the further approval of
stockholders without obtaining such further approval. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.
10.6. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without regard to its rules of
conflict of laws. Each of Hallmark and CHS hereby irrevocably and
unconditionally consents to submit to the exclusive jurisdiction of the courts
of the State of Delaware and of the United States of America located in the
State of Delaware (the "Delaware Courts") for any litigation arising out of or
relating to this Agreement and the transactions contemplated hereby (and agrees
not to commence any litigation relating thereto except in such courts), waives
any objection to the laying of venue of any such litigation in the Delaware
Courts and agrees not to plead or claim in any Delaware Court that such
litigation brought therein has been brought in an inconvenient forum.
10.7. COUNTERPARTS. This Agreement may be executed by the parties hereto
in separate counterparts, each of which when so executed and delivered shall be
an original, but all such counterparts shall together constitute one and the
same instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all of the parties hereto.
10.8. HEADINGS. Headings of the Articles and Sections of this Agreement
are for the convenience of the parties only, and shall be given no substantive
or interpretive effect whatsoever.
10.9. INTERPRETATION. In this Agreement, unless the context otherwise
requires, words describing the singular number shall include the plural and vice
versa, and words denoting any gender shall include all genders and words
denoting natural persons shall include corporations and partnerships and vice
versa.
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<PAGE>
10.10. WAIVERS. Except as provided in this Agreement, no action taken
pursuant to this Agreement, including, without limitation, any investigation by
or on behalf of any party, shall be deemed to constitute a waiver by the party
taking such action of compliance with any representations, warranties, covenants
or agreements contained in this Agreement. The waiver by any party hereto of a
breach of any provision hereunder shall not operate or be construed as a waiver
of any prior or subsequent breach of the same or any other provision hereunder.
10.11. INCORPORATION OF EXHIBITS. The Hallmark Disclosure Letter, the CHS
Disclosure Letter and all Exhibits attached hereto and referred to herein are
hereby incorporated herein and made a part hereof for all purposes as if fully
set forth herein.
10.12. SEVERABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
10.13. ENFORCEMENT OF AGREEMENT. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement was
not performed in accordance with its specific terms or was otherwise breached.
It is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any Delaware Court, this being in addition to
any other remedy to which they are entitled at law or in equity.
10.14. SUBSIDIARIES. As used in this Agreement, the word "Subsidiary" when
used with respect to any party means any corporation or other organization,
whether incorporated or unincorporated, of which such party directly or
indirectly owns or controls at least a majority of the securities or other
interests having by their terms ordinary voting power to elect a majority of the
board of directors or others performing similar functions with respect to such
corporation or other organization, or any organization of which such party is a
general partner. When a reference is made in this Agreement to Significant
Subsidiaries, the words "Significant Subsidiaries" shall refer to Subsidiaries
(as defined above) which constitute "significant subsidiaries" under Rule 405
promulgated by the SEC under the Securities Act.
10.15. MATERIALITY. (a) Without limiting what may constitute, for
purposes of this Agreement, a Hallmark Material Adverse Effect, any single event
or series of related events that exceeds, or the effect or result of which can
reasonably be expected to exceed, individually or in the aggregate, $8,000,000
shall be deemed to be material. In determining whether a representation or
warranty of Hallmark is true and correct in all material respects, all
references to the word "material" shall be disregarded, and any untruth or
incorrectness shall be measured, if measurable as a dollar amount, against the
definition of materiality in the preceding sentence or any other determination
of materiality.
(b) Without limiting what may constitute, for purposes of this Agreement, a
CHS Material Adverse Effect, any single event or series of related events that
exceeds, or the effect or result of which can reasonably be expected to exceed,
individually or in the aggregate, $8,000,000 shall be deemed to be material. In
determining whether a representation or warranty of CHS or Merger Sub is true
and correct in all material respects, all references to the word "material"
shall be disregarded, and any untruth or incorrectness shall be measured, if
measurable as a dollar amount, against the definition of materiality in the
preceding sentence or any other determination of materiality.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf on the day and year first written
above.
<TABLE>
<S> <C>
COMMUNITY HEALTH SYSTEMS, INC.
ATTEST:
By: /s/TYREE G. WILBURN By: /s/E. THOMAS CHANEY
TYREE G. WILBURN E. THOMAS CHANEY
COMMUNITY ACQUISITION CORP.
ATTEST:
By: /s/TYREE G. WILBURN By: /s/E. THOMAS CHANEY
TYREE G. WILBURN E. THOMAS CHANEY
HALLMARK HEALTHCARE CORPORATION
ATTEST:
By: /s/PETER J. PIZZO, III By: /s/ROBERT M. THORNTON, JR.
PETER J. PIZZO, III ROBERT M. THORNTON, JR.
</TABLE>
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<PAGE>
EXHIBIT A
FORM OF AFFILIATE LETTER
, 1994
Community Health Systems, Inc.
3707 FM 1960 West
Suite 500
Houston, TX 77068
Attn: E. Thomas Chaney, President
Ladies and Gentlemen:
I have been advised that as of the date of this letter I may be deemed to be
an "affiliate" of Hallmark Healthcare Corporation, a Delaware corporation
("Hallmark"), as the term "affiliate" is (i) defined for purposes of paragraphs
(c) and (d) of Rule 145 of the rules and regulations (the "Rules and
Regulations") of the Securities and Exchange Commission (the "Commission") under
the Securities Act of 1933, as amended (the "Act"), or (ii) used in and for
purposes of Accounting Series Releases 130 and 135, as amended, of the
Commission. Pursuant to the terms of the Amended and Restated Agreement and Plan
of Merger, dated as of June 10, 1994 (the "Agreement"), between Community Health
Systems, Inc., a Delaware corporation ("CHS"), Community Acquisition Corp., a
Delaware corporation and a wholly-owned subsidiary of CHS ("Merger Sub"), and
Hallmark, Hallmark will be merged with and into Merger Sub (the "Merger").
As a result of the Merger, I may receive shares of Common Stock, $.01 par
value, of CHS, (the "CHS Securities") in exchange for shares owned by me of
Common Stock, $.05 par value, of Hallmark.
I represent, warrant and covenant to CHS that in the event I receive any CHS
Securities as a result of the Merger:
A. I shall not make any sale, transfer or other disposition of the CHS
Securities in violation of the Act or the Rules and Regulations.
B. I have carefully read this letter and the Agreement and discussed
the requirements of such documents and other applicable limitations upon my
ability to sell, transfer or otherwise dispose of the CHS Securities to the
extent I felt necessary, with my counsel or counsel for Hallmark.
C. I have been advised that the issuance of CHS Securities to me
pursuant to the Merger has been registered with the Commission under the Act
on a Registration Statement on Form S-4. However, I have also been advised
that, since at the time the Merger was submitted for a vote of the
stockholders of Hallmark, I may be deemed to have been an affiliate of
Hallmark and the distribution by me of the CHS Securities has not been
registered under the Act, I may not sell, transfer or otherwise dispose of
the CHS Securities issued to me in the Merger unless (i) such sale, transfer
or other disposition has been registered under the Act, (ii) such sale,
transfer or other disposition is made in conformity with Rule 145
promulgated by the Commission under the Act, or (iii) in the opinion of
counsel reasonably acceptable to CHS, or a "no action" letter obtained by
the undersigned from the Staff of the Commission, to the effect that such
sale, transfer or other disposition is otherwise exempt from registration
under the Act.
D. I understand that CHS is under no obligation to register the sale,
transfer or other disposition of the CHS Securities by me or on my behalf
under the Act or to take any other action necessary in order to make
compliance with an exemption from such registration available.
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<PAGE>
E. I also understand that stop transfer instructions will be given to
CHS' transfer agent with respect to the CHS Securities and that there will
be placed on the certificates for the CHS Securities issued to me, or any
substitutions therefor, a legend stating in substance:
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A
TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF
1933 APPLIES. THE SHARES REPRESENTED BY THIS CERTIFICATE MAY ONLY BE
TRANSFERRED IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT, DATED AS OF
JUNE 10, 1994, BETWEEN THE REGISTERED HOLDER HEREOF AND CHS, A COPY
OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICES OF COMMUNITY
HEALTH SYSTEMS, INC."
F. I also understand that unless the transfer by me of my CHS
Securities has been registered under the Act or is a sale made in conformity
with the provisions of Rule 145, CHS reserves the right to put the following
legend on the certificates issued to my transferee:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 AND WERE ACQUIRED FROM A PERSON WHO
RECEIVED SUCH SHARES IN A TRANSACTION TO WHICH RULE 145 PROMULGATED
UNDER THE SECURITIES ACT OF 1933 APPLIES. THE SHARES HAVE BEEN
ACQUIRED BY THE HOLDER NOT WITH A VIEW TO, OR FOR RESALE IN
CONNECTION WITH, ANY DISTRIBUTION THEREOF WITHIN THE MEANING OF THE
SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE
TRANSFERRED EXCEPT IN ACCORDANCE WITH AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933."
It is understood and agreed that the legends set forth in paragraphs E and F
above shall be removed by delivery of substitute certificates without such
legend if such legend is not required for purposes of the Act or this Agreement.
It is understood and agreed that such legends and the stop orders referred to
above will be removed if (i) two years shall have elapsed from the date the
undersigned acquired the CHS Securities received in the Merger and the
provisions of Rule 145(d)(2) are then available to the undersigned, (ii) three
years shall have elapsed from the date the undersigned acquired the CHS
Securities received in the Merger and the provision of Rule 145(d)(3) are then
applicable to the undersigned, or (iii) CHS has received either an opinion of
counsel, which opinion and counsel shall be reasonably satisfactory to CHS, or a
"no action" letter obtained by the undersigned from the staff of the Commission,
to the effect that the restrictions imposed by Rule 145 under the Act no longer
apply to the undersigned.
I further represent to and covenant with CHS that I will not sell, transfer
or otherwise dispose of any CHS Securities received by me in the Merger or any
other shares of the capital stock of CHS until after such time as results
covering at least 30 days of combined operations of Hallmark and CHS have been
published by CHS, in the form of a quarterly earnings report, an effective
registration statement filed with the Commission, a report to the Commission on
Form 10-K, Form 10-Q or Form 8-K, or any other public filing or announcement
which includes such combined results of operations. CHS shall notify the
"affiliates" of the publication of such results. Notwithstanding the foregoing,
I understand that I will not be prohibited from selling up to 10% of the CHS
Securities received by me in the Merger during the aforementioned period.
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<PAGE>
Execution of this letter should not be considered an admission on my part
that I am an "affiliate" of Hallmark as described in the first paragraph of this
letter or as a waiver of any rights I may have to object to any claim that I am
such an affiliate on or after the date of this letter.
Very truly yours,
Name:
Accepted this day of
, 1994 by
COMMUNITY HEALTH SYSTEMS, INC.
By:
Name:
Title:
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<PAGE>
EXHIBIT B
FORM OF AFFILIATE LETTER
, 1994
Hallmark Healthcare Corporation
300 Galleria Parkway
Suite 650
Atlanta, GA 30339
Attn: Robert M. Thornton, Jr., President
Ladies and Gentlemen:
I have been advised that as of the date of this letter I may be deemed to be
an "affiliate" of Community Health Systems, Inc., a Delaware corporation
("CHS"), as the term "affiliate" is (i) defined for purposes of paragraphs (c)
and (d) of Rule 145 of the rules and regulations (the "Rules and Regulations")
of the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Act"), or (ii) used in and for purposes
of Accounting Series Releases 130 and 135, as amended, of the Commission.
Pursuant to the terms of the Amended and Restated Agreement and Plan of Merger,
dated as of June 10, 1994 (the "Agreement"), between Hallmark Healthcare
Corporation, a Delaware corporation ("Hallmark"), Community Acquisition Corp., a
Delaware corporation and a wholly owned subsidiary of CHS ("Merger Sub"), and
CHS, Hallmark will be merged with and into Merger Sub (the "Merger").
I represent to and covenant with Hallmark that I will not sell, transfer or
otherwise dispose of any shares of common stock, par value $.01 per share, of
CHS that I may hold until after such time as results covering at least 30 days
of combined operations of Hallmark and CHS have been published by CHS, in the
form of a quarterly earnings report, an effective registration statement filed
with the Commission, a report to the Commission on Form 10-K, Form 10-Q or Form
8-K, or any other public filing or announcement which includes such combined
results of operations.
Execution of this letter should not be considered an admission on my part
that I am an "affiliate" of CHS as described in the first paragraph of this
letter or as a waiver of any rights I may have to object to any claim that I am
such an affiliate on or after the date of this letter.
Very truly yours,
Name:
Accepted this day of
, 1994 by
HALLMARK HEALTHCARE CORPORATION
By:
Name:
Title:
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<PAGE>
EXHIBIT C
STOCKHOLDER'S COMMITMENT
The undersigned stockholder of Hallmark Healthcare Corporation ("Hallmark"),
in consideration of the benefits to be derived by Hallmark and its stockholders
pursuant to an Amended and Restated Agreement and Plan of Merger, dated as of
June 10, 1994 (the "Agreement"), among Hallmark, Community Health Systems, Inc.
("CHS") and Community Acquisition Corp. (the defined terms in which are used
herein as defined therein) and the expenses to be incurred by CHS in connection
therewith, hereby agrees with CHS as follows:
(1) Such stockholder, acting solely in such stockholder's capacity as
such, agrees and undertakes to vote or cause to be voted all shares of
Hallmark Common Stock and Redeemable Preferred Stock as to which such
stockholder has voting power at any meeting or meetings (including any and
all adjournments thereof) before which the Agreement or any related matter
may come for consideration by stockholders, in favor of the approval of the
Agreement and the Merger and against any similar agreement, unless (a) CHS
or Merger Sub then is in breach or default in any material respect with
respect to any covenant, representation or warranty as to it contained in
the Agreement, or (b) the Board of Directors of Hallmark shall have failed
to recommend or shall have withdrawn or modified its recommendation or
approval of the transactions contemplated by the Agreement following a good
faith determination by such Board that such action is required for the Board
of Directors to comply with its fiduciary duty to stockholders. Such
stockholder further agrees not to transfer any of the shares of Hallmark
Common Stock or Redeemable Preferred Stock over which such stockholder has
dispositive power or grant any proxy with respect thereto (except any
revocable proxy solicited by the Board of Directors of Hallmark) until the
earlier of the Effective Date or the date that the Agreement has been
terminated pursuant to its provisions, except (i) for transfers by operation
of law and (ii) for transfers in connection with which the transferee shall
agree in writing with CHS to be bound by this Stockholder's Commitment as
fully as the undersigned. In the case of any transfer by operation of law,
the provisions of this Stockholder's Commitment are intended to be binding
upon and to inure to the benefit of such transferee, and such transferee
shall be bound thereby.
(2) Such stockholder will not, and will cause such stockholder's
affiliates not to, until the Effective Time of the Merger or until the
Agreement has been terminated, whichever shall first occur, purchase or sell
or otherwise deal in CHS Common Stock or other securities of CHS unless CHS
shall have otherwise consented in writing.
(3) Such stockholder hereby releases, effective at the Effective Time of
the Merger, CHS and the Surviving Corporation from any obligation that
either of them may have (including any obligation as successor to Hallmark)
to indemnify such stockholder for acts taken by such stockholder as an
officer and/or director and/or employee of Hallmark and/or any of its
Subsidiaries, except to the extent set forth in Section 7.12 of the
Agreement.
(4) The provisions of this Stockholder's Commitment shall be enforceable
through an action by CHS for damages at law or a suit for specific
performance or other appropriate extraordinary relief, the signatory
stockholder acknowledging that remedies at law for breach or default under
this Stockholder's Commitment might be or become inadequate.
(5) All provisions hereof shall survive the Effective Date of the
Merger.
This Stockholder's Commitment is dated , 1994.
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<PAGE>
EXHIBIT D
[CHS letterhead]
, 1994
Dear Participant:
Community Health Systems, Inc. (the "Company") has recently entered into an
Amended and Restated Agreement and Plan of Merger with Hallmark Healthcare
Corporation ("Hallmark") and Community Acquisition Corp. ("Merger Sub."),
whereby Hallmark would be merged with and into Merger Sub. (the "Merger") and
holders of the common and preferred shares of Hallmark would receive shares of
Company Common Stock. As a result of the Merger, the separate corporate
existence of Hallmark would cease and its business and operations would be
conducted through Merger Sub. as a wholly-owned subsidiary of the Company.
In order to facilitate the proposed Merger and in consideration of amounts
paid to you under Hallmark's home office employee retention program, the Company
requests that you agree and consent that, in the event the Merger is
consummated, (i) the aggregate amount of all awards, whether vested or unvested,
under the 1993 Long-Term Incentive Plan (the "1993 Incentive Plan") made to you
(the "Awards") will be cancelled and terminated; and (ii) the 1993 Incentive
Plan and the 1995 Annual Plan will each be terminated and be of no further force
and effect. If the Merger is not consummated, the Awards previously granted to
you under the 1993 Incentive Plan will not be affected and will vest and be
payable as provided for therein.
By signing this letter below and returning it to the Company, you
acknowledge, consent and agree, in consideration of amounts paid to you under
Hallmark's home office employee retention program, that (i) the Awards will be
cancelled and terminated; and (ii) the 1993 Incentive Plan and the 1995 Annual
Plan will each be terminated and be of no further force and effect.
Please acknowledge your agreement and consent to the foregoing by signing
the enclosed copy of this letter and returning it to Community Health Systems,
Inc., 3707 FM 1960 West, Suite 500, Houston, TX 77068, Attn: Deborah G. Moffett,
Vice President, so that it is received by her on or before , 1994.
Very truly yours,
A-38
<PAGE>
ACKNOWLEDGMENT, CONSENT AND AGREEMENT
I hereby acknowledge, consent and agree to the cancellation and termination
of the aggregate amount of all Awards previously granted to me, whether vested
or unvested, under the 1993 Incentive Plan and the termination of such plan and
the 1995 Annual Plan on the terms and conditions and subject to the payments to
me provided in the above letter.
______________________________________
Signature
______________________________________
Please print name
, 1994
A-39
<PAGE>
APPENDIX B
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
Section 262. Appraisal rights
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to the provisions of
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with the provisions of subsection (d) of this section and
who has neither voted in favor of the merger or consolidation nor consented
thereto in writing pursuant to Section 228 of this title shall be entitled to an
appraisal by the Court of Chancery of the fair value of his shares of stock
under the circumstances described in subsections (b) and (c) of this section. As
used in this section, the word "stockholder" means a holder of record of stock
in a stock corporation and also a member of record of a non-stock corporation;
the words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a non stock
corporation and the words "depositary receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sections 251, 252, 254, 257, 258, 263 or 264 of this title;
(1) Provided, however, that no appraisal rights under this section shall be
available for the shares of any class or series of stock, which stock, or
depositary receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of section 251 of this title.
(2) Notwithstanding the provisions of subsection (b)(1) of this section,
appraisal rights under this section shall be available for the shares of any
class or series of stock of a constituent corporation if the holders thereof are
required by the terms of an agreement of merger or consolidation pursuant to
sections 251, 252, 254, 257, 258, 263 and 264 of this title to accept for such
stock anything except (i) shares of stock of the corporation surviving or
resulting from such merger or consolidation, or depositary receipts in respect
thereof; (ii) shares of stock of any other corporation or depositary receipts in
respect thereof, which shares of stock or depositary receipts at the effective
date of the merger or consolidation will be either listed on a national
securities exchange or designated as a national market system security or an
interdealer quotation system by the National Association of Securities Dealers,
Inc. or held of record by more than 2,000 holders; (iii) cash in lieu of
fractional shares or fractional depositary receipts described in the foregoing
clauses (i) and (ii); or (iv) any combination of the shares of stock, depositary
receipts and cash in lieu of fractional shares or fractional depositary receipts
described in the foregoing clauses (i), (ii) and (iii) of this subsection.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e), shall apply as nearly as is practicable.
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(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsections (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of his
shares shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to demand
the appraisal of his shares. A proxy or vote against the merger or consolidation
shall not constitute such a demand. A stockholder electing to take such action
must do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation who
has complied with the provisions of this subsection and has not voted in favor
of or consented to the merger or consolidation of the date that the merger or
consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to section 228 or
section 253 of this title, the surviving or resulting corporation, either before
the effective date of the merger or consolidation or within 10 days thereafter,
shall notify each of the stockholders entitled to appraisal rights of the
effective date of the merger or consolidation and that appraisal rights are
available for any or all of the shares of the constituent corporation, and shall
include in such notice a copy of this section. The notice shall be sent by
certified or registered mail, return receipt requested, addressed to the
stockholder at his address as it appears on the records of the corporation. Any
stockholder entitled to appraisal rights may, within 20 days after the date of
mailing of the notice, demand in writing from the surviving or resulting
corporation the appraisal of his shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and that
the stockholder intends thereby to demand the appraisal of his shares.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with the provisions of subsections (a) and (d) hereof and who is
otherwise entitled to appraisal rights, may file a petition in the Court of
Chancery demanding a determination of the value of the stock of all such
stockholders. Notwithstanding the foregoing, at any time within 60 days after
the effective date of the merger or consolidation, any stockholder shall have
the right to withdraw his demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to
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the surviving or resulting corporation and to the stockholders shown on the list
at the addresses therein stated. Such notice shall also be given by one or more
publications at least one week before the day of the hearing, in a newspaper of
general circulation as the Court deems advisable. The forms of the notices by
mail and by publication shall be approved by the Court, and the costs thereof
shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with the provisions of this section and who have
become entitled to appraisal rights. The Court may require the stockholders who
have demanded an appraisal for their shares and who hold stock represented by
certificates to submit their certificates of stock to the Register in Chancery
for notation thereon of the pendency of the appraisal proceedings; and if any
stockholder fails to comply with such direction, the Court may dismiss the
proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and in the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any other state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all of
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
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(l) The shares of the surviving or resulting corporation into which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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APPENDIX C
FAIRNESS OPINION OF LEHMAN BROTHERS
[Letterhead of Lehman Brothers]
June 10, 1994
Board of Directors
Community Health Systems, Inc.
3707 FM 1960 West, Suite 500
Houston, Texas 77068
Members of the Board:
We understand that Community Health Systems, Inc. (the "Company"), Community
Acquisition Corp., a wholly-owned subsidiary of the Company ("Merger Sub"), and
Hallmark Healthcare Corporation ("Hallmark") have entered into an Agreement and
Plan of Merger dated as of June 10, 1994 (the "Agreement") pursuant to which
Hallmark will be merged with and into Merger Sub and each share of common and
preferred shares issued and outstanding of Hallmark will be converted into the
right to receive shares of common stock of the Company ("the Merger"). The terms
and conditions of the Merger are set forth in more detail in the Agreement.
We have been requested by the Company to render our opinion with respect to
the fairness, from a financial point of view, to the Company of the
consideration to be paid by the Company in the Merger. We have not been
requested to opine as to, and our opinion does not in any manner address, the
Company's underlying business decision to proceed with or effect the Merger.
In arriving at our opinion, we reviewed and analyzed the Agreement and
certain other information concerning Hallmark and the Company. We reviewed and
analyzed the following items concerning Hallmark: (1) publicly avaliable
information concerning Hallmark which we believed to be relevant to our inquiry,
including its Annual Report on Form 10-K for the year ended June 30, 1993, its
Quarterly Report on Form 10-Q for the period ended March 31, 1994, its Proxy
Statement for the Annual Meeting of Stockholders held November 23, 1993, and its
Prospectus dated November 5, 1993 related to the public offering of $80,000,000
principal amount of 10 5/8% Senior Subordinated Notes due 2003; (2) a trading
history of Hallmark's common stock from June 1991 to the present and a
comparison of that trading history with those of other companies which we deemed
relevant; (3) a comparison of the historical financial results and present
financial condition of Hallmark with those other companies which we deemed
relevant; and (4) a comparison of the financial terms of the Merger with the
financial terms of certain other transactions which we deemed relevant. In
addition, we have had discussions with the management of Hallmark concerning its
business, operations, assets, financial condition and prospects and undertook
such other studies, analyses and investigations as we deemed appropriate.
We reviewed and analyzed the following items concerning the Company: (1)
publicly available information concerning the Company which we believed to be
relevant to our inquiry, including its Annual Report on Form 10-K for the year
ended December 31, 1993, its Quarterly Report on Form 10-Q for the period ended
March 31, 1994, and its Prospectus dated August 4, 1993 related to the public
offering of $100,000,000 principal amount of 10 1/4% Senior Subordinated
Debentures due 2003; (2) financial and operating information with respect to the
business, operations and prospects of the Company furnished to us by the
Company; (3) a trading history of the Company's common stock from June 1991 to
the present and a comparison of that trading history with those of other
companies
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<PAGE>
which we deemed relevant; (4) a comparison of the historical financial results
and present financial condition of the Company with those of other companies
which we deemed relevant; and (5) the pro forma effect of the Merger on the
financial statements of the Company. In addition, we have had discussions with
the management of the Company concerning its business, operations, assets,
financial condition and prospects and undertook such other studies, analyses and
investigations as we deemed appropriate.
We have assumed and relied upon the accuracy and completeness of the
financial and other information used by us in arriving at our opinion without
independent verification (including the information provided by Hallmark) and
have further relied upon the assurances of the management of the Company that
they are not aware of any facts that would make such information inaccurate or
misleading. With respect to the financial projections of the Company, including
those relating to a range of potential synergies that may result from the
Merger, upon advice of the Company we have assumed that such projections have
been reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the management of the Company as to the future
financial performance of the Company, and we have relied on such projections in
arriving at our opinion. However, in connection with our review and analysis of
Hallmark, we have not had any access to Hallmark's financial projections and
strategic plans for 1994 and subsequent years. In arriving at our opinion, we
have not conducted a physical inspection of the properties and facilities of
Hallmark or the Company and have not made nor obtained any evaluations or
appraisals of the assets or liabilities of Hallmark or the Company. Our opinion
is necessarily based upon market, economic, legislative, regulatory (including
current reimbursement practices under Medicare and Medicaid programs) and other
conditions as they exist on, and can be evaluated as of, the date of this
letter. Upon advice of the Company and its accounting advisors, we have assumed
that the merger will qualify for pooling-of-interests accounting treatment.
We have acted as financial advisor to the Company in connection with the
Merger and will receive a fee for our services, a portion of which is contingent
upon the consummation of the Merger. In addition, the Company has agreed to
indemnify us for certain liabilities arising out of the rendering of this
opinion. We also have performed various investment banking services for the
Company in the past (including as lead underwriter for the Company's public
offering of $100,000,000 principal amount of 10 1/4% Senior Subordinated
Debentures due 2003) and have received customary fee for such services. In the
ordinary course of our business, we may trade in the debt and equity securities
of the Company and Hallmark for our own account and for the accounts of our
customers and, accordingly, may at any time hold a long or short position in
such securities.
Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that, from a financial point of view, the consideration to be paid
by the Company in the Merger is fair to the Company.
This opinion is solely for the use and benefit of the Board of Directors of
the Company and shall not be disclosed publicly or made available to, or relied
upon by, any third party without our prior approval; provided, however, that the
Company may reproduce this opinion in full in any disclosure document or proxy
statement relating to the Merger that the Company must file under the Securities
Act of 1993 and distributed to its shareholders. This opinion is not intended to
be and does not constitute a recommendation to any stockholder of the Company as
to how such stockholder should vote with respect to the Merger.
Very truly yours,
LEHMAN BROTHERS
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APPENDIX D
FAIRNESS OPINION OF MABON SECURITIES CORP.
[Letterhead of Mabon Securities Corp.]
June 10, 1994
Board of Directors
Hallmark Healthcare Corporation
300 Galleria Parkway
Suite 650
Atlanta, Georgia 30339
Gentlemen:
We understand that Hallmark Healthcare Corporation, a Delaware corporation
("HALLMARK" or the "COMPANY"), intends, subject to approval by its Board of
Directors, to enter into an Agreement and Plan of Merger substantially in the
form delivered to us on June 9, 1994 (the "AGREEMENT OF MERGER") with a newly
formed acquisition corporation, a Delaware corporation (the "SUB"), and a
wholly-owned subsidiary of Community Health Systems, Inc., a Delaware
corporation ("COMMUNITY"), relating to the proposed merger of the Company with
and into Sub (which will be the surviving corporation in the merger) (the
"MERGER") pursuant to which, among other things: (a) each share of Class A
Common Stock, $.05 par value, of Hallmark and each share of Class B Common
Stock, $.05 par value, of Hallmark (collectively, the "HALLMARK COMMON STOCK")
issued and outstanding immediately prior to the effective time of the Merger
shall be converted into the right to receive .97 shares of Common Stock, $.01
par value (the "COMMUNITY COMMON STOCK"), of Community (the "EXCHANGE RATIO");
(b) each share of 25% Participating Cumulative Convertible Redeemable Preferred
Stock, $5.00 par value, of Hallmark issued and outstanding immediately prior to
the effective time of the Merger shall be converted into the right to receive
5.4 shares of Community Common Stock, and (c) all vested options to purchase
Hallmark Common Stock then outstanding under Hallmark's 1993 Stock Option Plan,
Long-Term Stock Incentive Plan -- 1989, Stock Incentive Performance Plan -- 1991
and 1991 Directors' Stock Option Plan (as amended) shall be assumed by Community
as provided in the Agreement of Merger.
The Merger is expected to be considered by the stockholders of the Company
at a special meeting of stockholders and to be consummated on or shortly after
the date of such meeting.
You have asked for our opinion as to whether the Exchange Ratio is fair to
the holders of Hallmark Common Stock from a financial point of view.
Mabon Securities Corp., as part of its investment banking business, is
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes.
We are familiar with the Company as a result of having provided investment
banking services to the Company since 1993. We have also acted as financial
advisor to the Company in connection with, and have participated in certain of
the negotiations leading to, the Agreement of Merger for which we will receive a
fee upon the consummation of the Merger, which fee is in addition to the fee to
be paid to us for our services in rendering this opinion.
In arriving at the opinion set forth below, we have, among other things,
with respect to Hallmark: (a) reviewed, from a financial point of view, the
Agreement of Merger and the annexes thereto, (b) studied the Annual Reports to
Stockholders and Annual Reports on Form 10-K for the years ended June 30, 1991
through 1993 and its interim reports on Form 10-Q and 8-K filed since June 30,
1993;
D-1
<PAGE>
(c) reviewed certain financial and operating data relating to Hallmark's
business and prospects, which information and data management of Hallmark has
represented to us as being accurate and, with respect to the prospects of
Hallmark, as being reasonable evaluations of Hallmark's prospects; (d) discussed
certain financial information and the business and prospects of Hallmark with
its senior management; (e) reviewed financial information (both historical and
forecast), certain contracts and agreements relating to the business of Hallmark
and discussed such financial information and the business and prospects of
Hallmark with management of Hallmark; (f) reviewed the reported historical and
recent market prices and trading volumes of the Hallmark Common Stock; (g)
compared the financial, operating and stock price performance of Hallmark with
certain other companies deemed comparable; (h) reviewed the financial terms, to
the extent publicly available, of certain other acquisition transactions deemed
comparable; and (i) made such other analyses and examinations as we deemed
necessary or appropriate. With respect to Community, we have, among other
things: (1) studied the Annual Reports to Stockholders and Annual Reports on
Form 10-K for the years ended December 31, 1991 through 1993 and its interim
reports on Form 10-Q and 8-K filed since December 31, 1993; (2) reviewed certain
financial and operating data relating to Community's business and prospects,
which information and data management of Community has represented to us as
being accurate and, with respect to the prospects of Community, as being
reasonable evaluations of Community's prospects; (3) discussed certain financial
information and the business and prospects of Community with its senior
management; (4) reviewed historical financial information, certain contracts and
agreements relating to the business of Community and discussed such financial
information and the business and prospects of Community with management of
Community; (5) reviewed the reported historical and recent market prices and
trading volumes of the Community Common Stock; (6) compared the financial,
operating and stock price performance of Community with certain other companies
deemed comparable; and (7) made such other analyses and examinations as we
deemed necessary or appropriate.
We have also taken into account our assessment of economic, market and
financial conditions generally and within the industry in which Hallmark and
Community are engaged.
We have not independently verified the information concerning Hallmark and
Community or other data which we have considered in our review, and for purposes
of the opinion set forth below, we have assumed and relied upon the accuracy and
completeness of all such information and data. We have not undertaken an
independent appraisal of any of Hallmark's assets or those of Community. With
respect to the financial forecasts and prospects of each of Hallmark and
Community, we have relied on the assurances of the respective managements of
Hallmark and Community that certain publicly available forecasts are accurate
and that (i) as to the respective forecast, they are unaware of any facts that
would make such information incomplete or misleading and (ii) there have been no
material adverse developments in the business condition (financial or otherwise)
or prospects of Hallmark or Community, respectively, since each company's most
recent fiscal year end.
Our opinion is necessarily based on economic, market and other conditions as
they exist, and the information made available to us, as of the date hereof. We
disclaim any undertaking or obligation to advise any person of any change in any
fact or matter affecting our opinion which may come or be brought to our
attention after the date of this opinion.
Based on the foregoing, we are of the opinion that the Merger is fair to the
holders of Common Stock of Hallmark from a financial point of view.
Sincerely yours,
MABON SECURITIES CORP.
By: /s/ PETER H. BLUM
-----------------------------------
Name: Peter H. Blum
Title: Managing Director
D-2
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the DGCL gives corporations the power to indemnify officers
and directors under certain circumstances.
Article VIII of Community's Restated Certificate of Incorporation and
Article X of Community's By-Laws provide for indemnification of officers and
directors to the extent permitted by the DGCL. Community also has policies
insuring its officers and directors against certain liabilities for actions
taken in such capacities, including liabilities under the Securities Act.
Article XI of Community's Restated Certificate of Incorporation adopted the
provision of Delaware law limiting or eliminating the potential monetary
liability of directors to Community or its stockholders for breaches of a
director's fiduciary duty of care. However, the provision does not limit or
eliminate the liability of a director for disloyalty to Community or its
stockholders, failing to act in good faith, engaging in intentional misconduct
or a knowing violation of the law, obtaining an improper personal benefit or
paying a dividend or approving a stock repurchase that was illegal under section
174 of the DGCL.
Reference is made to Section 7.12 of the Merger Agreement in which Community
has agreed, under certain circumstances, to indemnify the directors and officers
of Hallmark against certain liabilities.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
A. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------------- ------------------------------------------------------------------------------------------
<C> <C> <S>
2.1 -- Agreement and Plan of Merger, dated as of June 10, 1994, by and among Community,
Acquisition Corp. and Hallmark included in the Joint Proxy Statement/Prospectus as
Appendix A.
3.1(a) -- Fourth Restated Certificate of Incorporation of the Company.
3.2(a) -- Amended and Restated By-Laws of the Company.
4(a) -- Specimen certificate of Common Stock, $0.01 Par Value, and portion of Certificate of
Incorporation defining rights of holders.
5.1 -- Opinion of McGlinchey Stafford Lang re legality of shares to be issued.
8.1 -- Opinion of McGlinchey Stafford Lang re certain tax matters.
8.2 -- Opinion of King & Spalding re certain tax matters.
10.4(a) -- Hospital Authority of Fannin County, Georgia Revenue Anticipation Certificates, Series
1982.
10.10(a) -- Hospital Management Agreement dated December 31, 1988 between the Company and the Hospital
Authority of Fannin County.
10.11(a) -- Option Agreement dated December 31, 1988 between the Company and the Hospital Authority of
Fannin County.
10.13(a) -- Lease dated November 1, 1987 between the Company and Enid Memorial Hospital, as amended.
10.14(a) -- Management Agreement dated November 1, 1987 between the Company and Enid Memorial
Hospital.
10.15(a) -- Scott County Hospital Operating Agreement dated November 1, 1989.
10.16(l) -- Amended and Restated Employment Agreement dated December 15, 1993 between the Company and
David L. Steffy.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------------- ------------------------------------------------------------------------------------------
<C> <C> <S>
10.17.1(l) -- Amended and Restated Employment Agreement dated December 15, 1993 between the Company and
Richard E. Ragsdale.
10.18.1(h) -- Restated Consulting Agreement dated July 1, 1992 between the Company and Thomas P. Cooper,
M.D.
10.19(l) -- Amended and Restated Employment Agreement dated December 15, 1993 between the Company and
E. Thomas Chaney.
10.20.5(l) -- Amended and Restated Employment Agreement dated December 15, 1993 between the Company and
Tyree G. Wilburn.
10.20.6(l) -- Employment Agreement dated March 1, 1994 between the Company and Martin S. Rash.
10.22(c) -- Second Amended and Restated 1986 General Nonqualified Stock Option Plan.
10.23(h) -- Third Amended and Restated 1986 Executive Nonqualified Stock Option Plan.
10.23.1(a) -- Stock Option Agreement dated July 1, 1988 between the Company and Thomas P. Cooper, M.D.,
as amended.
10.24(l) -- Description of Incentive Compensation Program for executive officers not under employment
agreements with the Company.
10.26(b) -- Trust Indenture dated as of October 29, 1991 between Community Health Systems, Inc. and
Texas Commerce Bank National Association, as Trustee.
10.28(d) -- Transition Service Agreement dated September 30, 1991 by and between Community Health
Systems, Inc. and Subsidiaries and EPIC Healthcare Group, Inc. and Subsidiaries.
10.29(f) -- Amended and Restated Credit Agreement dated as of August 14, 1992 between Community Health
Systems, Inc. and the lenders named in the Credit Agreement and First Union National Bank
of North Carolina as the Issuing Bank and as the Agent.
10.29.1(h) -- First Amendment to the Amended and Restated Credit Agreement dated as of August 14, 1992.
10.29.2(h) -- Second Amendment to the Amended and Restated Credit Agreement dated as of August 14, 1992.
10.29.3(h) -- Third Amendment to the Amended and Restated Credit Agreement dated as of August 14, 1992.
10.29.4(i) -- Fourth Amendment to the Amended and Restated Credit Agreement dated as of August 14, 1992.
10.29.5(j) -- Fifth Amendment to the Amended and Restated Credit Agreement dated as of August 14, 1992.
10.29.6(l) -- Sixth Amendment to the Amended and Restated Credit Agreement dated as of August 14, 1992.
10.29.7(m) -- Amended and Restated Seventh Amendment to the Amended and Restated Credit Agreement dated
as of August 14, 1992.
10.29.8(m) -- Eighth Amendment to the Amended and Restated Credit Agreement dated as of August 14, 1992.
10.30 -- Amended and Restated Credit Agreement dated as of August 24, 1994 among Community Health
Systems, Inc., the lenders named therein, NationsBank of Tennessee, N.A., as
Administrative Agent, and First Union National Bank of North Carolina, as Co-Agent and
Issuing Bank.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------------- ------------------------------------------------------------------------------------------
<C> <C> <S>
10.30.1* -- Credit Agreement dated as of August 24, 1994 among Community Health Systems, Inc., the
lenders named therein, NationsBank of Tennessee, N.A., as Administrative Agent, and First
Union National Bank of North Carolina as Co-Agent.
10.31(g) -- Stock Purchase Agreement dated May 20, 1992 between Park Healthcare and certain of its
subsidiaries as Sellers, and Community Health Systems, Inc. and its wholly-owned
subsidiary Community Health Investment Corporation, as Buyers, relating to the stock
purchase of Parkwood and Parkway Regional Hospitals.
10.32(h) -- Lease dated January 13, 1993 between the City of Barstow, California and Hospital of
Barstow, Inc.
10.32.1(l) -- First Amendment to Hospital Lease Agreement between the City of Barstow, California and
Hospital of Barstow, Inc.
10.32(k) -- Stock Purchase Agreement dated May 27, 1993 between Galen Health Care, Inc. and certain of
its subsidiaries, as Sellers, and Community Health Systems, Inc. and its wholly-owned
subsidiary, Community Health Investment Corporation, as Buyers, relating to the stock
purchase of Three Rivers Medical Center and Lakeway Regional Hospital.
10.34(l) -- Amended Community Health Systems Deferred Compensation Plan dated December 10, 1993.
10.35(l) -- Description of Community Health Systems Supplemental Survivor Accumulation Plan.
10.33(j) -- Trust Indenture dated as of August 11, 1993 between Community Health Systems, Inc. and
NationsBank of Tennessee, N.A., Trustee.
11.1(n) -- Computation of net income per share.
12.1 -- Statements re computation of ratios.
21(l) -- List of subsidiaries of Community.
23.1 -- Consent of Arthur Andersen & Co. (relating to Community Health Systems, Inc.).
23.2 -- Consent of Arthur Andersen & Co. (relating to Hallmark Healthcare Corporation).
23.3 -- Consent of McGlinchey Stafford Lang (included in Exhibits 5.1 and 8.1).
23.4 -- Consent of King & Spalding (included in Exhibit 8.2).
23.5 -- Consent of Lehman Brothers.
23.6 -- Consent of Mabon Securities Corp.
23.7 -- Consent of James T. McAfee, Jr.
23.8 -- Consent of Kay W. Slayden.
24.1 -- Power of attorney of each director and officer of Community whose name appears on the
signature page and followed by an asterisk (contained on page II-6).
99.1 -- Form of Proxy of Community.
99.2 -- Form of Proxy of Hallmark.
</TABLE>
- ------------------------
(a) Incorporated by reference from exhibit of the same number to Community's
Registration Statement on Form S-1, Commission File No. 33-36010.
II-3
<PAGE>
(b) Incorporated by reference from exhibit of the same number to Community's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1991.
(c) Incorporated by reference from Community's Amendment No. 1 to Form S-8 as
filed on December 20, 1991, Commission File No. 33-39526 (Exhibits 4.3 and
4.4).
(d) Incorporated by reference from Community's Current Report on Form 8-K, dated
September 30, 1991 (Exhibits 2.1 and 2.2).
(e) Reserved.
(f) Incorporated by reference from exhibit of the same number to Community's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1992.
(g) Incorporated by reference from Community's Current Report on Form 8-K, dated
May 20, 1992 (Exhibit 2.3).
(h) Incorporated by reference from exhibit of the same number to Community's
Annual Report on Form 10-K for the year ended December 31, 1992.
(i) Incorporated by reference from Community's Registration Statement on Form
S-3, Commission File No. 33-64534 (Exhibit 4.3).
(j) Incorporated by reference from exhibit of the same number to Community's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1993.
(k) Incorporated by reference from Community's Current Report on Form 8-K dated
May 27, 1993 (Exhibit 2.4).
(l) Incorporated by reference from exhibit of the same number to Community's
Annual Report on Form 10-K for the year ended December 31, 1993.
(m) Incorporated by reference from exhibit of the same number to Community's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1994.
(n) Incorporated by reference from exhibit of the same number to Hallmark's
Annual Report on Form 10-K for three years ended June 30, 1993 and
Hallmark's Quarterly Report on Form 10-Q for the quarter ended March 31,
1994.
- ------------------------
* To be filed by amendment.
B. FINANCIAL STATEMENT SCHEDULES.
None required.
C. REPORTS, OPINIONS OR APPRAISALS.
Information requested hereunder is furnished as Appendices as Exhibits C and
D to the Joint Proxy Statement/Prospectus.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act (and each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference
in this Registration Statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(b) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration
II-4
<PAGE>
Statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other items of the applicable form.
(c) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (b) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to this Registration Statement and will not be used until
such amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(d) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(e) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of this Registration Statement through the date
of responding to the request.
(f) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in this Registration Statement when it became effective.
II-5
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas,
on August 24, 1994.
COMMUNITY HEALTH SYSTEMS, INC.
By /s/ E. THOMAS CHANEY
-----------------------------------
E. Thomas Chaney
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Deborah G. Moffett, T. Mark Buford and Alan
Jacobs, and each or any one of them, his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitutes or
substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date or dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ------------------------------------------------------ ------------------------------------ -------------------
<C> <S> <C>
/s/ E. THOMAS CHANEY President and Chief Executive
------------------------------------------- Officer and Director
E. Thomas Chaney (Principal executive officer)
/s/ DEBORAH G. MOFFETT
------------------------------------------- Vice President -- Finance
Deborah G. Moffett (Principal financial officer)
/s/ T. MARK BUFORD Vice President and Corporate
------------------------------------------- Controller (Principal accounting
T. Mark Buford officer)
/s/ RICHARD E. RAGSDALE
------------------------------------------- Director
Richard E. Ragsdale
August 24, 1994
/s/ THOMAS P. COOPER, M.D.
------------------------------------------- Director
Thomas P. Cooper, M.D.
/s/ M. RAY FERGUSON
------------------------------------------- Director
M. Ray Ferguson
/s/ GEORGE O. JOHNSON, Ph.D.
------------------------------------------- Director
George O. Johnson, Ph.D.
/s/ DAVID L. STEFFY
------------------------------------------- Director
David L. Steffy
</TABLE>
II-6
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
TOTAL OF
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGES
- ------------- ---------------------------------------------------------------------------------- ------------
<C> <C> <S> <C>
2.1 -- Agreement and Plan of Merger, dated as of June 10, 1994, by and among Community,
Acquisition Corp. and Hallmark included in the Joint Proxy Statement/Prospectus as
Appendix A.
3.1(a) -- Fourth Restated Certificate of Incorporation of the Company.
3.2(a) -- Amended and Restated By-Laws of the Company.
4(a) -- Specimen certificate of Common Stock, $0.01 Par Value, and portion of Certificate
of Incorporation defining rights of holders.
5.1 -- Opinion of McGlinchey Stafford Lang re legality of shares to be issued.
8.1 -- Opinion of McGlinchey Stafford Lang re certain tax matters.
8.2 -- Opinion of King & Spalding re certain tax matters.
10.4(a) -- Hospital Authority of Fannin County, Georgia Revenue Anticipation Certificates,
Series 1982.
10.10(a) -- Hospital Management Agreement dated December 31, 1988 between the Company and the
Hospital Authority of Fannin County.
10.11(a) -- Option Agreement dated December 31, 1988 between the Company and the Hospital
Authority of Fannin County.
10.13(a) -- Lease dated November 1, 1987 between the Company and Enid Memorial Hospital, as
amended.
10.14(a) -- Management Agreement dated November 1, 1987 between the Company and Enid Memorial
Hospital.
10.15(a) -- Scott County Hospital Operating Agreement dated November 1, 1989.
10.16(l) -- Amended and Restated Employment Agreement dated December 15, 1993 between the
Company and David L. Steffy.
10.17.1(l) -- Amended and Restated Employment Agreement dated December 15, 1993 between the
Company and Richard E. Ragsdale.
10.18.1(h) -- Restated Consulting Agreement dated July 1, 1992 between the Company and Thomas P.
Cooper, M.D.
10.19(l) -- Amended and Restated Employment Agreement dated December 15, 1993 between the
Company and E. Thomas Chaney.
10.20.5(l) -- Amended and Restated Employment Agreement dated December 15, 1993 between the
Company and Tyree G. Wilburn.
10.20.6(l) -- Employment Agreement dated March 1, 1994 between the Company and Martin S. Rash.
10.22(c) -- Second Amended and Restated 1986 General Nonqualified Stock Option Plan.
10.23(h) -- Third Amended and Restated 1986 Executive Nonqualified Stock Option Plan.
10.23.1(a) -- Stock Option Agreement dated July 1, 1988 between the Company and Thomas P.
Cooper, M.D., as amended.
10.24(l) -- Description of Incentive Compensation Program for executive officers not under
employment agreements with the Company.
10.26(b) -- Trust Indenture dated as of October 29, 1991 between Community Health Systems,
Inc. and Texas Commerce Bank National Association, as Trustee.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TOTAL OF
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGES
- ------------- ---------------------------------------------------------------------------------- ------------
<C> <C> <S> <C>
10.28(d) -- Transition Service Agreement dated September 30, 1991 by and between Community
Health Systems, Inc. and Subsidiaries and EPIC Healthcare Group, Inc. and
Subsidiaries.
10.29(f) -- Amended and Restated Credit Agreement dated as of August 14, 1992 between
Community Health Systems, Inc. and the lenders named in the Credit Agreement and
First Union National Bank of North Carolina as the Issuing Bank and as the Agent.
10.29.1(h) -- First Amendment to the Amended and Restated Credit Agreement dated as of August
14, 1992.
10.29.2(h) -- Second Amendment to the Amended and Restated Credit Agreement dated as of August
14, 1992.
10.29.3(h) -- Third Amendment to the Amended and Restated Credit Agreement dated as of August
14, 1992.
10.29.4(i) -- Fourth Amendment to the Amended and Restated Credit Agreement dated as of August
14, 1992.
10.29.5(j) -- Fifth Amendment to the Amended and Restated Credit Agreement dated as of August
14, 1992.
10.29.6(l) -- Sixth Amendment to the Amended and Restated Credit Agreement dated as of August
14, 1992.
10.29.7(m) -- Amended and Restated Seventh Amendment to the Amended and Restated Credit
Agreement dated as of August 14, 1992.
10.29.8(m) -- Eighth Amendment to the Amended and Restated Credit Agreement dated as of August
14, 1992.
10.30 -- Amended and Restated Credit Agreement dated as of August 24, 1994 among Community
Health Systems, Inc., the lenders named therein, NationsBank of Tennessee, N.A.,
as Administrative Agent, and First Union National Bank of North Carolina, as
Co-Agent and Issuing Bank.
10.30.1* -- Credit Agreement dated as of August 24, 1994 among Community Health Systems, Inc.,
the lenders named therein, NationsBank of Tennessee, N.A., as Administrative
Agent, and First Union National Bank of North Carolina as Co-Agent.
