<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 17, 1996
REGISTRATION NO. 333-3096
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
HARBORSIDE HEALTHCARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8051 04-3307188
(STATE OR OTHER (PRIMARY STANDARD (IRS
JURISDICTION OF INDUSTRIAL CLASSIFICATION EMPLOYERIDENTIFICATION
INCORPORATION OR CODE NUMBER) NO.)
ORGANIZATION)
470 ATLANTIC AVENUE
BOSTON, MASSACHUSETTS 02210 (617) 556-1515
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
STEPHEN L. GUILLARD
PRESIDENT AND CHIEF EXECUTIVE OFFICER HARBORSIDE HEALTHCARE CORPORATION 470
ATLANTIC AVENUE BOSTON, MASSACHUSETTS 02210 (617) 556-1515
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
JAMES M. DUBIN, ESQ. JAMES R. TANENBAUM, ESQ.
CARL L. REISNER, ESQ. STROOCK & STROOCK & LAVAN
PAUL, WEISS, RIFKIND, WHARTON & SEVEN HANOVER SQUARE
GARRISON NEW YORK, NEW YORK 10004
1285 AVENUE OF THE AMERICAS (212) 806-5400
NEW YORK, NEW YORK 10019
(212) 373-3000
----------------
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
----------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]
----------------
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, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE>
HARBORSIDE HEALTHCARE CORPORATION
CROSS-REFERENCE SHEET SHOWING THE LOCATION IN THE PROSPECTUS
OF THE INFORMATION REQUIRED BY THE ITEMS OF FORM S-1
<TABLE>
<CAPTION>
ITEM
NUMBER CAPTION LOCATION IN PROSPECTUS
------ ------- ----------------------
<S> <C> <C>
Item 1 Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus........................... Front Cover Page of Prospectus
Item 2 Inside Front and Outside Back Cover
Pages of Prospectus.................. Inside Front and Outside Back Cover
Pages of Prospectus
Item 3 Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges... Prospectus Summary; Risk Factors
Item 4 Use of Proceeds....................... Prospectus Summary; Use of Proceeds
Item 5 Determination of Offering Price....... Front Cover Page of Prospectus;
Underwriting
Item 6 Dilution.............................. Dilution
Item 7 Selling Security Holders.............. Not Applicable
Item 8 Plan of Distribution.................. Underwriting
Item 9 Description of Securities to be
Registered............................ Dividend Policy; Description of
Capital Stock
Item 10 Interests of Named Experts and
Counsel............................... Legal Matters; Experts
Item 11 Information with Respect to the
Registrant............................ Prospectus Summary; The Company;
Dividend Policy; Capitalization; Pro
Forma Combined Financial Information;
Selected Combined Financial and
Operating Data; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business; Management; The
Reorganization; Certain Transactions;
Stock Ownership of Directors,
Executive Officers and Principal
Holders; Shares Eligible For Future
Sale; Financial Statements
Item 12 Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.......................... Not Applicable
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 17, 1996
PROSPECTUS
3,600,000 SHARES
[LOGO]HARBORSIDE
HEALTHCARE CORPORATION
COMMON STOCK
-----------
All of the shares of Common Stock, par value $.01 per share (the "Common
Stock"), offered hereby are being sold by Harborside Healthcare Corporation
(the "Company"). Prior to this Offering (the "Offering"), there has been no
public market for the Common Stock. It is currently estimated that the initial
public offering price per share will be between $11.50 and $13.50. See
"Underwriting" for a discussion of the factors that will be considered in
determining the initial public offering price. It is anticipated that
approximately 500,000 shares of Common Stock will be offered outside the United
States to non-United States citizens or residents. At the request of the
Company, up to 180,000 shares of Common Stock offered hereby have been reserved
for sale to certain individuals, including directors and employees of the
Company and members of their families, at the initial public offering price set
forth above. The Common Stock has been approved for listing, subject to
official notice of issuance, on the New York Stock Exchange under the symbol
"HBR."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
-----------
THESE SECURITIES 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.
<TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................... $ $ $
- --------------------------------------------------------------------------------
Total(3).................... $ $ $
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $850,000 payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 540,000 shares of Common Stock on the same terms and
conditions as set forth above, solely to cover over-allotments, if any. If
the option is exercised in full, the "Price to Public," "Underwriting
Discounts and Commissions" and "Proceeds to Company" will be $ , $
and $ , respectively. See "Underwriting."
-----------
The shares of Common Stock are offered by the Underwriters when, as and if
delivered to and accepted by the Underwriters, and subject to various prior
conditions, including the right to withdraw, cancel or modify the Offering and
to reject any order in whole or in part. It is expected that delivery of share
certificates will be made in New York, New York, on or about , 1996.
NATWEST SECURITIES LIMITED DEAN WITTER REYNOLDS INC.
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE>
[Map of Eastern United States showing location of the Company's facilities,
regional offices and corporate office. Number of facilities licensed beds is
subtotaled by region.]
[MAP]
FOR UNITED KINGDOM PURCHASERS: The shares of Common Stock offered hereby may
not be offered or sold in the United Kingdom other than to persons whose
ordinary activities involve them in acquiring, holding, managing or disposing
of investments, whether as principal or agent (except in circumstances that do
not constitute an offer to the public within the meaning of the Public Offers
of Securities Regulations 1995 or the Financial Services Act 1986) and this
Prospectus may only be issued or passed on to any person in the United Kingdom
if that person is of a kind described in Article 11(3) of the Financial
Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995 or a
person to whom this Prospectus may otherwise lawfully be passed on.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified in
its entirety by reference to, the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in this
Prospectus. Prospective investors should carefully consider the information set
forth under the heading "Risk Factors." Unless otherwise indicated, the
information in this Prospectus assumes (i) the consummation of the transactions
relating to the formation of the Company described herein under the heading
"The Reorganization" (such transactions are hereinafter referred to as the
"Reorganization") and (ii) that the Underwriters' over-allotment option is not
exercised. References in this Prospectus to the "Company" or "Harborside
Healthcare" refer to Harborside Healthcare Corporation, its combined affiliates
and partnerships and their predecessors, or any of them, depending on the
context.
THE COMPANY
Harborside Healthcare provides high quality long-term care, subacute care and
other specialty medical services in four principal regions: the Southeast
(Florida), the Midwest (Ohio and Indiana), New England (New Hampshire) and the
Mid-Atlantic (New Jersey and Maryland). Within these regions, the Company
operates 26 licensed long-term care facilities (9 owned and 17 leased) with a
total of approximately 3,000 licensed beds. After giving effect to the pending
acquisition of four facilities in Ohio (the "Ohio Facilities"), the Company
will operate 30 long-term care facilities (13 owned and 17 leased) with a total
of 3,700 licensed beds. The Company provides traditional skilled nursing care,
a wide range of subacute care programs (such as orthopedic, cerebrovascular
accident ("CVA")/stroke, cardiac, pulmonary and wound care), as well as
distinct programs for the provision of care to Alzheimer's and hospice
patients. In addition, the Company provides certain rehabilitation therapy and
behavioral health services both at Company-operated and non-affiliated
facilities. The Company seeks to position itself as the long-term care provider
of choice to managed care and other private referral sources in its target
markets by achieving a strong regional presence and by providing a full range
of high quality, cost effective nursing and specialty medical services.
Since commencing operations in 1988, the Company has experienced significant
growth through strategic acquisitions in states it believes possess favorable
demographic and regulatory environments, as well as through the expansion of
subacute care and other specialty medical services provided at its long-term
care facilities. Since 1993 and after giving effect to the recent and pending
transactions, the Company increased its overall patient capacity by
approximately 1,550 licensed beds, or 72.2%. During the same period, the
Company also improved its overall quality mix (defined as net patient service
revenues derived from Medicare, commercial insurance and other private payors)
from 61.1% to 65.4% of net patient service revenues for the years ended
December 31, 1993 and 1995, respectively, primarily as a result of the
Company's rapid expansion of its subacute care and other specialty medical
services. For the three months ended March 31, 1996, during which the Company
began leasing six additional long-term care facilities in New Hampshire with
approximately 540 beds (the "New Hampshire Facilities"), the Company's quality
mix was 60.1% (31.8% private and other and 28.3% Medicare) and its average
occupancy rate was 91.3%. The Company believes that its quality mix and its
average occupancy rate have consistently been among the highest in the long-
term care industry.
The Company intends to continue to grow by (i) selectively acquiring
additional long-term care facilities in its existing and in new geographic
regions, (ii) expanding the range of subacute care provided, including the
addition of distinct COMPASS (COMprehensive Patient Active Subacute Systems)
subacute care units, (iii) expanding its existing rehabilitation therapy and
behavioral healthcare businesses, (iv) developing and acquiring new ancillary
service operations, such as institutional pharmacy, home healthcare and
infusion therapy and (v) expanding its Alzheimer's and hospice care programs.
In keeping with its growth strategy, starting in January 1996, the Company
began leasing the New Hampshire Facilities. Subsequently, the Company also
entered into an agreement to acquire the four Ohio Facilities with
approximately 700 licensed beds pursuant to a capital lease transaction (the
"Ohio Transaction"), thereby further strengthening its existing Midwest
regional presence.
3
<PAGE>
Collectively, the New Hampshire and Ohio transactions represented approximately
$54.3 million in combined total net revenues for the year ended December 31,
1995. Since 1994, the Company has also successfully implemented subacute care
programs at 24 of its long-term care facilities, added approximately 170
distinct COMPASS beds and 132 distinct Alzheimer's and hospice care beds and
expanded its rehabilitation therapy business to include 35 contracts with non-
affiliated long-term care facilities. The Company believes that its strategy of
concentrating its operations in selected geographic markets and complementing
its long-term care platform with a wide range of specialty medical and other
ancillary services will enable it to benefit from economies of scale and
improve its ability to penetrate regional managed care markets. Although the
Company is continuously discussing with third parties the possible acquisition
of additional long-term care facilities, the Company does not at this time have
any firm commitments to make any material acquisitions of long-term care
facilities other than the Ohio Transaction, nor has it identified any material,
specific ancillary business acquisitions.
The Company believes that it is favorably positioned to benefit from trends
impacting the healthcare industry, including favorable demographic shifts,
advances in medical technology and continuing public and private pressures to
contain growing healthcare costs. At the same time, government restrictions and
high construction and start-up costs are expected to continue to constrain the
supply of long-term care and subacute facilities. The Company further believes
that an increasingly complex operating environment is motivating smaller, less
efficient long-term care facility operators to combine with or sell to
established operators. Harborside Healthcare expects that such recent trends
toward industry consolidation will continue and will provide it with future
acquisition opportunities.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered............... 3,600,000 shares
Common Stock to be outstanding
after the Offering(1)............. 8,000,000 shares
Use of Proceeds.................... The Company will use the net proceeds from
the Offering as follows: (i) approximately
$26.7 million to repay mortgage
indebtedness, including a related
prepayment penalty (the "Debt Repayment");
(ii) $4.4 million to partially fund an
option to purchase the Ohio Facilities at
the end of the capital lease term; (iii)
approximately $960,000 for payments to
certain of the Company's key employees
under existing plans and arrangements; and
(iv) the remainder for general corporate
purposes, including working capital and
acquisitions. See "Use of Proceeds," and
"Management--Employment Agreements and
Change of Control Arrangements."
New York Stock Exchange Symbol..... "HBR"
</TABLE>
- --------
(1) Excludes 800,000 shares of Common Stock reserved for issuance pursuant to
the Company's stock and stock option plans, under which, upon consummation
of the Offering, options to purchase 420,000 shares at an exercise price
equal to the initial public offering price will be granted and options to
purchase 80,000 shares at an exercise price of $8.15 per share will be
granted in substitution for previously granted options to purchase
interests in one of the Company's predecessors. See "Management--Stock
Option Plans" and "Description of Capital Stock."
4
<PAGE>
SUMMARY COMBINED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT SHARE, PER SHARE AND OTHER DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------- -----------------------------------------------
1995 PRO FORMA AS ADJUSTED 1996 PRO FORMA AS ADJUSTED
----------------------------- -----------------------------
BEFORE OHIO INCLUDING OHIO BEFORE OHIO INCLUDING OHIO
1993 1994 1995 TRANSACTION(2) TRANSACTION(3) 1995 1996 TRANSACTION(4) TRANSACTION(5)
------- ------- -------- -------------- -------------- ------- ------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS
DATA(1):
Total net
revenues(6)...... $75,101 $86,376 $109,425 $ 131,381 $ 163,698 $23,777 $34,931 $ 34,931 $ 43,203
------- ------- -------- --------- --------- ------- ------- --------- ---------
Expenses:
Facility
operating........ 57,412 68,951 89,378 106,584 131,244 19,734 28,120 28,120 34,463
General and
administrative... 3,092 3,859 5,076 5,958 6,638 1,141 2,235 2,235 2,405
Service charges
paid to
affiliate........ 746 759 700 700 700 177 185 185 185
Depreciation and
amortization..... 4,304 4,311 4,385 2,155 3,350 1,043 539 539 838
Facility rent.... 525 1,037 1,907 9,882 9,882 392 2,545 2,545 2,545
------- ------- -------- --------- --------- ------- ------- --------- ---------
Total expenses.. 66,079 78,917 101,446 125,279 151,814 22,487 33,624 33,624 40,436
------- ------- -------- --------- --------- ------- ------- --------- ---------
Income from
operations....... 9,022 7,459 7,979 6,102 11,884 1,290 1,307 1,307 2,767
Interest expense,
net.............. (4,740) (4,609) (5,107) (1,343) (5,692) (1,264) (975) (295) (1,382)
Loss on
investment in
limited
partnership(7)... -- (448) (114) (114) (114) (81) (127) (127) (127)
Other, net....... (2,297) (2,028) (1,524) -- -- (185) -- -- --
------- ------- -------- --------- --------- ------- ------- --------- ---------
Net income
(loss)........... 1,985 374 1,234 4,645 6,078 (240) 205 885 1,258
Pro forma data:
Pro forma income
taxes(8)......... 774 146 481 1,812 2,371 (94) 80 345 491
------- ------- -------- --------- --------- ------- ------- --------- ---------
Pro forma net
income
(loss)(8)........ $ 1,211 $ 228 $ 753 $ 2,833 $ 3,707 $ (146) $ 125 $ 540 $ 767
======= ======= ======== ========= ========= ======= ======= ========= =========
Pro forma net
income per
share(8)......... $ 0.35 $ 0.46 $ 0.07 $ 0.10
Pro forma
weighted average
shares
outstanding...... 8,052,160 8,052,160 8,052,160 8,052,160
OTHER DATA(1):
Facilities (as of
end of period):
Owned(9)(10)..... 15 16 9 9 13 9 9 9 13
Leased(10)....... 2 3 11 17 17 10 17 17 17
------- ------- -------- --------- --------- ------- ------- --------- ---------
Total............ 17 19 20 26 30 19 26 26 30
Licensed beds (as
of end of
period):
Owned(9)(10)..... 1,860 1,976 1,028 1,028 1,720 1,022 1,028 1,028 1,720
Leased(10)....... 289 389 1,443 1,980 1,980 1,343 1,980 1,980 1,980
------- ------- -------- --------- --------- ------- ------- --------- ---------
Total............ 2,149 2,365 2,471 3,008 3,700 2,365 3,008 3,008 3,700
Average occupancy
rate(11)......... 92.5% 91.5% 91.5% 91.9% 92.2% 90.9% 91.3% 91.3% 91.8%
Sources of net
patient service
revenues(12):
Private and
other(13)........ 39.9% 37.1% 32.3% 33.0% 32.9% 34.2% 31.8% 31.8% 31.8%
Medicare......... 21.2% 24.9% 33.1% 27.4% 27.0% 30.6% 28.3% 28.3% 27.3%
Medicaid......... 38.9% 38.0% 34.6% 39.6% 40.1% 35.2% 39.9% 39.9% 40.9%
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
---------------------------------------
1996 PRO FORMA AS ADJUSTED
-------------------------------
BEFORE OHIO INCLUDING OHIO
1996 TRANSACTION(14) TRANSACTION(15)
------- --------------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA(1):
Cash and cash equivalents............... $10,000 $23,340 $17,840
Working capital......................... 12,395 26,516 17,414
Total assets............................ 63,378 76,646 134,185
Total debt.............................. 43,422 18,422 75,961
Stockholders' equity.................... 5,001 43,269 43,269
</TABLE>
- ------
(1) Harborside Healthcare has been created in anticipation of the Offering in
order to combine under its control the operations of the long-term care
facilities and ancillary businesses that are currently under the control
of The Berkshire Companies Limited Partnership ("Berkshire") and its
affiliates. See "The Reorganization." The Company's financial and
operating data above combine the historical results of these business
entities.
5
<PAGE>
(2) Gives effect to the consummation of (i) the lease of the New Hampshire
Facilities by the Company on January 1, 1996 (the "New Hampshire
Transaction"); (ii) the sale by Krupp Yield Plus Limited Partnership
("KYP") of seven long-term care facilities (the "Seven Facilities") to
Meditrust, a real estate investment trust ("Meditrust"), on December 31,
1995 and the subsequent distribution of $33,493,000 payable to the limited
partners of KYP (the "KYP Unitholders") as of December 31, 1995 in
connection with the liquidation of that partnership (the "Distribution");
(iii) the lease of the Seven Facilities by the Company on December 31,
1995 (the "1995 REIT Lease"); and (iv) the Offering and the application of
the net proceeds therefrom (assuming an initial public offering price of
$12.50 per share), as if such transactions had occurred on January 1,
1995.
(3) Gives effect to the transactions described in Note (2) above and the
pending Ohio Transaction as if such transactions had occurred on January
1, 1995. The Ohio Transaction will be accounted for as a capital lease as
a result of the bargain purchase option granted at the end of the lease
term. This accounting treatment will result in an increase in depreciation
and amortization expense of $1,195,000 and an increase in interest
expense, net, of $4,349,000. The Company expects to complete the Ohio
Transaction in the third quarter of 1996, subject to the satisfaction of
certain customary conditions, including the satisfactory completion of the
Company's due diligence review and receipt of regulatory and other
approvals.
(4) Gives effect to the consummation of the Offering and the application of
the net proceeds therefrom (assuming an initial public offering price of
$12.50 per share), as if the Offering had occurred on January 1, 1996.
(5) Gives effect to (i) the consummation of the Offering and the application
of the net proceeds therefrom (assuming an initial public offering price
of $12.50 per share), and (ii) the pending Ohio Transaction, as if the
transactions had occurred on January 1, 1996. The Ohio Transaction will
result in an increase in depreciation and amortization expense for the
period of $299,000 and an increase in interest expense, net, for the
period of $1,087,000.
(6) Total net revenues include net patient service revenues from the Company's
facilities and revenues from ancillary services provided at non-affiliated
long-term care facilities. Total net revenues exclude net patient service
revenues from the Larkin Chase Nursing and Restorative Center (the "Larkin
Chase Center"), but include management fees and rehabilitation therapy
service revenues from such facility. See "Business--Properties" and Note F
to the Company's audited combined financial statements included elsewhere
in this Prospectus.
(7) Represents the Company's allocation of operating results for the Larkin
Chase Center which the Company accounts for using the equity method. See
"Business--Properties" and Note F to the Company's audited combined
financial statements included elsewhere in this Prospectus.
(8) Prior to the Reorganization, the Company's predecessors operated under
common control but were not subject to Federal or state income taxation
and, accordingly, no provision for income taxes has been made in the
Company's audited combined financial statements. Following the
Reorganization, these predecessors will be subject to Federal and state
income taxes. Pro forma net income (loss) and pro forma net income per
share reflect the combined income tax expense that the Company's
predecessors would have incurred had they been subject to such taxation
during each of the periods indicated.
(9) Includes the Larkin Chase Center commencing in 1994.
(10) On December 31, 1995, the Seven Facilities were reclassified as "leased"
following the sale and concurrent 1995 REIT Lease. See Note (2) above. The
Ohio Facilities are classified as "owned" reflecting the treatment of the
Ohio Transaction as a capital lease.
(11) "Average occupancy rate" is computed by dividing the number of occupied
licensed beds by the total number of available licensed beds during each
of the periods indicated.
(12) Net patient service revenues exclude all management fees and all
rehabilitation therapy service revenues and the net patient service
revenues of the Larkin Chase Center. See "Business--Properties."
(13) Consists primarily of revenues derived from private pay individuals,
managed care organizations, HMOs, hospice programs and commercial
insurers.
(14) Gives effect to the consummation of the transactions described in Note (4)
above and a bonus payment in the form of Common Stock valued at $225,000
to Damian Dell'Anno, the Company's Executive Vice President of Operations,
under an existing plan which will be incurred as a result of the Offering
(the "Bonus Payment"), as if such transactions had occurred on March 31,
1996.
(15) Gives effect to the transactions described in Note (14) above and the Ohio
Transaction as if such transactions had occurred on March 31, 1996. The
Ohio Transaction will be accounted for as a capital lease. See Note (3)
above. This accounting treatment will result in an increase in total debt
of $57,539,000.
6
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves various
risks. Prior to investing in the Common Stock being offered hereby,
prospective investors should carefully consider the risk factors set forth
below, together with the other information set forth in this Prospectus.
RISK OF ADVERSE EFFECT OF HEALTHCARE REFORM
The Company is subject to extensive governmental healthcare regulation. In
addition, there are numerous legislative and executive initiatives at the
Federal and state levels for comprehensive reforms affecting the payment for
and availability of healthcare services. It is not clear at this time what
proposals, if any, will be adopted or, if adopted, what effect such proposals
would have on the Company's business. Aspects of certain of these proposals,
such as reductions in funding or payment rates of the Medicare and Medicaid
programs, potential changes in reimbursement regulations for rehabilitation
therapy services, interim measures to contain healthcare costs such as a
short-term freeze on prices charged by healthcare providers or changes in the
administration of Medicaid at the state level, could materially adversely
affect the Company. There can be no assurance that currently proposed or
future healthcare legislation or other changes in the administration or
interpretation of governmental healthcare programs will not have a material
adverse effect on the Company. In particular, changes to the Medicare
reimbursement program that have recently been proposed could materially
adversely affect the Company's revenues derived from ancillary services.
Concern about the potential effects of proposed and unanticipated future
reform measures has contributed to the volatility of securities prices of
companies in healthcare and related industries and may similarly affect the
price of the Common Stock. See "Business--Sources of Revenues" and "--
Governmental Regulation."
REIMBURSEMENT BY THIRD-PARTY PAYORS
The Company received approximately 32.9%, 27.0% and 40.1% of its net patient
revenues from private and other, Medicare and Medicaid patients, respectively,
for the year ended December 31, 1995, on a pro forma basis after giving effect
to the New Hampshire Transaction and the Ohio Transaction (31.8%, 27.3% and
40.9%, respectively, for the three months ended March 31, 1996, on a pro forma
basis after giving effect to the Ohio Transaction). The Company typically
receives higher payment rates for services to private pay and Medicare
patients than for equivalent services provided to patients eligible for
Medicaid. Any decline in the number of private or Medicare patients or
increases in the number of Medicaid patients could materially adversely affect
the Company.
Both governmental and other third-party payors, such as commercial insurers,
managed care organizations, HMOs and PPOs, have instituted cost containment
measures designed to limit payments made to long-term care providers. These
measures include the adoption of initial and continuing recipient eligibility
criteria, the adoption of coverage criteria and the establishment of payment
ceilings. Furthermore, governmental reimbursement programs are subject to
statutory and regulatory changes, retroactive rate adjustments, administrative
rulings and government funding restrictions. There can be no assurance that
payments under state or Federal governmental programs will remain at levels
comparable to present levels or will be sufficient to cover the costs
allocable to patients eligible for reimbursement pursuant to such programs. In
addition, there can be no assurance that the Company's facilities or the
services provided by the Company will continue to meet the requirements for
participation in such programs or that the states in which the Company
operates will continue to meet their Medicaid reimbursement obligations on a
timely basis, if at all. Any of the foregoing could materially adversely
affect the Company.
The Company is subject to periodic audits by the Medicare and Medicaid
programs, and the paying agencies for these programs have various rights and
remedies against the Company if they assert that the Company has overcharged
the programs or failed to comply with program requirements. Such paying
agencies could seek to require the Company to repay any overcharges or amounts
billed in violation of program requirements, or could make deductions from
future amounts due to the Company. Such agencies could also impose fines,
criminal penalties or program exclusions. Any such action could materially
adversely affect the Company. See "Business--Sources of Revenues" and "--
Government Regulation."
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ACQUISITIONS AND DEVELOPMENTS; DIFFICULTIES OF MANAGING RAPID EXPANSION
The Company has pursued an aggressive facility acquisition program and
expects that a significant portion of any future growth will result from the
acquisition of additional long-term care facilities. The Company's success
will depend in large part on its ability to identify suitable acquisition
opportunities and its ability to pursue and finance such opportunities, obtain
governmental licenses and approvals, consummate such acquisitions, implement
operating enhancements and effectively assimilate newly acquired facilities
into its operations. The Company may also seek to acquire ancillary service
businesses. There can be no assurance that the Company will be successful in
making such acquisitions or that such facilities or businesses will be
profitable following their acquisition. In addition, growth through
acquisition entails certain risks because the acquired facilities or
businesses could be subject to unanticipated business uncertainties or legal
liabilities.
The Company recently entered into an agreement to acquire the four Ohio
Facilities pursuant to a capital lease. The Ohio Transaction is anticipated to
close in the third quarter of 1996 and is subject to the satisfaction of
customary closing conditions, including the receipt of regulatory and other
approvals. However, there can be no assurance that such conditions will be met
or that the Ohio Transaction will be successfully completed during the third
quarter of 1996, if at all, or if completed, that the Ohio Facilities will be
successfully integrated into the Company's operations. The consummation of the
Offering is not conditioned on the closing of the Ohio Transaction.
The Company also intends to grow through the expansion of existing
facilities and the development of new facilities. Facility expansion and
development projects are subject to a number of contingencies that are common
to construction projects but over which the Company may have little control
and which may adversely affect project cost and completion time. These may
include shortages of supplies and materials, the inability of contractors and
subcontractors to perform under their contracts and changes in building,
zoning and other applicable laws and regulations or the interpretation of such
laws and regulations. The Company may also experience start-up costs and
delays during the period between the completion of a newly developed or
expanded facility and the full utilization of the facility's capacity, all of
which could adversely affect the Company's operating results.
The Company's rapid growth has placed a significant burden on the Company's
management and operating personnel. The Company's ability to manage its growth
effectively and assimilate the operations of acquired facilities or businesses
or newly expanded or developed facilities, will require it to continue to
attract, train, motivate, manage and retain key employees. If the Company is
unable to manage its growth effectively, it could be materially adversely
affected. See "Use of Proceeds," "Business--Growth Strategy," "--The Ohio
Transaction," and "--Selected Expansion Projects."
GEOGRAPHIC CONCENTRATION
The Company's operations are located in Florida, Ohio, Indiana, New
Hampshire, New Jersey and Maryland. A substantial portion of the Company's net
revenues are derived from its operations in Florida, Ohio and New Hampshire.
After giving effect to the New Hampshire Transaction, the Company derived
41.2%, 20.9% and 17.3%, respectively, of its net revenues from these three
states, for the year ended December 31, 1995 (32.9%, 36.9% and 13.8%,
respectively, after giving effect to the New Hampshire Transaction and the
Ohio Transaction). Downturns in local and regional economies could have a
material adverse effect on the Company. Any adverse changes in the regulatory
environment or to the reimbursement rates paid in the states in which the
Company operates, particularly in Florida, Ohio and New Hampshire, could also
have a material adverse affect on the Company. The state of New Hampshire
recently adopted legislation which froze Medicaid reimbursement rates and
called for a redesign of its Medicaid program which has had, and may continue
to have, an adverse effect on reimbursements paid under that state's Medicaid
program. For the year ended December 31, 1995, 63.6% of the net revenues from
the New Hampshire Facilities were derived from the New Hampshire Medicaid
program. See "Business--Sources of Revenues."
SIGNIFICANT DEBT AND LEASE OBLIGATIONS; ACCUMULATED DEFICIT
After giving effect to the Offering, the Debt Repayment and the Ohio
Transaction, which will be accounted for as a capital lease, the Company's
total combined indebtedness (including total short-term and long-term debt)
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as of March 31, 1996 would have been approximately $75.9 million, accounting
for approximately 63.7% of its total capitalization. After giving effect to
the Debt Repayment and the Ohio Transaction, the Company's total annual debt
service obligations in 1995 would have been approximately $7.2 million. All
nine of the facilities owned by the Company are currently subject to
mortgages, seven of which are subject to mortgages in favor of Meditrust for a
single loan. A default under this loan could therefore result in a loss to the
Company of all of its facilities mortgaged to Meditrust.
The Company is also the lessee under 17 long-term operating leases for long-
term care facilities with aggregate minimum annual base rent payments of $9.1
million in 1996 and which generally provide for annual rent increases and
payment by the Company of taxes, insurance and other obligations. Fourteen of
the Company's facilities are leased from Meditrust. Because these leases
contain cross-default and cross-collateralization provisions, a default by the
Company under one of these leases could adversely affect all 14 of the
facilities leased from Meditrust and result in a loss to the Company of such
facilities.
The degree to which the Company will be leveraged and subject to significant
lease obligations could have important consequences to the Company, including
limiting the Company's ability to obtain additional financing in the future
for working capital, capital expenditures, facility acquisitions, expansions
or developments or the refinancing of existing debt. In addition, a
substantial portion of the Company's cash flows from operations may be
dedicated to the payment of principal and interest on its indebtedness and
rent expense, thereby reducing the funds available to the Company for its
operations and to support its growth. Certain of the Company's current, and
possibly future, debt agreements and leases contain cross-collateral and
cross-default provisions and financial and other restrictive covenants,
including restrictions on the incurrence of additional indebtedness, the
creation of liens, the payment of dividends and the sale of assets. In
addition, certain of the Company's leases do not contain non-disturbance
provisions which could result in the loss of such facilities if the lessor
defaults on its mortgage. There can be no assurance that the Company's
operating results will be sufficient to support the payment of the Company's
indebtedness and rent expense. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources," "Business--Growth Strategy" and "--Properties."
As of December 31, 1995, and as of March 31, 1996, the Company had an
accumulated deficit of $6.2 million and $6.0 million, respectively, and a
stockholders' equity of $4.1 million and $5.0 million, respectively. See the
historical and pro forma combined financial statements and notes thereto
appearing elsewhere in this Prospectus.
GOVERNMENTAL REGULATION
The Federal government and all the states in which the Company operates
regulate various aspects of the Company's business. In addition to the
regulation of Medicare and Medicaid reimbursement rates, the development and
operation of long-term care facilities and the provision of long-term care
services are subject to Federal, state and local licensure and certification
laws that regulate, among other matters, the number of licensed beds, the
provision of services, the distribution of pharmaceuticals, equipment,
staffing (including professional licensing), operating policies and
procedures, fire prevention measures, environmental matters and compliance
with building and safety codes. The failure to maintain or renew any required
regulatory approvals or licenses could materially adversely affect the
Company's ability to provide its services and receive reimbursement of its
expenses. There can be no assurance that Federal, state or local governments
will not impose additional restrictions on the Company's activities which
could materially adversely affect the Company.
Long-term care facilities are subject to periodic inspection by governmental
authorities to assure compliance with the standards established for continued
licensing under state law and for certification under the Medicare or Medicaid
programs, including a review of billing practices and policies. Failure to
comply with these standards could result in the denial of reimbursement, the
imposition of fines, temporary suspension of admission of new patients,
suspension or decertification from the Medicare or Medicaid programs,
restrictions on the ability to
9
<PAGE>
acquire new facilities or expand existing facilities and, in extreme cases,
the revocation of a facility's license or closure of a facility. There can be
no assurance that the facilities currently owned or leased by the Company will
continue to meet the requirements for participation in the Medicare or
Medicaid programs nor can there be any assurance that the facilities acquired
or developed by the Company in the future will initially meet or continue to
meet these requirements.
Many states, including each state in which the Company currently operates,
control the supply of licensed long-term care beds through certificate of need
("CON") programs. Presently, state approval is required for the construction
of new long-term care facilities, the addition to or reduction of the number
of licensed beds and certain capital expenditures at such facilities. To the
extent that a CON or other similar approval is required for the acquisition or
construction of new facilities or the expansion of the number of licensed
beds, services or existing facilities, the Company could be adversely affected
by the failure or inability to obtain such approval, changes in the standards
applicable for such approval and possible delays and expenses associated with
obtaining such approval. In addition, in most states the reduction of the
number of licensed beds or the closure of a facility requires the approval of
the appropriate state regulatory agency and, if the Company were to seek to
reduce the number of licensed beds at, or to close, a facility, the Company
could be adversely affected by a failure to obtain or a delay in obtaining
such approval. Ohio has imposed a moratorium until June 30, 1997 on the
issuance of CONs for the construction of new long-term care facilities and the
addition of beds to existing facilities. Until recently, New Hampshire
permitted long-term care facilities to add up to 10 licensed beds without
obtaining a CON (referred to as "leeway beds") every two years as a matter of
right. Recent legislation in New Hampshire has eliminated the right to leeway
beds on existing CONs. These actions will restrict the Company's ability to
expand its facilities in Ohio and New Hampshire.
The Company is also subject to Federal and state laws that govern financial
and other arrangements between healthcare providers. Federal laws, as well as
the laws of certain states, prohibit direct or indirect payments or fee
splitting arrangements between healthcare providers that are designed to
induce or encourage the referral of patients to, or the recommendation of, a
particular provider for medical products and services. These laws include the
Federal "anti-kickback law" which prohibits, among other things, the offer,
payment, solicitation or receipt of any form of remuneration in return for the
referral of Medicare and Medicaid patients. A wide array of relationships and
arrangements, including ownership interests in a company by persons in a
position to refer patients and personal service agreements have, under certain
circumstances, been alleged to violate these provisions. A violation of the
Federal anti-kickback law could result in the loss of eligibility to
participate in Medicare or Medicaid, or in civil or criminal penalties for
individuals or entities. Violation of state anti-kickback laws could lead to
loss of licensure, significant fines and other penalties for individuals or
entities. See "Business--Sources of Revenues" and "--Governmental Regulation."
ENVIRONMENTAL AND OCCUPATIONAL HEALTH AND SAFETY MATTERS
The Company is subject to a wide variety of Federal, state and local
environmental and occupational health and safety laws and regulations. Among
the types of regulatory requirements faced by healthcare providers such as the
Company are: air and water quality control requirements, occupational health
and safety requirements, waste management requirements, specific regulatory
requirements applicable to asbestos, polychlorinated biphenyls and radioactive
substances, requirements for providing notice to employees and members of the
public about hazardous materials and wastes and certain other requirements. In
its role as owner and/or operator of properties or facilities, the Company may
be subject to liability for investigating and remediating any hazardous
substances that have come to be located on the property, or such substances
that may have migrated off of, or been emitted, discharged, leaked, escaped or
transported from, the property. The Company's operations may involve the
handling, use, storage, transportation, disposal and/or discharge of
hazardous, infectious, toxic, radioactive, flammable and other hazardous
materials, wastes, pollutants or contaminants. Such activities may harm
individuals, property or the environment; may interrupt operations and/or
increase their costs; may result in legal liability, damages, injunctions or
fines; may result in investigations, administrative proceedings, penalties or
other governmental agency actions; and may not be covered by insurance. The
cost of any required remediation or removal of hazardous or toxic substances
could be substantial and the liability of an owner or operator for any
property is generally not limited under applicable laws and could exceed the
property's value.
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Although the Company is not aware of any material liability under any
environmental or occupational health and safety laws, there can be no
assurance that the Company will not encounter such liabilities in the future,
which could have a material adverse effect on the Company. See "Business--
Governmental Regulation."
COMPETITION
The long-term care industry is highly competitive. The Company competes with
other providers of long-term care on the basis of the scope and quality of
services offered, the rate of positive medical outcomes, cost-effectiveness
and the reputation and appearance of its long-term care facilities. The
Company also competes in recruiting qualified healthcare personnel, in
acquiring and developing additional facilities and in obtaining CONs. The
Company's current and potential competitors include national, regional and
local long-term care providers, some of whom have substantially greater
financial and other resources and may be more established in their communities
than the Company. The Company also faces competition from assisted living
facility operators as well as providers of home healthcare. In addition,
certain competitors are operated by not-for-profit organizations and similar
businesses which can finance capital expenditures and acquisitions on a tax-
exempt basis or receive charitable contributions unavailable to the Company.
The Company expects competition for the acquisition and development of long-
term care facilities to increase in the future as the demand for long-term
care increases. Construction of new (or the expansion of existing) long-term
care facilities near the Company's facilities could adversely affect the
Company's business. State regulations generally require a CON before a new
long-term care facility can be constructed or additional licensed beds can be
added to existing facilities. CON legislation is in place in all states in
which the Company operates or expects to operate. The Company believes that
these regulations reduce the possibility of overbuilding and promote higher
utilization of existing facilities. However, a relaxation of CON requirements
could lead to an increase in competition. In addition, as cost containment
measures have reduced occupancy rates at acute care hospitals, a number of
these hospitals have converted portions of their facilities into subacute
units. Competition from acute care hospitals could adversely affect the
Company. The New Jersey legislature is currently considering legislation that
would permit acute care hospitals to offer subacute care services under
existing CONs issued to those providers. Ohio has imposed a moratorium on the
conversion of acute care hospital beds into long-term care beds. See
"Business--Governmental Regulation."
STAFFING AND LABOR COSTS
Staffing and labor costs represent the Company's largest expense. Labor
costs accounted for 59.9%, 56.4% and 52.0% of the Company's total facility
operating expenses in 1993, 1994 and 1995, respectively. The Company competes
with other healthcare providers in attracting and retaining qualified or
skilled personnel. The long-term care industry has, at times, experienced
shortages of qualified personnel. A shortage of nurses or other trained
personnel or general economic inflationary pressures may require the Company
to enhance its wage and benefits package in order to compete with other
employers. There can be no assurance that the Company's labor costs will not
increase or, if they do, that they can be matched by corresponding increases
in private-payor revenues or governmental reimbursement. Failure by the
Company to attract and retain qualified employees, to control its labor costs
or to match increases in its labor expenses with corresponding increases in
revenues could have a material adverse effect on the Company. Approximately
180 employees at two of the Company's facilities are covered by collective
bargaining agreements. Although the Company believes that it maintains good
working relationships with its employees and the unions that represent certain
of its employees, it cannot predict the impact of continued or increased union
representation or organizational activities on its future operations. See
"Business--Employees."
LIABILITY AND INSURANCE
The Company's business entails an inherent risk of liability. In recent
years, participants in the long-term care industry have been subject to
lawsuits alleging malpractice or related legal theories, many of which involve
large claims and significant legal costs. The Company expects that from time
to time it will be subject to such suits as a result of the nature of its
business. The Company currently maintains insurance policies in amounts and
with coverage and deductibles as it deems appropriate, based on the nature and
risks of its business, historical
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<PAGE>
experience and industry standards. There can be no assurance, however, that
claims in excess of the Company's insurance coverage or claims not covered by
insurance will not arise. A successful claim against the Company not covered
by, or in excess of, its insurance coverage could have a material adverse
effect on the Company. Claims against the Company, regardless of their merit
or eventual outcome, may also have a material adverse effect on the Company's
business and reputation, may lead to increased insurance premiums and may
require the Company's management to devote time and attention to matters
unrelated to the Company's business. The Company is self-insured (subject to
contributions by covered employees) with respect to most of the healthcare
benefits and for workers' compensation benefits made available to its
employees. The Company believes that it has adequate resources to cover any
self-insured claims and the Company maintains excess liability coverage to
protect it against unusual claims in these areas. However, there can be no
assurance that the Company will continue to have such resources available to
it or that substantial claims will not be made against the Company. See
"Business--Insurance."
CONCENTRATION OF OWNERSHIP
After giving effect to the Offering, Douglas Krupp, George Krupp and
Laurence Gerber (collectively, the "Principal Stockholders") will have
combined beneficial ownership of 50.9% (47.7% if the Underwriters' over-
allotment option is exercised in full) of the outstanding Common Stock. These
individuals, together with the Company's other Directors and Executive
Officers, will have combined beneficial ownership of 55.0% (51.5% if the
underwriters' over-allotment option is exercised in full) of the outstanding
Common Stock after giving effect to the Offering. Consequently, the Principal
Stockholders will be able to control the business, policies and affairs of the
Company, including the election of directors and major corporate transactions.
The concentration of beneficial ownership of the Company may have the effect
of delaying, deterring or preventing a change in control of the Company, may
discourage bids for the Common Stock at a premium over the market price of the
Common Stock or may otherwise adversely affect the market price of the Common
Stock. See "Stock Ownership of Directors, Executive Officers and Principal
Holders."
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Certificate of Incorporation and By-laws of the
Company, as well as Delaware corporate law, contain provisions that may be
deemed to have an anti-takeover effect and may delay, defer or prevent a
tender offer or takeover attempt that a stockholder of the Company might
consider in its best interest, including an attempt that might result in the
receipt of a premium over the then current market price for the shares held by
stockholders. Certain of these provisions allow the Company to issue, without
stockholder approval, preferred stock having rights senior to those of the
Common Stock. Other provisions impose various procedural and other
requirements that could make it more difficult for stockholders to effect
certain corporate actions. In addition, the Company's Board of Directors is
divided into three classes, each of which serves for a staggered three-year
term, which may make it more difficult for a third party to gain control of
the Board of Directors. In addition, the Company is subject to Section 203 of
the Delaware General Corporation Law which under certain circumstances can
make it more difficult for a third party to gain control of the Company
without approval of the Board of Directors. See "Description of Capital
Stock--Certain Provisions of the Company's Certificate of Incorporation and
By-laws," "--Classification of Directors" and "--Section 203 of the Delaware
Law."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market after the
Offering under Rule 144 ("Rule 144") of the Securities Act of 1933, as amended
(the "Securities Act") or otherwise or the perception that such sales could
occur may adversely affect prevailing market prices of the Common Stock. The
Company and all persons who were stockholders of the Company prior to the
Offering have agreed, for a period of 180 days after the date of this
Prospectus, not to sell, offer to sell, contract to sell, grant any option to
purchase or otherwise dispose of any shares of Common Stock or any securities
which are convertible into, or exchangeable or exercisable for, shares of
Common Stock, without the prior written consent of NatWest Securities Limited,
except for grants by the Company of options to purchase shares of Common Stock
described in this Prospectus, the exercise of such options and the issuance of
shares in connection with the Reorganization. See "The Reorganization" and
"Shares Eligible for Future Sale."
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IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of Common Stock in the Offering will experience immediate and
substantial dilution of $7.51 per share in pro forma net tangible book value
per share of Common Stock from the public offering price. See "Dilution."
ABSENCE OF PRIOR PUBLIC MARKET
Prior to the Offering, there has been no public market for the Common Stock
and there can be no assurance that an active trading market will develop or be
sustained following the Offering. There can be no assurance that market prices
for the Common Stock after the Offering will equal or exceed the initial
public offering price per share set forth on the cover page of this
Prospectus. The initial public offering price per share will be determined by
negotiation between the Company and the Underwriters based upon several
factors and may not be indicative of the market price for the Common Stock
following the Offering. The market price of the Common Stock could be subject
to significant fluctuations in response to various factors and events,
including the liquidity of the market for shares of Common Stock, changes in
the Company's historical and anticipated operating results, new statutes or
regulations or changes in interpretations of existing statutes and regulations
affecting the healthcare industry in general and the long-term care industry
in particular. In addition, the stock market in recent years has experienced
broad price and volume fluctuations that often have been unrelated or
disproportionate to the operating performance of individual companies. These
fluctuations, as well as general economic and market conditions, may adversely
affect the market price of the Common Stock. See "Underwriting."
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THE COMPANY
Harborside Healthcare provides high quality long-term care, subacute care
and other specialty medical services in four principal regions: the Southeast
(Florida), the Midwest (Ohio and Indiana), New England (New Hampshire) and the
Mid-Atlantic (New Jersey and Maryland). Within these regions, the Company
operates 26 licensed long-term care facilities (9 owned and 17 leased) with a
total of approximately 3,000 licensed beds. After giving effect to the pending
Ohio Transaction, the Company will operate 30 facilities (13 owned and 17
leased) with a total of 3,700 licensed beds. The Company provides traditional
skilled nursing care, a wide range of subacute care programs (such as
orthopedic, CVA/stroke, cardiac, pulmonary and wound care), as well as
distinct programs for the provision of care to Alzheimer's and hospice
patients. In addition, the Company provides certain rehabilitation therapy and
behavioral health services both at Company-operated and non-affiliated
facilities. The Company seeks to position itself as the long-term care
provider of choice to managed care and other private referral sources in its
target markets by achieving a strong regional presence and by providing a full
range of high quality, cost effective nursing and specialty medical services.
Harborside Healthcare was organized as a Delaware corporation in March 1996.
The predecessors of the Company have operated long-term care facilities since
1988. The Company's principal executive offices are located at 470 Atlantic
Avenue, Boston, Massachusetts 02210. Its telephone number is (617) 556-1515.
THE REORGANIZATION
The Company's operations have historically been conducted by various
corporations and limited partnerships controlled by Berkshire, certain of its
direct and indirect subsidiaries and affiliates, trusts for the benefit of the
families of George and Douglas Krupp, and Messrs. Guillard, Dell'Anno and
Gerber (collectively, the "Contributors"). The Company has entered into a
reorganization agreement (the "Reorganization Agreement") with the
Contributors, pursuant to which the Contributors will contribute their equity
interests in such entities to the Company in exchange for an aggregate of
4,400,000 shares of Common Stock immediately prior to completion of the
Offering (the "Reorganization"). Except as described herein under the caption
"Certain Transactions," the equity interests transferred to the Company by the
Contributors in connection with the Reorganization constitute all of the
equity interests relating to the business of the Company that were previously
owned directly or indirectly by the Contributors. Following the
Reorganization, the Company will operate as a holding company and conduct all
of its business through its wholly owned subsidiary corporations and limited
partnerships. The representations and warranties made by the Contributors in
the Reorganization Agreement are limited to their ownership of the equity
interests being conveyed, their personal tax liabilities and their
qualifications as accredited investors. In addition, upon consummation of the
Reorganization, the Company will indemnify the Contributors against all
obligations and liabilities of the Company's predecessors arising after such
consummation. In connection with the Reorganization Agreement, the Company has
agreed that if any of the Contributors pledge the shares of Common Stock
received in connection with the Reorganization to a financial institution, the
Company will enter into a registration rights agreement which provides,
subject to certain limitations, the pledgee a demand registration right, at
the Company's expense, in the event that it forecloses on the pledged shares.
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USE OF PROCEEDS
The net proceeds to the Company from the Offering, assuming an initial
public offering price of $12.50 per share (the midpoint of the range set forth
on the cover page of this Prospectus) and after deducting the estimated
Offering expenses, including underwriting discounts and commissions, are
estimated to be $41,000,000 ($47,277,500 if the Underwriters' over-allotment
option is exercised in full). See "Underwriting." The Company will use the net
proceeds of the Offering as follows: (i) approximately $26.7 million to repay
mortgage indebtedness, including a related prepayment penalty of approximately
$1.7 million, (ii) $4.4 million to partially fund an option to purchase the
Ohio Facilities at the end of the capital lease term, (iii) approximately
$960,000 for payments to certain of the Company's key employees under existing
plans and arrangements and (iv) the remainder for general corporate purposes,
including working capital and acquisitions. See "Management--Employment
Agreements and Change of Control Arrangements." Although the Company is
continuously discussing with third parties the possible acquisition of
additional long-term care facilities, the Company does not at this time have
any firm commitments to make any material acquisitions of long-term care
facilities other than the Ohio Transaction, nor has it identified any
material, specific ancillary business acquisitions. Pending their use, the net
proceeds from the Offering will be invested principally in short-term,
investment grade, interest-bearing securities.
The repayment of indebtedness will reduce the principal amount outstanding
under a mortgage loan in favor of Meditrust, of which $41.7 million aggregate
principal amount was outstanding as of April 30, 1996. The loan matures on
October 1, 2004 and bears interest at an annual rate of 10.65% plus additional
interest equal to 0.3% of the difference between the annual operating revenues
of the mortgaged facilities and actual revenues during the twelve-month base
period commencing on October 1, 1995. Such additional interest begins to
accrue on October 1, 1996. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
DIVIDEND POLICY
Since its formation in 1996, the Company has never declared or paid any
dividends on its Common Stock. The Company does not anticipate paying cash
dividends on its Common Stock for the foreseeable future and intends to retain
all of its earnings for reinvestment in the operations and activities of the
Company. Any future decision as to the payment of dividends will be at the
discretion of the Company's Board of Directors. The Company's ability to pay
dividends is also limited by the terms of current (and possibly future) lease
and financing arrangements that restrict, among other things, the ability of
the Company's combined affiliates to distribute funds to the Company.
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DILUTION
At March 31, 1996, the pro forma net tangible book value of the Company
after giving effect to the Reorganization, but prior to the Offering would
have been approximately $1.1 million, or $0.25 per share. Pro forma net
tangible book value per share of Common Stock is determined by dividing the
number of shares of Common Stock outstanding after giving effect to the
Reorganization into the pro forma net tangible book value of the Company
(total tangible assets less total liabilities) but without giving effect to
the possible exercise of stock options which have been or will be granted by
the Company prior to the consummation of the Offering under its stock option
plans. After giving effect to the Offering at an assumed initial public
offering price of $12.50 per share (the midpoint of the range set forth on the
cover page of this Prospectus) the pro forma net tangible book value at such
date would have been $39.9 million, or $4.99 per share, representing an
immediate increase in pro forma net tangible book value of $4.74 per share to
existing stockholders. Accordingly, purchasers of the Common Stock in the
Offering would sustain an immediate and substantial dilution of $7.51 per
share.
The following table illustrates such per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price............................. $12.50
Pro forma net tangible book value as of March 31, 1996.......... $0.25
Increase in pro forma net tangible book value attributable to
the Offering(1)................................................ 4.74
-----
Pro forma net tangible book value after the Offering(2)........... 4.99
------
Dilution to new investors in the Offering(2)(3)................... $ 7.51
======
</TABLE>
- --------
(1) After deduction of underwriting discounts and commissions and estimated
Offering expenses.
(2) If the Underwriters' over-allotment option were exercised in full, the pro
forma net tangible book value per share after the Offering would be $5.41
and the dilution per share to new public investors would be $7.09.
(3) Dilution is determined by subtracting the pro forma net tangible book
value per share after completion of the Offering from the assumed initial
public offering price per share of the Common Stock.
The following table summarizes, on a pro forma basis as of March 31, 1996,
after giving effect to the Reorganization and the Offering, the differences
between the holders of Common Stock prior to the Offering, as a group, and the
new investors in the Common Stock offered hereby, with respect to the number
of shares purchased, the total consideration paid and the average price paid
per share, based upon an assumed initial public offering price of $12.50 per
share:
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION
---------------------------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- --------------------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockhold-
ers(2)................. 4,400,000 55.0% $11,263,000(/3/) 20.0% $ 2.56
New investors........... 3,600,000 45.0 45,000,000 80.0 $12.50
----------- ------- ----------- -----
Total................. 8,000,000 100.0% $56,263,000 100.0%
=========== ======= =========== =====
</TABLE>
- --------
(1) If the Underwriters' over-allotment option is exercised in full, the
number of shares of Common Stock held by existing stockholders would be
reduced to 51.5% of the total number of shares to be outstanding after the
Offering and the number of shares of Common Stock held by new investors
would be increased to 4,140,000 or 48.5% of the total number of shares of
Common Stock to be outstanding after the Offering.
(2) Excludes 800,000 shares of Common Stock reserved for issuance pursuant to
the Company's stock and stock option plans, under which, upon consummation
of the Offering, options to purchase 420,000 shares at an exercise price
equal to the initial public offering price will be granted and options to
purchase 80,000 shares at an exercise price of $8.15 per share will be
granted in substitution for previously granted options to purchase
interests in one of the Company's predecessors (See Note M to the Combined
Financial Statements). See "Management--Stock Option Plans," "--Directors
Retainer Fee Plan" and "Description of Capital Stock."
(3) Total consideration paid by existing stockholders is equal to the sum of
(i) cash paid for common stock of and partnership interests in the
Company's predecessors , net of dividends and distributions paid back to
these stockholders and (ii) the Bonus Payment of $225,000.
16
<PAGE>
CAPITALIZATION
The following table sets forth at March 31, 1996 (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the
Company after giving effect to the Bonus Payment as adjusted to reflect the
Offering at an assumed initial public offering price of $12.50 per share (the
midpoint of the range set forth on the cover page of this Prospectus) and the
application of the net proceeds therefrom and (iii) the pro forma
capitalization of the Company as further adjusted after giving effect to the
Ohio Transaction. This table should be read in conjunction with "Use of
Proceeds" and the historical and pro forma combined financial statements and
notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT MARCH 31, 1996
----------------------------------------
PRO FORMA AS ADJUSTED
------------------------------
BEFORE OHIO INCLUDING OHIO
ACTUAL(1) TRANSACTION TRANSACTION(2)
--------- ----------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt, less current por-
tion............................. $42,974 $18,255 $ 72,192
------- ------- --------
Stockholders' equity:
Preferred Stock, par value $.01
per share:
1,000,000 shares authorized; no
shares issued or outstanding ac-
tual, pro forma as adjusted be-
fore Ohio Transaction or pro
forma as adjusted including Ohio
Transaction..................... -- -- --
Common Stock, par value $.01 per
share:
30,000,000 shares authorized;
4,400,000 shares issued and
outstanding actual; 8,000,000
shares issued and outstanding
pro forma as adjusted before
Ohio Transaction and pro forma
as adjusted including Ohio
Transaction(3).................. 44 80 80
Additional paid-in capital........ 10,994 52,183 (/4/) 52,183 (/4/)
Accumulated deficit............... (6,037) (8,994)(/5/) (8,994)(/5/)
------- ------- --------
Total stockholders' equity........ 5,001 43,269 43,269
------- ------- --------
Total capitalization.............. $47,975 $61,524 $115,461
======= ======= ========
</TABLE>
- --------
(1) Gives effect to the Reorganization.
(2) The Ohio Facilities will be acquired pursuant to a lease financing
accounted for as a capital lease. The capitalization of the Company has
increased by $53,937,000 to record this transaction.
(3) Excludes 800,000 shares of Common Stock reserved for issuance pursuant to
the Company's stock and stock option plans, under which, upon consummation
of the Offering, options to purchase 420,000 shares at an exercise price
equal to the initial public offering price will be granted and options to
purchase 80,000 shares at an exercise price of $8.15 per share will be
granted in substitution for previously granted options to purchase
interests in one of the Company's predecessors. See "Management--Stock
Option Plans" and "Description of Capital Stock."
(4) Gives effect to the Offering and the Bonus Payment.
(5) Gives effect to payment of a $1.7 million debt prepayment penalty,
$1,185,000 in bonus payments to certain key employees in connection with
the Offering (of which $225,000 was paid in the form of Common Stock
pursuant to the Bonus Payment), the write-off of $572,000 of deferred
financing costs and the recognition of a deferred tax asset of $500,000.
See "Management--Employment Agreements and Change of Control Arrangements"
and "Certain Transactions."
17
<PAGE>
PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined balance sheet of the Company at
March 31, 1996 has been prepared to reflect (i) in the case of the "Pro Forma
As Adjusted Before Ohio Transaction" column, the consummation of the Offering
and the application of the net proceeds therefrom and (ii) in the case of the
"Pro Forma As Adjusted Including Ohio Transaction" column, the consummation of
the Offering and the application of the net proceeds therefrom and the
consummation of the Ohio Transaction. The Ohio Transaction is anticipated to
be completed in the third quarter of 1996, although there can be no assurance
that the Ohio Transaction will be completed during such time, if at all. See
"The Ohio Transaction." The unaudited pro forma combined balance sheet
reflects the pro forma transactions as if they had occurred on March 31, 1996.
The following unaudited pro forma combined statement of operations for the
year ended December 31, 1995 has been prepared to reflect (i) in the case of
the "Pro Forma Before Ohio Transaction" column, the consummation of the New
Hampshire Transaction, the sale by KYP of the Seven Facilities on December 31,
1995, the Distribution and the 1995 REIT Lease, (ii) in the case of the "Pro
Forma As Adjusted Before Ohio Transaction" column, the consummation of the New
Hampshire Transaction, the sale by KYP of the Seven Facilities, the
Distribution, the 1995 REIT Lease, and the Offering and the application of the
net proceeds therefrom and (iii) in the case of the "Pro Forma As Adjusted
Including Ohio Transaction" column, the consummation of the New Hampshire
Transaction, the sale by KYP of the Seven Facilities, the Distribution, the
1995 REIT Lease, the Offering and the application of the net proceeds
therefrom and the Ohio Transaction. Non-recurring charges that result directly
from (i) the Offering, (ii) the subscription by Stephen Guillard, the
Company's Chairman and Chief Executive Officer, on December 31, 1995, for the
purchase of an equity interest in certain of the Company's predecessors for a
purchase price of $438,000 (the "Executive Equity Purchase") and (iii) the
purchase of equity interests in certain of the Company's predecessors by
Laurence Gerber, one of the Company's Directors, on December 31, 1995, for an
aggregate purchase price of $365,000 (the "Director Equity Purchase") are not
included in the unaudited pro forma combined statement of operations. The
unaudited pro forma combined statement of operations for the year ended
December 31, 1995 reflects the pro forma transactions as if they had occurred
on January 1, 1995.
The following unaudited pro forma combined statement of operations for the
three months ended March 31, 1996 has been prepared to reflect (i) in the case
of the "Pro Forma As Adjusted Before Ohio Transaction" column, the
consummation of the Offering and the application of the net proceeds therefrom
and (ii) in the case of the "Pro Forma As Adjusted Including Ohio Transaction"
column, the consummation of the Offering and the application of the net
proceeds therefrom and the Ohio Transaction. The unaudited pro forma combined
statement of operations for the three months ended March 31, 1996 reflects the
pro forma transactions as if they had occurred on January 1, 1996.
The following unaudited pro forma combined financial statements have been
prepared by the Company based on the historical financial statements of the
Company, the New Hampshire Facilities and the Ohio Facilities included
elsewhere in this Prospectus, giving effect to these transactions and the
assumptions and adjustments described in the accompanying notes.
The following unaudited pro forma combined financial statements are not
indicative of the actual results that would have been achieved if the pro
forma transactions had actually been completed as of the dates indicated, or
which may be realized in the future. The unaudited pro forma combined
financial statements should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical combined financial statements of the Company, the prior owner
of the New Hampshire Facilities and the owners of the Ohio Facilities and the
related notes thereto included elsewhere in this Prospectus.
18
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HARBORSIDE AS ADJUSTED AS ADJUSTED
HEALTHCARE OFFERING BEFORE OHIO OHIO INCLUDING
CORPORATION ADJUSTMENTS OHIO FACILITIES TRANSACTION OHIO
(A) (B) TRANSACTION (C) ADJUSTMENTS TRANSACTION
----------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash
equivalents............ $10,000 $13,340 $23,340 $ 8,187 $ (8,187)(D) $ 17,840
(5,500)(E)
Accounts receivable,
net.................... 11,354 11,354 1,679 (1,679)(D) 11,354
Prepaid expenses and
other.................. 1,935 1,935 190 (190)(D) 1,935
Demand note due from
limited partnership.... 1,284 1,284 -- 1,284
Deferred income taxes... -- 500 500 -- 500
------- ------- ------- -------- -------- ---------
Total current assets... 24,573 13,840 38,413 10,056 (15,556) 32,913
Restricted cash......... 4,331 4,331 1,112 (1,112)(D) 4,331
Investment in limited
partnership............ 395 395 -- 395
Property and equipment,
net.................... 30,185 30,185 15,331 (15,331)(D) 93,224
63,039 (E)
Intangible assets, net.. 3,894 (572) 3,322 554 (554)(D) 3,322
------- ------- ------- -------- -------- ---------
Total assets........... $63,378 $13,268 $76,646 $ 27,053 $ 30,486 $ 134,185
======= ======= ======= ======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of
long-term debt......... $ 448 $ (281) $ 167 $ 317 $ (317)(D) $ 3,769
3,602 (E)
Accounts payable........ 3,762 3,762 1,556 (1,556)(D) 3,762
Employee compensation
and benefits........... 6,640 6,640 1,277 (1,277)(D) 6,640
Other accrued
liabilities............ 892 892 510 (510)(D) 892
Advances from
affiliates............. -- -- 1,227 (1,227)(D) --
Accrued interest........ 67 67 131 (131)(D) 67
Current portion of
deferred income........ 369 369 -- 369
------- ------- ------- -------- -------- ---------
Total current
liabilities........... 12,178 (281) 11,897 5,018 (1,416) 15,499
Long-term portion of
deferred income........ 3,225 3,225 3,225
Loan payable--
affiliate.............. -- -- 407 (407)(D) --
Long-term debt.......... 42,974 (24,719) 18,255 18,172 (18,172)(D) 72,192
53,937 (E)
------- ------- ------- -------- -------- ---------
Total liabilities...... 58,377 (25,000) 33,377 23,597 33,942 90,916
------- ------- ------- -------- -------- ---------
Stockholders' equity:
Common stock............ 44 36 80 -- 80
Additional paid-in
capital................ 10,994 41,189 52,183 -- 52,183
Accumulated deficit..... (6,037) (2,957) (8,994) -- (8,994)
Partners' equity........ -- -- 3,456 (3,456)(D) --
------- ------- ------- -------- -------- ---------
Total stockholders'
equity................ 5,001 38,268 43,269 3,456 (3,456) 43,269
------- ------- ------- -------- -------- ---------
Total liabilities and
stockholders'
equity.............. $63,378 $13,268 $76,646 $ 27,053 $ 30,486 $ 134,185
======= ======= ======= ======== ======== =========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Balance Sheet as of
March 31, 1996
19
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 1996
A. Historical combined balance sheet of the Company as of March 31, 1996 after
giving effect to the Reorganization.
B. To record the effects of the sale of 3,600,000 shares of Common Stock sold
by the Company hereby and the receipt of the estimated net proceeds of
$41,000,000, based on an assumed initial public offering price of $12.50
per share and estimated underwriting discounts and commissions and Offering
expenses of $4,000,000. Proceeds from the sale in the amount of $25,000,000
will be used to repay long-term debt and $1,700,000 will be used to pay a
related prepayment penalty. The prepayment penalty, the write-off of
$572,000 of deferred financing costs associated with the retired debt, the
establishment of a deferred tax asset of $500,000 and bonus payments
totaling approximately $1,185,000 (of which $225,000 was paid in the form
of Common Stock pursuant to the Bonus Payment) to a group of key employees
of the Company and incurred as a result of the Offering have been reflected
as an aggregate adjustment of $2,957,000 to the Company's accumulated
deficit.
C. Historical combined balance sheet of the Ohio Facilities as of March 31,
1996. The Company anticipates that the Ohio Transaction will be consummated
in the third quarter of 1996 and has categorized the completion of this
acquisition as probable.
D. Represents the elimination of all the historical combined balances of the
Ohio Facilities as of March 31, 1996. The Company has recorded the lease of
the Ohio Facilities as a capital lease as a result of the bargain purchase
option at the end of the lease term. However, the Company will not purchase
the eliminated assets or assume the eliminated liabilities in connection
with such lease.
E. Represents the recording of the Ohio Facilities as a capital lease with a
capitalized asset value of $63,039,000, including closing costs of
$2,100,000. The lease agreement requires an up-front payment of $5,000,000
for an option to purchase the Ohio Facilities at the end of the lease term.
Of such $5,000,000, $600,000 was previously paid and $4,400,000 will be
paid from the proceeds of the Offering. See "Use of Proceeds." The capital
lease obligation has been apportioned between current liabilities of
$3,602,000 and long-term debt of $53,937,000. The $5,000,000 purchase
option price and closing costs of $500,000 have been recorded as a
reduction of cash and cash equivalents.
20
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
HARBORSIDE NEW NEW HAMPSHIRE PRO FORMA PRO FORMA AS
HEALTHCARE HAMPSHIRE AND OTHER BEFORE OFFERING ADJUSTED OHIO OHIO
CORPORATION FACILITIES PRO FORMA OHIO ADJUSTMENTS BEFORE OHIO FACILITIES TRANSACTION
(A) (B) ADJUSTMENTS TRANSACTION (C) TRANSACTION (D) ADJUSTMENTS
----------- ---------- ------------- ----------- ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total net
revenues........ $109,425 $21,956 $131,381 $ 131,381 $32,317
-------- ------- -------- --------- -------
Expenses:
Facility
operating...... 89,378 16,871 $ 311 (E) 106,584 106,584 24,660
277 (E)
(253)(F)
General and
administrative.. 5,076 -- 882 (G) 5,958 5,958 -- $ 680 (O)
Management
fees........... -- 1,832 (1,832)(H) -- -- 2,664 (2,664)(P)
Service charges
paid to
affiliate...... 700 -- 700 700 --
Depreciation and
amortization... 4,385 273 (273)(H) 2,155 2,155 882 (882)(P)
106 (I) 1,195 (Q)
(2,430)(F)
94 (J)
Facility rent... 1,907 2,382 (2,382)(H) 9,882 9,882 --
5,114 (J)
2,861 (K)
-------- ------- ------ -------- --------- ------- -------
Total expenses... 101,446 21,358 2,475 125,279 125,279 28,206 (1,671)
-------- ------- ------ -------- --------- ------- -------
Income from
operations...... 7,979 598 (2,475) 6,102 6,102 4,111 1,671
Other:
Interest
expense, net... (5,107) (160) 998 (F) (4,070) $2,727 (1,343) (1,186) 1,626 (P)
199 (H) (4,349)(Q)
(440)(R)
Loss on
investment in
limited
partnership.... (114) -- (114) (114) --
Gain on sale of
facilities,
net............ 4,869 -- (4,869)(L) -- -- --
Minority
interest in net
income of
combined
affiliates..... (6,393) -- 6,393 (L) -- -- --
-------- ------- ------ -------- ------ --------- ------- -------
Income before
income taxes.... 1,234 438 246 1,918 2,727 4,645 2,925 (1,492)
Income taxes..... -- 27 (27)(M) -- -- --
Pro forma income
taxes........... 481 -- 267 (N) 748 1,064(N) 1,812 -- 559 (N)
-------- ------- ------ -------- ------ --------- ------- -------
Pro forma net
income.......... $ 753 $ 411 $ 6 $ 1,170 $1,663 $ 2,833 $ 2,925 $(2,051)
======== ======= ====== ======== ====== ========= ======= =======
Pro forma net
income per
common share.... $ 0.35
Pro forma
weighted average
number of shares
outstanding..... 8,052,160
<CAPTION>
PRO FORMA
AS ADJUSTED
INCLUDING OHIO
TRANSACTION
--------------
<S> <C>
Total net
revenues........ $ 163,698
--------------
Expenses:
Facility
operating...... 131,244
General and
administrative.. 6,638
Management
fees........... --
Service charges
paid to
affiliate...... 700
Depreciation and
amortization... 3,350
Facility rent... 9,882
--------------
Total expenses... 151,814
--------------
Income from
operations...... 11,884
Other:
Interest
expense, net... (5,692)
Loss on
investment in
limited
partnership.... (114)
Gain on sale of
facilities,
net............ --
Minority
interest in net
income of
combined
affiliates..... --
--------------
Income before
income taxes.... 6,078
Income taxes..... --
Pro forma income
taxes........... 2,371
--------------
Pro forma net
income.......... $ 3,707
==============
Pro forma net
income per
common share.... $ 0.46
Pro forma
weighted average
number of shares
outstanding..... 8,052,160
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Statement of
Operationsfor the year ended December 31, 1995
21
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
A. Historical audited combined statement of operations of the Company for the
year ended December 31, 1995.
B. Historical audited combined statement of operations of the New Hampshire
Facilities for the year ended December 31, 1995.
C. To record the effects of the sale of 3,600,000 shares of Common Stock sold
by the Company hereby and the receipt of the estimated net proceeds of
$41,000,000, based on an assumed initial public offering price of $12.50
per share and estimated underwriting discounts and commissions and Offering
expenses of $4,000,000. Proceeds from the sale in the amount of $25,000,000
will be used to repay long-term debt and $1,700,000 will be used to pay a
related prepayment penalty. If the proposed debt repayment had occurred on
January 1, 1995, the Company's interest expense, including amortization of
deferred financing costs, would have been reduced by $2,727,000. See "Use
of Proceeds."
The following are non-recurring charges resulting from the Offering and are
therefore not reflected in the pro forma combined statement of operations:
the prepayment penalty of $1,700,000, the write-off of $572,000 of deferred
financing costs associated with the retired debt, the establishment of a
deferred tax asset of $500,000 and the making of bonus payments totaling
approximately $1,185,000 (of which $225,000 was paid in the form of Common
Stock pursuant to the Bonus Payment) to a group of key employees of the
Company and incurred as a result of the Offering. The related tax effect of
these non-recurring charges at an effective rate of 39% would have been a
reduction of income tax expense of $1,348,000.
D. Historical audited combined statement of operations of the Ohio Facilities
for the year ended December 31, 1995. The Company anticipates that the Ohio
Transaction will be consummated in the third quarter of 1996 and has
categorized the completion of this acquisition as probable.
E. Represents $311,000 in real estate taxes and $277,000 of purchased services
relating to the New Hampshire Facilities which would have been recorded by
the Company if the New Hampshire Transaction had occurred on January 1,
1995.
F. Represents the elimination of historical amounts recorded with respect to
the Seven Facilities for letter of credit fees of $253,000, depreciation
and amortization expense of $2,430,000, and interest expense of $998,000 as
if the sale of the Seven Facilities and the subsequent Distribution had
occurred on January 1, 1995.
G. Represents $882,000 of historical general and administrative expenses
associated with the operation of the New Hampshire Facilities as if the New
Hampshire Transaction had occurred on January 1, 1995. These costs are
provided in lieu of management fees paid to the seller which included
predecessor owner's compensation and profit.
H. Represents the elimination of the historical combined amounts recorded by
the New Hampshire Facilities for management fee expenses of $1,832,000,
depreciation and amortization expenses of $273,000, rent expense of
$2,382,000 and interest expense of $199,000.
I. Represents the amortization of deferred financing costs in the amount of
$106,000 relating to the New Hampshire Transaction.
J. Represents the amortization of deferred financing costs in the amount of
$94,000 and rent expense of $5,114,000 (recorded on a straight-line basis
over the initial lease term of ten years) which the Company would have
recorded if the sale of the Seven Facilities and the subsequent
Distribution had occurred on January 1, 1995.
K. Represents rent expense of $2,861,000 (recorded on a straight-line basis
over the initial lease term of ten years), net of amortization of deferred
income, that the Company would have incurred if the New Hampshire
Transaction had occurred on January 1, 1995.
22
<PAGE>
L. Represents the elimination of the "gain on sale of facilities, net" of
$4,869,000, and "minority interest in net income of combined affiliates" of
$6,393,000 as if the sale of the Seven Facilities and the subsequent
Distribution had occurred on January 1, 1995.
M. Represents the elimination of the historical combined amount recorded by
the New Hampshire Facilities for state income taxes of $27,000.
N. Represents adjustments to the Federal and state provision for income taxes
which the Company would have recorded if the Company had historically been
subject to taxation, based on an effective income tax rate of 39.0%.
O. Represents $680,000 of historical general and administrative expenses
associated with the operation of the Ohio Facilities as if the Ohio
Transaction had occurred on January 1, 1995. These costs are provided in
lieu of management fees paid to the seller which included predecessor
owners' compensation, related costs and profit.
P. Represents the elimination of the historical combined amounts recorded by
the Ohio Facilities for management fee expenses of $2,664,000, depreciation
and amortization of $882,000, and interest expense of $1,626,000.
Q. Represents depreciation and amortization expense of $1,195,000 (recorded on
a straight-line basis over the estimated useful life of 40 years) and
interest expense of $4,349,000 (recorded at an interest rate of 8%) which
the Company would have recorded if the Ohio Transaction had occurred on
January 1, 1995.
R. Represent the elimination of the historical combined amount recorded by the
Ohio Facilities for interest income of $440,000.
23
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
HARBORSIDE PRO FORMA AS PRO FORMA
HEALTHCARE OFFERING ADJUSTED OHIO OHIO AS ADJUSTED
CORPORATION ADJUSTMENTS BEFORE OHIO FACILITIES TRANSACTION INCLUDING OHIO
(A) (B) TRANSACTION (C) ADJUSTMENTS TRANSACTION
----------- ----------- ------------ ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Total net revenues...... $34,931 $ 34,931 $8,272 $ 43,203
------- --------- ------ ---------
Expenses:
Facility operating..... 28,120 28,120 6,343 34,463
General and
administrative........ 2,235 2,235 -- $ 170 (E) 2,405
Management fees........ -- -- 742 (742)(F) --
Service charges paid to
affiliate............. 185 185 -- 185
Depreciation and 539 539 203 (203)(F) 838
amortization.......... 299 (G)
Facility rent.......... 2,545 2,545 -- 2,545
------- --------- ------ ------- ---------
Total expenses.......... 33,624 33,624 7,288 (476) 40,436
------- --------- ------ ------- ---------
Income from operations.. 1,307 1,307 984 476 2,767
Other:
Interest expense, net.. (975) $680 (295) (289) 289 (F) (1,382)
(1,087)(G)
Loss on investment in
limited partnership... (127) (127) -- (127)
------- ---- --------- ------ ------- ---------
Income before income
taxes.................. 205 680 885 695 (322) 1,258
Pro forma income taxes.. 80(D) 265(D) 345 -- 146 (D) 491
------- ---- --------- ------ ------- ---------
Pro forma net income.... $ 125 $415 $ 540 $ 695 $ (468) $ 767
======= ==== ========= ====== ======= =========
Pro forma net income per
common share........... $ 0.07 $ 0.10
Pro forma weighted
average number of
shares outstanding..... 8,052,160 8,052,160
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Statement of Operations
for the three months ended March 31, 1996
24
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
A. Historical unaudited combined statement of operations of the Company for
the three months ended March 31, 1996.
B. To record the effects of the sale of 3,600,000 shares of Common Stock sold
by the Company hereby and the receipt of the estimated net proceeds of
$41,000,000, based on an assumed initial public offering price of $12.50
per share and estimated underwriting discounts and commissions and Offering
expenses of $4,000,000. Proceeds from the sale in the amount of $25,000,000
will be used to repay long-term debt and $1,700,000 will be used to pay a
related prepayment penalty. If the proposed debt repayment had occurred on
January 1, 1996, the Company's interest expense, including amortization of
deferred financing costs, would have been reduced by $680,000. See "Use of
Proceeds."
The following are non-recurring charges resulting from the Offering and are
therefore not reflected in the pro forma combined statement of operations:
the prepayment penalty of $1,700,000, the write-off of $572,000 of deferred
financing costs associated with the retired debt, the establishment of a
deferred tax asset of $500,000 and the making of bonus payments totaling
approximately $1,185,000 (of which $225,000 was paid in the form of Common
Stock pursuant to the Bonus Payment) to a group of key employees of the
Company and incurred as a result of the Offering. The related tax effect of
these non-recurring charges at an effective rate of 39% would have been a
reduction of income tax expense of $1,348,000.
C. Historical unaudited combined statement of operations of the Ohio
Facilities for the three months ended March 31, 1996. The Company
anticipates that the Ohio Transaction will be consummated in the third
quarter of 1996 and has categorized the completion of this acquisition as
probable.
D. Represents adjustments to the Federal and state provision for income taxes
which the Company would have recorded if the Company had historically been
subject to taxation, based on an effective tax rate of 39.0%.
E. Represents $170,000 of historical general and administrative expenses
associated with the operation of the Ohio Facilities as if the Ohio
Transaction had occurred on January 1, 1996. These costs are provided in
lieu of management fees paid to the seller which included predecessor
owners' compensation, related costs and profit.
F. Represents the elimination of historical combined amounts recorded by the
Ohio facilities for management fee expenses of $742,000, depreciation and
amortization expense of $203,000, and interest expense, net, of $289,000.
G. Represents depreciation and amortization expense of $299,000 (recorded on a
straight-line basis over the estimated useful life of 40 years) and
interest expense of $1,087,000 (recorded at an interest rate of 8%) which
the Company would have recorded if the Ohio Transaction had occurred on
January 1, 1996.
25
<PAGE>
SELECTED COMBINED FINANCIAL
AND OPERATING DATA
The following table sets forth selected historical combined financial data
and selected pro forma combined financial data for the Company. The selected
historical combined financial data for each of the years in the five year
period ended December 31, 1995 have been derived from the Company's combined
financial statements, which have been audited by Coopers & Lybrand L.L.P.,
independent accountants. The selected historical combined financial data as of
March 31, 1996 and for the three-month periods ended March 31, 1995 and 1996
were derived from unaudited combined financial statements of the Company. In
the opinion of management, the unaudited combined financial statements reflect
all adjustments (consisting of normal recurring adjustments) necessary for a
fair presentation of the financial position and results of operations for the
unaudited periods. The results of operations for the interim periods are not
necessarily indicative of results that may be expected for the full year.
The pro forma data are derived from the Company's unaudited pro forma
combined financial information and the notes thereto contained elsewhere in
this Prospectus. The pro forma data are not necessarily indicative of the
financial condition or results of operations that would have occurred or that
will occur in the future had the transactions occurred on the dates indicated
in the unaudited pro forma combined financial information. The financial data
set forth below should be read in conjunction with the information under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Pro Forma Combined Financial Information" and the audited
combined financial statements of the Company, the predecessor owner of the New
Hampshire Facilities and the owners of the Ohio Facilities and the related
notes thereto included elsewhere in this Prospectus.