10.31(g) -- Stock Purchase Agreement dated May 20, 1992 between Park Healthcare and certain of
its subsidiaries as Sellers, and Community Health Systems, Inc. and its
wholly-owned subsidiary Community Health Investment Corporation, as Buyers,
relating to the stock purchase of Parkwood and Parkway Regional Hospitals.
10.32(h) -- Lease dated January 13, 1993 between the City of Barstow, California and Hospital
of Barstow, Inc.
10.32.1(l) -- First Amendment to Hospital Lease Agreement between the City of Barstow,
California and Hospital of Barstow, Inc.
10.32(k) -- Stock Purchase Agreement dated May 27, 1993 between Galen Health Care, Inc. and
certain of its subsidiaries, as Sellers, and Community Health Systems, Inc. and
its wholly-owned subsidiary, Community Health Investment Corporation, as Buyers,
relating to the stock purchase of Three Rivers Medical Center and Lakeway Regional
Hospital.
10.34(l) -- Amended Community Health Systems Deferred Compensation Plan dated December 10,
1993.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TOTAL OF
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGES
- ------------- ---------------------------------------------------------------------------------- ------------
<C> <C> <S> <C>
10.35(l) -- Description of Community Health Systems Supplemental Survivor Accumulation Plan.
10.33(j) -- Trust Indenture dated as of August 11, 1993 between Community Health Systems, Inc.
and NationsBank of Tennessee, N.A., Trustee.
11.1(n) -- Computation of net income per share.
12.1 -- Statements re computation of ratios.
21(l) -- List of subsidiaries of Community.
23.1 -- Consent of Arthur Andersen & Co. (relating to Community Health Systems, Inc.).
23.2 -- Consent of Arthur Andersen & Co. (relating to Hallmark Healthcare Corporation).
23.3 -- Consent of McGlinchey Stafford Lang (included in Exhibits 5.1 and 8.1).
23.4 -- Consent of King & Spalding (included in Exhibit 8.2).
23.5 -- Consent of Lehman Brothers.
23.6 -- Consent of Mabon Securities Corp.
23.7 -- Consent of James T. McAfee, Jr.
23.8 -- Consent of Kay W. Slayden.
24.1 -- Power of attorney of each director and officer of Community whose name appears on
the signature page and followed by an asterisk (contained on page II-6).
99.1 -- Form of Proxy of Community.
99.2 -- Form of Proxy of Hallmark.
</TABLE>
- ------------------------
(a) Incorporated by reference from exhibit of the same number to Community's
Registration Statement on Form S-1, Commission File No. 33-36010.
(b) Incorporated by reference from exhibit of the same number to Community's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1991.
(c) Incorporated by reference from Community's Amendment No. 1 to Form S-8 as
filed on December 20, 1991, Commission File No. 33-39526 (Exhibits 4.3 and
4.4).
(d) Incorporated by reference from Community's Current Report on Form 8-K, dated
September 30, 1991 (Exhibits 2.1 and 2.2).
(e) Reserved.
(f) Incorporated by reference from exhibit of the same number to Community's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1992.
(g) Incorporated by reference from Community's Current Report on Form 8-K, dated
May 20, 1992 (Exhibit 2.3).
(h) Incorporated by reference from exhibit of the same number to Community's
Annual Report on Form 10-K for the year ended December 31, 1992.
(i) Incorporated by reference from Community's Registration Statement on Form
S-3, Commission File No. 33-64534 (Exhibit 4.3).
(j) Incorporated by reference from exhibit of the same number to Community's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1993.
<PAGE>
(k) Incorporated by reference from Community's Current Report on Form 8-K dated
May 27, 1993 (Exhibit 2.4).
(l) Incorporated by reference from exhibit of the same number to Community's
Annual Report on Form 10-K for the year ended December 31, 1993.
(m) Incorporated by reference from exhibit of the same number to Community's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1994.
(n) Incorporated by reference from exhibit of the same number to Hallmark's
Annual Report on Form 10-K for three years ended June 30, 1993 and
Hallmark's Quarterly Report on Form 10-Q for the quarter ended March 31,
1994.
- ------------------------
* To be filed by amendment.
<PAGE>
EXHIBIT 5.1
August __, 1994
Community Health Systems, Inc.
3707 FM 1960 West
Suite 500
Houston, Texas 77068
Gentlemen:
As special counsel for Community Health Systems, Inc., a Delaware corporation
(the "Company"), we are representing the Company in connection with the
proposed issuance by the Company of up to 3,600,000 shares of Common Stock,
par value $.01 per share (the "Shares"), pursuant to the terms of an Amended
and Restated Agreement and Plan of Merger (the "Merger Agreement"), dated as
of June 10, 1994, by and among the Company, Community Acquisition Corp., a
Delaware corporation, and Hallmark Healthcare Corporation, a Delaware
corporation. In such connection, we have examined:
(a) the Amended and Restated Certificate of Incorporation of the Company;
(b) the Bylaws, as amended, of the Company;
(c) pertinent corporate minutes of the Company;
(d) the Merger Agreement; and
(e) the Registration Statement on Form S-4 (the "Registration Statement") to
be filed with the Securities and Exchange Commission, registering the
Shares to be issued by the Company pursuant to the Merger Agreement.
Based upon our examination of the foregoing and of such other documents,
certificates and instruments as we have deemed necessary to the expression of
the opinions hereinafter set forth, we are of the opinion that the Shares have
been duly authorized and, when issued as provided in the Merger Agreement, will
be validly issued, fully paid and nonassessable.
<PAGE>
We consent to the use of this opinion as an exhibit to the Registration
Statement and to the reference to our firm under the caption "Legal Opinions"
appearing in the Joint Proxy Statement/Prospectus included in the Registration
Statement.
Very truly yours,
<PAGE>
EXHIBIT 8.1
October __, 1994
Community Health Systems, Inc.
3707 FM 1960 West
Suite 500
Houston, Texas 77068
Gentlemen:
We have acted as special counsel to Community Health Systems, Inc., a
Delaware corporation ("Community"), in connection with the proposed merger (the
"Merger") of Hallmark Healthcare Corporation, a Delaware corporation
("Hallmark"), with and into Community Acquisition Corp., a Delaware corporation
("Sub"), pursuant to the terms of an Amended and Restated Agreement and Plan of
Merger, dated as of June 10, 1994 (the "Merger Agreement"), by and among
Community, Hallmark and Sub, as described in the Registration Statement on Form
S-4 (File No. 33- ) filed by Community with the Securities and Exchange
Commission (the "Registration Statement"). This opinion is being rendered
pursuant to Section 8.3(b) of the Merger Agreement. All capitalized terms,
unless otherwise specified, have the meaning assigned to them in the
Registration Statement.
In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of (i) the Merger
Agreement, (ii) the Registration Statement and (iii) such other documents,
certificates and instruments as we have deemed necessary or appropriate in order
to enable us to render the opinions set forth below. In our examination, we have
assumed the genuineness of all signatures, the legal capacity of all natural
persons, the authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as certified,
conformed or photostatic copies and the authenticity of the originals of such
copies. In rendering the opinions set forth below, we have relied upon such
written certificates of officers of Community and Hallmark as we deemed
necessary or appropriate.
In rendering our opinion, we have considered the applicable provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations,
pertinent judicial authorities, interpretive rulings of the Internal Revenue
Service and such other authorities as we have considered relevant.
<PAGE>
Based upon and subject to the foregoing, we are of the opinion that the
Merger will, under current law, constitute a tax-free reorganization under
Section 368(a) of the Code, and that Community, Sub, and Hallmark will each be
a party to the reorganization within the meaning of Section 368(b) of the Code.
As a tax-free reorganization, the Merger will have the following Federal
income tax consequences for Hallmark stockholders, Hallmark and Community:
1. No gain or loss will be recognized by holders of Class A Common Stock,
$.05 par value per share, of Hallmark or Class B Common Stock, $.05 par
value per share, of Hallmark (collectively "Hallmark Common Stock") or 25%
Participating Cumulative Convertible Redeemable Preferred Stock, $5.00 par
value per share, of Hallmark ("Hallmark Preferred Stock"), as a result of
the exchange of such shares for shares of Common Stock, $.01 par value per
share, of Community ("Community Common Stock") pursuant to the Merger.
2. Gain or loss will be recognized by Hallmark stockholders of the
receipt of cash, if any, received in lieu of fractional shares of Community
Common Stock. Any cash received by a stockholder of Hallmark in lieu of a
fractional share will, subject to the conditions and limitations of Section
302 of the Code, be treated as received in exchange for such fractional share
and not as a dividend. If a fractional share of Community Common Stock would
constitute a capital asset in the hands of such Hallmark stockholder, then
any gain or loss recognized as a result of the receipt of such cash will be
a capital gain or loss in accordance with the provisions and limitations of
Subchapter P of Chapter 1 of the Code.
3. A holder of Hallmark Preferred Stock who perfects his statutory right
to dissent from the Merger and who receives solely cash in exchange for his
Hallmark Preferred Stock will be treated as having received such cash payment
as a distribution in redemption of his shares of Hallmark Preferred Stock
subject to the provisions and limitations of Section 302 of the Code. If a
dissenting Hallmark stockholder owns only Hallmark Preferred Stock, he will
recognize capital gain or loss in accordance with the provisions and
limitations of Subchapter P of Chapter 1 of the Code. However, if a
dissenting stockholder also owns Hallmark Common Stock, he may be required
to report all amounts received in payment for his Hallmark Preferred Stock
as ordinary dividend income.
<PAGE>
4. Neither Community nor Hallmark will recognize gain or loss as a
result of the Merger.
Except as set forth above, we express no opinion as to the tax consequences
to any party, whether Federal, state, local or foreign, of the Merger or of any
transactions related to the Merger or contemplated by the Merger Agreement.
This opinion is being furnished only to you in connection with the Merger and
solely for your benefit and may not be relied upon for any other purpose.
Moreover, this opinion is specifically limited to applicable Federal income
tax law in effect as of the date hereof. We undertake no responsiblility to
advise you of any changes in Federal income tax law or as to any events that
occur or as to any amendment of any of the documents referred to herein, after
the date hereof that may alter the scope or substance of this opinion.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and to the summary of this opinion under the caption "Federal Income
Tax Consequences" and to the reference to this firm under the caption "Legal
Opinions" in the Joint Proxy Statement/Prospectus included in the Registration
Statement.
McGLINCHEY STAFFORD LANG,
A Law Corporation
By:______________________________
<PAGE>
EXHIBIT 8.2
[LETTERHEAD OF KING & SPALDING]
August 23, 1994
Hallmark Healthcare Corporation
300 Galleria Parkway
Suite 650
Atlanta, Georgia 30339
Gentlemen:
We have acted as counsel to Hallmark Healthcare Corporation ("Hallmark") in
connection with the merger (the "Merger") of Hallmark into Community Acquisition
Corp., a wholly owned subsidiary of Community Health Systems, Inc.
("Community"). The Merger is described in the Joint Proxy Statement/Prospectus
(the "Joint Proxy/Statement Prospectus") dated August 26, 1994 that forms a part
of the Registration Statement on Form S-4 that will be filed with the Securities
and Exchange Commission (the "Registration Statement").
All capitalized terms used herein without definition have the respective
meanings specified in the Joint Proxy Statement/Prospectus.
You have requested our opinion with respect to certain federal income tax
consequences of the Merger. We understand that our opinion will be attached as
an Exhibit to the Registration Statement and that our opinion will be referred
to in the Joint Proxy Statement/Prospectus. We hereby consent to such use of our
opinion.
In rendering the opinion expressed herein, we have examined such documents
as we have deemed appropriate, including the Joint Proxy Statement/Prospectus.
In our examination of documents, we have assumed, with your consent, that all
documents submitted to us are authentic originals or, if submitted as
photocopies, faithfully reproduce the originals thereof, that all such documents
have been or will be duly executed to the extent required, that all
representations and statements set forth in such documents are true and correct,
and that all obligations imposed by any such documents on the parties thereto
have been or will be performed or satisfied in accordance with their terms. We
also have obtained such additional information and representations as we have
deemed relevant and necessary through consultation with the officers of
Hallmark.
The obligation of Hallmark to consummate the Merger is conditioned upon its
receipt of our opinion at the Effective Time concerning the federal income tax
treatment of the Merger. Such future opinion will be based upon certain factual
assumptions that are to be confirmed by written certificates signed by
appropriate officers of Hallmark and Community shortly before the consummation
of the Merger. In rendering our opinion herein, we express no view as to our
ability to render any opinion concerning the Merger at the Effective Time.
Based upon and subject to the foregoing, it is our opinion that:
(i) the Merger will constitute a "reorganization" within the meaning of
Section 368(a) of the Code;
<PAGE>
Hallmark Healthcare Corporation
August 23, 1994
Page 2
(ii) the exchange in the Merger of Hallmark Common Stock and Hallmark
Preferred Stock for Community Common Stock will not give rise to gain or
loss to the Hallmark stockholders with respect to such exchange; and
(iii) the federal income tax consequences to Hallmark stockholders who
receive cash in lieu of fractional shares of Community Common Stock, or who
dissent to the Merger and receive cash payment for their Hallmark Preferred
Stock, are fairly and accurately described in the Joint Proxy
Statement/Prospectus.
The opinion expressed herein is based upon existing statutory, regulatory
and judicial authority, any of which may be changed at any time with retroactive
effect. In addition, as noted above, our opinion is based solely on the
documents that we have examined, the additional information that we have
obtained, and the representations that have been made to us. Our opinion cannot
be relied upon if any of the facts contained in such documents or if such
additional information is, or later becomes, inaccurate or if any of the
representations made to us is, or later becomes, inaccurate.
Finally, our opinion is limited to the tax matters specifically discussed
herein, and we have not been asked to address, nor have we addressed, any other
tax consequences relating to the Merger.
Very truly yours,
KING & SPALDING
<PAGE>
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- --------------------------------------------------------------------------------
AMENDED AND RESTATED
CREDIT AGREEMENT
Dated as of August , 1994
Among
COMMUNITY HEALTH SYSTEMS, INC.,
as the Borrower,
All of its present and future Subsidiaries
that become parties hereto, as Guarantors,
the Lenders identified herein,
NATIONSBANK OF TENNESSEE, N.A.,
as Administrative Agent
and
FIRST UNION NATIONAL BANK OF NORTH CAROLINA,
as Co-Agent and Issuing Bank
$ 150,000,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
AMENDED AND RESTATED CREDIT AGREEMENT
THIS AMENDED AND RESTATED CREDIT AGREEMENT (this "AGREEMENT"), dated as
of August , 1994, is made and entered into on the terms and conditions
hereinafter set forth, by and among COMMUNITY HEALTH SYSTEMS, INC., a Delaware
corporation (the "BORROWER"), all subsidiaries of the Borrower now or hereafter
becoming parties to this Agreement (collectively, the "GUARANTORS" and,
individually, a "GUARANTOR"), those several lenders who are or become parties to
this Agreement (collectively, the "LENDERS" and, individually, a "LENDER"),
NATIONSBANK OF TENNESSEE, N.A., a national banking association with principal
offices in Nashville, Tennessee ("NATIONSBANK"), as administrative agent for the
Lenders and the Issuing Bank (in such capacity, the "ADMINISTRATIVE AGENT"),
FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a national banking association with
principal offices in Charlotte North Carolina ("FIRST UNION"), as the Issuing
Bank and as co-agent for the Lenders and the Issuing Bank (in such capacity, the
"CO-AGENT").
THE PARTIES HERETO AGREE AS FOLLOWS:
ARTICLE 1
DEFINITIONS, ACCOUNTING TERMS
AND PRINCIPLES OF CONSTRUCTION
1.1. DEFINED TERMS. In addition to terms defined elsewhere herein, the
following terms, as used in this Agreement, shall have the respective meanings
set forth below (terms defined in the singular to have the same meaning when
used in the plural, and vice versa, unless otherwise expressly indicated):
"ACQUIRED ASSET CASH FLOW" shall mean, with respect to any Permitted
Acquisition by the Borrower or any Guarantor of an acute care hospital business,
the net income (adjusted for customary exclusions with respect to extraordinary
and nonrecurring items) of the acquired entity, PLUS its Interest Expense, PLUS
any provision for taxes based on income or profits that was deducted in
computing its net income, PLUS its charges for depreciation and amortization of
intangible assets, all computed in accordance with GAAP for the twelve (12)
month period immediately preceding such acquisition, adjusted for cost savings
in the expense categories of salaries, employee benefits, medical specialist
fees, management fees, purchased services and supplies that the Borrower
reasonably anticipates, on the basis of historical experience, will result from
such acquisition.
<PAGE>
"ADMINISTRATIVE AGENT" shall mean NationsBank or such successor
Administrative Agent as may be appointed by the Lenders pursuant to SECTION
12.10 hereof.
"AFFILIATE" shall mean, as to any Person, any other Person, directly
or indirectly controlling (including all directors, officers and employees of
such Person), directly or indirectly controlled by or under direct or indirect
common control with such Person.
"AGENTS" shall mean the Administrative Agent and the Co-Agent or
either of them as the context may require.
"APPLICABLE BANKRUPTCY LAW" shall mean, with respect to any Guarantor,
Title 11 of the United States Code, as amended from time to time, and any other
laws governing bankruptcy, suspension of payments, reorganization, arrangement,
adjustment of debts, relief of debtors, dissolution, insolvency or other similar
laws applicable to such Guarantor.
"APPLICABLE BASE RATE MARGIN" shall mean the margin to be added to the
Base Rate for purposes of determining the interest rate(s) applicable to Base
Rate Loans from time to time, which shall be determined as provided in SECTION
2.13.
"APPLICABLE COMMITMENT FEE PERCENTAGE" shall mean the percentage to be
used to calculate Commitment Fees from time to time, which shall be determined
as provided in SECTION 2.13.
"APPLICABLE LETTER OF CREDIT FEE PERCENTAGE" shall mean the percentage
to be used to calculate Letter of Credit Fees from time to time, which shall be
determined as provided in SECTION 2.13.
"APPLICABLE LIBOR MARGIN" shall mean the margin to be added to LIBOR
for purposes of determining the interest rate(s) applicable to LIBOR Loans from
time to time, which shall be determined as provided in SECTION 2.13.
"ASSET ACQUISITION" shall mean (i) any investment by the Borrower or
any of its Subsidiaries in any other Person pursuant to which such Person shall
become a Subsidiary of the Borrower or any of its Subsidiaries or shall be
merged with the Borrower or any of its Subsidiaries or (ii) any acquisition by
the Borrower or any of its Subsidiaries of (a) the assets of any Person that
constitute substantially all of an operating unit or business of such Person or
(b) any health care facility.
"ASSIGNMENT AND ACCEPTANCE" shall mean an assignment and acceptance,
substantially in the form of EXHIBIT 13.2, between a transferor Lender and a
proposed transferee, regarding the sale, assignment, transfer or other
disposition (other than
2
<PAGE>
the sale of a participation) of all or any amount of the Commitments, Loans and
participations in the Letters of Credit of such Lender.
"ASSIGNMENT AND SECURITY AGREEMENT" shall mean the Assignment and
Security Agreement, substantially in the form of EXHIBIT 4.1B, executed by the
Borrower and certain of the Guarantors, granting in favor of the Administrative
Agent for the ratable benefit of the Lenders a valid, first-priority, perfected
security interest in all rights, title and interest of the Borrower and such
Guarantors in all partnerships and joint ventures in which the Borrower or any
of its Subsidiaries own interests aggregating at least fifty percent (50%) of
the ownership interests therein.
"BASE LIBOR" shall mean the rate per annum for offered Dollar deposits
in the interbank Eurodollar market appearing on page 3750 of the TELERATE rate
reporting system at about 11:00 a.m., Eastern time, on the Interest Rate
Determination Date immediately prior to the beginning of the Interest Period for
the corresponding LIBOR Loan, for the number of months comprised therein and in
an amount equal to the amount of such LIBOR Loan to be outstanding during such
Interest Period. Without limiting the provisions of SECTION 2.14.3, in the
event that prior to the Termination Date TELERATE quotes for Base Libor are
discontinued or become unascertainable, the Administrative Agent may designate a
comparable resource for use in determining Base LIBOR for purposes hereof.
"BASE Rate" shall mean, for any period, the greater of (a) the
fluctuating rate of interest per annum from time to time established by
NationsBank as its "prime rate", regardless of whether published or publicly
announced, or (b) a fluctuating rate of interest per annum equal to one-half of
one percentage point (0.5%) in excess of the Federal Funds Rate in effect from
time to time. Each change in the Base Rate shall be effective as of the opening
of business on the day such change occurs. The parties hereto acknowledge that
the rate established by NationsBank as its "prime rate" is an index or base rate
and is not necessarily the lowest rate charged to its customers or other banks.
In the event that prior to the Termination Date NationsBank discontinues or
abandons the practice of establishing a prime rate, or should the same become
unascertainable, the Administrative Agent shall designate a comparable reference
rate for use in determining the Base Rate for purposes hereof.
"BASE RATE LOANS" shall mean Loans bearing interest at rates
determined by reference to the Base Rate.
"BOND DOCUMENTS" shall mean the Series A and Series B Bond Documents,
the Fulton Bond Documents and the Olive Branch Bond Documents.
3
<PAGE>
"BOND PLEDGE AGREEMENTS" shall mean (a) the Bond Pledge Agreement
dated October 24, 1991, from the Borrower to First Union, as amended by a First
Amendment to Bond Pledge Agreement dated or to be dated on or about the date
hereof, in substantially the form of EXHIBIT 4.1C, with respect to the Series A
Bonds, (b) the Bond Pledge Agreement dated October 24, 1991, from the Borrower
to First Union, as amended by a First Amendment to Bond Pledge Agreement dated
or to be dated on or about the date hereof, in substantially the form of EXHIBIT
4.1D, with respect to the Series B Bonds, (c) the Bond Pledge Agreement dated
August 14, 1992, among Hospital of Fulton, Inc, a Kentucky corporation, the
Borrower and First Union, as amended by a First Amendment to Bond Pledge
Agreement dated or to be dated on or about the date hereof, in substantially the
form of EXHIBIT 4.1E, with respect to the Fulton Bonds, and (d) the Bond Pledge
Agreement dated August 14, 1992, among Olive Branch Hospital, Inc, a Mississippi
corporation, the Borrower and First Union, as amended by a First Amendment to
Bond Pledge Agreement dated or to be dated on or about the date hereof, in
substantially the form of EXHIBIT 4.1F, with respect to the Olive Branch Bonds,
each granting in favor of the Issuing Bank, for its benefit and the ratable
benefit of the Lenders, a security interest in and to the Pledged Bonds (as
defined therein).
"BONDS" shall mean the Series A Bonds, the Series B Bonds, the Fulton
Bonds or the Olive Branch Bonds or all of them, as the context indicates.
"BORROWING" shall mean a Revolving Credit Borrowing or a Letter of
Credit Borrowing.
"BUSINESS DAY" shall mean any day on which commercial banks in
Nashville, Tennessee, Charlotte, North Carolina and the cities of the
principal corporate trust offices of the Trustees and the Tender Agents are
neither authorized nor required by law or executive order to close and on
which the New York Stock Exchange is not closed.
"CAPITAL EXPENDITURES" shall mean, as to any Person for any period,
the aggregate capital expenditures recorded by such Person and its Subsidiaries
on a consolidated basis in conformity with GAAP, including charges in respect of
Capitalized Lease Obligations exclusive of imputed interest on such Capitalized
Lease Obligations; PROVIDED, HOWEVER, that for purposes of determining Capital
Expenditures for the Borrower and its Subsidiaries on a consolidated basis,
there shall be excluded therefrom any Capital Expenditures attributable solely
to the making of Permitted Acquisitions.
"CAPITALIZATION" shall mean, for the Borrower and its Subsidiaries on
a consolidated basis, the sum of Consolidated Funded Indebtedness PLUS
shareholders' equity.
4
<PAGE>
"CAPITALIZED LEASE, shall mean, as to any Person, any lease of
property by such Person as lessee that would be capitalized on a balance sheet
of such Person prepared in accordance with GAAP.
"CAPITALIZED LEASE OBLIGATIONS" shall mean, as to any Person, the
capitalized amount of the obligations of such Person and its Subsidiaries under
all Capitalized Leases.
"CASH EQUIVALENTS" shall mean, at any time,
(a) Government Obligations having a maturity not exceeding ninety
(90) days;
(b) commercial paper rated at least A-1 by Standard & Poor's
Corporation or P-1 by Moody's Investors Services, Inc., having a maturity
not exceeding ninety (90) days;
(c) certificates of deposit or time deposits of (i) the Lenders or
(ii) other commercial banks with capital and undivided surplus of at least
$300 million issuing commercial paper rated as described in the preceding
clause (b) and organized and existing under, or chartered or otherwise
qualified to do business under, the laws of the United States of America or
any State thereof or the District of Columbia, having a maturity not
exceeding ninety (90) days;
(d) repurchase agreements or investment contracts having a maturity
not exceeding ninety (90) days with a financial institution insured by the
Federal Deposit Insurance Corporation, or any broker or dealer (as defined
in the Securities Exchange Act of 1934) that is a dealer in government
bonds and that is recognized by trades with and reports to, a Federal
Reserve Bank as a primary dealer in government securities; PROVIDED that in
any case (i) collateral is pledged for the repurchase agreement or
investment contract, which collateral consists of (A) Government
Obligations or evidences of ownership of proportionate interests in future
interest and principal payments on Government Obligations held by a bank or
trust company as custodian, under which the owner of the investment is the
real party in interest and has the right to proceed directly and
individually against the obligor on such obligations, and which underlying
obligations are held in a segregated account and not available to satisfy
any claim of the custodian or any person claiming through the custodian or
to whom the custodian may be obligated or (B) evidences of indebtedness
issued by any of the
5
<PAGE>
following: Bank of Cooperatives, Export-Import Bank of the United States,
Farmers Home Administration, Federal Financing Bank, Federal Home Loan
Bank System, Federal Home Loan Mortgage Corporation (including
participation certificates), Federal Housing Administration, Federal Farm
Credit Banks, Federal National Mortgage Association, Government National
Mortgage Association, Inter-American Development Bank, International Bank
for Reconstruction and Development, Small Business Administration or any
other agency or instrumentality of the United States of America created
by an act of Congress that is substantially similar to the foregoing in
its legal relationship to the United States of America, (ii) the current
market value of the collateral securing the repurchase agreement or
investment contract is at least equal to the amount of the repurchase
agreement or investment contract and (iii) the current market value of
the collateral is determined not less frequently than monthly;
(e) investments in money market funds substantially all of whose
assets consist of securities of the types described in the foregoing
CLAUSES (a) through (d);
(f) investments in obligations the return with respect to which is
excludable from gross income under Section 103 of the Code, having a
maturity of not more than six (6) months or providing the holder the right
to put such obligations for purchase at par upon not more than twenty-eight
(28) days' notice, and which are rated at least A-1 by Standard & Poor's
Corporation or P-1 by Moody's Investors Services, Inc.;
(g) investments in tax free money market funds all of whose assets
consist of securities of the types described in the foregoing clause (g);
and
(h) investments, redeemable upon not more than seven (7) days'
notice, in money market preferred municipal bond funds that are rated at
least AAA by Standard & Poor's Corporation or Aaa by Moody's Investors
Services, Inc.
"CHAMPUS" shall mean the Civilian Health and Medical Program of the
Uniformed Services, which provides health benefits to active and retired
military personnel and their families.
"CHIC" shall mean Community Health Investment Corporation, a Delaware
corporation.
"CHS DEBENTURES" shall mean the $100,000,000 aggregate principal
amount of 10-1/4% Senior Subordinated Debentures due 2003 issued pursuant to the
CHS Subordinated Indenture.
6
<PAGE>
"CHS SUBORDINATED INDENTURE" shall mean that certain Indenture dated
as of August 11, 1993, as amended from time to time with the consent of the
Lenders, between the Borrower and NationsBank, in its capacity as trustee,
pursuant to which the Borrower has issued $100,000,000 in CHS Debentures.
"CODE" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
"COLLATERAL" shall mean all property and interests in property,
presently owned or hereafter acquired or presently existing or hereafter created
by the Borrower or the Guarantors, including any and all proceeds thereof, in
which lies a security interest granted in favor of the Administrative Agent for
the ratable benefit of the Lenders, whether under this Agreement, the Security
Documents or any other Loan Document.
"COLLATERAL ACCOUNT" shall mean the Collateral Account described in
SECTION 11.3.1.
"COMMISSION" shall mean the Securities and Exchange Commission or any
successor entity.
"COMMITMENT FEES" shall have the meaning given such term in SECTION
2.11.3.
"COMMITMENT PERIOD" shall mean that period commencing on the date
hereof and continuing to, but not including, the Termination Date.
"COMMITMENTS" shall mean the Revolving Credit Commitments and the
Letter of Credit Commitments, which collectively are in the aggregate amount set
forth in SECTION 2.1 and in the case of each Lender are in the initial amount
set forth with such Lender's signature on this Agreement or the Assignment and
Acceptance pursuant to which such Lender became a party hereto.
"COMMONLY CONTROLLED ENTITY" shall mean a Person that is under common
control with the Borrower within the meaning of subsection 414(b), (c), (m),
(n) or (o) of the Code.
"CONSOLIDATED FUNDED INDEBTEDNESS" shall mean, for the Borrower and
its Subsidiaries on a consolidated basis, all Indebtedness that constitutes (a)
indebtedness for borrowed money or for notes, debentures or other debt
securities, (b) notes payable and drafts accepted representing extensions of
credit whether or not representing obligations for borrowed money, (c)
liabilities for all or any part of the deferred purchase price of property or
services, (d) liabilities secured by any Lien on any
7
<PAGE>
property or asset owned or held by the Borrower or any of its Subsidiaries
regardless of whether the Indebtedness secured thereby shall have been assumed
by or is a primary obligation of the Borrower or such Subsidiary, (e)
Capitalized Lease Obligations, and (f) without duplication, all Contingent
Obligations the primary obligation of which is Indebtedness of the type
described in CLAUSES (a) through (e) above; PROVIDED, HOWEVER, that Consolidated
Funded Indebtedness shall not include unsecured current liabilities incurred in
the ordinary course of business and not represented by any note, bond, debenture
or other instrument (including any such current liabilities assumed in
connection with a Permitted Acquisition).
"CONSOLIDATED NET FUNDED INDEBTEDNESS" shall mean Consolidated Funded
Indebtedness LESS an amount equal to the lesser of (i) the amount by which the
amount of cash and Investments of the Borrower and its Subsidiaries permitted
under SECTION 9.5(a) exceeds $7,500,000, or (ii) $30,000,000.
"CONSOLIDATED NET INCOME" shall mean, as to the Borrower and its
Subsidiaries on a consolidated basis for any period, the net income (or loss)
after taxes of the Borrower and its Subsidiaries on a consolidated basis for
such period taken as a single accounting period determined in conformity with
GAAP, subject to customary exclusions with respect to extraordinary and
nonrecurring items.
"CONTINGENT OBLIGATIONS" shall mean, as to any Person, any contingent
obligation calculated in accordance with GAAP, and in any event shall include
(without duplication) all indebtedness, obligations or other liabilities of such
Person guaranteeing or in effect guaranteeing the payment or performance of any
indebtedness, obligation or other liability, whether or not contingent
(collectively, the "PRIMARY OBLIGATIONS"), of any other Person (the "PRIMARY
OBLIGOR") in any manner, whether directly or indirectly, including any
indebtedness, obligation or other liability of such Person, (a) to purchase any
such primary obligation or any property constituting direct or indirect security
therefor, (b) to advance or supply funds (i) for the purchase or payment of any
such primary obligation or (ii) to maintain working capital or equity capital of
the primary obligor or otherwise to maintain the net worth or solvency of the
primary obligor, (c) to purchase property, securities or services primarily for
the purpose of assuring the owner of any such primary obligation of the ability
of the primary obligor to make payment of such primary obligation, or (d)
otherwise to assure or hold harmless the owner of such primary obligation
against loss with respect thereto; PROVIDED, HOWEVER, that "Contingent
Obligations" shall not include Practice Guarantees.
"CONTRACTUAL OBLIGATIONS" shall mean, as to any Person, any and all
indebtedness, obligations or other liabilities of
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such Person, now existing or hereafter arising, whether due or not due,
absolute or contingent, liquidated or unliquidated, direct or indirect,
express or implied, individually or jointly with others, pursuant to the
provisions of any security issued by such Person or any document, instrument
or agreement to which such Person is a party or by which such Person or any of
its property is or may be bound or affected.
"CREDIT FEES" shall mean the credit fees payable as provided in
SECTION 2.11.
"CURRENT MATURITIES OF LONG-TERM DEBT" shall mean, as of any date of
determination, that portion of Consolidated Funded Indebtedness (including the
Loans) that is due and payable within the twelve (12) month period immediately
following the date of determination, calculated in conformity with GAAP.
"DIVIDENDS" shall mean, as to any Person for any period,
(a) dividends, other distributions and other payments on account of the
capital stock, or any warrants, options or other rights in respect of any
capital stock, of such Person or its Subsidiaries that are recorded by such
Person and its Subsidiaries on a consolidated basis (excluding any such
dividends, distributions and other payments made solely to such Person or a
wholly-owned Subsidiary of such Person by a Subsidiary of such Person), and
(b) amounts paid to purchase, redeem, retire or otherwise acquire for value
any of the capital stock or any warrants, options or other rights in respect
of the capital stock of such Person now or hereafter outstanding (excluding
any such amounts paid solely to such Person or a wholly-owned Subsidiary of
such Person by a Subsidiary of such Person) and (c) any assets segregated or
set apart by such Person or any of its Subsidiaries for a sinking
or analogous fund for the purchase, redemption or retirement or other
acquisition of any capital stock, or any warrants, options or other rights in
respect of any capital stock, of such Person or its Subsidiaries (excluding any
assets so segregated or set apart with respect to any stock, warrants, options
or other rights held by a wholly-owned Subsidiary of such Person); all
determined in conformity with GAAP.
Notwithstanding the foregoing, for purposes of calculating
compliance with the Fixed Charge Coverage Ratio, "Dividends" shall not include
payments in an aggregate amount not exceeding $5,000,000 that are made in
connection with the Hallmark Acquisition by the Borrower or any of its
Subsidiaries to holders of Hallmark preferred stock who exercise appraisal
rights pursuant to the Delaware General Corporation Law in connection with the
Hallmark Acquisition.
"DOLLARS" and "$" shall mean lawful money of the United States of
America.
"DEFAULT" shall mean any of the events specified in SECTION 11.1,
regardless of whether any requirement for the giving of notice, the lapse of
time or both has been satisfied.
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"DEFAULT RATE" shall mean the rate(s) per annum otherwise applicable
to Loans from time to time PLUS two percentage points (2.00).
"EBITDA" shall mean, for the Borrower and its Subsidiaries on a
consolidated basis for any period, after giving Pro Forma Effect to any Asset
Acquisition made during such period, the sum of Consolidated Net Income, PLUS
Interest Expense, PLUS any provision for taxes based on income or profits that
was deducted in computing Consolidated Net Income, PLUS depreciation, PLUS
amortization of intangible assets.
"EBIT" shall mean, for the Borrower and its Subsidiaries on a
consolidated basis for any period, after giving Pro Forma Effect to any Asset
Acquisition made during such period, the sum of Consolidated Net Income, PLUS
any provision for taxes based on income or profits that was deducted in
computing Consolidated Net Income, PLUS Interest Expense.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time.
"EVENT OF DEFAULT" shall mean any of the events specified in SECTION
11.1.
"EXISTING LETTERS OF CREDIT" shall mean the Series A Bonds Letter of
Credit, the Series B Bonds Letter of Credit, the Fulton Letter of Credit and the
Olive Branch Letter of Credit, issued pursuant to the Previous Credit Agreement,
together with any and all amendments, modifications, supplements, extensions,
renewals, substitutions and/or replacements thereof issued pursuant to this
Agreement.
"EXISTING LIENS" shall mean those certain Liens in existence on the
date hereof that are described on SCHEDULE 9.2.
"FACILITIES" shall mean the Revolving Credit Facility and the Letter
of Credit Facility.
"FEDERAL FUNDS RATE" shall mean, for any period, a fluctuating
interest rate per annum equal for each day during such period to the weighted
average of the rates on overnight federal funds transactions with members of the
Federal Reserve System arranged by federal funds brokers, as published for each
day (or, if such day is not a Business Day, for the immediately preceding
Business Day) by the Federal Reserve Bank of New York.
"$50,000,000 CREDIT AGREEMENT" shall mean the Credit Agreement dated
or to be dated on or about the date here of, by and among the parties to this
Agreement, relating to the provision by the Lenders to the Borrower of a
revolving credit facility, in an aggregate principal amount not exceeding
$50,000,000, in addition to the Facilities provided hereunder.
"$50,000,000 CREDIT FACILITY" shall mean the revolving credit
facility, in an aggregate principal amount not exceeding
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$50,000,000, provided by the Lenders to the Borrower pursuant to the
$50,000,000 Credit Agreement.
"FINANCING STATEMENT" shall mean any Uniform Commercial Code financing
statement, on Form UCC-1 or otherwise, executed pursuant to the provisions of
this Agreement or any other Loan Document.
"FISCAL QUARTER" shall mean any three (3) month accounting period in a
Fiscal Year.
"FISCAL Year" shall mean the twelve (12) month period ending on
December 31 of each year.
"FIXED CHARGE COVERAGE RATIO" shall mean, for the Borrower and its
Subsidiaries on a consolidated basis, calculated for the most recent twelve (12)
month period after giving Pro Forma Effect to any Asset Acquisition made during
such period, the ratio of (a) EBITDA, PLUS Rent Expense, LESS Capital
Expenditures, LESS Dividends, to (b) the sum of Interest Expense, PLUS Current
Maturities of Long-Term Debt, PLUS Rent Expense.
"FULTON BOND DOCUMENTS" shall mean the Loan Agreement (as defined in
the Fulton Indenture), the Remarketing Agreement (as defined in the Fulton
Indenture), the Fulton Indenture, the Fulton Bonds and the corresponding Bond
Pledge Agreement.
"FULTON BONDS" shall mean the $8,000,000 aggregate principal amount
City of Fulton, Kentucky Floating Rate Weekly Demand Revenue Bonds, Series 1985
(United Healthcare of Kentucky, Inc. Project).
"FULTON BONDS MATURITY DATE" shall mean the stated maturity date of
the Fulton Bonds.
"FULTON INDENTURE" shall mean the Trust Indenture, dated as of May 22,
1985, as amended by the First Supplemental Trust Indenture, dated as of
August 14, 1992, between the City of Fulton and the Fulton Trustee.
"FULTON LETTER OF CREDIT" shall mean that certain irrevocable letter
of credit, dated August 14, 1992, issued by the Issuing Bank for the account of
Hospital of Fulton, Inc. to the Fulton Trustee, in an aggregate principal amount
of $8,138,083, as it may hereafter be amended, and any Letter of Credit issued
in replacement or substitution thereof in accordance with the terms of this
Agreement.
"FULTON TRUSTEE" shall mean Third National Bank in Nashville, a
national banking association with principal offices in Nashville, Tennessee, and
any successor trustee pursuant to the terms of the Fulton Indenture.
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"FUNDED INDEBTEDNESS TO CAPITALIZATION RATIO" shall mean, for the
Borrower and its Subsidiaries on a consolidated basis, the ratio of
(a) Consolidated Funded Indebtedness to (b) Capitalization.
"FUNDED INDEBTEDNESS TO EBITDA RATIO" shall mean, for the Borrower and
its Subsidiaries on a consolidated basis, calculated for the most recent twelve
(12) month period after giving Pro Forma Effect to any Asset Acquisition made
during such period, the ratio of (a) Consolidated Funded Indebtedness to (b)
EBITDA.
"FUNDING DATE" shall mean each of the respective dates on which the
funding of a Borrowing made under this Agreement occurs.
"GAAP" shall mean generally accepted accounting principles in the
United States of America in effect from time to time.
"GOVERNMENT OBLIGATIONS" shall mean direct obligations of the United
States of America or obligations for the full and prompt payment of which the
full faith and credit of the United States of America is pledged.
"GOVERNMENTAL AUTHORITY" shall mean any nation, province, state or
other political subdivision thereof and any government or any natural person or
entity exercising executive, legislative, regulatory or administrative functions
of or pertaining to government.
"GUARANTEED OBLIGATIONS" shall mean all the obligations of the
Borrower guaranteed by the Guarantors pursuant to ARTICLE 5.
"GUARANTORS" shall mean those Subsidiaries of the Borrower that now or
hereafter execute this Agreement or any amendment hereto and agree to guarantee
the Obligations of the Borrower; PROVIDED, HOWEVER, that the term "Guarantors"
shall not include (a) Hallmark or any Subsidiary of Hallmark prior to the time
that the Hallmark Requirement is satisfied or (b) any Permitted Minority-
Interest Subsidiary.
"GUARANTY" shall mean the guaranty of the Obligations of the Borrower
set forth in ARTICLE 5.
"HALLMARK" shall mean Hallmark Healthcare Corporation, a Delaware
corporation.
"HALLMARK ACQUISITION" shall mean the Asset Acquisition transaction to
be consummated subject to and upon the terms and conditions of the Hallmark
Acquisition Agreement.
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"HALLMARK ACQUISITION AGREEMENT" shall mean the Amended and Restated
Agreement and Plan of Merger dated June 10, 1994, by and among the Borrower,
Community Acquisition Corp., a Delaware corporation, and Hallmark.
"HALLMARK NOTES" shall mean the $80,000,000 aggregate principal amount
of 10-5/8% Senior Subordinated Notes due 2003 issued pursuant to the Hallmark
Subordinated Indenture.
"HALLMARK REQUIREMENT" shall mean the requirements that (a) each of
Hallmark and its Subsidiaries becomes a Qualified Subsidiary or that all of the
assets of Hallmark and its Subsidiaries be acquired by one or more Qualified
Subsidiaries and (b) the Indebtedness evidenced by the Hallmark Notes,
principal, interest and premium, if any, be fully repaid and the Hallmark
Subordinated Indenture be satisfied and discharged.
"HALLMARK SUBORDINATED INDENTURE" shall mean that certain Indenture
dated as of November 1, 1993, as amended from time to time with the consent of
the Lenders, between the Borrower and First Union, in its capacity as trustee,
pursuant to which Hallmark has issued $80,000,000 in Hallmark Notes.
"HAZARDOUS MATERIALS" shall mean any hazardous, toxic or dangerous
materials, substances, chemicals, wastes or pollutants that from time to time
are defined by or pursuant to or are regulated under any Hazardous Materials
Laws, including asbestos, polychlorinated biphenyls, petroleum, petroleum
derivatives or by-products, other hydrocarbons, urea formaldehyde and any
material, substance, pollutant or waste that is defined as a hazardous waste
under RCRA or defined as a hazardous substance under CERCLA.
"HAZARDOUS MATERIALS LAWS" shall mean all federal, state, regional,
county or local laws, statutes, rules, regulations or ordinances, now or
hereafter in effect, relating to the generation, recycling, use, reuse, sale,
storage, handling, transport, treatment or disposal of Hazardous Materials,
including the Comprehensive Environmental Response Compensation Liability Act of
1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42
U.S.C. SECTION 9601 ET SEQ. ("CERCLA"), the Resource Conservation and Recovery
Act of 1976, as amended by the Solid and Hazardous Waste Amendments of 1984, 42
U.S.C. SECTION 6901 ET SEQ. ("RCRA"), the Clean Air Act, 42 U.S.C. SECTION
7401, ET SEQ. ("CAA"), the Toxic Substances Control Act, 15 U.S.C. Section 2601
ET SEQ. ("TSCA") and any rules, regulations and guidance documents promulgated
or published thereunder, and any state, regional, county or local statute, law,
rule, regulation or ordinance now or hereafter in effect that relates to
public health, safety or the discharge, emission or disposal of Hazardous
Materials in or to air, water, land or groundwater, to the withdrawal or use of
groundwater, to the use, handling or
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disposal of asbestos, polychlorinated biphenyls, petroleum, petroleum
derivatives or by-products, other hydrocarbons or urea formaldehyde, to the
treatment, storage, disposal or management of Hazardous Materials, to exposure
to Hazardous Materials or to the transportation, storage, disposal, management
or release of gaseous or liquid substances, and any regulation, order,
injunction, judgment, declaration, notice or demand issued thereunder.
"HIGHEST LAWFUL RATE" shall mean, with respect to each Lender, the
maximum nonusurious interest rate, if any, that at any time or from time to time
may be contracted for, taken, reserved, charged or received on debts outstanding
hereunder or under the Notes, as the case may be, under the laws applicable to
such Lender that are presently in effect or, to the extent allowed by law, under
such applicable laws that may hereafter be in effect and that allow a higher
maximum nonusurious interest rate than applicable laws now allow.
"HOSPITAL" shall mean each hospital listed in SCHEDULE 1.1A hereto
and each other hospital now or hereafter owned or operated by the Borrower or
any of its Subsidiaries.
"HOSPITAL OPERATING INCOME" shall mean, as to the Borrower or any
Subsidiary of the Borrower, calculated for the most recent twelve (12) month
period, the net revenue from its Hospital(s), LESS the following (to the extent
not previously deducted in calculating net revenue): salary expense, employee
benefit expense and other operating expenses (including minority interest
expense, if any).
"INDEBTEDNESS" shall mean, as to any Person, all items that in
accordance with GAAP would be shown on the balance sheet of such Person as a
liability and in any event shall include (without duplication) (a) indebtedness
for borrowed money or for notes, debentures or other debt securities, (b) notes
payable and drafts accepted representing extensions of credit whether or not
representing obligations for borrowed money, (c) liabilities for all or any part
of the deferred purchase price of property or services, (d) liabilities secured
by any lien on any property or asset owned or held by such Person regardless of
whether the indebtedness secured thereby shall have been assumed by or is a
primary liability of such Person, (e) Capitalized Lease Obligations and
(f) Contingent Obligations.
"INDENTURES" shall mean the Series A and Series B Indenture, the
Fulton Indenture and the Olive Branch Indenture.
"INTEREST COVERAGE RATIO" shall mean, for the Borrower and its
Subsidiaries on a consolidated basis, calculated for the most recent twelve (12)
month period after giving Pro Forma
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Effect to any Asset Acquisition made during such period, the ratio of (a) EBIT
to (b) Interest Expense.
"INTEREST EXPENSE" shall mean, as to any Person for any period, the
aggregate interest expense and amortization of deferred loan costs of such
Person and its Subsidiaries on a consolidated basis for such period (calculated
without regard to any limitations on the payment thereof), imputed interest on
Capitalized Lease Obligations, commissions, discounts and other fees and charges
owed with respect to letters of credit and unused commitments and net costs
under interest rate protection agreements, all as determined in conformity with
GAAP.
"INTEREST PAYMENT DATE" shall mean, (a) with respect to any Base Rate
Loan, January 1, April 1, July 1 and October 1 of each year, commencing on the
first such date after the applicable Funding Date, and (b) with respect to any
LIBOR Loan, the last day of the Interest Period applicable to such Loan;
PROVIDED, HOWEVER, that with respect to any Interest Period of six (6) months
"Interest Payment Date" also shall include the day that is three (3) months
after the day on which that Interest Period commenced.
"INTEREST PERIOD" shall mean any interest period applicable to a LIBOR
Loan as determined pursuant to SECTION 2.14.1.
"INTEREST RATE CONTRACTS" shall mean any interest rate swap
agreements, interest rate cap agreements, interest rate collar agreements,
interest rate insurance, and other agreements or arrangements designed to
provide protection against fluctuations in interest rates, in each case between
the Borrower and any Lender, and in an aggregate notional amount at any time not
to exceed an amount equal to Consolidated Funded Indebtedness at such time.
"INTEREST RATE DETERMINATION DATE" shall mean each date for
calculating LIBOR for purposes of determining the interest rate in respect of an
Interest Period, which in each case shall be the second (2d) Business Day prior
to the first (1st) day of the corresponding Interest Period.
"INVESTMENT" shall have the meaning given such term in SECTION 9.5.
"ISSUING BANK" shall mean First Union and any other financial
institution that, subject to approval by the Administrative Agent and the
Borrower, agrees to become a party to this Agreement and to issue Letters of
Credit pursuant to SECTION 2.3.
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"JCAHO" shall mean the Joint Commission on Accreditation of
Healthcare Organizations.
"LAST FOUR FISCAL QUARTERS" shall mean, as at any time, the Fiscal
Quarter most recently ended plus the immediately preceding three Fiscal
Quarters.
"LENDING OFFICE" shall mean with respect to any Lender or either of
the Agents the office of each such Lender at the address specified on the
signature pages hereto or in the Assignment and Acceptance pursuant to which it
became a Lender, or such other office as any such Lender from time to time may
specify to the Borrower and the Administrative Agent.
"LETTER OF CREDIT BORROWING" shall mean a borrowing consisting of
Letter of Credit Loans made to the Borrower on the same day by the Lenders
ratably according to their respective Commitments pursuant to the provisions of
SECTION 2.3.4.