26
<PAGE>
(IN THOUSANDS, EXCEPT SHARE, PER SHARE AND OTHER DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1995 PRO FORMA AS ADJUSTED
-----------------------------
BEFORE OHIO INCLUDING OHIO
1991 1992 1993 1994 1995 TRANSACTION(2) TRANSACTION(3)
------- ------- ------- ------- -------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OP-
ERATIONS DA-
TA(1):
Total net reve-
nues(6)......... $56,879 $62,623 $75,101 $86,376 $109,425 $ 131,381 $ 163,698
------- ------- ------- ------- -------- --------- ---------
Expenses:
Facility operat-
ing............. 43,299 48,413 57,412 68,951 89,378 106,584 131,244
General and ad-
ministrative.... 3,019 3,079 3,092 3,859 5,076 5,958 6,638
Service charges
paid to affili-
ate............. 1,040 637 746 759 700 700 700
Depreciation and
amortization.... 5,278 4,655 4,304 4,311 4,385 2,155 3,350
Facility rent.... -- -- 525 1,037 1,907 9,882 9,882
------- ------- ------- ------- -------- --------- ---------
Total expenses.. 52,636 56,784 66,079 78,917 101,446 125,279 151,814
------- ------- ------- ------- -------- --------- ---------
Income from oper-
ations.......... 4,243 5,839 9,022 7,459 7,979 6,102 11,884
Other:
Interest expense,
net............. (4,527) (4,690) (4,740) (4,609) (5,107) (1,343) (5,692)
Loss on
investment in
limited
partnership(7).. -- -- -- (448) (114) (114) (114)
Gain on sale of
facilities,
net............. -- -- -- -- 4,869 -- --
Loss on refinanc-
ing of debt..... -- -- -- (453) -- -- --
Minority interest
in net income of
combined
affiliates...... (1,709) (1,472) (2,297) (1,575) (6,393) -- --
------- ------- ------- ------- -------- --------- ---------
Net income....... $(1,993) $ (323) $ 1,985 $ 374 $ 1,234 $ 4,645 $ 6,078
======= ======= ======= ======= ======== ========= =========
Pro forma data:
Historical net
income(8)....... $(1,993) $ (323) $ 1,985 $ 374 $ 1,234 $ 4,645 $ 6,078
Pro forma income
taxes(8)........ -- -- 774 146 481 1,812 2,371
------- ------- ------- ------- -------- --------- ---------
Pro forma net in-
come (loss)(8).. $(1,993) $ (323) $ 1,211 $ 228 $ 753 $ 2,833 $ 3,707
======= ======= ======= ======= ======== ========= =========
Pro forma net in-
come per
share(8)........ $ 0.35 $ 0.46
Pro forma
weighted average
shares outstand-
ing............. 8,052,160 8,052,160
OTHER DATA(1):
Facilities (as of
end of period)
Owned(9)(10)..... 15 15 15 16 9 9 13
Leased(10)....... -- -- 2 3 11 17 17
------- ------- ------- ------- -------- --------- ---------
Total........... 15 15 17 19 20 26 30
Licensed beds (as
of end of peri-
od)
Owned(9)(10)..... 1,860 1,860 1,860 1,976 1,028 1,028 1,720
Leased(10)....... -- -- 289 389 1,443 1,980 1,980
------- ------- ------- ------- -------- --------- ---------
Total........... 1,860 1,860 2,149 2,365 2,471 3,008 3,700
Average occupancy
rate(11)........ 93.9% 93.5% 92.5% 91.5% 91.5% 91.9% 92.2%
Sources of net
patient service
revenues(12):
Private and oth-
er(13).......... 43.9% 43.0% 39.9% 37.1% 32.3% 33.0% 32.9%
Medicare......... 14.7% 16.2% 21.2% 24.9% 33.1% 27.4% 27.0%
Medicaid......... 41.4% 40.8% 38.9% 38.0% 34.6% 39.6% 40.1%
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------
1991 1992 1993 1994 1995
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DA-
TA(1):
Cash and cash
equivalents..... $ 7,290 $ 5,935 $10,214 $14,013 $ 40,157
Working capital.. 6,069 6,734 6,511 13,915 10,735
Total assets..... 87,923 84,865 85,472 93,876 92,632
Total debt....... 39,673 40,580 40,708 53,296 45,496
Stockholders' eq-
uity............ 4,119 3,631 4,918 2,866 4,130
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------
1996 PRO FORMA AS ADJUSTED
-------------------------------
BEFORE OHIO INCLUDING OHIO
1995 1996 TRANSACTION(4) TRANSACTION(5)
-------- -------- --------------- ---------------
<S> <C> <C> <C> <C>
STATEMENT OF OP-
ERATIONS DA-
TA(1):
Total net reve-
nues(6)......... $23,777 $34,931 $ 34,931 $43,203
-------- -------- --------------- ---------------
Expenses:
Facility operat-
ing............. 19,734 28,120 28,120 34,463
General and ad-
ministrative.... 1,141 2,235 2,235 2,405
Service charges
paid to affili-
ate............. 177 185 185 185
Depreciation and
amortization.... 1,043 539 539 838
Facility rent.... 392 2,545 2,545 2,545
-------- -------- --------------- ---------------
Total expenses.. 22,487 33,624 33,624 40,436
-------- -------- --------------- ---------------
Income from oper-
ations.......... 1,290 1,307 1,307 2,767
Other:
Interest expense,
net............. (1,264) (975) (295) (1,382)
Loss on
investment in
limited
partnership(7).. (81) (127) (127) (127)
Gain on sale of
facilities,
net............. -- -- -- --
Loss on refinanc-
ing of debt..... -- -- -- --
Minority interest
in net income of
combined
affiliates...... (185) -- -- --
-------- -------- --------------- ---------------
Net income....... $ (240) $ 205 $ 885 $ 1,258
======== ======== =============== ===============
Pro forma data:
Historical net
income(8)....... $ (240) $ 205 $ 885 $ 1,258
Pro forma income
taxes(8)........ (94) 80 345 491
-------- -------- --------------- ---------------
Pro forma net in-
come (loss)(8).. $ (146) $ 125 $ 540 $ 767
======== ======== =============== ===============
Pro forma net in-
come per
share(8)........ $ 0.07 $ 0.10
Pro forma
weighted average
shares outstand-
ing............. 8,052,160 8,052,160
OTHER DATA(1):
Facilities (as of
end of period)
Owned(9)(10)..... 9 9 9 13
Leased(10)....... 10 17 17 17
-------- -------- --------------- ---------------
Total........... 19 26 26 30
Licensed beds (as
of end of peri-
od)
Owned(9)(10)..... 1,022 1,028 1,028 1,720
Leased(10)....... 1,343 1,980 1,980 1,980
-------- -------- --------------- ---------------
Total........... 2,365 3,008 3,008 3,700
Average occupancy
rate(11)........ 90.9% 91.3% 91.3% 91.8%
Sources of net
patient service
revenues(12):
Private and oth-
er(13).......... 34.2% 31.8% 31.8% 31.8%
Medicare......... 30.6% 28.3% 28.3% 27.3%
Medicaid......... 35.2% 39.9% 39.9% 40.9%
<CAPTION>
AS OF MARCH 31,
----------------------------------------
1996 PRO FORMA AS ADJUSTED
-------------------------------
BEFORE OHIO INCLUDING OHIO
1996 TRANSACTION(14) TRANSACTION(15)
-------- --------------- ---------------
<S> <C> <C> <C> <C>
BALANCE SHEET DA-
TA(1):
Cash and cash
equivalents..... $10,000 $23,340 $ 17,840
Working capital.. 12,395 26,516 17,414
Total assets..... 63,378 76,646 134,185
Total debt....... 43,422 18,422 75,961
Stockholders' eq-
uity............ 5,001 43,269 43,269
</TABLE>
27
<PAGE>
(1) Harborside Healthcare has been created in anticipation of the Offering in
order to combine under its control the operations of the long-term care
facilities and ancillary businesses that are currently under the control
of Berkshire and its affiliates. See "The Reorganization." The Company's
financial and operating data above combine the historical results of
these business entities.
(2) Gives effect to the consummation of the New Hampshire Transaction on
January 1, 1996, the sale by KYP of the Seven Facilities on December 31,
1995 and the subsequent Distribution, the 1995 REIT Lease, the Offering
and the application of the net proceeds therefrom (assuming an initial
public offering price of $12.50 per share), as if such transactions had
occurred on January 1, 1995.
(3) Gives effect to the transactions described in Note (2) above and the
pending Ohio Transaction as if such transactions had occurred on January
1, 1995. The Ohio Transaction will be accounted for as a capital lease as
a result of the bargain purchase option granted at the end of the lease
term. This accounting treatment will result in an increase in
depreciation and amortization expense of $1,195,000 and an increase in
interest expense, net, of $4,349,000. The Company expects to complete the
Ohio Transaction in the third quarter of 1996, subject to the
satisfaction of certain customary conditions, including the satisfactory
completion of the Company's due diligence review and receipt of
regulatory and other approvals.
(4) Gives effect to the consummation of the Offering and the application of
the net proceeds therefrom (assuming an initial public offering price of
$12.50 per share), as if the Offering had occurred on January 1, 1996.
(5) Gives effect to (i) the consummation of the Offering and the application
of the net proceeds therefrom (assuming an initial public offering price
of $12.50 per share), and (ii) the pending Ohio Transaction, as if the
transactions had occurred on January 1, 1996. The Ohio Transaction will
result in an increase in depreciation and amortization expense for the
period of $299,000 and an increase in interest expense, net, for the
period of $1,087,000.
(6) Total net revenues include net patient service revenues from the
Company's facilities and revenues from ancillary services provided at
non-affiliated long-term care facilities. Total net revenues exclude net
patient service revenues from the Larkin Chase Center, but include
management fees and rehabilitation therapy service revenues from such
facility. See "Business--Properties" and Note F to the Company's audited
combined financial statements included elsewhere in this Prospectus.
(7) Represents the Company's allocation of operating results for the Larkin
Chase Center which the Company accounts for using the equity method. See
"Business--Properties" and Note F to the Company's audited combined
financial statements included elsewhere in this Prospectus.
(8) Prior to the Reorganization, the Company's predecessors operated under
common control but were not subject to Federal or state income taxation
and, accordingly, no provision for income taxes has been made in the
Company's audited combined financial statements. Following the
Reorganization, these predecessors will be subject to Federal and state
income taxes. Pro forma net income (loss) and pro forma net income per
share reflect the combined income tax expense that the Company's
predecessors would have incurred had they been subject to taxation during
each of the periods indicated.
(9) Includes the Larkin Chase Center commencing in 1994.
(10) On December 31, 1995, the Seven Facilities were reclassified as "leased"
following the sale and concurrent 1995 REIT Lease. See Note (2) above.
The Ohio Facilities are classified as "owned" reflecting the treatment of
the Ohio Transaction as a capital lease.
(11) "Average occupancy rate" is computed by dividing the number of occupied
licensed beds by the total number of available licensed beds during each
of the periods indicated.
(12) Net patient service revenues exclude all management fees and all
rehabilitation therapy service revenues and the net patient service
revenues of the Larkin Chase Center. The Company accounts for its
investment in this facility using the equity method because of certain
control and purchase rights held by the minority investor in that
facility. See "Business--Properties."
(13) Consists primarily of revenues derived from private pay individuals,
managed care organizations, HMOs, hospice programs and commercial
insurers.
(14) Gives effect to the consummation of the transactions described in Note
(4) above and the Bonus Payment, as if such transactions had occurred on
March 31, 1996.
(15) Gives effect to the transactions described in Note (14) above and the
Ohio Transaction as if such transactions had occurred on March 31, 1996.
The Ohio Transaction will be accounted for as a capital lease. See Note
(3) above. This accounting treatment will result in an increase in total
debt of $57,539,000.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company's predecessors commenced operations in 1988 with the acquisition
of two long-term care facilities. The Company has experienced significant
growth since that time, primarily through the acquisition of additional
facilities. The Company operates 26 long-term care facilities and provides
rehabilitation therapy services to patients at 36 non-affiliated long-term
care facilities. The Company has been created in anticipation of the Offering
in order to combine under its control the operations of long-term care
facilities and ancillary businesses (the "Predecessors") that are currently
under the control of Berkshire and its affiliates. Immediately prior to the
completion of the Offering, the owners of the Predecessors will contribute
their interests in such entities to the Company in exchange for 4,400,000
shares of Common Stock. See "The Reorganization." The Company's audited
combined financial statements included elsewhere in this Prospectus have been
prepared by combining the historical financial statements of the Predecessors,
similar to a pooling of interests presentation.
One of the Predecessors is the general partner of KYP, which owned the Seven
Facilities throughout the period from January 1, 1991 to December 31, 1995.
During this period, 95% of the net income of KYP was allocated to the
Unitholders and 5% to the general partner. Effective December 31, 1995, KYP
sold the Seven Facilities to Meditrust for a purchase price of $47,000,000.
Simultaneously, the general partner leased the Seven Facilities from the
purchaser pursuant to the 1995 REIT Lease. The accounts of KYP are included in
the Company's audited combined financial statements and the interest of its
limited partners is reflected as the minority interest. See "Business--
Properties" and Notes B and N to the Company's audited combined financial
statements included elsewhere in this Prospectus.
The Company's audited combined financial statements do not include a
provision for Federal or state income taxes because the Predecessors were not
subject to Federal or state income taxation. Accordingly, the Company's
audited combined financial statements reflect a pro forma income tax expense
for each year presented, as if the Predecessors had previously been tax-paying
entities.
The following discussion should be read in conjunction with "Selected
Combined Financial and Operating Data" and the Company's audited combined
financial statements and the notes thereto included elsewhere in this
Prospectus.
The following table sets forth the number of facilities owned and leased by
the Company and the number of licensed beds operated by the Company:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
------------------------- -------------------------
1996
PRO FORMA
AS ADJUSTED
INCLUDING OHIO
1993 1994 1995 1996 TRANSACTION
------ ------ ------ ----- --------------
<S> <C> <C> <C> <C> <C>
Facilities:
Owned.......... 15 16(/1/) 9(/1/)(/2/) 9(/1/) 13(/1/)
Leased......... 2 3 11(/2/) 17 17
------ ------ ------ ----- -----
Total........ 17 19 20 26 30
====== ====== ====== ===== =====
Licensed beds:
Owned.......... 1,860 1,976(/1/) 1,028(/1/)(/2/) 1,028(/1/) 1,720(/1/)
Leased......... 289 389 1,443(/2/) 1,980 1,980
------ ------ ------ ----- -----
Total........ 2,149 2,365 2,471 3,008 3,700
====== ====== ====== ===== =====
</TABLE>
- --------
(1) Includes the Larkin Chase Center, which is owned by Bowie Center Limited
Partnership ("Bowie L.P."), a joint venture in which the Company has a 75%
ownership interest and a non-affiliated investor has a 25% ownership
interest. See "Business--Properties" and Note F to the Company's audited
combined financial statements included elsewhere in this Prospectus.
(2) On December 31, 1995, KYP sold the Seven Facilities which were
concurrently leased by the Company pursuant to the 1995 REIT Lease. See
"Business--Properties" and Note D to the Company's audited combined
financial statements included elsewhere in this Prospectus.
29
<PAGE>
The following table sets forth certain operating data for the periods
indicated:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------- ----------------------
1995
PRO FORMA
AS ADJUSTED
INCLUDING OHIO
1993 1994 1995 TRANSACTION 1995 1996
------- ------- ------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Patient days:
Private and other..... 258,847 258,585 257,864 397,675 62,296 74,365
Medicare.............. 60,459 68,256 90,107 117,756 22,223 23,496
Medicaid.............. 366,105 404,372 432,392 684,331 100,887 142,226
------- ------- ------- --------- ---------- ----------
Total............... 685,411 731,213 780,363 1,199,762 185,406 240,087
======= ======= ======= ========= ========== ==========
Average occupancy
rate(1)................ 92.5% 91.5% 91.5% 92.2% 90.9% 91.3%
Net patient service rev-
enues (2):
Private and other..... 39.9% 37.1% 32.3% 32.9% 34.2% 31.8%
Medicare.............. 21.2 24.9 33.1 27.0 30.6 28.3
Medicaid.............. 38.9 38.0 34.6 40.1 35.2 39.9
------- ------- ------- --------- ---------- ----------
Total............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
======= ======= ======= ========= ========== ==========
</TABLE>
- --------
(1) "Average occupancy rate" is computed by dividing the number of occupied
licensed beds by the total number of available licensed beds during each
of the periods indicated.
(2) Net patient service revenues exclude all management fees and all
rehabilitation therapy service revenues and the net patient service
revenues of the Larkin Chase Center. See "Business--Properties."
RESULTS OF OPERATIONS
The Company's total net revenues include net patient service revenues
(excluding those recorded at the Larkin Chase Center), management fees from
the Larkin Chase Center, and rehabilitation therapy service revenues from
contracts with the Larkin Chase Center and, beginning in 1995, non-affiliated
long-term care facilities. Private net patient service revenues are recorded
at established per diem billing rates. Net patient service revenues to be
reimbursed under contracts with third-party payors, primarily the Medicare and
Medicaid programs, are recorded at amounts estimated to be realized under
these contractual arrangements. Estimated Medicare and Medicaid revenues may
be adjusted after the year of origination based on payor audits, improved
revenue estimates or final settlements. Such adjustments are included in the
net revenues for the period in which the adjustment occurs.
The Company's facility operating expenses consist primarily of payroll and
employee benefits related to nursing, housekeeping and dietary services
provided to patients, as well as maintenance and administration of the
facilities. Other significant facility operating expenses include the cost of
rehabilitation therapy services provided by third parties, medical and
pharmacy supplies, food, utilities, insurance and taxes. The Company's
facility operating expenses also include the general and administrative costs
associated with the operation of the Company's rehabilitation therapy
business. The Company's general and administrative expenses include all costs
associated with its regional and corporate operations.
The "loss on investment in limited partnership" reflects the Company's 75%
allocation of the net loss of the Larkin Chase Center. The Company accounts
for its investment in this facility using the equity method because of certain
purchase rights held by the minority investor in the facility and because the
Company does not exercise control over the operations. As described in Note N
to the Company's audited combined financial statements, KYP sold the Seven
Facilities in December 1995 and recognized a net gain of $4,869,000, all of
which was allocated to the KYP Unitholders and is reflected in "minority
interest in net income of combined affiliates."
30
<PAGE>
The following table presents certain combined financial data of the Company
expressed as a percentage of total net revenues for the historical periods
presented and for the year ended December 31, 1995 on a pro forma basis after
giving effect to the consummation of the New Hampshire Transaction, the sale
by KYP of the Seven Facilities and the subsequent Distribution, the 1995 REIT
Lease, the Offering and the application of the net proceeds therefrom and the
pending Ohio Transaction.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
FOR THE
THREE
1995 MONTHS
PRO FORMA ENDED MARCH
AS ADJUSTED 31,
INCLUDING OHIO -------------
1993 1994 1995 TRANSACTION 1995 1996
----- ----- ----- -------------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Total net revenues...... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- ----- -----
Expenses:
Facility operating.... 76.5 79.8 81.7 80.2 83.0 80.5
General and adminis-
trative.............. 4.1 4.5 4.6 4.1 4.8 6.4
Service charges paid
to an affiliate...... 1.0 0.9 0.6 0.4 0.7 0.5
Depreciation and amor-
tization............. 5.7 5.0 4.0 2.0 4.4 1.6
Facility rent......... 0.7 1.2 1.8 6.0 1.7 7.3
----- ----- ----- ----- ----- -----
Total expenses...... 88.0 91.4 92.7 92.7 94.6 96.3
----- ----- ----- ----- ----- -----
Income from operations.. 12.0 8.6 7.3 7.3 5.4 3.7
Other:
Interest expense,
net.................. (6.3) (5.4) (4.6) (3.5) (5.3) (2.7)
Loss on investment in
limited partnership.. -- (0.5) (0.1) (0.1) (0.3) (0.4)
Gain on sale of facil-
ities, net........... -- -- 4.4 -- -- --
Loss on refinancing... -- (0.5) -- -- -- --
Minority interest in
net income of com-
bined affiliates..... (3.1) (1.8) (5.9) -- (0.8) --
----- ----- ----- ----- ----- -----
Net income (loss)....... 2.6 % 0.4 % 1.1 % 3.7 % (1.0)% 0.6 %
Pro forma data:
Pro forma income tax-
es................... (1.0)% (0.2)% (0.4)% (1.4)% 0.4 % (0.2)%
----- ----- ----- ----- ----- -----
Pro forma net income
(loss)............... 1.6 % 0.2 % 0.7 % 2.3 % (0.6)% 0.4 %
===== ===== ===== ===== ===== =====
</TABLE>
The Company experienced an increase in average net patient service revenues
per patient day as a result of an increase in the proportion of patients
requiring higher levels of medical care, including subacute care. In 1993, the
Company anticipated a decline in revenues from traditional custodial care
private pay patients and sought to offset this potential loss through the
expansion of subacute care and other specialty medical services. As a result,
the percentage of net patient service revenues attributable to the Medicare
program was 33.1% in 1995, a substantial increase from the 24.9% and 21.2%
experienced in 1994 and 1993, respectively.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Total Net Revenues. Total net revenues increased by $23,049,000, or 26.7%,
from $86,376,000 in 1994 to $109,425,000 in 1995. This increase resulted
primarily from the operation of two additional facilities, the generation of
revenues from rehabilitation therapy services provided to patients at the
Larkin Chase Center and non-affiliated long-term care facilities and increased
net patient service revenues per patient day at the Company's existing
facilities. Of such increase, $6,279,000, or 27.2%, resulted from the
operation of the Brevard facility, which the Company began leasing in October
1994, and the Swanton facility, which the Company began leasing in April 1995.
In 1995, the Company began providing rehabilitation therapy services at non-
affiliated long-term care facilities, which generated revenues of $3,045,000,
or 13.2% of such increase. In addition,
31
<PAGE>
rehabilitation therapy service revenues from the Larkin Chase Center increased
by $687,000, or 3.0% of such increase, to $1,031,000 in 1995. The remaining
$13,038,000, or 56.6% of such increase, is attributable to higher average net
patient service revenues per patient day at the Company's existing facilities,
resulting from increased care levels provided to patients with medically
complex conditions. Average net patient service revenues per patient day
increased by 14.4% from $117.54 in 1994 to $134.45 in 1995. The average
occupancy rate at the Company's facilities remained unchanged in 1995 at
91.5%.
Facility Operating Expenses. The increase in the number of facilities
operated by the Company and the expansion of the Company's rehabilitation
therapy services to include non-affiliated facilities, as well as the greater
percentage of patients receiving higher levels of care, resulted in an
increase in facility operating expenses of $20,427,000, or 29.6%, from
$68,951,000 in 1994 to $89,378,000 in 1995. Facilities added during 1994 and
1995 accounted for $4,962,000, or 24.3%, of the increase in facility operating
expenses. As described above, in 1995 the Company began providing
rehabilitation therapy services to patients at non-affiliated facilities.
During 1995, the Company entered into rehabilitation therapy service contracts
with 16 non-affiliated facilities and expensed all related contract
development costs as incurred, including marketing, recruiting and other
related expenses. These expenses, together with the cost of providing
rehabilitation therapy services at these facilities, increased the Company's
facility operating expenses by $3,290,000, which approximated the revenues
derived from such activities in 1995. The remainder of the increase in
facility operating expenses, approximately $12,175,000, is due to significant
increases in the costs of labor, medical supplies and rehabilitation therapy
services purchased from third parties. The Company's efforts to enhance its
clinical capabilities required it to significantly increase facility staffing
levels in 1995 as compared to 1994.
General and Administrative; Service Charges Paid to Affiliate. Expenses
associated with the Company's regional and corporate offices increased by
$1,217,000, or 31.5%, from $3,859,000 in 1994 to $5,076,000 in 1995. The
majority of this increase resulted from the creation of new positions to
support the development of subacute programs, as well as from the addition of
administrative services needed to support facilities added during 1995 and
late in 1994. The Company reimbursed Berkshire in 1995 for rent and other
expenses related to its corporate headquarters, as well as for certain data
processing and administrative services. See "Certain Transactions." In 1995,
such reimbursements totaled $700,000, compared to $759,000 in 1994. The
reduction in this expense is attributable to functions assumed by employees of
the Company during 1995.
Depreciation and Amortization. Depreciation and amortization remained
relatively unchanged at $4,385,000 in 1995 as compared to $4,311,000 in 1994.
Facility Rent. Facility rent expense increased by $870,000, or 83.9%, from
$1,037,000 in 1994 to $1,907,000 in 1995. The increase in rent is attributable
to the addition of two facilities financed pursuant to long-term leases. In
April 1995, the Company began leasing its Swanton facility. In October 1994,
the Company entered into a lease for its Brevard facility with an affiliate.
See "Certain Transactions."
Interest Expense, net. Interest expense, net, increased from $4,609,000 in
1994 to $5,107,000 in 1995. This increase of $498,000, or 10.8%, related to
the incurrence of approximately $13,100,000 of additional debt in October
1994, and was offset in part by the refinancing of certain high cost debt at a
lower interest rate. The increase in interest expense was partially offset by
increased interest income resulting from a higher average cash balance held
during 1995 following the incurrence of additional debt in October 1994 and
prior to the use of these funds for facility acquisitions.
Loss on Investment in Limited Partnership. The Company accounts for its
investment in the Larkin Chase Center using the equity method. The Company's
75% allocation of the net loss from this facility was reduced from $448,000 in
1994 to $114,000 in 1995. Most of the improvement resulted from an increase in
occupancy at this facility in 1995 and the recognition of start-up losses
during 1994. The Larkin Chase Center opened on April 30, 1994 and achieved
stabilized occupancy by the fourth quarter of 1995.
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Gain on Sale of Facilities. The net gain on sale of facilities of
approximately $4,869,000 in 1995 resulted from the sale on December 31, 1995
of the Seven Facilities. All of the net gain from this sale has been allocated
to the Unitholders in accordance with the partnership agreement and is
reflected in the increased minority interest charge in 1995. At the time of
the sale, the Company entered into the 1995 REIT Lease. See "Business--
Properties" and Note N to the Company's audited combined financial statements
included elsewhere in this Prospectus.
Minority Interest in Net Income of Combined Affiliates. The minority
interest charge increased from $1,575,000 in 1994 to $6,393,000 in 1995, an
increase of $4,818,000. Substantially all of the increase is attributable to
the allocation of the net gain on the sale of the Seven Facilities. Following
the Distribution and subsequent dissolution of the partnership, the minority
interest charge will be eliminated.
Net Income. Net income was $374,000 in 1994 as compared to $1,234,000 in
1995. The increase of $860,000 was primarily the result of increased operating
income in 1995 and a reduced loss from the Company's equity investment in the
Larkin Chase Center in 1995. In addition, in 1994 the Company incurred a loss
of $453,000 relating to the refinancing of certain indebtedness.
Year Ended December 31, 1994 Compared to Year ended December 31, 1993
Total Net Revenues. Total net revenues increased by $11,275,000, or 15.0%,
from $75,101,000 in 1993 to $86,376,000 in 1994. This increase resulted
primarily from the operation of three additional facilities and increased net
patient service revenues per patient day. Of such increase, $5,146,000, or
45.6%, resulted from the operation of these additional facilities. The
remaining $6,129,000, or 54.4%, of such increase in revenues was the result of
higher average net patient service revenues per patient day associated with
increased levels of care to patients with medically complex conditions.
Average net patient service revenues per patient day increased by 7.3% from
$109.57 in 1993 to $117.54 in 1994, while the average occupancy rate decreased
from 92.5% to 91.5% during the same period. Part of the reduction in average
occupancy rate was the result of the opening of the newly constructed Larkin
Chase Center in April 1994. Excluding the Larkin Chase Center, the average
occupancy rate at the Company's facilities was 92.1% in 1994, only a slight
reduction from 1993. Additionally, the Company closed certain Medicare and
Medicaid cost reports in 1994 and 1993 which resulted in additional net
patient service revenues of $1,000,000 and $2,000,000, respectively.
Facility Operating Expenses. Facility operating expenses increased by
$11,539,000, or 20.1%, from $57,412,000 in 1993 to $68,951,000 in 1994. Of
this increase, $4,361,000, or 37.8%, resulted from increased expenses
associated with the addition of three facilities in 1993 and 1994. The
remaining $7,178,000, or 62.2%, of such increase resulted from increased
expenses associated with higher skilled staffing levels and increased use of
rehabilitation therapy and medical supplies. The incurrence of higher
operating expenses is consistent with the Company's objective of providing
care to patients requiring higher levels of medical care or specialized
treatment. Beginning in 1993, the Company began providing its own
rehabilitation therapy services to patients at certain of its facilities. The
closing of certain Medicare and Medicaid cost reports in 1993 and 1994 had the
effect of reducing facility operating expenses as a percentage of net
revenues.
General and Administrative; Service Charges Paid to Affiliate. General and
administrative expenses increased by $767,000, or 24.8%, from $3,092,000 in
1993 to $3,859,000 in 1994. This increase resulted from higher expenses
associated with expansion of regional and corporate support as well as
increases in salaries. During 1994, the Company added corporate marketing and
clinical positions as it expanded subacute care and other forms of specialty
medical care. The Company reimbursed Berkshire in 1994 for rent and other
expenses related to its corporate headquarters as well as for certain data
processing and administrative services which were provided to the Company. In
1994, reimbursements to Berkshire totaled $759,000 as compared to $746,000 in
1993.
Depreciation and Amortization. Depreciation and amortization remained
relatively unchanged at $4,311,000 in 1994 as compared to $4,304,000 in 1993.
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Facility Rent. Facility rent expense increased by $512,000, or 97.5%, from
$525,000 in 1993 to $1,037,000 in 1994. This increase was primarily due to the
addition of two facilities in June 1993 and one facility in October 1994, all
of which were financed pursuant to long-term leases.
Interest Expense, net. Interest expense, net, was $4,740,000 in 1993 as
compared to $4,609,000 in 1994. The Company refinanced the majority of its
long-term debt in October 1994. As a result, the Company incurred
approximately $13,100,000 of additional debt at a reduced interest rate. The
Company recorded a loss on refinancing of $453,000 in connection with this
transaction.
Loss on Investment in Limited Partnership. The Company recorded a loss of
$448,000 in 1994 in connection with its 75% ownership interest in the Larkin
Chase Center. The loss recognized in 1994 is primarily the result of the
recognition of start-up costs incurred before the facility achieved stabilized
occupancy.
Minority Interest in Net Income of Combined Affiliates. Minority interest
declined from $2,297,000 in 1993 to $1,575,000 in 1994, a decrease of
$722,000. Minority interest in net income of combined affiliates reflects the
allocation of 95% of the net income of KYP to the Unitholders. KYP generated
less net income in 1994 than in 1993 and the minority interest was
correspondingly reduced.
Net Income. Net income was $1,985,000 in 1993 as compared to $374,000 in
1994. The decrease of $1,611,000 was primarily the result of reduced Medicare
and Medicaid settlements in 1994, the loss related to the Company's equity
investment in the Larkin Chase Center, and the loss on refinancing recorded by
the Company in October 1994. A reduction in minority interest partially offset
these factors.
Year Ended December 31, 1995, Pro Forma As Adjusted Including the Ohio
Transaction, Compared to Historical Year Ended December 31, 1995
Total Net Revenues. Total net revenues on a pro forma basis in 1995
increased by $54,273,000, or 49.6%, to $163,698,000 as compared to the
Company's historical 1995 net revenues of $109,425,000. The addition of the
six New Hampshire Facilities represented $21,956,000, or 40.5%, of such
increase and the four Ohio Facilities represented $32,317,000, or 59.5%, of
such increase.
Facility Operating Expenses. Facility operating expenses on a pro forma
basis increased 46.8%, or $41,866,000, to $131,244,000 in 1995 as compared to
the Company's historical 1995 facility operating expenses of $89,378,000. The
increase resulted from the addition of the New Hampshire and Ohio Facilities.
Facility operating expenses as a percentage of total net revenues were 80.2%
on a pro forma basis in 1995 and 81.7% on a historical basis. The operating
expenses of these facilities are lower as a percentage of total net revenues
than the Company's historical percentage due to differences in levels of
medical care provided and start-up expenses incurred by the Company in
connection with its rehabilitation therapy business.
General and Administrative Expenses. General and administrative expenses on
a pro forma basis in 1995 increased by $1,562,000, or 30.8%, to $6,638,000 as
compared to the Company's historical 1995 general and administrative expenses
of $5,076,000. This increase resulted from costs associated with the addition
of the New Hampshire and Ohio Facilities. The New Hampshire Facilities operate
as a new region of the Company and correspondingly require a higher level of
general and administrative expenses than the Ohio Facilities, which are
expected to be integrated into the Company's existing Midwest region.
Depreciation and Amortization. Depreciation and amortization expense on a
pro forma basis in 1995 decreased by $1,035,000, or 23.6%, to $3,350,000 as
compared to the Company's historical 1995 depreciation and amortization
expense of $4,385,000. The net reduction was largely the result of the
elimination of $2,430,000 in depreciation and amortization expense recorded by
the Seven Facilities owned by KYP after giving effect to the sale and
subsequent lease of the Seven Facilities. This amount was partly offset by a
$1,195,000 increase relating to the Ohio Transaction which has been recorded
as a capital lease.
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Facility Rent. Facility rent expense on a pro forma basis in 1995 increased
by $7,975,000 to $9,882,000 as compared to the Company's historical 1995
expense of $1,907,000. The increase in rent expense was solely the result of
the effect of the sale and subsequent lease of the Seven Facilities and the
lease of the New Hampshire Facilities.
Interest Expense, net. Interest expense, net, on a pro forma basis in 1995
increased by $585,000, or 11.5%, to $5,692,000 as compared to the Company's
historical interest expense, net, of $5,107,000. Interest expense increased by
$4,349,000 as the result of the Ohio Transaction, which has been recorded as a
capital lease. This increase was partially offset by $2,727,000 as a result of
the repayment of $25,000,000 of Meditrust debt with the proceeds of the
Offering. All non-recurring items such as the prepayment penalty of $1,700,000
and the write-off of deferred financing costs of $572,000 have been excluded
from the unaudited pro forma combined statement of operations.
Net Income. Net income on a pro forma basis in 1995 increased by $2,954,000
to $3,707,000 as compared to the Company's historical net income of $753,000
(after reflecting a pro forma tax expense). Net income increased primarily as
the result of reduced interest expense following the Debt Repayment as well as
the addition of the New Hampshire Facilities and the Ohio Facilities.
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31,
1995
Total Net Revenues. Total net revenues increased by $11,154,000, or 46.9%,
from $23,777,000 in 1995 to $34,931,000 in 1996. This increase resulted
primarily from the operation of seven additional facilities in 1996, and the
generation of revenues from additional contracts to provide rehabilitation
therapy services to patients at non-affiliated long-term care facilities. Of
such increase, $6,345,000, or 56.9%, resulted from the operation of the
Swanton facility, which the Company began leasing on April 1, 1995, and the
six New Hampshire Facilities, which the Company began leasing on January 1,
1996. In 1995 the Company began providing rehabilitation therapy services to
patients at non-affiliated long-term care facilities. As of March 31, 1995 the
Company had one contract with a non-affiliated long-term care facility as
compared to contracts with 35 facilities as of March 31, 1996. Revenues during
the first quarter of 1995 from non-affiliated rehabilitation therapy services
were $136,000 as compared to $2,141,000 for the first quarter of 1996, an
increase of $2,005,000, or 18.0% of the overall increase in net revenues. The
remaining $2,804,000, or 25.1% of such increase, is attributable to higher
average net patient service revenues per patient day at the Company's
previously existing facilities, resulting from increased care levels provided
to patients with medically complex conditions.
Facility Operating Expenses. The increase in the number of facilities
operated by the Company and the expansion of the Company's rehabilitation
therapy services at non-affiliated facilities, as well as the greater
percentage of patients receiving higher levels of care, resulted in an
increase in facility operating expenses of $8,386,000, or 42.5%, from
$19,734,000 during the first quarter of 1995 to $28,120,000 during the first
quarter of 1996. Facilities operated by the Company during the first quarter
of 1996 but not during the prior year period accounted for $4,933,000, or
58.8%, of the increase in facility operating expenses. During 1995 the Company
began providing rehabilitation services to patients at non-affiliated
facilities. At the end of the first quarter of 1995 the Company had entered
into only one contract with a non-affiliated facility but by the end of the
first quarter of 1996, the Company had entered into 35 such contracts. The
costs associated with the development of these contracts (including marketing
and recruiting) together with the costs of providing rehabilitation therapy
services at these facilities increased the Company's facility operating
expenses by approximately $1,642,000, or 19.6%, of the total increase in these
costs. The remainder of the increase in facility operating expenses,
approximately $1,811,000, is primarily due to increases in the costs of labor,
medical supplies and rehabilitation therapy services purchased from third
parties.
General and Administrative; Services Charges Paid to Affiliate. Expenses
associated with the Company's regional and corporate offices increased by
$1,094,000, or 95.9%, from $1,141,000 during the first quarter of 1995 to
$2,235,000 during the first quarter of 1996. General and administrative
expenses for the first quarter of 1996 included a compensation charge of
$438,000 as a result of a special bonus paid to the President of the
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Company. Most of the remaining increase, $656,000, resulted from the creation
of new positions and additional administrative costs required to support the
addition of the new facilities and the development of subacute programs. The
Company reimbursed Berkshire during the first quarter of 1995 and 1996 for
rent and other expenses related to its corporate headquarters, as well as for
certain data processing and administrative services. See "Certain
Transactions." During the first quarter of 1995, such reimbursements totalled
$177,000, compared to $185,000 during the first quarter of 1996. The level of
services provided by Berkshire on behalf of the Company was comparable in each
period.
Depreciation and Amortization. Depreciation and amortization expense
decreased by $504,000, from $1,043,000 during the first quarter of 1995 to
$539,000 during the first quarter of 1996. This decrease is the result of the
sale of the Seven Facilities, which accounted for $601,000 of depreciation and
amortization during the prior period, partially offset by additional expenses
recorded at newly acquired facilities during the first quarter of 1996.
Facility Rent. Facility rent expense increased by $2,153,000, from $392,000
during the first quarter of 1995 to $2,545,000 during the first quarter of
1996. The increase in rent is attributable to the addition of the Swanton
facility on April 1, 1995, the Seven Facilities on December 31, 1995, and the
New Hampshire Facilities effective January 1, 1996.
Interest Expense, net. Interest expense, net, decreased by $289,000 from
$1,264,000 during the first quarter of 1995 to $975,000 during the first
quarter of 1996. This decrease was primarily the result of the retirement of
the KYP Medium-Term Notes and the elimination of the related interest expense
of $248,000 which was incurred during the first quarter of 1995.
Loss on Investment in Limited Partnership. The Company accounts for its
investment in the Larkin Chase Center using the equity method. The Company's
75% allocation of the net loss from this facility increased from $81,000
during the first quarter of 1995 to $127,000 during the first quarter of 1996.
Net Income (Loss). The Company recorded a net loss of $240,000 during the
first quarter of 1995 compared to net income of $205,000 during the first
quarter of 1996, which is net of the $438,000 special bonus compensation
charge included in general and administrative expenses. The improved
performance was primarily the result of increased operating income during the
first quarter of 1996 along with higher interest income.
LIQUIDITY AND CAPITAL RESOURCES
The Predecessors historically financed their operations and acquisitions
growth primarily through a combination of mortgage financing, operating
leases, and capital contributed by the KYP Unitholders. Although the Company
had cash and cash equivalents totalling $40,157,000 as of December 31, 1995,
approximately $33,493,000 of such amount was held pending the Distribution,
which occurred in March 1996. As of March 31, 1996 the Company had cash and
cash equivalents totaling $10,000,000.