"LETTER OF CREDIT COMMITMENTS" shall mean, at any time, (a) the
commitment of the Issuing Bank to issue Letters of Credit pursuant to the
provisions of SECTION 2.3.1 and (b) the aggregate commitments of all the Lenders
to (i) purchase participations in the Letter of Credit Liabilities pursuant to
the provision of SECTION 2.4 and (ii) make Letter of Credit Loans to the
Borrower during the Commitment Period pursuant to the provisions of SECTION
2.3.4, and the "LETTER OF CREDIT COMMITMENT" of any Lender at any time shall
mean an amount equal to such Lender's Percentage multiplied by the then
effective aggregate Letter of Credit Commitments under CLAUSE (b) above. The
Letter of Credit Commitments are in the aggregate amount set forth in SECTION
2.1.
"LETTER OF CREDIT FACILITY" shall mean the letter of credit facility
provided by the Lenders pursuant to the Letter of Credit Commitments as more
particularly set forth in SECTION 2.3.
"LETTER OF CREDIT FEES" shall have the meaning given such term in
SECTION 2.11.4.
"LETTER OF CREDIT LIABILITIES" shall mean all liabilities of the
Borrower to the Issuing Bank in respect of Letters of Credit, regardless of
whether any such liability is contingent, and shall consist of the sum, without
duplication, of (a) the amount available to be drawn or that may become
available to be drawn under outstanding Letters of Credit (including all amounts
committed to be paid by the Issuing Bank thereunder) and (b) all amounts that
have been paid or made available by the Issuing Bank thereunder if and to the
extent the Issuing Bank has not received reimbursement from the Borrower
pursuant to the terms hereof.
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"LETTER OF CREDIT LOANS" shall mean the Loans made by the Lenders to
the Borrower pursuant to the provisions of SECTION 2.3.4.
"LETTER OF CREDIT REQUEST" shall mean a request substantially in the
form of EXHIBIT 2.3.2 annexed hereto with respect to the proposed issuance of
a Letter of Credit hereunder.
"LETTER OF CREDIT SUPPORTABLE OBLIGATIONS" shall mean (a) obligations
of the Borrower or any of its Subsidiaries incurred in the ordinary course of
business with respect to workers' compensation, surety bonds and other similar
statutory obligations, (b) obligations of the Borrower or any of its
Subsidiaries supported by the Existing Letters of Credit and (c) such other
obligations of the Borrower or any of its Subsidiaries as are reasonably
acceptable to the Issuing Bank and the Administrative Agent and otherwise
permitted to exist pursuant to the terms of this Agreement.
"LETTERS OF CREDIT" shall mean the Existing Letters of Credit and all
other Letters of Credit issued by the Issuing Bank pursuant to the provisions of
SECTION 2.3.1.
"LIBOR" shall mean the rate per annum (rounded upwards, if necessary,
to the nearest whole one-eighth of 1%) equal to the product of Base LIBOR times
Statutory Reserves.
"LIBOR LOANS" shall mean Loans bearing interest at rates determined by
reference to LIBOR.
"LIEN" shall mean, as to any asset, (a) any lien, charge, claim,
mortgage, security interest, pledge or other encumbrance of any kind with
respect to such asset, (b) any interest of a vendor or lessor under any
conditional sale agreement, Capitalized Lease or other title retention agreement
relating to such asset, (c) any reservation, exception, encroachment, easement
right-of-way, covenant, condition, restriction, lease or other title exception
affecting such asset, or (d) any preference, priority or other security
agreement or preferential arrangement of any kind or nature whatsoever
(including any conditional sale or other title retention agreement, any
financing lease having substantially the same economic effect as any of the
foregoing, and the filing of any financing statement under the Uniform
Commercial Code or comparable law of any jurisdiction).
"LOAN DOCUMENTS" shall mean this Agreement, the Notes, the Letters of
Credit, the Security Documents, the Interest Rate Contracts and all other
documents, instruments and agreements now or hereafter executed or delivered
pursuant hereto or in connection herewith.
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"LOANS" shall mean Revolving Credit Loans and Letter of Credit Loans.
"MATERIAL CONTRACT" shall mean each contract to which the Borrower or
any of its Subsidiaries is a party or a guarantor (or by which it is bound) that
requires payments in excess of $500,000 in any twelve-month period (a) the
cancellation, nonperformance or non-renewal of which by any party thereto would
have a material adverse effect on the condition (financial or otherwise),
operations or properties of the Borrower and its Subsidiaries, or (b) which is a
lease, license, managed care contract, management or operating agreement, or
other similar agreement that creates a possessory interest in real property or
pursuant to which the Borrower or any of its Subsidiaries operates a Hospital,
or (c) pursuant to which the Borrower or any of its Subsidiaries may incur
Indebtedness for borrowed money or Capitalized Lease Obligations.
"MAXIMUM GUARANTY LIABILITY" shall mean the maximum liability
hereunder of the respective Guarantors permitted by Applicable Bankruptcy Law as
provided in SECTION 5.2.
"MULTI-EMPLOYER PLAN" shall mean any multiple employer plan as defined
in Section 4001(a)(3) of ERISA, that is maintained by the Borrower, any
Guarantor, any of their respective subsidiaries or a Commonly Controlled Entity.
"NET FUNDED INDEBTEDNESS TO EBITDA RATIO" shall mean, for the
Borrower and its Subsidiaries on a consolidated basis, calculated for the most
recent twelve (12) month period after giving Pro Forma Effect to any Asset
Acquisition made during such period, the ratio of Consolidated Net Funded
Indebtedness to EBITDA.
"NOTES" shall mean the promissory notes, substantially in the form of
EXHIBIT 2.8, executed by the Borrower in favor of the Lenders, evidencing the
indebtedness of the Borrower to the Lenders in connection with the Loans.
"NOTICE OF BORROWING" shall mean a notice substantially in the form of
EXHIBIT 2.2.4 annexed hereto with respect to a proposed Revolving Credit
Borrowing.
"NOTICE OF CONVERSION/CONTINUATION" shall mean a notice substantially
in the form of EXHIBIT 2.7.2 annexed hereto with respect to a proposed
conversion or continuation of Loans bearing interest at a rate determined by
reference to one basis to Loans bearing interest at a rate determined by
reference to an alternative basis pursuant to SECTION 2.7.
"OBLIGATIONS" shall mean, as to any Person, all indebtedness,
obligations and other liabilities of such Person of
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any kind and description owing to the Administrative Agent, the Co-Agent,
the Issuing Bank or the Lenders, whether now existing or hereafter arising,
due or not due, absolute or contingent, liquidated or unliquidated, direct or
indirect, express or implied, individually or jointly with others, howsoever
evidenced or acquired, pursuant to the provisions of this Agreement, the Notes
and the other Loan Documents.
"OLIVE BRANCH BOND DOCUMENTS" shall mean the Lease Agreement (as
defined in the Olive Branch Indenture), the Remarketing Agreement (as defined in
the Olive Branch Indenture), the Olive Branch Indenture, the Olive Branch Bonds
and the corresponding Bond Pledge Agreement.
"OLIVE BRANCH BONDS" shall mean the $5,700,000 City of Olive Branch,
Mississippi Floating Rate Weekly Demand Industrial Development Revenue Bonds,
Series 1986 (United Healthcare of Mississippi, Inc. Project).
"OLIVE BRANCH BONDS MATURITY DATE" shall mean the stated maturity date
of the Olive Branch Bonds.
"OLIVE BRANCH INDENTURE" shall mean the Trust Indenture, dated as of
November 1, 1986, as amended by the First Supplemental Trust Indenture, dated as
of August 1, 1992, between the City of Olive Branch and the Olive Branch
Trustee.
"OLIVE BRANCH LETTER OF CREDIT" shall mean that certain irrevocable
letter of credit, dated August 14, 1992, issued by the Issuing Bank for the
account of Olive Branch Hospital, Inc. to the Olive Branch Trustee, in an
aggregate principal amount of $5,798,384, as it may hereafter be amended, and
any Letter of Credit issued in replacement or substitution thereof in accordance
with the terms of this Agreement.
"OLIVE BRANCH TRUSTEE" shall mean First American National Bank
(formerly "First American Bank of Nashville, N.A."), a national banking
association with principal offices in Nashville, Tennessee, and any successor
trustee pursuant to the terms of the Olive Branch Indenture.
"OPERATING LEASE" shall mean, as to any Person, any lease of property
(whether real, personal or mixed) by such Person as lessee that is not a
Capitalized Lease.
"PBGC" shall mean the Pension Benefit Guaranty Corporation established
pursuant to subtitle A of Title IV of ERISA.
"PERCENTAGE" shall mean, as to each Lender, the percentage set forth
with such Lender's signature on this
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Agreement or the Assignment and Acceptance pursuant to which such Lender became
a party hereto.
"PERMITTED ACQUISITION" shall mean the Hallmark Acquisition and any
Asset Acquisition by the Borrower or any Subsidiary of the Borrower with
respect to which (a) the Borrower or such Subsidiary is the surviving entity
in the transaction, (b) all assets acquired in the transaction are held or
acquired by the Borrower or such Subsidiary, (c) at the time of such
acquisition and after giving Pro Forma Effect thereto and to any other Asset
Acquisition made during the then most recent twelve (12) month period, no
Default or Event of Default shall have occurred or be continuing or would
result therefrom, (d) the Borrower has furnished to the Administrative Agent
and the Lenders a certificate duly executed by a Responsible Officer thereof,
in form satisfactory to the Administrative Agent, certifying that no Default
or Event of Default has occurred or is continuing or will result from such
Asset Acquisition, and certifying specifically as to covenant compliance
calculations both before and after giving Pro Forma Effect to such Asset
Acquisition, (e) the Borrower has furnished to the Administrative Agent and
the Lenders the information set forth on EXHIBIT 1.1B, in form and
detail reasonably satisfactory to the Administrative Agent, and (f) the
following additional conditions, as applicable, are satisfied:
(1) with respect to any Asset Acquisition of an acute care hospital
business that is financed in whole or in part, directly or indirectly, with
proceeds of Loans, the consideration paid or to be paid (inclusive of
Indebtedness incurred or assumed) in connection with such Asset Acquisition
(x) shall not exceed an amount equal to seven and one-half percent (7.5%)
of the assets of the Borrower and its Subsidiaries on a consolidated basis
as of the end of the most recently completed Fiscal Quarter of the
Borrower, as reported on Form 10-K or Form 10-Q filed with the Commission,
and (y) shall not exceed an amount equal to the Acquired Asset Cash Flow
multiplied by six and one-half (6.5);
(2) with respect to any Asset Acquisition of a business other than an
acute care hospital business that is financed in whole or in part, directly
or indirectly, with proceeds of Loans, (a) the acquired entity shall be
engaged in a business related to the health care industry, (b) the acquired
business shall support the primary business of the Borrower as a provider
of health care delivery systems and shall provide services that are
ancillary thereto, (c) the Borrower shall have certified to the
Administrative Agent and the Lenders in writing that CLAUSES (a) and (b) of
this PARAGRAPH 2 are true and correct with respect to such acquisition, and
(d) the aggregate consideration paid or to
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be paid (inclusive of Indebtedness incurred or assumed) in connection
with all such acquisitions during any Fiscal Year of the Borrower shall
not exceed two and one-half percent (2.5%) of the assets of the Borrower
and its Subsidiaries on a consolidated basis as of the end of the most
recently completed Fiscal Year of the Borrower, as reported on
Form 10-K filed with the Commission;
(3) with respect to any Asset Acquisition of an acute care hospital
business that is not financed in whole or in part, directly or indirectly,
with proceeds of Loans, the consideration paid or to be paid (inclusive of
Indebtedness incurred or assumed) in connection with such Asset Acquisition
shall not exceed an amount equal to fifteen percent (15%) of the assets of
the Borrower and its Subsidiaries on a consolidated basis as of the end of
the most recently completed Fiscal Quarter of the Borrower, as reported on
Form 10-K or Form 10-Q filed with the Commission; and
(4) with respect to any Asset Acquisition of a business other than an
acute care hospital business that is not financed in whole or in part with
proceeds of Loans (a) the acquired entity shall be engaged in a business
related to the health care industry, (b) the acquired entity shall support
the primary business of the Borrower as a provider of health care delivery
systems and shall provide services that are ancillary to such business, (c)
the Borrower shall have certified to the Administrative Agent and the
Lenders in writing that CLAUSES (a) and (b) of this PARAGRAPH 4 are true
and correct with respect to such acquisition, and (d) the aggregate
consideration paid or to be paid (inclusive of Indebtedness incurred or
assumed) in connection with all such acquisitions during any Fiscal Year of
the Borrower shall not exceed five percent (5%) of the assets of the
Borrower and its Subsidiaries on a consolidated basis as of the end of the
most recently completed Fiscal Year of the Borrower, as reported on Form
10-K filed with the Commission.
"PERMITTED LIENS" shall mean Liens permitted pursuant to the
provisions of SECTION 9.2.
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"PERMITTED MINORITY-INTEREST SUBSIDIARY" shall mean:
(a) a Subsidiary of the Borrower (i) that itself or through
wholly-owned Subsidiaries thereof owns or will own a Hospital or an interest
in a Hospital, (ii) in which the Borrower and/or one or more of its Qualified
Subsidiaries collectively own not less than eighty and one-tenth percent
(80.1%) of the outstanding shares of each class of the capital stock thereof,
which shares so owned constitute pledge stock, and (iii) that has executed and
delivered a "capitalization note" constituting a Pledged Note (a "First-Tier
Permitted Minority-Interest Subsidiary),
(b) any wholly-owned Subsidiary of a "First-Tier Permitted Minority-
Interest Subsidiary", PROVIDED that (i) any Indebtedness of such wholly-owned
Subsidiary to such First-Tier Permitted Minority-Interest Subsidiary (or to
any other Subsidiary of such First-Tier Permitted Minority-Interest
Subsidiary) is evidenced by a promissory note in form and substance
satisfactory to the Administrative Agent, and (ii) the Indebtedness evidenced
by the Pledged Note of such First-Tier Permitted Minority-Interest
Subsidiary is secured by a first priority perfected security interest in the
promissory note described in the preceding CLAUSE (i) and the Indebtedness
evidenced thereby, which security interest has been assigned to the
Administrative Agent pursuant to documentation in form and substance
satisfactory to the Administrative Agent, and
(c) a Subsidiary of the Borrower (i) that does not and will not itself
or through Subsidiaries own a Hospital or an interest in a Hospital, (ii) in
which the Borrower and/or one or more Qualified Subsidiaries collectively own
not less than fifty-one percent (51%) of the outstanding shares of each class of
the capital stock thereof, and (iii) in which an Investment is permitted under
SECTION 9.5(I).
"PERMITTED MINORITY-INTEREST TRANSFER" shall mean a sale or other
transfer of securities of a Subsidiary of the Borrower that is permitted
pursuant to the provisions OF SECTION 9.16.
"PERSON" shall mean an individual, corporation, partnership, trust,
business trust, association, joint stock company, joint venture, pool,
syndicate, sole proprietorship, unincorporated organization, Governmental
Authority or other form of entity not specifically listed herein.
"PLAN" shall mean an employee pension benefit plan that is covered
by Title IV of ERISA that is maintained by the Borrower, any Guarantor, any of
their respective Subsidiaries or a Commonly Controlled Entity and shall
include any Single Employer Plan or any Multi-Employer Plan.
"PLEDGE AGREEMENT" shall mean the Pledge and Security Agreement,
substantially in the form of EXHIBIT 4.1A, executed by the Borrower and certain
of the Guarantors, granting in favor of the Administrative Agent for the ratable
benefit of the Lenders a security interest in the Pledged Stock, the Pledged
Notes and all proceeds thereof, together with all books and records pertaining
thereto.
"PLEDGED NOTES" shall mean all intercompany notes now or hereafter
issued by Subsidiaries of the Borrower to the Borrower or a Guarantor, and
pledged by the Borrower or such Guarantor in favor of the Administrative Agent
for the ratable benefit of the Lenders pursuant to the Pledge Agreement.
"PLEDGED STOCK" shall mean all of the outstanding capital stock of the
Subsidiaries of the Borrower owned by the Borrower or a Guarantor and pledged in
favor of the Administrative Agent for the ratable benefit of the Lenders
pursuant to the Pledge Agreement.
"PRACTICE GUARANTEES" shall mean the physician or mental health
professional practice guarantees pursuant to which the Borrower or any of its
Subsidiaries guarantees to pay a physician or mental health professional on
the medical staff of a Hospital owned or operated by it the difference between
the physician's or mental health professional's monthly net revenue from
professional fees and a minimum monthly guaranteed amount.
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"PREVIOUS CREDIT AGREEMENT" shall mean that certain Amended and
Restated Credit Agreement dated as of August 14, 1992, as amended by Amendment
to Credit Agreement dated August 16, 1992, Second Amendment to Credit Agreement
dated November 2, 1992, Third Amendment to Credit Agreement dated January 13,
1993, Fourth Amendment to Credit Agreement dated May 28, 1993, Fifth Amendment
to Credit Agreement dated August 11, 1993, Sixth Amendment to Credit Agreement
dated October 20, 1993, Seventh Amendment to Credit Agreement dated January 20,
1994 and Eighth Amendment to Credit Agreement dated May 1, 1994, each among the
Borrower, certain Subsidiaries of the Borrower, the lenders parties thereto and
First Union as letter of credit issuing bank and as agent for such lenders.
"PRICING TIER DETERMINATION DATE" shall mean (a) the date of this
Agreement and (b) the fifth (5th) Business Day following each date on which the
Borrower has delivered to the Administrative Agent (i) financial statements,
financial reports and other financial information complying with the
requirements of SECTION 8.1 that contain information sufficient to enable a
calculation of the Funded Indebtedness to EBITDA Ratio or the Net Funded
Indebtedness to EBITDA Ratio, as applicable, for the Last Four Fiscal
Quarters for the purpose of determining the Applicable Base Rate Margin, the
Applicable LIBOR Margin, the Applicable Letter of Credit Fee Percentage and
the Applicable Commitment Fee Percentage pursuant to SECTION 2.13 and (ii) a
certificate of a Responsible Officer of the Borrower, in form satisfactory to
the Administrative Agent, setting forth the computations used to determine the
Funded Indebtedness to EBITDA Ratio or the Net Funded Indebtedness EBITDA
Ratio, as applicable, for the Last Four Fiscal Quarters.
"PRINCIPAL OBLIGOR" shall mean, with respect to a certain indebtedness
or obligation, the Person creating, incurring, assuming or suffering to exist
such indebtedness or obligation without becoming liable for same as a surety or
guarantor.
"PRO FORMA EFFECT" shall mean, in making any calculation necessary to
determine whether the Borrower is in compliance with SECTIONS 10.1.1, 10.1.2 and
10.1.3 or whether a Default or Event of Default would result from any Asset
Acquisition, (a) any Asset Acquisition made during the most recent twelve (12)
month period (the "REFERENCE PERIOD") ending on and including the date of
determination (the "CALCULATION DATE") shall be assumed to have occurred on the
first day of the Reference Period, (b) Consolidated Funded Indebtedness, and
the application of proceeds therefrom, incurred or to be incurred in
connection with any Asset Acquisition made or to be made during the Reference
Period shall be assumed to have occurred in the first day of the Reference
Period, (c) there shall be excluded any Interest Expense in respect of
Consolidated Funded
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Indebtedness outstanding during the Reference Period that was or is to be
refinanced with proceeds of Indebtedness incurred or to be incurred in
connection with any Asset Acquisition made or to be made during the Reference
Period, (d) Interest Expense in respect of Consolidated Funded Indebtedness
bearing a floating rate of interest and assumed to have been incurred on the
first day of the Reference Period shall be calculated on the basis of the
average rate in effect under this Agreement for Base Rate Loans throughout the
period such Consolidated Funded Indebtedness is assumed to be outstanding, and
(e) Rent Expense shall include actual Rent Expense incurred by any Person,
operating unit or business acquired during the Reference Period, plus Rent
Expense projected for the twelve (12) month period following the date of actual
incurrence thereof in respect of any Operating Lease entered into or to be
entered into in connection with any Asset Acquisition made during the Reference
Period, which projected Rent Expense shall be deemed to have been incurred on
the first day of the Reference Period.
"PURCHASE MONEY DEBT" shall mean (a) Indebtedness of the Borrower or
any of its Subsidiaries that, within thirty (30) days of the purchase of
equipment in which neither the Borrower nor any of its Subsidiaries at any
time prior to such purchase had any interest, is incurred to finance part or
all of (but not more than) the purchase price of such assets, and
(b) Indebtedness (i) that constitutes a renewal, extension or refunding of,
but not an increase in the principal amount of, Purchase Money Debt that is
such by virtue of CLAUSE (A), (ii) that is binding only upon the obligor or
obligors under the Purchase Money Debt being renewed, extended or refunded and
(iii) that bears interest at a rate per annum that is commercially reasonable
at the time.
"QUALIFIED SUBSIDIARY" shall mean a Subsidiary of the Borrower that is
wholly owned by the Borrower or one of its other wholly-owned Subsidiaries and
that meets all of the following requirements:
(1) all of the outstanding capital stock or other ownership interests
in such Subsidiary is (are) owned by the Borrower and/or Guarantors who are
parties to the Pledge Agreement and the Assignment and Security Agreement;
(2) the Administrative Agent, for the ratable benefit of the Lenders,
has been granted a first priority perfected security interest in all of the
outstanding capital stock or other ownership interests in such Subsidiary
pursuant to the Pledge Agreement or the Assignment and Security
Agreement, as appropriate, and all certificates and other instruments or
documents evidencing same have been delivered to the Administrative
Agent, accompanied by stock powers endorsed in blank or the equivalent;
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(3) such Subsidiary has become a party to this Agreement as a
Guarantor by executing a Supplement to Credit Agreement in the form of
EXHIBIT 1.1C, has become a party to the Pledge Agreement by executing a
Supplement to Pledge Agreement in the form of EXHIBIT A thereto, has become
a party to the Assignment and Security Agreement by executing a Supplement
to Assignment and Security Agreement in the form of EXHIBIT A thereto and
has delivered to the Administrative Agent, for the ratable benefit of the
Lenders, (a) all certificates and other instruments or documents evidencing
capital stock or other ownership interests of such Subsidiary in any other
Subsidiaries of the Borrower, accompanied by stock powers endorsed in blank
or the equivalent and (b) all promissory notes and other instruments
evidencing intercompany Indebtedness owed to such Subsidiary by any other
Subsidiary of the Borrower, endorsed to the order of the Administrative
Agent; and
(4) in connection with the foregoing, the Administrative Agent has
received all other documents, instruments, agreements, opinions,
certificates, consents and evidences of other legal matters, in form and
substance satisfactory to the Administrative Agent and its counsel, as the
Administrative Agent reasonably may request.
"REMARKETING AGENT" shall have the meaning given such term in the
Series A and Series B Indenture.
"RENT EXPENSE" shall mean, as to any Person for any period, the
aggregate rent and lease expenses recorded by such Person and its Subsidiaries
on a consolidated basis in conformity with GAAP pursuant to any Operating Lease.
"REPLACEMENT LENDER" shall have the meaning given such term in SECTION
2.17.
"REPORTABLE EVENT" shall mean any of the events set forth under
Section 4043(b) of ERISA or the PBGC regulations thereunder.
"REQUIREMENT OF LAW" shall mean, as to any Person (a) the partnership
agreement, certificate of incorporation, bylaws or other organizational or
governing documents of such Person; (b) any federal, state or local law, treaty,
ordinance, rule or regulation; (c) any order, decree or determination of a
court, arbitrator or other Governmental Authority, in each case applicable to
or binding upon such Person or any of its property or to which such person or
any of its property is subject.
"REQUISITE LENDERS" shall mean at any time Lenders having at least
fifty-one percent (51%) of the Commitments.
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"RESPONSIBLE OFFICER" shall mean, as to any Person, either (a) its
president or chief executive officer, or (b) with respect to financial matters,
its president or chief executive officer or any vice president designated in
writing by the chief executive officer to the Administrative Agent.
"REVOLVING CREDIT BORROWING" shall mean a borrowing consisting of
Revolving Credit Loans made to the Borrower on the same day by the Lenders
ratably according to their respective Commitments pursuant to the provisions of
SECTION 2.2.
"REVOLVING CREDIT COMMITMENTS" shall mean, at any time, the commitment
of all the Lenders, collectively, to make Revolving Credit Loans to the Borrower
during the Commitment Period pursuant to the provisions of SECTION 2.2, and the
"REVOLVING CREDIT COMMITMENT" of any Lender at any time shall mean an amount
equal to such Lender's Percentage multiplied by the then effective aggregate
Revolving Credit Commitments. The Revolving Credit Commitments are in the
aggregate amount set forth in SECTION 2.1.
"REVOLVING CREDIT FACILITY" shall mean the revolving credit facility
provided by the Lenders pursuant to the Revolving Credit Commitments as more
particularly set forth in SECTION 2.2.
"REVOLVING CREDIT LOANS" shall mean the Loans made by the Lenders to
the Borrower pursuant to the provisions of SECTION 2.2.
"SCHEDULED COMMITMENT REDUCTION DATE" shall mean each date on which
the aggregate Commitments automatically reduce in accordance with SECTION 2.1.2.
"SECURITY DOCUMENTS" shall mean the Pledge Agreement, the Assignment
and Security Agreement, the Bond Pledge Agreements and the Financing Statements,
together with all documents, instruments and agreements now or hereafter
executed or delivered pursuant thereto or in connection therewith.
"SENIOR INDEBTEDNESS" shall mean Consolidated Funded Indebtedness less
Subordinated Indebtedness.
"SERIES A AND SERIES B BOND DOCUMENTS" shall mean the Remarketing
Agreement (as defined in the Series A and Series B Indenture), the Series A and
Series B Indenture, the Series A Bonds, the Series B Bonds and the
corresponding Bond Pledge Agreement(s).
"SERIES A AND SERIES B INDENTURE" shall mean (i) the trust indenture
dated as of October 1, 1991, between the Borrower and the Trustee, executed
with respect to the Series A Bonds and the Series B Bonds, as the same may be
modified, amended,
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restated or supplemented from time to time, including in connection with a
conversion of the interest rate on any portion of the Series A Bonds or the
Series B Bonds to a fixed rate and (ii) any indenture, note purchase agreement
or other similar debt instrument, the form and substance of which have been
approved by the Administrative Agent, pursuant to which the Borrower issues
bonds, notes or other evidences of indebtedness secured by the Series A Letter
of Credit or the Series B Letter of Credit.
"SERIES A AND SERIES B TRUSTEE" shall mean with respect to the Series
A Bonds and the Series B Bonds, the trustee under the Series A and Series B
Indenture pursuant to which the Series A Bonds and the Series B Bonds have been
issued, and any successor trustee pursuant to the terms thereof.
"SERIES A BONDS" shall mean up to $40,000,000 aggregate principal
amount of Borrower's bonds, notes or other evidences of indebtedness supported
by the Series A Bonds Letter of Credit, initially, the Borrower's Floating Rate
Weekly Demand Taxable Bonds, Series 1991A.
"SERIES A BONDS LETTER OF CREDIT" shall mean that certain irrevocable
letter of credit, dated October 29, 1991, issued by the Issuing Bank for the
account of the Borrower to the Series A and Series B Trustee, in the aggregate
principal amount of $40,000,000 plus an amount equal to interest computed on
such amount for forty-two (42) days at fifteen percent (15%) per annum, as it
may hereafter be amended, and any Letter of Credit issued in replacement or
substitution thereof in accordance with the terms of this Agreement, as more
fully described in SECTION 2.3.3, including any Letter of Credit issued to
support any portion of the Series A Bonds that bear interest at a fixed rate.
"SERIES A BONDS MATURITY DATE" shall mean the stated maturity date of
the Series A Bonds.
"SERIES B BONDS" shall mean up to $20,000,000 aggregate principal
amount of Borrower's bonds, notes or other evidences of indebtedness supported
by the Series B Bonds Letter of Credit, initially, the Borrower's Floating Rate
Weekly Demand Taxable Bonds Series 1991B.
"SERIES B BONDS LETTER OF CREDIT" shall mean that certain irrevocable
letter of credit, dated October 29, 1991, issued by the Issuing Bank for the
account of the Borrower to the Series A and Series B Trustee, in the aggregate
principal amount of $20,000,000 plus an amount equal to interest computed on
such amount for forty-two (42) days at fifteen percent (15%) per annum, as it
may hereafter be amended, and any Letter of Credit issued in replacement or
substitution thereof in accordance with the terms of this Agreement, as more
fully described in SECTION
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2.3.3, including any Letter of Credit issued to support any portion of the
Series B Bonds that bear interest at a fixed rate.
"SERIES B BONDS MATURITY DATE" shall mean the stated maturity date of
the Series B Bonds.
"SINGLE EMPLOYER PLAN" shall mean any Plan that is not a Multi-
Employer Plan.
"SOLVENT" shall mean, with respect to any Person on any particular
date, that on such date (a) the fair value of the assets of such Person (both at
fair valuation and at present fair saleable value) is, on the date of
determination, greater than the total amount of liabilities, including
contingent and unliquidated liabilities, of such Person, (b) such Person is able
to pay all liabilities of such Person as they mature, and (c) such Person does
not have unreasonably small capital with which to carry on its business. In
computing the amount of contingent or unliquidated liabilities at any time, such
liabilities will be computed at the amount that, in light of all the facts and
circumstances existing at such time, represents the amount that can be
reasonably expected to become an actual or matured liability.
"STATUTORY RESERVES" shall mean a fraction (expressed as a decimal),
the numerator of which is the number one and the denominator of which is the
number one minus the aggregate of the maximum reserve percentages (including any
marginal, special, emergency or supplemental reserves), expressed as a decimal,
established by the Federal Reserve Board and/or any other banking authority to
which any Lender or any member bank of the Federal Reserve System is subject
with respect to LIBOR, for Eurocurrency Liabilities (as defined in
Regulation D of the Federal Reserve Board). Such reserve percentages shall
include those imposed under such Regulation D. LIBOR Loans shall be deemed to
constitute Eurocurrency Liabilities and as such shall be deemed to be subject
to such reserve requirements without benefit of or credit for proration,
exceptions or offsets that may be available from time to time to the Lenders
under such Regulation D. Statutory Reserves shall be adjusted automatically on
and as of the effective date of any change in any reserve percentage.
"SUBORDINATED INDEBTEDNESS" shall mean, for the Borrower and its
Subsidiaries on a consolidated basis, all Indebtedness evidenced by the CHS
Debentures and all other Indebtedness subordinated in right of payment to the
Indebtedness incurred hereunder on terms satisfactory to Requisite Lenders.
"SUBSIDIARIES" shall mean, as to any Person (a) a corporation of
which shares of stock having ordinary voting power (other than stock having
such power only by reason of the occurrence of a contingency) to elect a
majority of the board
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of directors or other managers thereof are at the time owned, or the
management of which is otherwise controlled, directly or indirectly, through
one or more intermediaries, or both, by such Person or (b) a partnership in
which such Person is a general partner or the management of which is otherwise
controlled, directly or indirectly, through one or more intermediaries or both,
by such Person. The term "Subsidiaries" herein, when used with reference to the
Borrower, shall be deemed to refer to and include any and all Subsidiaries of
the Subsidiaries of the Borrower.
"TENDER AGENT", with respect to the Series A Bonds and the Series B
Bonds, shall have the meaning given such term in the Series A and Series B
Indenture, and, with respect to the Olive Branch Bonds, shall have the meaning
given such term in the Olive Branch Indenture, and with respect to the Fulton
Bonds, shall have the meaning given such term in the Fulton Indenture, or all of
them, as the context indicates.
"TENDER DRAFT" shall mean, with respect to any Existing Letter of
Credit, a Tender Draft as defined in such Existing Letter of Credit.
"TERMINATION Date" shall mean the day that is seventy-two (72) months
after the date hereof.
"THIRD PARTY PAYOR PROGRAMS" shall mean all third party payment and/or
reimbursement programs in which the Borrower or any of its Subsidiaries
presently or hereafter participates, including Medicare, Medicaid, CHAMPUS, Blue
Cross and private insurance programs.
"TRUSTEES" shall mean the Series A and Series B Trustee, the Fulton
Trustee and the Olive Branch Trustee, or any of them, as the context indicates.
"UCC" shall mean the Uniform Commercial Code in the State of
Tennessee, as in effect from time to time.
1.2. ACCOUNTING AND COMMERCIAL TERMS. As used in this Agreement, all
accounting terms used but not otherwise defined herein shall have the respective
meanings assigned to them in conformity with GAAP. All terms used but not
otherwise defined herein that are defined or used in Article 9 of the UCC shall
have the respective meanings assigned to them in such Article.
1.3. GENERAL CONSTRUCTION. As used in this Agreement, the masculine,
feminine and neuter genders and the plural and singular numbers shall be deemed
to include the others in all cases in which they would so apply. "Includes" and
"including" are not limiting, and shall be deemed to be followed by "without
limitation" regardless of whether such words or words of like
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import in fact follow same. The word "or" is not intended and shall not be
construed to be exclusive.
1.4. DEFINED TERMS; HEADINGS. The use of defined terms in the Loan
Documents is for convenience of reference and shall not be deemed to be limiting
or to have any other substantive effect with respect to the persons or things to
which reference is made through the use of such defined terms. Article and
section headings and captions in the Loan Documents are included in such Loan
Documents for convenience of reference and shall not constitute a part of the
applicable Loan Documents for any other purpose.
1.5. REFERENCES TO THIS AGREEMENT AND PARTS THEREOF. As used in this
Agreement, unless otherwise specified the words "hereof," "herein" and
"hereunder" and words of similar import shall refer to this Agreement including
all schedules and exhibits hereto, as a whole, and not to any particular
provision of this Agreement, and the words "Article", "Section", "Schedule" and
"Exhibit" refer to articles, sections, schedules and exhibits to this Agreement.
1.6. DOCUMENTARY REFERENCES Any reference herein to any instrument,
document or agreement, by whatever terminology used, shall be deemed to include
any and all amendments, modifications, supplements, extensions, renewals,
substitutions and/or replacements thereof as the context may require.
ARTICLE 2
LOANS AND LETTERS OF CREDIT
2.1. COMMITMENTS; REDUCTIONS.
2.1.1. AMOUNTS OF COMMITMENTS. The aggregate amount of the
Commitments is $150,000,000, subject to reduction as provided in SECTIONS 2.1.2
and 2.1.3. The aggregate amount of the Revolving Credit Commitments at any time
is equal to the aggregate amount of the Commitments in effect at such time less
the aggregate amount of Letter of Credit Loans and Letter of Credit Liabilities
outstanding at such time. The aggregate amount of the Letter of Credit
Commitments at any time is equal to the lesser of (i) the aggregate amount of
the Commitments in effect at such time LESS the aggregate amount of Revolving
Credit Loans outstanding at such time or (ii) $75,000,000.
2.1.2. MANDATORY REDUCTIONS OF COMMITMENTS. The Commitments shall
be permanently reduced on each Scheduled Commitment Reduction Date set forth
below by the correlative amount shown below:
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<TABLE>
<CAPTION>
Scheduled Commitment Reduction Remaining
Reduction Date Amount Commitments
- -------------------- --------- -----------
<S> <C> <C>
January 1, 1997 $15,000,000 $135,000,000
July 1, 1997 15,000,000 120,000,000
January 1, 1998 15,000,000 105,000,000
July 1, 1998 15,000,000 90,000,000
January 1, 1999 15,000,000 75,000,000
July 1, 1999 15,000,000 60,000,000
January 1, 2000 15,000,000 45,000,000
Termination Date 45,000,000 -0-
</TABLE>
PROVIDED, HOWEVER, that, on the effective date of any voluntary reduction in the
Commitments pursuant to SECTION 2.1.3, the amount of the scheduled reduction on
the first Scheduled Commitment Reduction Date following the date of such
voluntary reduction shall be reduced by the amount of such voluntary reduction
and to the extent that the amount of such voluntary reduction exceeds the amount
of such scheduled reduction, the excess shall be applied to the reduction of the
amount of the scheduled reduction on the next succeeding Scheduled Commitment
Reduction Date and each Scheduled Commitment Reduction Date thereafter until
applied in full.
2.1.3. VOLUNTARY REDUCTIONS OF COMMITMENTS. The Borrower shall
have the right, at any time and from time to time, to terminate in whole or
permanently reduce in part, without premium or penalty, the Commitments in an
amount up to the amount by which the Commitments exceed the aggregate amount of
the then outstanding Loans and Letter of Credit Liabilities. The Borrower shall
give not less than ten (10) Business Days' prior written notice to the
Administrative Agent designating the date (which shall be a Business Day) of
such termination or reduction and the amount of any reduction. Promptly after
receipt of a notice of such termination or reduction, the Administrative Agent
shall notify each Lender of the proposed termination or reduction. Such
termination or reduction of the Commitments shall be effective on the date
specified in the Borrower's notice and shall reduce the Commitment of each
Lender in proportion to its Percentage of the Commitments. Any such reduction
of the Commitments shall be in a minimum amount of $10,000,000 and in integral
multiples of $1,000,000.
2.1.4. LIMITATIONS ON COMMITMENTS RELATING TO HALLMARK ACQUISITION.
Notwithstanding the other provisions of this SECTION 2.1, or any other
provision of this Agreement to the contrary, during such period of time as
(a) the Hallmark Acquisition Agreement remains in effect but the Hallmark
Acquisition has not yet been consummated or (b) the Hallmark Acquisition has
been consummated but the Hallmark Requirement has not yet been satisfied, the
aggregate amount of the Loans and Letter of Credit Liabilities, together with
the aggregate
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amount of all Loans made pursuant to the $50,000,000 Credit Agreement shall
not exceed, at any time during such period, an amount equal to the lesser of
(i) the aggregate amount of the Commitments hereunder and under the
$50,000,000 Credit Agreement calculated without reference to the provisions of
this SECTION 2.1.4, SECTION 2.1.3 of the $50,000,0000 Credit Agreement, or
(ii) an amount equal to (x) four times EBITDA for the Last Four Fiscal
Quarters, exclusive of any amounts attributable to Hallmark or the
Subsidiaries of Hallmark, LESS (y) the aggregate amount outstanding in respect
of the CHS Debentures, PLUS (z) following consummation of the Hallmark
Acquisition, the aggregate amount loaned or advanced by the Borrower or any of
its Subsidiaries in accordance with the provisions of clause (j) of
SECTION 9.5 for the purpose of redeeming Hallmark Notes (taking into account
any such loans or advances that are to be made substantially contemporaneously
with, and using the proceeds of, a Borrowing hereunder.
2.2. REVOLVING CREDIT LOANS.
2.2.1. COMMITMENT TO MAKE REVOLVING CREDIT LOANS. Subject to all
of the terms and conditions of this Agreement (including the conditions set
forth in SECTIONS 6.1 and 6.2) and in reliance upon the representations and
warranties of the Borrower herein set forth, each Lender hereby severally agrees
to make Revolving Credit Loans to the Borrower from time to time during the
Commitment Period, in amounts up to its Percentage of the aggregate Revolving
Credit Commitments, for the purposes identified in SECTION 2.10. In no event
shall (a) the aggregate principal amount of the Revolving Credit Loans from any
Lender outstanding at any time exceed such Lender's Revolving Credit Commitment
or (b) the aggregate principal amount of the Revolving Credit Loans from all
Lenders outstanding at any time exceed the Revolving Credit Commitments. Each
Lender's Revolving Credit Commitment shall expire upon the expiration of the
Commitment Period, and all Revolving Credit Loans shall be paid in full no
later than the Termination Date.
2.2.2. LENDERS' OBLIGATIONS SEVERAL; PROPORTIONATE LOANS. The
obligations of the Lenders to make Revolving Credit Loans under SECTION 2.2.1
shall be several and not joint and, subject to SECTION 2.14.4, all Revolving
Credit Loans under this Agreement shall be made by the Lenders simultaneously
and proportionately to their respective Percentages of the Revolving Credit
Commitments. It is understood and agreed that the failure of any Lender to make
its Revolving Credit Loan as part of any Revolving Credit Borrowing under
SECTION 2.2.1 shall not relieve any other Lender of its obligation to make its
Revolving Credit Loan as provided in SECTION 2.2.1. Neither the Administrative
Agent nor any Lender shall be responsible for the failure of any other Lender to
make a Revolving Credit Loan as provided herein nor shall the Revolving Credit
Commitment of any Lender be
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increased as a result of the default by any other Lender in such other
Lender's obligation to make Revolving Credit Loans hereunder.
2.2.3. REVOLVING CREDIT; MINIMUM BORROWINGS. Amounts borrowed by
the Borrower under the Revolving Credit Commitments may be prepaid and
reborrowed from time to time to during the Commitment Period. The aggregate
amount of Revolving Credit Loans made on any Funding Date shall be in integral
multiples of $500,000; PROVIDED, HOWEVER, that the aggregate amount of LIBOR
Loans made on any Funding Date shall be in a minimum amount of $5,000,000.
2.2.4. NOTICE OF BORROWING.
(a) DELIVERY OF NOTICE. Whenever the Borrower desires to borrow
under SECTION 2.2, it shall deliver to the Administrative Agent a Notice of
Borrowing no later than 11:00 a.m. (Eastern time) at least one (1) Business
Day in advance of the proposed Funding Date (in the case of a Base Rate
Loans) or three (3) Business Days in advance of the proposed Funding Date
(in the case of LIBOR Loans). The Notice of Borrowing shall specify (i)
the proposed Funding Date (which shall be a Business Day), (ii) the amount
of the proposed Revolving Credit Borrowing, (iii) whether the proposed
Revolving Credit Borrowing shall be in the form of Base Rate Loans or LIBOR
Loans, and (iv) in the case of LIBOR Loans, the requested Interest Period.
In lieu of delivering a Notice of Borrowing, the Borrower may give the
Administrative Agent telephonic notice by the required time of notice of
any proposed Borrowing under this SECTION 2.2.4; PROVIDED, HOWEVER, that
such notice shall be promptly confirmed in writing by delivery of a Notice
of Borrowing to the Administrative Agent on or prior to the Funding Date of
the requested Revolving Credit Loans. The execution and delivery of each
Notice of Borrowing shall be deemed a representation and warranty by the
Borrower that the requested Revolving Credit Loans may be made in
accordance with, and will not violate the requirements of, this Agreement,
including those set forth in SECTION 2.2.1.
(b) NO LIABILITY FOR TELEPHONIC NOTICES. Neither the Administrative
Agent nor any Lender shall incur any liability to the Borrower in acting
upon any telephonic notice given pursuant to this SECTION 2.2.4 that the
Administrative Agent believes in good faith to have been given by a duly
authorized officer or other person authorized to borrow on behalf of the
Borrower or for otherwise acting in good faith under this SECTION 2.2.4
and, upon the funding of Revolving Credit Loans by the Lenders in
accordance with this Agreement pursuant to any telephonic
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notice, the Borrower shall have effected a Revolving Credit Borrowing
hereunder.
(c) NOTICE IRREVOCABLE. Except as provided in SECTION 3.4.5, a
Notice of Borrowing for LIBOR Loans (or a telephonic notice in lieu
thereof) shall be irrevocable on and after the related Interest Rate
Determination Date, and the Borrower shall be bound to make a Revolving
Credit Borrowing in accordance therewith.
(d) OBLIGATIONS TO CONSTITUTE SENIOR INDEBTEDNESS. Notwithstanding
the foregoing provisions of this SECTION 2.2.4, the Borrower will not
deliver to the Administrative Agent a Notice of Borrowing or otherwise
request a Borrowing hereunder unless the proposed Borrowing will
constitute "Senior Indebtedness", as such term is used in the CHS
Subordinated Indenture.
2.2.5. DISBURSEMENT OF FUNDS. Promptly after receipt of a Notice
of Borrowing (or telephonic notice in lieu thereof), the Administrative Agent
shall notify each Lender of the proposed Revolving Credit Borrowing in writing,
or by telephone promptly confirmed in writing. Each Lender shall make the
amount of its Revolving Credit Loan available to the Administrative Agent, in
immediately available (same day) funds, at the Lending Office of the
Administrative Agent, not later than 11:00 a.m. (Eastern time) on the Funding
Date. The Administrative Agent shall make the proceeds of such Revolving Credit
Loans available to the Borrower on such Funding Date by causing an amount of
immediately available (same day) funds equal to the proceeds of all such
Revolving Credit Loans received by the Administrative Agent to be credited to
the account of the Borrower at such office of the Administrative Agent.
2.3. LETTERS OF CREDIT.
2.3.1. ISSUANCE OF LETTERS OF CREDIT. The Borrower may request the
Issuing Bank at any time and from time to time during the Commitment Period to
issue, and subject to and upon all of the terms and conditions of this Agreement
(including the conditions set forth in SECTIONS 6.1 and 6.2) and in reliance
upon the representations and warranties of the Borrower herein set forth the
Issuing Bank shall issue, for the account of the Borrower and for the benefit of
the holder(s) (or any trustee, agent or other representative of such holder(s))
of Letter of Credit Supportable Obligations of the Borrower and its
Subsidiaries, one or more irrevocable standby or direct-pay letters of credit in
the form customarily used by such Issuing Bank, or in such other form as has
been approved by the Issuing Bank and the Administrative Agent, in support of
such Letter of Credit Supportable Obligations; PROVIDED, HOWEVER, that (a) each
Letter of Credit shall be in a minimum stated amount of $500,000, (b) each
Letter of Credit by its terms shall terminate no later than two (2) years after
the date of issuance (or the date of the most recent extension, as the case may
be), nor later than thirty (30) days prior to the Termination Date, (c) no
Letter of Credit may be scheduled to expire after any date upon which the
Commitments are scheduled to be reduced under SECTION 2.1.2 unless, after giving
effect to the issuance of the requested Letter of Credit, the aggregate
principal amount of Loans that are Base Rate Loans or that have Interest Periods
that will expire on or before such date equals or exceeds the amount of any
prepayment required pursuant to SECTION 3.1.2(b) in connection with such
reduction in the Commitments, and (d) in no event shall any Letter of Credit be
issued if the issuance thereof would
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cause the aggregate amount of the then outstanding Letter of Credit Loans and
Letter of Credit Liabilities to exceed the aggregate amount of the Letter of
Credit Commitments then in effect.
2.3.2. LETTER OF CREDIT REQUESTS. At least five (5) Business Days
prior to (i) the date on which the Borrower desires that a Letter of Credit be
issued hereunder or (ii) the date on which the Borrower desires that the
expiration date of an outstanding Letter of Credit be extended, as the case may
be, the Borrower shall deliver to the Issuing Bank (with copies to the
Administrative Agent and each Lender) a Letter of Credit Request therefor. The
execution and delivery of each Letter of Credit Request shall be deemed a
representation and warranty by the Borrower that the requested Letter of Credit
issuance or extension may be accomplished in accordance with, and will not
violate the requirements of, this Agreement, including those set forth in
SECTION 2.3.1. Unless the Issuing Bank has received notice from the
Administrative Agent or Requisite Lenders before it issues or extends the
requested Letter of Credit that a Default exists or that the requested issuance
or extension would violate the requirements of this Agreement, including those
set forth in SECTION 2.3.1, then the Issuing Bank may issue or extend, as the
case may be, the requested Letter of Credit for the account of the Borrower in
accordance with the Issuing Bank's usual and customary practices. Upon the
issuance or extension of any Letter of Credit, the Issuing Bank shall promptly
notify the Administrative Agent and each Lender of such issuance or extension,
which notice to the Administrative Agent shall be accompanied by a copy of the
Letter of Credit so issued or the instrument(s) evidencing such extension.
Notwithstanding the foregoing provisions of this SECTION 2.3.2, the
Borrower will not deliver to the Administrative Agent a Letter of Credit
Request or otherwise requires the issuance of a Letter of Credit hereunder
unless the corresponding Letter of Credit Obligations will constitute "Senior
Indebtedness", as such term is used in the CHS Subordinated Indenture.
2.3.3. EXISTING LETTERS OF CREDIT. The Existing Letters of Credit
shall be deemed outstanding pursuant to, and shall constitute "Letters of
Credit", for all purposes of this Agreement. For the purposes of the Series A
and Series B Indenture, this Agreement shall be deemed to be a "Reimbursement
Agreement" as therein defined.
2.3.4. COMMITMENT TO MAKE LETTER OF CREDIT LOANS. Notwithstanding
anything to the contrary contained in SECTION 2.3 or SECTION 3.2, when the
Issuing Bank shall make any payment under any Existing Letter of Credit pursuant
to a Tender Draft and the conditions set forth in SECTIONS 6.1 and 6.2 shall
have been fulfilled, the amount of such payment by the Issuing Bank shall
constitute a Letter of Credit Borrowing by the Borrower on the date of such
payment, such Borrowing to consist of Base Rate Loans made by each Lender in an
amount equal to such Lender's Percentage of the amount of such payment;
PROVIDED, HOWEVER, that if the conditions of SECTIONS 6.1 and 6.2 have not been
fulfilled, the amount so drawn pursuant to the Tender Draft shall be payable by
the Borrower in accordance with the terms of
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SECTION 3.2.1. Subject to all of the terms and conditions set forth in this
Agreement, upon receipt of notice of any such payment by the Issuing Bank under
an Existing Letter of Credit, the Administrative Agent shall establish the
appropriate Letter of Credit Borrowing effective on the date of the
corresponding payment under such Existing Letter of Credit.
2.3.5. PLEDGED BONDS. Pursuant to the Bond Pledge Agreements, the
Borrower has agreed that, in accordance with the terms of the Indentures, Bonds
purchased with the proceeds of any Tender Draft and not remarketed on the date
of such Tender Draft shall be delivered by the respective Tender Agent to the
Issuing Bank or its designee, to be held by the Issuing Bank or its designee in
pledge as collateral securing the Letter of Credit Loans or Letter of Credit
Liabilities arising from the purchase of such Bonds with the proceeds of such
Tender Draft. Bonds so delivered to the Issuing Bank or its designee shall be
registered in the name of the Issuing Bank or its designee, as pledgee of the
Borrower, as provided in the applicable Bond Pledge Agreement.
2.3.6. LENDERS' OBLIGATIONS SEVERAL. The obligations of the
Lenders to make Letter of Credit Loans under SECTION 2.3.4 shall be several and
not joint, and all Letter of Credit Loans under this Agreement shall be made by
the Lenders simultaneously and proportionately to their respective Percentages
of the Letter of Credit Commitments. It is understood and agreed that the
failure of any Lender to make its Letter of Credit Loan as part of any Letter of
Credit Borrowing under SECTION 2.3.4 shall not relieve any other Lender of its
obligation to make its Letter of Credit Loan as provided in SECTION 2.3.4.
Neither the Administrative Agent nor any Lender shall be responsible for the
failure of any other Lender to make a Letter of Credit Loan as provided herein
nor shall the Letter of Credit Commitment of any Lender be increased as a result
of the default by any other Lender in such other Lender's obligation to make
Letter of Credit Loans hereunder.
2.4. PARTICIPATIONS IN LETTER OF CREDIT LIABILITIES.
2.4.1. PURCHASE OF PARTICIPATIONS BY LENDERS. Each Lender shall be
deemed to have irrevocably and unconditionally purchased and received from the
Issuing Bank, without recourse or warranty and without any further action on the
part of any party, an undivided interest and participation to the extent of such
Lender's Percentage in all Letter of Credit Liabilities as to each Letter of
Credit and any security therefor or guarantee relating thereto.
2.4.2. NOTIFICATION BY ISSUING BANK OF DRAWING. The Issuing Bank
shall notify the Administrative Agent and each Lender promptly after the
presentation of any draft and
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certificate or equivalent documents to the Issuing Bank in connection with any
drawing under a Letter of Credit not reimbursed by or on behalf of the Borrower
on the date such drawing is made.
2.4.3. PAYMENTS BY LENDERS UPON A DRAWING OR PAYMENT UNDER A LETTER
OF CREDIT; ADJUSTMENTS. Each of the Lenders, shall, on or before 11:00 a.m.
(Eastern time) on the date of any drawing under a Letter of Credit (including
any drawing or payment under an Existing Letter of Credit that results in a
Letter of Credit Loan), unconditionally pay to the Administrative Agent, for
distribution by the Administrative Agent to the Issuing Bank, such Lender's
Percentage of such drawing; PROVIDED, HOWEVER, that, if the Borrower should pay
in full or in part such drawing on the date thereof, the obligation of each
Lender to pay to the Issuing Bank pursuant to this SECTION 2.4.3 such Lender's
Percentage of such drawing shall be reduced by the amount equal to such Lender's
Percentage of such payment by the Borrower. Amounts paid in excess of the net
amount so owed by each Lender to the Issuing Bank shall promptly be refunded by
the Issuing Bank to the Administrative Agent for distribution by the
Administrative Agent to the respective Lenders.
2.4.4. FAILURE TO PAY BY LENDERS. If any Lender shall fail to pay
its Percentage of any drawing under a Letter of Credit as provided in SECTION
2.4.3 above, the Issuing Bank shall be deemed to have advanced funds on behalf
of such Lender. Any advance made by the Issuing Bank on behalf of a Lender
hereunder and not paid by such Lender to the Issuing Bank shall bear interest
for each day from the day such payment is due until such payment shall be paid
in full at a rate per annum equal to the Federal Funds Rate or any other rate
customarily used by banks for the correction of errors among banks, but in no
event to exceed the Highest Lawful Rate, and shall be repaid by application
by the Administrative Agent (for the account of the Issuing Bank) of any
payment that such Lender otherwise is entitled to receive under this
Agreement. Pending repayment, each such advance shall be secured by such
Lender's participation interest in the Letter of Credit drawn upon, the Letter
of Credit Liabilities arising therefrom and any security therefor, and the
Issuing Bank shall be subrogated to such Lender's rights hereunder in respect
thereof.
2.4.5. LENDERS' OBLIGATIONS ABSOLUTE. The obligation of each
Lender to pay to the Administrative Agent, for the benefit of the Issuing Bank,
its Percentage of each drawing under a Letter of Credit not indefeasibly repaid
by the Borrower shall be unconditional and irrevocable, shall not be subject to
any qualification or exception whatsoever, shall be made in accordance with the
terms and conditions of this Agreement under all circumstances and shall be
binding in accordance with the
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terms and conditions of this Agreement under all circumstances, including the
following circumstances:
(a) any lack of validity or enforceability of this Agreement, the
Bond Documents or any other instrument, document or agreement relating to
the transactions that are the subject thereof;
(b) the existence of any claim, set-off, defense or other right that
the Borrower, any Guarantor or any Lender may have at any time against any
other, the Administrative Agent, the Co-Agent, the Issuing Bank, any Lender
or any other Person, whether in connection with this Agreement, the Bond
Documents, the transactions contemplated herein or therein or any related
transactions;
(c) any draft, statement or other document presented under or in
connection with any Letter of Credit, this Agreement or any other Loan
Document proving to be forged, fraudulent, invalid or insufficient in any
respect or any statement therein being untrue or inaccurate in any respect;
(d) the surrender or impairment of any security for the performance
or observance of any of the terms of this Agreement;
(e) the occurrence or continuance of any Default or Event of Default;
(f) payment by the Issuing Bank under a Letter of Credit against
presentation of a draft or certificate that does not comply with the terms
of the Letter of Credit, except for any such payment resulting from the
Issuing Bank's gross negligence or willful misconduct; or
(g) any other reason.
2.4.6. INFORMATION REGARDING LETTER OF CREDIT LIABILITIES. Upon
request by the Administrative Agent from time to time, the Issuing Bank shall
advise the Administrative Agent and the Lenders as to the various amounts of
the outstanding Letter of Credit Liabilities as shown on the records of the
Issuing Bank.
2.5. BORROWER'S OBLIGATIONS ABSOLUTE.
2.5.1. OBLIGATIONS ABSOLUTE. The obligations of the Borrower under
this Agreement in respect of any Letter of Credit and under any other agreement
or instrument relating to any Letter of Credit shall be unconditional and
irrevocable, and shall be paid strictly in accordance with the terms of this
Agreement and such other agreement or instrument under all
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circumstances, to the extent permitted by law, including the following
circumstances:
(a) any lack of validity or enforceability of any of the Loan
Documents, the Bond Documents or any other instrument, document or
agreement relating to the transactions that are the subject thereof;
(b) any change in the time, manner or place of payment of, or in any
other term of, all or any of the obligations of the Borrower in respect
of the Letters of Credit or the Bonds or any other amendment or waiver of
or any consent to departure from all or any of the Loan Documents or the
Bond Documents;
(c) any exchange or release of, or the non-perfection of any Lien on
any Collateral, or any release or amendment or waiver of or consent to
departure from any guaranty, for all or any of the Letter of Credit
Obligations;
(d) the existence of any claim, set-off, defense or other right that
the Borrower or any Guarantor may have at any time against the Trustees,
any beneficiary or any transferee of a Letter of Credit (or any Persons for
whom the Trustees, any such beneficiary or any such transferee may be
acting), any of the Lenders, the Issuing Bank, the Administrative Agent,
the Co-Agent or any other Person, whether in connection with the Loan
Documents, the Bond Documents or the transactions contemplated hereby or by
the other Loan Documents, the Bond Documents or any unrelated transaction;
(e) any draft, statement or other document presented under or in
connection with any Letter of Credit, this Agreement or any other Loan
Document proving to be forged, fraudulent, invalid or insufficient in any
respect or any statement therein being untrue or inaccurate in any respect;
(f) payment by the Issuing Bank under a Letter of Credit against
presentation of a draft or certificate that does not comply with the terms
of the Letter of Credit, except for any such payment resulting from the
Issuing Bank's gross negligence or willful misconduct;
(g) any consequences arising from causes beyond the control of the
Issuing Bank; and
(h) any other circumstances or happening whatsoever, whether or not
similar to any of the foregoing, that might otherwise constitute a defense
available to, or a discharge of, the Borrower or any Guarantor.
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2.5.2. NO LIABILITY. No action taken or omitted by the Issuing
Bank under or in connection with the Letters of Credit or the related
applications, agreements or certificates, if taken or omitted in good faith,
shall put the Administrative Agent, the Issuing Bank or any Lender under any
resulting liability to the Borrower.
2.6. INTEREST.
2.6.1. INTEREST RATE ON LOANS. Subject to SECTION 2.6.3, the
unpaid principal balances of the Loans shall bear interest from their respective
Funding Dates through maturity (whether by acceleration or otherwise) (including
post-petition interest in any proceeding under applicable bankruptcy laws) at a
rate determined by reference to the Base Rate or LIBOR. The applicable basis
for determining the rate of interest for Revolving Credit Loans shall be
selected by the Borrower at the time a Notice of Borrowing is given pursuant to
Section 2.2.4 or at the time a Notice of Conversion/Continuation is given
pursuant to SECTION 2.7.2. Each Letter of Credit Loan shall be a Base Rate Loan
unless and until converted to a LIBOR Loan as provided in SECTION 2.7. If on any
day any Loan is outstanding with respect to which notice has not been delivered
to the Administrative Agent in accordance with the terms of this Agreement
specifying the basis for determining the rate of interest, then for that day
such Loan shall bear interest determined by reference to the Base Rate. The
Loans shall bear interest as follows:
(a) if a Base Rate Loan, then at a fluctuating rate per annum equal
to the sum of the Base Rate, as it varies from time to time, plus the
Applicable Base Rate Margin; or
(b) if a LIBOR Loan, then at a rate per annum equal to the sum of
LIBOR plus the Applicable LIBOR Margin.
2.6.2. INTEREST RATE ON UNREIMBURSED DRAWS UNDER LETTERS OF CREDIT.
The unpaid principal amount of all draws under the Letters of Credit (other than
draws that become Letter of Credit Loans pursuant to SECTION 2.3.4) not
immediately repaid pursuant to SECTION 3.2.1 shall bear interest from the date
of such drawing until the principal balance thereof is paid in full at the
Default Rate applicable to Base Rate Loans, but in no event to exceed the
Highest Lawful Rate. Interest accruing pursuant to this SECTION 2.6.2 shall be
payable upon demand.
2.6.3. DEFAULT RATE. Upon the occurrence and during the
continuance of an Event of Default, the unpaid principal balances of the Loans
and, to the extent permitted by applicable law, any unpaid interest accrued in
respect of the Loans shall bear interest at the Default Rate, but in no event to
exceed the Highest Lawful Rate; PROVIDED, HOWEVER, that in the case of LIBOR
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Loans, upon the expiration of the Interest Period in effect at the time any such
increase in interest rate is effective, such LIBOR Loans shall thereupon become
Base Rate Loans and thereafter bear interest at the corresponding Default Rate,
but in no event to exceed the Highest Lawful Rate. Interest accruing pursuant
to this SECTION 2.6.3 shall be payable upon demand.
2.6.4. CONCLUSIVE DETERMINATION. Each determination by the
Administrative Agent of an interest rate under this Agreement shall be
conclusive and binding for all purposes, absent manifest error.
2.7. CONVERSION OR CONTINUATION.
2.7.1. OPTION TO CONVERT OR CONTINUE. Subject to the provisions of
SECTION 2.14, the Borrower shall have the option (a) at any time to convert all
or any part of any outstanding Base Rate Loans in an aggregate minimum amount of
$5,000,000 and integral multiples of $500,000 in excess of that amount from Base
Rate Loans to LIBOR Loans and (b) upon the expiration of any Interest Period
applicable to a specific Borrowing of LIBOR Loans, to continue all or any
portion of such Loans in an aggregate minimum amount of $5,000,000 and integral
multiples of $500,000 in excess of that amount as LIBOR Loans, and the
succeeding Interest Period of such continued LIBOR Loans shall commence on the
expiration date of the Interest Period previously applicable thereto.
2.7.2. NOTICE OF CONVERSION/CONTINUATION. The Borrower shall
deliver a Notice of Conversion/Continuation to the Administrative Agent no later
than 11:00 a.m. (Eastern time) at least three (3) Business Days in advance of
the proposed conversion/continuation date. A Notice of Conversion/Continuation
shall specify (a) the proposed conversion/continuation date (which shall be a
Business Day), (b) the aggregate amount of Loans to be converted/continued, (c)
the nature of the proposed conversion/continuation, and (d) the requested
Interest Period. In lieu of delivering a Notice of Conversion/Continuation, the
Borrower may give the Administrative Agent telephonic notice by the required
time of any proposed conversion/continuation under this SECTION 2.7; PROVIDED,
HOWEVER, that such notice shall be promptly confirmed in writing by a Notice of
Conversion/Continuation delivered to the Administrative Agent on or before the
proposed conversion/continuation date. The execution and delivery of each
Notice of Conversion/Continuation shall be deemed a representation and warranty
by the Borrower that the requested conversion/continuation may be made in
accordance with, and will not violate the requirements of, this Agreement,
including those set forth in SECTIONS 2.7.1 and 2.14.1.
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2.7.3. NOTICE TO THE LENDERS. Promptly after receipt of a Notice
of Conversion/Continuation (or telephonic notice in lieu thereof), the
Administrative Agent shall notify each Lender of the proposed conversion or
continuation. Neither the Administrative Agent nor the Lender shall incur any
liability to the Borrower in acting upon any telephonic notice referred to above
that the Administrative Agent believes in good faith to have been given by a
duly authorized officer or other person authorized to act on behalf of the
Borrower or for otherwise acting in good faith under this SECTION 2.7 and,
upon conversion/continuation by the Administrative Agent in accordance with
this Agreement pursuant to any telephonic notice, the Borrower shall have
effected a conversion/continuation of Loans hereunder.
2.7.4. NOTICE IRREVOCABLE. Except as provided in SECTION 3.4.5, a
Notice of Conversion/Continuation shall be irrevocable on and after the related
Interest Rate Determination Date, and the Borrower shall be bound to convert or
continue such Loan in accordance therewith.
2.7.5. AUTOMATIC CONVERSION. In the event any LIBOR Loan is unpaid
upon the expiration of the Interest Period applicable thereto and a Notice of
Conversion/Continuation has not been given in the manner provided in SECTION
2.7.2, such LIBOR Loan shall, effective as of the last day of such Interest
Period, become a Base Rate Loan.
2.8. NOTES; RECORDS OF PAYMENTS. Each Loan made by a Lender to the
Borrower pursuant to this Agreement shall be evidenced by a Note payable to the
order of such Lender in an amount equal to such Lender's Percentage of the
aggregate amount of the Commitments. Each Lender hereby is authorized to record
and endorse the date and principal amount of each Loan made by it, and the
amount of all payments and prepayments of principal and interest made to such
Lender with respect to such Loans, on a schedule annexed to and constituting a
part of such Lender's Note, which recordation and endorsement shall constitute
prima facie evidence of the Loans made by such Lender to the Borrower
and payments made by the Borrower to such Lender, absent manifest error;
PROVIDED, HOWEVER, that (a) failure by any Lender to make any such recordation
or endorsement shall not in any way limit or otherwise affect the obligations of
the Borrower or the rights and remedies of the Lenders under this Agreement or
the Notes, and (b) payments of principal and interest on the Loans to the
Lenders shall not be affected by the failure to make any such recordation or
endorsement thereof. In lieu of making recordation or endorsement, the Lenders
hereby are authorized, at their option, to record the payments or prepayments on
their respective books and records in accordance with their usual and customary
practice, which recordation shall constitute prima facie evidence of the Loans
made by the Lenders to the Borrower
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and the payments and prepayments made by the Borrower to the Lenders, absent
manifest error.
2.9. ADMINISTRATIVE AGENT'S RIGHT TO ASSUME FUNDS AVAILABLE. The
Administrative Agent may assume that each Lender has made the proceeds of its
Loans available to the Administrative Agent on the corresponding Funding Date in
the event the applicable conditions precedent to funding the
requested Loans set forth in ARTICLE 6 have been satisfied or waived in
accordance with SECTION 14.3, and the Administrative Agent, in its sole
discretion, may, but shall not be obligated to, advance all or any portion of
the amount of any requested Borrowing on such Funding Date to the Borrower prior
to receiving the proceeds of the corresponding Loans from the Lenders. If the
Administrative Agent has advanced proceeds of any Loan to the Borrower on behalf
of any Lender and such Lender fails to make available to the Administrative
Agent its Percentage share of such Loan as required by SECTIONS 2.2 or 2.3.4,
the Administrative Agent shall be entitled to recover such amount on demand from
such Lender. If such Lender does not pay such amount forthwith upon the
Administrative Agent's demand therefor, the Administrative Agent shall notify
the Borrower and the Borrower shall pay such amount to the Administrative Agent.
The Administrative Agent also shall be entitled to recover from such Lender
interest at the Federal Funds Rate or any other rate customarily used by banks
for the correction of errors among banks, but in no event to exceed the Highest
Lawful Rate, on such amount so advanced on behalf of a Lender for each day from
the date such amount was made available by the Administrative Agent to the
Borrower to the date such amount is recovered by the Administrative Agent, with
interest at the applicable rate for such Loan. Nothing herein shall be deemed
to relieve any Lender from its obligation to fulfill such Lender's Commitments
or to prejudice any rights that the Administrative Agent or the Borrower may
have against any Lender as a result of any default by such Lender hereunder.
2.10. USE OF PROCEEDS. The proceeds of the Revolving Credit Loans will
be used by the Borrower for the making of Permitted Acquisitions, for working
capital purposes and for other general corporate purposes, and will not be used
by the Borrower for any purpose prohibited by the terms of this Agreement or by
any law. The proceeds of the Letter of Credit Loans will be used solely to
reimburse the Issuing Bank for amounts paid by it in respect of Tender Drafts
and will not be used by the Borrower for any purpose prohibited by the terms of
this Agreement or by any law.
2.11. CREDIT FEES. In consideration for the obligations of the
Administrative Agent, the Issuing Bank and the Lenders set forth herein, the
Borrower shall pay the following credit fees:
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2.11.1. ADMINISTRATIVE AGENT'S FEES. Pursuant to one or more
separate agreements with the Administrative Agent, the Borrower shall pay to the
Administrative Agent the fees and charges specified therein for the services of
the Administrative Agent in acting as such hereunder.
2.11.2. FACILITY INITIATION FEES. In consideration of each Lender's
agreement to participate in the Facilities as provided herein, on the date
hereof the Borrower shall pay to each Lender a fee in an amount equal to
(a) fifteen one-hundredths of one percent (0.15%) of such Lender's Percentage
of the Commitments hereunder if such Lender's commitment to Borrower to
participate in the Facilities and in the $50,000,000 Credit Facility
was in an aggregate amount less than $25,000,000, (b) one-fourth of one percent
(0.25%) of such Lender's Percentage of the Commitments hereunder if such
Lender's commitment to Borrower to participate in the Facilities and in the
$50,000,000 Credit Facility was in an aggregate amount equal to or greater than
$25,000,000 but less than $50,000,000 or (c) three-eighths of one percent
(0.375%) of such Lender's Percentage of the Commitments if such Lender's
commitment to Borrower to participate in the Facilities and in the $50,000,000
Credit Facility was in an aggregate amount equal to or greater than $50,000,000.
Such fees shall be deemed fully earned and nonrefundable when due.
2.11.3. COMMITMENT FEES. The Borrower agrees to pay to the
Administrative Agent, for distribution to each Lender in proportion to that
Lender's Percentage of the Commitments, annual commitment fees for the period
commencing on the date hereof to but excluding the Termination Date equal to the
average of the daily unused portion of the Commitments (I.E., the aggregate
amount of the Commitments LESS the aggregate amount of Loans and Letter of
Credit Liabilities outstanding) multiplied by the Applicable Commitment Fee
Percentage ("COMMITMENT FEES"). Commitment Fees shall be payable in quarter-
annual installments, in arrears, on January 1, April 1, July 1 and October 1 of
each year, commencing October 1, 1994, and on the Termination Date.
2.11.4. LETTER OF CREDIT FEES. The Borrower agrees to pay to the
Administrative Agent, for distribution to each Lender in proportion to that
Lender's Percentage of the Commitments, annual letter of credit fees for the
period commencing on the date hereof to but excluding the Termination Date equal
to the average of the daily aggregate amount available to be drawn under Letters
of Credit multiplied by the Applicable Letter of Credit Fee Percentage ("LETTER
OF CREDIT FEES"). Letter of Credit Fees shall be payable in quarter-annual
installments, in arrears, on January 1, April 1, July 1 and October 1 of each
year, commencing January 1, 1995, and on the Termination Date. Letter of
credit fees paid pursuant to the Previous Credit Agreement for the period
ending on September 30, 1994 shall be equitably adjusted among the Lenders.
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2.11.5. OPENING FEES; AMENDMENT OR TRANSFER FEES; DRAWING FEES.
Pursuant to one or more separate agreements with the Issuing Bank, Borrower
shall pay to the Issuing Bank its fees for the issuance of Letters of Credit
pursuant to this Agreement, together with the normal and customary fees charged
by the Issuing Bank upon the establishment of any Letter of Credit, upon any
amendment or transfer of a Letter of Credit and upon the payment of any drawing
under any Letter of Credit.
2.12. COMPUTATIONS. To the extent permitted by applicable law, all
computations of fees and interest under this Agreement payable in respect of any
period shall be made by the Administrative Agent on the basis of a 360-day year,
in each case for the actual number of days (including the first day but
excluding the last day) occurring in the period for which such fees or interest
are payable. In computing interest on any Loan, the date of the making of such
Loan or the first day of an Interest Period, as the case may be, shall be
included and the date of payment or the expiration date of an Interest Period,
as the case may be, shall be excluded; PROVIDED, HOWEVER, that if a Loan is
repaid on the same day on which it is made, one day's interest shall be paid on
that Loan.
2.13. INTEREST AND FEES MARGINS. For purposes of interest and fee
computations hereunder involving the Applicable Base Rate Margin, the Applicable
LIBOR Margin, the Applicable Letter of Credit Fee Percentage and the Applicable
Commitment Fee Percentage, such margins and percentages shall be determined as
follows:
<TABLE>
<CAPTION>
Applicable Applicable
Applicable Applicable Letter of Commitment
LIBOR Base Rate Credit Fee Fee
Tier Margin Margin Percentage Percentage
- ---- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1 0.875% 0.000% 0.875% 0.200%
2 1.125% 0.000% 1.125% 0.375%
3 1.375% 0.000% 1.375% 0.375%
4 1.625% 0.125% 1.625% 0.375%
</TABLE>
Except as expressly hereinafter provided, the applicable tier at any time
shall be determined with reference to the Borrower's Funded Indebtedness to
EBITDA Ratio for the Last Four Fiscal Quarters, as follows:
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<TABLE>
<CAPTION>
Tier Funded Indebtedness to EBITDA Ratio
- ---- ------------------------------------------------
<S> <C>
1 Equal to or less than 2.0 to 1.0
2 Greater than 2.0 to 1.0 but less than or equal to 2.5 to 1.0
3 Greater than 2.5 to 1.0 but less than or equal to 3.0 to 1.0
4 Greater than 3.0 to 1.0
</TABLE>
Any adjustment in the margins set forth above shall take effect on the
first Pricing Tier Determination Date following the Last Four Fiscal Quarters as
to which such ratio was calculated.
Notwithstanding the foregoing, during such time as (i) the Hallmark
Acquisition Agreement remains in effect but the Hallmark Acquisition has not yet
been consummated or (ii) the Hallmark Acquisition has been consummated but the
Hallmark Requirement has not yet been satisfied, the applicable tier as
hereinabove set forth shall be calculated with reference to the Borrower's Net
Funded Indebtedness to EBITDA Ratio.
2.14. SPECIAL PROVISIONS GOVERNING -LIBOR LOANS. Notwithstanding other
provisions of this Agreement, the following provisions shall govern with respect
to LIBOR Loans as to the matters covered:
2.14.1. DETERMINATION OF INTEREST PERIOD. By giving a Notice of
Borrowing pursuant to SECTION 2.2.4, the Borrower shall have the option, subject
to the other provisions of this SECTION 2.14.1, to specify whether the Interest
Period commencing on the date specified therein shall be a one, two, three or
six-month period; PROVIDED that:
(a) in the case of immediately successive Interest Periods, each
successive Interest Period shall commence on the day on which the next
preceding Interest Period expires;
(b) if any Interest Period otherwise would expire on a day that is
not a Business Day, that Interest Period shall be extended to expire on the
next succeeding Business Day; PROVIDED, HOWEVER, that if any such 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 that month,
that Interest Period shall expire on the immediately preceding Business
Day;
(c) any Interest Period that begins on the last Business Day of a
calendar month (or on a day for which
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there is no numerically corresponding day in the calendar month at the
end of such Interest Period) shall, subject to paragraphs (d), (e) and
(f) below, end on the last Business Day of a calendar month;
(d) no Interest Period may be chosen that would extend beyond any
date upon which the Commitments are scheduled to be reduced under SECTION
2.1.2 unless, after giving effect to such LIBOR Loan, the aggregate
principal amount of Loans that are Base Rate Loans or that have Interest
Periods that will expire on or before such date equals or exceeds the
amount of any prepayment required pursuant to SECTION 3.1.2(b) in
connection with such reduction in the Commitments;
(e) with respect to a Letter of Credit Loan, no Interest Period may
be chosen that would extend beyond any date on which such Loan may be
required to be repaid pursuant to SECTION 3.2.2; and
(f) no Interest Period shall extend beyond the Termination Date.
2.14.2. DETERMINATION OF INTEREST RATE. As soon as is practicable
after 11:00 a.m. (Eastern time) on the Interest Rate Determination Date, the
Administrative Agent shall determine (which determination shall, absent manifest
error, be final, conclusive and binding upon all parties) the interest rate that
shall apply to the LIBOR Loans for which an interest rate is then being
determined for the applicable Interest Period and shall promptly give notice
thereof (in writing or by telephone confirmed in writing) to the Borrower and to
each Lender.
2.14.3. INABILITY TO DETERMINE RATE. In the event the
Administrative Agent shall have determined (which determination shall be
conclusive and binding absent manifest error) that by reason of circumstances
affecting the London interbank Eurodollar market, adequate and reasonable means
do not exist for ascertaining Base LIBOR, the Administrative Agent forthwith
shall give telephonic notice of such determination, confirmed in writing, to the
Borrower and to each Lender. If such notice is given, and until such notice has
been withdrawn by the Administrative Agent, no additional LIBOR Loans shall be
made.
2.14.4. ILLEGALITY; TERMINATION OF COMMITMENT TO MAKE LIBOR LOANS.
Notwithstanding any other provisions of this Agreement, if any law, treaty, rule
or regulation or determination of a court or other governmental authority, or
any change therein or in the interpretation or application thereof, shall make
it unlawful for any Lender to make or maintain LIBOR Loans, as contemplated by
this Agreement, then, and in any such
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event, such Lender shall be an "AFFECTED LENDER" and shall promptly give
notice (by telephone confirmed in writing) to the Borrower and the
Administrative Agent (which notice the Administrative Agent shall promptly
transmit to each Lender in writing, or by telephone confirmed in
writing) of such determination, and the obligation of the Affected Lender to
make LIBOR Loans shall be terminated, and its obligation to maintain its LIBOR
Loans during such period shall be terminated at the earlier to occur of the
termination of the last Interest Period then in effect or when required by law.
Thereafter, and until such notice has been withdrawn by the Affected Lender, the
Affected Lender shall have no obligation to make LIBOR Loans, and
any LIBOR Loans of the Affected Lender then outstanding shall be converted into
Base Rate Loans as of the end of the corresponding Interest Period for each.
2.14.5. LIBOR LOANS AFTER DEFAULT. Unless all Lenders shall
otherwise agree, after the occurrence of and during the continuance of a Default
or an Event of Default, the Borrower may not elect to have a Loan be made or
continued as, or converted to, a LIBOR Loan.
2.15. EXPENSES. The Borrower shall reimburse the Administrative Agent, on
demand, for all reasonable attorneys' and paralegals' fees and expenses of
counsel to the Administrative Agent, all fees and expenses for title, lien and
other public records searches, all filing and recordation fees and taxes, all
duplicating expenses, corporation search fees, appraisal fees and escrow agent
fees and expenses and all other customary fees and expenses incurred in
connection with (a) the negotiation, documentation and closing of the
transactions contemplated hereby, (b) the perfection of or the continued
perfection of the security interests contemplated hereby, and (c) the review and
preparation of any documentation in connection with, and the approval by the
Lenders of any matter for which the Lenders' approval is requested or required
hereunder. The obligations described in this SECTION 2.15 regarding the payment
of expenses are independent of all other obligations of the Borrower hereunder,
shall survive the expiration or termination of the Commitments and shall be
payable regardless of whether the financing transactions contemplated by this
Agreement shall be consummated.
2.16. RATINGS OF THE ISSUING BANK AND THE LENDERS.
(a) If the long-term rating of the Issuing Bank shall fall below
"All" as established by Standard & Poor's Corporation, then the Borrower may
request that the Lenders replace the Issuing Bank and the Letters of Credit
with a substitute Issuing Bank and substitute Letters of Credit issued
thereby, having said credit rating. Upon such request by the Borrower, the
Lenders may make arrangements
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to replace the Issuing Bank and the Letters of Credit but shall be under
no obligation hereunder to do so.
(b) If the long-term deposit rating of any Lender hereunder (or, in
the event a Lender has no rating, the rating of its holding company) shall
fall below Baa1 as established by Moody's Investors Service, Inc. or BBB+
as established by Standard & Poor's Corporation, then the Issuing Bank may
require by written notice to such Lender that within ninety (90) days of
the date of such written notice, such Lender shall (a) cause the issuance
to the Issuing Bank of a letter of credit from a bank meeting one
of the above-noted ratings and reasonably acceptable to the Issuing Bank,
in the face amount equal to such Lender's Percentage of the aggregate
Letter of Credit Liabilities, securing such Lender's obligations hereunder
to the Issuing Bank (which bank may be a bank affiliated with such Lender),
or (b) subject to the requirements of SECTION 13.2, assign its Commitments
and participations in Letters of Credit to a Lender meeting one of the
above-noted ratings and reasonably acceptable to the Issuing Bank. If
after such ninety (90) day period such Lender has not met either of the
requirements of the foregoing sentence, the Issuing Bank may purchase all
or any portion of such Lender's participation hereunder and such Lender
shall cooperate in assigning such interest.
2.17. REPLACEMENT OR REMOVAL OF A LENDER. If the Administrative Agent
receives a notice pursuant to SECTION 3.4.7 claiming compensation, reimbursement
or indemnity pursuant to SECTION 3.4 or SECTION 3.5, and the aggregate amount
of all such compensation, reimbursement or indemnity payments made or required
to be made by the Borrower pursuant to SECTION 3.4 or SECTION 3.5 to the
Lender giving notice is materially greater (as determined by the Borrower in
its reasonable judgment) than the weighted average amount of payments made or
required to be made to the other Lenders pursuant to SECTION 3.4 or
SECTION 3.5, or if the Administrative Agent receives a notice from an Affected
Lender pursuant to SECTION 2.14.4, then, so long as no Default or Event of
Default shall have occurred and be continuing, the Borrower may, within sixty
(60) days after receipt of any such notice, elect to terminate such Lender as
a party to this Agreement. If the amount of such Lender's
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<PAGE>
Commitment, together with the amount of any other Commitments theretofore or
concurrently therewith to be reduced in accordance with this SECTION 2.17,
aggregates twenty-five percent (25%) or less of the aggregate Commitments, the
Borrower may elect either to replace such Lender with another financial
institution meeting one of the ratings set forth in SECTION 2.16(B) and
reasonably satisfactory to the Administrative Agent and the Issuing Bank (a
"REPLACEMENT LENDER") or to reduce the Commitments by the amount of the
Commitment of such Lender. If the amount of such Lender's Commitment,
together with the amount of any other Commitments theretofore or concurrently
therewith to be reduced in accordance with this SECTION 2.17, aggregates in
excess of twenty-five percent (25%) of the aggregate Commitments, the Borrower
may elect to terminate such Lender only if, together with its notice of
termination, it provides to the Administrative Agent a commitment from a
Replacement Lender to replace the Commitment of the terminated Lender on the
terms and conditions set forth herein. The Borrower's election to terminate a
Lender under this SECTION 2.17 shall be set forth in a written notice from the
Borrower to the Administrative Agent (with a copy to such Lender), setting
forth (i) the basis for termination of such Lender, (ii) whether the Borrower
intends to replace such Lender with a Replacement Lender or, if the Borrower
is not required to replace such Lender, to reduce the Commitments by the
amount of the Commitment of such Lender, and (iii) the date (not later than
thirty (30) days after the date of such notice) when such termination shall
become effective. On the date on which such termination becomes effective,
(x) the Borrower and/or the Replacement Lender, as applicable, shall pay the
terminated Lender an amount equal to all principal, interest, fees and other
amounts owed to such Lender pursuant to this Agreement (including any amounts
owed under SECTIONS 3.4 and 3.5) through such date, and (y) there shall have
been received by the Administrative Agent an executed Assignment and
Acceptance and all other documents and supporting materials necessary, in the
reasonable judgment of the Administrative Agent, to evidence the substitution
of the Replacement Lender for such terminated Lender, or if there is no
Replacement Lender, to reflect the adjustment of the Commitments, including
any necessary or appropriate adjustments to the Lenders' Percentages
(adjustments to the Commitments and Percentages of the remaining Lenders to be
based upon the relative proportions of their respective Percentages) and the
correlative pro rata reduction of the amounts set forth in SECTION 2.1.2.
ARTICLE 3
PAYMENTS, PREPAYMENTS AND COMPUTATIONS
3.1. GENERAL PROVISIONS RELATING TO REPAYMENT OF LOANS. Except as
specifically set forth in SECTION 3.2, the Loans shall be repaid as provided in
this SECTION 3.1.
3.1.1. INTEREST PAYMENTS. The interest accrued on each Loan shall
be payable on each Interest Payment Date applicable to such Loan, upon any
prepayment of any LIBOR Loan (to the extent accrued on the amount being prepaid)
and at maturity.
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3.1.2. PREPAYMENTS.
(a) VOLUNTARY PREPAYMENTS. The Borrower may, upon not less than one
(1) Business Day's prior written or telephonic notice confirmed in writing
to the Administrative Agent (in the case of Base Rate Loans), and upon not
less than three (3) Business Days' prior written or telephonic notice
confirmed in writing to the Administrative Agent (in the case of LIBOR
Loans) (each of which notices the Administrative Agent will promptly
transmit to each Lender in writing, or by telephone confirmed in writing),
at any time and from time to time prepay any Borrowing of Loans (as the
Borrower may specify to the Administrative Agent) in whole or in part in
integral multiples of $500,000; PROVIDED, HOWEVER, that LIBOR Loans may
only be prepaid in part if, after such prepayment, the unpaid portion of
such Loans shall have aggregate minimum balances of $5,000,000; and
PROVIDED FURTHER that, in connection with any prepayment of LIBOR Loans,
the Borrower shall pay to the Administrative Agent, for distribution to
the Lenders, the accrued interest on such Loan required to be paid
pursuant to SECTION 3.1.1 and any amounts required to be paid pursuant to
SECTION 3.4.5;
(b) MANDATORY PREPAYMENTS. The Borrower shall make prepayments of
Loans on each Scheduled Commitment Reduction Date required by the mandatory
reduction in the Commitments made on that date and shall otherwise prepay
Loans to the extent necessary so that the aggregate principal amount of
Loans and Letter of Credit Liabilities outstanding at any time does not
exceed the Commitments then in effect; PROVIDED, HOWEVER, that in
connection with any prepayment of LIBOR Loans, the Borrower shall pay to
the Administrative Agent, for distribution to the Lenders, the accrued
interest on such Loan required to be paid pursuant to SECTION 3.1.1 and any
amounts required to be paid pursuant to SECTION 3.4.5; and
(c) APPLICATION OF PREPAYMENTS. Any prepayment pursuant to this
SECTION 3.1.2 shall be applied first to Base Rate Loans to the full extent
thereof before application to LIBOR Loans.
3.1.3. FINAL MATURITY OF LOANS. In all events, the entire
aggregate principal balances of, all accrued and unpaid interest on and all fees
and other sums due and payable in respect of the Loans shall be due and payable
in full on the Termination Date if not sooner paid.
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3.2. SPECIAL PROVISIONS RELATING TO REPAYMENT OF DRAWINGS UNDER LETTERS OF
CREDIT AND LETTER OF CREDIT LOANS.
3.2.1. REPAYMENT OF AMOUNTS DRAWN UNDER LETTERS OF CREDIT. On each
day the Issuing Bank honors a drawing under a Letter of Credit (unless a Letter
of Credit Loan is made pursuant to SECTION 2.3.4), the Borrower shall, after the
Issuing Bank has honored such drawing, immediately reimburse the Issuing Bank
for the account of the Lenders, by 11:00 a.m. (Eastern time) (or as soon
thereafter as the drawing has been honored) in an amount equal to the amount of
such drawing.
3.2.2. REPAYMENT OF LETTER OF CREDIT LOANS WITH PROCEEDS OF
REMARKETING OF BONDS. Immediately upon the remarketing of Bonds purchased
pursuant to any Tender Draft, the Borrower shall repay the corresponding Letter
of Credit Loans in an amount equal to the proceeds from such remarketing. Upon
receipt by the Administrative Agent of any such repayment, and upon the
satisfaction of any other condition specified in the applicable Letter of
Credit, the Borrower irrevocably authorizes the Issuing Bank to reinstate a
portion of the Stated Amount (as defined in the corresponding Existing Letter
of Credit) equal to the amount of such repayment. Any amount held by a Tender
Agent or a Trustee as a result of the remarketing of Bonds pledged pursuant to
a Bond Pledge Agreement that is not delivered to the Issuing Bank shall be
paid to the Administrative Agent by such Tender Agent or Trustee to be applied
first to the corresponding Letter of Credit Loans and then to the
corresponding Letter of Credit Liabilities. Any such amounts received by the
Issuing Bank shall be paid to the Administrative Agent for application as
aforesaid.
3.2.3. CREDIT FOR INTEREST AND PRINCIPAL PAID ON PLEDGED BONDS. The
Borrower shall receive credit against the Letter of Credit Loans and Letter of
Credit Liabilities to the extent that the Issuing Bank or the Administrative
Agent receives any amounts actually paid by the Borrower in respect of the
principal and interest due in respect of Bonds pledged pursuant to the Bond
Pledge Agreements. Such amounts received by the Issuing Bank shall be paid to
the Administrative Agent and shall be applied first to the corresponding
Letter of Credit Loans and then to the corresponding Letter of Credit
Liabilities.
3.3. PAYMENTS AND COMPUTATIONS, ETC.
3.3.1. TIME AND MANNER OF PAYMENTS. Except as otherwise expressly
set forth herein, all payments of principal, interest and fees hereunder and
under the Notes shall be in lawful currency of the United States of America, in
immediately available (same day) funds, and delivered to the Administrative
Agent at its Lending Office for its account, the account of the Lenders or the
account of the Issuing Bank, as the case may be,
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<PAGE>
not later than 11:00 a.m. (Eastern time) on the date due. As soon as is
practicable thereafter, the Administrative Agent shall cause to be distributed
like funds relating to the payment of principal or interest or fees ratably to
the Lenders in accordance with their respective Percentages (other than
amounts payable pursuant to Sections 2.11.1, 3.4 and 3.5 which are to be
distributed other than ratably). Funds received by the Administrative Agent
after the time specified in the first sentence of this paragraph shall be
deemed to have been paid by the Borrower on the next succeeding Business Day.
3.3.2. PAYMENTS ON NON-BUSINESS DAYS. Whenever any payment to be
made hereunder or under the Notes shall be stated to be due on a day that is not
a Business Day, the payment shall be made on the next succeeding Business Day
and such extension of time shall be included in the computation of the payment
of interest hereunder or under the Notes or of the fees payable hereunder, as
the case may be; PROVIDED, HOWEVER, that in the event that the day on which
payment relating to a LIBOR Loan is due is not a Business Day but is a day of
the month after which no further Business Day occurs in that month, then the due
date thereof shall be the next preceding Business Day.
3.3.3. APPORTIONMENT OF PAYMENTS. Aggregated principal and
interest payments shall be apportioned among all outstanding Loans to which such
payments relate, and aggregated payments of Commitment Fees shall be apportioned
ratably among the Lenders, in each case proportionately to their respective
Percentages of the corresponding Loans and Commitments, as the case may be. The
Administrative Agent shall promptly distribute to each Lender at its Lending
Office its Percentage of all such payments received by the Administrative Agent.
Notwithstanding the foregoing provisions of this SECTION 3.3.3, if, pursuant to
the provisions of SECTION 2.14.4, any Notice of Borrowing is withdrawn as to any
Affected Lender or if any Affected Lender makes Base Rate Loans in lieu of its
Percentage of LIBOR Loans, the Administrative Agent shall give effect thereto in
apportioning payments received thereafter.
3.3.4. ASSUMPTION OF PAYMENTS MADE. Unless the Administrative
Agent shall have received notice from the Borrower prior to the date on which
any payment is due to the Administrative Agent for the benefit of the Lenders
hereunder that the Borrower will not make such payment in full, the
Administrative Agent may assume that the Borrower has made such payment in full
to the Administrative Agent on such date and the Administrative Agent may, in
reliance upon such assumption, cause to be distributed to each Lender on such
due date an amount equal to the amount then due such Lender. If and to the
extent the Borrower shall not have so made such payment in full to the
Administrative Agent, each Lender shall repay to the Administrative Agent
forthwith on demand such amount distributed
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to such Lender together with interest thereon, for each day from the date such
amount is distributed to such Lender until the date such Lender repays such
amount to the Administrative Agent, at the Federal Funds Rate, but in no event
to exceed the Highest Lawful Rate.
3.3.5. APPLICATION OF PROCEEDS. After the occurrence and during
the continuance of an Event of Default, unless otherwise set forth in this
Agreement or the other Loan Documents, all payments received by the
Administrative Agent from the enforcement of remedies under the Loan Documents
or otherwise with respect to the Obligations and not applied as provided in
SECTION 3.2.5 of the $50,000,000 Credit Agreement shall be applied (a) first,
to the payment of any fees, expenses, reimbursements or indemnities then due
from the Borrower to the Administrative Agent; (b) second, to the payment of
any fees, expenses, reimbursements or indemnities then due from the Borrower
to the Lenders, or any of them; (c) third, to the ratable payment of interest
due from the Borrower with respect to any of the Loans and fees in respect of
the Letters of Credit; (d) fourth, to the ratable payment of principal of any
of the Loans of the Borrower and all obligations of the Borrower to reimburse
the Issuing Bank and the Lenders in respect of drawings under Letters of
Credit; (e) fifth, to be held as cash collateral by the Administrative Agent
for the ratable benefit of the Lenders, as security for outstanding Letter of
Credit Liabilities, and (f) sixth, after satisfaction of all Obligations under
the $50,000 Credit Agreement other than those described only in CLAUSE (e) of
Section 3.2.5 thereof, to pay all other Obligations. Requisite Lenders shall
determine whether the proceeds of the enforcement of remedies shall be applied
as provided in this Section 3.3.5 or as provided in Section 3.2.5 of the
$50,000,000 Credit Agreement.
3.4. INCREASED COSTS, CAPITAL REQUIREMENTS AND TAXES.
3.4.1. INCREASED COSTS. Except to the extent reimbursed pursuant
to other provisions of this SECTION 3.4, in the event that either (i) the
introduction of, or any change in, or in the interpretation of, any law or
regulation or (ii) compliance with any guideline or request from any central
bank or other Governmental Authority (regardless of whether having the force of
law):
(a) does or shall subject any Lender to any additional income,
preference, minimum or excise tax or to any additional tax of any kind
whatsoever with respect to this Agreement, the Notes, the Letters of Credit
or any of the Loans or change the basis of taxation of payments to such
Lender of principal, commitment fees, interest or any other amount payable
hereunder (except for changes in the rate of tax on the overall gross or
net income of that Lender or its foreign branch, agency or subsidiary); or
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(b) does or shall impose, modify or hold applicable any reserve,
special deposit, compulsory loan, FDIC insurance or similar requirement
against assets held by, or deposits or other liabilities in or for the
account of, advances or loans by, or other credit extended by, or any other
acquisition of funds by, any office of such Lender (except, with respect to
LIBOR Loans, to the extent that the reserve requirements are reflected in
the definition of "LIBOR"); or
(c) does or shall impose on that Lender any other condition;
and the result of any of the foregoing is to increase the cost to that Lender of
issuing or participating in the Letters of Credit or of making, renewing or
maintaining the Loans or the Commitments or to reduce any amount receivable
hereunder or thereunder; then, in any such case, the Borrower shall promptly
pay to such Lender, upon demand, such additional amounts as are sufficient to
compensate such Lender for any such additional cost or reduced amount received.
3.4.2. CAPITAL REQUIREMENTS - GENERAL. If either (i) the
introduction of, or any change in, or in the interpretation of, any law or
regulation or (ii) compliance with any guideline or request from any central
bank or other Governmental Authority (regardless of whether having the force of
law), affects or would affect in any way the amount of capital required or
expected to be maintained by any Lender or any corporation controlling such
Lender with the effect of reducing the rate of return on such capital to a
level below the rate that such Lender or such other corporation could have
achieved but for such introduction, change or compliance, and such Lender
reasonably determines that such reduction is based on the existence of such
Lender's Commitments hereunder and other commitments of this type, then upon
demand by such Lender, the Borrower shall further pay to such Lender from time
to time as specified by such Lender such additional amounts as are sufficient
to compensate such Lender or other corporation for such reduction.
3.4.3. CAPITAL REQUIREMENTS - LETTERS OF CREDIT. If the Issuing
Bank or any Lender determines that either (i) the introduction of, or any change
in, or in the interpretation of, any law or regulation or (ii) compliance with
any guideline or request from any central bank or other Governmental Authority
(regardless of whether having the force of law), affects or would affect in any
way the amount of capital required or expected to be maintained by the Issuing
Bank or such Lender or any corporation controlling the Issuing Bank or such
Lender with the effect of reducing the rate of return on such capital below the
rate that the Issuing Bank or such Lender or such other corporation could have
achieved but for such introduction, change
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or compliance, and the Issuing Bank or such Lender reasonably determines that
such reduction is based on the existence of the Letters of Credit issued
hereunder and other commitments of this type, then upon demand by the Issuing
Bank or such Lender, the Borrower shall further pay to the Issuing Bank and
such Lender from time to time as specified by the Issuing Bank and such Lender
such additional amounts as are sufficient to compensate the Issuing Bank and
such Lender or other corporation for such reduction.
3.4.4. INCREASED RESERVES - LETTERS OF CREDIT. If either (i) the
introduction of, or any change in, or in the interpretation of, any law or
regulation or (ii) compliance with any guideline or request from any central
bank or other Governmental Authority (regardless of whether having the force of
law), shall either (a) impose, modify or deem applicable any reserve, special
deposit or similar requirement against letters of credit or similar instruments
issued by, or assets held by, or deposits in or for the account of, the Issuing
Bank or any Lender or (b) impose on the Issuing Bank or any Lender any other
condition regarding this Agreement as it pertains to the Letters of Credit, or
any letter of credit, and the result of any event referred to in the preceding
CLAUSE (a) or (b) shall be to increase the cost to the Issuing Bank or any
Lender of issuing or maintaining any Letter of Credit or any participation
therein (which increase in cost shall be determined by the Issuing Bank's or
such Lender's, as the case may be, reasonable allocations of the aggregate of
such cost increases resulting from such event), then, upon demand by the
Issuing Bank or such Lender, as the case may be, the Borrower shall forthwith
pay to the Issuing Bank or such Lender, as the case may be, from time to time
as specified by the Issuing Bank or such Lender, as the case may be, such
additional amounts as are sufficient to compensate the Issuing Bank or such
Lender, as the case may be, for such increased cost.
3.4.5. BREAKAGE COSTS - LIBOR LOANS. The Borrower shall indemnify
and hold each Lender free and harmless from all losses, liabilities and
reasonable expenses (including any loss sustained by that Lender in connection
with the re-employment of such funds), that such Lender may sustain: (a) if for
any reason (other than a default by such Lender) a Borrowing of LIBOR Loans
does not occur on a date specified therefor in a Notice of Borrowing or a
telephonic request for borrowing or a continuation of or conversion to LIBOR
Loans does not occur on a date specified therefor in a Notice of Conversion/
Continuation or in a telephonic request for conversion/continuation, (b) if any
prepayment of any of its LIBOR Loans occurs on a date that is not the last day
of an Interest Period, (c) if any prepayment of any of its LIBOR Loans is not
made on any date specified in a notice of prepayment given by the Borrower or
(d) as a consequence of any other default by
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the Borrower to repay its LIBOR Loans when required by the terms of this
Agreement.