The Company had two mortgage loans outstanding as of March 31, 1996. The
mortgage loan from Meditrust had an outstanding principal balance of
$41,809,000 and bears interest at an annual rate of 10.65% plus additional
interest equal to 0.3% of the difference between the annual operating revenues
of the mortgaged facilities and actual revenues during the twelve-month base
period commencing October 1, 1995. Such additional interest begins to accrue
on October 1, 1996. The loan is secured by mortgages in favor of Meditrust on
seven of the Company's facilities. The Company plans to use $25,000,000 of the
net proceeds of the Offering to prepay a portion of this debt. In connection
with this prepayment the Company expects to incur a cash prepayment penalty of
approximately $1,700,000. See "Use of Proceeds." After giving effect to the
Debt Repayment as of March 31, 1996, the outstanding principal as of such date
would have been reduced to $16,809,000 and the outstanding principal due at
maturity in 2004 would be $14,598,000. The Company's other mortgage loan,
which encumbers a single facility, had an outstanding principal balance of
$1,613,000 as of March 31, 1996 and bears interest at 14% per annum. This
mortgage matures in the year 2010.
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The Company's existing facility leases generally require it to make monthly
lease payments, establish escrow funds to serve as debt service reserve
accounts, and pay all property operating costs. The Company generally
negotiates leases which provide for extensions beyond the initial lease term
and an option to purchase the leased facility. See "Business--Properties." The
Company expects that such leasing arrangements will continue to provide it
with the most attractive form of financing to support its growth.
The Company expects that cash on hand and the net proceeds of the Offering
will be sufficient to meet its operating requirements and to finance
anticipated growth over the next twelve months. The Company has been and will
continue to be dependent on third-party financing to fund its acquisition
strategy. The Company is currently involved in discussions with several
financial institutions to establish a working capital line of credit secured
by its receivables. The Company has recently received pre-approval from
Meditrust, subject to customary due diligence and closing conditions, for up
to $50 million in debt and/or lease financing for future acquisitions. There
can be no assurances that such financing will be available to the Company on
acceptable economic terms, or at all. From time to time, the Company expects
to pursue certain expansion and new development opportunities associated with
existing facilities. In connection with a Certificate of Need received by its
Ocala facility in March 1996, the Company expects to commence construction of
a sixty-bed addition and a rehabilitation therapy area within approximately
six months. The costs of this project are estimated to be approximately
$2,800,000. In addition, in connection with a Certificate of Need held by its
Larkin Chase facility, the Company expects to commence construction of a
sixty-bed addition during 1996. The costs associated with the Larkin Chase
project are estimated to be approximately $2,500,000. The Company intends to
seek separate financing for each of these projects. There can be no assurances
that financing of either project will be available to the Company on
acceptable terms.
The Company's operating activities in 1995 generated net cash of $1,886,000
as compared to $4,939,000 in 1994, a decrease of $3,053,000. Most of the
reduction in cash provided by operations was the result of an increase in
accounts receivable of $7,573,000. This increase is the result of a
substantial growth in revenues as well as a shift in payor mix toward slower-
paying sources such as Medicare.
Net cash provided by investing activities was $36,818,000 in 1995. After
deducting the gross proceeds of $47,000,000 from the sale of the Seven
Facilities and related transaction costs of $884,000, net cash used by
investing activities was $9,298,000 in 1995 as compared to $6,078,000 used in
1994. In each year the primary use of invested cash related to additions to
property and equipment ($2,585,000 in 1994 compared to $3,081,000 in 1995),
the funding of escrow accounts in connection with debt or lease financing
arrangements ($1,995,000 in 1994 compared to $760,000 in 1995), and additions
to deferred financing costs associated with these financings ($1,410,000 in
1994 compared to $1,202,000 in 1995). In 1995, the Company loaned $1,255,000
to Bowie L.P. to finance its working capital requirements. The Company expects
that this loan will be repaid during 1996. In 1995, the Company also paid
acquisition deposits totalling $3,000,000 in connection with two groups of
facilities for which it was negotiating leases. The Company began leasing the
first group (the New Hampshire Facilities) on January 1, 1996 and received its
$1,000,000 deposit back upon the closing of the transaction. The Company's
offer to lease the second group of facilities was rescinded by the Company and
it received its $2,000,000 deposit back in March 1996. The Company borrowed
$2,000,000 from Berkshire to pay this acquisition deposit and repaid Berkshire
in March 1996. See "Certain Transactions."
Net cash used by financing activities was $12,560,000 in 1995. The repayment
of debt and the incurrence of a related prepayment penalty upon the sale of
the Seven Facilities and liquidation of KYP required the use of $10,954,000.
In 1994 the Company refinanced existing debt by incurring approximately
$13,100,000 in additional debt at a lower effective interest rate. A portion
of the funds raised through this refinancing, $2,200,000, was distributed to
shareholders of the Company's Predecessors.
The Company's operating activities in the first three months of 1995
generated net cash of $2,000 as compared to $1,097,000 in the comparable
period of 1996, an increase of $1,095,000. Most of the increase in cash
provided by operations was the result of an increase in accrued employee
compensation offset by an increase in prepaid expenses and a decrease in
accounts payable.
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Net cash used by investing activities was $275,000 in the three months ended
March 31, 1995 as compared to $224,000 provided in the comparable period of
1996. In each period the primary use of invested cash related to additions to
property and equipment ($486,000 in 1995 compared to $504,000 in 1996),
changes in escrow account balances established in connection with debt or
lease financing arrangements (a decrease of $247,000 in 1995 and an increase
of $1,576,000 in 1996), and additions to deferred financing costs associated
with these financings ($36,000 in 1995 compared to $696,000 in 1996).
Additionally, in 1996 the Company received $3,000,000 in refunded acquisition
deposits in connection with two groups of facilities which it was negotiating
to acquire.
Net cash used by financing activities was $1,068,000 in the three months
ended March 31, 1995 as compared to $31,478,000 in 1996. Distributions to
minority interest required the use of $909,000 in 1995 compared to $33,727,000
in 1996. The 1996 distribution consisted of the liquidating distribution to
the KYP Unitholders. During the first three months of 1996 the Company also
repaid a $2,000,000 note payable to an affiliate, but received a cash lease
inducement from a landlord of $3,685,000 and received $803,000 in capital
contributions through the Executive Equity Purchase and the Director Equity
Purchase. The note payable was incurred when the Company borrowed funds from
an affiliate to finance a deposit related to the acquisition of a group of
facilities. The lease inducement was received as the result of the leasing of
the New Hampshire Facilities.
INFLATION
The healthcare industry is labor intensive. Wages and other labor related
costs are especially sensitive to inflation. Certain of the Company's other
expense items, such as supplies and real estate costs are also sensitive to
inflationary pressures. Shortages in the labor market or general inflationary
pressure could have a significant effect on the Company. In addition,
suppliers pass along rising costs to the Company in the form of higher prices.
When faced with increases in operating costs, the Company has sought to
increase its charges for services and its requests for reimbursement from
government programs. The Company's private pay customers and third party
reimbursement sources may be less able to absorb increased prices for the
Company's services. The Company's operations could be adversely affected if it
is unable to recover future cost increases or experiences significant delays
in increasing rates of reimbursement of its labor or other costs from Medicare
and Medicaid revenue sources. See "Business--Governmental Regulation."
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BUSINESS
THE COMPANY
Harborside Healthcare provides high quality long-term care, subacute care
and other specialty medical services in four principal regions: the Southeast
(Florida), the Midwest (Ohio and Indiana), New England (New Hampshire) and the
Mid-Atlantic (New Jersey and Maryland). Within these regions, the Company
operates 26 licensed long-term care facilities (9 owned and 17 leased) with a
total of approximately 3,000 licensed beds. After giving effect to the pending
acquisition of the four Ohio Facilities, the Company will operate 30 long-term
care facilities (13 owned and 17 leased) with a total of 3,700 licensed beds.
The Company provides traditional skilled nursing care, a wide range of
subacute care programs (such as orthopedic, CVA/stroke, cardiac, pulmonary and
wound care), as well as distinct programs for the provision of care to
Alzheimer's and hospice patients. In addition, the Company provides certain
rehabilitation therapy and behavioral health services both at Company-operated
and non-affiliated facilities. The Company seeks to position itself as the
long-term care provider of choice to managed care and other private referral
sources in its target markets by achieving a strong regional presence and by
providing a full range of high quality, cost effective nursing and specialty
medical services.
Since commencing operations in 1988, the Company has experienced significant
growth through strategic acquisitions in states it believes possess favorable
demographic and regulatory environments, as well as through the expansion of
subacute care and other specialty medical services provided at its long-term
care facilities. Since 1993 and after giving effect to the recent and pending
transactions, the Company increased its overall patient capacity by
approximately 1,550 licensed beds, or 72.2%. During the same period, the
Company also improved its overall quality mix (defined as net patient service
revenues derived from Medicare, commercial insurance and other private payors)
from 61.1% to 65.4% of net patient service revenues for the years ended
December 31, 1993 and 1995, respectively, primarily as a result of the
Company's rapid expansion of its subacute care and other specialty medical
services. For the three months ended March 31, 1996, during which the Company
began leasing the New Hampshire Facilities, the Company's quality mix was
60.1% (31.8% private and other and 28.3% Medicare) and its average occupancy
rate was 91.3%. The Company believes that its quality mix and its average
occupancy rate have consistently been among the highest in the long-term care
industry.
The Company believes that it is favorably positioned to benefit from trends
impacting the healthcare industry, including favorable demographic shifts,
advances in medical technology and continuing public and private pressures to
contain growing healthcare costs. At the same time, government restrictions
and high construction and start-up costs are expected to continue to constrain
the supply of long-term care and subacute facilities. The Company further
believes that an increasingly complex operating environment is motivating
smaller, less efficient long-term care facility operators to combine with or
sell to established operators. Harborside Healthcare expects that such recent
trends toward industry consolidation will continue and will provide it with
future acquisition opportunities.
GROWTH STRATEGY
The Company intends to continue to grow by (i) selectively acquiring
additional long-term care facilities in its existing and in new geographic
regions, (ii) expanding the range of subacute care provided, including the
addition of distinct COMPASS (COMprehensive Patient Active Subacute Systems)
subacute care units, (iii) expanding its existing rehabilitation therapy and
behavioral healthcare businesses, (iv) developing and acquiring new ancillary
service operations, such as institutional pharmacy, home healthcare and
infusion therapy and (v) expanding its Alzheimer's and hospice care programs.
The Company believes that its strategy of concentrating its operations in
selected geographic markets and complementing its long-term care platform with
a wide range of specialty medical services and ancillary services will enable
the Company to benefit from economies of scale and improve its ability to
penetrate regional managed care markets.
39
<PAGE>
Acquisition Strategy
The Company generally seeks to acquire long-term care facilities in its
existing regions as well as in new geographic markets it believes possess
favorable demographic and regulatory environments. The Company believes that
concentrating its long-term care facilities within selected geographic regions
enables it to achieve certain operating efficiencies through economies of
scale, reduced corporate overhead and more effective management supervision
and financial controls. Geographic concentration also allows the Company to
establish more effective working relationships with referral sources and
regulatory authorities in the states in which it operates. The Company
believes that this strategy complements its operating approach of building
integrated networks of healthcare services targeted at managed care and other
private insurance organizations.
Harborside Healthcare generally seeks to acquire long-term care facilities
that: (i) have a history of stable occupancy and operations, (ii) are in good
physical condition, (iii) have been constructed or renovated in the past
fifteen years, (iv) have an overall size generally ranging from 100 to 200
licensed beds, (v) have a good reputation in the community, (vi) operate in
markets with favorable competitive climates and (vii) provide opportunities
for additional growth through the expansion of the range and scope of services
offered. All acquisition opportunities considered by the Company are subject
to the availability of financing on acceptable terms. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
The Company employs a full-time acquisitions staff to locate, evaluate,
negotiate and complete the acquisition of long-term care facilities. The
Company believes that maintaining a dedicated acquisitions staff enables it to
complete acquisitions without disruption of its operations. Prior to
consummating an acquisition, the Company conducts a comprehensive due
diligence review, including analyses of (i) financial and operating
performance, (ii) survey results and compliance with Federal and state
regulations, (iii) competition and market assessments, (iv) regulatory and
reimbursement issues, (v) engineering and environmental matters and (vi) legal
and ancillary risk issues. Upon completion of the due diligence process, the
Company's acquisition staff, in conjunction with its operating and marketing
personnel, develops a business plan for each facility or group of facilities
to be acquired. The plan is subsequently reviewed by the Company's senior
management and a decision whether to proceed is made.
In keeping with its growth strategy, the Company leased six additional long-
term care facilities with 537 beds in New Hampshire in January 1996. The
Company believes that a significant opportunity exists to improve the quality
mix revenues of its New Hampshire Facilities through the addition of Medicare,
subacute care and other specialty medical services at these facilities.
Subsequently, the Company also entered into an agreement to lease the Ohio
Facilities pursuant to a capital lease. This transaction is expected to
strengthen the Company's existing network of five long-term care facilities in
Ohio and to provide the Company with an opportunity to achieve regional
overhead cost efficiencies while further enhancing its ability to attract
managed care payors in that state. Together, the New Hampshire Facilities and
Ohio Facilities represented approximately $54.3 million in combined total net
revenues for the year ended December 31, 1995. See "--The Ohio Transaction."
Since 1993 and after giving effect to the New Hampshire Transaction and the
Ohio Transaction, the Company increased its overall patient capacity by
approximately 1,550 licensed beds, or approximately 72.2%.
The Company is continuously discussing with third parties the possible
acquisition of long-term care facilities. Although the Company regularly
considers and evaluates opportunities for expansion and from time to time
enters into letters of intent that provide the Company with an exclusivity
period during which it considers possible acquisitions, the Company does not
at this time have any firm commitments to make any material acquisitions of
long-term care facilities other than the Ohio Transaction, nor has it
identified any material, specific ancillary business.
Expansion of Specialty Medical Services
The Company also expects to continue to expand the range of subacute care
and other specialty medical services provided at its long-term care
facilities. Since its inception, the Company has developed strong
40
<PAGE>
capabilities in the areas of subacute care and other specialty medical service
design and delivery and has implemented subacute care services at each of its
current long-term care facilities, other than the recently acquired New
Hampshire Facilities. The Company is evaluating opportunities to introduce
subacute care and other specialty medical services at its New Hampshire
Facilities.
Where demand for subacute care is particularly strong, the Company has
developed distinct subacute care units. Where appropriate, the Company expects
to continue to add distinct subacute care units within its existing facilities
or within newly acquired long-term care facilities. Within these units, the
Company has designed and implemented several clinical pathways designed to
achieve specified, measurable treatment outcomes in an efficient and cost-
effective manner. The Company believes that its subacute services and clinical
pathways are attractive to managed care organizations and other private payors
as a result of the Company's emphasis on quality and cost efficiency. The
Company has also developed and expects to continue to develop specialized care
units for patients with Alzheimer's disease and hospice units for patients
with terminal illnesses. See "--Patient Services." Primarily as a result of
the Company's expansion of specialty medical services, net revenues per
patient day have increased from $109.57 in 1993 to $134.45 in 1995.
Expansion of Ancillary Businesses
The Company currently provides a range of ancillary services, including
physical, occupational and speech rehabilitation therapy, at 15 Company-
operated and 36 non-affiliated long-term care facilities. Where appropriate,
the Company expects to add its rehabilitation therapy programs at newly
acquired long-term care facilities and to selectively expand its ancillary
business with non-affiliated long-term care facilities. The Company also
recently began providing behavioral health services at selected Company-
operated, as well as non-affiliated, long-term care facilities.
The Company is currently evaluating opportunities to acquire or develop
additional ancillary businesses, including home healthcare, institutional
pharmacy and infusion therapy. The Company believes that providing home
healthcare services will make it more attractive to managed care and other
private payors, allow it to retain patients within a broader continuum of care
and provide wider access to its current nursing capacity. The Company further
believes that entry into institutional pharmacy and infusion therapy
businesses will offer it opportunities to reduce operating costs and capture
additional profits by bringing within its organization services typically
purchased from third-party contractors. Although such activities are under
consideration, the Company has not at this time identified any specific
acquisitions or new business developments of these businesses. See "--
Ancillary Businesses."
OPERATING STRATEGY
The Company's operating strategy emphasizes (i) providing high quality
healthcare on a cost-effective basis and expanding the range of medical
services it provides, (ii) maintaining high occupancy rates and further
improving its quality mix and (iii) achieving operating efficiencies and
actively managing overhead costs.
The Company will continue to focus its efforts to ensure the efficient and
cost-effective delivery of high quality healthcare to its medically demanding
patients. To achieve these goals, the Company will continue to recruit highly
qualified administrators, nurses and medical directors. Performance
improvement standards and committees at each facility (comprised of the
facility administrator and the facility's senior medical professionals)
continually monitor the quality of care provided. The Company uses
interdisciplinary teams to provide high quality care and case managers to
coordinate, monitor and evaluate the delivery of care. The Company believes
that its commitment to providing high quality care has established its
favorable reputation in the markets it serves. The Company also seeks to
continually expand the range of medical services provided through its distinct
units and otherwise. In addition, the Company employs corporate-level staff in
the areas of specialty medical services, professional services and managed
care who are responsible for evaluating and expanding the range of medical
services provided at its facilities.
41
<PAGE>
The Company also seeks to maintain high occupancy rates at its facilities
while further improving its quality mix. The Company intends to achieve this
goal by: (i) expanding the breadth and improving the quality of services
offered, including the addition of speciality medical services in order to
attract Medicare, managed care and other private pay patients; (ii) developing
additional referral sources and marketing programs designed to increase
occupancy; and (iii) closely monitoring census information and other patient
data at the corporate, regional and facility levels.
The Company believes that concentrating its long-term care facilities within
selected geographic regions enables it to achieve operating efficiencies
through economies of scale, reductions in corporate overhead and improvements
in supervision and financial controls. Geographic concentration facilitates
the centralization of purchasing, training, marketing and other management
services and also allows the Company to establish more effective working
relationships with referral sources and regulatory authorities. As a result,
the Company believes it is better able to attract managed care and other
private payors and thereby improve its quality mix.
The Company actively monitors and manages operating costs in order to
maintain and improve the profitability of its operations. The Company's
management philosophy stresses close oversight of facility operations by all
three levels of management (corporate headquarters, regional and facility).
The Company's centralized, automated financial reporting system enables
corporate financial personnel to monitor key operating and financial data and
budget variances on a timely basis, as well as to respond quickly to unusual
developments at its facilities. See "--Operations" and "--Sources of
Revenues."
PATIENT SERVICES
Basic Patient Services
Basic patient services are those traditionally provided to elderly patients
in long-term care facilities to assist with the activities of daily living and
to provide general medical care. The Company provides 24-hour skilled nursing
care by registered nurses, licensed practical nurses and certified nursing
aides in all of its facilities. Each facility is managed by an on-site
licensed administrator who is responsible for the overall operation of the
facility, including the quality of care provided. The medical needs of
patients are supervised by a medical director, who is a licensed physician.
Although treatment of patients is the responsibility of their own attending
physicians, who are not employed by the Company, the medical director monitors
all aspects of delivery of care. The Company also provides a broad range of
support services, including dietary services, therapeutic recreational
activities, social services, housekeeping and laundry services, pharmaceutical
and medical supplies and routine rehabilitation therapy.
Each facility offers a number of individualized therapeutic activities
designed to enhance the quality of life of its patients. These activities
include entertainment events, musical productions, trips, arts and crafts and
volunteer and other programs that encourage community interaction.
Specialty Medical Services
Specialty medical services are those provided to patients with medically
complex needs, who generally require more extensive treatment and a higher
level of skilled nursing care. These services typically generate higher net
patient service revenues per patient day than basic patient services as a
result of increased levels of care and the provision of ancillary services.
The Company intends to expand the scope and range of its specialty medical
services and programs in order to further enhance revenues, profitability and
the reputation of its facilities for providing quality care.
Subacute Care. Subacute care is goal-oriented, comprehensive care designed
for an individual who has had an acute illness, injury, or exacerbation of a
disease process. Subacute care is typically rendered immediately after, or
instead of, acute hospitalization in order to treat one or more specific,
active, complex medical conditions or in order to administer one or more
technically complex treatments. The Company provides subacute care services at
all of its existing facilities (other than its recently acquired New Hampshire
Facilities) in such areas
42
<PAGE>
as complex medical, cardiac recovery, digestive, immuno-suppressed disease,
post-surgical, wound, and CVA/stroke care, hemodialysis, infusion therapy, and
diabetes and pain management.
In facilities that have shown strong demand for subacute services, the
Company has developed distinct subacute units marketed under the name
"COMprehensive Patient Active Subacute System" or "COMPASS." Each COMPASS unit
contains 20 to 60 beds and is specially staffed and equipped for the delivery
of subacute care. Patients in COMPASS units typically range in age from late
teens to the elderly, and typically require high levels of nursing care and
the services of physicians, therapists, dietitians, clinical pharmacists or
psycho/social counselors. Certain patients may also require life support or
monitoring equipment. Because patient goals are generally rehabilitation-
oriented, lengths of stay in COMPASS units are generally expected to be less
than 30 days each. The Company recently opened its first five COMPASS units at
its Gulf Coast, Larkin Chase, Tampa Bay, Sarasota and Troy facilities
containing a total of approximately 170 licensed beds. Four additional COMPASS
units are expected to open during 1996.
The Company has designed clinical pathways for these COMPASS units in the
areas of orthopedic rehabilitation, CVA/stroke recovery, cardiac recovery,
pulmonary rehabilitation and wound care management. These clinical pathways
are designed to achieve specified measurable outcomes in an efficient and
cost-effective manner. The Company's COMPASS units and the clinical pathways
used in these units are designed to attract commercial insurance and managed
care organizations, such as HMOs and PPOs. The Company has personnel dedicated
to actively marketing its COMPASS units to commercial insurers and managed
care organizations. The Company is currently developing five additional
clinical pathways in the areas of oncology, HIV/AIDS, post-surgical recovery,
ventilator care and neuro-trauma rehabilitation, and expects to introduce
these pathways in selected COMPASS units at various times during 1996.
The Company is seeking to establish a Medical Services Organization network
in conjunction with Humana Health Care Plans in the Pasco County, Florida
area. The Company will develop a network of healthcare providers and manage a
continuum of care ranging from subacute care to home healthcare services. The
network is expected to include the Company's Gulf Coast and Palm Harbor
facilities and is expected to commence operation in the third quarter of 1996.
Alzheimer's and Hospice Care. The Company has also developed distinct units
that provide care for patients with Alzheimer's disease and hospice units for
patients with terminal illnesses. As of March 31, 1996, the Company operates
three dedicated Alzheimer's units at its Pinebrook, Swanton and Northwood
facilities, with a total of 88 licensed beds. The Company expects to open two
additional Alzheimer's units at its Naples and Troy facilities during 1996.
The Company also operates three distinct hospice units with a total of 46
licensed beds at its Tampa Bay, Clearwater and Sarasota facilities, where it
provides care to terminally ill patients and counseling to their families. The
Company expects to open an additional hospice unit with ten licensed beds
during 1996 at its Pinebrook facility.
ANCILLARY BUSINESSES
The Company currently provides rehabilitation therapy services and
behavioral health services, principally at its own long-term care facilities
and, beginning in 1995, at selected non-affiliated long-term care facilities.
The Company believes it can improve the operating performance of its long-term
care facilities by further expanding the scope of ancillary services provided.
In this regard, the Company intends to pursue selected opportunities to
acquire or develop additional ancillary businesses, such as home healthcare,
institutional pharmacy, and infusion therapy, in order to complement existing
Company services. See "--Growth Strategy."
Rehabilitation Therapy Services. Commencing in January 1994, the Company
began to provide comprehensive physical, occupational and speech therapy
programs. As of March 31, 1996, the Company provided rehabilitation therapy
services at 13 of the Company's facilities and had therapy contracts with 35
non-affiliated long-term care providers. The Company currently employs
approximately 430 therapists.
43
<PAGE>
Behavioral Health Services. The Company recently commenced its behavioral
health business, which offers services provided by teams of licensed
professionals who assist patients with emotional and psychological issues
relating to their loss of functioning and relocation to a long-term care
setting. These teams of professionals also provide a range of therapy and
emotional support services to assist patients and their families in improving
the quality of their lives. The Company provides behavioral health services at
five of the Company's facilities in Florida and at seven non-affiliated
facilities in that region.
PROPERTIES
The Company operates 26 long-term care facilities, nine of which are owned
and 17 of which are leased. All nine of the properties owned by the Company
are subject to mortgages. See "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and Note E to the Company's audited combined financial
statements included elsewhere in this Prospectus. Of the Company's leased
facilities, fourteen are leased from subsidiaries of Meditrust. The Company's
Northwestern Ohio and Defiance facilities are leased from a non-affiliated
lessor and the Company's Brevard facility is leased from an affiliate. See
"Certain Transactions." The Company has also entered into an agreement to
acquire the Ohio Facilities from a non-affiliated lessor pursuant to a capital
lease. See "--The Ohio Transaction."
The Company's leases with Meditrust have initial terms which expire on
various dates in the year 2005 and provide for up to two five-year renewals.
The Company's annual rental expense under its leases with Meditrust for the
year ended December 31, 1995, were $0.5 million and are expected to be $8.7
million for the year ended December 31, 1996 (without giving effect to any
additional leases that might be entered into following the Offering). The
Company's lease for its Northwestern Ohio and Defiance facilities has a ten-
year term expiring in the year 2003 with no renewal options. The Company's
lease for its Brevard facility has an initial term expiring in the year 2004
and provides for up to two five-year renewal terms. Each of the Company's
leases provides for the payment of annual rent which in most cases increases
by a formula or by a fixed percentage each year. The lease with Meditrust for
the Company's Swanton facility also provides for additional rent based on
increases in that facility's revenues as compared to a base year. The
Company's leases also generally provide that the Company is responsible for
expenses such as taxes, insurance and maintenance and repairs.
Each of the Company's leases with Meditrust provides the Company with
options to purchase the leased facilities which are exercisable on the eighth
anniversary of the lease (the ninth anniversary in the case of the New
Hampshire Facilities), at the end of the initial term and at the end of each
renewal term at a price equal to the greater of (i) the fair market value of
the facilities subject to the purchase option (90% of the fair market value in
the case of the New Hampshire Facilities), excluding capital expenditures made
by the Company or (ii) Meditrust's purchase price for the facilities subject
to the purchase option. The lease with Meditrust for the Company's Swanton
facility grants the Company a right of first refusal to purchase the facility
which the Company may exercise if it exercises its first renewal option under
the lease. Each of the Company's other leases with Meditrust grants the
Company a right of first refusal to purchase the facility subject to the lease
exercisable at any time during the term of the lease. The leases for the
Company's Northwestern Ohio and Defiance facilities provides for a purchase
option to acquire both of the facilities, which the Company may exercise
during the final year of the lease term for an aggregate purchase price of
$8,500,000. In the event the Company does not exercise its purchase option
under the lease, the Company will be required to pay a one-time termination
fee of $500,000 to the lessor. The lease also grants the Company a right of
first refusal during the lease term. See Note D to the Company's audited
combined financial statements included elsewhere in this Prospectus. The
Company's lease for its Brevard facility also contains a purchase option. See
"Certain Transactions."
The Company's leases with Meditrust are secured by the facilities, the
facilities' accounts receivable, cash collateral and a pledge of the ownership
interests in the subsidiary lessees and the general partners of such lessees.
The facilities subject to the Meditrust leases are also cross-collateralized
and contain cross-default provisions, so that a default under one of the
leases would trigger a default under each of the other Meditrust leases. As a
result, the Company could lose all of the facilities subject to such leases in
the event of a default
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<PAGE>
under one such lease. In addition, the leases permit Meditrust to require the
Company to purchase the facilities at a specified purchase price upon the
occurrence of a default. The Meditrust leases also subordinate all
intercompany obligations and distributions of the subsidiary lessees to the
obligations owing to Meditrust pursuant to the leases.
Although many of the Company's leases provide for non-disturbance from
mortgagees of the leased properties, the lease for the Company's Northwood
facility is not so protected and is subject to termination in the event the
mortgage is foreclosed following a default by the owner-lessor. However, the
Company has the right to make mortgage payments on behalf of the owner-lessor
in order to prevent such foreclosure. In the case of the Company's Brevard
facility, the assets of the facility are subject to security interests in
favor of a mortgagee of the property and intercompany payments from the
subsidiary lessee are subordinate to payments under the mortgage. All of the
Company's lease obligations and certain of the Company's debt obligations are
guaranteed by Harborside Healthcare Limited Partnership ("HHLP"), the
Company's principal operating subsidiary. In addition, HHLP has also agreed to
indemnify Meditrust, as lessor under the Meditrust leases, and the senior
mortgage holder on the Company's Brevard facility, for certain environmental
liabilities.
One of the Company's owned facilities, the Larkin Chase Center, is owned by
Bowie L.P., a joint venture which is owned 75% by the Company and 25% by a
non-affiliated investor. Bowie L.P. subleases the land on which the facility
is located from an affiliate of the minority investor. The Company manages the
facility for a fee equal to 6.0% of the facility's annual total net revenues.
The minority investor has an option to purchase the Company's interest in
Bowie L.P. at fair market value, which option is exercisable during a sixty-
day period each year commencing in 2001. The Company accounts for the Larkin
Chase Center using the equity method and its share of the facility's operating
results is reflected in the Company's audited combined financial statements as
a "loss on investment in limited partnership." See "Selected Combined
Financial and Operating Data" and Note F to the Company's audited combined
financial statements included elsewhere in this Prospectus.
The following table summarizes certain information regarding the Company's
facilities and the facilities included in the Ohio Transaction:
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<PAGE>
SUMMARY OF FACILITIES
<TABLE>
<CAPTION>
YEAR OWNED/ LICENSED AVERAGE
FACILITY LOCATION ACQUIRED LEASED BEDS OCCUPANCY RATE(1)
- ----------- -------- -------- ------ -------- -----------------
<S> <C> <C> <C> <C> <C>
SOUTHEAST REGION
FLORIDA
Brevard Rockledge 1994 Leased(/2/) 100 91.6%
Clearwater Clearwater 1990 Owned(/3/) 120 94.1%
Gulf Coast New Port Richey 1990 Owned(/3/) 120 90.7%
Naples Naples 1989 Leased(/4/) 120 93.3%
Ocala Ocala 1990 Owned(/3/) 120 95.5%
Palm Harbor Palm Harbor 1990 Owned(/3/) 120 90.8%
Pinebrook Venice 1989 Leased(/4/) 120 93.6%
Sarasota Sarasota 1990 Leased(/4/) 120 92.4%
Tampa Bay Oldsmar 1990 Owned(/3/) 120 93.2%
-----
1,060
MIDWEST REGION
OHIO
Defiance Defiance 1993 Leased 100 87.9%
Northwestern Ohio Bryan 1993 Leased 189 80.4%
Swanton Swanton 1995 Leased(/4/) 100 97.2%
Toledo Perrysburg 1990 Owned(/3/) 100 95.7%
Troy Troy 1989 Leased(/4/) 195 95.2%
The Ohio Facilities -- Pending Owned(/5/) 692 93.0%
INDIANA
Decatur Indianapolis 1988 Owned(/6/) 88 90.6%
Indianapolis Indianapolis 1988 Leased(/4/) 103 91.5%
New Haven New Haven 1990 Leased(/4/) 120 92.4%
Terre Haute Terre Haute 1990 Owned(/3/) 120 91.9%
-----
1,807
NEW ENGLAND REGION
NEW HAMPSHIRE
Applewood Winchester 1996 Leased(/4/) 70 91.4%
Crestwood Milford 1996 Leased(/4/) 82 96.6%
Milford Milford 1996 Leased(/4/) 52 96.2%
Northwood Bedford 1996 Leased(/7/) 147 95.9%
Pheasant Wood Peterborough 1996 Leased(/4/) 99 96.7%
Westwood Keene 1996 Leased(/4/) 87 86.7%
-----
537
MID-ATLANTIC REGION
MARYLAND
Larkin Chase Center Bowie 1994 Owned(/8/) 120 81.5%(9)
NEW JERSEY
Woods Edge Bridgewater 1988 Leased(/4/) 176 94.6%
-----
296
-----
TOTAL 3,700
=====
</TABLE>
- ------------
(1) Average occupancy rate is computed by dividing the number of occupied
licensed beds by the total number of available licensed beds during 1995.
(2) Leased from Rockledge T. Limited Partnership ("RTLP"), an affiliate of the
Company. See "Certain Transactions."
(3) Subject to a mortgage in favor of Meditrust which secures a loan in the
aggregate principal amount of $42.3 million. A portion of the proceeds of
the Offering will be used to repay a portion of this loan pursuant to the
Debt Repayment. See "Use of Proceeds." The loan bears interest at a 10.65%
annual rate. Additional interest payments may also be required commencing
on January 1, 1997 in an amount equal to 0.3% of the difference between
the operating revenues of the borrowers after that date and the operating
revenues during a 12 month base period which commenced October 1, 1995.
Following the Debt Repayment the loan may be voluntarily prepaid, subject
to a 1.5% prepayment penalty commencing in 1999. The prepayment penalty
declines to zero in 2002. See Note E to the Company's combined financial
statements included elsewhere in this Prospectus.
(4) Leased from Meditrust.
(5) To be acquired in connection with the pending Ohio Transaction. The
capital lease for each of these facilities does not provide non-
disturbance protection from, and is subject to, prior mortgages. See "--
The Ohio Transaction."
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(6) This property is subject to a first mortgage loan which the Company
assumed in connection with its purchase of the facility in 1988. The
outstanding principal balance on the loan as of March 31, 1996 is
$1,613,000. The loan bears interest at 14% and requires the annual
retirement of $20,000 of principal each year. The final maturity of the
loan is in 2010 and the loan may be prepaid commencing in 1999 without
penalty. See Note E to the Company's combined financial statements
included elsewhere in this Prospectus.
(7) Leased from Meditrust. The lease for the Northwood facility does not
provide non-disturbance protection from, and is subject to, a prior
mortgage.
(8) Owned by Bowie L.P. The Company's interest in Bowie L.P. is pledged to the
facility's mortgage lender. HHLP has guaranteed the indebtedness of Bowie
L.P. See Note F to the Company's audited combined financial statements
included elsewhere in this Prospectus.
(9) Average occupancy rate for the fourth quarter of 1995. The Larkin Chase
Center was opened in April 1994 and did not reach stabilized occupancy
until the fourth quarter of 1995.
The Company's corporate offices in Boston are subleased from Berkshire. See
"Certain Transactions." The Company also leases regional offices in
Clearwater, Florida and Indianapolis, Indiana, maintains a regional office at
its facility in Bridgewater, New Jersey, and owns a regional office in
Peterborough, New Hampshire. An accounting and data processing office is
leased by the Company in Fort Wayne, Indiana and the Company's ancillary
services companies lease offices in Palm Harbor, Florida and Indianapolis,
Indiana.
The Company considers its properties to be in good operating condition and
suitable for the purposes for which they are being used. See "--The Ohio
Transaction" and "--Selected Expansion Projects" for a description of pending
property acquisitions and expansions.
THE OHIO TRANSACTION
The Company has entered into an agreement to lease the four Ohio Facilities
which will be accounted for as a capital lease, with a total of approximately
700 licensed beds. The Company expects to complete the Ohio Transaction in the
third quarter of 1996, subject to the satisfaction of certain customary
conditions, including the satisfactory completion of the Company's due
diligence review and receipt of regulatory and other approvals. The Company
has agreed to lease these facilities for an initial term ending in the year
2001. During the first six months of the final year of the initial term, the
Company may exercise an option to purchase all four facilities (the "Ohio
Purchase Option") for approximately $57.1 million (the "Ohio Purchase Price").
If the Company exercises the Ohio Purchase Option but is unable to finance the
Ohio Purchase Price, the lease may be extended for up to two additional years
pursuant to the terms of the lease, during which time the Company must
finance, either directly or through lease financing, and complete the purchase
of the Ohio Facilities. The annual aggregate base rent will be $5.0 million
during the initial term and $5.5 million during the extension term. The
Company will be responsible for expenses such as taxes, insurance and
maintenance and repairs.
The Company has agreed to pay a total of $8 million for the Ohio Purchase
Option (the "Ohio Purchase Option Price"), which will be applied toward the
Ohio Purchase Price of the facilities upon the closing of the purchase of the
Ohio Facilities. The Company paid $600,000 (the "Initial Deposit") of the Ohio
Purchase Option Price upon execution of the agreement to lease, which will be
refunded if the Company terminates the Ohio Transaction after completing its
due diligence investigation. An additional $600,000 of the Ohio Purchase
Option Price (collectively with the Initial Deposit, the "Deposit") is payable
upon the satisfactory completion of the Company's due diligence. The Deposit
is non-refundable except under certain limited circumstances, including an
inability to obtain necessary governmental approvals. An additional $3.8
million of the Ohio Purchase Option Price will become payable upon the
commencement of the lease and will be funded with a portion of the net
proceeds of the Offering. See "Use of Proceeds." The remaining $3.0 million of
the Ohio Purchase Option Price will be paid by the Company at the end of the
lease term whether or not the Company exercises the Ohio Purchase Option. If
the Company exercises the Ohio Purchase Option, the balance of the Ohio
Purchase Option Price will be paid upon the closing of the purchase or at the
end of the two-year extension term.
In connection with the Ohio Transaction, the Company has agreed to engage an
executive and principal owner of the lessor as a consultant. As compensation
for these services, the consultant will receive up to $120,000 per year during
the term of the lease and the extension term, if any. The consultant will also
receive $500,000 payable at the end of the initial lease term and an
additional $500,000 payable upon termination of the lease.
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<PAGE>
HHLP will guarantee the performance of the obligations of the leasees and
their affiliates under the Ohio Transaction and the Ohio Purchase Option.
While the guarantee is in effect, payments by HHLP to its affiliates will be
permitted subject to maintaining certain financial covenants. These covenants,
and a requirement that the Company maintain a $5 million security deposit,
will be waived upon delivery of an additional guaranty by the Company
following the Offering.
The leases under the Ohio Transaction are subordinate to certain mortgages
insured by the U.S. Department of Housing and Urban Development ("HUD"). The
lessors are responsible for debt service payments made in connection with such
mortgages, but the Company may satisfy any lessor's debt service obligations
should the lessor default in the payment of its debt service obligations under
its respective mortgage. The leases provide for non-disturbance protection
with respect to subsequent mortgages placed on the Ohio Facilities by the
lessors but do not provide for non-disturbance protection against the HUD
insured mortgages. The Ohio Transaction is subject to HUD approval, and no
assurance can be given that such approval will be obtained.
Certain portions of one of the Ohio Facilities are currently subleased to
third parties. During the lease term, the Company will assume all of the
lessor's rights under the subleases, and the lessor will remain responsible
for obtaining the necessary HUD approval for such subleases or terminating the
subleases if approval is not obtained.
SELECTED EXPANSION PROJECTS
From time to time, the Company expects to pursue select expansion and new
development opportunities which (i) complement its existing operations, (ii)
enable the Company to broaden the range of services offered at its facilities
or (iii) enhance its ability to compete effectively in a particular market.