3.4.6. LIBOR TAXES. The Borrower shall indemnify and hold each
Lender free and harmless from, and shall pay, prior to the date on which
penalties attach thereto, all present and future income, stamp and other taxes,
levies or costs and charges whatsoever imposed, assessed, levied or collected on
or in respect of a Loan solely as a result of the interest rate being determined
by reference to LIBOR and/or the provisions of this Agreement related to LIBOR
and/or the recording, registration, notarization or other formalization of any
thereof and/or any payments of principal, interest or other amounts made on or
in respect of a Loan when the interest rate is determined by reference to LIBOR
(all such taxes, levies, costs and charges being herein collectively called
"LIBOR TAXES"); PROVIDED, HOWEVER, that LIBOR Taxes shall not include: taxes
imposed on or measured by the overall gross or net income of such Lender or any
foreign branch, agency or subsidiary of such Lender by the United States of
America or any political subdivision or taxing authority thereof or therein, or
taxes on or measured by the overall gross or net income of that Lender or any
foreign branch, agency or subsidiary of that Lender by any foreign country or
subdivision thereof in which that Lender, branch, agency or subsidiary is doing
business. The Borrower also shall indemnify and hold each Lender free and
harmless from, and shall pay such additional amounts equal to, increases in
taxes payable by that Lender described in the foregoing proviso that are
attributable to payments made by the Borrower described in the immediately
preceding sentence or this sentence. Promptly after the date on
which payment of any such LIBOR Tax is due pursuant to applicable law, the
Borrower will, at the request of such Lender, furnish to such Lender evidence,
in form and substance satisfactory to such Lender, that the Borrower has met its
obligation under this SECTION 3.4.6; and the Borrower will indemnify each Lender
against, and reimburse each Lender on demand for, any LIBOR Taxes payable by
that Lender. Such Lender shall provide the Borrower with appropriate receipts
for any payments or reimbursements made by the Borrower pursuant to this SECTION
3.4.6.
3.4.7. NOTICE OF INCREASED COSTS; PAYMENT. Each Lender and the
Issuing Bank will promptly notify the Administrative Agent (with a copy to the
Borrower) of any event of which it has knowledge, occurring after the date
hereof, that entitles such Lender or the Issuing Bank to compensation,
reimbursement or indemnity pursuant to this SECTION 3.4 or SECTION 3.5, and
shall furnish to the Administrative Agent (with a copy to the Borrower) a
certificate of such Lender or the Issuing Bank claiming compensation,
reimbursement or indemnity under this SECTION 3.4 or SECTION 3.5, setting
forth in reasonable detail the additional amount or amounts to be paid to it
hereunder if not theretofore paid by Borrower as provided
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in SECTION 3.5 (which certificate shall be presumed correct and binding in the
absence of manifest error). In determining such amount, such Lender and the
Issuing Bank may use any reasonable averaging, attribution or allocation
methods. Within fifteen (15) days following receipt of such notice, the
Borrower shall pay to the Administrative Agent, for distribution to such
Lender, or to the Issuing Bank, as the case may be, the amount shown to be due
and payable by such certificate.
3.5. TAXES.
3.5.1. TAXES GENERALLY. Any and all payments by the Borrower or any
Guarantor hereunder or under the Notes or the other Loan Documents shall be
made free and clear of and without deduction for any and all present or future
taxes, levies, imposts, deductions, charges or withholdings, and all
liabilities with respect to such payments (including interest, additions to
tax and penalties thereon), excluding, in the case of each Lender, the
Administrative Agent and the Issuing Bank, (i) taxes imposed on or measured by
its net income or, in the State of Tennessee, net assets, and franchise taxes
imposed on it, by the jurisdiction of such Lender's Lending Office or any
political subdivision or taxing authority thereof, and (ii) withholding taxes
that are subject of SECTIONS 3.5.2 through 3.5.5. If the Borrower or any
Guarantor shall be required by law to deduct any such taxes from or in respect
of any sum payable hereunder or under any Note or any other Loan Document to
any Lender or the Administrative 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 3.5) such
Lender or the Administrative Agent (as the case may be) shall receive an
amount equal to the sum it would have received had no such deductions been
made and (b) the Borrower shall pay the full amount deducted to the relevant
taxation authority or other authority in accordance with applicable law.
If and to the extent that any Lender subsequently shall be refunded or
otherwise recover all or any part of any such deduction, it shall refund to
the Borrower the amount so recovered.
3.5.2. WITHHOLDING TAX EXEMPTION. If any Lender is a "foreign
corporation" within the meaning of the Code, such Lender shall deliver to the
Administrative Agent either: (a) if such Lender qualifies for an exemption
from or a reduction of United States withholding tax under a tax treaty, a
properly completed and executed Internal Revenue Service form 1001 before the
payment of any interest is due in the first calendar year and in each third
succeeding calendar year during which interest may be paid under this
Agreement, or (b) if such Lender qualifies for an exemption for interest paid
under this Agreement from United States withholding tax because it effectively
is connected with a United States trade or business of such Lender, two
properly
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completed and executed copies of Internal Revenue Service form 4224 before the
payment of any interest is due in the first taxable year of such Lender, and
in each succeeding taxable year of such Lender, during which interest may be
paid under this Agreement, and (c) such other form or forms as may be required
or reasonably requested by the Administrative Agent to establish or
substantiate exemption from, or reduction of, United States withholding tax
under the Code or other laws of the United States. Each such Lender agrees to
notify the Administrative Agent of any change in circumstances that would
modify or render invalid any claimed exemption or reduction.
3.5.3. WITHHOLDING TAXES. If any Lender is entitled to a reduction
in the applicable withholding tax, the Administrative Agent may withhold from
any interest payment to such Lender an amount equivalent to the applicable
withholding tax after taking into account such reduction. If the forms or
other documentation required by SECTION 3.5.2 are not delivered to the
Administrative Agent, then the Administrative Agent may withhold from any
interest payment to any Lender not providing such forms or other
documentation, an amount equivalent to the applicable withholding tax.
3.5.4. INDEMNIFICATION. If the Internal Revenue Service or any
authority of the United States or other jurisdiction asserts a claim that the
Administrative Agent did not properly withhold tax from amounts paid to or for
the account of any Lender (because the appropriate form was not delivered or
was not properly executed, or because such Lender failed to notify the
Administrative Agent of a change in circumstances that rendered the exemption
from or reduction of withholding tax ineffective, or for any other reason) such
Lender shall indemnify the Administrative Agent fully for all amounts paid,
directly or indirectly, by the Administrative Agent as tax or otherwise,
including penalties and interest, together with all expenses incurred,
including legal expenses, allocated staff costs, and any out-of-pocket
expenses.
3.5.5. SUBSEQUENT LENDERS. If any Lender sells, assigns, grants
participations in or otherwise transfers it rights under the Agreement, the
participant shall comply and be bound by the terms of SECTIONS 3.5.2, 3.5.3
and 3.5.4 as though it were such Lender.
3.6. BOOKING OF LOANS. Any Lender may make, carry or transfer Loans at, to
or for the account of, any of its branch or agency offices, PROVIDED, HOWEVER,
that in the event that any Lender transfers its Loans to another branch or
agency office in a transaction that does not involve the transfer by such Lender
of any of its other loans to such branch or agency office, such Lender shall not
be entitled to reimbursement for additional costs or taxes with respect to such
Loans pursuant to SECTION 3.4
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or SECTION 3.5 if the Borrower would be subject to additional liability under
SECTION 3.4 or SECTION 3.5 to which it would not be subject if such Lender's
Loans were maintained at the office at which such Loans were carried.
The Borrower acknowledges and agrees that (a) each Lender's method of
funding its Loans hereunder shall be in the sole discretion of such Lender, so
long as such funding complies with all applicable requirements of this
Agreement, and (b) for purposes of any determination to be made pursuant to
SECTIONS 2.14.4 or 3.4.5 of this Agreement, each Lender shall be presumed
conclusively to have funded its LIBOR Loans with the proceeds of Dollar
deposits obtained by such Lender in the interbank Eurodollar market.
ARTICLE 4
SECURITY
4.1. INITIAL SECURITY. The Obligations of the Borrower shall be secured
by:
(a) the Pledge Agreement;
(b) the Assignment and Security Agreement;
(c) the Bond Pledge Agreements; and
(d) the security interest in the Collateral Account herein granted in
favor of the Administrative Agent for the ratable benefit of the Lenders,
and the other Liens provided in this Agreement and the other Security
Documents.
4.2. FURTHER ASSURANCES. The Borrower and the Guarantors shall, and shall
cause each of their respective Subsidiaries to, at their sole cost and expense,
execute and deliver to the Administrative Agent for the ratable benefit of the
Lenders all such further documents, instruments and agreements and perform all
such other acts that reasonably may be required in the opinion of the
Administrative Agent to enable the Administrative Agent and the Lenders to
exercise and enforce their respective rights as the secured parties under the
Security Documents and to carry out the provisions or effectuate the purposes of
this Agreement and the other Loan Documents. To the extent permitted by
applicable law, the Borrower and the Guarantors hereby authorize the
Administrative Agent on behalf of the Lenders to file Financing Statements and
continuation statements with respect to the security interests granted or
assigned under the Security Documents and to execute such Financing Statements
and continuation statements on behalf of the Borrower, the Guarantors and their
respective Subsidiaries. The Administrative Agent
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shall furnish to the Borrower and the Guarantors copies of all such Financing
Statements and continuation statements filed by the Administrative Agent on
behalf of the Lenders pursuant to this SECTION 4.2.
ARTICLE 5
GUARANTY
5.1. GUARANTY. Each of the Guarantors hereby unconditionally and
irrevocably, jointly and severally, guarantees to the Administrative Agent, the
Lenders and the Issuing Bank the due and punctual payment and performance of all
of the Obligations (except to the extent such Guarantor is a Principal Obligor
on such Obligations), in each case as and when the same shall become due and
payable, whether at maturity, by acceleration, mandatory prepayment or
otherwise, according to their terms. In case of failure by a Principal Obligor
of any Obligation punctually to pay or perform such Obligation, each of the
Guarantors (other than a Principal Obligor on such Obligation) hereby
unconditionally and irrevocably agrees to cause such payment to be made
punctually as and when the same shall become due and payable, whether at
maturity, by prepayment, declaration or otherwise, and to cause such performance
to be rendered punctually as and when due, in the same manner as if such payment
or performance were made by such Principal Obligor. This guaranty is and shall
be a guaranty of payment and performance and not merely of collection.
5.2. MAXIMUM GUARANTY LIABILITY,
(a) The Guarantors' respective obligations hereunder and under the
other Loan Documents shall be in, but not in excess of, the maximum
liability permitted under Applicable Bankruptcy Law (the "MAXIMUM GUARANTY
LIABILITY"). To that end, but only to the extent such obligations
otherwise would be subject to avoidance under Applicable Bankruptcy Law if
any Guarantor is deemed not to have received valuable consideration, fair
value or reasonably equivalent value for its obligations hereunder or under
the other Loan Documents, each such Guarantor's respective obligations
hereunder and under the other Loan Documents shall be reduced to that
amount which, after giving effect thereto, would not render such Guarantor
insolvent, or leave such Guarantor with an unreasonably small capital to
conduct its business, or cause such Guarantor to have incurred debts (or to
be deemed to have intended to incur debts), beyond its ability to pay such
debts as they mature, at the time such obligations are deemed to have been
incurred under Applicable Bankruptcy Law. As used herein, the terms
"insolvent" and "unreasonably small capital" shall likewise be
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determined in accordance with Applicable Bankruptcy Law. This SECTION
5.2 is intended solely to preserve the rights of the Lenders, the
Administrative Agent and the Issuing Bank hereunder and under the other
Loan Documents to the maximum extent permitted by Applicable Bankruptcy
Law, and neither the Guarantors nor any other Person shall have any right
or claim under this SECTION 5.2 that otherwise would not be available
under Applicable Bankruptcy Law.
(b) Each Guarantor agrees that the Guaranteed Obligations at any time
and from time to time may exceed the Maximum Guaranty Liability of such
Guarantor, and may exceed the aggregate Maximum Guaranty Liability of all
Guarantors hereunder, without impairing this Guaranty or affecting the
rights and remedies of the Lenders, the Administrative Agent or the Issuing
Bank hereunder.
5.3. CONTRIBUTION. In the event any Guarantor (a "FUNDING GUARANTOR")
shall make any payment or payments under this Guaranty or shall suffer any loss
as a result of any realization upon any of its property granted as Collateral
under any Loan Document, each other Guarantor (each, a "CONTRIBUTING GUARANTOR")
shall contribute to such Funding Guarantor an amount equal to such Contributing
Guarantor's "PRO RATA SHARE" of such payment or payments made, or losses
suffered, by such Funding Guarantor. For the purposes hereof, each Contributing
Guarantor's Pro Rata Share with respect to any such payment or loss by a Funding
Guarantor shall be determined as of the date on which such payment or loss was
made by reference to the ratio of (a) such Contributing Guarantor's Maximum
Guaranty Liability as of such date (without giving effect to any right to
receive, or obligation to make, any contribution hereunder) to (b) the aggregate
Maximum Guaranty Liability of all Guarantors (including such Funding Guarantor)
as of such date (without giving effect to any right to receive, or obligation to
make, any contribution hereunder). Nothing in this SECTION 5.3 shall affect
each Guarantor's several liability for the entire amount of the Guaranteed
Obligations (up to such Guarantor's Maximum Guaranty Liability). Each Guarantor
covenants and agrees that its right to receive any contribution hereunder from a
Contributing Guarantor shall be subordinate and junior in right of payment to
all the Guaranteed Obligations.
5.4. GUARANTY UNCONDITIONAL. The obligations of each Guarantor under this
ARTICLE 5 shall be continuing, unconditional and absolute and, without limiting
the generality of the foregoing, shall not be released, discharged or otherwise
affected by:
(a) any extension, renewal, settlement, compromise, waiver or release
in respect of any Obligation of the
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Borrower under this Agreement or any other Loan Document, by operation of
law or otherwise;
(b) any modification or amendment or supplement to this Agreement or
any other Loan Document;
(c) any modification, amendment, waiver, release, non- perfection or
invalidity of any direct or indirect security, or of any guaranty or other
liability of any third party, for any Obligation of the Borrower under this
Agreement or any other Loan Document;
(d) any change in the corporate existence, structure or ownership of
the Borrower or any Guarantor, or any insolvency, bankruptcy,
reorganization or other similar case or proceeding affecting the Borrower
or any Guarantor or any of their respective assets, or any resulting
release or discharge of any Obligation of the Borrower under this Agreement
or any other Loan Document;
(e) the existence of any claim, set-off or other right that any
Guarantor at any time may have against the Borrower, the Administrative
Agent, the Co-Agent, the Issuing Bank, any Lender or any other Person,
whether or not arising in connection with this Agreement or any other Loan
Document;
(f) any invalidity or unenforceability relating to or against the
Borrower for any reason of the whole or any provision of this Agreement or
any other Loan Document, any Bond Document or any provision of Applicable
Bankruptcy Law purporting to prohibit the payment or performance by the
Borrower of any Obligation, or the payment by the Borrower of any other
amount payable by it under this Agreement or any other Loan Document;
(g) any other act or omission to act or delay of any kind by the
Borrower, the Administrative Agent, the Co-Agent, the Issuing Bank, any
Lender or any other Person or any other circumstance whatsoever that might
but for the provisions of this SECTION 5.4 constitute a legal or equitable
discharge of the obligations of any Guarantor under this ARTICLE 5.
5.5. DISCHARGE ONLY UPON PAYMENT IN FULL; REINSTATEMENT IN CERTAIN
CIRCUMSTANCES. Each Guarantor's obligations under this ARTICLE 5 shall remain
in full force and effect so long as any Obligations are unpaid or outstanding,
any Obligation under the Loan Documents is not performed or any of the
Commitments are in effect. If at any time any payment of the Obligations or any
other amount payable by the Borrower under this Agreement or the other Loan
Documents is rescinded or otherwise must be restored
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or returned upon the insolvency, bankruptcy or reorganization of the Borrower or
otherwise, each Guarantor's obligations under this ARTICLE 5 with respect to
such payment shall be reinstated at such time as though such payment had become
due but not been made at such time.
5.6. WAIVER. Each Guarantor irrevocably waives acceptance hereof,
presentment, demand, protest, notice of any breach or default by the Borrower
and any other notice not specifically provided for herein, as well as any
requirement that at any time any action be taken by any Person against the
Borrower or any other Person or any Collateral granted as security for the
Obligations or the Guaranteed Obligations. Each Guarantor hereby specifically
waives any right to require that an action be brought against the Borrower or
any other Principal Obligor with respect to the Obligations under the provisions
of Title 47, Chapter 12, Tennessee Code Annotated, as the same may be amended
from time to time.
5.7. WAIVER OF REIMBURSEMENT, SUBROGATION, ETC. Each Guarantor hereby
waives to the fullest extent possible as against the Borrower and its assets any
and all rights, whether at law, in equity, by agreement or otherwise, to
subrogation, indemnity, reimbursement, contribution, exoneration or any other
similar claim, right, cause of action or remedy that otherwise would arise out
of such Guarantor's performance of its obligations to the Administrative Agent
or any Lender under this ARTICLE 5. The preceding waiver is intended by the
Guarantors, the Administrative Agent, the Co-Agent, the Issuing Bank and the
Lenders to be for the benefit of the Borrower or any of its successors and
permitted assigns as an absolute defense to any action by any Guarantor against
the Borrower or its assets that arises out of such Guarantor's having made any
payment to the Administrative Agent, the Issuing Bank or any Lender with respect
to any of the Guaranteed Obligations.
5.8. STAY OF ACCELERATION. If acceleration of the time for payment of any
amount payable by the Borrower under this Agreement is stayed upon the
insolvency, bankruptcy or reorganization of the Borrower, all such amounts
otherwise subject to acceleration under the terms of this Agreement shall
nonetheless be payable by the Guarantors hereunder forthwith on demand by the
Administrative Agent as directed by Requisite Lenders.
5.9. SUBORDINATION OF INDEBTEDNESS. Any indebtedness of the Borrower for
borrowed money now or hereafter owed to any Guarantor is hereby subordinated in
right of payment to the payment by the Borrower of the Obligations such that if
a default in the payment of the Obligations shall have occurred and be
continuing, any such indebtedness of the Borrower owed to any Guarantor, if
collected or received by such Guarantor, shall be
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held in trust by such Guarantor for the holders of the Obligations and be paid
over to the Administrative Agent for application in accordance with this
Agreement and the other Loan Documents.
5.10. RELEASE OF PERMITTED MINORITY-INTEREST SUBSIDIARIES. Upon the
request of a Permitted Minority-Interest Subsidiary, described in CLAUSE (A)
or CLAUSE (B) of the definition of "Permitted Minority - Interest Subsidiary",
the Administrative Agent shall release such Subsidiary from its duties and
obligations to the Lenders pursuant to this Agreement and the other Loan
Documents to which such Subsidiary is a party, and if such Subsidiary is not a
First-Tier Permitted Minority-Interest Subsidiary, the Administrative Agent
also shall release the Lenders' security interest in any Pledged Notes made by
such Subsidiary; PROVIDED that at the times of such request and releases no
Default or Event of Default has occurred and is continuing or would result
from such releases.
5.11. CERTAIN OTHER RELEASES. In the event that any asset sale
permitted under SECTION 9.4(f) consists in whole or in part of the sale of all
of the capital stock of (or other ownership interests in) a Subsidiary that is
owned by the Borrower or any other Subsidiary of the Borrower, upon the
request of the Borrower, the Administrative Agent shall release the Subsidiary
whose stock (or other ownership interests in) has (have) been sold from any
duties and obligations to the Lenders pursuant to this Agreement and the other
Loan Documents to which such Subsidiary may be a party; PROVIDED that (a) at
the times of such request and releases any Indebtedness evidenced by a Pledged
Note made by such Subsidiary has been fully satisfied, and (b) no Default or
Event of Default has occurred and is continuing or would result from such
releases.
ARTICLE 6
CONDITIONS PRECEDENT
6.1. CONDITIONS PRECEDENT TO INITIAL LOANS AND OF LETTERS OF CREDIT. The
obligations of the Issuing Bank to issue Letters of Credit, the obligations of
the Lenders to purchase participations in Letters of Credit and the obligations
of the Lenders to make the Loans are all subject to the satisfaction by the
Borrower and the Guarantors, to the extent not waived by the Lenders, of the
following conditions precedent, except to the extent that any of such
conditions are to be satisfied after the date hereof pursuant to SECTION 8.20:
6.1.1. DELIVERIES TO THE ADMINISTRATIVE AGENT. The Administrative
Agent shall have received, for the ratable benefit of each Lender (and in such
number of original counterparts or copies as the Administrative Agent reasonably
may specify), each of the following, in form and substance satisfactory to the
Administrative Agent, the Co-Agent, the Issuing Bank, the Lenders and their
respective counsel:
(a) AGREEMENT. Counterpart originals of this Agreement, each duly and
validly executed and delivered by or on behalf of all the appropriate
parties thereto;
(b) NOTES. The Notes, each duly and validly executed and delivered
on behalf of the Borrower;
(c) SECURITY DOCUMENTS. The Pledge Agreement, the Assignment and
Security Agreement, the Bond Pledge Agreements and all of the other
Security Documents, each duly and validly executed and delivered by or on
behalf of all the appropriate parties thereto, together with (i)
acknowledgment copies of the financing statements duly filed under the
Uniform Commercial Code of all jurisdictions
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necessary or, in the opinion of the Administrative Agent, desirable to perfect
the security interests created by such Security Documents and (ii) evidence of
the public recordation or filing of such of the Security Documents as the
Administrative Agent deems it necessary or desirable to record or file publicly,
in such offices as the Administrative Agent shall require;
(d) PLEDGED STOCK. Certificates evidencing the Pledged Stock, together
with an appropriate stock power for each certificate, duly executed in blank by
the Borrower or the appropriate Guarantor, as the case may be;
(e) PLEDGED NOTES. The Pledged Notes, together with appropriate
instruments of assignment attached thereto, duly endorsed in blank by the
Borrower or the appropriate Guarantor, as the case may be;
(f) PERFECTED SECURITY INTEREST. Evidence of Lien searches, through a
date satisfactory to the Administrative Agent, showing no Liens affecting the
Collateral other than Liens in favor of the Administrative Agent for the ratable
benefit of the Lenders in connection herewith;
(g) BOND DOCUMENTS. If requested by the Administrative Agent, copies of
the Bond Documents and all amendments thereto, each duly and validly executed
and delivered on behalf of the appropriate parties thereto;
(h) CHARTER DOCUMENTS. Copies of the articles or certificates of
incorporation of the Borrower and each of its Subsidiaries, certified by the
Secretary of State or other appropriate public official in each jurisdiction of
incorporation, all in form and substance satisfactory to the Lenders;
(i) BYLAWS. Copies of the bylaws, and all amendments thereto, of the
Borrower and each of its Subsidiaries, together with certificates of the
respective Secretaries or Assistant Secretaries of the Borrower and each of such
Subsidiaries, dated the date hereof, stating that such copy is complete and
correct;
(j) GOOD STANDING AND AUTHORITY. Certificates of the appropriate
governmental officials of each jurisdiction as the Administrative Agent
reasonably may request, dated within ten (10) days of the date hereof, stating
that the Borrower and each of its Subsidiaries exists, is in good standing with
respect to the payment of franchise and similar taxes and is duly qualified to
transact business therein;
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(k) INCUMBENCY. Certificates of the respective Secretaries or Assistant
Secretaries of the Borrower and each of the Guarantors, dated the date hereof,
as to the incumbency and signature of all officers of the Borrower or such
Guarantor authorized to execute or attest to this Agreement, the Notes and the
other Loan Documents to which the Borrower or each such Guarantor is a party,
together with evidence of the incumbency of each such Secretary or Assistant
Secretary;
(1) RESOLUTIONS. With respect to the Borrower and each of the Guarantors
(i) copies of the resolutions authorizing, approving and ratifying this
Agreement, the Notes, the Security Documents and the other Loan Documents and
the transactions contemplated herein and therein, duly adopted by the respective
boards of directors of the Borrower and each of the Guarantors, together with
(ii) certificates of the respective Secretaries or Assistant Secretaries of the
Borrower and each of the Guarantors, dated the date hereof, stating that each
such copy is a true and correct copy of resolutions duly adopted at a meeting,
or by action taken on written consent, of the board of directors of the Borrower
or such Guarantor and that such resolutions have not been modified, amended,
rescinded or revoked in any respect and are in full force and effect as of the
date hereof;
(m) LEGAL OPINIONS OF THE BORROWER'S AND GUARANTORS' COUNSEL. The
favorable legal opinion of Messrs. Boult, Cummings, Conners & Berry, counsel to
the Borrower and the Guarantors, dated the date hereof, and addressed to the
Administrative Agent, the Co-Agent and the Lenders, substantially in the form of
EXHIBIT 6.1.1A, together with a letter from the Borrower and the Guarantors to
such counsel, substantially in the form of EXHIBIT 6.1.1B, requesting each such
counsel to deliver its opinion to the Administrative Agent, the Co-Agent, the
Lenders and the Issuing Bank;
(n) EVIDENCE OF INDEBTEDNESS. If requested by the Administrative Agent,
(i) a copy of each indenture, loan agreement, guaranty, promissory note or other
evidence of Indebtedness (together with all modifications, amendments,
restatements or supplements thereto) to which the Borrower, the Guarantors or
their respective Subsidiaries are parties constituting a liability (contingent
or otherwise) equal to or in excess of $1,000,000, the terms and conditions of
which shall be satisfactory to the Administrative Agent, and (ii) a report
certified by the chief executive officers of the Borrower and each of the
Guarantors describing any default or failure of performance or any event that
with the giving of notice of, or the lapse of time, or both, would become a
default by the Borrower, the Guarantors or any of
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their respective Subsidiaries under any of such documents, instruments or
agreements;
(o) JUNE 30, 1994 FINANCIAL STATEMENTS. The final June 30, 1994
unaudited consolidated and consolidating balance sheets of the Borrower and its
Subsidiaries and the related consolidated and consolidating statements of income
and consolidated statements of shareholders' equity and of cash flows for the
Fiscal Quarter then ended, together with a calculation of the financial ratios
and covenants contained in this Agreement after giving effect to the
transactions that are the subject hereof, in each case certified by the
Borrower's principal financial officer;
(p) OFFICER'S CERTIFICATE. A certificate of the principal financial
officer of the Borrower and each of the Guarantors, dated the date hereof,
stating that (i) each of the representations and warranties contained in ARTICLE
7 is true and correct at and as of the date hereof with the same force and
effect as if made on such date, (ii) all obligations, covenants, agreements and
conditions contained in this Agreement to be performed or satisfied by the
Borrower or such Guarantor on or prior to the date hereof have been performed or
satisfied in all respects, (iii) since June 30, 1994, there has been no material
adverse change in the properties, businesses or results of operations or in the
actual or prospective financial or other condition of the Borrower or any
Guarantor and (iv) no Default or Event of Default has occurred or is occurring,
and in addition setting forth in such detail as shall be required by the Lenders
calculations showing that as of the date hereof and after giving effect to the
transactions that are the subject hereof the Borrower and the Guarantors are in
compliance with ARTICLE 10;
(q) NO DEFAULT CERTIFICATE. A certificate duly executed by a Responsible
Officer of the Borrower, certifying that no Default or Event of Default exists
as of the date hereof;
(r) SOLVENCY CERTIFICATES. (i) A solvency certificate of a Responsible
Officer of the Borrower, in substantially the form of EXHIBIT 6.1.1C hereto and
(ii) a solvency certificate of the Responsible Officer of each Guarantor, in
substantially the form of EXHIBIT 6.1.1D (collectively, the "SOLVENCY
CERTIFICATES");
(s) TRUSTEE CERTIFICATES. Certificates from the Series A and Series B
Trustee, the Fulton Trustee and the Olive Branch Trustee in the form of Exhibit
6.1.1E, 6.1.1F and 6.1.1G, respectively;
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(t) CONSENTS. Evidence that the Borrower and each Guarantor have
obtained all requisite consents and approvals required to be obtained from
any Person to permit the transactions contemplated by this Agreement, the
Notes and the other Loan Documents to be consummated in accordance with
their respective terms and conditions; and
(u) OTHER MATTERS. All other documents, instruments, agreements,
opinions, certificates, insurance policies, consents and evidences of other
legal matters, in form and substance satisfactory to the Administrative
Agent and its counsel, as the Administrative Agent reasonably may request.
6.1.2. COMPLIANCE WITH HEALTH CARE LAWS. The Borrower, the
Guarantors and their respective Subsidiaries shall not be in violation of, or
have received notice of any violation of, any health care regulatory conditions
or standards of licensure or any other applicable legal requirements, including
any building, zoning, occupational safety and health, health care, pension,
environmental control, certificate of need, Medicare, Medicaid or insurance
fraud or similar law, ordinance or regulation relating to its structure or
equipment, or the operation thereof or of its business, or any applicable fair
employment, equal opportunity or similar law, ordinance or regulation, if such
violation or non-compliance could have a material adverse effect on the
properties, business, prospectus, results of operations, management or
financial or other condition of the Borrower and its Subsidiaries, taken
as a whole, and if requested by the Administrative Agent the Borrower, the
Guarantors or their respective Subsidiaries shall have furnished to the
Administrative Agent and Lenders copies of all required approvals (including
required operating licenses and permits) of any Governmental Authority, JCAHO
and American Osteopathic Hospital Association accreditation and Medicare and
Medicaid certification.
6.1.3. ACTIONS RELATING TO PREVIOUS CREDIT AGREEMENT. All
promissory notes and other evidences of indebtedness executed and delivered by
the Borrower and its Subsidiaries pursuant to the Previous Credit Agreement
shall have been returned for cancellation to First Union, as the agent for the
lenders under the Previous Credit Agreement, all security and collateral
documents executed and delivered in connection with the Previous Credit
Agreement (including mortgages, deeds of trust, security agreements, pledge
agreements, assignments, UCC financing statements and guaranties) shall have
been released terminated and/or assigned to the Administrative Agent, as
appropriate, and First Union, as the agent for the lenders under the Previous
Credit Agreement, shall have certified to the Administrative Agent that the
foregoing actions have been taken.
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6.1.4. NO MATERIAL ADVERSE CHANGE. Since June 30, 1994, no
material adverse change, as determined by the Administrative Agent, the Issuing
Bank and the Lenders, in their sole discretion, shall have occurred in the
properties, businesses or results of operations, or in the actual or
prospective financial or other condition of the Borrower, the Guarantors or
any of their respective Subsidiaries.
6.1.5. NO MATERIAL MISREPRESENTATION. No material
misrepresentation or omission shall have been made by or on behalf of the
Borrower or any Guarantor to the Lenders with respect to the Borrower's or such
Guarantor's business operations or financial or other condition.
6.1.6. LEGAL PROCEEDINGS. No action, suit, proceeding or
investigation shall be pending before or threatened by any court or Governmental
Authority with respect to the transactions contemplated hereby or that may have
a material adverse effect (as determined by the Administrative Agent, the
Issuing Bank and the Lenders, in their sole discretion) on the Borrower's or any
Guarantor's business operations or financial or other condition.
6.2. CONDITIONS PRECEDENT TO ALL LOANS AND LETTERS OF CREDIT. The
obligations of each of the Lenders to make any Loans (including Loans used to
refinance or repay other Loans) or to purchase participations in Letters of
Credit on any date (including the date hereof), and the obligations of the
Issuing Bank to issue Letters of Credit on any date (including the date
hereof), are subject to the satisfaction of the conditions set forth below in
this SECTION 6.2. Each request for Loans or for a Letter of Credit hereunder
shall constitute a representation and warranty by the Borrower to the
Administrative Agent, the Co-Agent, the Issuing Bank and each such Lender, as
of the date of the making of such Loans or the issuance of such Letter(s) of
Credit, that the conditions in this SECTION 6.2 have been satisfied.
6.2.1. SATISFACTION OF CONDITIONS PRECEDENT TO INITIAL LOANS OF
LETTER OF CREDIT. The conditions precedent set forth in SECTION 6.1 shall
have been satisfied.
6.2.2. REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Borrower and the Guarantors set forth in this Agreement, the
Notes and the other Loan Documents and in any certificate, opinion or other
statement provided at any time by or on behalf of the Borrower or any Guarantor
in connection herewith shall be true and correct on and as of the date of the
making of such Loans or the issuance of such Letter(s) of Credit as if made on
and as of such date, except for such changes as are permitted by the terms of
this Agreement.
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6.2.3. NO DEFAULT OR EVENT OF DEFAULT. No Default or Event of
Default shall have occurred and be continuing on the date of the requested
Borrowing or Letter of Credit issuance or after giving effect to such Borrowing
or Letter of Credit issuance.
6.2.4. NO VIOLATIONS. No law or regulation shall prohibit the
making of the requested Loan or the issuance of the requested Letter of Credit
and no order, judgment or decree of any court or Governmental Authority shall,
and no litigation shall be pending that in the judgment of the Administrative
Agent or Requisite Lenders would, enjoin, prohibit or restrain any Lender or the
Issuing Bank from making a requested Loan or the Issuing Bank from issuing a
requested Letter of Credit.
6.2.5. PROCEEDINGS SATISFACTORY. All proceedings in connection
with the making of any Loan, the issuance of any Letter of Credit and the other
transactions contemplated by this Agreement, the Loan Documents and all
documents incidental thereto shall be satisfactory to the Administrative Agent,
and the Administrative Agent shall have received all such information and such
counterpart originals or certified or other copies of such documents as the
Administrative Agent reasonably may request.
ARTICLE 7
REPRESENTATIONS AND WARRANTIES
In order to induce the Administrative Agent, the Co-Agent, the Issuing Bank
and the Lenders to enter into this Agreement, to make the Loans, to issue the
Letters of Credit and to provide the other financial accommodations provided for
herein, the Borrower and each of the Guarantors hereby make the following
representations and warranties to the Administrative Agent, the Co-Agent, the
Issuing Bank and each Lender:
7.1. EXISTENCE AND POWER. The Borrower, each of the Guarantors and each
of their respective Subsidiaries are corporations duly organized, validly
existing and in good standing under the laws of the jurisdiction indicated next
to the name of such entity on SCHEDULE 7.1. The Borrower, each of the Guarantors
and each of their respective Subsidiaries have the corporate power and authority
and the legal right to own and operate their respective properties and assets,
to lease the properties and assets they operate under lease and to carry on
their respective businesses as they are now being conducted and intended to be
conducted, and are duly qualified to transact business as a foreign corporation
in good standing under the laws of each jurisdiction in which their ownership,
lease or operation of property or the conduct of their respective businesses
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requires such qualification, except to the extent that failure to qualify to
transact business would not have a material adverse effect on the properties,
business, results of operation or financial or other condition of the Borrower,
such Guarantor or such Subsidiary.
7.2. AUTHORIZATION AND ENFORCEMENT OF OBLIGATIONS. The Borrower, each
of the Guarantors and each of their respective Subsidiaries (a) have the
corporate power and authority and the legal right to enter into this Agreement
and such of the Loan Documents and the Bond Documents to which each is a party
and to enter into and perform their respective obligations hereunder and
thereunder, and (b) have taken all necessary corporate action on the part of
each to authorize the execution and delivery of such documents, instruments and
agreements and the performance of their respective obligations hereunder and
thereunder. This Agreement, the Notes and the other Loan Documents have been
duly executed and delivered on behalf of the Borrower, each of the
Guarantors and such of their respective Subsidiaries as are parties to such
Loan Documents, and constitute legal, valid and binding obligations,
enforceable against the Borrower, the Guarantors and their respective
Subsidiaries as are parties hereto or thereto in accordance with their
respective terms.
7.3. NO CONSENTS. Except as set forth on SCHEDULE 7.3, all necessary
consents, approvals and authorizations of, filings with and acts by or with
respect to all Governmental Authorities and other Persons required to be
obtained, made or taken in connection with the transactions contemplated hereby
or the execution, delivery, performance, validity or enforceability of this
Agreement, the Notes and the other Loan Documents (a) have been obtained, made
or taken and (b) remain in effect.
7.4. NO CONFLICT. The execution and delivery of this Agreement, the Notes
and the other Loan Documents, the transactions contemplated hereby, the use of
the proceeds thereof and the performance by the Borrower, the Guarantors and
their respective Subsidiaries as are parties to the Loan Documents of their
respective obligations (including the operation of their respective health care
facilities) (a) do not conflict with or violate any Requirement of Law or any
Contractual Obligation of the Borrower, such Guarantor or such Subsidiary,
except to the extent that any such violation or conflict would not have a
material adverse effect on the properties, businesses, prospects, results of
operations, management or financial or other condition of the Borrower and its
Subsidiaries, taken as a whole, and (b) do not conflict with, constitute a
default or require any consent under, or result in the creation of any Lien
upon any property or assets of the Borrower, such Guarantor or such Subsidiary
pursuant to any Contractual Obligation of the Borrower, such Guarantor or such
Subsidiary.
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7.5. FINANCIAL STATEMENTS; SOLVENCY.
(a) The consolidated balance sheet of the Borrower and its
Subsidiaries as of December 31, 1993 and the related consolidated
statements of income, shareholders' equity and cash flows for the Fiscal
Year then ended, together with the opinion of Arthur Andersen & Co. with
respect thereto, copies of which have been furnished to the Administrative
Agent, are complete and correct and fairly present the assets, liabilities
and consolidated financial position of the Borrower and its Subsidiaries
as at such date and the consolidated results of their operations and
their cash flow for the Fiscal Year then ended. The unaudited
consolidated and consolidating balance sheets of the Borrower and its
Subsidiaries as of June 30, 1994, and the related unaudited consolidated
and consolidating statements of income and shareholders' equity and
statements of cash flows for the six-month period ended on such date,
certified by a Responsible Officer, copies of which have been furnished
to the Administrative Agent, are complete and correct and fairly (except
for the absence of footnotes) present the assets, liabilities and
consolidated financial position of the Borrower and its
Subsidiaries as at such date and the results of their operations and their
cash flow for the six-month period then ended (subject to normal year-end
adjustments). All such financial statements, including the related
schedules and notes thereto, have been prepared in compliance with GAAP
applied consistently throughout the periods involved, and the patient
accounts receivable recorded in all such financial statements accurately
reflect the reimbursable amounts under all Third Party Payor Programs in
which the Borrower or any of its Subsidiaries participates and are net of
contractual adjustments. Neither the Borrower nor any of its Subsidiaries
has any material Indebtedness, obligation or other unusual forward or long-
term commitment that is not fairly reflected in the foregoing financial
statements or in the notes thereto.
(b) After giving effect to the consummation of the transactions
contemplated by this Agreement, the making of Loans hereunder, the issuance
of Letters of Credit hereunder, the incurrence by the Borrower of the
Obligations and the incurrence by the Guarantors of the Guaranteed
Obligations, each of the Borrower, the Guarantors and their respective
Subsidiaries is Solvent.
7.6. ABSENCE OF LITIGATION. Except as otherwise set forth in SCHEDULE 7.6,
there are no actions, suits, proceedings or other litigation (including
proceedings by or before any arbitrator or Governmental Authority) pending or
threatened against or affecting the Borrower, the Guarantors or any of their
respective Subsidiaries, nor to the knowledge of the Borrower
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and the Guarantors is there any basis therefor, (a) that challenge the
validity or propriety of the transactions contemplated hereby, (b) that could,
if adversely determined, individually or in the aggregate, have a material
adverse effect on the properties, businesses, prospects, results of
operations, management or financial or other condition of the Borrower and its
Subsidiaries, taken as a whole, or (c) that could affect the ability of the
Borrower, any Guarantor or any of their respective Subsidiaries to perform its
obligations under this Agreement, the Notes or the other Loan Documents to
which it is a party.
7.7. NO DEFAULT. Neither the Borrower nor any Guarantor nor any of
their respective Subsidiaries is in default (nor has any event occurred that
with notice or lapse of time or both would constitute a default) under any
Contractual Obligation of the Borrower, any Guarantor or any of their respective
Subsidiaries, if such default or event could have a material adverse effect on
the properties, businesses, prospects, results of operations, management or
financial or other condition of the Borrower and its Subsidiaries, taken as a
whole, or on the ability of the Borrower, any Guarantor or any of their
respective Subsidiaries to perform its obligations under this Agreement, the
Notes or the other Loan Documents to which it is a party. No Default or Event
of Default has occurred and is continuing.
7.8. SECURITY DOCUMENTS. The Security Documents create in favor of the
Administrative Agent for the benefit of the Issuing Bank and the ratable benefit
of the Lenders valid, perfected, first priority security interests in the
Collateral subject to no prior Liens. The security interests granted in favor
of the Administrative Agent as contemplated by this Agreement and the Security
Documents do not constitute a fraudulent conveyance under the Federal Bankruptcy
Code or any applicable state law.
7.9. CAPITAL STOCK. The capitalization of the Borrower, the Guarantors
and their respective Subsidiaries consists of such number of shares, authorized,
issued and outstanding, of such classes and series, with or without such par
value, as are set forth in SCHEDULE 7.1. All such outstanding shares have been
duly authorized and validly issued and are fully paid and nonassessable. There
are no outstanding stock purchase warrants, subscriptions, options, securities,
instruments or other rights of any type or nature whatsoever that are
convertible into, exchangeable for or otherwise provide for the issuance of
capital stock of the Borrower, any Guarantor or any of their respective
Subsidiaries, except as described in SCHEDULE 7.1.
7.10. TAXES. The Borrower, the Guarantors and their respective
Subsidiaries have filed all tax returns that were required to be filed in any
jurisdiction and have paid all taxes shown thereon to be due or otherwise due
upon the Borrower, the Guarantors, their respective Subsidiaries or their
respective
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properties, income or franchises, including interest, assessments,
fees and penalties, or have provided adequate reserves for the payment thereof.
To the knowledge of the Borrower and the Guarantors, no claims are threatened,
pending or being asserted with respect to, or in connection with, any return
referred to in this SECTION 7.10 that, if adversely determined, could have a
material adverse effect on the properties, businesses, prospects, results of
operations, management or financial or other condition of the Borrower and its
Subsidiaries, taken as a whole, or could affect the ability of the Borrower, any
Guarantor or any of their respective Subsidiaries to perform its obligations
under this Agreement, the Notes and the other Loan Documents to which it is a
party.
7.11. NO BURDENSOME RESTRICTIONS. No Contractual Obligation of the
Borrower, any Guarantor or any of their respective Subsidiaries, and no
Requirement of Law relating to or otherwise affecting the Borrower, the
Guarantors or any of their respective Subsidiaries or any of their respective
properties, businesses or operations, materially and adversely affects, or
insofar as any of them may reasonably foresee could so affect, the properties,
businesses, prospects, results of operations, management or financial or other
condition of the Borrower and its Subsidiaries, taken as a whole, or could
affect the ability of the Borrower, any Guarantor or any of their respective
Subsidiaries to perform its obligations under this Agreement, the Notes and the
other Loan Documents to which it is a party.
7.12. JUDGMENTS. There are no outstanding or unpaid judgments against
the Borrower, any of the Guarantors or any of their respective Subsidiaries.
7.13. SUBSIDIARIES. Each of the Subsidiaries of the Borrower and the
Guarantors as of the date hereof is set forth in SCHEDULE 7.1. Each such
Subsidiary, with the exception of Permitted Minority-Interest Subsidiaries, is
wholly owned by the Borrower or a Guarantor. The Borrower and/or one or more
of its wholly-owned Subsidiaries collectively own not less than eighty and
one-tenth percent (80.1%) of the outstanding shares of each class of the
capital stock of each First-Tier Permitted Minority-Interest Subsidiary, and
each other Permitted Minority-Interest Subsidiary is wholly owned by its
parent corporation. SCHEDULE 7.1 also shows as of the date hereof as to each
such Subsidiary the jurisdiction of its incorporation or formation, the number
of shares of each class of capital stock outstanding, the direct owner of the
outstanding shares of each such class owned, and the jurisdictions in which
such Subsidiary is qualified to do business as a foreign corporation.
7.14. ERISA. No "prohibited transaction" or "accumulated funding
deficiency" (each as defined in ERISA) or Reportable Event has occurred with
respect to any Single Employer Plan, or
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to the knowledge of Borrower and the Guarantors with respect to any
Multi-Employer Plan. As of the most recent actuarial valuation of any such
Plan, the actuarial present value of all benefits under each Plan (based on
those assumptions used to fund the Plan) does not exceed the fair market value
of the assets of the Plan allocable to such benefits. The Borrower, the
Guarantors, their respective Subsidiaries and each Commonly Controlled Entity
are in compliance in all material respects with ERISA and the rules and
regulations promulgated thereunder.
7.15. MARGIN SECURITIES. None of the Borrower, the Guarantors or any
of their respective Subsidiaries is engaged principally in, nor has as one of
its most important activities, the business of extending credit for the purpose
of purchasing or carrying "margin stock" as that term is defined in Regulation U
promulgated by the Board of Governors of the Federal Reserve System, as now in
effect. No part of the Indebtedness evidenced by the Notes or the Bonds, or
otherwise created in connection with this Agreement, the other Loan Documents or
the Bond Documents, shall be used, directly or indirectly, for the purpose of
purchasing any such margin stock. If requested by the Administrative Agent or
any of the Lenders, the Borrower shall furnish or cause to be furnished to the
Administrative Agent and each such Lender a statement, in conformity with the
requirements of Federal Reserve Form U-1 referred to in Regulation U, to the
foregoing effect.
7.16. INVESTMENT COMPANY ACT. None of the Borrower, the Guarantors or
any of their respective Subsidiaries is an "investment company," or company
"controlled" by an investment company within the meaning of the Investment
Company Act of 1940, as now in effect.
7.17. INDEBTEDNESS AND CONTINGENT OBLIGATIONS. Set forth on SCHEDULE
7.17A hereto is a complete and correct list of all Indebtedness (other than
Contingent Obligations, Indebtedness incurred under the Loan Documents or the
$50,000,000 Credit Agreement, trade debt incurred in the ordinary course of
business and obligations under Operating Leases) of the Borrower, each
Guarantor and each of their respective Subsidiaries and the aggregate
principal amount thereof outstanding on the date hereof. Set forth on
SCHEDULE 7.17B is a complete and correct list of all Contingent Obligations
(other than any Contingent Obligations created under the Loan Documents or the
$50,000,000 Credit Agreement) of the Borrower, each Guarantor and each of
their respective Subsidiaries and the aggregate amount thereof outstanding on
the date hereof.
7.18. BUSINESS LOCATIONS AND TRADE NAMES. Set forth on SCHEDULE 7.18A
is a complete and correct list of the locations where each of the Borrower, the
Guarantors and their respective Subsidiaries maintain their respective chief
executive offices,
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their principal places of business, an office, a place of business or any
material financial records. Set forth on SCHEDULE 7.18B is a
complete and correct list of each name under or by which each of the Borrower,
the Guarantors and their respective Subsidiaries presently conducts its business
or has conducted its business during the past seven years.
7.19. TITLE TO ASSETS. The Borrower, the Guarantors and their
respective Subsidiaries have good and marketable title (or good and marketable
leasehold interests with respect to leased property) to all their respective
assets (including all assets constituting a part of the Collateral and all
assets reflected in the unaudited consolidated balance sheet as of the
six-month period ended June 30, 1994), subject to no Liens other than
Permitted Liens.
7.20. LABOR MATTERS. There are no disputes or controversies pending
between the Borrower, the Guarantors or their respective Subsidiaries and their
respective employees, the outcome of which may have a material adverse effect on
the properties, businesses, prospects, results of operations, management or
financial or other condition of the Borrower and its Subsidiaries, taken as a
whole.
7.21. BUSINESS. There is no pending or threatened claim or litigation
against or affecting the Borrower, the Guarantors or their respective
Subsidiaries contesting the right of the Borrower, the Guarantors or their
respective Subsidiaries to conduct their businesses as presently conducted or as
proposed to be conducted, and there are no other facts or circumstances that
have had or may have a material adverse effect on the properties, businesses,
prospects, results of operations, management or financial or other condition of
the Borrower and its Subsidiaries, taken as a whole.
7.22. COMPLIANCE WITH LAWS. The Borrower and its Subsidiaries (a)
have not been, are not and will not be in violation of any Requirement of Law
binding upon the Borrower, the Guarantors or their respective Subsidiaries or
their respective properties and assets, including any health care regulatory
conditions or standards of licensure or any other applicable legal requirements,
including any building, zoning, occupational safety and health, health care,
pension, environmental control, certificate of need, Medicare, Medicaid or
insurance fraud or similar law, ordinance or regulation relating to their
properties or the operation thereof or of their businesses, or any applicable
fair employment, equal opportunity or similar law, ordinance or regulation, (b)
have not failed to obtain any license, permit, certificate or other governmental
authorization necessary for the conduct of their businesses or the ownership and
operation of their properties, (c) have not received any notice from any
Governmental Authority, and to their knowledge no
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such notice is pending or threatened, alleging that the Borrower, any
Guarantor or any of their respective Subsidiaries has violated, or has not
complied with, any Requirement of Law, condition or standard applicable with
respect to any of the foregoing, and (d) are not a party to any agreement or
instrument, or subject to any judgment, order, writ, rule, regulation, code or
ordinance, except where any violation, noncompliance, failure, agreement,
judgment, etc. as described in this SECTION 7.22 would not have a material
adverse effect on the properties, businesses, prospects, results of
operations, management or financial or other condition of the Borrower and its
Subsidiaries, taken as a whole.