The Company is currently in the initial phases of the following expansion
projects:
Ocala Expansion. In March 1996, the Company received a CON to construct an
addition to its existing 120-bed facility in Ocala, Florida. The CON permits
the addition of 60 licensed beds and a rehabilitation therapy area. The CON
also provides for a 21-bed COMPASS unit and a 20-bed distinct Alzheimer's unit
to be located within the addition. The CON permits project costs of up to
approximately $2.8 million. The Company expects to commence construction
within approximately six months.
Larkin Chase Center Expansion. Bowie L.P. has received a CON permitting it
to construct a 60-bed addition to its existing 120-bed facility, the Larkin
Chase Center, located in Bowie, Maryland. The total permitted project cost is
approximately $2.5 million including allowances for inflation. Bowie L.P.
expects to commence construction during 1996.
The Company expects to finance these expansion projects with debt or lease
financings. There can be no assurance that sufficient financing will be
available on favorable terms, that all required licenses and governmental
approvals will be received or that the Company will be able to successfully
complete these projects. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
OPERATIONS
Facilities. Each of the Company's facilities is supervised by a licensed
facility administrator who is responsible for all aspects of the facility's
operations. The facility administrator oversees (i) a director of nursing who
supervises a staff of registered nurses, licensed practical nurses and
certified nursing aides, (ii) a director of admissions who is responsible for
developing local marketing strategies and programs and (iii) various other
departmental supervisors. The Company also contracts with one or more licensed
physicians at each facility to serve as medical directors for the purpose of
supervising the medical management of patients. Facilities with subacute or
specialty medical units or programs may also contract with physician
specialists to serve as rehabilitation or specialty program medical directors
in areas such as physiatry (physical medicine), neurology or gero-psychology.
Facilities may also employ or contract for additional clinical staff such as
case managers, respiratory therapists and program directors. Department
supervisors at each of the Company's facilities oversee personnel who provide
dietary, maintenance, laundry, housekeeping, therapy and social services. In
addition, a
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business office staff at each facility routinely performs administrative
functions, including billing, payroll, accounts payable and data processing.
The Company's corporate and regional staff provide support services such as
quality assurance, management training, clinical consultation and support,
management information systems, risk management, human resource policies and
procedures, operational support, accounting and reimbursement expertise.
Regions. The Company seeks to cluster its long-term care facilities and
ancillary businesses in selected geographic regions to establish a strong
competitive position as well as to position the Company as a healthcare
provider of choice to managed care and private payors in these markets. The
Company's facilities currently serve four principal geographic regions: the
Southeast (Florida), the Midwest (Ohio and Indiana), New England (New
Hampshire), and the Mid-Atlantic (New Jersey and Maryland). The Company
maintains regional operating offices in Clearwater, Florida; Indianapolis,
Indiana; Bridgewater, New Jersey; and Peterborough, New Hampshire. Geographic
concentration enables the Company to take advantage of economies of scale in
operations support, purchasing, training and other management services. Each
region is supervised by a regional director of operations who directs the
efforts of a team of professional support staff in the areas of clinical
services, marketing, bookkeeping, human resources and engineering. Other
Company staff, who are principally based in the regions, provide support and
assistance to all of the Company's facilities in the areas of subacute
services, managed care contracting, reimbursement services, risk management,
data processing and training. Financial control is maintained through
financial and accounting policies established at the corporate level for use
at each facility. The Company has standardized operating policies and
procedures and continually monitors operating performance to assure
consistency and quality of operations. In addition to its principal executive
office in Boston, an accounting and data processing office is maintained in
Fort Wayne, Indiana. The Company's ancillary services businesses maintain
offices in Palm Harbor, Florida, and Indianapolis, Indiana.
Management and Financial Systems. The Company maintains a comprehensive
system of management and financial controls which is designed to enable the
Company to monitor operating costs closely and to quickly distribute financial
and other operational information to appropriate levels of management. All of
the Company's existing long-term care facilities, other than the recently
acquired New Hampshire Facilities, together with its ancillary service
companies, share common data processing systems for all financial
applications, including the processing of billing, accounts payable, payroll
and general ledger transactions. In addition, each of the Company's long-term
care facilities processes clinical data through facility-based information
systems.
The Company expects that as new facilities are acquired, the Company will
initially integrate their operations on the basis of their existing computer
systems with a view toward ultimately converting all of its facilities to
operate under a common management information system. In this regard, the
Company expects to continue to use existing information systems to operate its
six recently-acquired New Hampshire Facilities as well as those to be leased
pursuant to the Ohio Transaction.
Continuous Quality Improvement Program. The Company has developed a
continuous quality improvement program which is designed to monitor, evaluate
and improve the delivery of patient care. The program is supervised by the
Company's Vice President of Professional Services and consists of the
standardization of policies and procedures, routine site visits and
assessments and a quality control system for patient care and physical plant
compliance. Pursuant to its quality control system, the Company routinely
collects information from patients, family members, referral sources,
employees and state survey agencies which is then compiled, analyzed and
distributed throughout the Company in order to monitor the quality of care and
services provided.
The Company's continuous quality improvement program is modeled after
guidelines for long-term care and subacute facilities promulgated by the Joint
Commission on Accreditation of Healthcare Organizations ("JCAHO"), a
nationally recognized accreditation agency for hospitals and other healthcare
organizations. The Company has received accreditation "with commendation" by
JCAHO for its Pinebrook and Tampa Bay facilities. JCAHO recently completed an
additional accreditation survey at the Company's Terre Haute facility
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and the Company is awaiting formal notification of the results of such survey.
Of the approximately 16,000 licensed long-term care facilities in the United
States, approximately 1,200, or 7.5%, are accredited by JCAHO. Of those
surveyed in 1995, approximately 16% were accredited "with commendation." The
Company believes accreditation by JCAHO is considered an important criterion
by both managed care and commercial insurance companies in awarding provider
contracts and is therefore seeking accreditation of its remaining facilities.
MARKETING
The Company's marketing program is designed to attract patients who will
have a favorable impact on the Company's profits and quality mix of revenues.
The Company establishes monthly occupancy and revenue goals for each of its
facilities and maintains marketing objectives to be met by each facility. The
Company's Vice President of Marketing is principally responsible for the
development and implementation of the Company's marketing program. Regional
marketing directors provide routine support to the facility-based admissions
directors through the development of facility-based marketing strategies,
competitive assessments and routine visits.
The Company uses a decentralized marketing approach in order to capitalize
on each facility's strengths and reputation in the community it serves.
Admissions staff at each facility are primarily responsible for marketing
basic medical services and developing semi-annual marketing plans in
consultation with the Company's regional marketing and operations staff. Basic
medical services are marketed to area physicians, hospital discharge planning
personnel, individual patients and their families and community referral
sources. Facility personnel also market the Company's specialty medical
services to these sources. Corporate and regional personnel who specialize in
subacute care, managed care and reimbursement also assist in the marketing of
specialty medical services.
Since June 1994, the Company has maintained a dedicated managed care
marketing group whose primary purpose is to solicit managed care and
commercial insurance contracts. The Company's regional and corporate staff
attend trade shows and events for managed care, commercial insurance companies
and case managers in order to broaden the Company's overall presence and
recognition with these groups. As of March 31, 1996, the Company had 35
contracts with these payors.
INDUSTRY BACKGROUND
The long-term care industry encompasses a broad range of healthcare services
provided to the elderly and to other patients, with medical needs ranging from
custodial to complex, who can be cared for outside of the acute care hospital
environment. The Company believes that the demand for the services it provides
will increase substantially during the foreseeable future primarily because of
demographic trends, advances in medical technology and emphasis on healthcare
cost containment. At the same time, government restrictions and high
construction and start-up costs are expected to limit the supply of long-term
care facilities. Furthermore, the Company believes that recent trends towards
industry consolidation will continue and will provide it with future
acquisition opportunities.
Growth of Elderly Population. According to the U.S. Bureau of the Census,
the number of people age 65 and over in the U.S. has grown from approximately
25.6 million in 1980, or 11.3% of the population, to approximately 31.1
million in 1990, or 12.5% of the population, and is projected to grow to 40.1
million, or 13.3% of the population, by the year 2010. In addition, people age
85 and older represent one of the fastest growing segments of the elderly
population and are expected to approximately double in number between 1990 and
2010. This population segment comprises the largest number of consumers of
long-term care services as 42% of nursing-home residents are aged 85 or older.
The high growth rate of the elderly is due to general demographic changes as
well as advances in medical technology that have increased life expectancies.
Advances in Medical Technology. Sophisticated new forms of medical equipment
and treatment have lengthened life expectancies, thereby increasing the number
and medical needs of individuals requiring
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specialized care and supervision. In addition, technological advances have
made long-term care facilities a more attractive alternative to acute care or
rehabilitation hospitals by enabling them to offer, on a more cost-effective
basis, services traditionally provided by acute care hospitals.
Cost Containment Pressures. In response to rapidly rising healthcare costs,
governmental and private pay sources have adopted cost containment measures
that have encouraged shorter stays in acute care hospitals. The Federal
government has acted to curtail increases in Medicare costs by limiting to
pre-established amounts acute care hospital reimbursement for specific
services. As a result, average hospital stays have been shortened, with many
patients being discharged despite a continuing need for long-term care. For
many of these patients, home healthcare is not a viable alternative because of
the complexity of the medical services, equipment or monitoring they require.
Long-term care facilities, such as those operated by the Company, are able to
provide many of these specialty services at significantly lower costs than
acute care hospitals because of their lower capital costs, overhead and salary
levels. The Company believes that managed care organizations, insurance
companies, hospital discharge personnel and physicians view long-term care
facilities as a cost-effective and appropriate environment for the delivery of
the type of care offered by the Company and are increasingly referring
patients to such facilities.
Industry Consolidation. The long-term care industry is highly fragmented.
There are approximately 16,000 long-term care facilities in the United States
which contain a total of approximately 1.6 million licensed beds. The 32
largest long-term care providers operate approximately 3,000 facilities
comprising approximately 360,000 licensed beds, or 22% of the industry total.
Recently, the long-term care industry has been subject to competitive
pressures and uncertainty with regard to future changes in governmental
regulations, which have resulted in a trend toward consolidation, especially
of smaller, local operators into larger, more established regional or national
providers. The increasing complexity of medical services provided, growing
regulatory and compliance requirements and increasingly complicated and
potentially volatile reimbursement systems have resulted in the consolidation
of operators who lack sophisticated management information systems, operating
efficiencies and financial resources to compete effectively. The Company
believes that this trend toward consolidation will continue and will provide
the Company with opportunities for continued growth. There can be no
assurance, however, that the Company will be successful in acquiring
facilities on favorable terms, if at all, and in incorporating acquired
facilities into its existing operations. See "--Growth Strategy."
Limitations on the Supply of Long-Term Care Facilities. All of the states in
which the Company operates have enacted CON programs or similar legislation,
which act to artificially restrict the supply of long-term care services.
These laws generally limit the construction of long-term care facilities and
the addition of beds or services in existing facilities. High construction
costs and limitations on government reimbursement of costs of construction and
start-up expenses also act to constrain growth in the number of facilities. As
a result, the Company believes that the supply of long-term care facilities
may not be able to keep up with the demand for such facilities. However, the
relaxation of CON programs could increase industry competition. See "--
Governmental Regulation" and "--Competition."
SOURCES OF REVENUES
The Company derives its revenues primarily from private pay sources, the
Federal Medicare program for certain elderly and disabled patients and state
Medicaid programs for indigent patients. The Company's revenues are influenced
by a number of factors, including (i) the licensed bed capacity of its
facilities, (ii) occupancy rates, (iii) the mix of patients and the rates of
reimbursement among payor categories (private and other, Medicare and
Medicaid) and (iv) the extent to which subacute and other specialty medical
and ancillary services are utilized by the patients and paid for by the
respective payment sources. The Company employs specialists to monitor
reimbursement rules, policies and related developments in order to comply with
all reporting requirements and to assist the Company in receiving
reimbursements.
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The following table identifies the Company's net patient service revenues
attributable to each of its payor sources for the periods indicated:
NET PATIENT SERVICE REVENUES(1)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------- ----------------------------
1993 1994 1995 1995 1996
------------- ------------- -------------- ------------- -------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Private and other....... $29,967 39.9% $31,899 37.1% $ 33,912 32.3% $ 7,981 34.2% $10,313 31.8%
Medicare................ 15,904 21.2 21,423 24.9 34,730 33.1 7,129 30.6 9,176 28.3
Medicaid................ 29,230 38.9 32,627 38.0 36,274 34.6 8,216 35.2 12,943 39.9
------- ----- ------- ----- -------- ----- ------- ----- ------- -----
Total................. $75,101 100.0% $85,949 100.0% $104,916 100.0% $23,326 100.0% $32,432 100.0%
======= ===== ======= ===== ======== ===== ======= ===== ======= =====
</TABLE>
- --------
(1) Net patient service revenues exclude all management fees and all
rehabilitation therapy service revenues and the net patient service
revenues of the Larkin Chase Center. See "--Properties."
Private and Other. Private and other net patient service revenues include
payments from individuals who pay directly for services without governmental
assistance and payments from commercial insurers, HMOs, PPOs, Blue Cross
organizations, workers' compensation programs, hospice programs and other
similar payment sources. Private and other net patient service revenues as a
percentage of total net revenues have declined over the past three years
primarily due to the large increase in the portion of the Company's revenues
derived from Medicare. The Company's rates for private pay patients are
typically higher than rates for patients eligible for assistance under state
Medicaid programs. The Company's private pay rates vary from facility to
facility and are influenced primarily by the rates charged by other providers
in the local market and by the Company's ability to distinguish its services
from those provided by its competitors. Although private pay rates are
generally established on a facility-specific fee schedule, rates charged for
individual cases may vary widely because, in the case of managed care, they
are either negotiated on a case-by-case basis with the payor or are fixed by
contract. Rates charged to private pay patients are not subject to regulatory
control in any of the states in which the Company operates.
Medicare. All of the Company's facilities, except for two of the New
Hampshire Facilities, are certified Medicare providers. In addition, one of
the Ohio Facilities is not a certified Medicare provider. The Company does not
expect to seek Medicare certification for this Ohio Facility because all of
its current patients are private pay patients. The Company has applied for
Medicare certification of the two New Hampshire Facilities that are not
currently certified. Medicare is a Federally funded and administered health
insurance program primarily designed for individuals who are age 65 or over
and are entitled to receive Social Security benefits. The Medicare program
consists of two parts. The first part, Part A, covers inpatient hospital
services and certain services furnished by other institutional healthcare
providers, such as long-term care facilities. The second part, Part B, covers
the services of doctors, suppliers of medical items and services and various
types of outpatient services. Part B services include physical, speech and
occupational therapy, pharmaceuticals and medical supplies, certain intensive
rehabilitation and psychiatric services and ancillary services of the type
provided by long-term care or acute care facilities. Part A coverage, as
applied to services delivered in a long-term care facility, is limited to
skilled nursing and rehabilitative care related to a recent hospitalization
and is limited to a specified term (generally 100 days per calendar year),
requires beneficiaries to share some of the cost of covered services through
the payment of a deductible and a co-insurance payment and requires
beneficiaries to meet certain qualifying criteria. There are no limits on
duration of coverage for Part B services, but there is a co-insurance
requirement for most services covered by Part B.
The method used in determining Medicare reimbursement for rehabilitation
therapy services furnished in the Company's facilities depends on the type of
therapy provided. Medicare applies salary equivalency guidelines to determine
the reasonable cost of physical therapy services and respiratory therapy
services provided on a contract basis, which is the cost that would be
incurred if the therapist were employed at the facility, plus an
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amount designed to compensate the provider for certain general and
administrative overhead costs. Medicare pays for occupational therapy and
speech language pathology services on a reasonable cost basis, subject to the
so-called "prudent buyer" rule for evaluating the reasonableness of the costs.
The Company's gross margins for its contract physical therapy services are
less under the salary equivalency guidelines than for its services under the
"prudent buyer" rule. The Health Care Financing Administration ("HCFA") has
announced its intention to propose rules applying salary equivalency
guidelines to speech and occupational therapy services provided on a contract
basis. If these proposed rules are implemented, they could reduce the
profitability of these services. See "--Governmental Regulation."
Under the Medicare Part A program, the Company is reimbursed for its direct
costs plus an allocation of indirect costs up to a regional limit. As the
Company expands its subacute care and other specialty medical services, the
costs of care for these patients have exceeded and are expected to continue to
exceed the regional reimbursement routine cost limits. In order to recover
these costs, the Company is required to submit routine cost limit exception
requests to recover the excess costs from Medicare. There can be no assurance
that the Company will be able to recover such excess costs under any pending
or future requests. The failure to recover these excess costs in the future
could materially adversely affect the Company. Under current regulations, new
long-term care facilities are, in certain limited circumstances, able to apply
for a three year exemption from routine cost limits. The Company has applied
for, but has not received, such exemptions for its Indianapolis facility and
the Larkin Chase Center. Unless and until such exemptions are granted, these
facilities can recover excess costs only through routine cost limit exception
requests.
Medicaid. Medicaid includes the various state-administered reimbursement
programs for indigent patients created by Federal law. Medicaid programs vary
from state to state. Although reimbursement rates are determined by the state,
the Federal government retains the right to approve or disapprove individual
state plans. Providers must accept reimbursement from Medicaid as payment in
full for the services rendered, because the provider may not bill the patient
for more than the amount of the Medicaid payment received.
Each of the facilities operated by the Company participates in the Medicaid
program of the state in which it is located. One of the Ohio Facilities, which
is currently occupied solely by private pay patients, does not participate in
the Ohio Medicaid program. Under the Federal Medicaid statute and regulations,
state Medicaid programs must provide reimbursement rates that are reasonable
and adequate to cover the costs that would be incurred by efficiently and
economically operated facilities in providing services in conformity with
state and Federal laws, regulations and quality and safety standards.
Furthermore, payments must be sufficient to enlist enough providers so that
services under the state's Medicaid plan are available to recipients at least
to the extent that those services are available to the general population.
However, there can be no assurance that payments under Medicaid programs will
be sufficient to cover the costs allocable to patients eligible for
reimbursement pursuant to such programs. In several states, including New
Jersey and Indiana, healthcare provider organizations have initiated
litigation challenging the Medicaid reimbursement methodologies employed in
such states, asserting that reimbursement payments are not adequate to
reimburse an efficiently operated facility for the costs of providing Medicaid
covered services. Although there can be no assurance that any of these
proceedings will be determined in favor of the healthcare industry, the
Company would benefit from any increases in reimbursement levels resulting
from successful litigation in these states.
The Medicaid programs in the states in which the Company operates pay a per
diem rate for providing services to Medicaid patients based on the facility's
reasonable allowable costs incurred in providing services, subject to cost
ceilings applicable to both operating and capital costs. The Ohio, Florida,
and Maryland Medicaid programs currently include incentive allowances for
providers whose costs are less than certain ceilings and who meet other
requirements.
There are generally two types of Medicaid reimbursement rates: retrospective
and prospective, although many states have adopted plans that have both
retrospective and prospective features. A retrospective rate is determined
after completion of a cost report by the service provider and is designed to
reimburse costs after they are incurred. Typically, an interim rate based upon
historical cost factors and inflation is paid by the state during
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the cost reporting period and a cost settlement is made following an audit of
the filed cost report. Such adjustments may result in additional payments
being made to the Company or in recoupments from the Company, depending on
actual performance and the limitations within an individual state plan.
The more prevalent type of Medicaid reimbursement rate is the prospective
rate. Under a prospective plan, the state sets its rate of payment for the
period in advance of services rendered. Actual costs incurred by operators
during a period are used by the state to establish the prospective rate for a
subsequent period. The provider must accept the prospective rate as payment in
full for all services rendered. Although there is usually no settlement based
upon actual costs incurred subsequent to the cost report filing, subsequent
audits may provide a basis for the state program to retroactively recoup
monies. Maryland's, Florida's, Indiana's, New Hampshire's and New Jersey's
Medicaid programs are, at present, substantially prospective plans. Ohio's
reimbursement plan is a prospective plan with reimbursement rates adjusted on
a facility-by-facility basis. The Ohio plan recalculates certain costs on a
quarterly basis.
In November 1995, the State of New Hampshire adopted legislation which
eliminated incentive payments and froze reimbursement rates through June 30,
1996. The legislation also called for a redesign of the Medicaid payment
system in New Hampshire, effective July 1, 1996. These rate and payment system
changes have had and may continue to have an adverse effect on reimbursements
paid under New Hampshire's Medicaid program.
To date, adjustments from Medicaid audits have not had a material adverse
effect on the Company. Although there can be no assurance that future
adjustments will not have a material adverse effect on the Company, the
Company believes that it has properly applied the various payment formulas and
that it is not likely that audit adjustments would have a material adverse
effect on the Company.
Ancillary Services to Non-Affiliates. The Company generates revenues from
services to non-affiliates from its rehabilitation therapy and behavioral
healthcare businesses which provide services to patients at long-term care
facilities not operated by the Company. In general, payments for these
services are received directly from the non-affiliated long-term care
facilities, which in turn are reimbursed by Medicare or other payors. The
Company's revenues from non-affiliates, though not directly regulated, are
effectively limited by competitive market factors and regulatory reimbursement
policies imposed on the long-term care facilities that contract for these
therapy services. In addition, the revenues that the Company derives for these
services are subject to adjustment in the event the facility is denied
reimbursement by Medicare or any other applicable payor on the basis that the
services provided by the Company were not medically necessary.
GOVERNMENTAL REGULATION
The Federal government and all states in which the Company operates regulate
various aspects of the Company's business. In addition to the regulation of
rates by governmental payor sources, the development and operation of long-
term care facilities and the provision of long-term care services are subject
to Federal, state and local licensure and certification laws which regulate
with respect to a facility, among other matters, the number of beds, the
services provided, the distribution of pharmaceuticals, equipment, staffing
requirements, patients' rights, operating policies and procedures, fire
prevention measures, environmental matters and compliance with building and
safety codes. There can be no assurance that Federal, state or local
governmental regulations will not change or be subjected to new
interpretations that impose additional restrictions which might adversely
affect the Company's business.
All of the facilities operated by the Company are licensed under applicable
state laws, possess the required CONs from responsible state authorities and
are certified or approved as providers under the Medicaid and Medicare
programs, except that two of the New Hampshire Facilities are not certified
for Medicare (although the Company has applied for such certification). One of
the Ohio Facilities is also not certified for Medicare or Medicaid. Both the
initial and continuing qualification of a long-term care facility to
participate in such programs depend upon many factors, including
accommodations, equipment, services, non-discrimination policies against
indigent patients, patient care, quality of life, patients' rights, safety,
personnel, physical environment and
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<PAGE>
adequacy of policies, procedures and controls. Licensing, certification and
other applicable standards vary from jurisdiction to jurisdiction and are
revised periodically. State agencies survey or inspect all long-term care
facilities on a regular basis to determine whether such facilities are in
compliance with the requirements for participation in government-sponsored
third-party payor programs. In some cases or upon repeat violations, the
reviewing agency has the authority to take various adverse actions against a
facility, including the imposition of fines, temporary suspension of admission
of new patients to the facility, suspension or decertification from
participation in the state Medicaid or the Medicare program, offset of amounts
due against future billings to the Medicare or Medicaid programs, denial of
payments under Medicaid for new admissions, reduction of payments,
restrictions on the ability to acquire new facilities and, in extreme
circumstances, revocation of a facility's license or closure of a facility.
The compliance history of a prior operator may be used by state or Federal
regulators in determining possible action against a successor operator.
The Company believes that its facilities are in substantial compliance with
all statutes, regulations, standards and requirements applicable to its
business, including applicable Medicaid and Medicare regulatory requirements.
However, in the ordinary course of its business, the Company from time to time
receives notices of deficiencies for failure to comply with various regulatory
requirements. In most cases, the Company and the reviewing agency will agree
upon corrective measures to be taken to bring the facility into compliance.
Although the Company has been subject to fines and in one instance to a 30-day
moratorium on admissions at one of the Company's Florida facilities in January
1995, statements of deficiency and other corrective actions have not had a
material adverse effect on the Company. There can be no assurance that future
agency inspections will not have a material adverse effect on the Company.
Certificates of Need. All states in which the Company operates have adopted
CON or similar laws which generally require that a state agency determine that
a need exists prior to the construction of new facilities, the addition or
reduction of licensed beds or services, the implementation of other changes,
the incurrence of certain capital expenditures, the approval of certain
acquisitions and changes in ownership or, in certain states, the closure of a
facility. State CON approval is generally issued for a specific project or
number of beds, specifies a maximum expenditure, is sometimes subject to an
inflation adjustment, and requires implementation of the proposal within a
specified period of time. Failure to obtain the necessary state approval can
result in the inability of the facility to provide the service, operate the
facility or complete the acquisition, addition or other change and can also
result in adverse reimbursement action or the imposition of sanctions or other
adverse action on the facility's license. Ohio has imposed a moratorium on the
issuance of CONs for the construction of new long-term care facilities and the
addition of beds to existing facilities. The moratorium is scheduled to remain
in effect until June 30, 1997. Recent legislation in New Hampshire has
eliminated the right to "leeway beds" on existing CONs. New Hampshire
previously permitted long-term care facilities to add up to 10 licensed beds
every two years as a matter of right.
Medicare and Medicaid. Effective October 1, 1990, the Omnibus Budget
Reconciliation Act of 1987 ("OBRA") eliminated the different certification
standards for "skilled" and "intermediate care" nursing facilities under the
Medicaid program in favor of a single "nursing facility" standard. This
standard requires, among other things, that the Company have at least one
registered nurse on each day shift and one licensed nurse on each other shift
and also increases training requirements for nurses aides by requiring a
minimum number of training hours and a certification test before a nurses aide
can commence work. In order to obtain Medicare reimbursement, states continue
to be required to certify that nursing facilities provide "skilled care." The
Omnibus Budget Reconciliation Act of 1993 ("OBRA 93") affects Medicare
reimbursement for skilled nursing services in two ways, both of which have had
a minimum effect on the Company. First, the current limits on the portion of
the Medicare reimbursement known as "routine service costs" (excluding
capital-related expenses) were frozen for two consecutive cost report years
beginning October 1, 1993. Second, the return on equity component of Medicare
reimbursement was eliminated beginning October 1, 1993. Although the Company
believes that it is in substantial compliance with the current requirements of
OBRA and OBRA 93, it is unable to predict how future interpretation and
enforcement of regulations promulgated under OBRA and OBRA 93 by the state and
Federal governments could affect the Company in the future.
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Effective July 1, 1995, the HCFA promulgated new survey, certification and
enforcement rules governing long-term care facilities participating in the
Medicare and Medicaid programs, which impose significant new burdens on long-
term care facilities and may require state survey agencies to take aggressive
enforcement actions. Among other things, the new HCFA rules governing survey
and certification requirements define or redefine a number of terms used in
the survey and certification process. The rules require states to amend their
state plans (as required by Federal law) to incorporate the provisions of the
new rules. The regulations may require state survey agencies to take
aggressive enforcement actions. The breadth of the new rules and their recent
effective date create uncertainty over the manner in which the rules will be
implemented, the ability of any long-term care facility to comply with them
and the effect of the new rules on the Company.
Under the new rules, unannounced standard surveys of facilities must be
conducted at least once every 15 months with a state-wide average of 12
months. In addition to the standard survey, survey agencies have the authority
to conduct surveys as frequently as necessary to determine whether facilities
comply with participation requirements, to determine whether facilities have
corrected past deficiencies and to monitor care if a change occurs in the
ownership or management of a facility. Furthermore, the state survey agency
must review all complaint allegations and conduct a standard or an abbreviated
survey to investigate such complaints if a review of the complaint shows that
a deficiency in one or more of the Federal requirements may have occurred and
only a survey will determine whether a deficiency or deficiencies exist. If a
facility has been found to furnish substandard care, it is subject to an
extended survey. The extended survey is intended to identify the policies and
procedures that caused a facility to furnish substandard care.
HCFA's new rules substantially revise provisions regarding the enforcement
of compliance requirements for long-term care facilities with deficiencies.
The rules allow either HCFA or state agencies to impose one or more remedies
provided under the rules for any particular deficiency. Facilities must
provide a plan of correction for all deficiencies regardless of whether a
remedy is imposed. At a minimum, the following remedies are available:
termination of provider agreement; temporary management; denial of payment for
new admissions; civil money penalties; closure of the facility in emergencies
or transfer of patients or both; and on-site state monitoring. States may also
adopt optional remedies. The new rules divide remedies into three categories.
Category 1 remedies include directed plans of correction, state monitoring and
directed in-service training. Category 2 remedies include denial of payments
for new admissions, denial of payments for all individuals (imposed only by
HCFA) and civil money penalties of $50 to $3,000 per day. Category 3 remedies
include temporary management, immediate termination or civil money penalties
of $3,050 to $10,000 per day. The rules define situations in which one or more
of the penalties must be imposed.
HCFA has announced its intention to propose rules applying salary
equivalency guidelines to speech and occupational therapy services, while
updating physical and respiratory therapy guidelines. In addition, on April
14, 1995, HCFA issued a memorandum in response to requests by intermediaries
for information on reasonable costs for speech and occupational therapy. The
cost data in the memorandum set forth rates for speech and occupational
therapy services that are lower than the Medicare reimbursement rates
currently received by the Company for such services. Although the memorandum
states that the cost data are to be informative and not serve as a limit on
reimbursement rates for speech and occupational therapy services,
intermediaries and customers of the Company may apply the cost data guidelines
as absolute limits on payments. The cost data figures contained in the
memorandum have been subject to criticism by the industry and the Company is
unable to determine what effect, if any, such criticism will have on future
actions or policy decisions taken by HCFA in connection with Medicare
reimbursement rates for speech and occupational therapy services. The Company
cannot predict when, or if, any changes will be made to the current Medicare
reimbursement methodologies for contract speech and occupational therapy
services, or the extent to which the data in the HCFA memorandum will be used
by intermediaries and customers in determining reimbursement. The imposition
of salary equivalency guidelines on contract speech and occupational therapy
services, or the widespread use by intermediaries of the data in the
memorandum, could adversely affect the Company's revenues derived from
ancillary services and thereby limit the Company's ability to recoup its
investment in that part of its business. Similarly, any future regulations
reducing the government payment rates for subacute or other specialty medical
services could materially adversely affect the Company.
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Fee Splitting and Referrals. The Company is also subject to Federal and
state laws that govern financial and other arrangements between healthcare
providers. Federal laws, as well as the laws of certain states, prohibit
direct or indirect payments or fee splitting arrangements between healthcare
providers that are designed to induce or encourage the referral of patients
to, or the recommendation of, a particular provider for medical products and
services. These laws include the Federal "anti-kickback law" which prohibits,
among other things, the offer, payment, solicitation or receipt of any form of
remuneration in return for the referral of Medicare and Medicaid patients. A
wide array of relationships and arrangements, including ownership interests in
a company by persons in a position to refer patients and personal service
agreements have, under certain circumstances, been alleged to violate these
provisions. Certain discount arrangements may also violate these laws. Because
of the broad reach of these laws, the Federal government has published certain
"safe harbors," which set forth the requirements under which certain
relationships will not be considered to violate such laws. One of these safe
harbors protects investment interests in certain large, publicly traded
entities which meet certain requirements regarding the marketing of their
securities and the payment of returns on the investment. A second safe harbor
protects payments for management services which are set in advance at a fair
market rate and which do not vary with the value or volume of services
referred, so long as there is a written contract which meets certain
requirements. A safe harbor for discounts, which focuses primarily on
appropriate disclosure, is also available. A violation of the Federal anti-
kickback law could result in the loss of eligibility to participate in
Medicare or Medicaid, or in criminal penalties. Violation of state anti-
kickback laws could lead to loss of licensure, significant fines and other
penalties.
Various Federal and state laws regulate the relationship between healthcare
providers and physicians, including employment or service contracts and
investment relationships. These laws include the broadly worded fraud and
abuse provisions of the Medicaid and Medicare statutes, which prohibit various
transactions involving Medicaid or Medicare covered patients or services. In
particular, OBRA 93 contains provisions which greatly expand the Federal
prohibition on physician referrals to entities with which they have a
financial relationship. Effective January 1, 1995, OBRA 93 prohibits any
physician with a financial relationship (defined as a direct or indirect
ownership or investment interest or compensation arrangement) with an entity
from making a referral for "designated health services" to that entity and
prohibits that entity from billing for such services. "Designated health
services" do not include skilled nursing services but do include many services
which long-term care facilities provide to their patients, including infusion
therapy and enteral and parenteral nutrition. Various exceptions to the
application of this law exist, including one that protects physician ownership
in publicly traded companies which in the past three years have had average
shareholder equity exceeding $75 million and one which protects the payment of
fair market compensation for the provision of personal services, so long as
various requirements are met. Violations of these provisions may result in
civil or criminal penalties for individuals or entities and/or exclusion from
participation in the Medicaid and Medicare programs. Various state laws
contain analogous provisions, exceptions and penalties. The Company believes
that in the past it has been, and in the future it will be, able to arrange
its business relationships so as to comply with these provisions.
Each of the Company's long-term care facilities has at least one medical
director that is a licensed physician. The medical directors may from time to
time refer their patients to the Company's facilities in their independent
professional judgment. The physician anti-referral restrictions and
prohibitions could, among other things, require the Company to modify its
contractual arrangements with its medical directors or prohibit its medical
directors from referring patients to the Company. From time to time, the
Company has sought guidance as to the interpretation of these laws. However,
there can be no assurance that such laws will ultimately be interpreted in a
manner consistent with the practices of the Company.
Healthcare Reform. In addition to extensive existing governmental healthcare
regulation, there are numerous legislative and executive initiatives at the
Federal and state levels for comprehensive reforms affecting the payment for
and availability of healthcare services. It is not clear at this time what
proposals, if any, will be adopted or, if adopted, what effect such proposals
would have on the Company's business. Aspects of certain of these proposals,
such as reductions in funding of the Medicare and Medicaid programs, potential
changes in reimbursement regulations for rehabilitation therapy services,
interim measures to contain healthcare costs such
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<PAGE>
as a short-term freeze on prices charged by healthcare providers or changes in
the administration of Medicaid at the state level, could materially adversely
affect the Company. There can be no assurance that currently proposed or
future healthcare legislation or other changes in the administration or
interpretation of governmental healthcare programs will not have an adverse
effect on the Company.
Environmental and Other. The Company is also subject to a wide variety of
Federal, state and local environmental and occupational health and safety laws
and regulations. Among the types of regulatory requirements faced by
healthcare providers are: air and water quality control requirements, waste
management requirements, specific regulatory requirements applicable to
asbestos, polychlorinated biphenyls and radioactive substances, requirements
for providing notice to employees and members of the public about hazardous
materials and wastes and certain other requirements.
In its role as owner and/or operator of properties or facilities, the
Company may be subject to liability for investigating and remedying any
hazardous substances that have come to be located on the property, including
such substances that may have migrated off of, or emitted, discharged, leaked,
escaped or been transported from, the property. The Company's operations may
involve the handling, use, storage, transportation, disposal and/or discharge
of hazardous, infectious, toxic, radioactive, flammable and other hazardous
materials, wastes, pollutants or contaminants. Such activities may harm
individuals, property or the environment; may interrupt operations and/or
increase their costs; may result in legal liability, damages, injunctions or
fines; may result in investigations, administrative proceedings, penalties or
other governmental agency actions; and may not be covered by insurance. The
cost of any required remediation or removal of hazardous or toxic substances
could be substantial and the liability of an owner or operator for any
property is generally not limited under applicable laws and could exceed the
property's value. Although the Company is not aware of any material liability
under any environmental or occupational health and safety laws, there can be
no assurance that the Company will not encounter such liabilities in the
future, which could have a material adverse effect on the Company.
COMPETITION
The long-term care industry is highly competitive. The Company competes with
other providers of long-term care on the basis of the scope and quality of
services offered, the rate of positive medical outcomes, cost-effectiveness
and the reputation and appearance of its long-term care facilities. The
Company also competes in recruiting qualified healthcare personnel, in
acquiring and developing additional facilities and in obtaining CONs. The
Company's current and potential competitors include national, regional and
local long-term care providers, some of whom have substantially greater
financial and other resources and may be more established in their communities
than the Company. The Company also faces competition from assisted living
facility operators as well as providers of home healthcare. In addition,
certain competitors are operated by not-for-profit organizations and similar
businesses which can finance capital expenditures and acquisitions on a tax-
exempt basis or receive charitable contributions unavailable to the Company.
The Company expects competition for the acquisition and development of long-
term care facilities to increase in the future as the demand for long-term
care increases. Construction of new (or the expansion of existing) long-term
care facilities near the Company's facilities could adversely affect the
Company's business. State regulations generally require a CON before a new
long-term care facility can be constructed or additional licensed beds can be
added to existing facilities. CON legislation is in place in all states in
which the Company operates or expects to operate. The Company believes that
these regulations reduce the possibility of overbuilding and promote higher
utilization of existing facilities. However, a relaxation of CON requirements
could lead to an increase in competition. In addition, as cost containment
measures have reduced occupancy rates at acute care hospitals, a number of
these hospitals have converted portions of their facilities into subacute
units. Competition from acute care hospitals could adversely affect the
Company. The New Jersey legislature is currently considering legislation that
would permit acute care hospitals to offer subacute care services under
existing CONs issued to those providers. Ohio has imposed a moratorium on the
conversion of acute care hospital beds into long-term care beds. See "--
Governmental Regulation."
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EMPLOYEES
As of March 31, 1996, the Company employed approximately 3,420 facility-
based personnel on a full- and part-time basis. The Company's corporate and
regional staff consisted of 76 persons as of such date. In addition, the
Company's ancillary businesses employed approximately 480 persons as of such
date. Approximately 180 employees at two of the Company's facilities are
covered by collective bargaining agreements. Although the Company believes
that it maintains good relationships with its employees and the unions that
represent certain of its employees, it cannot predict the impact of continued
or increased union representation or organizational activities on its future
operations.
The Company believes that the attraction and retention of dedicated, skilled
and experienced nursing and other professional staff has been and will
continue to be a critical factor in the successful growth of the Company. The
Company believes that its wage rates and benefit packages for nursing and
other professional staff are commensurate with market rates and practices.
The Company competes with other healthcare providers in attracting and
retaining qualified or skilled personnel. The long-term care industry has, at
times, experienced shortages of qualified personnel. A shortage of nurses or
other trained personnel or general economic inflationary pressures may require
the Company to enhance its wage and benefits package in order to compete with
other employers. There can be no assurance that the Company's labor costs will
not increase or, if they do, that they can be matched by corresponding
increases in private-payor revenues or governmental reimbursement. Failure by
the Company to attract and retain qualified employees, to control its labor
costs or to match increases in its labor expenses with corresponding increases
in revenues could have a material adverse effect on the Company.
INSURANCE
The Company carries general liability, professional liability, comprehensive
property damage and other insurance coverages that management considers
adequate for the protection of its assets and operations based on the nature
and risks of its business, historical experience and industry standards. There
can be no assurance, however, that the coverage limits of such policies will
be adequate or that insurance will continue to be available to the Company on
commercially reasonable terms in the future. A successful claim against the
Company not covered by, or in excess of, its insurance coverage could have a
material adverse effect on the Company. Claims against the Company, regardless
of their merit or eventual outcome, may also have a material adverse effect on
the Company's business and reputation, may lead to increased insurance
premiums and may require the Company's management to devote time and attention
to matters unrelated to the Company's business. The Company is self-insured
(subject to contributions by covered employees) with respect to most of the
healthcare benefits and workers' compensation benefits available to its
employees. The Company believes that it has adequate resources to cover any
self-insured claims and the Company maintains excess liability coverage to
protect it against unusual claims in these areas. See Note J to the Company's
audited combined financial statements included elsewhere in this Prospectus.