7.23. THIRD PARTY PAYOR PROGRAMS. To the extent that the Borrower, the
Guarantors and their respective Subsidiaries participate in Third Party Payor
Programs, they are eligible for reimbursement thereunder and are in material
compliance with all requirements for participation therein. To the knowledge of
the Borrower and the Guarantors there is no pending or threatened proceeding or
investigation under any Third Party Payor Program involving the Borrower, any
Guarantor, any of their respective Subsidiaries or any of the Hospitals. The
Borrower, the Guarantors and their respective Subsidiaries have timely filed or
caused to be timely filed all cost reports and other reports of contract or
otherwise to be made with respect to reimbursement by third party payors, and
all such reports are, or when filed will be, complete and accurate. Except as
may be disclosed in the financial statements referred to in SECTION 7.5, the
Borrower, the Guarantors and each of their respective Subsidiaries have no
liability (whether or not disclosed in any report heretofore or hereafter made)
for any refund, discount or adjustment to any Person that has not been fully
reserved for, and no interest or penalties are accruing with respect thereto, if
the aggregate amount of all such liabilities would have a material adverse
effect on the properties, businesses, prospects, results of operations,
management or financial or other condition of the Borrower and its Subsidiaries,
taken as a whole.
7.24. GOVERNMENTAL AUTHORIZATIONS; PERMITS, LICENSES AND
ACCREDITATION; OTHER RIGHTS. The Borrower and its Subsidiaries have all
licenses, permits, approvals, registrations, contracts, consents, franchises,
qualifications, certificates of need, accreditations and other authorizations
necessary for the lawful conduct of their respective businesses or operations
wherever now conducted and as planned to be conducted, including the ownership
and operation of their Hospitals, pursuant to all applicable statutes, laws,
ordinances, rules and regulations of all Governmental Authorities having,
asserting or claiming jurisdiction over the Borrower and its Subsidiaries or
over any part of their respective operations. Except as set forth on SCHEDULE
7.24, each hospital is fully accredited by JCAHO or, if applicable, the American
Osteopathic Hospital Association. Copies
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of all such licenses, permits, approvals, registrations, contracts, consents,
franchises, qualifications, certificates of need, accreditations and other
authorizations shall be provided to the Administrative Agent upon request.
The Borrower and its Subsidiaries are not in default under any of such
licenses, permits, approvals, registrations, contracts, consents, franchises,
qualifications, certificates of need, accreditations and other authorizations,
and no event has occurred, and no condition exists, that with the giving of
notice, the passage of time or both would constitute a default thereunder or
would result in the suspension, revocation, impairment, forfeiture or
non-renewal of any thereof. The continuation, validity and effectiveness of
all such licenses, permits, approvals, registrations, contracts, consents,
franchises, qualifications, certificates of need, accreditations and other
authorizations will not be adversely affected by the transactions contemplated
by this Agreement. The Borrower and its Subsidiaries know of no reason why
they will not be able to maintain after the date hereof all licenses, permits,
approvals, registrations, contracts, consents, franchises, qualifications,
certificates of need, accreditations and other authorizations necessary or
appropriate to own and operate all Hospitals that they presently own and
operate and to obtain those necessary to own and operate all Hospitals that
they may acquire, and otherwise to conduct the businesses of the Borrower and
its Subsidiaries as now conducted and presently proposed to be conducted.
7.25. NO MATERIAL ADVERSE CHANGE. Since December 31, 1993 there has
been no material adverse change in the properties, businesses, results of
operations, prospects, management or financial or other condition of the
Borrower and its Subsidiaries, taken as a whole.
7.26. EMPLOYMENT AND INVESTMENT AGREEMENTS. Set forth on SCHEDULE 7.26
is a complete and accurate list, as of the date hereof, of (a) all employment
agreements and executive compensation arrangements to which the Borrower, the
Guarantors or any of their respective Subsidiaries is a party and which provide
for aggregate compensation (including bonuses) to any Person (assuming
compliance with or satisfaction of all contingencies or conditions) of $200,000
or more per year and (b) all agreements relating to the voting or disposition of
any outstanding shares of capital stock of the Borrower's Subsidiaries and, to
the Borrower's knowledge, of the Borrower.
7.27. ENVIRONMENTAL MATTERS. Except as disclosed in SCHEDULE 7.27, (a)
none of the Borrower, the Guarantors or any of their respective Subsidiaries,
nor any of their respective operations, is in violation of any applicable
Hazardous Materials Law or any restrictive covenant or deed restriction relating
to environmental matters (recorded or otherwise), the violation of which would
be likely to have a material adverse effect on the
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properties, businesses, prospects, results of operations, management or
financial or other condition of the Borrower and its Subsidiaries, taken as a
whole; (b) without limitation of CLAUSE (a) above, none of the Borrower, the
Guarantors or, to the knowledge of
the Borrower and the Guarantors, any of their respective Subsidiaries or their
respective operations, nor any current or prior owner, lessor or operator (other
than the Borrower) is in violation of any Hazardous Materials Law or subject to
any existing, pending or threatened investigation, inquiry or proceeding by any
Governmental Authority or subject to any remedial obligations under any
Hazardous Materials Law; (c) all permits and licenses required of the
Borrowers, the Guarantors or any of their respective Subsidiaries with respect
to Hazardous Materials, including past or present treatment, storage, disposal
or release of any Hazardous Materials or solid waste into the environment,
have been obtained or filed; (d) all Hazardous Materials or solid waste
generated by the Borrower, any Guarantor or any of their respective
Subsidiaries have in the past been, and will continue to be, transported,
treated and disposed of only by carriers maintaining valid permits
under all applicable Hazardous Materials Laws and only at treatment, storage and
disposal facilities maintaining valid permits under applicable Hazardous
Materials Laws, which carriers and facilities have been and are, to the
knowledge of the Borrower and the Guarantors, operating in compliance with such
permits; (e) the Borrower, the Guarantors and their respective Subsidiaries have
taken all reasonable steps necessary to determine, and have determined, that no
Hazardous Materials or solid wastes have been disposed of or otherwise released
by them except in compliance with Hazardous Material Laws; and (f) neither the
Borrower nor any Guarantor nor any of their respective Subsidiaries has a
material contingent liability in connection with any release of any Hazardous
Materials or solid waste into the environment, and in connection herewith the
Borrower hereby agrees to pursue diligently the resolution of any environmental
issues disclosed in SCHEDULE 7.27 by all necessary and appropriate actions and
shall report to the Administrative Agent not less frequently than quarter-
annually as to the status of the resolution of such issues.
7.28. MATERIAL CONTRACTS. Set forth on SCHEDULE 7.28 hereto is a
complete and accurate list of all Material Contracts of the Borrower, each of
the Guarantors and each of their respective Subsidiaries. Other than as set
forth on SCHEDULE 7.28, each such Material Contract is in full force and effect
in accordance with the terms thereof and there are no material defaults by the
Borrower, the Guarantors or any of their respective Subsidiaries as are parties
thereto or, to the knowledge of the Borrower and the Guarantors, by any other
party, under any such Material Contract. The Borrower has delivered to the
Administrative Agent a true and complete copy of each Material Contract required
to be listed on SCHEDULE 7.28.
7.29. NO MISSTATEMENTS. Neither this Agreement nor any of the other
Loan Documents, nor any agreement, instrument or other document pursuant
executed hereto or thereto or in connection herewith or therewith, nor any
certificate, statement or other information referred to herein or therein or
furnished to the Administrative Agent, the Issuing Bank or any of the Lenders
pursuant hereto or thereto or in connection herewith or therewith, contains any
misstatement of a material fact or omits to state any material fact necessary to
make the statements
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contained herein or therein, in the light of the circumstances under which they
were made, not misleading on the date hereof or on the date furnished, as the
case may be, except as otherwise disclosed to the Administrative Agent, the
Issuing Bank and the Lenders in writing on or prior to the date hereof. Neither
the Borrower nor any Guarantor is aware of any fact that it has not disclosed in
writing to the Administrative Agent that materially and adversely affects, or
insofar as the Borrower or such Guarantor can now foresee, could materially and
adversely affect, the properties, businesses, prospects, results of operations,
management or financial or other condition of the Borrower and its Subsidiaries,
taken as a whole, or could affect the ability of the Borrower, any Guarantor or
any of their respective Subsidiaries to perform its obligations under this
Agreement and the other Loan Documents to which it is a party.
7.30. OPERATING LEASES. SCHEDULE 7.30 sets forth each Operating
Lease existing on the date hereof providing for annual lease payments in excess
of $100,000.
7.31. OBLIGATIONS CONSTITUTE SENIOR INDEBTEDNESS. The Loans, the
Letter of Credit Liabilities and the other monetary Obligations of the Borrower
constitute, or upon creation thereof will constitute, "Senior Indebtedness", as
such term is used in the CHS Subordinated Indenture.
ARTICLE 8
AFFIRMATIVE COVENANTS
So long as any Obligations are unpaid or outstanding, any Obligation under
the Loan Documents is unperformed or any of the Commitments are in effect, the
Borrower and Guarantors shall:
8.1. FINANCIAL STATEMENTS.
8.1.1. ANNUAL FINANCIAL STATEMENTS. Furnish to the Administrative
Agent and each Lender, as soon as available and in any event within one hundred
(100) days after the end of each Fiscal Year of the Borrower, a consolidated
balance sheet of the Borrower and its Subsidiaries as of the end of such Fiscal
Year and the related consolidated statements of income, shareholders' equity and
cash flows of the Borrower and its Subsidiaries for such Fiscal Year, audited
and reported upon, without qualification, by Arthur Andersen & Co. or other
independent public accountants acceptable to the Lenders in their sole
discretion, accompanied by an unaudited consolidating balance sheet of the
Borrower and its Subsidiaries as of the end of such
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period and an unaudited consolidating statement of income for such period,
together with (a) a certificate of a Responsible Officer of the Borrower
stating that no Default or Event of Default has occurred and is continuing or,
if in the opinion of such officer, a Default or Event of Default has occurred
and is continuing, a statement as to the nature thereof and the action that
the Borrower proposes to take with respect thereto, (b) a schedule in form
satisfactory to the Administrative Agent and the Lenders of the computations
used by the Borrower in determining, as of the end of such Fiscal Year,
compliance with all financial covenants contained herein and (c) a written
discussion and analysis by the management of the Borrower of the financial
statements furnished in respect of such annual fiscal period.
8.1.2. QUARTERLY REPORTS. Furnish to the Administrative Agent and
each Lender, as soon as available and in any event within fifty (50) days after
the end of each Fiscal Quarter of the Borrower (other than the last Fiscal
Quarter in any Fiscal Year) an unaudited consolidated and consolidating balance
sheet of the Borrower and its Subsidiaries as of the end of such Fiscal Quarter
and the related consolidated and consolidating statements of income,
shareholders' equity and cash flows of the Borrower and its Subsidiaries for the
period commencing at the beginning of the current Fiscal Year and ending with
the end of such Fiscal Quarter, certified by a Responsible Officer of the
Borrower, together with (a) a certificate of said Responsible Officer stating
that no Default or Event of Default has occurred and is continuing or, if in the
opinion of such officer, a Default or Event of Default has occurred and is
continuing, a statement as to the nature thereof and the action that the
Borrower proposes to take with respect thereto, (b) a schedule in form
satisfactory to the Administrative Agent and the Lenders of the computations
used by the Borrower in determining, as of the end of such period, compliance
with all financial covenants contained herein and (c) a written discussion and
analysis by the management of the Borrower of the financial statements furnished
in respect of such period.
8.1.3. GAAP. Take all actions necessary to cause all such
financial statements to be complete and correct in all material respects and to
be prepared in reasonable detail and in accordance with GAAP applied
consistently throughout the periods reflected therein (except as may be approved
by such accountants or Responsible Officer, as the case may be, and disclosed
therein).
8.1.4. PATIENT ACCOUNTS. Take all actions necessary to cause the
patient accounts receivable recorded in all such financial statements to reflect
accurately the reimbursable amounts under all Third Party Payor Programs in
which the Borrower or any of its Subsidiaries participates, net of contractual
adjustments.
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8.1.5. HOSPITAL OPERATING STATISTICS. Furnish to the
Administrative Agent and each Lender, as soon as available and in any event
within fifty (50) days after the end of each Fiscal Quarter of the Borrower and
within one hundred (100) days after the end of each Fiscal Year of the Borrower,
a quantitative analysis and statistical summary for the Borrower and its
Subsidiaries on a consolidated basis, in the form of EXHIBIT 8.1.5, plus such
additional information regarding the Hospitals as the Lenders from time to
time may reasonably request, as of the end of each such Fiscal Quarter or
Fiscal Year, as the case may be, and for such period, together with a
certificate of a Responsible officer of the Borrower certifying as to the
accuracy and completeness of such data.
8.2. CERTIFICATES AND OTHER INFORMATION. Furnish to the Administrative
Agent and each Lender, each in form and substance acceptable to Requisite
Lenders:
8.2.1. MANAGEMENT LETTERS. Promptly after the same are received by
the Borrower, copies of management letters provided to the Borrower by its
independent certified public accountants that describe or refer to any
inadequacy, defect, problem, qualification or other lack of satisfactory
accounting controls utilized by the Borrower or any of its Subsidiaries.
8.2.2. SHAREHOLDER MATERIALS. (a) Within two (2) Business Days
after the delivery of same to the shareholders of the Borrower, copies of all
financial statements and reports that the Borrower, any Guarantor or any of
their respective Subsidiaries sends to the shareholders of the Borrower, and (b)
concurrently with the filing thereof, copies of all reports and statements of
the Borrower, the Guarantors and their respective Subsidiaries (including proxy
and information statements, quarterly, annual and current reports and
registration statements, but excluding those pertaining only to employee benefit
plans) that it may make to, or file with, the Commission.
8.2.3. BUDGETS. As soon as available, and in any event not later
than sixty (60) days after the end of each Fiscal Year of the Borrower, twelve
(12) month consolidated budgeted financial statements (including balance sheets
and statements of income, shareholders' equity and cash flows) for the following
Fiscal Year of the Borrower and its Subsidiaries on a consolidated basis
(including underlying assumptions), and twelve (12) month consolidating budgeted
statements of income for the following Fiscal Year of the Borrower and each of
its Subsidiaries, all in a format reasonably acceptable to Requisite Lenders and
certified by a Responsible Officer of the Borrower as being fairly stated in
good faith. Any updates thereto shall be provided upon request of the
Administrative Agent.
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8.2.4. LICENSURE AND ACCREDITATION SURVEYS. Promptly upon request
by the Administrative Agent, a copy of each licensing report of the appropriate
state agency, any deficiency list and a copy of the most recent JCAHO and, if
applicable, American Osteopathic Hospital Association accreditation survey
report and any deficiency list received by any Hospital.
8.2.5. REVIEW OF MALPRACTICE SELF-INSURANCE RESERVES.
Promptly upon request by the Administrative Agent, a copy of a
review of the malpractice claims and self-insurance reserves with respect to
any claims against or self-insurance maintained by the Borrower, the Guarantors
and any of their respective Subsidiaries, which review shall be made by an
actuary or other consultant experienced in valuing malpractice claims and
acceptable to the Administrative Agent.
8.2.6. COST REPORTS. Promptly upon request by the Administrative
Agent, copies of each cost report, interim cost report or similar report filed
by the Borrower, any of the Guarantors or any of their respective Subsidiaries
with Medicare, Medicaid or Blue Cross, and any summaries thereof prepared by the
Borrower, any Guarantor or any of their respective Subsidiaries.
8.2.7. REPORTS TO OTHER PERSONS. Promptly After the furnishing
thereof, copies of any statement or report furnished to any other holder of any
Indebtedness of the Borrower, any of the Guarantors or any of their respective
Subsidiaries pursuant to the terms of any indenture, loan or credit or similar
agreement and not otherwise required to be furnished to the Administrative Agent
or Lenders pursuant to any other clause of this SECTION 8.2.
8.2.8. INTERNAL HEALTH CARE AUDITS. Promptly upon request by any
Lender specifying in reasonable detail the types of documents to be provided,
copies of any and all statements, audits, studies or reports submitted by or on
behalf of the Borrower, any of the Guarantors, any of their respective
Subsidiaries or any of the Hospitals to any Governmental Authority or any
nationally recognized accreditation association or commission.
8.2.9. OTHER HEALTH CARE AUDITS. Within sixty (60) days following
the receipt thereof, copies of any and all audits, studies or reports prepared
by any Governmental Authority or nationally recognized accreditation association
or commission relating specifically to the business or operations of the
Borrower, any of the Guarantors, any of their respective Subsidiaries or any of
the Hospitals.
8.2.10. FUNDED INDEBTEDNESS. Promptly upon request by the
Administrative Agent, copies of all agreements,
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instruments and/or documents evidencing or otherwise related to Consolidated
Funded Indebtedness.
8.2.11. THIRD PARTY PAYOR PROGRAMS. Promptly upon request by the
Administrative Agent, a schedule setting forth each Third Party Payor Program in
which the Borrower, any Guarantor or any of their respective Subsidiaries
participates.
8.2.12. EMPLOYMENT AND INVESTMENT AGREEMENTS.
Promptly upon request by the Administrative Agent, a true and complete copy
of each of the agreements required to be listed on SCHEDULE 7.26.
8.2.13. AMENDMENT OF HALLMARK SUBORDINATED INDENTURE. Not later
than twenty (20) days prior to entering into any amendment to or modification of
the Hallmark Subordinated Indenture, copies of the proposed amendments, and
upon the execution and delivery of same, copies of the final forms thereof.
8.2.14. ADDITIONAL INFORMATION. Promptly, such additional
financial and other information as the Administrative Agent or any Lender from
time to time may reasonably request.
8.3. PROVISION OF NOTICES. Notify the Administrative Agent and each Lender
of the occurrence of any of the following events not later than five (5) days
after the Borrower or any Guarantor knows or has reason to know of such event:
8.3.1. DEFAULT. Any Default or Event of Default.
8.3.2. OTHER DEFAULT OR LITIGATION. (a) Any default
or event of default under any Contractual Obligation or Operating Lease of the
Borrower, any Guarantor or any of their respective Subsidiaries that if
adversely determined could result in liability equal to or greater than $500,000
or could otherwise have a material adverse effect on the properties, businesses,
prospects, results of operations, management or financial or other condition of
the Borrower and its Subsidiaries, taken as a whole, (b) any litigation,
investigation or proceeding that may exist at any time between the Borrower, any
Guarantor or any of their respective Subsidiaries and any Governmental Authority
(excluding, however, audits and inquiries made in the ordinary course of
business) or (c) any other litigation that if adversely determined would (i) if
the relief sought does not include damages, have a material adverse effect on
the properties, businesses, prospects, results of operations, management or
financial or other condition of the Borrower and its Subsidiaries, taken as a
whole, or (ii) if the relief sought includes damages, would result in an
uninsured liability to the Company, any Guarantor or any of their respective
Subsidiaries equal to or in excess of $500,000.
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8.3.3. REPORTABLE EVENTS. (a) Any Reportable Event with respect to
any Plan, (b) the institution of proceedings or the taking or expected taking of
any other action by the PBGC, the Borrower, any Guarantor, any of their
respective Subsidiaries or any Commonly Controlled Entity to terminate, withdraw
or partially withdraw from any Plan and (c) with respect to any Multi-Employer
Plan, the reorganization or insolvency of such Plan. In addition to such
notice, the Borrower and the Guarantors shall deliver or cause to be delivered
to the Administrative Agent and each Lender whichever of the following
may be applicable: (i) a certificate of a Responsible Officer of the Borrower
or such Guarantor setting forth details as to such Reportable Event and the
action that it, such Subsidiary or the Commonly Controlled Entity proposes to
take with respect thereto, together with the copy of any notice of such
Reportable Event that may be required to be filed with the PBGC, or (ii) any
notice delivered by the PBGC evidencing its intent to institute such proceedings
or any notice to the PBGC that such Plan is to be terminated, as the case may
be.
8.3.4. ENVIRONMENTAL MATTERS. (a) Any event that makes any of the
representations set forth in SECTION 7.27 inaccurate in any respect or (b) the
receipt by the Borrower, any of the Guarantors or any of their respective
Subsidiaries of any notice, order, directive or other communication from a
Governmental Authority alleging a violation of or noncompliance with any
Hazardous Material Laws.
8.3.5. LOSS OF ACCREDITATION OR LICENSE.
(a) The loss or, if known by the Borrower, any Guarantor or any of
their respective Subsidiaries, threatened loss, by any Hospital owned or
leased by the Borrower, any Guarantor or any of their respective
Subsidiaries, of its accreditation by the JCAHO, the American Osteopathic
Hospital Association or any other nationally recognized accreditation
association or commission;
(b) The loss or, if known by the Borrower, any Guarantor or any of
their respective Subsidiaries, threatened loss, by the Borrower, any
Guarantor or any of their respective Subsidiaries or any of the Hospitals
owned, leased or operated by the Borrower, any Guarantor or any of their
respective Subsidiaries, of any license, permit, approval, registration,
contract, consent, franchise, qualification, certificate of need,
accreditation or other authorization issued by any Governmental Authority
referenced in SECTION 7.24; or
(c) The decertification or, if known by the Borrower, any Guarantor
or any of their respective Subsidiaries, potential decertification, of the
Borrower, any Guarantor or
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any of their respective Subsidiaries, under any Third Party Payor Program.
8.3.6. MATERIAL CONTRACTS. (a) Any proposed material amendment,
change or modification to, or waiver of any material provision of, or any
termination of, any Material Contract and
(b) any Default or Event of Default under any Material Contract.
8.3.7. CASUALTY LOSSES. Any casualty loss or event not insured
against in an amount in excess of $250,000.
8.3.8. CERTAIN DIVIDEND DECLARATIONS. Any declaration of
dividends by any Permitted Minority-Interest Subsidiary, together with a
statement of the aggregate amount of dividends declared, amount of dividends
declared per share, the formula, if any, used to determine the dividends
declared, the record date for the payment of such dividends and the number of
shares of such Permitted Minority-Interest Subsidiary that are not owned by the
Borrower or one of its wholly-owned Subsidiaries as of such record date.
8.4. PAYMENT OF OBLIGATIONS AND PERFORMANCE OF COVENANTS.
(a) Make full and timely payment of the Obligations, including the
Loans and Letter of Credit Liabilities, whether now existing or hereafter
arising;
(b) Duly comply with all terms, covenants and conditions contained in
each of the Loan Documents, at the times and places and in the manner set
forth therein; and
(c) Take all action necessary to maintain the security interests
provided for under this Agreement and the Security Documents as valid and
perfected Liens on the property intended to be covered thereby, subject to
no other Liens except Permitted Liens, and supply all information to the
Administrative Agent or the Lenders necessary to accomplish same.
8.5. PAYMENT OF TAXES. Pay, and cause their respective Subsidiaries to
pay, or cause to be paid before the same shall become delinquent and before
penalties have accrued thereon, all taxes, assessments and governmental charges
or levies imposed on the income, profits, franchises, property or businesses of
the Borrower, the Guarantors or their respective Subsidiaries, except to the
extent and so long as (a) the same are being contested in good faith by
appropriate proceedings and (b) adequate reserves with respect thereto in
conformity with GAAP have been provided on the books of the Borrower or any such
Guarantor or Subsidiary, as appropriate.
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8.6. CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE. Continue, and
cause their respective Subsidiaries to continue, (a) to engage in the business
of providing health care delivery systems and businesses that enhance or
support the provision of health care delivery systems and (b) except as
permitted by SECTIONS 9.3 and 9.4, to preserve, renew and keep in full force
and effect their existence and present corporate or partnership structure, as
the case may be.
8.7. COMPLIANCE WITH LAW. Observe and comply with, and cause their
respective Subsidiaries to observe and comply with, all present and future
Requirements of Law relating to the conduct of their businesses or to their
properties or assets, except to the extent and so long as the nonobservance
thereof or noncompliance therewith will not have a material adverse effect on
the properties, businesses, prospects, results of operations, management or
financial or other condition of the Borrower and its Subsidiaries, taken as a
whole, and will not materially impair the Administrative Agent's or the Lenders'
rights or materially affect the ability of the Borrower, any Guarantor or any of
their respective Subsidiaries to perform its obligations under this Agreement,
the Notes or the other Loan Documents to which it is a party.
8.8. MAINTENANCE OF PROPERTIES AND FRANCHISES. Maintain, preserve and keep
and cause their respective Subsidiaries to maintain, preserve and keep (a) all
of their buildings, tangible properties, equipment and other property and assets
used and necessary in their businesses, whether owned or leased, in good repair,
working order and condition, from time to time making all necessary and proper
repairs and replacements so that at all times the utility, efficiency and value
thereof shall not be impaired, and (b) all rights, privileges and franchises
necessary or desirable in the normal conduct of their businesses.
8.9. INSURANCE.
(a) Maintain and cause their respective Subsidiaries to maintain:
(i) insurance (in addition to any insurance required under the
Security Documents) on all insurable property and assets owned or
leased by the Borrower, the Guarantors or any of their respective
Subsidiaries in the manner, to the extent and against at least such
risks (in any event including hospital liability (general liability,
medical professional liability, contractual liability, druggists'
liability and personal injury), workers' compensation, employers'
liability, automobile liability and physical damage coverage,
environmental impairment liability, all risk property, business
interruption,
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fidelity and crime insurance) usually maintained by owners
of similar businesses and properties in similar geographic areas;
PROVIDED that the amounts of such physical damage insurance
coverage shall not be less than the full replacement cost
of all such insurable property and assets, except for coverage
limitations with respect to flood, earthquake and windstorm perils
that are acceptable to the Administrative Agent and Requisite
Lenders; and
(ii) self-insurance reserves covering those risks for which the
Borrower, the Guarantors and each of their respective Subsidiaries
presently self-insure in appropriate amounts as determined from time
to time by independent insurance claims auditors acceptable to the
Administrative Agent and Requisite Lenders; PROVIDED that the
retention level of such self-insurance for hospital liability for the
Borrower and its Subsidiaries as a group shall not exceed $1,000,000
per occurrence and $3,000,000 in annual aggregate losses.
All such insurance shall be in such amounts, in such form and
with such insurance companies as are reasonably satisfactory to the
Administrative Agent and Requisite Lenders.
(b) Furnish to the Administrative Agent not less frequently than
annually and at any time upon written request, (i) full information as to
such insurance carried, including the amounts of all self-insurance
reserves of the Borrower, the Guarantors and their respective Subsidiaries,
and (ii) certificates of insurance from the insurance companies and
certified copies of such insurance policies. All policies of insurance
shall provide for not less than fifteen (15) days' prior written
cancellation notice to the Administrative Agent.
(c) To the extent permitted by applicable law, adopt and cause their
respective Subsidiaries to adopt policies to encourage physicians
practicing at their respective facilities to maintain medical malpractice
insurance in such amounts as shall be adequate to cover such physicians'
normal risks.
8.10. USE OF PROCEEDS. Use, and cause their respective Subsidiaries
to use, the proceeds of the Facilities for the purposes specified in SECTION
2.10 and for no other purpose.
8.11. BOOKS AND RECORDS. Keep and maintain, and cause their
respective Subsidiaries to keep and maintain, full and accurate books of record
and accounts of their operations,
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dealings and transactions in relation to their business and activities, in
conformity with GAAP and all Requirements of Law.
8.12. INSPECTION. Permit, and cause their respective Subsidiaries to
permit, any employees, agents or other representatives of the Administrative
Agent or the Lenders and any attorneys, accountants or other agents or
representatives designated by the Administrative Agent or the Lenders to (a)
have access to and visit and inspect any of the books of account, financial
records and properties, real, personal or mixed, of the Borrower, the Guarantors
and their respective Subsidiaries (b) examine and make abstracts from any such
books and records and (c) discuss the affairs, finances and accounts of the
Borrower, the Guarantors and their respective Subsidiaries with their officers,
employees or agents, all at such reasonable business times as the Administrative
Agent or the Lenders deem necessary or advisable to protect their respective
interests.
8.13. COMPLIANCE WITH TERMS OF MATERIAL CONTRACTS. Comply, and cause
their respective to Subsidiaries to comply, with all agreements, covenants,
terms, conditions and provisions of all Material Contracts, except to the
extent and so long as noncompliance therewith will not have a material adverse
effect on the properties, businesses, prospects, results of operations,
management or financial or other condition of the Borrower and
its Subsidiaries, taken as a whole, and will not materially impair the
Administrative Agent's or the Lenders' rights or materially affect the ability
of the Borrower, any Guarantor or any of their respective Subsidiaries to
perform its obligations under this Agreement, the Notes or the other Loan
Documents to which it is a party.
8.14. EMPLOYMENT OF TECHNOLOGY, DISPOSAL OF HAZARDOUS WASTE, ETC.
(a) employ, and cause their respective Subsidiaries to employ, in
connection with the use of any real property, appropriate technology
(including appropriate secondary containment measures) to maintain
compliance with any applicable Hazardous Materials Laws;
(b) take, and cause their respective Subsidiaries to take, all
actions identified as necessary to comply with all Hazardous Materials Laws
in any environmental compliance reports or assets delivered to the
Administrative Agent pursuant to the provisions of this Agreement;
(c) obtain and maintain, and cause their respective Subsidiaries to
obtain and maintain, any and all permits required by applicable Hazardous
Materials Laws in connection with the operations of the Borrower, the
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Guarantors or any of their respective Subsidiaries or any Affiliate
thereof;
(d) dispose of, and cause their respective Subsidiaries to dispose
of, any and all Hazardous Materials only at facilities and with carriers
maintaining valid permits under any applicable federal, state and local
Hazardous Materials Laws; and
(e) use best efforts to obtain, and cause their respective
Subsidiaries to use their best efforts to obtain, certificates of disposal
from all contractors employed by the Borrower, the Guarantors or any of
their respective Subsidiaries in connection with the transportation or
disposal of any Hazardous Materials.
8.15. ENVIRONMENTAL MONITORING. Establish and maintain, and cause
their respective Subsidiaries to establish and maintain, a system to assure and
monitor continued compliance with all applicable Hazardous Material Laws, the
noncompliance with which may materially adversely affect the value of the real
property of the Borrower, the Guarantors and their respective Subsidiaries,
taken as a whole, which system shall include annual reviews of such compliance
by employees or agents of the Borrower, the Guarantors and their respective
Subsidiaries who are familiar with the requirements of applicable Hazardous
Material Laws.
8.16. MAINTENANCE OF ACCREDITATION, LICENSES, ETC. Preserve and
maintain, and cause their respective Subsidiaries to preserve and maintain, (a)
the accreditation of each Hospital by the JCAHO, the American Osteopathic
Hospital Association and each other nationally recognized accreditation
association or commission that now or hereafter accredits such Hospital, except
to the extent that failure to maintain such accreditation would not have a
material adverse effect on the properties, businesses, prospects, results of
operations, management or financial or other condition of the Borrower and its
Subsidiaries, taken as a whole, (b) all certifications and authorizations
necessary to ensure that each Hospital now or hereafter may participate in the
Medicare, Medicaid, CHAMPUS, if applicable, and Blue Cross programs and to
ensure that each of the Borrower, the Guarantors and their respective
Subsidiaries that owns or operates a Hospital now or hereafter participating
in Medicare, Medicaid, CHAMPUS or any other Third Party Payor Program is and
remains eligible for reimbursement thereunder and (c) all licenses, permits,
approvals, registrations, contracts, consents, franchises, qualifications,
certificates of need, accteditations and other authorizations required under
applicable state or local laws and regulations in connection with the
ownership or operation of the Hospitals or otherwise necessary or desirable
in the normal conduct of their businesses.
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8.17. OPERATION OF THE HOSPITALS. Operate, and cause their respective
Subsidiaries to operate, the Hospitals in a manner consistent with prevailing
health care industry standards in the United States of America from time to
time.
8.18. INTERCOMPANY INDEBTEDNESS REPORTING. Maintain, and cause their
respective Subsidiaries to maintain, accounting practices and procedures that
enable the Borrower, the Guarantors and their respective Subsidiaries to report
to the Administrative Agent upon request and at any time the amount of proceeds
of any unsecured advances or loans that any such Subsidiary has received from
the Borrower or a Guarantor. All such advances or loans shall constitute Senior
Indebtedness of the primary obligor with respect thereto and shall be evidenced
by Pledged Notes delivered to the Administrative Agent pursuant to the Pledge
Agreement.
8.19. FURTHER ASSURANCES. Perform, make, execute and deliver, and
cause their respective Subsidiaries to perform, make, execute and deliver, all
such additional and further acts, deeds, occurrences and instruments as the
Administrative Agent or the Lenders reasonably may require to document and
consummate the transactions contemplated hereby and to vest completely in and to
ensure the Administrative Agent and the Lenders their respective rights under
this Agreement, the Notes and the other Loan Documents.
8.20. POST-CLOSING MATTERS. Deliver to the Administrative Agent each
item listed on SCHEDULE 8.20 prior to the deadline therefor as set forth on said
schedule.
8.21. COMPLIANCE WITH BOND DOCUMENTS.
(a) Make all payments and otherwise perform all of its obligations
in respect of all Bond Documents and use their best efforts to keep, and
take all action to keep, the Bond Documents in full force and effect and to
keep the interest on the Fulton Bonds and the Olive Branch Bonds excludable
from the gross income of the owners thereof for Federal income tax
purposes.
(b) Promptly notify the Lenders of any defaults of the Borrower or
any of its Subsidiaries or any other party with respect to such Bond
Documents.
8.22 DOCUMENTATION RELATING TO PLEDGED NOTES. Contemporaneously with
the delivery to the Administrative Agent of any Pledged Note, assign and
deliver to the Administrative Agent any loan agreement or other instrument,
document or agreement further evidencing, securing or otherwise relating to
the indebtedness evidenced by such Pledged Note.
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ARTICLE 9
NEGATIVE COVENANTS
So long as any Obligations are unpaid or outstanding, any Obligation under
the Loan Documents is unperformed or any of the Commitments are in effect, the
Borrower and the Guarantors shall not:
9.1. INDEBTEDNESS. Create, incur, assume or suffer to exist, or
permit any of their respective Subsidiaries to create, incur, assume or suffer
to exist, any Indebtedness, except:
(a) Indebtedness of the Borrower or any of the Guarantors under or
pursuant to this Agreement or the $50,000,000 Credit Agreement;
(b) Indebtedness existing, or relating to commitments existing, on
the date hereof, all as set forth in SCHEDULES 7.17A and 7.17B, and any
extensions, refundings or renewals thereof on the same terms or other
terms satisfactory to Requisite Lenders; PROVIDED, HOWEVER, that neither
the principal amount thereof nor the interest rate thereon shall be
increased, nor shall the amortization schedule thereof be shortened;
(c) Purchase Money Debt in an aggregate amount not to exceed
$25,000,000 outstanding at any one time, and Capitalized Lease
Obligations;
(d) Subordinated Indebtedness;
(e) Indebtedness constituting current liabilities incurred in the
ordinary course of business and not represented by any note, bond,
debenture or other instrument, and which is not past due for a period of
more than thirty (30) days, or if overdue for more than thirty (30) days,
which are being contested in good faith and by appropriate proceedings
and for which adequate reserves in accordance with GAAP have been
established on the books of the primary obligor with respect thereto;
(f) Contingent Obligations under guarantees executed by the
Borrower, any Guarantor or any of their respective Subsidiaries in the
ordinary course of business up to $1,000,000 in the aggregate outstanding
at any one time, exclusive of any Contingent Obligations included in
Consolidated Funded Indebtedness;
(g) Contingent Obligations consisting of the indemnification by the
Borrower or any of its Subsidiaries of (i) the officers, directors,
employees and agents of the
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Borrower or such Subsidiary, to the extent permissible under the
corporation law of the jurisdiction in which the Borrower or such
Subsidiary is organized, (ii) commercial banks, investment bankers and
other independent consultants or professional advisors pursuant to
agreements relating to the underwriting of the Borrower's or such
Subsidiary's securities or the rendering of banking or professional
services to the Borrower or such Subsidiary and (iii) landlords,
licensors, licensees and other parties pursuant to agreements entered
into in the ordinary course of business by the Borrower or such
Subsidiary.
(h) Contingent Obligations owed to a seller of assets in a
Permitted Acquisition that (i) relate to customary post-closing
adjustments with respect to accounts receivable, accounts payable and
similar items typically subject to post-closing adjustments in similar
transactions, (ii) in each instance are in an aggregate amount not to
exceed ten percent (10%) of the consideration paid or to be paid
(inclusive of Indebtedness incurred or assumed) in connection with
such Permitted Acquisition and (iii) are outstanding for a period of one
(1) year or less following the creation thereof;
(i) Indebtedness of the seller of assets in a Permitted
Acquisition that is assumed by a Subsidiary of the Borrower in connection
with such Permitted Acquisition and that is fully repaid within thirty
(30) days of the assumption thereof;
(j) Indebtedness with respect to financed insurance premiums not past
due;
(k) Contingent Obligations of the Borrower or any Subsidiary of the
Borrower under the Hallmark Acquisition Agreement; and
(l) Indebtedness of a Subsidiary of the Borrower that is owed to
the Borrower or any other Subsidiary of the Borrower and that is
described in CLAUSES (e), (g), (h), (i), (j), (k), (l) or (m) of
SECTION 9.5.
9.2. LIENS. Create, incur, assume or suffer to exist, or permit any of
their respective Subsidiaries to create, incur, assume or suffer to exist, any
Lien upon any real or personal property, fixtures, revenues or other assets
whatsoever (including the Collateral), whether now owned or hereafter acquired,
of the Borrower, the Guarantors or any of their respective Subsidiaries, except:
(a) Liens securing the Obligations;
(b) Existing Liens;
(c) Liens for taxes not yet due or that are being
contested in good faith and by appropriate proceedings and for which
adequate reserves in accordance with GAAP have been established on the
books of the Borrower or such Guarantor or Subsidiary;
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(d) Carriers', warehousemen's, mechanics', materialmen's,
repairmen's or other like Liens arising in the ordinary course of business
that are not overdue for a period of more than thirty (30) days, or if
overdue for more than thirty (30) days, (i) which are being contested in
good faith and by appropriate proceedings, (ii) for which adequate reserves
in accordance with GAAP have been established on the books of the Borrower
or such Guarantor or Subsidiary; and (iii) with respect to which the
obligations secured thereby are not material;
(e) Pledges or deposits in connection with workers' compensation
insurance, unemployment insurance and like matters;
(f) Liens securing Purchase Money Debt or arising under Capitalized
Leases; PROVIDED, HOWEVER, that any such Lien attaches only to the item or
items of property or asset financed with such Purchase Money Debt or
Capitalized Lease;
(g) Deposits to secure the performance of bids, trade contracts
(other than for borrowed money), leases, statutory obligations, surety and
appeal bonds, performance bonds and other obligations of a like nature
incurred in the ordinary course of business;
(h) Easements, reservations, exceptions, rights-of-way, covenants,
conditions, restrictions and other similar encumbrances incurred in the
ordinary course of business that, in the aggregate, are not substantial in
amount, and that do not in any case materially detract from the value of
the property subject thereto or interfere with the ordinary conduct of
business by the Borrower or such Guarantor or Subsidiary;
(i) Liens in respect of any writ of execution, attachment,
garnishment, judgment or award in an amount less than $100,000, the time
for appeal or petition for rehearing of which shall not have expired, or in
respect of which an appeal or appropriate proceeding for review is being
prosecuted in good faith and a stay of execution pending such appeal or
proceeding for review has been secured;
(j) Liens of a lessor with respect to Operating Leases;
(k) Liens securing Indebtedness permitted under CLAUSE (b) of SECTION
9.1, but only to the extent that such Indebtedness is presently secured as
set forth on Schedule 7.17A; and
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(l) Liens securing Indebtedness permitted under CLAUSE (i) of SECTION
9.1, but only to the extent that such Indebtedness is secured at the time
of the assumption thereof by such Subsidiary of the Borrower.
9.3. FUNDAMENTAL CHANGES. Directly or indirectly, or permit any of their
respective Subsidiaries directly or indirectly, (whether in one transaction or a
series of transactions), to (a) enter into any transaction of merger,
consolidation or amalgamation; (b) liquidate, wind up or dissolve itself (or
suffer any liquidation or dissolution); (c) make any Asset Acquisition other
than a Permitted Acquisition; (d) make any material change in its present method
of conducting business; or (e) enter into any agreement or transaction to do or
permit any of the foregoing; PROVIDED, HOWEVER, that notwithstanding CLAUSE (b)
of this SECTION 9.3, the Borrower may permit the dissolution of any of its
Subsidiaries (and any such Subsidiary may suffer such dissolution) if at the
time of such dissolution such Subsidiary has no assets, engages in no business
and otherwise has no activities other than activities related to the maintenance
of its corporate existence and good standing.
9.4. SALE OR TRANSFER OF ASSETS. Sell, lease, assign, transfer or
otherwise dispose of, or permit any of their respective Subsidiaries to sell,
lease, assign, transfer or otherwise dispose of, any of their assets (including
the stock of Subsidiaries) except:
(a) sales of personal property assets in the ordinary course of
business of the Borrower and its Subsidiaries;
(b) the disposition of obsolete or worn-out equipment or other
property no longer required by or useful to the Borrower or any of its
Subsidiaries in connection with the operation of their businesses;
(c) the sale or transfer to the Borrower or any Qualified Subsidiary
of any asset owned by any Subsidiary of the Borrower;
(d) following consummation of the Hallmark Acquisition and prior to
satisfaction of the Hallmark Requirement, the sale or transfer to Hallmark
(or the Subsidiary of the Borrower that acquires the assets of Hallmark),
or any Subsidiary thereof, of any asset owned by any Subsidiary of
Hallmark;
(e) Permitted Minority-Interest Transfers; and
(f) any other sale(s) of assets in any Fiscal Year of the Borrower
to the extent that such assets in the aggregate did not account for more
than five percent (5%) of EBITDA
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for the immediately preceding Fiscal Year of the Borrower; PROVIDED that
in connection with each such sale the Borrower shall make a voluntary
reduction in the Commitments hereunder and/or under the $50,000,000 Credit
Agreement in an aggregate amount equal to the amount of the net proceeds of
such sale (notwithstanding the fact that the amount(s) of such voluntary
reduction(s) may be less than the minimum amounts specified herein and in
the $50,000,000 Credit Agreement), and further provided that within one
(1) year of each such sale, (i) the net proceeds of such sale shall be
reinvested or committed to be reinvested in the primary business of the
Borrower, the Guarantors and their respective Subsidiaries as providers of
health care delivery systems or in businesses of the Borrower, the
Guarantors and their respective Subsidiaries that enhance or support the
provision of health care delivery systems by them, or (ii) the net proceeds
of such sale shall be used to repay Loans outstanding hereunder or under
the $50,000,000 Credit Agreement, or if no such Loans are outstanding,
to make any Investment permitted by SECTION 9.5.
9.5. INVESTMENTS. Make, commit to make or suffer to exist any loan,
extension of credit or capital contribution to, or purchase of any stock,
bonds, notes, debentures or other securities of, or make any other investment
in any Person (all such transactions being called "INVESTMENTS") or permit any
of their respective Subsidiaries to do the same, except:
(a) Cash Equivalents;
(b) the Bonds;
(c) Investments existing on the date hereof and set
forth in SCHEDULE 9.5;
(d) accounts receivable representing trade credit extended in the
ordinary course of business;
(e) unsecured loans or advances by the Borrower or any of its
Subsidiaries to a Qualified Subsidiary or a First-Tier Permitted Minority-
Interest Subsidiary for working-capital needs evidenced by a Pledged Note,
so long as such loans or advances constitute Indebtedness of the primary
obligor that is not subordinated to any other Indebtedness of such
obligor;
(f) Investments consisting of Permitted Acquisitions;
(g) unsecured loans or advances by the Borrower or
any of its Subsidiaries to a Qualified Subsidiary for the purpose of paying
the purchase price of a Permitted Acquisition, so long as such loans or
advances are evidenced by a Pledged Note and constitute Indebtedness of
the primary obligor that is not subordinated to any other Indebtedness of
such obligor;
(h) Investments in Permitted Minority-Interest Subsidiaries to which
clause (b) of SECTION 9.16 is applicable;
(i) Investments in Subsidiaries of the Borrower (including
Permitted Minority-Interest subsidiaries) that are not Qualified
Subsidiaries and that do not own directly or indirectly any interest in a
Hospital; PROVIDED that at all times (i) the amount value of any such
Investment in any individual
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case shall not exceed $3,000,000, (ii) the aggregate amount
value of all such Investments shall not exceed ten percent (10%) of the
assets of the Borrower and its Subsidiaries on a consolidated basis, and
(iii) if the amount value of any such Investment in any individual case
exceeds $1,000,000, all of the outstanding capital stock of such
Subsidiary of all classes (or other ownership interests) that is or are
owned by the Borrower or any of its Subsidiaries shall have been pledged
assigned and/or delivered to the Administrative Agent pursuant to the
Pledge Agreement or the Assignment and Security Agreement in the same
manner as the other Collateral covered by those Security Documents;
(j) following consummation of the Hallmark Acquisition, unsecured
loans or advances by the Borrower or any of its Subsidiaries to Hallmark,
or to the Subsidiary of the Borrower that acquires the assets of Hallmark,
in an aggregate amount not to exceed $80,000,000 for the purpose of
paying the Hallmark Notes, so long as such loans or advances are
evidenced by a Pledged Note and constitute "Senior Indebtedness" as
defined in the Hallmark Subordinated Indenture and also constitute
Indebtedness of the primary obligor that is not subordinate to any other
indebtedness of such obligor;
(k) following consummation of the Hallmark Acquisition and prior to
satisfaction of the Hallmark Requirement, unsecured loans or advances to
Hallmark (or the Subsidiary of the Borrower that acquires the assets of
Hallmark), or any Subsidiary thereof, by any Subsidiary of Hallmark; and
(l) following consummation of the Hallmark Acquisition and prior to
satisfaction of the Hallmark Requirement, unsecured loans or advances by
the Borrower or any of its Subsidiaries to Hallmark (or the Subsidiary of
the Borrower that acquires the assets of Hallmark) for working capital
needs evidenced by a Pledged Note, so long as the aggregate amount of such
loans or advances does not exceed $25,000,000 and such loans or advances
constitute "Senior Indebtedness" as defined in the Hallmark Subordinated
Indenture and also constitute Indebtedness of the primary obligor that is
not subordinate to any other Indebtedness of such obligor; and
(m) Investments, not otherwise described in this SECTION 9.5, in
Qualified Subsidiaries that otherwise are permitted under the terms of
this Agreement.
9.6. ERISA.
(a) terminate or permit any of their respective Subsidiaries to
terminate any Plan so as to result in any material liability to the PBGC;
(b) engage or permit any of their respective Subsidiaries to engage
in any "prohibited transaction" (as defined in Section 4975 of the Code)
involving any Plan that would result in a material liability for an excise
tax or civil penalty in connection therewith;
(c) incur or suffer to exist, or permit any of their respective
Subsidiaries to incur or suffer to exist, any material "accumulated funding
deficiency" (as defined in
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Section 302 of ERISA), regardless of whether waived, involving any Plan;
or
(d) allow or suffer to exist, or permit any of their respective
Subsidiaries to allow or suffer to exist, any event or condition that
presents a material risk of incurring a material liability to the PBGC by
reason of the termination of any Plan.
9.7. RESTRICTED PAYMENTS. (a) Declare, pay or make, or permit any of their
respective Subsidiaries to declare, pay or make any dividends or other
distributions with respect to, any other payment on account of, the capital
stock or any warrants, options or other rights in respect of the capital stock
(or partnership interests, as the case may be) of the Borrower or a Subsidiary
of the Borrower; now or hereafter outstanding; (b) purchase, redeem, retire or
otherwise acquire for value, or permit any of their respective Subsidiaries to
purchase, redeem, retire or otherwise acquire for value, any of the capital
stock or any warrants, options or other rights in respect of the capital stock
(or partnership interests, as the case may be) of the Borrower or a Subsidiary
of the Borrower now or hereafter outstanding; or (c) segregate or set apart, or
permit any of their respective Subsidiaries to segregate or set apart, assets
for a sinking or analogous fund for the purchase, redemption, retirement or
other acquisition of any shares of the capital stock or any warrants, options
or other rights in respect of the capital stock (or partnership interests, as
the case may be) of the Borrower or a Subsidiary of the Borrowers now or
hereafter outstanding; PROVIDED, HOWEVER, that so long as no Default or Event
of Default exists or would result therefrom:
(i) the Borrower may declare and deliver dividends and make
distributions payable solely in common stock of the Borrower, and may
distribute cash in lieu of fractional shares otherwise distributable
pursuant to this CLAUSE (a):
(ii) the Borrower may purchase or otherwise acquire shares of its
capital stock by exchange for or out of the proceeds received from a
substantially concurrent issue of new shares of its capital stock;
(iii) the Borrower may declare and pay cash dividends or repurchase
its own common stock in transactions effected through NASDAQ or any
national securities exchange with respect to any Fiscal Year in an
aggregate amount not to exceed fifty percent (50%) of Consolidated Net
Income for such Fiscal Year;
(iv) in addition to transactions permitted under the immediately
preceding CLAUSE (c), the Borrower may redeem or repurchase its own
common stock in transactions effected
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through NASDAQ or any national securities exchange for contribution to
any Plan of the Borrower provided that such stock is contributed to such
Plan within three (3) months of the acquisition thereof;
(v) any Permitted Minority-Interest Subsidiary may declare and
pay dividends and make other distributions with respect to the capital
stock of such Subsidiary now or hereafter outstanding;
(vi) any Subsidiary of the Borrower may declare and pay dividends
and make other distributions with respect to the capital stock of (or other
ownership interests in) such Subsidiary now or hereafter outstanding, or
any other interest or participation in or measured by its profits, owned by
the Borrower or another Subsidiary of the Borrower; and
(vii) if and to the extent that holders of Hallmark preferred
stock exercise appraisal rights pursuant to the Delaware General
Corporation Law in connection with the Hallmark Acquisition, the Borrower
or any Subsidiary of the Borrower may make payments in an aggregate
amount not exceeding $5,000,000 to such holders in satisfaction of
liability of Hallmark (or the Subsidiary of the Borrower that acquires
the assets of Hallmark) to such holders in respect of the corresponding
claims.