However, there can be no assurance that the Company will continue to have such
resources available to it or that substantial claims will not be made against
the Company.
LEGAL PROCEEDINGS
The Company is a party to claims and legal actions arising in the ordinary
course of business. Management does not believe that unfavorable outcomes in
any such matters, individually or in the aggregate, would have a material
adverse effect on the Company.
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MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The following table sets forth certain information with respect to the
executive officers, key employees, Directors and Director nominees of the
Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Stephen L. Guillard.............. 46 Chairman, President, Chief Executive
Officer and Director
Damian N. Dell'Anno.............. 36 Executive Vice President of Operations
William H. Stephan............... 39 Senior Vice President and Chief Financial
Officer
Bruce J. Beardsley............... 33 Senior Vice President of Acquisitions
Robert L. Boelter, R.R.T......... 45 Senior Vice President of Subacute and
Specialty Services
Michael E. Gomez, R.P.T.......... 34 Senior Vice President of Rehabilitation
Services
Lisa Vachet-Miller............... 37 Vice President of Marketing
Mary Anne Cherundolo, R.N........ 51 Vice President of Professional Services
Jeffrey J. Leroy................. 43 Vice President of Managed Care and
Commercial Insurance
Laurence Gerber.................. 39 Director
Douglas Krupp.................... 49 Director
David F. Benson.................. 46 Director Nominee
Robert M. Bretholtz.............. 51 Director Nominee
Robert T. Barnum................. 50 Director Nominee
Sally W. Crawford................ 42 Director Nominee
</TABLE>
The Director Nominees will become Directors of the Company upon consummation
of the Offering.
The Company's Board of Directors is classified into three classes which
consist of, as nearly as practicable, an equal number of directors. The
members of each class will serve staggered three-year terms. Mr. Guillard is a
Class I director, Mr. Gerber is a Class II director and Mr. Krupp is a Class
III director. Nominees for Director will be divided among the three classes
upon their election or appointment. The terms of Class I, Class II and Class
III directors expire at the annual meeting of stockholders to be held in 1997,
1998 and 1999, respectively. See "Description of Capital Stock--Classification
of Directors."
Stephen L. Guillard has served as President and Chief Executive Officer
since joining the Company in May 1988 and as a Director and Chairman of the
Board since its incorporation. Mr. Guillard previously served as Chairman,
President and Chief Executive Officer of Diversified Health Services ("DHS"),
a long-term care company which Mr. Guillard co-founded in 1982. DHS operated
approximately 7,500 long-term care and assisted living beds in five states.
Mr. Guillard has a total of 24 years of experience in the long-term care
industry and is a licensed Nursing Home Administrator.
Damian N. Dell'Anno has served as Executive Vice President of Operations
since 1994. From 1993 to 1994, he served as the head of the specialty services
group for the Company and was instrumental in developing the Company's
rehabilitation therapy business. From 1989 to 1993, Mr. Dell'Anno was Vice
President of Reimbursement for the Company. From 1988 to 1989, Mr. Dell'Anno
served as Director of Budget, Reimbursement and Cash Management for The
Mediplex Group, Inc. ("Mediplex"), a long-term care company. Mr. Dell'Anno has
a total of 14 years of experience in the long-term care industry.
William H. Stephan has served as Senior Vice President and Chief Financial
Officer since joining the Company in 1994. From 1986 to 1994, Mr. Stephan was
a Manager in the health care practice of Coopers & Lybrand L.L.P. His clients
there included long-term care facilities, continuing care retirement centers,
physician
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practices and acute care hospitals. Mr. Stephan is a Certified Public
Accountant and a member of the Healthcare Financial Management Association.
Bruce J. Beardsley has served as Senior Vice President of Acquisitions since
1994. From 1992 to 1994, he was Vice President of Planning and Development of
the Company with responsibility for the development of specialized services,
planning and engineering. From 1990 to 1992, he was an Assistant Vice
President of the Company responsible for risk management and administrative
services. From 1988 to 1990, Mr. Beardsley served as Special Projects Manager
of the Company. Prior to joining the Company in 1988, Mr. Beardsley was a
commercial and residential real estate appraiser.
Robert L. Boelter, R.R.T. has served as Senior Vice President of Subacute
and Specialty Services since 1995. From 1994 to 1995, he was Vice President of
Subacute and Specialized Services for the Company. From 1992 through 1994, Mr.
Boelter was the Manager and later, Corporate Director, of Subacute Programs
for Arbor Health Care Company ("Arbor"), a publicly-held nursing and subacute
care organization based in Lima, Ohio. While at Arbor, Mr. Boelter assisted
with the development of that company's subacute model and directed the
implementation of all distinct subacute programs. From 1984 to 1992, he was
President of Pedi-Medical, a hospital-affiliated home medical equipment
provider. Mr. Boelter is a licensed respiratory therapist.
Michael E. Gomez, R.P.T. has served as the Company's Senior Vice President
of Rehabilitation Services since 1994. From 1993 to 1994, Mr. Gomez served as
Director of Therapy Services for the Company with responsibility for
overseeing the coordination and direction of physical, occupational and speech
therapy services. From 1991 to 1993, Mr. Gomez was Director of Rehabilitation
Services at Mary Washington Hospital in Fredericksburg, Virginia. From 1988 to
1990, he was Physical Therapy State Manager for Pro-Rehab, a contract therapy
company based in Boone, North Carolina. Mr. Gomez is a licensed physical
therapist.
Lisa Vachet-Miller has served as Vice President of Marketing since 1994.
From 1990 to 1994, Mrs. Vachet-Miller was the Regional Marketing Director for
the Southeast Region of the Company. Before joining the Company, Mrs. Vachet-
Miller was Senior Director of Consumer Relations for Unicare Health Facilities
("Unicare"), a long-term care provider located in Evansville, Indiana and was
Admissions/Marketing Director for Medco Center North, a Unicare facility, also
in Evansville.
Mary Anne Cherundolo, R.N. has served as Vice President of Professional
Services since she joined the Company in 1994. From 1986 to 1993, Mrs.
Cherundolo served as the Director of Quality Management for PersonaCare, a
long-term care company which is now a subsidiary of Theratx, Inc. Mrs.
Cherundolo is a licensed Registered Nurse in the states of Connecticut and
Maryland and holds a gerontological nurse certification from the American
Nursing Association.
Jeffrey J. Leroy has served as Vice President of Managed Care and Commercial
Insurance since 1995. Before his promotion to Vice President, from 1994 to
1995, Mr. Leroy served as a Director of Managed Care and Commercial Insurance
of the Company in a similar capacity. From 1992 to 1994, Mr. Leroy served as
Vice President of Strategic Planning and Marketing for Mediplex in Wellesley,
Massachusetts and from 1989 to 1992, he served as the Regional Marketing
Director for the Hillhaven Corporation, a long-term care provider.
Douglas Krupp, a Director of the Company and Chairman of the Executive
Committee since its incorporation, is Co-founder and Chairman of Berkshire, a
holding company with approximately $3 billion under management for individual
and institutional investors. Separately, Mr. Krupp is Chairman of The Board of
Directors of Berkshire Realty Company, Inc. ("BRI"), a $500 million equity
real estate investment trust that is publicly traded on the New York Stock
Exchange and he serves as Chairman of the Board of Trustees for Krupp
Government Income Trusts I and II. Since 1990, Douglas Krupp has been a
trustee of Bryant College and he serves as a Corporate Overseer for Brigham
and Women's Hospital.
Laurence Gerber, a Director of the Company since its incorporation, is the
President and Chief Executive Officer of Berkshire. Prior to becoming
President and Chief Executive Officer in 1991, Mr. Gerber held various
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positions within Berkshire, where his responsibilities included strategic
planning and corporate finance. Mr. Gerber also serves as Chief Executive
Officer and a Director of BRI and as President and Trustee of Krupp Government
Income Trust and Krupp Government Income Trust II.
David F. Benson, a Director Nominee, has been President of Meditrust since
September 1991 and was Treasurer of Meditrust from June 1987 to May 1992. He
was Treasurer of Mediplex from January 1986 through June 1987. He was
previously associated with Coopers & Lybrand L.L.P., from 1979 to 1985. Mr.
Benson is a trustee of Mid-Atlantic Realty Trust, a publicly-held shopping
center real estate investment trust.
Robert T. Barnum, Director Nominee, has been President, Chief Operating
Officer and a Director of American Savings Bank ("American") since 1992. He
joined American, the largest privately held thrift in the United States, in
1989 as Chief Financial Officer. Mr. Barnum is also a Director of National RE
Holdings Corporation, a publicly held reinsurance holding company.
Robert M. Bretholtz, a Director Nominee, was President and a Director of
Madison Cable Corp., a privately held manufacturing company, from 1976 to
1995. Mr. Bretholtz is the Vice Chairman of the Board of Trustees of Brigham
and Women's Hospital in Boston and a Corporator for Partners Healthcare
System, Inc., the parent organization of the hospital. In addition, he is a
Trustee of the Foundation for Neurological Diseases.
Sally W. Crawford, a Director Nominee, has served since 1985 as Chief
Operating Officer of Healthsource, Inc., a publicly held managed care
organization headquartered in New Hampshire. Ms. Crawford's responsibilities
at Healthsource, Inc. include leading that company's Northern Region
operations and marketing efforts.
DIRECTOR COMPENSATION AND COMMITTEES
The Company established the Stock Option Plan for Non-Employee Directors
which will become effective upon completion of the Offering. See "--Stock
Option Plans." Commencing after the Offering, non-employee and non-affiliated
Directors will receive a $15,000 annual fee plus $1,000 for each meeting of
the Board of Directors or committee of the Board of Directors that they
attend.
The Board of Directors has established, effective upon the completion of the
Offering, an Executive Committee, a Compensation Committee, an Audit Committee
and a Stock Plan Committee. The Compensation Committee, which will be composed
of three directors, will establish salaries, incentives and other forms of
compensation for the Company's Directors and officers and will recommend
policies relating to the Company's benefit plans. The Stock Plan Committee,
which will be composed of three non-employee and non-affiliated Directors,
will administer the Company's 1996 Long-Term Stock Incentive Plan. The Audit
Committee, which will be composed of two non-employee and non-affiliated
Directors, will oversee the engagement of the Company's independent auditors
and, together with the Company's independent auditors, will review the
Company's accounting practices, internal accounting controls and financial
results. The Executive Committee will be composed of Douglas Krupp, Lawrence
Gerber and Stephen Guillard. The By-laws of the Company provide the Executive
Committee the authority to meet with members of the Company's senior
management in between meetings of the Board of Directors for the purpose of
advice and consultation only, but the Executive Committee has no power to
exercise any of the powers of the Board of Directors.
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EXECUTIVE COMPENSATION
The following table sets forth information with respect to the compensation
of the Company's Chief Executive Officer and each of the four other most
highly compensated executive officers of the Company (collectively, the "Named
Executive Officers") for the fiscal year ended December 31, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
NAME AND -------------------- ALL OTHER
PRINCIPAL POSITION SALARY BONUS COMPENSATION(1)
------------------ ---------- --------- ---------------
<S> <C> <C> <C>
Stephen L. Guillard
Chairman, President and Chief Executive
Officer.................................. $267,800 $80,000 $4,063
Damian N. Dell'Anno
Executive Vice President of Operations... 159,326 32,000 1,573
Bruce J. Beardsley
Senior Vice President of Acquisitions.... 117,192 32,149 3,191
William H. Stephan
Senior Vice President and Chief Financial
Officer.................................. 120,000 24,000 5,954
Robert L. Boelter
Senior Vice President of Subacute and
Specialty Services....................... 102,193 17,500 2,037
</TABLE>
- --------
(1) Includes matching contributions made by the Company under its Supplemental
Executive Retirement Plan and 401(k) Plan.
EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS
Upon completion of the Offering, the Company will enter into employment
agreements with Messrs. Guillard, Dell'Anno, Beardsley and Stephan, each of
which will have an initial term of two years, subject to automatic renewal for
successive one-year periods unless the Company or the employee gives notice of
non-renewal 60 days prior to expiration. The employment agreements provide for
an annual base salary of $310,000 for Mr. Guillard, $180,000 for Mr.
Dell'Anno, $135,000 for Mr. Beardsley and $130,000 for Mr. Stephan. Such
salaries may be increased, but not decreased, at the discretion of the
Compensation Committee. Each employee will be entitled to participate in all
benefits generally made available to senior executives of the Company and to
receive annual bonus compensation in such amounts and upon such conditions as
determined by the Compensation Committee, but not less than 15% of base salary
in a given year. If any of the employment agreements is terminated by the
Company other than for cause, the employee is entitled to receive all accrued
but unpaid salary and bonus amounts plus termination payments equal to the
employee's monthly base salary for each of the greater of (i) the number of
months remaining under the term of the agreement or (ii) 12 months (24 months
in the case of Mr. Guillard). In the event of an employee's termination due to
disability or death, the employee (or his designated beneficiary) will receive
monthly payments equal to the employee's monthly base salary for 12 months,
reduced by payments made under any disability insurance policy or program
maintained by the Company for the employee's benefit. If any of the employment
agreements is not renewed by the Company at the end of its initial or
subsequent term, the employee will be entitled to receive severance payments
equal to the employee's monthly base salary for 12 months (24 months in the
case of Mr. Guillard).
Each employment agreement provides that neither the employee nor any
business enterprise in which he has an interest may (i) until the later of the
termination of the employee's employment with the Company and the expiration
of two years from the commencement of such employment, engage in activities
which compete with the Company's business, (ii) at any time during the
employee's employment and one year following his termination (two years in the
case of Mr. Guillard), manage or operate any long-term care facility managed
or operated by the Company and (iii) for a period of one year following
termination (two years in the case of Mr. Guillard), solicit or employ persons
employed or retained as a consultant by the Company.
Pursuant to prior employment agreements, Messrs. Guillard and Dell'Anno
received limited partner capital (but not income) interests in HHLP as
follows: Mr. Guillard received a 6.0% interest in HHLP; Mr. Dell'Anno
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<PAGE>
received a 2.0% interest in the excess value of HHLP above $7.0 million. As of
December 31, 1995 Mr. Guillard also subscribed for equity interests in certain
of the Predecessors pursuant to the Executive Equity Purchase. The aggregate
subscription price of $438,000, equal to the fair market value of such
interests as of December 31, 1995 was paid by Mr. Guillard in 1996 with the
proceeds of a special bonus equal to such purchase price. To pay taxes due
with respect to the Executive Equity Purchase and this bonus, Mr. Guillard is
entitled to receive a loan from the Company, evidenced by a note maturing
April 15, 2001, and bearing interest at 7.0% per annum. In connection with the
Reorganization, the interests subject to the Executive Equity Purchase and
Messrs. Guillard's and Dell'Anno's interests in HHLP will be exchanged for an
aggregate of 307,723 shares of Common Stock. Under his prior employment
agreement, Mr. Dell'Anno will also receive an additional 18,037 shares of
Common Stock pursuant to the Bonus Payment in connection with the Offering.
Mr. Dell'Anno will also receive a loan from the Company to pay income tax
liabilities that result from the Bonus Payment. The loan will bear interest at
1% over the prime rate and will mature on the earlier of three years or when
restrictions on sales of Common Stock under Rule 144 in respect of the Bonus
Payment terminate. See "The Reorganization" and "Stock Ownership of Directors,
Executive Officers and Principal Holders."
The Company has adopted an Executive Long-Term Incentive Plan (the
"Executive Plan") effective July 1, 1995. Eligible participants, consisting of
the Company's department heads and regional directors, are entitled to receive
a payment upon an initial public offering or sale of the Company above a
baseline valuation of $23,000,000 within two years of the effective date of
the plan. The total size of the pool available will depend upon the valuation
implied by the initial public offering price. Allocations of the available
pool among eligible participants were made by senior management. Assuming an
initial public offering price of $12.50 (the midpoint of the range set forth
on the cover page of this Prospectus), approximately $960,000 in the aggregate
will be paid to eligible participants under the Executive Plan, of which
Messrs. Beardsley and Stephan will receive $187,200 and $148,800,
respectively, upon the completion of the Offering. The Executive Plan will
terminate upon completion of the Offering.
401(k) PLAN
All Company employees with at least one year of service (defined as 1,000
working hours within a consecutive twelve-month period) are eligible to
participate in the Company's retirement savings program (the "401(k) Plan"),
which is designed to be tax deferred in accordance with the provisions of
Section 401(k) of the Internal Revenue Code of 1986 (the "Code"). The 401(k)
Plan provides that each participant may defer up to 15% of his or her total
compensation, subject to statutory limits, and the Company may also make a
discretionary matching contribution to the 401(k) Plan in an amount to be
determined by the Board of Directors at the end of each year. The Company may
also make additional discretionary contributions, in the Board's discretion,
to non-highly compensated participants.
To be eligible for an allocation of Company matching or discretionary
contributions, an employee must be employed by the Company on the last day of
the year. Company matching or additional contributions vest 20% following the
participant's second year of service and an additional 20% annually
thereafter.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Effective September 15, 1995, the Company established a Supplemental
Executive Retirement Plan ("SERP") to provide benefits for key employees of
the Company. Participants may defer up to 25% of their salary and bonus
compensation (100% for the period from September 16, 1995 to December 21,
1995) by making contributions to the SERP. Amounts deferred by the participant
are credited to his or her account and are always fully vested. The Company
matches 50% of amounts contributed (up to an amount equal to 10% of base
salary) which become vested as of January 1 of the second year following the
end of the plan year for which contributions were credited, provided the
employee is still employed with the Company on that date. In addition,
participants will be fully vested in such matching contribution amounts in the
case of death or permanent disability or at the discretion of the Company.
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Participants are eligible to receive benefits distributions upon retirement
or in certain predesignated years. Participants may not receive distributions
prior to a pre-designated year, except in the case of termination, death or
disability or demonstrated financial hardship. Only amounts contributed by the
employee may be distributed because of financial hardship.
Although amounts deferred and Company matching contributions are deposited
in a "rabbi trust," they are subject to risk of loss. If the Company becomes
insolvent, the rights of participants in the SERP would be those of an
unsecured general creditor of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During its fiscal year ended December 31, 1995, the Company had no
compensation committee. Decisions concerning compensation for 1995 were made
by a committee comprised of the Company's senior management. Future
compensation decisions will be made by the Compensation Committee. See "--
Director Compensation and Committees."
STOCK OPTION PLANS
1996 NON-EMPLOYEE DIRECTOR PLAN
The Company has established its 1996 Stock Option Plan for Non-Employee
Directors (the "Director Plan"). A maximum of 105,000 shares of Common Stock
(subject to adjustment for stock splits and similar events) has been reserved
by the Company for issuance pursuant to options under the Director Plan.
Directors of the Company who are not employees or affiliates of the Company
("Outside Directors") are eligible to participate. The Director Plan is
intended to allow the Outside Directors receiving grants to be "disinterested
persons" as defined in Rule 16b-3 of the Securities Exchange Act of 1934
("Rule 16b-3") with respect to other stock plans of the Company and,
accordingly, is intended to be self-governing to the extent required by Rule
16b-3. Any administrative issues that nevertheless arise under the Director
Plan will be resolved by the Board of Directors.
As of the effective date of the Offering, each Outside Director will be
granted an option to purchase 15,000 shares of Common Stock (60,000 in the
aggregate). Thereafter, each person who is elected or appointed as an Outside
Director will be granted an option to purchase 15,000 shares of Common Stock.
Commencing in 1997, each person who is an Outside Director on January 1 of
each year during the term of the Director Plan will receive an option to
purchase 3,500 shares of Common Stock. All options granted under the Plan will
be "nonqualified" stock options subject to the provisions of section 83 of the
Code.
Options issued under the Director Plan become exercisable on the first
anniversary of the date of grant and terminate on the earliest of the
following: (a) ten years from the date of grant; (b) one year from the
termination of the optionee's service as an Outside Director by reason of
death or Disability; (c) the termination of the optionee's service as an
Outside Director for cause (as defined in the Plan); and (d) three months from
the termination of the optionee's service as an Outside Director other than by
reason of death, disability or cause.
The exercise price of each option granted upon the effectiveness of the
Offering will be the initial public offering price per share and the exercise
price of all other options granted under the Director Plan will be the Fair
Market Value (as defined in the Director Plan) of a share of Common Stock on
the date the option is granted. Shares of Common Stock purchased upon the
exercise of an option are to be paid for in cash, check or money order or by
shares of Common Stock owned by the optionee for at least six months prior to
exercise. Subject to certain limitations, the Company's Board of Directors may
amend, suspend or discontinue the Director Plan at any time.
1996 LONG-TERM STOCK INCENTIVE PLAN
The Company has adopted, and the Company's stockholders approved, the
Harborside Healthcare Corporation 1996 Long-Term Stock Incentive Plan (the
"Stock Plan").
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The Stock Plan is administered by the Stock Plan Committee, which is
comprised of Directors who are intended to be "disinterested persons" (within
the meaning of Rule 16b-3) and "outside directors" (within the meaning of
section 162(m) of the Code). Any officer or other key employee or consultant
to the Company or any of its subsidiaries who is not a member of the Stock
Plan Committee may be designated as a participant under the Stock Plan. The
Stock Plan Committee has the sole and complete authority to determine the
participants to whom awards will be granted under the Stock Plan.
The Stock Plan authorizes the grant of awards to participants with respect
to a maximum of 680,000 shares of the Company's Common Stock ("Shares"),
subject to adjustment for stock splits, stock dividends and similar events,
which awards may be made in the form of (i) nonqualified stock options; (ii)
stock options intended to qualify as incentive stock options under section 422
of the Code; (iii) stock appreciation rights; (iv) restricted stock and/or
restricted stock units; (v) performance awards and (vi) other stock based
awards; provided that the maximum number of shares with respect to which stock
options and stock appreciation rights may be granted to any participant in the
Stock Plan in any calendar year shall not exceed 150,000 and the maximum
number of shares which may be paid to a participant in the Stock Plan in
connection with the settlement of any awards designated as a "Performance
Compensation Award" (as defined below) in respect of a single performance
period may not exceed 150,000 or, in the event such Performance Compensation
Award is paid in cash, the equivalent cash value thereof, after the effective
date of the Stock Plan, any Shares covered by an award granted under the Stock
Plan, or to which such an award relates, are forfeited, or if an award has
expired, terminated or been canceled for any reason whatsoever (other than by
reason of exercise or vesting), then the shares covered by such award will
again be, or will become, Shares with respect to which awards may be granted
under the Stock Plan.
Awards may be made under the Stock Plan in assumption of, or in substitution
for, outstanding awards previously granted by the Company or its affiliates or
a company acquired by the Company or with which the Company combines. The
number of shares underlying any such assumed or substitute awards will be
counted against the aggregate number of Shares which are available for grant
under awards made under the Stock Plan.
Awards of options, stock appreciation rights, restricted stock units,
performance awards and other stock based awards granted under the Stock Plan
will be subject to such terms, including exercise price, circumstances of
forfeiture and conditions and timing of exercise (if applicable), as may be
determined by the Stock Plan Committee. Stock options that are intended to
qualify as incentive stock options will be subject to terms and conditions
that comply with such rules as may be prescribed by section 422 of the Code.
Payment in respect of the exercise of an option granted under the Stock Plan
may be made in cash, or its equivalent, or, to the extent permitted by the
Stock Plan Committee, (i) by exchanging Shares owned by the optionee (which
are not the subject of any pledge or other security interest and which have
been owned by such optionee for at least 6 months) or (ii) through delivery of
irrevocable instructions to a broker to deliver promptly to the Company an
amount equal to the aggregate exercise price, or by a combination of the
foregoing, provided that the combined value of all cash and cash equivalents
and the fair market value of such Shares so tendered to the Company as of the
date of such tender is at least equal to the aggregate exercise price of the
option.
Awards in the form of stock options and stock appreciation rights are
intended to qualify as "performance-based compensation" and therefore be
deductible under section 162(m) of the Code provided that the exercise or
grant price, as the case may be, is the fair market value per Share on the
date of the grant. In addition, the Stock Plan Committee may designate awards
other than stock options or stock appreciation rights as a "Performance
Compensation Award." Such awards meeting the criteria described below are also
intended to be deductible under the section 162(m).
Each Performance Compensation Award will be payable only upon achievement
over a specified performance period (ranging from one to three years) of a
pre-established objective performance goal established by the Stock Plan
Committee for such period. The Stock Plan Committee may designate one or more
performance criteria for purposes of establishing a performance goal with
respect to Performance Compensation
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Awards made under the Stock Plan. The performance criteria that will be used
to establish such performance goals will be limited to the following: return
on net assets, return on shareholders' equity, return on assets, return on
capital, shareholder returns, profit margin, earnings per share, net earnings,
operating earnings, price per share and sales or market share.
With regard to a particular performance period, the Stock Plan Committee
will have the discretion, subject to the Stock Plan's terms, to select the
length of the performance period, the type(s) of Performance Compensation
Award(s) to be issued, the performance goals that will be used to measure
performance for the period and the performance formula that will be used to
determine what portion, if any, of the Performance Compensation Award has been
earned for the period. Such discretion shall be exercised by the Stock Plan
Committee in writing no later than 90 days after the commencement of the
performance period and performance for the period will be measured and
certified by the Stock Plan Committee upon the period's close. In determining
entitlement to payment in respect of a Performance Compensation Award, the
Stock Plan Committee may through use of negative discretion reduce or
eliminate such award, provided such discretion is permitted under section
162(m) of the Code.
No award that constitutes a "derivative security," for purposes of section
16 of the Exchange Act, may be assigned, alienated, pledged, attached, sold or
otherwise transferred or encumbered by a Participant otherwise than by will or
by the laws of descent and distribution or pursuant to a qualified domestic
relations order.
The Board may amend, alter, suspend, discontinue, or terminate the Stock
Plan or any portion thereof at any time; provided that no such amendment,
alteration, suspension, discontinuation or termination shall be made without
stockholder approval if such approval is necessary to comply with any tax or
regulatory requirement, including for these purposes any approval requirement
which is a prerequisite for exemptive relief from section 16(b) of the
Exchange Act.
Upon effectiveness of the Offering, the Company will grant options to
purchase 360,000 shares of Common Stock at the initial public offering price
to members of senior management and other employees. Of this total, Messrs.
Guillard and Dell'Anno will receive options to purchase 80,000 and 48,000
shares of Common Stock, respectively, at the initial public offering price.
Options to purchase interests in one of the Company's predecessors were
granted to Messrs. Beardsley and Stephan in February 1996. The exercise price
of these options reflected the fair market value of the predecessor at the
time of grant. Upon completion of the Offering, Messrs. Beardsley and Stephan
will both receive options to purchase 40,000 shares of Common Stock at $8.15
per share in pro rata substitution for these previously issued options. One-
third of each option described above will become exercisable on the first,
second and third anniversary of the date of grant.
DIRECTORS RETAINER FEE PLAN
The Company has adopted, and its shareholders have approved, the Harborside
Healthcare Corporation Directors Retainer Fee Plan (the "Retainer Fee Plan").
The aggregate number of shares authorized for issuance under the Retainer Fee
Plan is 15,000. Under the Retainer Fee Plan, a director who is not an employee
of the Company or an affiliate (an "Eligible Director") may elect to receive
payment of all or any portion of his annual cash retainer and meeting fees
(including fees for committee meetings) either currently, in cash or shares of
Common Stock, or may elect to defer receipt of such payment in stock.
Following the consummation of the Offering, it is expected that four directors
will be eligible to participate in the Retainer Fee Plan. Any deferral must be
made pursuant to an irrevocable election made prior to the year of service
with respect to which such fees relate and at least six months in advance of
the deferral. Any election by an Eligible Director to receive all or a portion
of such Eligible Director's retainer or meeting fees in shares of Common Stock
must be made at least six months prior to the date when such fees are to be
paid.
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Deferrals are invested, at the election of the Eligible Director, in a Stock
Unit Account (as defined in the Retainer Fee Plan). As elected by the Eligible
Director, distributions are made on the first day of the month following (i)
death, (ii) disability, (iii) termination of service or retirement, (iv) a
fixed date in the future or (v) the earliest to occur of the foregoing.
Distributions made from an Eligible Director's Stock Unit Account will be paid
in a single payment in the form of shares of Common Stock (and cash
representing any fractional share).
The Retainer Fee Plan is administered by a committee of employee directors
selected by the Board of Directors. No rights granted under the Retainer Fee
Plan are transferable other than pursuant to the laws of descent or
distribution. The Retainer Fee Plan may be amended or terminated by the Board
of Directors, provided that no amendment or termination may adversely affect
any rights accrued prior to the date of amendment or termination and provided
that any amendment for which shareholder approval is required by law or in
order to maintain continued qualification of the Plan under Rule 16b-3
promulgated under the Exchange Act shall not be effective until such approval
has been obtained.
CERTAIN TRANSACTIONS
Berkshire, one of the Contributors, is beneficially owned by, among others,
Douglas Krupp, a Director of the Company, his brother George Krupp and
Laurence Gerber, a Director of the Company. Berkshire has historically had and
expects to maintain certain relationships with the Company. All future
transactions with George or Douglas Krupp or their affiliates, including
Berkshire, will be approved by disinterested directors.
Effective October 1, 1994, the Company entered into an agreement to lease
its Brevard facility from RTLP, which is beneficially owned by Douglas Krupp,
George Krupp. The Brevard lease agreement is for a period of ten years, plus
up to two five-year renewals. Rent was $551,250 for the initial twelve-month
period and increases by 2.0% each year thereafter. At the end of the initial
lease term, the Company has the option to exercise two consecutive five-year
lease renewals. The Company also has the right after the fifth anniversary of
the commencement of the lease to purchase the facility at its fair market
value. RTLP is required to make capital expenditures totaling $500,000 during
the first three years of the lease. As of March 31, 1996, approximately
$338,000 of such capital expenditures have been made. See "Business--
Properties."
The Company's Boston headquarters occupy office space leased from Berkshire.
The Company has historically been allocated certain expenses for office space
and various services provided by Berkshire, including legal, tax, data
processing and other administrative services. The allocations of expenses for
the years ended December 31, 1993, 1994 and 1995 were $746,000, $759,000 and
$700,000, respectively. As of March 31, 1996, no amounts were owed to
Berkshire for these services. Berkshire also provided investor relations
services to KYP, for which the Company paid a total of $118,000. The Company
and Berkshire will enter into an administrative services agreement, which will
both become effective upon consummation of the Offering, pursuant to which
Berkshire will continue to provide the same services and office space to the
Company as described above, as well as certain investor relation services. The
administrative services agreement will have an initial term that ends on
December 31, 1996, and will be automatically renewable annually thereafter.
The Company or Berkshire may terminate the agreement upon 120 days' prior
written notice. Management believes that the terms of the administrative
services agreement will be as favorable to the Company as could be obtained
from independent third parties.
The administrative services agreement provides that the Company will
indemnify Berkshire, including its officers and partners, to the fullest
extent permitted by Delaware law, as if Berkshire were an agent of the Company
in connection with the performance of its services under the agreement.
Berkshire has agreed to indemnify the Company for losses arising from
Berkshire's deliberate dishonesty or gross negligence or willful misconduct.
The Company has entered into the Reorganization Agreement with the
Contributors, pursuant to which the Contributors will receive 4,400,000 shares
of Common Stock in exchange for their ownership interests in the Company's
predecessors. The Reorganization will be completed immediately prior to
completion of the Offering. See "The Reorganization."
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In connection with the acquisition of the Company's Decatur facility, a
subsidiary of the Company assumed a first mortgage note from the facility's
prior owner. Douglas Krupp personally guaranteed the note which at the time
had a remaining balance of $1,775,000. As of March 31, 1996, the remaining
principal balance on the note is $1,613,000. The Company has agreed to
indemnify Mr. Krupp for liability under such guaranty.
On December 28, 1995, an affiliate of Berkshire advanced $2,000,000 to the
Company at an interest rate of 9.0% per annum. The Company used these funds to
make a purchase deposit on five long-term care facilities which the Company
has since determined not to acquire. The advance and all accrued interest has
since been repaid.
In 1994, Bowie L.P. entered into an agreement with Krupp Construction
Corporation ("Krupp Construction"), an affiliate of Douglas Krupp and George
Krupp, to manage the construction of the Company's Larkin Chase Center. Krupp
Construction received a total of $278,000 in management fees and
reimbursements for certain costs incurred in connection with the agreement.
Effective December 31, 1995, Mr. Gerber purchased equity interests in
certain Predecessors pursuant to the Director Equity Purchase. Mr. Gerber
purchased these equity interests for an aggregate price of $365,000, the fair
market value of such interests on such date. In connection with the
Reorganization, Mr. Gerber will exchange the interests for an aggregate of
69,892 shares of Common Stock.
The Company has historically entered into a number of financings and lease
arrangements with Meditrust. David F. Benson, the President of Meditrust, is a
Director Nominee. Fourteen of the Company's facilities are leased from
Meditrust. See "Business--Properties." The Seven Facilities were sold to
Meditrust by KYP on December 31, 1995 for $47,000,000 and were subsequently
leased to the Company. Total minimum rent payments under the Company's leases
with Meditrust are expected to be approximately $7.6 million for 1996 and were
$0.5 million in 1995. Seven of the Company's owned facilities are subject to
mortgages in favor of Meditrust. See "Business--Properties" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources." The Company will use a portion of the
proceeds of the Offering to repay an aggregate of $25 million principal amount
of these mortgages. Meditrust will also receive a prepayment penalty of $1.7
million. See "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources." The Company has recently received pre-approval from Meditrust,
subject to customary due diligence and closing conditions, for up to $50
million in debt and/or lease financing for future acquisitions.
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STOCK OWNERSHIP OF DIRECTORS,
EXECUTIVE OFFICERS AND PRINCIPAL HOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of certain voting securities of the Company by all
persons known by the Company to own beneficially more than 5% of the Common
Stock, each of the Company's Directors, the Named Executive Officers and by
all Directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK SHARES OF COMMON STOCK
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO OFFERING AFTER OFFERING
------------------------- -------------------------
NUMBER OF PERCENTAGE NUMBER PERCENTAGE
NAME AND ADDRESS(1) SHARES OF CLASS OF SHARES OF CLASS
- ------------------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Douglas Krupp(2)......... 3,382,305 76.9% 3,382,305 42.3%
George Krupp(2).......... 3,382,305 76.9% 3,382,305 42.3%
Laurence Gerber(3)....... 2,830,156 64.3% 2,830,156 35.4%
The Berkshire Companies
L.P..................... 2,696,903 61.3% 2,696,903 33.7%
The Douglas Krupp 1994
Family Trust(4)......... 622,042 14.1% 622,042 7.8%
The George Krupp 1994
Family Trust(4)......... 622,042 14.1% 622,042 7.8%
Stephen L. Guillard(5)... 260,160 5.9% 260,160 3.3%
Damian N. Dell'Anno(6)... 65,600 1.5% 65,600 *
Bruce J. Beardsley....... -- * -- *
William H. Stephan....... -- * -- *
Robert L. Boelter........ -- * -- *
All Directors and
Executive Officers as a
group (11 persons)...... 3,777,958 85.9% 3,777,958 47.2%
</TABLE>
- --------
* Less than one percent.
(1) The address of each person named, unless otherwise noted, is c/o
Harborside Healthcare Corporation, 470 Atlantic Avenue, Boston,
Massachusetts 02210.
(2) Includes 2,696,903 shares of Common Stock received by Berkshire and 63,360
shares of Common Stock received by Krupp Enterprises, L.P.
("Enterprises"), in each case in connection with the Reorganization. The
general partners of Berkshire are KGP-1, Inc. ("KGP-1") and KGP-2, Inc.
("KGP-2") and the general partner of Enterprises is KGP-1. KGP-1 and KGP-2
are both 50% owned by each of George Krupp and Douglas Krupp. By virtue of
their interests in the general partners of Berkshire and Enterprises,
George Krupp and Douglas Krupp may each be deemed to beneficially own the
2,760,263 shares of Common Stock held by Berkshire and Enterprises. In
addition, George Krupp and Douglas Krupp may each be deemed to
beneficially own the 622,042 shares of Common Stock held by their
respective family trusts. See Note 4, below.
(3) Includes 69,893 shares of Common Stock received in connection with the
Reorganization. Also includes an aggregate of the 2,760,263 shares of
Common Stock held by Berkshire and Enterprises, which Mr. Gerber may be
deemed to beneficially own because of his position as President of KGP-1
and KGP-2.
(4) Includes 622,042 shares of Common Stock received in connection with the
Reorganization by each of The George Krupp 1994 Family Trust ("GKFT") and
The Douglas Krupp 1994 Family Trust ("DKFT"). Each of George Krupp and
Douglas Krupp may be deemed to beneficially own the 622,042 shares of
Common Stock held by GKFT and DKFT, respectively. The trustees of both
GKFT and DKFT are Lawrence I. Silverstein, Paul Krupp and M. Gordon
Ehrlich (the "Trustees"). The Trustees share control over the power to
dispose of the assets of GKFT and DKFT and thus each may be deemed to
beneficially own the 622,042 shares of Common Stock held by GKFT and DKFT;
however, each of the Trustees disclaims beneficial ownership of all of
such shares which are or may be deemed to be beneficially owned by George
Krupp or Douglas Krupp.
(5) Includes 260,160 shares of Common Stock received in connection with the
Reorganization.
(6) Includes 65,600 shares of Common Stock received in connection with the
Reorganization, of which 18,037 shares of Common Stock received consist of
the Bonus Payment.
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DESCRIPTION OF CAPITAL STOCK
The following summary information is qualified in its entirety by the
provisions of the Company's Certificate of Incorporation and By-laws, copies
of which have been filed as exhibits to the Registration Statement of which
this Prospectus is a part. See "Additional Information."
The authorized capital stock of the Company consists of 30,000,000 shares of
Common Stock, par value $.01 per share, and 1,000,000 shares of preferred
stock, par value $.01 per share ("Preferred Stock"), of which 4,400,000 shares
of Common Stock are outstanding upon completion of the Reorganization but
prior to completion of the Offering. Upon completion of the Offering,
8,000,000 shares of Common Stock will be outstanding (8,540,000 shares if the
Underwriters' over-allotment is exercised in full) and no shares of preferred
stock will be issued or outstanding.
Prior to the Offering, there has been no public market for the Common Stock.
See "Underwriting."
COMMON STOCK
Voting Rights. The Company's Certificate of Incorporation provides that
holders of Common Stock are entitled to one vote per share on all matters
submitted to a vote of stockholders. The stockholders are not entitled to vote
cumulatively for the election of directors.
Dividends. Each share of Common Stock is entitled to receive dividends if,
as and when declared by the Board of Directors. Under Delaware law, a
corporation may declare and pay dividends out of surplus, or if there is no
surplus, out of net profits for the fiscal year in which the dividend is
declared and/or the preceding year. No dividends may be declared, however, if
the capital of the corporation has been diminished by depreciation in the
value of its property, losses or otherwise to an amount less than the
aggregate amount of capital represented by any issued and outstanding stock
having a preference on the distribution of assets. See "Dividend Policy."
Other Rights. Stockholders of the Company have no preemptive or other rights
to subscribe for additional shares. Subject to any rights of the holders of
any preferred stock that may be issued subsequent to the Offering, all holders
of Common Stock are entitled to share equally on a share-for-share basis in
any assets available for distribution to stockholders on liquidation,
dissolution or winding up of the Company. No shares of Common Stock are
subject to redemption or a sinking fund. All outstanding shares of Common
Stock are, and the Common Stock to be outstanding upon completion of the
Offering will be, fully paid and nonassessable.
Transfer Agent and Registrar. The Transfer Agent and Registrar for the
Common Stock is American Stock Transfer and Trust Company.
PREFERRED STOCK
The Company's Board of Directors is authorized to issue, without further
authorization from stockholders, up to 1,000,000 shares of Preferred Stock in
one or more series and to determine, at the time of creating each series, the
distinctive designation of, and the number of shares in, the series, its
dividend rate, the number of votes, if any, for each share of such series, the
price and terms on which such shares may be redeemed, the terms of any
applicable sinking fund, the amount payable upon liquidation, dissolution or
winding up, the conversion rights, if any, and such other rights, preferences
and priorities of such series as the Board of Directors may be permitted to
fix under the laws of the State of Delaware as in effect at the time such
series is created. The issuance of Preferred Stock could adversely affect the
voting power of the holders of Common Stock and could have the effect of
delaying, deferring or preventing a change in control of the Company. The
Company has no present plan to issue any shares of Preferred Stock.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BY-LAWS
Certain provisions of the Certificate of Incorporation and By-laws of the
Company summarized below may be deemed to have an anti-takeover effect and may
delay, defer or prevent a tender offer or takeover attempt that a stockholder
might consider in its best interest, including an attempt that might result in
the receipt of a premium over the market price for the shares held by
stockholders.
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The Company's Certificate of Incorporation or By-laws provide (i) that no
director may be removed from office during his term except for cause, (ii)
that vacancies on the Board of Directors may be filled only by the remaining
directors and not by the stockholders, (iii) that any action required or
permitted to be taken by the stockholders of the Company may be effected only
at an annual or special meeting of stockholders and stockholder action by
written consent in lieu of a meeting is prohibited, (iv) that special meetings
of stockholders may be called only by a majority of the Board of Directors, or
by the Chairman of the Board of Directors or the President of the Company, (v)
that stockholders are not permitted to call a special meeting or require that
the Board of Directors call a special meeting of stockholders and (vi) for an
advance notice procedure for the nomination, other than by or at the direction
of the Board of Directors, of candidates for election as directors as well as
for other stockholder proposals to be considered at annual meetings of
stockholders. In general, notice of intent to nominate a director or raise
business at such meetings must be received by the Company not less than 60 or
more than 90 days prior to the anniversary of the previous year's annual
meeting and must contain certain information concerning the person to be
nominated or the matters to be brought before the meeting and concerning the
stockholder submitting the proposal.
CLASSIFICATION OF DIRECTORS
The Company's Board of Directors is classified into three classes. It is
anticipated that each class will, as nearly as practicable, contain an equal
number of Directors. The members of each class will serve staggered three-year
terms. At each annual meeting of stockholders, Directors will be elected for a
full three-year term to succeed those Directors whose terms are expiring. The
Company's classified Board of Directors could have the effect of increasing
the length of time necessary to change the composition of a majority of the
Board of Directors. In general, at least two annual meetings of stockholders
will be necessary for stockholders to effect a change in a majority of the
members of the Board of Directors.
LIMITATION ON DIRECTORS' LIABILITY
The Company has included in its Certificate of Incorporation provisions to
eliminate the rights of the Company and its stockholders (through
stockholders' derivative suits on behalf of the Company) to recover monetary
damages from a director resulting from breaches of fiduciary duty (including
breaches resulting from grossly negligent behavior). This provision does not
eliminate liability for breaches of the duty of loyalty, acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation
of law, violations under Section 174 of the Delaware General Corporation Law
("Delaware Law") concerning the unlawful payment of dividends or stock
redemptions or repurchases or for any transaction from which the director
derived an improper personal benefit. However, these provisions will not limit
the liability of the Company's Directors under Federal securities laws. The
Company believes that these provisions are necessary to attract and retain
qualified persons as directors and officers.
SECTION 203 OF THE DELAWARE LAW
Section 203 of the Delaware Law prohibits publicly held Delaware
corporations from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date of the transaction
in which the person or entity became an interested stockholder, unless (i)
prior to such date, either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder is approved by
the Board of Directors of the corporation, (ii) upon consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the outstanding
voting stock of the corporation (excluding for this purpose certain shares
owned by persons who are directors and also officers of the corporation and by
certain employee benefit plans) or (iii) on or after such date the business
combination is approved by the Board of Directors of the corporation and by
the affirmative vote (and not by written consent) of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested stockholder. For
the purposes of Section 203, a "business combination" is broadly defined to
include mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. An "interested stockholder" is a person
who, together with affiliates and associates, owns (or within the immediately
preceding three years did own) 15% or more of the corporation's voting stock.
72
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding 8,000,000
shares of Common Stock (8,540,000 shares if the Underwriters' overallotment
option is exercised in full). An additional 500,000 shares of Common Stock
will be issuable upon the exercise in full of all outstanding options to
purchase Common Stock. Of the maximum 8,540,000 shares of Common Stock
outstanding, 4,140,000 shares will have been sold pursuant to the Offering and
all of such shares will be freely tradeable without restriction or further
registration under the Securities Act, except for any shares purchased or
acquired by an "affiliate" of the Company (as that term is defined under the
rules and regulations of the Securities Act). The remaining outstanding shares
of Common Stock were issued to the Contributors in connection with the
Reorganization and are "restricted securities" that may not be sold in the
absence of registration under the Securities Act unless an exemption from
registration is available, including the exemptions contained under Rule 144.
In connection with the Reorganization, the Company has agreed to grant a
demand registration right, subject to certain limitations and at the Company's
expense, to financial institutions to whom the Contributors may pledge the
Common Stock received by them in the Reorganization. See "The Reorganization."
The Company has agreed that it will not, directly or indirectly, without the
prior written consent of NatWest Securities Limited, offer to sell, sell,
contract to sell, grant any option to purchase or otherwise dispose (or
announce any offer to sell, sale, contract to sell, grant of any option to
purchase or other disposition) of any shares of Common Stock or any securities
convertible into, or exchangeable or exercisable for, shares of Common Stock
for a period of 180 days after the date of this Prospectus, except for
specific grants of options to purchase shares of Common Stock described in
this Prospectus and for the issuance of shares in connection with the
Reorganization. The Contributors have agreed that they will not, directly or
indirectly, without the prior written consent of NatWest Securities Limited,
offer to sell, sell, contract to sell, grant any option to purchase or
otherwise dispose (or announce any offer to sell, sale, contract to sell,
grant of any option to purchase or other disposition) of any shares of Common
Stock or any securities convertible into, or exchangeable or exercisable for,
shares of Common Stock for a period of 180 days after the date of this
Prospectus.
An aggregate of 800,000 shares of Common Stock have been reserved for
issuance to employees, officers and Directors upon exercise of options, of
which options for 500,000 shares of Common Stock will be granted upon the
effectiveness of the Offering. The Company anticipates filing a registration
statement on Form S-8 under the Securities Act to register all of the shares
of Common Stock currently issuable or reserved for future issuance under the
Stock Plan, the Director Plan and the Retainer Fee Plan. Shares purchased upon
exercise of options granted pursuant to the Stock Plan, the Director Plan and
the Retainee Fee Plan generally will be available for resale in the public
market (in the case of the Stock Plan, to the extent the stock transfer
restriction agreements with NatWest Securities Limited have expired), except
that any such shares issued to affiliates are subject to the volume
limitations and certain other restrictions of Rule 144. See "Management--Stock
Option Plans" and "Management--Directors Retainer Fee Plan."
In general, under Rule 144 as currently in effect, beginning 90 days after
the Offering, a person (or persons whose shares are aggregated) who has
beneficially owned "restricted" shares for at least two years, including a
person who may be deemed to be an affiliate of the Company, is entitled to
sell within any three-month period a number of shares that does not exceed the
greater of (i) 1% of the then outstanding shares of Common Stock of the
Company (80,000 shares after giving effect to the Offering) or (ii) the
average weekly trading volume of Common Stock during the four calendar weeks
preceding the date on which a notice of sale is filed with the Commission. A
person (or persons whose shares are aggregated) who is not at any time during
the 90 days preceding a sale an "affiliate" is entitled to sell such shares
under Rule 144, commencing three years after the date such shares were
acquired from the Company or an affiliate of the Company, without regard to
the volume limitations described above. As defined in Rule 144, an "affiliate"
of an issuer is a person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control
with, such issuer. Sales under Rule 144 are subject to certain other
restrictions relating to the manner of sale, notice and the availability of
current public information about the Company. The Company is unable to
estimate the number of shares that may be resold from time to time under Rule
144, because such number will depend on the market price and trading volume
for the Common Stock, the personal circumstances of the sellers and other
factors.
Prior to the Offering, there has been no public market for Common Stock and
no prediction can be made as to the effect, if any, that the sale or
availability for sale of additional shares of Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of significant amounts
of such shares in the public market or the availability of large amounts of
shares for sale could adversely affect the market price of Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities.
73
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement, the Company has agreed to sell to each of the Underwriters named
below (the "Underwriters"), for whom NatWest Securities Limited and Dean
Witter Reynolds Inc. are acting as representatives (the "Representatives"),
and each such Underwriter has severally agreed to purchase from the Company,
the number of shares of Common Stock set forth opposite its name:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
NatWest Securities Limited...........................................
Dean Witter Reynolds Inc. ...........................................
---------
Total.............................................................. 3,600,000
=========
</TABLE>
The Company is obligated to sell, and the Underwriters are severally
obligated to purchase, all of the shares of Common Stock offered hereby if any
such shares are purchased.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public initially at the
public Offering price set forth on the cover page of this Prospectus and to
certain securities dealers at such price, less a concession not in excess of
$ per share of Common Stock. The Underwriters may allow, and such selected
dealers may reallow, a concession not in excess of $ per share of Common
Stock to certain other brokers and dealers. The public Offering price,
concession and discount to dealers may be changed by the Underwriters after
the shares of Common Stock are released for sale to the public. The
Representatives have informed the Company that the Underwriters do not intend
to confirm sales to any accounts over which they exercise discretionary
authority.
The Company has granted the Underwriters an option, exercisable within 30
days after the date of this Prospectus, to purchase up to 540,000 additional
shares of Common Stock at the initial public offering price, less the
underwriting discount set forth on the cover page of this Prospectus. If the
Underwriters exercise their option to purchase any of the additional shares of
Common Stock, each of the Underwriters will have a firm commitment, subject to
certain conditions, to purchase approximately the same percentage thereof
which the number of shares of Common Stock to be purchased by each of them as
shown in the above table bears to the Underwriters' initial commitment. The
Underwriters may exercise the option only to cover over-allotments in the sale
of the shares of Common Stock offered hereby.
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments which the Underwriters may be required to make in respect thereof.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price of the Common Stock will be determined by
negotiations between the Company and the Representatives. The factors
considered in determining the initial public offering price will include an
assessment of the history and the prospects for the industry in which the
Company operates, the ability of the Company's management, the past and
present operations of the Company, the historical results of operations of the
Company, the Company's earnings prospects, the general conditions of the
securities markets at the time of the Offering and the prices of similar
securities of comparable companies. There can be no assurance, however, that
the price at which the Common Stock will sell in the public market after this
Offering will not be lower than the price at which it is sold by the
Underwriters.
74
<PAGE>
The Company has agreed that it will not, directly or indirectly, without the
prior written consent of NatWest Securities Limited, offer to sell, sell,
contract to sell, grant any option to purchase or otherwise dispose (or
announce any offer to sell, sale, contract to sell, grant of any option to
purchase or other disposition) of any shares of Common Stock or any securities
convertible into, or exchangeable or exercisable for, shares of Common Stock
for a period of 180 days after the date of this Prospectus, except for
specific grants of options to purchase shares of Common Stock described in
this Prospectus and for the issuance of shares in connection with the
Reorganization. The Contributors have agreed that they will not, directly or
indirectly, without the prior written consent of NatWest Securities Limited,
sell, offer to sell, contract to sell, grant any option to purchase or
otherwise dispose of any shares of Common Stock or any securities convertible
into, or exchangeable or exercisable for, shares of Common Stock for a period
of 180 days after the date of this Prospectus.
NatWest Securities Limited, a United Kingdom broker-dealer and a member of
the Securities and Futures Authority Limited, has agreed that, as part of the
distribution of the Common Stock offered hereby and subject to certain
exceptions, it will not offer or sell any Common Stock within the United
States, its territories or possessions or to persons who are citizens thereof
or residents therein. The Underwriting Agreement does not limit the sale of
the Common Stock offered hereby outside of the United States.
NatWest Securities Limited has represented and agreed that (i) it has not
offered or sold and will not offer to sell any shares of Common Stock to
persons in the United Kingdom, except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purpose of their businesses or otherwise in
circumstances which have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995 or the Financial Services Act 1986 (the "Act"),
(ii) it has complied and will comply with all applicable provisions of the Act
with respect to anything done by it in relation to the shares of Common Stock
in, from or otherwise involving the United Kingdom and (iii) it has only
issued or passed on, and will only issue or pass on, in the United Kingdom,
any document which consists of or any part of listing particulars,
supplementary listing particulars, or any other document required or permitted
to be published by listing rules under Part IV of the Act, to a person who is
of a kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1995 or is a person to whom the
document may otherwise lawfully be issued or passed on.
An affiliate of NatWest Securities Limited has in the past provided
investment banking services to an affiliate of the Company.
At the request of the Company, up to 180,000 shares of Common Stock offered
hereby have been reserved for sale to certain individuals, including directors
and employees of the Company and members of their families. The price of such
shares to such persons will be the initial public offering price set forth on
the cover of this Prospectus. The number of shares available to the general
public will be reduced to the extent those persons purchase reserved shares.
Any shares not so purchased will be offered hereby at the public Offering
price set forth on the cover of this Prospectus.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York.
Certain legal matters will be passed upon for the Underwriters by Stroock &
Stroock & Lavan, New York, New York.
EXPERTS
The combined balance sheets as of December 31, 1994 and 1995 and the
combined statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1995, of
the Company included in this Prospectus and elsewhere in the Registration
Statement of which this Prospectus is a part, have been audited by Coopers &
Lybrand L.L.P., independent accountants, as indicated in their report with
respect thereto, and are included herein and in the Registration Statement, of
which this Prospectus is a part, given on the authority of said firm as
experts in accounting and auditing.
75
<PAGE>
The combined balance sheets as of December 31, 1993, 1994 and 1995 and the
combined statements of income, retained earnings and cash flows for each of
the three years in the period ended December 31, 1995, of Sowerby Enterprises,
the former owner of the New Hampshire Facilities, included in this Prospectus
and elsewhere in the Registration Statement of which this Prospectus is a
part, have been audited by Leverone & Company, independent accountants, as
indicated in their report with respect thereto, and are included herein and in
the Registration Statement of which this Prospectus is a part, given on the
authority of said firm as experts in accounting and auditing.
The combined balance sheets as of December 31, 1994 and 1995 and the
combined statements of income, partners' equity and cash flows for the years
ended December 31, 1993, 1994 and 1995 of the owners of the Ohio Facilities
included in this Prospectus and elsewhere in this Registration Statement of
which this Prospectus is a part have been audited by Howard, Wershbale & Co.,
independent accountants, as indicated in their report with respect thereto,
and are included herein and in the Registration Statement of which this
Prospectus is a part, given on the authority of said firm as experts in
accounting and auditing.
The balance sheets as of December 31, 1994 and 1995 and the statements of
operations and partners' equity and cash flows for the period from April 7,
1993 (date of inception) through December 31, 1993 and for the years ended
December 31, 1994 and 1995, of Bowie Center Limited Partnership included in
this Prospectus and elsewhere in the Registration Statement of which this
Prospectus is a part, have been audited by Coopers & Lybrand L.L.P.,
independent accountants, as indicated in their report with respect thereto,
and are included herein and in the Registration Statement, of which this
Prospectus is a part, given on the authority of said firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a registration statement on Form
S-1 (together with all amendments and exhibits, the "Registration Statement")
under the Securities Act with respect to the Common Stock offered hereby. This
Prospectus, which constitutes part of the Registration Statement, 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 and to the schedules and exhibits thereto.
The Registration Statement, including the exhibits and schedules thereto, may
be inspected, without charge, and copies may be obtained, at prescribed rates,
at the public reference facilities of the Commission maintained at Judiciary
Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. Copies of
the Registration Statement may also be inspected, without charge, at the
Commission's regional offices at Seven World Trade Center, Suite 1300, New
York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. In addition, copies of the Registration
Statement may be obtained by mail at prescribed rates, from the Commission's
Public Reference Section at Judiciary Plaza, 450 Fifth Street, N.W.
Washington, D.C. 20549.
Statements contained in this Prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete and in
each instance reference is made to the copy of such contract, agreement or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
As a result of this Offering, the Company will become subject to the
information and periodic reporting requirements of the Securities Exchange Act
of 1934, as amended, and, in accordance therewith, will file periodic reports,
proxy statements and other information with the Commission. Such periodic
reports, proxy statements and other information will be available for
inspection and copying at the public reference facilities and regional offices
referred to above. The Company intends to furnish to its stockholders annual
reports containing audited financial statements and an opinion thereon
expressed by independent certified public accountants and quarterly reports
containing unaudited interim summary financial information for the first three
fiscal quarters of each fiscal year of the Company.
76
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES
Report of Independent Accountants....................................... F-2
Combined Balance Sheets as of December 31, 1994, December 31, 1995 and
(unaudited) March 31, 1996............................................. F-3
Combined Statements of Operations for the years ended December 31, 1993,
1994 and 1995 and (unaudited) for the three months ended March 31, 1995
and 1996............................................................... F-4
Combined Statements of Changes in Stockholders' Equity for the years
ended December 31, 1993, 1994 and 1995 and (unaudited) for the three
months ended March 31, 1995 and 1996................................... F-5
Combined Statements of Cash Flows for the years ended December 31, 1993,
1994 and 1995 and (unaudited) for the three months ended March 31, 1995
and 1996............................................................... F-6
Notes to Combined Financial Statements.................................. F-7
</TABLE>
<TABLE>
<S> <C>
SOWERBY ENTERPRISES:
Independent Auditors' Report............................................ F-21
Combined Balance Sheets at December 31, 1993, 1994 and 1995............. F-22
Combined Statements of Income for the years ended December 31, 1993,
1994 and 1995.......................................................... F-24
Combined Statements of Retained Earnings (Deficit) for the years ended
December 31, 1993, 1994 and 1995....................................... F-25
Combined Statements of Cash Flows for the years ended December 31, 1993,
1994 and 1995.......................................................... F-26
Notes to Combined Financial Statements.................................. F-27
BEACHWOOD CARE CENTER,
WESTBAY MANOR COMPANY,
WESTBAY MANOR II DEVELOPMENT COMPANY,
ROYALVIEW MANOR COMPANY, AND
ROYALVIEW MANOR DEVELOPMENT COMPANY:
Independent Auditors' Report............................................ F-31
Combined Balance Sheets at December 31, 1994, December 31, 1995 and
(unaudited) March 31, 1996............................................. F-32
Combined Statements of Income for the years ended December 31, 1993,
1994 and 1995 and (unaudited) for the three months ended March 31,
1996................................................................... F-33
Combined Statements of Partners' Equity for the years ended December 31,
1993, 1994 and 1995 and (unaudited) for the three months ended March
31, 1996............................................................... F-34
Combined Statements of Cash Flows for the years ended December 31, 1993,
1994 and 1995 and (unaudited) for the three months ended March 31,
1996................................................................... F-35
Notes to Combined Financial Statements.................................. F-36
BOWIE CENTER LIMITED PARTNERSHIP:
Report of Independent Accountants....................................... F-42
Balance Sheets as of December 31, 1994 and 1995......................... F-43
Statements of Operations and Partners' Equity for the period from April
7, 1993 (date of inception) through December 31, 1993 and the years
ended December 31, 1994 and 1995....................................... F-44
Statements of Cash Flows for the period from April 7, 1993 (date of
inception) through December 31, 1993 and the years ended December 31,
1994 and 1995.......................................................... F-45
Notes to Financial Statements........................................... F-46
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Harborside Healthcare
Corporation:
We have audited the accompanying combined balance sheets of Harborside
Healthcare Corporation and its combined affiliates (the "Company") as of
December 31, 1994 and 1995 and the related combined statements of operations,
changes in stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of the Company as of
December 31, 1994 and 1995, and the combined results of their operations and
their cash flows for each of the three years in the period ended December 31,
1995 in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 19, 1996
F-2
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
----------------
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
PRO FORMA
MARCH 31, MARCH 31,
1994 1995 1996 1996 (NOTE B)
------- ------- ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........ $14,013 $40,157 $10,000 $10,000
Accounts receivable, net of
allowances for doubtful accounts
of $801, $1,526 and $1,618,
respectively.................... 5,351 9,967 11,354 11,354
Prepaid expenses and other....... 1,334 1,790 1,935 1,935
Demand note due from limited
partnership
(Note F)........................ -- 1,255 1,284 1,284
Facility acquisition deposits
(Notes O and P)................. -- 3,000 -- --
Restricted cash (Note C)......... 586 -- -- --
------- ------- ------- -------
Total current assets........... 21,284 56,169 24,573 24,573
Restricted cash (Note C)........... 1,409 2,755 4,331 4,331
Investment in limited partnership
(Note F).......................... 633 519 395 395
Property and equipment, net (Note
G)................................ 66,938 30,139 30,185 30,185
Intangible assets, net (Note H).... 3,612 3,050 3,894 3,894
------- ------- ------- -------
Total assets................... $93,876 $92,632 $63,378 $63,378
======= ======= ======= =======
LIABILITIES
Current liabilities:
Current maturities of long-term
debt (Note E)................... $ 391 $ 428 $ 448 $ 448
Accounts payable................. 2,689 4,034 3,762 3,762
Employee compensation and bene-
fits............................ 3,110 4,495 6,640 6,640
Other accrued liabilities........ 664 959 892 892
Note payable to affiliate (Note
P).............................. -- 2,000 -- --
Accrued interest................. 515 25 67 67
Current portion of deferred in-
come............................ -- -- 369 369
Distribution payable to minority
interest
(Note N)........................ -- 33,493 -- --
------- ------- ------- -------
Total current liabilities...... 7,369 45,434 12,178 12,178
Long-term portion of deferred in-
come.............................. -- -- 3,225 3,225
Long-term debt (Note E)............ 52,905 43,068 42,974 42,974
------- ------- ------- -------
Total liabilities.............. 60,274 88,502 58,377 58,377
------- ------- ------- -------
Minority interest (Notes B and N).. 30,736 -- -- --
------- ------- ------- -------
Commitments and contingencies
(Notes C, D, F and J)..............
STOCKHOLDERS' EQUITY (NOTE M)
Common stock, $.01 par value, 1,000
shares authorized, issued and
outstanding; pro forma 30,000,000
shares authorized, 4,400,000
shares issued and outstanding..... -- -- -- 44
Additional paid-in capital......... 10,342 10,372 11,038 10,994
Accumulated deficit................ (7,476) (6,242) (6,037) (6,037)
------- ------- ------- -------
Total stockholders' equity..... 2,866 4,130 5,001 5,001
------- ------- ------- -------
Total liabilities and stock-
holders' equity............... $93,876 $92,632 $63,378 $63,378
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-3
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE FOR THE THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------- ----------------------
1993 1994 1995 1995 1996
--------- --------- --------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Total net revenues...... $ 75,101 $ 86,376 $ 109,425 $ 23,777 $ 34,931
--------- --------- --------- ---------- ----------
Expenses:
Facility operating.... 57,412 68,951 89,378 19,734 28,120
General and
administrative....... 3,092 3,859 5,076 1,141 2,235
Service charges paid
to affiliate (Note
P)................... 746 759 700 177 185
Depreciation and
amortization......... 4,304 4,311 4,385 1,043 539
Facility rent......... 525 1,037 1,907 392 2,545
--------- --------- --------- ---------- ----------
Total expenses...... 66,079 78,917 101,446 22,487 33,624
--------- --------- --------- ---------- ----------
Income from operations.. 9,022 7,459 7,979 1,290 1,307
Other:
Interest expense,
net.................. (4,740) (4,609) (5,107) (1,264) (975)
Loss on investment in
limited partnership
(Note F)............. -- (448) (114) (81) (127)
Gain on sale of
facilities, net (Note
N)................... -- -- 4,869 -- --
Loss on refinancing of
debt (Note E)........ -- (453) -- -- --
Minority interest in
net income of
combined affiliates
(Notes B and N)...... (2,297) (1,575) (6,393) (185) --
--------- --------- --------- ---------- ----------
Net income (loss)....... $ 1,985 $ 374 $ 1,234 $ (240) $ 205
========= ========= ========= ========== ==========
Pro forma data
(unaudited--Notes C and
L):
Historical net income
(loss)............... $ 1,985 $ 374 $ 1,234 $ (240) $ 205
Pro forma income
taxes................ (774) (146) (481) 94 (80)
--------- --------- --------- ---------- ----------
Pro forma net income
(loss)............... $ 1,211 $ 228 $ 753 $ (146) $ 125
========= ========= ========= ========== ==========
Pro forma net income
(loss) per share
(Note C)............. $ 0.27 $ 0.05 $ 0.17 $ (0.03) $ 0.03
========= ========= ========= ========== ==========
Weighted average number
of common and common
equivalent shares used
in pro forma net income
(loss) per share
(Note B)............... 4,452,160 4,452,160 4,452,160 4,452,160 4,452,160
========= ========= ========= ========== ==========
</TABLE>
The accompanying notes are an integral
part of the combined financial statements.
F-4
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
----------------
<TABLE>
<CAPTION>
ADDITIONAL
PAID- IN ACCUMULATED
CAPITAL DEFICIT TOTAL
---------- ----------- -------
<S> <C> <C> <C>
Stockholders' equity, December 31, 1992....... $11,266 $(7,635) $ 3,631
Net income for the year ended December 31,
1993......................................... -- 1,985 1,985
Distributions................................. (698) -- (698)
------- ------- -------
Stockholders' equity, December 31, 1993....... 10,568 (5,650) 4,918
Net income for the year ended December 31,
1994......................................... -- 374 374
Distributions................................. (226) (2,200) (2,426)
------- ------- -------
Stockholders' equity, December 31, 1994....... 10,342 (7,476) 2,866
Net income for the year ended December 31,
1995......................................... -- 1,234 1,234
Contributions................................. 30 -- 30
------- ------- -------
Stockholders' equity, December 31, 1995....... 10,372 (6,242) 4,130
Net income for the three months ended March
31, 1996 (unaudited)......................... -- 205 205
Purchase of equity interests (unaudited)...... 803 -- 803
Distributions (unaudited)..................... (137) -- (137)
------- ------- -------
Stockholders' equity, March 31, 1996 (unau-
dited)....................................... $11,038 $(6,037) $ 5,001
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-5
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
----------------
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------------------- ----------------------
1993 1994 1995 1995 1996
------- ------- ------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss).......... $ 1,985 $ 374 $ 1,234 $ (240) $ 205
Adjustments to reconcile
net income (loss) to net
cash provided by operating
activities:
Minority interest.......... 2,297 1,575 6,393 185 234
Gain on sale of facilities,
net....................... -- -- (4,869) -- --
Loss on refinancing of
debt...................... -- 453 -- -- --
Depreciation of property
and equipment............. 3,734 3,744 3,924 924 459
Amortization of intangible
assets.................... 570 567 461 119 80
Amortization of deferred
income.................... -- -- -- -- (91)
Loss from investment in
limited partnership....... -- 448 114 81 127
Amortization of loan costs
and fees.................. 355 172 109 27 33
Deferred interest.......... 472 -- -- -- --
Other...................... 108 8 14 -- (5)
------- ------- ------- ---------- ----------
9,521 7,341 7,380 1,096 1,042
Changes in operating assets
and liabilities:
(Increase) in accounts
receivable................ (534) (2,888) (7,573) (1,630) (1,387)
(Increase) decrease in
prepaid expenses and
other..................... (95) (521) (456) 372 (406)
Increase (decrease) in
accounts payable.......... 147 656 1,345 148 (272)
Increase in employee
compensation and
benefits.................. 713 635 1,385 302 2,145
Increase (decrease) in
accrued interest.......... 9 367 (490) (248) 42
Increase (decrease) in
other accrued
liabilities............... 169 (60) 295 (38) (67)
Increase (decrease) in due
to affiliates............. 591 (591) -- -- --
------- ------- ------- ---------- ----------
Net cash provided by
operating activities..... 10,521 4,939 1,886 2 1,097
------- ------- ------- ---------- ----------
Investing activities:
Additions to property and
equipment................. (1,205) (2,585) (3,081) (486) (504)
Facility acquisition
deposits.................. -- -- (3,000) -- 3,000
Additions to intangibles... (1,365) (1,410) (1,202) (36) (696)
Transfers to (from)
restricted cash, net...... -- (1,995) (760) 247 (1,576)
Purchase of commercial
paper..................... (2,677) -- -- -- --
Maturity of commercial
paper..................... 6,100 -- -- -- --
Demand note from limited
partnership............... -- -- (1,255) -- --
Contributions to investment
in limited partnership.... (995) (88) -- -- --
Payment of costs related to
sale of facilities........ -- -- (884) -- --
Proceeds from sale of
facilities................ -- -- 47,000 -- --
------- ------- ------- ---------- ----------
Net cash provided (used)
by investing activities.. (142) (6,078) 36,818 (275) 224
------- ------- ------- ---------- ----------
Financing activities:
Payment of long-term debt.. (663) (29,842) (9,800) (93) (102)
Debt prepayment penalty.... -- -- (1,154) -- --
Payment of termination fee
on interest protection
agreement................. -- (384) -- -- --
Payment of demand note
payable................... -- (225) -- -- --
Issuance of long-term
debt...................... 11 42,300 -- -- --
Note payable to an
affiliate................. -- -- 2,000 -- (2,000)
Receipt of lease
inducement................ -- -- -- -- 3,685
Dividend distribution...... (698) (2,426) -- (66) (137)
Distributions to minority
interest.................. (4,750) (4,485) (3,636) (909) (33,727)
Purchase of equity
interests and other
contributions............. -- -- 30 -- 803
------- ------- ------- ---------- ----------
Net cash provided (used)
by financing activities.. (6,100) 4,938 (12,560) (1,068) (31,478)
------- ------- ------- ---------- ----------
Net increase (decrease) in
cash and cash equivalents.. 4,279 3,799 26,144 (1,341) (30,157)
Cash and cash equivalents,
beginning of period........ 5,935 10,214 14,013 14,013 40,157
------- ------- ------- ---------- ----------
Cash and cash equivalents,
end of period.............. $10,214 $14,013 $40,157 $12,672 $10,000
======= ======= ======= ========== ==========
Supplemental Disclosure:
Interest paid............... $ 4,197 $ 4,505 $ 6,208 $ 1,705 $ 1,227
======= ======= ======= ========== ==========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-6
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS ENDED MARCH 31,
1995 AND 1996 IS UNAUDITED)
----------------
A. NATURE OF BUSINESS
Harborside Healthcare Corporation and its combined affiliates (the
"Company") operate long-term care facilities and provide rehabilitation
therapy services (see Note B). As of December 31, 1995, the Company owned
eight facilities, operated eleven additional facilities under various leases
and owned a rehabilitation therapy services company. The Company also
maintained a majority equity investment in Bowie Center Limited Partnership
("Bowie L.P.") which owns an additional long-term care facility (see Note F).
The Company's long-term care facilities are located in Florida, Ohio, Indiana,
Maryland and New Jersey. In January 1996, the Company entered into a leasing
arrangement for six additional facilities located in New Hampshire (see Note
Q).
B. BASIS OF PRESENTATION
Harborside Healthcare Corporation is a Delaware corporation and was
incorporated on March 19, 1996. The Company was formed as a holding company,
in anticipation of an initial public offering, to combine under the control of
a single corporation the operations of various business entities (the
"Predecessor Entities") which are all under the majority control of several
related stockholders. These stockholders expect to enter into an agreement
(the "Reorganization Agreement") whereby they will transfer their ownership of
the Predecessor Entities to the Company in exchange for shares of Common Stock
of the Company.
The accompanying financial statements have been prepared to reflect the
combination of the Predecessor Entities in a manner which is similar to a
pooling-of-interests. This presentation results in a combination of the
Predecessor Entities (which will become subsidiaries of the Company under the
terms of the Reorganization Agreement) at each entity's respective historical
accounting basis.
A Pro Forma unaudited balance sheet as of March 31, 1996 has been presented
to reflect the exchange of the ownership interests of the Predecessor Entities
for 4,400,000 shares of common stock of the Company, which will occur upon
implementation of the Reorganization Agreement, and which will result in a
transfer of $44,000 from additional paid-in capital to common stock.
The Predecessor Entities include one C corporation, KHI Corporation ("KHI"),
two limited partnerships, HH Advisors Limited Partnership ("HH Advisors") and
Riverside Retirement Limited Partnership ("Riverside") and seven Subchapter S
corporations (the "S Corporations") and their direct and indirect wholly-owned
subsidiaries. The common stock of KHI Corporation has not been presented on
the balance sheet as it is immaterial. The partnership equity of HH Advisors
and Riverside has been presented as additional paid-in capital and accumulated
deficit.
A subsidiary of HH Advisors, HHCI Limited Partnership ("HHCI"), is the
general partner of Krupp Yield Plus Limited Partnership ("KYP"), a partnership
which was formed in June 1987 to purchase and operate long-term care
facilities. KYP raised proceeds through the sale of limited partnership
interests ("Units") in KYP to the public, and by March 6, 1990, KYP had
purchased seven long-term care facilities. For financial reporting purposes,
the interests of the holders of the Units ("Unitholders"), including
distributions of capital, have been reflected in the accompanying financial
statements as a minority interest. The net income of KYP was allocated 95% to
the Unitholders and 5% to HHCI. In December 1995, a majority of the
Unitholders approved the sale, effective December 31, 1995, of the real estate
owned by the seven KYP facilities to Meditrust, a real estate investment trust
("Meditrust"). Simultaneously, Meditrust leased the real estate of these
facilities to HHCI (see Notes D and N).
In addition to the seven leased facilities described above, KHI and HH
Advisors together control subsidiaries, which as of December 31, 1995, leased
four long-term care facilities and owned a rehabilitation therapy services
company.
F-7
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
----------------
Additionally, Riverside owns one long-term care facility, and the S
Corporations in total own seven long-term care facilities.
C. SIGNIFICANT ACCOUNTING POLICIES
The Company uses the following accounting policies for financial reporting
purposes:
Principles of Combination
The combined financial statements include the accounts of the Company and
its combined affiliates. All significant intercompany transactions and
balances have been eliminated in combination.
Unaudited Interim Financial Data
The interim financial data at March 31, 1996 and for the three months ended
March 31, 1995 and 1996 included herein are unaudited and, in the opinion of
management, reflect all adjustments (consisting of only normal recurring
adjustments) necessary for a fair presentation of financial position and the
results of operations and cash flows for such interim periods.
Total Net Revenues
Total net revenues include net patient service revenues, rehabilitation
therapy service revenues from contracts to provide services to non-affiliated
long-term care facilities and management fees from the facility owned by Bowie
L.P. (see Note F).
Net patient service revenues payable by patients at the Company's facilities
are recorded at established billing rates. Net patient service revenues to be
reimbursed by contracts with third-party payors, primarily the Medicare and
Medicaid programs, are recorded at the amount estimated to be realized under
these contractual arrangements. Revenues from Medicare and Medicaid are
generally based on reimbursement of the reasonable direct and indirect costs
of providing services to program participants or a prospective payment system.
The Company separately estimates revenues due from each third party with which
it has a contractual arrangement and records anticipated settlements with
these parties in the contractual period during which services were rendered.
The amounts actually reimbursable under Medicare and Medicaid are determined
by filing cost reports which are then audited and generally retroactively
adjusted by the payor. Legislative changes to state or federal reimbursement
systems may also retroactively affect recorded revenues. Changes in estimated
revenues due in connection with Medicare and Medicaid may be recorded by the
Company subsequent to the year of origination and prior to final settlement
based on improved estimates. Such adjustments and final settlements with third
party payors, which could materially and adversely affect the Company, are
reflected in operations at the time of the adjustment or settlement.
In addition, direct and allocated indirect costs reimbursed under the
Medicare program are subject to regional limits. The Company's costs generally
exceed these limits and accordingly, the Company is required to submit
exception requests to recover such excess costs. The Company believes it will
be successful in collecting these receivables, however, the failure to recover
these costs in the future could materially and adversely affect the Company.
Beginning in 1995, total net revenues includes revenues recorded by the
Company's rehabilitation therapy combined affiliate (which does business under
the name "Theracor") for therapy services provided to non-affiliated long-term
care facilities. These revenues approximated $3,045,000, $136,000 and
$2,141,000 for the year ended December 31, 1995 and the three months ended
March 31, 1995 and 1996, respectively and were derived from contracts
negotiated with each facility. Additionally, Theracor recorded approximately
$345,000, $1,031,000, $265,000 and $240,000 in rehabilitation therapy service
revenues in connection with services
F-8
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
----------------
provided to the facility owned by Bowie L.P. for the years ended December 31,
1994 and 1995 and the three months ended March 31, 1995 and 1996,
respectively.
Concentrations
A significant portion of the Company's revenues are derived from the
Medicare and Medicaid programs. There have been, and the Company expects that
there will continue to be, a number of proposals to limit reimbursement
allowable to long-term care facilities under these programs. The Company
cannot predict at this time whether any of these proposals will be adopted, or
if adopted and implemented, what effect such proposals would have on the
Company. Approximately 60%, 63%, 68%, 66% and 68% of the Company's net patient
service revenues in the years ended December 31, 1993, 1994 and 1995 and the
three months ended March 31, 1995 and 1996, respectively, are from the
Company's participation in the Medicare and Medicaid programs. As of December
31, 1994, December 31, 1995 and March 31, 1996, $4,637,000, $7,780,000 and
$8,405,000, respectively, of net accounts receivable were due from the
Medicare and Medicaid programs.
Facility Operating Expenses
Facility operating expenses include expenses associated with the normal
operations of a long-term care facility. The majority of these costs consist
of payroll and employee benefits related to nursing, housekeeping and dietary
services provided to patients, as well as maintenance and administration of
the facilities. Other significant facility operating expenses include: the
cost of rehabilitation therapies, medical and pharmacy supplies, food and
utilities. Beginning in 1995, facility operating expenses include expenses of
$3,311,000 associated with services rendered by Theracor to non-affiliated
facilities. For the three months ended March 31, 1995 and 1996, these expenses
totaled $96,000 and $1,738,000, respectively.