9.8. TRANSACTIONS WITH AFFILIATES. Enter into any transaction, including
any purchase, sale, lease or exchange of property or the rendering of any
service, with any Affiliate or employee, except transactions that are in the
ordinary course of the Borrower's, the Guarantors' or their respective
Subsidiaries' businesses and that are upon fair and reasonable terms no less
favorable to the Borrower, the Guarantors or such Subsidiaries than they would
obtain in a comparable arm's length transaction with a Person not an Affiliate.
9.9. SALES/LEASE-BACKS. Enter or permit any of their respective
Subsidiaries to enter into any arrangements, directly or indirectly, with any
Person whereby the Borrower, any Guarantor or any of their respective
Subsidiaries shall sell or transfer any property, whether now owned or hereafter
acquired, used or useful in its business, in connection with the rental or lease
by the Borrower, such Guarantor or such Subsidiary of the property so sold or
transferred or of other property that the Borrower, the Guarantors or such
Subsidiaries intend to use for substantially the same purpose or purposes as the
property so sold or transferred.
9.10. PREPAYMENT OF SUBORDINATED INDEBTEDNESS. Pay or prepay or
permit any of their respective Subsidiaries to pay or prepay any Subordinated
Indebtedness prior to the time that same is due and payable according to its
stated terms; PROVIDED, HOWEVER, that so long as no Default or Event of Default
has occurred and is continuing, the Hallmark Notes may be prepaid following
consummation of the Hallmark Acquisition.
9.11. MANAGEMENT FEES. Pay or permit any of their respective
Subsidiaries to pay any management fees, personnel fees, guaranty fees or other
fees or commissions to any Affiliate of the Borrower, any Guarantor or any of
their respective Subsidiaries or to any outside consultants or advisors except
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fees and expenses payable to accountants, attorneys, appraisers and inspectors
(including environmental inspectors), investment bankers, consultants and
outside directors and except fees and expenses in amounts no less favorable to
the Borrower or any Guarantor than those that would have been obtained in an
arm's length transaction and that are approved in advance by a majority of the
outside directors of the board of directors of the Borrower or such Guarantor,
which at such date of approval shall have at least two outside directors.
9.12. MAINTENANCE OF MATERIAL CONTRACTS. Without the prior written
consent of Requisite Lenders, enter into an agreement to cancel, terminate or
surrender, or enter into any material amendment of, any Material Contract.
9.13. PRACTICE GUARANTEES. Enter into any Practice Guarantees in an
aggregate amount in excess of $15,000,000 with respect to all such Practice
Guarantees.
9.14. ISSUANCE OF STOCK. Issue any capital stock or permit any
Subsidiary to issue any capital stock; PROVIDED, HOWEVER, that
(a) the Borrower may issue common stock and preferred stock to the
extent the aggregate of all preferred stock outstanding does not require
the payment of dividends in excess of the amounts permitted under SECTION
9.7, and provided such preferred stock is not redeemable, payable or
subject to being required to be purchased or otherwise retired or
extinguished (i) at a fixed or determinable date, whether by operation of
a sinking fund or otherwise, (ii) at the option of any Person other than
the Borrower or (iii) upon the occurrence of a condition not solely
within the control of the Borrower, such as a redemption required to be
made out of future earnings;
(b) a Permitted Minority-Interest Subsidiary may issue capital stock
in connection with, but only to the extent required by the terms of, a
Permitted Minority-Interest Transfer; and
(c) any Subsidiary of the Borrower may issue capital stock to the
Borrower or any wholly-owned Subsidiary of the Borrower.
9.15. AGREEMENTS RESTRICTING LIENS. Enter into or become a party to,
or permit any of their respective Subsidiaries to enter into or become a party
to, any agreement with any Person that in any way restricts or limits the
ability of the Borrower, any Guarantor or any such Subsidiary to create, incur,
assume or suffer to exist any Lien with respect to any real or personal
property, fixtures, revenues or other assets whatsoever, whether now owned or
hereafter acquired, of the Borrower, any Guarantor or any such Subsidiary,
except for this Agreement, the CHS Subordinated Indenture and, after
consummation of the Hallmark Acquisition, the Hallmark Subordinated Indenture.
9.16. MINORITY-INTEREST TRANSFERS. Except as permitted by SECTION
9.4(F), sell or otherwise transfer securities of any Subsidiary of the Borrower
unless (a) immediately following such sale or other transfer such Subsidiary
shall meet the applicable requirements of the definition of "Permitted Minority-
Interest Subsidiary" and (b) with respect to any Permitted Minority-Interest
Subsidiary that itself or through wholly-owned Subsidiaries thereof owns or will
own a Hospital or an interest in a Hospital, the following requirements are
complied with:
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(1) with respect to the sale or transfer of securities of any such
Subsidiary other than a Hallmark Subsidiary that occurs after the date of
this Agreement and during such time as (x) the Hallmark Acquisition
Agreement remains in effect but the Hallmark Acquisition has not yet been
consummated or (y) the Hallmark Acquisition has been consummated but the
Hallmark Requirement has not yet been satisfied, the Hospital Operating
Income of such Subsidiary, when aggregated with the Hospital Operating
Income of all Subsidiaries that theretofore have become Permitted Minority-
Interest Subsidiaries pursuant to this CLAUSE (b)(1), shall not exceed ten
percent (10%) of the aggregate Hospital Operating Income of the Borrower
and its Subsidiaries exclusive of any amounts attributable to Hallmark or
the Subsidiaries of Hallmark;
(2) with respect to each sale or transfer of securities of any such
Subsidiary that occurs after the date of this Agreement (including sales or
transfers described in the preceding CLAUSE (b)(1), the Hospital Operating
Income of such Subsidiary, when aggregated with the Hospital Operating
Income of all Subsidiaries that own Hospitals or interest in Hospitals
and that have become Permitted Minority-Interest Subsidiaries after the
date of this Agreement, shall not exceed thirty percent (30%) of the
aggregate Hospital Operating Income of the Borrower and its Subsidiaries;
and
(3) with respect to each sale or transfer of securities of any such
Subsidiary that occurs after the date of this Agreement, the Borrower
shall have certified to the Administrative Agent and the Lenders that the
requirements of the preceding CLAUSES (b)(1) and (b)(2), as applicable,
have been met.
9.17. HOSPITAL OPERATING INCOME OF THE BORROWER AND THE GUARANTORS.
Permit the aggregate Hospital Operating Income of the Borrower and the
Guarantors at any time to be less than fifty percent (50%) of the aggregate
Hospital Operating Income of the Borrower and its Subsidiaries.
9.18. ADVERSE TRANSACTIONS. Enter into or become a party to, or permit
any of their respective Subsidiaries to enter into or become a party to, any
transactions the performance of which in the future would be inconsistent with
or has any reasonable likelihood of resulting in a breach of any covenant
contained herein or any other Loan Document or give rise to any Default or
Event of Default.
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9.19. CHS SUBORDINATED INDENTURE. Without the prior written consent
of Requisite Lenders, (a) redeem, repurchase or defease (including covenant
defeasance) the CHS Debentures, (b) deposit in trust any payments of principal,
premium (if any), or interest with respect to the CHS Debentures prior to the
day such payments become due and payable under the terms of the CHS Subordinated
Indenture, (c) amend or modify the CHS Subordinated Indenture in any way or (d)
create, incur, assume or suffer to exist any Indebtedness, other than the
Obligations and the Indebtedness of the Borrower and its Subsidiaries pursuant
to the $50,000,000 Credit Agreement, that would be deemed "Designated Senior
Indebtedness" as defined in the CHS Subordinated Indenture.
9.20. HALLMARK SUBORDINATED INDENTURE. Following the consummation of
the Hallmark Acquisition, without the prior written consent of Requisite
Lenders, (a) amend or modify the Hallmark Subordinated Indenture in any way that
would (i) change any provision thereof relating to the terms of subordination of
the Hallmark Notes to "Senior Indebtedness" as therein defined or (ii) otherwise
adversely affect the rights, powers, privileges, options and remedies of the
Lenders VIS-A-VIS the holders of the Hallmark Notes or (b) create, incur, assume
or suffer to exist any Indebtedness, other than the Obligations, the
Indebtedness of the Borrower and its Subsidiaries pursuant to the $50,000,000
Credit Agreement and Indebtedness described in CLAUSE (j) of SECTION 9.5, that
would be deemed "Designated Senior Indebtedness" as defined in the Hallmark
Subordinated Indenture.
ARTICLE 10
FINANCIAL COVENANTS
10.1. BORROWER RATIOS. So long as any Obligations are unpaid or
outstanding, any Obligation under the Loan Documents is unperformed or any of
the Commitments are in effect, the Borrower and the Guarantors shall not:
10.1.1. INTEREST COVERAGE RATIO. Permit the Interest Coverage Ratio
(a) as of the end of any Fiscal Quarter prior to the Fiscal Quarter that ends on
December 31, 1995 to be less than 2.00 to 1.00, or (b) as of the end of any
Fiscal Quarter that ends on or after December 31, 1995 to be less than 2.25 to
1.00.
10.1.2. FIXED CHARGE COVERAGE RATIO. Permit the Fixed Charge
Coverage Ratio as of the end of any Fiscal Quarter to be less than 1.35 to 1.00.
10.1.3. FUNDED INDEBTEDNESS TO EBITDA RATIO. Permit the Funded
Indebtedness to EBITDA Ratio (a) as of the end of any Fiscal Quarter prior to
the Fiscal Quarter that ends on December
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31, 1995 to be greater than 4.00 to 1.00, (b) as of the end of any Fiscal
Quarter that ends on or after December 31, 1995 but is prior to the Fiscal
Quarter that ends on December 31, 1996 to be greater than 3.50 to 1.00, or (c)
as of the end of any Fiscal Quarter that ends on or after December 31, 1996 to
be greater than 3.25 to 1.00.
10.1.4. FUNDED INDEBTEDNESS TO CAPITALIZATION RATIO. Permit the
Funded Indebtedness to Capitalization Ratio (a) as of the end of any Fiscal
Quarter prior to the Fiscal Quarter that ends on December 31, 1995 to be greater
than 0.75 to 1.00, (b) as of the end of any Fiscal Quarter that ends on or after
December 31, 1995 but is prior to the Fiscal Quarter that ends on December 31,
1996 to be greater than 0.70 to 1.00, or (c) as of the end of any Fiscal Quarter
that ends on or after December 31, 1996 to be greater than 0.65 to 1.00.
10.2. GUARANTOR SOLVENCY. So long as any Obligations or any Guaranteed
Obligations are unpaid or outstanding, any Obligations under the Loan Documents
are unperformed or any of the Commitments are in effect, each of the Guarantors
at all times shall be Solvent.
ARTICLE 11
EVENTS OF DEFAULT AND LENDERS' REMEDIES
11.1. EVENTS OF DEFAULT. Any one or more of the following described
events shall constitute an Event of Default hereunder, whether such occurrence
shall be voluntary or involuntary, or come about or be effected by operation of
law or otherwise:
11.1.1. FAILURE TO PAY LOANS, ETC. The Borrower shall fail to pay
when due any amount of principal of or interest payable on or in respect of the
Loans, the Letter of Credit Liabilities, the Credit Fees, any other Obligations
or any other amount payable under this Agreement, the Notes, the other Loan
Documents or the Bond Documents.
11.1.2. FAILURE TO PERFORM CERTAIN COVENANTS. The Borrower or any
Guarantor shall fail to perform or observe any of its covenants and agreements
set forth in SECTIONS 8.6, 8.10 and 8.12 and in ARTICLES 9 and 10.
11.1.3. FAILURE TO PERFORM AGREEMENTS GENERALLY. The Borrower or
any Guarantor shall fail to perform or observe any of its other covenants and
agreements set forth in this Agreement (other than those described in SECTIONS
11.1.1 and 11.1.2) or the other Loan Documents, and such failure shall continue
for more than thirty (30) days after the earlier of (a) written notice from the
Administrative Agent to the Borrower or such Guarantor,
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as applicable, of the existence of such Default or (b) the date any
Responsible Officer of the Borrower or such Guarantor, as applicable, first
obtains knowledge of such failure.
11.1.4. VOLUNTARY INSOLVENCY PROCEEDINGS. The Borrower, any
Guarantor or any of their respective Subsidiaries (a) shall commence a voluntary
case or other proceeding seeking dissolution, liquidation, reorganization or
other relief with respect to itself or its debts under any bankruptcy,
insolvency or other similar law now or hereafter in effect or seeking the
appointment of a receiver, trustee, liquidator, custodian or other similar
official with respect to it or any substantial part of its property, (b) shall
consent to any such relief or to the appointment of, or the taking of possession
of any of its property by, any such official in any involuntary case or other
proceeding commenced against it, (c) shall make a general assignment for the
benefit of creditors, (d) shall take any action to authorize any of the
foregoing, or (e) shall become insolvent or fail generally to pay its debts as
they become due.
11.1.5. INVOLUNTARY INSOLVENCY PROCEEDINGS. Any involuntary case
or other proceeding shall be commenced against the Borrower, any Guarantor or
any of their respective Subsidiaries seeking dissolution, liquidation,
reorganization or other relief with respect to it or its debts under any
bankruptcy, insolvency or other similar law now or hereafter in effect or
seeking the appointment of a receiver, trustee, liquidator, custodian or other
similar official with respect to it or any substantial part of its property, an
(a) an order for relief (or the equivalent) shall be entered in such involuntary
case or other proceeding or (b) such involuntary case or other proceeding shall
remain undismissed and unstayed for a period of thirty (30) days after the
commencement thereof.
11.1.6. FALSE STATEMENTS. Any representation or warranty of the
Borrower or any Guarantor set forth in this Agreement, the Notes, the other Loan
Documents or the Bond Documents or in any other certificate, opinion or other
statement at any time provided by or on behalf of the Borrower or any Guarantor
in connection herewith or therewith shall prove to be false or misleading in any
material respect at the time made or given.
11.1.7. EXECUTION OR ATTACHMENT. Any judgment lien shall be filed,
or any writ of execution, attachment, garnishment or other legal process shall
be issued, against any of the property of the Borrower, any Guarantor or any
of their respective Subsidiaries, which lay itself or together with all other
such legal processes is for an amount in excess of $50,000, and which shall
remain unvacated, unbonded or unstayed for a period of thirty (30) days, or in
any event later than five (5) days prior to the date of any proposed sale
thereunder.
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11.1.8. CONDEMNATION OF PROPERTY. All or substantially all of the
property of the Borrower, any Guarantor or any of their respective Subsidiaries
shall be condemned, seized or otherwise appropriated, and the condemnation award
is materially less than the book value of such property at the date hereof (if
such property was owned by the Borrower or any of its Subsidiaries on the date
hereof) or at the time such property was acquired by the Borrower or such
Subsidiary (if such property was acquired by the Borrower or such Subsidiary
after the date hereof).
11.1.9. SUSPENSION OF BUSINESS. The Borrower, any Guarantor or any
of their respective Subsidiaries shall voluntarily suspend the transaction of
its business for more than five (5) Business Days in any Fiscal Year after the
date hereof without the prior express written consent of Requisite Lenders.
11.1.10. FAILURE TO PERFORM OTHER OBLIGATIONS. The Borrower, any
Guarantor or any of their respective Subsidiaries shall (a) fail to pay any
amount of any Indebtedness or interest thereon, or (b) fail to observe or
perform any term, covenant or agreement contained in any Contractual Obligation
(including Contractual Obligations evidencing, securing or relating to any
Indebtedness) executed by it, which failure (i) would cause or permit the holder
or holders or beneficiary or beneficiaries of such Indebtedness (or any agent or
trustee on their behalf) to cause such Indebtedness to become due or otherwise
payable prior to its stated maturity, so long as the aggregate principal amount
of all such Indebtedness that would then become due or payable would equal or
exceed $500,000, or (ii) would impair the Lenders' rights or the performance of
the obligations of the Borrower, any Guarantor or any of their respective
Subsidiaries under this Agreement, the Notes, the other Loan Documents or the
Bond Documents or the business or operations of the Borrower, any Guarantor or
any of their respective Subsidiaries; unless in the case of a Contractual
Obligation that is not for borrowed money, such failure of performance is being
contested by the Borrower, such Guarantor or such Subsidiary in good faith and
adequate reserves with respect thereto have been established on the books of the
Borrower, such Guarantor or such Subsidiary in conformity with GAAP.
11.1.11. ERISA. (a) The Borrower or any Commonly Controlled Entity
shall engage in any "prohibited transaction" (as defined in ERISA or Section
4975 of the Code) involving any Plan, (b) any "accumulated funding deficiency"
(as defined in ERISA), whether or not waived, shall exist with respect to any
Plan, (c) a Reportable Event shall occur with respect to, or a proceeding
shall commence to have a trustee appointed, or a trustee shall be appointed,
to administer or to terminate, any Single Employer Plan, which Reportable
Event or proceeding presents a material risk of termination of such Plan for
purposes
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of Title IV of ERISA, and, in the case of a Reportable Event, shall continue
unremedied for ten (10) days after notice of such Reportable Event is given
pursuant to Section 4043(a), (c) or (d) of ERISA and, in the case of such
proceeding, shall continue for ten (10) days after commencement thereof,
(d) any Single Employer Plan shall terminate for purposes of Title IV of
ERISA, (e) the withdrawal or partial withdrawal by the Borrower
or any Commonly Controlled Entity from any Multi-Employer Plan, or (f) the
reorganization or insolvency of a Plan or any other event or condition shall
occur or exist with respect to a Plan and in each case in clauses (a) through
(f) above, such event or condition together with all other such events or
conditions, if any, could subject the Borrower, any Guarantor or any of their
respective Subsidiaries to any tax, penalty or other liability in excess of
$100,000 or otherwise would have a material adverse affect on the properties,
businesses, prospects, results of operations, management or financial or other
condition of the Borrower and its Subsidiaries, taken as a whole.
11.1.12. VALIDITY OF LOAN DOCUMENTS. Any of the Loan Documents or
any provision thereof, for any reason whatsoever, cease to be binding on the
Borrower, any Guarantor or any of their respective Subsidiaries as is a party
thereto, or the Borrower or any Guarantor shall so assert, or the Liens granted
or assigned pursuant to any of the Security Documents shall not constitute
valid, perfected, first-priority Liens on the properties and assets described
therein, subject only to Permitted Liens.
11.1.13. VALIDITY OF BOND DOCUMENTS. Any of the Bond Documents or
any provision thereof, for any reason whatsoever, ceases to be binding on
such of the Borrower, the Guarantors or their respective Subsidiaries as are
parties thereto, or any of same shall so assert.
11.1.14. GUARANTY OBLIGATIONS. Any Guarantor shall default in the
performance or observance of its guarantee hereunder, or such guarantee for any
reason whatsoever shall cease to be a valid and binding obligation of any such
Guarantor, or any such Guarantor shall so assert.
11.1.15. DEFAULTS UNDER LOAN DOCUMENTS, $50,000,000 CREDIT AGREEMENT
OR BOND DOCUMENTS. Any default or event of default shall occur under any other
Loan Document, the $50,000,000 Credit Agreement or any Bond Document and, if
subject to a cure right, shall fail to be cured or corrected within the
applicable cure period.
11.1.16. DEFAULTS UNDER MATERIAL CONTRACTS. Any default or event of
default shall occur under any material Contract, and, if subject to a cure
right, shall fail to be cured or corrected within the applicable cure period.
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11.1.17. MATERIAL ADVERSE CHANGE. There shall occur after the date
hereof any material adverse change in the condition (financial or otherwise),
operations or properties of the Borrower and its Subsidiaries, taken as a
whole, and such change shall have the effect of impairing the ability of the
Borrower, the Guarantors and the respective Subsidiaries thereof who are
parties to the Loan Documents to satisfy and discharge their respective
Obligations in a timely manner.
11.1.18. CHANGE IN CONTROL. An event or series of events by which
(a) any "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2)
of the Securities Exchange Act of 1934, as amended), becomes the "beneficial
owner" (within the meaning of Rule 13d-3 and/or Rule 13d-5 under the Securities
Exchange Act of 1934, as amended, except that a Person shall be deemed to have
"beneficial ownership" of all shares that such Person has the right to acquire
without condition, other than the passage of time, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than thirty percent (30%) or more of the combined voting
power of all securities of the Borrower entitled to vote in the election of
directors, other than securities having such power only by reason of the
happening of a contingency (other than the passage of time), (b) the Borrower
consolidates with or merges into another Person or conveys, transfers or leases
all or substantially all of its assets to any Person, or any corporation
consolidates with or merges into the Borrower pursuant to a transaction in which
the outstanding securities of the Borrower entitled to vote in the election of
directors are changed into or exchanged for cash, securities or other property,
other than a transaction between the Borrower and a Subsidiary of the Borrower,
or (c) individuals who at the beginning of any period of two (2) consecutive
calendar years constituted the Board of Directors (together with any new
directors whose election by such Board of Directors or whose nomination for
election by the Borrower's shareholders was approved by a vote of at least two-
thirds (2/3) of the members of the Board of Directors then still in office who
either were members of the Board of Directors at the beginning of such period or
whose election or nomination for election was previously so approved) cease for
any reason to constitute a majority of the members of the Board of Directors
then in office.
11.1.19. FAILURE OF LIEN. Any Security Document, after delivery
thereof pursuant to this Agreement, for any reason ceases to create a valid Lien
on any of the Collateral purported to be covered thereby or, after recordation
of such Security Document as provided in this Agreement, ceases to be a
perfected and first-priority Lien on such Collateral.
11.1.20. CHS SUBORDINATED INDENTURE EVENTS OF DEFAULT. Any event of
default shall occur under the CHS
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Subordinated Indenture and, if subject to a cure right, shall fail to be cured
or corrected within the applicable cure period.
11.1.21. HALLMARK SUBORDINATED INDENTURE EVENTS OF DEFAULT. Any
event of default shall be in existence under the Hallmark Subordinated Indenture
at the time of the consummation of the Hallmark Acquisition, or shall occur
under the Hallmark Subordinated Indenture at any time thereafter, and, if
subject to a cure right, shall fail to be cured or corrected within the
applicable cure period.
11.2. LENDERS' REMEDIES. Upon the occurrence of an Event of Default or at
any time thereafter, and in each and every case, unless such Event of Default
shall have been remedied or waived in writing by Requisite Lenders, any one or
all of the following actions may be taken:
(a) upon the request of Requisite Lenders, the Administrative Agent
shall, by notice to the Borrower terminate any or all of the Commitments,
whereupon such Commitments of the Lenders thereunder immediately shall
terminate; PROVIDED, HOWEVER, that upon the occurrence of any event
specified in either SECTION 11.1.4 or SECTION 11.1.5 the Commitments shall
terminate automatically without further action by the Administrative Agent,
the Issuing Bank or the Lenders;
(b) upon request of Requisite Lenders, the Administrative Agent shall
declare all outstanding Obligations and other amounts owing under this
Agreement, the Notes and the other Loan Documents to be due and payable
immediately, and all such Obligations and other amounts immediately shall
be due and payable, without presentment, demand, protest or notice of any
kind, all of which are hereby expressly waived to the extent permitted by
applicable law; PROVIDED, HOWEVER, that upon the occurrence of any event
specified in either SECTION 11.1.4 or SECTION 11.1.5 all such Obligations
and other amounts immediately shall be due and payable in full without
declaration or other notice;
(c) the Administrative Agent immediately, and without expiration of
any period of grace, may enforce payment of all Obligations of the Borrower
and the Guarantors to the Administrative Agent and the Lenders under this
Agreement, the Notes and the other Loan Documents, and the Administrative
Agent shall be entitled to all remedies available hereunder or thereunder
and the right to instruct the Issuing Bank to notify the Trustees of the
occurrence of such Event of Default and to request the Trustees to
accelerate the maturity of one or more of the Bonds; and
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(d) the Administrative Agent shall be entitled to exercise, for the
ratable benefit of the Lenders, all other rights, powers, privileges,
options and remedies available under or by virtue of the Loan Documents or
otherwise available at law or in equity.
11.3. ACTIONS IN RESPECT OF LETTERS OF CREDIT.
11.3.1. COLLATERAL ACCOUNT. If an Event of Default shall have
occurred and be continuing, the Administrative Agent may, and upon the request
of Requisite Lenders shall, whether in addition to the taking by the
Administrative Agent of any of the actions described in SECTION 11.2 or
otherwise, make demand upon the Borrower or any of the Guarantors to, and
forthwith upon such demand such Person(s) will, pay to the Administrative Agent
at its Lending Office, for its benefit and the ratable benefit of the Lenders
and the Issuing Bank, in immediately available (same day) funds for deposit in a
Collateral Account to be maintained for the benefit of the Administrative Agent
and the ratable benefit of the Lenders and the Issuing Bank at such place as
shall be designated by the Administrative Agent, an amount equal to the amount
of the Letter of Credit Liabilities.
11.3.2. SECURITY INTEREST. The Borrower and the Guarantors hereby
pledge and assign to the Administrative Agent, for its benefit and the ratable
benefit of the Lenders and the Issuing Bank, and grant to the Administrative
Agent for its benefit and the ratable benefit of the Lenders and the Issuing
Bank, a lien on and a security interest in the Collateral Account, all cash
deposited therein, all notes, certificates and instruments, if any, from time to
time representing or evidencing the Collateral Account and all interest and
other earnings thereon, additions thereto, substitutions therefor and proceeds
thereof. The lien and security interest granted hereby secures the payment of
all of the Obligations.
11.3.3. APPLICATION OF PROCEEDS. The Borrower and the Guarantors
hereby authorize the Administrative Agent to apply, from time to time after
funds are deposited in the Collateral Account, funds then held in the Collateral
Account to the payment of any amounts, in such order as the Administrative Agent
may elect, as shall have become or shall become due and payable by the Borrower
to the Lenders in respect of the Letter of Credit Liabilities and thereafter to
the satisfaction of the other Obligations.
11.3.4. INVESTMENTS. Neither the Borrowers, nor the Guarantors, nor
any Person claiming or acting on behalf of or through the Borrowers or the
Guarantors shall have any right to withdraw any of the funds held in the
Collateral Account, except as provided in SECTION 11.3.8; PROVIDED, HOWEVER,
that with the consent of the Administrative Agent, and to the extent that there
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is an amount in excess of $100,000 in the Collateral Account at the end of any
Business Day after taking into account applications of funds, if any, from the
Collateral Account made pursuant to SECTION 11.3.8, the Administrative Agent
may, at the written request of the Borrower, from time to time invest amounts on
deposit in the Collateral Account in Cash Equivalents; PROVIDED, FURTHER that in
order to provide the Administrative Agent with a perfected security interest
therein, each investment in Cash Equivalents shall be evidenced by negotiable
certificates or instruments of which the Administrative Agent shall take
physical possession. If the Borrower or any Guarantor shall have the right to
have any amounts on deposit in the Collateral Account invested by the
Administrative Agent, but shall have failed to request the Administrative Agent
to invest such amounts, the Administrative Agent will endeavor to invest such
amounts in such Cash Equivalents as the Administrative Agent shall select;
PROVIDED, HOWEVER, that in order to provide the Administrative Agent with a
perfected security interest therein, each such investment in Cash Equivalents
shall be evidenced by negotiable certificates or instruments of which the
Administrative Agent shall take physical possession. Any interest or other
proceeds received by the Administrative Agent in respect of Cash Equivalents
that are not invested or reinvested in Cash Equivalents as provided above shall
be deposited and held in cash in the Collateral Account under the sole dominion
and control of the Administrative Agent and shall be applied as provided in
SECTION 11.3.3.
11.3.5. FURTHER LIENS. The Borrower and the Guarantors agree that
they will not (a) sell or otherwise dispose of any interest in the Collateral
Account or (b) create or permit to exist any Lien on or with respect to the
Collateral Account or the funds on deposit therein except for the security
interest created by this SECTION 11.3.
11.3.6. REMEDIES.
(a) Requisite Lenders may, in their sole discretion, without notice
to the Borrower or any Guarantor except as required by law and at any time
and from time to time, direct any Lender to charge, set-off and otherwise
apply all or any part of FIRST, the Letter of Credit Liabilities and
SECOND, the other Obligations, against the Collateral Account, or any part
thereof, in such order as the Administrative Agent shall elect. The
Administrative Agent agrees to notify promptly the Borrower or such
Guarantor after any such set-off and application made by any Lender, at
the direction of Requisite Lenders, provided that the failure to give
such notice shall not affect the validity of such set-off and
application. The rights of the Lenders under this SECTION 11.3.6 are in
addition to other rights
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and remedies (including other rights of set-off) which any Lender may
have.
(b) The Administrative Agent may exercise, in its sole discretion, in
respect of the Collateral Account, in addition to the other rights and
remedies provided for herein or otherwise available to it, all the rights
and remedies of a secured party upon default under the UCC, and the
Administrative Agent may, without notice except as specified below, sell
the Collateral or any part thereof in one or more parcels at public or
private sale, at any office of the Administrative Agent or elsewhere, for
cash, on credit or for future delivery, and upon such other terms as the
Administrative Agent may deem commercially reasonable. The Borrower and
the Guarantors agree that to the extent notice of sale shall be required by
law, at least ten (10) days' notice of the time and place of any public
sale or the time after which any private sale is to be made shall
constitute reasonable notice. The Administrative Agent shall not be
obligated to make any sale of the Collateral or any part thereof,
regardless of notice of sale having been given. The Administrative Agent
may adjourn any public or private sale from time to time by announcement at
the time and place fixed therefor, and such sale may, without further
notice, be made at the time and place to which it was so adjourned.
(c) Any cash or other property held in the Collateral Account, and
all proceeds received by the Administrative Agent in respect of any sale
of, collection from or other realization upon all or any part of the
Collateral Account may, in the discretion of the Administrative Agent, then
or at any time thereafter be applied (after payment of any amounts payable
pursuant to this SECTION 11.3) in whole or in part by the Administrative
Agent for the ratable benefit of the Lenders against all or any part of the
Obligations in such order as the Administrative Agent may elect.
11.3.7. PRESERVATION OF THE COLLATERAL. The Administrative Agent
shall be deemed to have exercised reasonable care in the custody and
preservation of the Collateral Account if the Collateral Account is accorded
treatment substantially equal to that which the Administrative Agent accords its
own property, it being understood that the Administrative Agent shall not have
any responsibility or liability (a) for ascertaining or taking action with
respect to calls, conversions, exchanges, maturities, tenders or other matters
relative to any Cash Equivalents, whether or not the Administrative Agent has
or is deemed to have knowledge of such matters, (b) for taking any necessary
steps to preserve rights against any parties with respect to the Collateral
Account, (c) for the collection of any proceeds from Cash Equivalents, (d) by
reason of any invalidity, lack of value
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or uncollectability of any of the payments received by the Administrative Agent
from obligors with respect to Cash Equivalents, (e) for any loss resulting from
investments made in compliance with SECTION 11.3.4, except to the extent such
loss was attributable to the Administrative Agent's gross negligence or willful
misconduct in complying with SECTION 11.3.4, as determined by a final judgment
of a court of competent jurisdiction, or (f) in connection with any investments
made in compliance with SECTION 11.3.4 without a written request from the
Borrower or any Guarantor, or any failure by the Administrative Agent to make
any such investment.
11.3.8. SURPLUS FUNDS. Any surplus funds held in the Collateral
Account and remaining after the Obligations are fully satisfied shall be paid to
the Borrower or such other Person(s) as may be lawfully entitled to receive such
surplus.
ARTICLE 12
THE ADMINISTRATIVE AGENT
12.1. APPOINTMENT. Each Lender hereby (a) irrevocably appoints NationsBank
as the Administrative Agent for such Lender and the other Lenders under this
Agreement, the Notes and the other Loan Documents, and (b) irrevocably
authorizes the Administrative Agent to take such action on its behalf under the
provisions of this Agreement, the Notes and the other Loan Documents and to
exercise such powers and perform such duties as are expressly delegated to the
Administrative Agent by the terms of this Agreement, the Notes and the other
Loan Documents, together with such other powers as are reasonably incidental
thereto. The Administrative Agent shall, among other things, take such actions
as the Administrative Agent is authorized to take pursuant to this Agreement,
the Notes and the other Loan Documents. As to any matters not expressly
provided for in this Agreement, the Administrative Agent may, but shall not be
required to, exercise any discretion or take any action; however, the
Administrative Agent shall be required to act or to refrain from acting upon the
written instructions of Requisite Lenders if the Administrative Agent shall be
indemnified to its satisfaction by the Lenders against any and all liability and
expense that may be incurred by it by reason of so acting or refraining from
acting. Notwithstanding anything to the contrary herein, the Administrative
Agent shall have no duties, responsibilities or fiduciary relationships with any
Lender except those expressly set forth in this Agreement, the Notes and the
other Loan Documents, and no implied covenants, responsibilities, duties,
obligations or liabilities shall be read into this Agreement, the Notes or the
other Loan Documents or otherwise exist against the Administrative Agent.
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12.2. DELEGATION OF DUTIES. The Administrative Agent may exercise any of
its powers or execute any of its duties under this Agreement, the Notes and the
other Loan Documents by or through one or more agents or attorneys-in-fact and
shall be entitled to obtain, and to rely on, advice of counsel concerning all
matters pertaining to such rights and duties. The Administrative Agent may
utilize the services of such agents and attorneys-in-fact as the Administrative
Agent in its sole discretion reasonably determines, and all reasonable fees and
expenses of such agents and attorneys-in-fact shall be paid by the Borrower on
demand. The Administrative Agent shall not be responsible for the negligence or
misconduct of any agents or attorneys-in-fact selected by the Administrative
Agent in good faith.
12.3. LIMITATION OF LIABILITY. Neither the Administrative Agent nor its
respective officers, directors, employees, agents, attorneys-in-fact or
affiliates shall be (a) liable for any waiver, consent or approval given or any
action taken or omitted to be taken by it or by such Person under or in
connection with this Agreement, the Notes, the other Loan Documents or the Bond
Documents, if authorized or permitted hereunder, except for its or such Person's
own gross negligence or willful misconduct, or (b) responsible for the
consequences of any oversight or error in judgment by it or such Person
whatsoever, except for its or such Person's own gross negligence or willful
misconduct. The Administrative Agent shall not be responsible for (i) the
execution, validity, genuineness, effectiveness, sufficiency, enforceability,
perfection or priority of this Agreement, the Notes, the other Loan Documents or
the Bond Documents, (ii) the collectability of any amounts owing under this
Agreement, the Notes or the other Loan Documents, (iii) the value, sufficiency,
enforceability, perfection or collectability of any Collateral, (iv) the failure
by the Borrower, any Guarantor or any of their respective Subsidiaries to
perform its obligations under this Agreement, the Notes or the other Loan
Documents or to observe any conditions hereof or thereof, (v) the truth,
accuracy and completeness of the recitals, statements, representations or
warranties made by the Borrower, any Guarantor or any of their respective
Subsidiaries or any officer or agent thereof contained in this Agreement, the
Notes, the other Loan Documents or the Bond Documents, or in any certificate,
report, statement, document or other writing referred to or provided for in, or
received by the Administrative Agent in connection with, this Agreement, the
Notes, the other Loan Documents or the Bond Documents believed by the
Administrative Agent to be genuine and correct and to have been signed, sent
or made by the proper Person or Persons.
12.4. RELIANCE BY THE ADMINISTRATIVE AGENT. The Administrative Agent
shall not have any obligation (a) to ascertain or to inquire as to the
observance or performance of
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any of the conditions, covenants or agreements in this Agreement, the Notes or
the other Loan Documents or in any document, instrument or agreement at any
time constituting, or intended to constitute, Collateral, (b) to ascertain or
inquire as to whether any notice, consent, waiver or request delivered to it
shall have been duly authorized or is genuine, accurate and complete or (c) to
inspect the properties, books or records of the Borrower, any Guarantor or any
of their respective Subsidiaries. The Administrative Agent shall be entitled
to rely, and shall be fully protected in relying (i) upon any note, writing,
resolution, notice, consent, certificate, affidavit, letter, cablegram,
telegram, telecopy, telex or teletype message, statement, order or other
document, instrument 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
(ii) upon advice and statements of legal counsel (including counsel to the
Borrower or the Guarantors), independent accountants and other experts
selected by the Administrative Agent. The Administrative Agent may deem and
treat the payee of any Note as the owner thereof for all purposes unless a
written notice of the assignment, negotiation or transfer thereof, in
accordance with the provisions of this Agreement, shall have been delivered to
the Administrative Agent identifying the name of the subsequent
payee or holder thereof. The Administrative Agent shall be entitled to fail or
refuse, and shall be fully protected in failing or refusing, to take any action
required or permitted by it under this Agreement, the Notes or the other Loan
Documents unless (A) it first shall receive such advice or concurrence of
Requisite Lenders as it deems appropriate, or (B) it first shall be indemnified
to its satisfaction by the Lenders against any and all liability and expense
that may be incurred by it by reason of taking or continuing to take any such
action. In all cases the Administrative Agent shall be fully protected in
acting, or in refraining from acting, under this Agreement, the Notes or the
other Loan Documents in accordance with a request of Requisite 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.
12.5. NOTICE OF DEFAULT. The Administrative Agent shall not be deemed to
have knowledge or notice of the occurrence of any Default or Event of Default
unless the Administrative Agent has received notice from a Lender, the Borrower
or any Guarantor referring to this Agreement, describing such Default or Event
of Default and stating that such notice is a "Notice of Default." If the
Administrative Agent receives such a notice, the Administrative Agent shall
give telephonic and written notice thereof to the Lenders as soon as is
practicable. The Administrative Agent shall take such action with respect to
such Default or Event of Default as shall be reasonably directed by Requisite
Lenders; PROVIDED, HOWEVER, that unless and until the Administrative Agent
shall have received such directions, the
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Administrative 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 deems advisable in the best interests of the Lenders.
12.6. NON-RELIANCE ON THE ADMINISTRATIVE AGENT BY THE OTHER LENDERS. Each
Lender expressly acknowledges that neither the Administrative Agent nor any of
its officers, directors, employees, agents, attorneys-in-fact or affiliates has
made any representations or warranties to such Lender. The Administrative Agent
shall have no obligation, responsibility or liability to any of the Lenders
regarding the creditworthiness or financial condition of the Borrower, any of
the Guarantors or any of their respective Subsidiaries or for any recitals,
statements, information, representations or warranties herein or in any
document, certificate or other writing delivered in connection herewith or for
the execution, effectiveness, genuineness, validity, enforceability, perfection,
collectability, priority or sufficiency of this Agreement or any other Loan
Document. No act by the Administrative Agent hereinafter taken, including any
review of the Borrower, the Guarantors and their respective Subsidiaries, shall
be deemed to constitute any representation or warranty by the Administrative
Agent to any Lender. Each Lender represents to the Administrative Agent that,
independently and without reliance upon the Administrative Agent or any other
Lender and based on such documents and information as it has deemed appropriate,
it has made its own appraisal of and investigation into the business,
operations, property, financial and other condition and creditworthiness of the
Borrower, the Guarantors and their respective Subsidiaries and has made its own
decision to enter into this Agreement and to make its Loans and otherwise
participate in the transactions hereunder. Each Lender also represents that,
independently and without reliance upon the Administrative Agent or any other
Lender, and based on such documents and information as it deems appropriate at
the time, it shall continue to make its own credit analysis, appraisals and
decisions in taking or not taking action under this Agreement, the Notes 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, the Guarantors and their
respective Subsidiaries. The Administrative Agent shall not be required to make
any inquiry concerning the performance or observance of any of the terms,
provisions or conditions of this Agreement or any other Loan Document, or the
financial condition of the Borrower or the Guarantors or the existence or
possible existence of any Default or Event of Default. Except for notices,
reports and other documents expressly required to be furnished to the Lenders
by the Administrative Agent hereunder, the Administrative Agent shall have no
obligation or liability to provide any Lender with any credit or other
information concerning the business, operations, property, financial and other
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condition or creditworthiness of the Borrower, the Guarantors or their
respective Subsidiaries that may come into the possession of the Administrative
Agent or any of its respective officers, directors, employees, agents,
attorneys-in-fact or affiliates.
12.7. INDEMNIFICATION. Each of the Lenders shall indemnify, defend and
hold harmless the Administrative Agent in its capacity as such (to the extent
not reimbursed by the Borrower and without limiting the obligation of the
Borrower to do so), ratably according to their respective Percentages, from and
against any and all claims, demands, lawsuits, costs, expenses, fees,
liabilities, obligations, losses, damages, actions, recoveries, judgments,
suits, costs, expenses or disbursements of any kind whatsoever, including
interest, penalties and reasonable attorneys' and paralegals' fees and costs and
amounts paid in settlement of any of the foregoing, whether direct, indirect,
consequential or incidental, that at any time (including at any time following
the satisfaction of the Obligations) may be imposed on, incurred by or asserted
against the Administrative Agent in any way relating to, resulting from or
arising out of this Agreement, the Notes or the other Loan Documents, the
transactions contemplated hereby or any action taken or omitted by the
Administrative Agent under or in connection with any of the foregoing; PROVIDED,
HOWEVER, that no Lender shall be liable for the payment of any portion of such
claims, demands, lawsuits, costs, expenses, fees, liabilities, obligations,
losses, damages, actions, remedies, judgments, suits, costs, expenses or
disbursements to the extent such result arose solely from the Administrative
Agent's gross negligence or willful misconduct. The agreements in this SECTION
12.7 shall survive the repayment of the Loans and the satisfaction of the other
Obligations and shall be in addition to and not in lieu of any other
indemnification agreements set forth in the Loan Documents.
12.8. PAYMENTS. If in the opinion of the Administrative Agent, the
distribution of any amount received by the Administrative Agent in such capacity
under this Agreement, the Notes or the other Loan Documents might involve it in
liability, the Administrative Agent may refrain from making the distribution
thereof until the Administrative Agent's right to make such distribution shall
have been adjudicated by a court of competent jurisdiction. If a court of
competent jurisdiction shall adjudge that any amount received from and
distributed by the Administrative Agent in such capacity as Administrative Agent
is to be repaid, each Person to whom any such distribution shall
have been made either (a) shall repay to the Administrative Agent its
proportionate share of the amount so adjudged to be repaid, or (b) shall repay
the same in such manner and to such Persons as shall be determined by such
court.
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12.9. ADMINISTRATIVE AGENT IN ITS INDIVIDUAL CAPACITY. The Administrative
Agent in its individual capacity, and its Affiliates, may make loans and other
financial accommodations to, accept deposits from and generally engage in any
kind of business with the Borrower or any of the Guarantors and their respective
Subsidiaries as though the Administrative Agent were not the Administrative
Agent hereunder. With respect to Loans made or renewed by it, any Notes issued
to it and its participation in the Letter of Credit Liabilities, the
Administrative Agent in its individual capacity shall have the same benefits,
rights, powers and privileges under this Agreement, the Notes and the other Loan
Documents as any other Lender and may exercise the same as though it were not
the Administrative Agent, and the terms "Lender", "Lenders" and "Requisite
Lenders" shall include the Administrative Agent in its individual capacity.
12.10. SUCCESSOR ADMINISTRATIVE AGENT. The Administrative Agent may
resign as such upon thirty (30) days' prior written notice to the Lenders. If
the Administrative Agent shall resign as such under this Agreement, then
Requisite Lenders shall appoint from among the Lenders a successor agent for
the Lenders, which successor agent shall be reasonably acceptable to the
Borrower; PROVIDED, HOWEVER, that acceptability to the Borrower shall not be
required if a Default or Event of Default has occurred and is continuing.
Upon acceptance of its appointment as successor agent, (a) such successor
agent shall succeed to the rights, powers, privileges and duties of the
Administrative Agent, (b) the retiring Administrative Agent shall be
discharged of all its obligations and liabilities in such capacity under this
Agreement, the Notes and the other Loan Documents, (c) the term
"Administrative Agent" shall mean such successor agent effective upon its
appointment and (d) the retiring Administrative Agent's rights, powers and
duties as Administrative Agent shall be terminated, without any other or
further act or deed on the part of such retiring Administrative Agent or any
of the parties to this Agreement or any holders of the Notes. After any
retiring Administrative Agent's resignation hereunder as Administrative Agent,
the provisions of this ARTICLE 12 shall continue to inure to its benefit as to
any actions taken or omitted to be taken by it while it was Administrative
Agent under this Agreement.
12.11. PERFORMANCE OF AGENTS' DUTIES BY ADMINISTRATIVE AGENT. The
parties acknowledge that all duties of the Agents hereunder as such shall be
performed by the Administrative Agent, and that the Co-Agent shall have no
responsibility with respect thereto.
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ARTICLE 13
ASSIGNMENTS AND PARTICIPATIONS
13.1. SUCCESSORS AND ASSIGNS. This Agreement, the Notes and the other
Loan Documents shall be binding on and shall inure to the benefit of the
Borrower, the Guarantors, the Administrative Agent, the Lenders and their
respective successors and assigns, except as otherwise provided herein or
therein. Neither the Borrower nor the Guarantors may assign, transfer,
hypothecate or otherwise convey their respective rights, benefits, obligations
or duties hereunder or thereunder without the prior express written consent of
the Lenders. Any purported assignment, transfer, hypothecation or other
conveyance by the Borrower or the Guarantors without the prior express written
consent of all the Lenders shall be void. Neither the Administrative Agent
nor any of the Lenders may sell, assign, transfer, grant a participation in,
or otherwise dispose of all or any portion of its interest in this Agreement,
the Notes or the other Loan Documents except as expressly provided herein.
13.2. ASSIGNMENTS.
13.2.1. ASSIGNMENTS. With prior notice to the Borrower, each Lender
may assign (other than the sale of a participation) up to one hundred percent
(100%) of its right, title and interest under this Agreement, the Notes, the
Letters of Credit and the other Loan Documents (including all or a portion of
its Commitments and the same portion of the Loans at the time owing to it) to
one or more banks or other financial institutions so long as any such bank or
financial institution meets the rating requirements set forth in SECTION 2.16
hereof; PROVIDED, HOWEVER, that (a) each such assignment shall be of a constant,
and not a varying, percentage of all such Lender's right, title and interest
hereunder and thereunder, (b) such share equals no less than $15,000,000 in the
case of any one assignee, (c) any assignee shall execute and deliver to the
Administrative Agent an Assignment and Acceptance, and (d) a Lender may not
assign any interest without the prior approval of the Administrative Agent, the
Issuing Bank and the Borrower, which approval shall not be unreasonably
withheld. Notwithstanding the foregoing, any Lender may assign, as collateral
or otherwise, any of its rights (including such Lender's rights to payments of
principal and/or interest on the Notes) under this Agreement to any Federal
Reserve Bank without notice to or consent of the Administrative Agent, the
Issuing Bank or the Borrower.
13.2.2. EFFECT OF ASSIGNMENTS. Upon the sale, assignment, transfer
or other disposition (other than the sale of a participation) of any of a
Lender's right, title and interest under this Agreement, the Notes, the Letters
of Credit and the
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other Loan Documents to any assignee in accordance with this SECTION 13.2,
then upon the execution, delivery and acceptance of the Assignment
and Acceptance, from and after the effective date specified therein, (a) the
transferor Lender no longer shall have the rights, benefits and obligations
under this Agreement, the Notes, the Letters of Credit or the other Loan
Documents to the extent of the interest transferred (except for such rights,
benefits and obligations that such Lender would retain under or with respect to
this Agreement, the Notes, the Letters of Credit or the other Loan Documents
upon payment in full of the Obligations), and (b) the assignee shall become a
Lender, shall succeed to the rights and benefits and assume the obligations of
such transferor Lender hereunder and thereunder to the extent of the interest
transferred.
13.2.3. ACTIONS BY THE BORROWER. The Borrower hereby agrees that it
shall execute and deliver, at the request of the Administrative Agent (a) one or
more substitute Notes to the order of such Lenders to evidence the portions of
the Loans retained and sold and (b) any amendment to any Loan Document to
effectuate the provisions of this SECTION 13.2.
13.3. PARTICIPATIONS. Subject to the provisions of this SECTION 13.3,
each Lender shall have the right at any time to sell undivided participating
interests in all or any part of its Commitments, the Loans and the Letters of
Credit to one or more banks or other financial institutions; PROVIDED, HOWEVER,
that (a) such sale or transfer shall not relieve such Lender of any obligation
or liability hereunder, (b) such Lender shall make and receive all payments for
the account of its participants and shall retain exclusively, and shall continue
to exercise exclusively, all rights of approval and administration available
hereunder with respect to such Lender's Commitments, the Loans and the Letters
of Credit, even after giving effect to the sale of any such participation
(although such Lender may at its option agree with its participants that it
will not consent to any matter described in CLAUSES (a) THROUGH (G) OF
SECTION 14.3.4 without their concurrence), and (c) such Lender shall make such
arrangements with its participants as may be necessary to accomplish the
foregoing. No such participant shall be a Lender for any purpose of this
Agreement, other than for purposes of SECTION 14.13, without the consent of
the Administrative Agent and the Issuing Bank.
13.4. DISCLOSURE. In connection with any assignments, participations or
offers therefor pursuant to this ARTICLE 13, each Lender may disclose to any
assignee or participant or prospective assignee or participant such information
pertaining to the Borrower, the Guarantors or any of their respective
Subsidiaries as such Lender may deem appropriate or such assignee or participant
or prospective assignee or participant may request; PROVIDED, HOWEVER, that
prior to any such disclosure such
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assignee or participant or prospective assignee or participant shall agree to
preserve the confidentiality of any confidential information relating to the
Borrower or its Subsidiaries received by it on the same basis as provided in
this SECTION 13.4.
13.5. ASSIGNMENTS AND PARTICIPATIONS AS UNITS. No Lender shall assign or
sell any participation in its Commitments, the Loans or the Letters of Credit,
except in the form of units consisting of pro rata interests in its Commitments,
the Loans and the Letters of Credit.
13.6. MAINTENANCE OF IDENTICAL PERCENTAGES UNDER CREDIT AGREEMENTS. In
all events, each Lender's Percentage of the Commitments under this Agreement
shall be maintained continuously so as to be the same as such Lender's
percentage of the commitments under the $50,000,000 Credit Agreement. If any
action shall be taken or event shall occur (including any action taken or
event occurring under SECTION 2.17 and this ARTICLE 13) that would result in a
change in any Lender's Percentage of the Commitments hereunder, such action
also shall be taken and/or such event also shall be deemed to have occurred
under the $50,000,000 Credit Agreement such that at all times each Lender's
Percentage of the Commitments under this Agreement shall be the same as such
Lender's percentage of the commitments under the $50,000,000 Credit Agreement.
ARTICLE 14
GENERAL PROVISIONS
14.1. NOTICES. Any notice, request, demand or other communication required
or permitted under this Agreement, the Notes or the other Loan Documents shall
be in writing and shall be deemed to be properly given (a) when received, if
personally delivered or sent by overnight courier with appropriate confirmation
of delivery, (b) two (2) Business Days after deposit in the mail, if mailed by
United States first class, certified or registered mail, postage prepaid, (c)
one (1) Business Day after deposit with a public telegraph company for
transmittal, charges prepaid, or (d) when received, if given by telecopy, with
appropriate confirmation, each to the appropriate address set forth below or to
such other address that any such party or the Administrative Agent may designate
by written notice to other parties.
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If to the Borrower:
Community Health Systems, Inc.
Suite 500
3707 FM 1960 West
Houston, Texas 77068-5704
Attn: Ms. Deborah G. Moffett
Telecopy No. 713/537-9265
If to any of the Guarantors:
c/o Community Health Systems, Inc.
Suite 500
3707 FM 1960 West
Houston, Texas 77068-5704
Attn: Ms. Deborah G. Moffett
Telecopy No. 713/537-9265
If to any of the Lenders:
Their respective addresses as set forth with their signatures on this
Agreement.
If to NationsBank as Administrative Agent:
NationsBank of Tennessee, N.A.
One NationsBank Plaza
Nashville, Tennessee 37239-1697
Attn: Medical Industries Group
Telecopy No. 615/749-4743
with a copy to:
NationsBank of North Carolina, N.A.
NC1-002-06-19
NationsBank Plaza
101 South Tryon Street
Charlotte, North Carolina 28255
Attn: Agency Services
Telecopy No. 704/386-9923
If to First Union as Issuing Bank:
First Union National Bank of North Carolina
One First Union Center SW-19
Charlotte, North Carolina 28288-0735
Attn: Healthcare Finance Group
Telecopy No. 704/374-4092
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14.2. AMENDED AND RESTATED AGREEMENT; ENTIRE AGREEMENT.
(a) This Agreement amends, restates, supersedes and replaces the
Previous Credit Agreement in its entirety, and the credit facilities
provided herein represent extensions and modifications of the credit
facilities provided pursuant to the Previous Credit Agreement.
(b) The execution and delivery of the $50,000,000 Credit Agreement,
this Agreement, the Notes and the other Loan Documents supersede all the
negotiations or stipulations concerning the matters that preceded or
accompanied the execution and delivery hereof and thereof (other than
with respect to fees payable pursuant to separate agreements among the
Borrower, the Administrative Agent and the Issuing Bank). The $50,000,000
Credit Agreement and this Agreement, the Notes and the other Loan
Documents also are intended, by the parties hereto and thereto, as a
complete and exclusive statement of the terms and conditions hereof and
thereof.
14.3. AMENDMENTS, WAIVERS AND CONSENTS.
14.3.1. AMENDMENTS. Except as otherwise set forth in this
Agreement, the provisions of (a) this Agreement may not be modified, amended,
restated or supplemented, except by a written instrument duly executed and
delivered on behalf of the Borrower, the Guarantors and Requisite Lenders, and
(b) the Notes and all Loan Documents other than this Agreement may not be
modified, amended, restated or supplemented, except by a written instrument duly
executed and delivered on behalf of the Borrower and any of the Guarantors, to
the extent that the Borrower or any such Guarantor is a signatory party to such
Note or such Loan Document, and on behalf of the Administrative Agent, with the
written consent of Requisite Lenders. Notwithstanding anything to the contrary
herein, the Administrative Agent and Requisite Lenders may modify, amend,
restate, supplement or waive any provision of ARTICLE 12 without the consent
of the Borrower or any Guarantor. The Borrower agrees to give the Trustees
notice of any amendments hereto to the extent required by the terms of the
Indentures.
14.3.2. WAIVERS AND CONSENTS. Except as otherwise set forth in this
Agreement, any waiver of the terms and conditions of this Agreement, the Notes,
the other Loan Documents or the Bond Documents, or any waiver of any Default or
Event of Default and its consequences hereunder or thereunder, and any consent
or approval required or permitted by this Agreement, the Notes, the other Loan
Documents or the Bond Documents to be given by the Lenders, may be made or given
with, but only with, the written consent of Requisite Lenders on such terms and
conditions
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as specified in the written instrument granting such waiver, consent
or approval. A waiver, to be effective, must be in writing and signed by the
party making the waiver.
14.3.3. EFFECT OF WAIVERS. In the case of any waiver, the Borrower,
the Guarantors, the Lenders and the Administrative Agent shall be restored to
their former positions and rights under this Agreement, the Notes, the other
Loan Documents and the Bond Documents to the extent of such waiver, and any
Default or Event of Default waived shall be deemed to be cured and not
continued; PROVIDED, HOWEVER, that no waiver shall constitute the waiver of any
subsequent or other Default or Event of Default or impair any right consequent
thereon. No failure or delay on the part of the Administrative Agent or any
Lender to exercise or enforce any right or remedy under or in connection with
this Agreement, the Notes or the other Loan Documents, whether by their
respective terms, at law, in equity or otherwise, shall operate as a waiver
thereof. No single or partial exercise of any such right or remedy shall
preclude other or further exercise thereof or the exercise of any other right or
remedy.
14.3.4. CONSENT OF ALL THE LENDERS. Without in each instance the
prior express written consent of the Administrative Agent and all the Lenders,
no such modification, amendment, restatement, supplement, waiver or consent
shall:
(a) increase the aggregate Commitments, or increase the Commitment
of any Lender without such Lender's approval;
(b) extend any Scheduled Commitment Reduction Date or reduce the
amount of the scheduled reduction of the aggregate Commitments on any
Scheduled Commitment Reduction Date;
(c) reduce the amounts or extend the dates for the payment of any
Credit Fees that are payable ratably to all of the Lenders in
accordance with their respective Percentages of the Commitments;
(d) extend the maturity of the Notes or the date of any scheduled
principal payments or mandatory prepayments hereunder or thereunder;
(e) reduce the rate or extend the time of payment of interest
hereunder or under the Notes;
(f) waive the payment of any principal, interest or Credit Fees
payable hereunder or under the Notes;
(g) extend the termination dates of any of the Commitments or the
Termination Date;
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(h) consent to the assignment or transfer by the Borrower of any
of its Obligations under this Agreement, the Notes or the other Loan
Documents, or;
(i) release a material portion of the Collateral or release any of
the guarantees hereunder, except as expressly provided herein; or
(j) amend or modify the definitions of "Percentages" or "Requisite
Lenders" contained in this Agreement.
14.3.5. BINDING EFFECT. Any such modification, amendment,
restatement, supplement, waiver or consent shall apply equally to each of the
Lenders and shall be binding upon the Borrower, the Guarantors, the Lenders, the
Administrative Agent and all future holders of the Notes.
14.4. INDEPENDENCE OF COVENANTS. All covenants hereunder shall be given
independent effect so that if a particular action or condition is not permitted
by any of such covenants, the fact that it would be permitted by an exception
to, or otherwise would be within the limitations of, another covenant shall not
avoid the occurrence of a Default or an Event of Default if such action is taken
or condition exists.
14.5. INTERPRETATION. Neither this Agreement, the Notes or the other Loan
Documents, nor any uncertainty or ambiguity herein or therein, shall be
construed or resolved against the Administrative Agent, the Co-Agent, the
Issuing Bank, the Lenders, the Borrower or the Guarantors whether under any rule
of construction or otherwise. This Agreement, the Notes and the other Loan
Documents have been reviewed by all the parties hereto and thereto and shall be
construed and interpreted according to the ordinary meaning of the words used as
to fairly accomplish the purposes and intentions of all such parties.
14.6. INCONSISTENCIES WITH OTHER DOCUMENTS. In the event there is a
conflict or inconsistency between this Agreement, the Notes or the other Loan
Documents, the terms of this Agreement shall control; PROVIDED, HOWEVER, that
any provision of the Security Documents that imposes additional burdens on the
Borrower or any Guarantor or further restricts the rights of the Borrower or any
Guarantor or gives the Lenders additional rights shall not be deemed to be in
conflict or inconsistent with this Agreement and shall be given full force and
effect.
14.7. SEVERABILITY. If any portion of this Agreement, the Notes or any
of the other Loan Documents shall be judged by a court of competent jurisdiction
to be unenforceable, the remaining portions shall be valid and enforceable to
the extent that the remaining terms thereof provide for the creation of the
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Obligations and the consummation of the issuance of the Notes, the grant of
collateral security therefor, the guarantee thereof and the payment of principal
and interest in respect of the Obligations substantially on the same terms and
subject to the same conditions as set forth herein and therein.
14.8. 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 TENNESSEE,
WITHOUT REFERENCE TO THE CONFLICTS OR CHOICE OF LAW PRINCIPLES THEREOF, EXCEPT
TO THE EXTENT THAT THE LAWS OF A PARTICULAR JURISDICTION GOVERN THE CREATION,
PERFECTION, PRIORITY AND ENFORCEMENT OF LIENS ON AND SECURITY INTERESTS IN THE
COLLATERAL. NOTWITHSTANDING THE FOREGOING, IF AT ANY TIME THE LAWS OF THE
UNITED STATES OF AMERICA PERMIT ANY LENDER TO CONTRACT FOR, TAKE, RESERVE,
CHARGE OR RECEIVE INTEREST OR LOAN CHARGES IN AMOUNTS GREATER THAN ARE ALLOWED
BY THE LAWS OF SUCH STATE (WHETHER SUCH FEDERAL LAWS DIRECTLY SO PROVIDE OR
REFER TO THE LAW OF THE STATE WHERE SUCH LENDER IS LOCATED), THEN
SUCH FEDERAL LAWS SHALL TO SUCH EXTENT GOVERN AS TO THE INTEREST AND LOAN
CHARGES THAT SUCH LENDER IS ALLOWED TO CONTRACT FOR, TAKE, RESERVE, CHARGE OR
RECEIVE UNDER THIS AGREEMENT, THE NOTES AND THE OTHER LOAN DOCUMENTS. REFERENCES
TO LAWS IN THIS SECTION ARE TO SUCH LAWS AS ARE NOW IN EFFECT, AND, WITH RESPECT
TO USURY LAWS, IF ANY, APPLICABLE TO ANY LENDER AND TO THE EXTENT ALLOWED
THEREBY, TO SUCH LAWS AS HEREAFTER MAY BE IN EFFECT THAT ALLOW A HIGHER MAXIMUM
NONUSURIOUS INTEREST RATE THAN SUCH LAWS NOW ALLOW. TO THE EXTENT THAT TEXAS
LAW IS APPLICABLE TO ANY LENDER, TEX. REV. CIV. STAT. ANN. ART. 5069, CH. 15
(WHICH REGULATES CERTAIN REVOLVING CREDIT LOAN ACCOUNTS AND REVOLVING TRIPARTY
ACCOUNTS) SHALL NOT APPLY TO THIS AGREEMENT OR THE NOTES.
14.9. CONSENT TO JURISDICTION. THE BORROWER AND EACH GUARANTOR HEREBY
IRREVOCABLY CONSENTS TO THE PERSONAL JURISDICTION OF THE STATE AND FEDERAL
COURTS LOCATED IN DAVIDSON COUNTY, TENNESSEE 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 AND
EACH GUARANTOR HEREBY IRREVOCABLY CONSENT TO THE SERVICE OF A SUMMONS AND
COMPLAINT AND OTHER PROCESS IN ANY ACTION, CLAIM OR PROCEEDING BROUGHT BY THE
ADMINISTRATIVE 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 14.1. NOTHING IN THIS SECTION 14.9
SHALL AFFECT THE RIGHT OF THE ADMINISTRATIVE AGENT OR ANY LENDER TO SERVE LEGAL
PROCESS IN ANY OTHER MANNER PERMITTED BY LPN OR AFFECT THE RIGHT OF THE
ADMINISTRATIVE AGENT OR ANY LENDER TO BRING ANY ACTION OR PROCEEDING AGAINST THE
BORROWER, ANY OF
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THE GUARANTORS OR THEIR RESPECTIVE PROPERTIES IN THE COURTS OF ANY OTHER
JURISDICTIONS.
14.10. WAIVER OF JURY TRIAL. THE ADMINISTRATIVE AGENT, THE CO-AGENT, THE
ISSUING BANK, EACH LENDER, THE BORROWER AND EACH GUARANTOR HEREBY IRREVOCABLY
WAIVES ITS RIGHT TO A JURY TRIAL WITH RESPECT TO ANY ACTION, CLAIM,
COUNTERCLAIM 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. The scope of this waiver is intended to be all-encompassing with
respect to any and all disputes that may be filed in any court
and that relate to the subject matter of this transaction, including without
limitation contract claims, tort claims, breach of duty claims and all other
common law and statutory claims. Each of the parties hereto (i) acknowledges
that this waiver is a material inducement for the parties to the Loan Documents
to enter into a business relationship, that the parties to the Loan Documents
have already relied on this waiver in entering into same and the transactions
that are the subject thereof, and that they will continue to rely on this waiver
in their related future dealings, and (ii) further warrants and represents that
each has reviewed this waiver with its legal counsel and that each knowingly and
voluntarily waives its jury trial rights following consultation with legal
counsel. This waiver is irrevocable, meaning that it may not be modified either
orally or in writing, and this waiver shall apply to any subsequent amendments,
modifications, supplements, extensions, renewals and/or replacements of this
Agreement. In the event of litigation, this Agreement may be filed as a written
consent to a trial by the court.
14.11. CUMULATIVE REMEDIES. All rights and remedies provided in or
contemplated by this Agreement, the Notes and the other Loan Documents are
cumulative and not exclusive of any right or remedy otherwise provide herein,
therein, at law or in equity.
14.12. EXPENSES OF ADMINISTRATION AND ENFORCEMENT. The Borrower shall pay
on demand all reasonable expenses of the Administrative Agent in connection with
this Agreement, the Notes and the other Loan Documents, and the preparation of
any modifications, amendments, restatements, supplements or waivers, including
all attorneys' and paralegals' fees and expenses, all fees and expenses for
title, lien and other public records searches, filing and recordation fees and
taxes, duplicating expenses, corporation search fees, appraisal fees, escrow
agent fees and expenses, and all other customary expenses. If there shall occur
a Default or Event of Default, all reasonable out-of-pocket expenses incurred by
the Lenders and the Administrative Agent (including administrative expenses of
the Administrative Agent and the Lenders and fees and disbursements of in-house
and
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outside counsel) in connection with such Default or Event of Default and
collection and other enforcement proceedings (including bankruptcy proceedings)
resulting therefrom shall be paid by the Borrower, regardless of whether suit is
actually commenced to obtain any relief provided hereunder. The Borrower shall
indemnify, defend and hold harmless the Administrative Agent, the Co-Agent, the
Issuing Bank and each of the Lenders from and against any and all documentary
or filing taxes, assessments or charges by any Governmental Authority by
reason of the execution and delivery of this Agreement, the Notes and the
other Loan Documents and the consummation of the transactions that are the
subject thereof.
14.13. INDEMNIFICATION. The Borrower and each of the Guarantors, jointly
and severally, shall indemnify, defend and hold harmless the Administrative
Agent and the Lenders (to the fullest extent permitted by law) from and against
any and all claims, demands, lawsuits, costs, expenses, fees, obligations,
liabilities, losses, damages, recoveries and deficiencies, including interest,
penalties and reasonable attorneys' and paralegals' fees and costs and amounts
paid in settlement of any of the foregoing, whether direct, indirect,
consequential or incidental, that the Administrative Agent or the Lenders may
incur or suffer or that may arise out of, result from or relate to (a) this
Agreement, the Notes, the Letters of Credit or the other Loan Documents or the
transactions contemplated hereby or thereby (excluding actions arising out of
the Administrative Agent's or the Lenders' own gross negligence or willful
misconduct and actions arising out of claims made by the Administrative Agent,
the Co-Agent, the Issuing Bank or any Lender against any of the others), or (b)
any action under this Agreement, the Notes, the Letters of Credit or the other
Loan Documents or the transactions contemplated hereby or thereby (excluding
actions arising out of the Administrative Agent's or the Lenders' own gross
negligence or willful misconduct and actions arising out of claims made by the
Administrative Agent, the Co-Agent, the Issuing Bank or any Lender against any
of the others). In no event shall the Administrative Agent or the Lenders be
liable to the Borrower or any of the Guarantors for any matter or thing in
connection with this Agreement, the Notes, the Letters of Credit or the other
Loan Documents other than to account for monies actually received by them in
accordance with the terms hereof. This SECTION 14.13 shall survive termination
of this Agreement.
14.14. ADJUSTMENT. If any Lender (a "BENEFITTED LENDER") at any time
shall receive any payment of all or part of its Loans or its participation in
the Letter of Credit Liabilities or the interest thereon or receive any
collateral therefor, whether voluntarily or involuntarily, by set-off or
otherwise, in a greater portion of any such payment to and collateral received
by any other Lender, if any, in respect of such other Lender's Loans
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or its participation in the Letter of Credit Obligations or the interest
thereon, such benefitted Lender shall purchase for cash from the other Lenders
such portion of each Lender's Loan and participation in the Letter of Credit
Obligations, 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, HOWEVER, that if all
or any portion of such excess payment or benefits thereafter is recovered from
such benefitted Lender, such purchase shall be rescinded and the purchase
price and benefit returned to the extent of such recovery, but without
interest. Each Lender so purchasing a portion of another Lenders' Loan and
participation in the Letter of Credit Obligations may exercise all rights of
payment (including rights of setoff) with respect to such portion as fully as
if such Lender were the direct holder of such portion.
14.15. SETOFF. In addition to any rights and remedies of the Lenders
provided by law, the Lenders each shall have a security interest in any and all
deposits of the Borrower and the Guarantors (general or special, time or
demand, provisional or final) at any time held by any Lender or any Affiliate
thereof, which security interest shall secure the Obligations. Upon the
occurrence and during the continuance of any Event of Default, with the
consent of the Administrative Agent without prior notice to the Borrower or
the Guarantors, any notice being specifically waived by the Borrower and the
Guarantors to the fullest extent permitted by applicable law, each Lender may
set off and apply against any indebtedness, whether matured or unmatured, of
the Borrower or any Guarantor to the Lenders, any amount owing from any Lender
or any Affiliate thereof to the Borrower or any Guarantor at, or at any time
after, the occurrence of an Event of Default (and each Affiliate of any Lender
is irrevocably authorized to permit such setoff and application), and the
aforesaid right of setoff may be exercised by any Lender against the Borrower
or the Guarantors or against any trustee in bankruptcy, debtor in possession,
assignee for the benefit of creditors, receiver or execution, judgment, or
attachment creditor of the Borrower or any Guarantor, or against anyone else
claiming through or against the Borrower or any such Guarantor or such trustee
in bankruptcy, debtor in possession, assignee for the benefit of creditors,
receiver or execution, judgment or other attachment creditor, notwithstanding
the fact that such right of setoff shall not have been exercised by any Lender
prior to the making, filing or issuance, or service upon any Lender of, or of
notice of, any such petition, assignment for the benefit of creditors,
appointment or application for the appointment of a receiver, or issuance of
execution, subpoena, order or warrant. Each Lender promptly shall notify the
Borrower or the Guarantors and the Administrative Agent after any such setoff
and application made by any Lender; PROVIDED, HOWEVER, that failure
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<PAGE>
to give such notice shall not affect the validity of such setoff and
application.
14.16. OTHER ACCOMMODATIONS TO THE BORROWER AND THE GUARANTORS; NO RIGHTS
BY VIRTUE OF CROSS-COLLATERALIZATION.
(a) Each Lender (including the Administrative Agent) may, without
notice to or consent by any other Lender, make or participate in loans,
extensions of credit or other financial accommodations to or for the
benefit of the Borrower and/or any of its Subsidiaries on any terms that it
deems desirable, and engage in other business transactions, in the same
manner as if this Agreement were not in existence, all without limiting,
waiving or otherwise impairing any rights of such Lender or any other
Lender under this Agreement. Without limiting the generality of
the foregoing, the Lenders acknowledge and agree that so long as a Lender
acts in good faith and the other Lenders' interests in the Obligations and
the Collateral are not impaired thereby, (i) such Lender may be preferred
or secured in any manner that it deems advisable with respect to such other
loans, extensions of credit, financial accommodations and transactions,
(ii) such Lender shall be under no obligation to collect or attempt to
collect any payments in respect of the Obligations in preference to the
collection or enforcement of any other borrowings or obligations of the
Borrower and/or its Subsidiaries to such Lender, and (iii) any amounts
collected by such Lender from the Borrower and/or its Subsidiaries that are
not expressly designated (or reasonably determinable to be intended) as
being in payment of the Obligations may be applied to any of the
obligations of such Person to such Lender in any manner deemed appropriate
by such Lender.
(b) The Lenders acknowledge and agree that the Collateral constitutes
all of the collateral security for the Obligations and that, as among
themselves, no Lender shall have any interest in (i) any property or
interests of the Borrower or any of its Subsidiaries, other than the
Collateral, that now or hereafter secures loans, extensions of credit,
other financial accommodations and other transactions (excluding the
Obligations), of the Borrower or any of its Subsidiaries with any other
Lender, whether entered into directly or acquired by such Lender, (ii) any
property of the Borrower or any of its Subsidiaries, other than the
Collateral, now or hereafter in the possession or control of any other
Lender, (iii) any deposit, not constituting Collateral, now or hereafter
held by any other Lender, or (iv) any other indebtedness now or hereafter
owing to any other Lender; any of which may be or become security for or
otherwise available for payment or performance of the Obligations by reason
of any cross-
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<PAGE>
collateralization or any general description of secured
indebtedness(es) and/or obligations) contained in any mortgage, security
agreement or other security instrument or agreement held by any Lender, or
by reason of the right of setoff, counterclaim or otherwise.
Notwithstanding the foregoing, if any such property, deposit or
indebtedness, or any proceeds thereof, in the discretion of the Lender
holding same, is applied to the reduction of the Obligations, then all of
the Lenders shall be entitled to their respective Percentages of such
application in the manner provided in SECTIONS 3.3 and 14.14.
14.17. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations
and warranties of the Borrower and the Guarantors set forth in this Agreement,
the Notes and the other Loan Documents and in any other certificate, opinion or
other statement provided at any time by or on behalf of the Borrower and the
Guarantors in connection herewith shall survive the execution of the delivery
of this Agreement, the Notes and the other Loan Documents, the purchase and
sale of the Notes hereunder and the payment or other satisfaction of the
Obligations.
14.18. RELATIONSHIP OF THE PARTIES. None of the Administrative Agent, the
Co-Agent, the Issuing Bank or the Lenders shall be deemed partners or joint
venturers with the Borrower or the Guarantors or any Affiliate thereof in making
this Agreement or by any action taken hereunder. The Borrower and the
Guarantors, jointly and severally, shall indemnify, defend and hold harmless the
Lenders and the Administrative Agent from and against any and all claims,
demands, lawsuits, costs, expenses, fees, obligations, liabilities, losses,
damages, recoveries and deficiencies, including interest, penalties and
reasonable attorneys' fees and costs, whether direct, indirect, consequential or
incidental, that the Lenders or the Administrative Agent may incur or suffer or
that may arise out of, result from or relate to such a construction of the
parties and their relationship. This SECTION 14.18 shall survive termination of
this Agreement.
14.19. DESTRUCTION OF RECORDS. Any documents, schedules, invoices or
other papers delivered to the Administrative Agent, the Co-Agent, the Issuing
Bank or the Lenders at their option may be destroyed or otherwise disposed of by
them six (6) months after they are delivered to or received by them, unless the
Borrower or any Guarantor requests, in writing, the return of such documents,
schedules, invoices or other papers and makes reasonably acceptable
arrangements, at the Borrower's or such Guarantor's expense, for their return.
14.20. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original,
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<PAGE>
but all of which together shall constitute one and the same document. This
Agreement shall become effective when (a) the Administrative Agent shall have
received counterparts executed by the Borrower, the Guarantors, the Lenders,
the Issuing Bank, the Co-Agent and the Administrative Agent, or (b) in the
case of any Lender, the Administrative Agent shall have received telecopied
notice from such Lender that it has executed a counterpart thereof and
forwarded the same to the Administrative Agent by first class, registered or
certified mail as set forth in SECTION 14.1. A set of the copies of this
Agreement or counterparts signed by all of the parties shall be lodged with
the Borrower, on behalf of itself and the Guarantors, and the Administrative
Agent.
14.21. INTEREST AND LOAN CHARGES NOT TO EXCEED MAXIMUM AMOUNTS ALLOWED BY
LAW. It is the intention of the Borrower and the Lenders to conform strictly
to all laws applicable to the Lenders that govern or limit the interest and
loan charges that may be charged in respect of the Obligations. Anything in
this Agreement, the Notes or any of the other Loan Documents to the contrary
notwithstanding, in no event whatsoever, whether by reason of advancement of
proceeds of the Loans or the Letters of Credit, acceleration of the maturity
of the unpaid balance of any of the Obligations or otherwise, shall the
interest and loan charges agreed to be paid to any of the Lenders for the use
of the money advanced or to be advanced hereunder exceed the maximum amounts
collectible by such Lender pursuant to applicable law. If for any reason
whatsoever the interest or loan charges paid or contracted to be paid
by the Borrower to any of the Lenders in respect of the Loans shall exceed the
maximum amounts collectible under the law applicable to such Lender then, in
that event, and notwithstanding anything to the contrary in this Agreement,
the Notes or any other Loan Document: (a) the aggregate of all consideration
that constitutes interest or loan charges under the law applicable to such
Lender that is contracted for, taken, reserved, charged or received under this
Agreement, the Notes or any other Loan Document or otherwise in connection
with the Obligations under no circumstances shall exceed the maximum amounts
allowed by such applicable law, and any excess shall be credited by such
Lender on the principal amount of the Obligations (or, to the extent the
principal amount outstanding under this Agreement, the Notes and the other
Loan Documents has been or thereby would be paid in full, refunded to the
Borrower); and (b) in the event that the maturity of any or all of the
Obligations is accelerated by reason of an election of the Lenders resulting
from any Default under this Agreement or otherwise, or in the event of any
required or permitted prepayment, then such consideration that constitutes
interest or loan charges under law applicable to any Lender may never include
more than the maximum amounts allowed by law applicable to such Lender, and
any excess interest or loan charges provided for in this Agreement or
otherwise shall be cancelled
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<PAGE>
automatically as of the date of such acceleration or prepayment and, if
theretofore paid, shall be credited by such Lender on the principal amount of
the Obligations (or, to the extent the principal amount of the Obligations has
been or thereby would be paid in full, refunded by such Lender to the
Borrower). All sums paid or agreed to be paid to the Lenders for the use,
forbearance or detention of sums due hereunder shall, to the extent permitted
by applicable law, be prorated, allocated and spread throughout the full term
of the Obligations until payment in full so that the rate or amount of
interest and loan charges on account of the Obligations will not exceed any
applicable legal limitation. The right to accelerate the maturity of the
Obligations does not include the right to accelerate the maturity of any
interest or loan charges not otherwise accrued on the date of
such acceleration, and the Lenders do not intend to charge or collect any
unearned interest or loan charges in the event of any such acceleration. If and
to the extent that Article 5069-1.04 of the Texas Revised Civil Statutes is
relevant to any Lender for the purpose of determining the Highest Lawful Rate,
each such Lender hereby elects to determine the applicable rate ceiling under
such Article by the indicated (weekly) rate ceiling from time to time in
effect, subject to each Lender's rights subsequently to change such method in
accordance with applicable law.
14.22. FINAL AGREEMENT. THIS WRITTEN AGREEMENT REPRESENTS THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the date first written above.
COMMUNITY HEALTH SYSTEMS, INC., as
Borrower
By:
-------------------------------------
Name: Deborah G. Moffett
Title: Vice President, Finance
Attest:
---------------------------------
Name: J. Anthony Van Slyke
Title: Assistant Secretary
COMMUNITY HEALTH INVESTMENT CORPORATION,
as Guarantor
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<PAGE>
CHS PROFESSIONAL SERVICES CORPORATION,
as Guarantor
PROFESSIONAL ACCOUNT SERVICES, INC., as
Guarantor
COMMUNITY HEALTH MANAGEMENT SERVICES,
INC., as Guarantor
HOSPITAL OF BARSTOW, INC., as Guarantor
ENID HEALTH SYSTEMS, INC., as Guarantor
FANNIN REGIONAL HOSPITAL, INC., as
Guarantor
HIGHLAND HEALTH SYSTEMS, INC., as
Guarantor
HILLSIDE HOSPITAL, INC., as Guarantor
MOBERLY HOSPITAL, INC., as Guarantor
HOSPITAL OF FULTON, INC., as Guarantor
HOSPITAL OF ROCKY MOUNT, INC., as
Guarantor
134
<PAGE>
OLIVE BRANCH HOSPITAL, INC., as
Guarantor
EAST TENNESSEE HEALTH SYSTEMS, INC., as
Guarantor
RUSSELL COUNTY MEDICAL CENTER, INC., as
Guarantor
WEST FLORIDA HOSPITAL CORPORATION, as
Guarantor
135
<PAGE>
HOSPITAL OF LOUISA, INC., as Guarantor
CENTRAL PLAINS REGIONAL HOSPITAL, INC.,
as Guarantor
By:
-------------------------------------
Name: Deborah G. Moffett
Title: Vice President of each of
the Guarantors listed above
Attest:
---------------------------------
Name: J. Anthony Van Slyke
Title: Assistant Secretary
136
<PAGE>
[Lender's Signature Page to $150,000,000 Community
Health Systems, Inc. Amended and Restated Credit
Agreement dated August , 1994]
NATIONSBANK OF TENNESSEE, N.A., as a
Lender and as Administrative Agent
By:
-------------------------------------
Title:
-----------------------------
Address: Second Floor
One NationsBank Plaza
Nashville, TN 37239-1697
Attn: Medical Industries Group
Telecopy No. 615/749-4743
Initial Commitment: $30,000,000
Percentage: 20.0%
137
<PAGE>
[Lender's Signature Page to $150,000,000 Community
Health Systems, Inc. Amended and Restated Credit
Agreement dated August , 1994]
FIRST UNION NATIONAL BANK OF NORTH
CAROLINA, as a Lender, as Co-Agent and
as Issuing Bank
By:
-------------------------------------
Title:
-----------------------------
Address: One First Union Center, TW 19
Charlotte, NC 28288-0735
Attn: John Ransom
Telecopy No. 704/383-9144
Initial Commitment: $26,250,000
Percentage: 17.5%
138
<PAGE>
[Lender's Signature Page to $150,000,000 Community
Health Systems, Inc. Amended and Restated Credit
Agreement dated August , 1994]
CITICORP USA, INC.,
as a Lender
By:
-------------------------------------
Title:
-----------------------------
Address: 12th Floor, Zone 17
399 Park Avenue
New York, NY 10027
Attn: Barbara E. Cohen
Telecopy No. 212/793-9310
with copies of notices to:
Citicorp North America, Inc.,
1400 Trammell Crow Center
2001 Ross Avenue
Dallas, TX 75201
Attn: Steve Bethel
Telecopy No. 214/953-3888
Initial Commitment: $26,250,000
Percentage: 17.5%
139
<PAGE>
[Lender's Signature Page to $150,000,000 Community
Health Systems, Inc. Amended and Restated Credit
Agreement dated August , 1994]
BANQUE PARIBAS, Houston Agency,
as a Lender
By:
-------------------------------------
Title:
-----------------------------
By:
-------------------------------------
Title:
-----------------------------
Address: 1200 Smith, Suite 3100
Houston, TX 77002
Attn: Glenn E. Mealey
Telecopy No. 713/659-3832
Initial Commitment: $15,000,000
Percentage: 10.0%
140
<PAGE>
[Lender's Signature Page to $150,000,000 Community
Health Systems, Inc. Amended and Restated Credit
Agreement dated August , 1994]
THE BANK OF NOVA SCOTIA,
as a Lender
By:
-------------------------------------
Title:
-----------------------------
Address: Suite 2700
600 Peachtree Street, NE
Atlanta, GA 30308
Attn: Mary K. Munoz
Telecopy No. 404/888-8998
Initial Commitment: $15,000,000
Percentage: 10.0%
141
<PAGE>
[Lender's Signature Page to $150,000,000 Community
Health Systems, Inc. Amended and Restated Credit
Agreement dated August , 1994]
CORESTATES BANK, N.A.,
as a Lender
By:
-------------------------------------
Title:
-----------------------------
Address: 1500 Market Street West Tower
Philadelphia, PA 19101-7558
Attn: Paul Hogan
Telecopy No. 215/786-7721
Initial Commitment: $15,000,000
Percentage: 10.0%
142
<PAGE>
[Lender's Signature Page to $150,000,000 Community
Health Systems, Inc. Amended and Restated Credit
Agreement dated August , 1994]
THE BANK OF CALIFORNIA, N.A.,
as a Lender
By:
-------------------------------------
Title:
-----------------------------
Address: Fifth Floor
550 South Hope Street
Los Angeles, CA 90071
Attn: Corporate Banking/
Healthcare
Telecopy No. 213/243-3552
Initial Commitment: $11,250,000
Percentage: 7.5%
143
<PAGE>
[Lender's Signature Page to $150,000,000 Community
Health Systems, Inc. Amended and Restated Credit
Agreement dated August , 1994]
NATIONAL CITY BANK, KENTUCKY,
as a Lender
By:
-------------------------------------
Title:
-----------------------------
Address: 101 South Fifth Street
Louisville, KY 40201
Attn: Charles P. Denny
Telecopy No. 502/581-4424
Initial Commitment: $11,250,000
Percentage: 7.5%
144
<PAGE>
SCHEDULES AND EXHIBITS
SCHEDULES
Schedule 1.1A List of Hospitals
Schedule 7.1 Borrower, Guarantors and Subsidiaries -
Capitalization and Jurisdictions of
Incorporation and Foreign Qualification
Schedule 7.3 Post-Closing Consents
Schedule 7.6 Pending Litigation
Schedule 7.17A Indebtedness
Schedule 7.17B Contingent Obligations
Schedule 7.18A Business Locations
Schedule 7.18B Trade Names
Schedule 7.24 Non-Accredited Hospitals
Schedule 7.26 Employment Agreements and Executive
Compensation Arrangements
Schedule 7.27 Environmental Matters
Schedule 7.28 Material Contracts and Capitalized Lease
Obligations
Schedule 7.30 Operating Leases
Schedule 8.20 Post-Closing Matters
Schedule 9.2 Existing Liens
Schedule 9.5 Existing Investments
EXHIBITS
Exhibit 1.1B Information to be Provided Regarding Permitted
Acquisitions
Exhibit 1.1C Form of Supplement to Credit Agreement
Exhibit 2.2.4 Form of Notice of Borrowing
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<PAGE>
Exhibit 2.3.2 Form of Letter of Credit Request
Exhibit 2.7.2 Form of Notice of Conversion/Continuation
Exhibit 2.8 Form of Note
Exhibit 4.1A Form of Pledge Agreement
Exhibit 4.1B Form of Assignment and Security Agreement
Exhibit 4.1C Form of First Amendment to Bond Pledge
Agreement (Series A Bonds)
Exhibit 4.1D Form of First Amendment to Bond Pledge
Agreement (Series B Bonds)
Exhibit 4.1E Form of First Amendment to Bond Pledge
Agreement (Fulton Bonds)
Exhibit 4.1F Form of First Amendment to Bond Pledge
Agreement (Olive Branch Bonds)
Exhibit 6.1.1A Form of Opinion of Counsel to the Borrower and
the Guarantors
Exhibit 6.1.1B Form of Borrower's and Guarantors' Letter to
Counsel Requesting Opinion
Exhibit 6.1.1C Form of Solvency Certificate of Borrower
Exhibit 6.1.1D Form of Solvency Certificate of Guarantors
Exhibit 6.1.1E Form of Trustee's Certificate (Series A and
Series B Trustee)
Exhibit 6.1.1F Form of Trustee's Certificate (Fulton Trustee)
Exhibit 6.1.1G Form of Trustee's Certificate (Olive Branch
Trustee)
Exhibit 8.1.5 Sample Quantitative Analysis and Statistical
Summary
Exhibit 13.2 Form of Assignment and Acceptance
146
<PAGE>
EXHIBIT 12.1
STATEMENTS RE COMPUTATION OF RATIOS
COMMUNITY HEALTH SYSTEMS, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
The following computations for the year ended June 30, 1994 reflect earnings
available for fixed charges and resultant ratios for Community on a historical
basis and for Community and Hallmark on a pro forma combined basis, assuming the
Merger was consummated on July 1, 1993.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1994
--------------------------
PRO FORMA
COMBINED
HISTORICAL COMMUNITY &
COMMUNITY HALLMARK
----------- -------------
<S> <C> <C>
Income from continuing operations before provision for income taxes................... $ 13,864 $ 17,766
Add:
(a) Interest expense................................................................ 13,504 21,006
(a) Interest element of rent expense................................................ 2,617 4,342
----------- -------------
Earnings.............................................................................. $ 29,985 $ 43,114
----------- -------------
----------- -------------
Fixed Charges (sum of a's)............................................................ $ 16,121 $ 25,348
----------- -------------
----------- -------------
Ratio of earnings to fixed charges.................................................... 1.86x 1.70 x
----------- -------------
----------- -------------
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Joint Proxy Statement/Prospectus contained in a Registration
Statement on Form S-4 related to the merger of Community Health Systems, Inc.
with Hallmark Healthcare Corporation of our reports, dated February 22, 1994,
included or incorporated by reference in Community Health Systems, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1993, and to all references
to our firm included in this Joint Proxy Statement/Prospectus.
ARTHUR ANDERSEN & CO.
Houston, Texas
August 22, 1994
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in
this Joint Proxy Statement/Prospectus contained in a Registration Statement on
Form S-4 related to the merger of Community Health Systems, Inc. with Hallmark
Healthcare Corporation of our report, dated August 12, 1994, on the consolidated
financial statements of Hallmark Healthcare Corporation and to all references to
our firm included in this Joint Proxy Statement/Prospectus.
ARTHUR ANDERSEN & CO.
Atlanta, Georgia
August 22, 1994
<PAGE>
EXHIBIT 23.5
CONSENT OF LEHMAN BROTHERS
We hereby consent to the inclusion in the Joint Proxy Statement/Prospectus
forming part of this Registration Statement on Form S-4 of our opinion dated
June 10, 1994 to the Board of Directors of Community Health Systems, Inc.
attached as Appendix C to such Joint Proxy Statement/Prospectus and the
references to such opinion therein. In giving such consent, we do not admit
that we come within the category of persons whose consent is required under
Section 7 of the Securities Act of 1933 and the rules and regulations issued
thereunder, and we do not thereby admit that we are experts with respect to
any part of the Registration Statement within the meaning of the term
"expert" as used in the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission promulgated thereunder.
LEHMAN BROTHERS
<PAGE>
[Letterhead of Mabon Securities Corp.]
CONSENT
The undersigned, Mabon Securities Corp., hereby consents to the references
to it under the sections captioned "Summary -- The Merger," "Background Of The
Merger And Related Matters -- Background of the Merger," "-- Recommendations
of the Boards of Directors" and "-- Opinions of Financial Advisors" in the
Proxy Statement-Prospectus (the "PROXY STATEMENT-PROSPECTUS") constituting a
part of the Registration Statement on Form S-4 of Community Health Systems,
Inc. filed pursuant to the Securities Act of 1933, as amended (the "SECURITIES
ACT"), and to the reference to it in the letter to stockholders of Hallmark
Healthcare Corporation accompanying the Proxy Statement-Prospectus. In giving
this consent, the undersigned does not hereby admit that it is within the
category of persons whose consent is required under Section 7 of the
Securities Act and the rules and regulations of the Securities and Exchange
Commission promulgated thereunder.
MABON SECURITIES CORP.
By: /s/ Peter H. Blum
-------------------------------
Peter H. Blum
Managing Director
<PAGE>
EXHIBIT 23.7
CONSENT OF JAMES T. MCAFEE, JR.
In accordance with the requirements of Rule 438 promulgated by the
Securities and Exchange Commission under the Securities Act of 1933,
as amended (the "Securities Act"), I hereby consent to the references
to my name appearing in the Registration Statement on Form S-4 and in the
accompanying Joint Proxy Statement/Prospectus forming a part thereof relating
to the registration under the Securities Act of up to 3,565,287 shares of
common stock of Community Health Systems, Inc., par value $.01 per share, to
be issued to the stockholders of Hallmark Healthcare Corporation in connection
with the proposed merger to which such Registration Statement relates.
/s/ James T. McAfee, Jr.
-------------------------------
James T. McAfee, Jr.
August 23, 1994
<PAGE>
EXHIBIT 23.8
CONSENT OF KAY W. SLAYDEN
In accordance with the requirements of Rule 438 promulgated by the
Securities and Exchange Commission under the Securities Act of 1933,
as amended (the "Securities Act"), I hereby consent to the references
to my name appearing in the Registration Statement on Form S-4 and in the
accompanying Joint Proxy Statement/Prospectus forming a part thereof relating
to the registration under the Securities Act of up to 3,565,287 shares of
common stock of Community Health Systems, Inc., par value $.01 per share, to
be issued to the stockholders of Hallmark Healthcare Corporation in connection
with the proposed merger to which such Registration Statement relates.
/s/ Kay W. Slayden
-------------------------------
Kay W. Slayden
August 23, 1994
<PAGE>
<TABLE>
<S> <C>
[LOGO] PROXY THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
COMMUNITY HEALTH SYSTEMS, INC. The undersigned hereby appoints E. Thomas Chaney and Linda K. Parsons,
3707 FM 1960 WEST, SUITE 500 or either of them, as Proxies, each with the power to appoint his or
HOUSTON, TEXAS 77068-5704 her substitute, to represent and to vote, as designated below, all the
- ---------------------------------------------- shares of common stock of Community Health Systems, Inc. held of record
by the undersigned on August 26, 1994, at the Special Meeting of
Stockholders to be held on October 5, 1994, or any adjournment thereof.
</TABLE>
1. To approve and adopt an Amended and Restated Agreement and Plan of Merger,
dated as of June 10, 1994 (the "Merger Agreement"), and the Merger
contemplated thereby.
/ / FOR / / AGAINST / / ABSTAIN
2. In their discretion, to vote upon such other business as may properly come
before the meeting or any adjournment thereof.
<PAGE>
This Proxy when properly executed, will be voted in the manner directed
herein by the undersigned stockholder. If no direction is made, this proxy will
be voted for Proposal 1 to approve the Merger Agreement and the Merger and the
Proxies, in their discretion, will vote on such other matters that may properly
come before the meeting.
__________________________________
Signature
__________________________________
Signature
(Please sign exactly as name
appears hereon. When shares are
held by joint tenants, both should
sign. When signing as attorney,
executor, administrator, trustee
or guardian, please give full
title as such. If a corporation,
please sign in full corporate name
by President or other authorized
officer. If a partnership, please
sign in partnership name by
authorized person.
Dated ______________________, 1994
PLEASE COMPLETE, SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED
ENVELOPE.
<PAGE>
PROXY
HALLMARK HEALTHCARE CORPORATION
25% PARTICIPATING CUMULATIVE CONVERTIBLE REDEEMABLE PREFERRED STOCK
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints James T. McAfee, Jr. and Robert M. Thornton,
Jr. as Proxies, each with the power to appoint a substitute, and hereby
authorizes either one or both of them to represent and to vote, as designated on
the reverse side, all the shares of 25% Participating Cumulative Convertible
Redeemable Preferred Stock of Hallmark Healthcare Corporation held of record by
the undersigned on August 26, 1994, at the Special Meeting of Stockholders to be
held on October 5, 1994 or any adjournment thereof.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
<PAGE>
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED
IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED
STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR PROPOSAL 1.
1. PROPOSAL TO APPROVE AND ADOPT THE AMENDED AND RESTATED AGREEMENT AND PLAN OF
MERGER (the "Merger Agreement") by and among Hallmark Healthcare Corporation
("Hallmark"), Community Acquisition Corp. ("Acquisition") and Community
Health Systems, Inc. ("CHS") pursuant to which (i) Hallmark would be merged
with and into Acquisition (or vice versa if mutually agreed by Hallmark and
CHS) and (ii) stockholders of Hallmark's 25% Participating Cumulative
Convertible Redeemable Preferred Stock, $5 par value per share, would receive
for each such share 5.4 shares of CHS's Common Stock, $.01 par value per
share (with cash paid in lieu of any resulting fractional shares), as
provided in the Merger Agreement and on the terms and conditions described in
the accompanying Joint Proxy Statement/Prospectus, receipt of which is
acknowledged.
<TABLE>
<S> <C> <C>
FOR AGAINST ABSTAIN
/ / / / / /
</TABLE>
2. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting or any adjournment thereof.
Please sign exactly as name appears to
the left. When shares are held by
joint tenants, both should sign. When
signing as attorney, executor,
administrator, trustee or guardian,
please give full title as such.
If a corporation, please sign in full
corporate name by President or other
authorized officer. If a partnership,
please sign in partnership name by
authorized person.
DATED: ________________________ , 1994
______________________________________
Signature
______________________________________
Signature if held jointly
"PLEASE MARK INSIDE BLUE BOXES SO THAT
DATA
PROCESSING EQUIPMENT WILL RECORD YOUR
VOTES"
<PAGE>
PROXY
HALLMARK HEALTHCARE CORPORATION
CLASS A COMMON STOCK
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints James T. McAfee, Jr. and Robert M. Thornton,
Jr. as Proxies, each with the power to appoint a substitute, and hereby
authorizes either one or both of them to represent and to vote, as designated on
the reverse side, all the shares of Class A Common Stock of Hallmark Healthcare
Corporation held of record by the undersigned on August 26, 1994, at the Special
Meeting of Stockholders to be held on October 5, 1994 or any adjournment
thereof.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
<PAGE>
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED
IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED
STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR PROPOSAL 1.
1. PROPOSAL TO APPROVE AND ADOPT THE AMENDED AND RESTATED AGREEMENT AND PLAN OF
MERGER (the "Merger Agreement") by and among Hallmark Healthcare Corporation
("Hallmark"), Community Acquisition Corp. ("Acquisition"), and Community
Health Systems, Inc. ("CHS") pursuant to which (i) Hallmark would be merged
with and into Acquisition (or vice versa if mutually agreed by Hallmark and
CHS) and (ii) stockholders of Hallmark's Class A Common Stock, $.05 par value
per share, would receive for each such share .97 of a share of CHS's Common
Stock, $.01 par value per share (with cash paid in lieu of any resulting
fractional shares), as provided in the Merger Agreement and on the terms and
conditions described in the accompanying Joint Proxy Statement/Prospectus,
receipt of which is acknowledged.
<TABLE>
<S> <C> <C>
FOR AGAINST ABSTAIN
/ / / / / /
</TABLE>
2. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting or any adjournment thereof.
Please sign exactly as name appears to
the left. When shares are held by
joint tenants, both should sign. When
signing as attorney, executor,
administrator, trustee or guardian,
please give full title as such.
If a corporation, please sign in full
corporate name by President or other
authorized officer. If a partnership,
please sign in partnership name by
authorized person.
DATED: ________________________ , 1994
______________________________________
Signature
______________________________________
Signature if held jointly
"PLEASE MARK INSIDE BLUE BOXES SO THAT
DATA
PROCESSING EQUIPMENT WILL RECORD YOUR
VOTES"