Provision for Doubtful Accounts
Provisions for uncollectible accounts receivable of $285,000, $538,000,
$1,240,000, $235,000 and $131,000 are included in facility operating expenses
for the years ended December 31, 1993, 1994 and 1995 and the three months
ended March 31, 1995 and 1996, respectively. Individual patient accounts
deemed to be uncollectible are written off against the allowance for doubtful
accounts.
Use of Estimates
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the period reported.
Actual results could differ from those estimates. Estimates are used when
accounting for the collectibility of receivables, depreciation and
amortization, employee benefit plans, taxes and contingencies.
Stock-Based Compensation
In 1996, the Company will adopt Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation." This standard will require
the Company to report the fair value for stock-based compensation plans either
through recognition or disclosure. The Company intends to adopt this standard
by disclosing the pro forma net income and pro forma net income per share
amounts assuming the fair value method was adopted on January 1, 1996. The
adoption of this standard will not impact the Company's results of operations,
financial position or cash flows.
Income Taxes
Prior to the implementation of the Reorganization Agreement, the Predecessor
Entities were operated under common control but, other than KHI (which is a C
corporation), were not subject to federal or state income
F-9
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
----------------
taxation and, accordingly, no provision for income taxes has been made in the
combined financial statements. No provision for income taxes and deferred
assets and liabilities of KHI has been reflected in the combined financial
statements, as it has never reported material taxable income. However, since
the Company will be a taxable entity upon implementation of the Reorganization
Agreement, a pro forma income tax expense has been reflected for each year
presented, as if the Company had always been a C corporation (see Note L).
Pro Forma Net Income Per Share (Unaudited)
Pro forma net income per share is computed using the estimated weighted
average number of common and dilutive common equivalent shares (stock options)
anticipated to be outstanding upon the implementation of the Reorganization
Agreement during each year presented. Pursuant to Securities and Exchange
Commission staff requirements, stock options issued within one year of an
initial public offering, calculated using the treasury stock method and an
assumed initial public offering price of $12.50 per share, have been included
in the calculation of pro forma net income (loss) per common share as if they
were outstanding for all periods presented.
Property and Equipment
Property and equipment are stated at cost. Expenditures that extend the
lives of affected assets are capitalized, while maintenance and repairs are
charged to expense as incurred. Upon the retirement or sale of an asset, the
cost of the asset and any related accumulated depreciation are removed from
the balance sheet, and any resulting gain or loss is included in net income.
Depreciation expense is estimated using the straight-line method. These
estimates are calculated using the following estimated useful lives:
<TABLE>
<S> <C>
Buildings and improvements........................ 31.5 to 40 years
Furniture and equipment........................... 5 to 10 years
Leasehold improvements............................ over the life of the lease
Land improvements................................. 8 to 40 years
</TABLE>
Intangible Assets
Intangible assets consist of amounts identified in connection with certain
facility acquisitions accounted for under the purchase method and certain
deferred costs which were incurred in connection with various financings (see
Note H).
In connection with each of its acquisitions, the Company reviewed the assets
of the acquired facility and assessed its relative fair value in comparison to
the purchase price. Certain acquisitions resulted in the allocation of a
portion of the purchase price to the value associated with the existence of a
workforce in place, residents in place at the date of acquisition and
covenants with sellers which limit their ability to engage in future
competition with the Company's facilities. The assets recognized from an
assembled workforce and residents in place are amortized using the straight-
line method over the estimated periods (from three to seven years) during
which the respective benefits would be in place. Covenants not-to-compete are
being amortized using the straight-line method over the period during which
competition is restricted.
Goodwill resulted from the acquisition of certain facilities for which the
negotiated purchase prices exceeded the allocations of the fair market value
of identifiable assets. The Company's policy is to evaluate each acquisition
separately and identify an appropriate amortization period for goodwill based
on the acquired property's characteristics. Goodwill was being amortized using
the straight-line method over a 31.5 to 40 year period. The Company's
remaining goodwill was written-off in connection with the sale of seven
facilities in 1995 (see Note N).
F-10
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
----------------
Costs incurred in obtaining financing (including loans, letters of credit
and facility leases) are amortized as interest expense using the straight-line
method (which approximates the interest method) over the term of the related
financial obligation.
Assessment of Long-Lived Assets
Effective for the year ended December 31, 1995, the Company has adopted the
provisions of Statement of Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
Accordingly, the Company periodically reviews the carrying value of its long-
lived assets (primarily property and equipment and intangible assets) to
assess the recoverability of these assets; any impairments would be recognized
in operating results if a diminution in value considered to be other than
temporary were to occur. The adoption of this Statement had no impact on the
Company's combined financial position, results of operations or liquidity. As
part of this assessment, the Company reviews the expected future net operating
cash flows from its facilities, as well as the values included in appraisals
of its facilities, which have periodically been obtained in connection with
various refinancings.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with
maturities of three months or less at the date of their acquisition by the
Company.
Restricted Cash
Restricted cash consists of cash set aside in escrow accounts as required by
several of the Company's leases and other financing arrangements. The current
portion of restricted cash related to the required deposits for the semiannual
interest payments on the KYP medium-term notes. These notes were repaid at the
end of 1995 (see Note N).
D. OPERATING LEASES
In March 1993, a combined affiliate of the Company entered into an agreement
with a non-affiliated entity to lease two long-term care facilities in Ohio
with 289 beds for a period of ten years. The lease agreement, which became
effective in June 1993, provides for fixed annual rental payments of $900,000.
At the end of the ten- year period, the Company has the option to acquire the
facilities for $8,500,000, or to pay a $500,000 termination fee and relinquish
the operation of the facilities to the lessor. On the effective date of the
lease, the subsidiary paid $1,200,000 to the lessor for a covenant not-to-
compete which remains in force through June 2003.
Effective October 1, 1994, a combined affiliate of the Company entered into
an agreement with a related party to lease a 100 bed long-term care facility
in Florida for a period of ten years. The lease agreement provides for annual
rental payments of $551,250 in the initial twelve-month period and annual
increases of 2% thereafter. The Company has the option to exercise two
consecutive five-year lease renewals. The Company also has the right to
purchase the facility at fair market value at any time after the fifth
anniversary of the commencement of the lease. The lease agreement also
required the Company to escrow funds equal to three months' base rent
($165,000). The lessor is required to make certain capital expenditures,
totalling $500,000, to the facility during the first three years of the lease.
Effective April 1, 1995, a combined affiliate of the Company entered into an
agreement with Meditrust to lease a 100-bed long-term care facility in Ohio
for a period of ten years. The lease agreement provides for annual rental
payments of $698,400 in the initial twelve-month period. The Company may also
be required to make additional rental payments beginning April 1, 1996 in an
amount equal to 5.0% of the difference between the facility's operating
revenues in each applicable year and the operating revenues in a twelve-month
base period which commenced on April 1, 1995. The annual additional rent
payment will not exceed $14,650. At the end of
F-11
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
----------------
the initial lease period, the Company has the option to exercise two
consecutive five-year lease renewals. The lease agreement also required the
Company to escrow funds equal to three months' base rent ($152,000). The
Company's obligations under the lease are collateralized by, among other
things, an interest in any property improvements made by the Company and by
the facility's accounts receivable. The Company also has the right to purchase
the facility at its fair market value on the eighth and tenth anniversary
dates of the commencement of the lease and at the conclusion of each lease
renewal. The Company is required to make certain capital expenditures,
totalling $150,000, to the facility.
Effective January 1, 1996, a combined affiliate of the Company entered into
an agreement with Meditrust to lease the seven facilities formerly owned by
KYP (see Note N). The lease agreement provides for annual rental payments of
$4,582,500 in the initial twelve-month period and annual rental increases of
$117,500 for the remainder of the lease term. The lease has an initial term of
ten years with two consecutive five-year renewal terms exercisable at the
Company's option. The lease agreement also required the Company to escrow
funds in an amount equal to three months' base rent ($1,146,000). The
Company's obligations under the lease are collateralized by, among other
things, an interest in any property improvements made by the Company and by
the related facilities' accounts receivable. In conjunction with the lease,
the Company was granted a right of first refusal and an option to purchase the
facilities as a group, which option is exercisable at the end of the eighth
year of the initial term and at the conclusion of each renewal term. The
purchase option is exercisable at the greater of the fair market value of the
facilities at the time of exercise or Meditrust's original investment.
The Meditrust leases contain cross-default and cross-collateralization
provisions. A default by the Company under one of these leases could adversely
affect a significant number of the Company's properties and result in a loss
to the Company of such properties. In addition, the leases permit Meditrust to
require the Company to purchase the facilities upon the occurrence of a
default.
Under the terms of each of the facility leases described above, the Company
is responsible for the payment of all real estate and personal property taxes,
as well as other reasonable costs required to operate, maintain, insure and
repair the facilities.
Future minimum rent commitments under the Company's non-cancelable operating
leases as of December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996.............................. $ 6,746,000
1997.............................. 6,875,000
1998.............................. 7,004,000
1999.............................. 7,133,000
2000.............................. 7,262,000
Thereafter........................ 34,647,000
------------
$ 69,667,000
============
</TABLE>
E. LONG-TERM DEBT
In October 1994, the Predecessor Entities (which are S corporations)
refinanced $29,189,000 of then outstanding bank debt, and as a result,
recorded a loss of $453,000. This loss included a payment of $384,000 upon the
termination of a related interest rate protection agreement, which was
required pursuant to the terms of the bank debt in order to effectively fix
the interest rate on such debt.
The retirement of this debt was financed by the concurrent borrowing of
$42,300,000 from Meditrust. The Meditrust debt requires monthly principal and
interest payments of $404,000 through October 1, 2004, at which
F-12
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
----------------
time the remaining unpaid principal balance of $36,318,000 is due. The
Meditrust debt bears interest at the annual rate of 10.65%. Additional
interest payments may also be required commencing on January 1, 1997 in an
amount equal to 0.3% of the difference between the operating revenues of the S
Corporations in each applicable year and the actual operating revenues of the
S Corporations during a twelve-month base period which commenced October 1,
1995. The Meditrust debt is cross-collateralized by the assets of the S
Corporations.
The loan agreement with Meditrust places certain restrictions on the S
Corporations; among them, the agreement restricts their ability to incur
additional debt or to make significant dispositions of assets. The S
Corporations are also required to maintain a debt service coverage ratio of at
least 1.2 to 1.0 (as defined in the loan agreement) and a current ratio of at
least 1.0 to 1.0. Management believes the S Corporations are in compliance
with these covenants.
The loan agreement required the Company to establish a debt service reserve
fund equal to three months' debt service and a renovation escrow account in
the amount of $197,000 to fund facility renovations identified in the
agreement. All of the renovation escrow funds will be released upon completion
of the required renovations.
As of December 31, 1995, substantially all of the required renovations have
been completed and the Company is in the process of obtaining the release of
the escrowed renovation funds. Accordingly, the funds have been classified as
unrestricted in the accompanying December 31, 1995 balance sheet.
The Meditrust loan agreement contains a prepayment penalty, which decreases
from 2.5% of the outstanding balance in the fourth year to none in the ninth
year (see Note M). Harborside Healthcare Limited Partnership ("HHLP"), a
combined affiliate of the Company, has entered into two guaranty agreements
with Meditrust on behalf of the S Corporations. Under the first agreement (the
"Guaranty"), HHLP has guaranteed a maximum of $2,780,000 of the Meditrust debt
if Meditrust demands payment under the Guaranty. The second agreement (the
"Environmental Indemnification Agreement") requires HHLP to make payments to
Meditrust upon the demand of the lender in order to fund the costs associated
with the clean-up of hazardous substances on the collateralized properties.
HHLP's maximum liability under the Environmental Indemnification Agreement is
limited to $4,500,000; however, certain matters identified in the
Environmental Indemnification Agreement are excluded from this limitation.
Payments made in excess of $1,720,000 under the Environmental Indemnification
Agreement would reduce the potential obligation of HHLP under the Guaranty. As
of December 31, 1995, the full amount of these guarantees remains in effect,
and management is not aware of any payments which are likely to be required in
the foreseeable future in connection with these agreements.
Riverside assumed a first mortgage note (the "Note") with a remaining
balance of $1,775,000 as part of the acquisition of a long-term care facility.
The Note requires the annual retirement of principal in the amount of $20,000.
The Company pays interest monthly at the rate of 14% per annum on the
outstanding principal amount until maturity in October 2010, when the
remaining unpaid principal balance of $1,325,000 is due. The Note is
collateralized by the property and equipment of Riverside's facility.
Interest expense charged to operations for the years ended December 31,
1993, 1994, and 1995 and the three months ended March 31, 1995 and 1996 was
$5,049,000, $5,048,000, $5,830,000, $1,457,000 and $1,246,000, respectively.
F-13
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
----------------
As of December 31, 1995, future long-term debt maturities associated with
the Company's debt are as follows:
<TABLE>
<S> <C>
1996............................. $ 428,000
1997............................. 472,000
1998............................. 523,000
1999............................. 579,000
2000............................. 642,000
Thereafter....................... 40,852,000
-----------
$43,496,000
===========
</TABLE>
Approximately $54 million of the Company's assets are subject to liens under
long-term debt or operating lease agreements.
F. INVESTMENT IN LIMITED PARTNERSHIP
In April 1993, an affiliate of the Company acquired a 75% partnership
interest in Bowie L.P., which developed a 120-bed long-term care facility in
Maryland that commenced operations on May 1, 1994. The remaining 25% interest
in Bowie L.P. is owned by a non-affiliated party. The Company records its
investment in Bowie L.P. on the equity method. Although the Company owns a
majority interest in Bowie L.P., the Company only maintains a 50% voting
interest and accordingly does not exercise control over the operations of
Bowie L.P In addition, the non-affiliated party has the option to purchase the
Company's partnership interest during the sixty-day period prior to the
seventh anniversary of the facility's opening and each subsequent anniversary
thereafter. If the option is exercised, the purchase price would be equal to
the fair market value of the Company's interest at the date on which the
option is exercised. The Company is entitled to 75% of the facility's net
income and manages this facility in return for a fee equal to 5.5% of the
facility's net revenues (effective September 1995). Prior to this date, the
management fee approximated $10,000 per month. The Company recorded $96,000,
$234,000, $35,000 and $111,000 in management fees from this management
contract for the years ended December 31, 1994 and 1995 and the three months
ended March 31, 1995 and 1996, respectively.
Bowie L.P. obtained a $4,377,000 construction loan from a bank to finance
the construction of the facility. Bowie L.P. also obtained a $1,000,000 line
of credit from the bank to finance pre-opening costs and working capital
requirements. On July 31, 1995, the line of credit converted to a term loan.
As of December 31, 1994 and 1995, Bowie L.P. owed the bank a principal amount
of $5,100,000 and $5,200,000, respectively, on these loans. Interest on the
loans is payable monthly at the bank's prime rate (8.5% at December 31, 1995)
plus 1%. These loans also limit Bowie L.P.'s ability to borrow additional
funds and to make acquisitions, dispositions and distributions. Additionally,
the loans contain covenants with respect to maintenance of specified levels of
net worth, working capital, occupancy and debt service coverage.
Bowie L.P.'s above loans are collateralized by each partner's partnership
interest as well as all of the assets of Bowie L.P. These loans are guaranteed
by an affiliate of the Company and additional collateral pledged by the non-
affiliated partner. The Bowie L.P. partnership agreement states that each
partner will contribute an amount in respect of any liability incurred by a
partner in connection with a guarantee of the partnership's debt so that the
partners each bear their proportionate share of the liability based on their
percentage ownership of the partnership.
F-14
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
----------------
The results of operations of Bowie L.P. are summarized below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
---------------------- ----------------------------
1994 1995 1995 1996
---------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
Net operating revenues.. $2,523,000 $7,595,000 $ 1,643,000 $ 1,976,000
Net operating expenses.. 2,840,000 7,238,000 1,628,000 1,982,000
Net loss................ (598,000) (152,000) (109,000) (170,000)
</TABLE>
The financial position of Bowie L.P. was as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------- AS OF MARCH 31,
1994 1995 1996
---------- ---------- ---------------
<S> <C> <C> <C>
Current assets......................... $1,019,000 $2,785,000 $2,910,000
Non-current assets..................... 5,507,000 5,045,000 4,946,000
Current liabilities.................... 1,491,000 2,227,000 2,485,000
Non-current liabilities................ 4,190,000 4,910,000 4,848,000
Partners' equity....................... 845,000 693,000 523,000
</TABLE>
On December 28, 1995, the Company advanced $1,255,000 to Bowie L.P. to
support additional facility working capital requirements by means of a demand
note bearing interest at 9.0% per annum.
G. PROPERTY AND EQUIPMENT
The Company's property and equipment are stated at cost and consist of the
following as of December 31:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Land................................................ $ 5,714,000 $ 2,994,000
Land improvements................................... 2,796,000 2,874,000
Leasehold improvements.............................. 54,000 450,000
Buildings and improvements.......................... 67,735,000 28,257,000
Equipment, furnishings and fixtures................. 10,898,000 5,872,000
----------- -----------
87,197,000 40,447,000
Less accumulated depreciation....................... 20,259,000 10,308,000
----------- -----------
$66,938,000 $30,139,000
=========== ===========
H. INTANGIBLE ASSETS
Intangible assets are stated at cost and consist of the following as of
December 31:
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Patient lists....................................... $ 1,805,000 $ 1,459,000
Assembled workforce................................. 1,328,000 930,000
Covenant not to compete............................. 2,617,000 1,838,000
Goodwill............................................ 1,123,000 --
Organization costs.................................. 150,000 256,000
Deferred financing costs............................ 1,719,000 2,157,000
----------- -----------
8,742,000 6,640,000
Less accumulated amortization....................... 5,130,000 3,590,000
----------- -----------
$ 3,612,000 $ 3,050,000
=========== ===========
</TABLE>
F-15
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
----------------
I. RETIREMENT PLANS
The Company maintains an employee 401(k) defined contribution plan. All
employees who have worked at least one thousand hours and completed one year
of continuous service are eligible to participate in the plan. The plan is
subject to the provisions of the Employee Retirement Income Security Act of
1974. Employee contributions to this plan may be matched at the discretion of
the Company. The Company contributed $40,000, $86,000 and $120,000 to the plan
in 1993, 1994 and 1995, respectively.
During September 1995, the Company established a Supplemental Executive
Retirement Plan (the "SERP") to provide benefits to key employees.
Participants may defer up to 25% of their compensation which is matched by the
Company at a rate of 50% (up to 10% of base salary). Vesting in the matching
portion occurs in January of the second year following the plan year in which
contributions were made.
J. CONTINGENCIES
The Company is involved in legal actions and claims in the ordinary course
of its business. It is the opinion of management, based on the advice of legal
counsel, that such litigation and claims will be resolved without material
effect on the Company's combined financial position, results of operations or
liquidity.
Beginning in 1994, the Company self-insures for health benefits provided to
a majority of its employees. The Company maintains stop-loss insurance such
that the Company's liability for losses is limited. The Company recognizes an
expense for estimated health benefit claims incurred but not reported at the
end of each accounting period.
Beginning in 1995, the Company self-insures for workers' compensation
claims. The Company maintains stop-loss insurance such that the Company's
liability for losses is limited. The Company accrues for estimated workers'
compensation claims incurred but not reported at the end of each accounting
period.
K. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The methods and assumptions used to estimate the fair value of each class of
financial instruments, for those instruments for which it is practicable to
estimate that value, and the estimated fair values of the financial
instruments are as follows:
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short effective
maturity of these instruments.
Long-term Debt
The fair value of the Company's long-term debt is estimated based on the
current rates offered to the Company for similar debt. The carrying value of
the Company's long-term debt approximates its fair value as of December 31,
1994 and 1995.
L. PRO FORMA INCOME TAXES (UNAUDITED)
For financial reporting purposes, a pro forma provision for income taxes has
been reflected in each period included in the accompanying combined statements
of operations. The purpose of these pro forma provisions is to reflect the
state and federal income tax provisions that would have been recorded in the
years presented if the non-taxpaying Predecessor Entities included in the
combined financial statements had been operating as a consolidated taxpaying
entity. The pro forma income tax expense was computed utilizing an estimated
effective tax rate of 39%. The rate was derived by using the statutory federal
income tax rate of 34% plus an average of the various state statutory income
tax rates (net of federal benefits) where the Company operates.
F-16
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
----------------
Upon the implementation of the Reorganization Agreement, the Company will
adopt Statement of Financial Accounting Standards No. 109 ("SFAS 109"),
"Accounting for Income Taxes." The adoption of SFAS 109 will require the
Company to recognize deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax bases of the Company's assets and liabilities. SFAS 109 requires
that deferred tax assets be reduced by the creation of a valuation allowance
if management believes that it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Adoption of SFAS 109 will
occur contemporaneous with the anticipated public offering and will result in
the recognition of an estimated net deferred tax asset of approximately
$500,000.
M. CAPITAL STOCK
Immediately prior to the completion of the Company's initial public offering
of Common Stock ("Offering"), the Reorganization Agreement will be
implemented. The Company intends to use approximately $25,000,000 of the net
proceeds of the Offering to retire an equal amount of its long-term debt and
approximately $1,700,000 to pay associated prepayment penalties. Had the early
retirement of debt occurred on January 1, 1995, the pro forma net income per
share, using 4,452,160 common and common equivalent shares, would have been
$0.31 for the year ended December 31, 1995. The pro forma amount assumes a
reduction in interest and amortization expense of $1,663,000 (net of related
tax expense) for the year ended December 31, 1995.
The Company intends to adopt a Long-Term Stock Incentive Plan ("Stock Plan")
prior to the initial public offering. The Stock Plan will authorize the
Company's Board of Directors or a committee appointed by the Board of
Directors to administer the Stock Plan and to grant certain employees of the
Company incentive stock options, nonqualified stock options, stock
appreciation rights, restricted stock, performance awards and other stock
based awards.
The Company also intends to adopt a non-employee directors stock option plan
("Directors Plan") prior to the initial public offering. The Directors Plan
will grant nonqualified stock options to purchase shares of the Company's
Common Stock as of the effective date of the Offering and thereafter at the
beginning of each calendar year. The exercise price of each option granted
will be the fair market value per share of the Company's Common Stock at the
date of grant. Options become exercisable on the first anniversary of the date
of grant and each option expires no later than ten years from the date of
grant.
The Company has an executive long-term incentive plan ("Executive Plan")
which grants an economic interest in the appreciation of the business above a
baseline valuation of $23,000,000 to certain senior level management personnel
upon the successful completion of an initial public offering at a minimum
retained equity valuation above $43,000,000. A pool of three percent of the
retained equity above $23,000,000 is to be reserved and allocated to the
eligible recipients. Assuming an equity valuation of $43,000,000 is achieved,
the minimum pool would be $600,000. In the event the retained equity is valued
at an amount greater than $43,000,000, the award amount would be increased
proportionately. The Executive Plan is effective for the two-year period
ending June 30, 1997.
On December 31, 1995, the S Corporations issued a 6% equity interest in the
S Corporations to the President of the Company amounting to $438,000 and a 5%
equity interest in the S Corporations to the president of an affiliate
amounting to $365,000. The issuance amounts represented the fair market value
of these interests at the date of issuance based on an independent appraisal
obtained by the Company. The payment for the issuance of these shares is due
within 90 days. Accordingly, the amounts receivable from these individuals
have been reflected as a contra-equity subscription receivable with no net
increase to stockholders' equity at December 31, 1995. Subsequent to year-end
and in connection with the execution of the President of the Company's 1996
employment agreement, the Company granted a special bonus to the President
equal to the cost of the shares issued. The bonus will be recorded as a 1996
compensation charge.
F-17
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
----------------
In February 1996, HHLP granted an option to purchase a 1.36% limited
partnership interest in HHLP to each of two members of senior management. The
exercise price per percentage limited partnership interest under each such
option is $239,525 per percentage interest, which represented the fair market
value of a 1% limited partnership interest in HHLP at the date of grant based
on an independent appraisal obtained by the Company. The options vest in equal
one-third portions on each anniversary of the date of grant over a three-year
period and expire ten years from the date of grant. The option grant contains
provisions for the pro rata conversion of these shares upon the completion of
an initial public offering.
N. GAIN ON SALE OF FACILITIES, NET
As discussed in Note B, in December 1995, a majority of the Unitholders
approved the sale (the "Transaction") of the seven long-term care facilities
owned by KYP to Meditrust for $47,000,000. The Transaction was effective
December 31, 1995 and a net gain of $4,869,000 was recorded.
A portion of the proceeds of the Transaction was used by KYP to repay the
outstanding balance of its Medium-Term Notes ($9,409,000), a related
prepayment penalty ($1,154,000) and transaction costs ($884,000). The original
principal amount of the Medium-Term Notes was $6,000,000 and interest on this
obligation accrued at 10.55% per annum through June 30, 1993. Commencing
December 31, 1993, KYP began making semiannual interest payments on the
original principal and the accrued interest. The principal and all deferred
interest were scheduled to be repaid in June 1998. As a result of the early
retirement of this debt, the Company recorded a loss of $1,502,000, which was
netted against the gain on the sale of the KYP facilities.
The terms of the KYP partnership agreement specified that HHCI would not
share in the gain associated with the sale of the facilities; as such, the
entire amount of the net gain has been allocated to the Unitholders, which is
included in the minority interest reflected in the Company's combined
statement of operations for the year ended December 31, 1995.
The determination of the net gain included the recognition of an estimated
liability of approximately $3,000,000 to Medicare and certain states' Medicaid
programs. This amount has been included with other estimated settlements due
to/from third-party payors as a component of accounts receivable. Under
existing regulations, KYP is required to repay these programs for certain
depreciation expense recorded by the KYP facilities and for which they
received reimbursement prior to the sale. Any payments assessed by these
programs to settle these obligations in excess of the funds withheld from the
proceeds of the sale of the facilities will be the responsibility of HHCI
without any recourse to the Unitholders. However, if the ultimate settlement
of these obligations results in a net amount due to KYP, this amount would be
distributed to the Unitholders.
The Transaction provides for the dissolution of KYP and the distribution of
the net proceeds of the Transaction to the Unitholders, which occurred in
March 1996. The Company's balance sheet as of December 31, 1995 includes the
cash to be distributed to the Unitholders as well the related distribution
payable of $33,493,000.
Concurrent with the closing of the Transaction, HHCI entered into an
agreement with Meditrust to lease the former KYP facilities (see Note D).
Unaudited pro forma results of operations of the Company for the years ended
December 31, 1994 and 1995 are presented below, assuming that the KYP
Facilities had been acquired by the Company as of January 1, 1994. The pro
forma results include the historical accounts of the Company and the minority
interest adjusted to reflect: (1) the elimination of the historical
depreciation and amortization amounts recorded by the KYP facilities, (2) the
elimination of historical interest expense on the Medium-Term Notes, (3) the
elimination of the historical income allocated to the minority interest and
(4) the recognition of the rental expense and amortization of closing costs
which would have been incurred by the Company. The pro
F-18
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
----------------
forma financial results are not necessarily indicative of the actual results
of operations which might have occurred or of the results of operations which
may occur in the future.
<TABLE>
<CAPTION>
FOR THE THREE
FOR THE YEARS ENDED DECEMBER 31, MONTHS ENDED
-------------------------------- MARCH 31,
1994 1995 1995
-------------------------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Total net revenues........... $ 86,376,000 $ 109,425,000 $23,777,000
Income (loss) before income
taxes....................... 835,000 1,231,000 (456,000)
Pro forma net income (loss).. 509,000 751,000 (278,000)
Pro forma net income (loss)
per common share using
4,452,160 common and common
equivalent shares........... $ 0.11 $ 0.17 $ (0.06)
</TABLE>
O. PENDING ACQUISITIONS
At December 31, 1995, Company funds in the amount of $3,000,000 were held in
escrow in connection with the acquisition of long-term care facilities. Of
this amount, $1,000,000 was refunded in January 1996 in conjunction with the
acquisition of six facilities as further described in Note Q. The remaining
$2,000,000 pertains to the purchase of a separate group of facilities, for
which negotiations have terminated and the deposit was returned in March 1996
(see Note P).
In November, 1995, the Company signed a letter of intent to purchase four
long-term care facilities in Ohio. The specific terms of the transaction are
still under negotiation (see Note R).
P. RELATED PARTY TRANSACTIONS
An affiliate which is a principal stockholder of the Company provides office
space, legal, tax, data processing and other administrative services to the
Company in return for a monthly fee. Total service charges under this
arrangement were $746,000, $759,000, $700,000, $177,000 and $185,000 for the
years ended December 31, 1993, 1994, and 1995 and the three months ended March
31, 1995 and 1996, respectively. As of December 31, 1995 and March 31, 1996,
the Company owed the stockholder $178,000 and $0, respectively for these and
other related services. Also, on December 28, 1995, the stockholder advanced
$2,000,000 to the Company to make an acquisition deposit on five long-term
care facilities. The advance was repaid in March 1996 (see Note O).
Q. SUBSEQUENT EVENTS
Effective January 1, 1996, a combined affiliate of the Company entered into
an agreement with Meditrust to lease six long-term care facilities with a
total of 537 licensed beds in New Hampshire. The lease agreement, which will
be treated as an operating lease, provides for annual rental payments of
$2,324,000 in the initial twelve-month period and annual rental increases of
$64,000 for the remainder of the lease term. The lease has an initial term of
ten years with two consecutive five-year renewal terms exercisable at the
Company's option. The lease agreement also required the Company to escrow
funds in an amount equal to three months' base rent ($581,000). In addition,
the lease agreement required the Company to establish a renovation escrow
account in the amount of $560,000 to fund facility renovations identified in
the agreement. All of the renovation escrow funds will be released upon
completion of the required renovations. The Company's obligations under the
lease are collateralized by, among other things, an interest in any property
improvements made by the Company and by the related facilities' accounts
receivable. In conjunction with the lease, the Company was granted a right of
first refusal and an option to purchase the facilities as a group, which is
exercisable at the end of the eighth year
F-19
<PAGE>
HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
----------------
of the initial term and at the conclusion of each renewal term. The purchase
option is exercisable at the greater of 90% of the fair market value of the
facilities at the time of exercise or Meditrust's original investment. In
connection with this lease, the Company received a cash payment of $3,685,000
from Meditrust representing a lease inducement which will be recorded as
deferred income and amortized over the ten-year initial lease term as a
reduction of rental expense. The Company incurred total transaction costs of
approximately $1,035,000 of which $206,000 had been incurred and capitalized
as of December 31, 1995.
Unaudited pro forma results of the Company for the three months ended March
31, 1995 are presented below assuming that the New Hampshire Facilities had
been acquired by the Company as of January 1, 1995. The pro forma results
include the historical accounts of the Company adjusted to include the
historical results of the New Hampshire Facilities and to reflect the
following adjustments: (1) the elimination of historical rent expense,
management fees, depreciation and amortization expense and interest expense
recorded by the New Hampshire Facilities, (2) the recognition of rent expense,
amortization of deferred financing costs, general and administrative expenses
and real estate taxes which would have been incurred by the Company if the New
Hampshire Facilities had been leased beginning on January 1, 1995. The pro
forma financial results are not necessarily indicative of the actual results
of operations which might have occurred or of the results of operations which
may occur in the future.
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31,
1995
-------------
(UNAUDITED)
<S> <C>
Total net revenues.......................................... $29,193,000
Loss before income taxes.................................... (196,000)
Pro forma net loss.......................................... (120,000)
Pro forma net loss per common share
using 4,452,160 common and
common equivalent shares................................... (0.03)
</TABLE>
R. OHIO TRANSACTION (UNAUDITED)
During May 1996, the Company entered into an agreement to lease four long-
term care facilities in Ohio for an initial term of five years which is
expected to commence in the third quarter of 1996. The Ohio Transaction will
be accounted for as a capital lease as a result of the bargain purchase option
granted at the end of the lease term. The annual aggregate base rent will be
$5,000,000. The Company has agreed to make an $8,000,000 non-refundable
deposit for the option to purchase the four facilities at the end of the lease
term at a fixed cost of $57,125,000. If the Company chooses to exercise this
option, the $8,000,000 deposit will be applied towards the purchase price. Of
the $8,000,000, $5,000,000 will be paid at or prior to the closing of the
lease agreement and the remainder will be paid upon the closing of the
purchase or termination of the lease.
F-20
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholder
Sowerby Enterprises
R.R. 2, Box 312C, Spring Hill Road
Peterborough, NH 03458
We have audited the accompanying combined balance sheets of Sowerby
Enterprises (see Note 1) for the years ended December 31, 1993, 1994 and 1995
and the related combined statements of income, retained earnings and cash
flows for the years then ended. 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 combined financial position of Sowerby
Enterprises for the years ended December 31, 1993, 1994 and 1995 and the
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
Leverone & Company
Billerica, Massachusetts
February 9, 1996
F-21
<PAGE>
SOWERBY ENTERPRISES
COMBINED BALANCE SHEETS
AT DECEMBER 31,
----------------
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
ASSETS
<S> <C> <C> <C>
Current Assets
Cash................................... $ 1,259,991 $ 1,172,962 $ 1,474,885
Patient Related Receivables (Note 1)... 684,281 830,653 925,892
Prepaid Expenses and Other............. 41,020 27,792 60,477
Due from Affiliate (Note 2)............ 727,514 687,533 455,000
----------- ----------- -----------
Total Current Assets................. 2,712,806 2,718,940 2,916,254
----------- ----------- -----------
Property and Equipment (Note 1)
Land................................... 125,000 125,000 125,000
Building............................... 1,850,000 1,850,000 1,850,000
Building Improvements.................. 606,631 847,836 829,528
Furniture, Fixtures and Equipment...... 1,483,995 1,556,676 1,499,036
Motor Vehicles......................... 84,111 140,633 140,171
----------- ----------- -----------
4,149,737 4,520,145 4,443,735
Less: Accumulated Depreciation....... (1,716,586) (1,955,685) (2,009,266)
----------- ----------- -----------
Net Property and Equipment........... 2,433,151 2,564,460 2,434,469
----------- ----------- -----------
Other Assets
Intangible Assets (Note 1)............. 48,667 38,363 28,059
----------- ----------- -----------
Total Assets......................... $ 5,194,624 $ 5,321,763 $ 5,378,782
=========== =========== ===========
</TABLE>
See Accompanying Notes to Combined Financial Statements.
F-22
<PAGE>
EXHIBIT A
SOWERBY ENTERPRISES
COMBINED BALANCE SHEETS
AT DECEMBER 31,
----------------
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C> <C>
Current Liabilities
Note Payable--Current Portion (Note 3)... $ 33,980 $ 33,954 $ 26,600
Mortgage Payable--Current Portion (Note
3)...................................... 86,400 80,000 80,000
Obligations Under Capital Leases--Current
Portion
(Note 4)................................ 56,400 58,464 15,223
Accounts Payable......................... 282,496 221,124 234,317
Accrued Rent (Note 2).................... 565,000 250,000 --
Accrued Compensation and Benefits........ 839,719 812,974 903,367
---------- ---------- ----------
Total Current Liabilities.............. 1,863,995 1,456,516 1,259,507
---------- ---------- ----------
Long-Term Debt
Notes Payable--Net of Current Portion
(Note 3)................................ 139,526 105,128 77,092
Mortgage Payable (Note 3)................ 1,996,431 1,922,810 1,843,423
Obligations under Capital Leases--Net of
Current Portion (Note 4)................ 73,388 15,223 --
Loans From Stockholder (Note 2).......... 705,000 730,000 655,000
Loan Payable--Affiliate (Note 2)......... 345,000 370,000 411,000
---------- ---------- ----------
Total Long-Term Debt................... 3,259,345 3,143,161 2,986,515
---------- ---------- ----------
Total Liabilities...................... 5,123,340 4,599,677 4,246,022
---------- ---------- ----------
Stockholder's Equity
Common Stock--No Par Value
Authorized--300 Shares
Issued and Outstanding--100 Shares...... 92,000 92,000 92,000
Additional Paid-in-Capital............... 49,831 49,831 49,831
Retained Earnings (Deficit) (Exhibit C).. (10,547) 640,255 1,050,929
---------- ---------- ----------
131,284 782,086 1,192,760
Less: Treasury Stock at Cost
49 Shares............................. (60,000) (60,000) (60,000)
---------- ---------- ----------
Total Stockholder's Equity............. 71,284 722,086 1,132,760
---------- ---------- ----------
Total Liabilities and Stockholders'
Equity................................ $5,194,624 $5,321,763 $5,378,782
========== ========== ==========
</TABLE>
See Accompanying Notes to Combined Financial Statements
F-23
<PAGE>
EXHIBIT B
SOWERBY ENTERPRISES
COMBINED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net Patient Service Revenue............. $19,342,515 $21,271,939 $21,956,010
----------- ----------- -----------
OPERATING EXPENSES
Facility Operating Expenses........... 14,621,845 15,942,680 16,837,294
Rent (Notes 2 & 5).................... 2,734,000 2,526,000 2,382,000
Depreciation.......................... 210,346 240,299 262,889
Management Fee (Note 2)............... 1,460,400 1,726,500 1,832,000
Loss on Disposal of Fixed Assets...... -- -- 33,539
Amortization.......................... 10,305 10,305 10,305
----------- ----------- -----------
Total Operating Expenses............ 19,036,896 20,445,784 21,358,027
----------- ----------- -----------
Operating Income.................... 305,619 826,155 597,983
----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest Expense...................... (189,395) (193,204) (199,313)
Interest Income....................... 25,961 38,912 38,609
Other................................. 2,429 2,006 --
----------- ----------- -----------
Total Other Income (Expense)........ (161,005) (152,286) (160,704)
----------- ----------- -----------
Net Income Before Provision for Income
Tax.................................. 144,614 673,869 437,279
Provision for State Income Taxes (Note
1)................................... (15,946) (23,067) (26,605)
----------- ----------- -----------
Net Income.............................. $ 128,668 $ 650,802 $ 410,674
=========== =========== ===========
</TABLE>
See Accompanying Notes to Combined Financial Statements
F-24
<PAGE>
EXHIBIT C
SOWERBY ENTERPRISES
COMBINED STATEMENTS OF RETAINED EARNINGS (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ----------
<S> <C> <C> <C>
Accumulated Adjustments Account
Balance Beginning.......................... $(638,489) $(404,132) $ (94,010)
Taxable Income............................. 223,254 274,519 96,271
Interest Income............................ 25,961 38,912 38,609
Non-Deductible Expenses.................... (14,858) (3,309) (2,124)
--------- --------- ----------
Balance Ending............................. (404,132) (94,010) 38,746
--------- --------- ----------
Accumulated Earnings and Profits
Subchapter C Corporation Income............ (96,082) (96,082) (96,082)
--------- --------- ----------
Tax Timing Adjustments
Balance Beginning.......................... 595,465 489,776 830,456
Tax Deferred Income........................ (105,689) 340,680 277,918
--------- --------- ----------
Balance Ending............................. 489,776 830,456 1,108,374
--------- --------- ----------
Other Retained Earnings
Balance Ending............................. (109) (109) (109)
--------- --------- ----------
Total Retained Earnings (Deficit)............ $ (10,547) $ 640,255 $1,050,929
========= ========= ==========
</TABLE>
See Accompanying Notes to Combined Financial Statements
F-25
<PAGE>
EXHIBIT D
SOWERBY ENTERPRISES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net Income............................... $ 128,668 $ 650,802 $ 410,674
Non-Cash Items Included in Net Income:
Depreciation and Amortization.......... 220,651 250,604 273,194
Loss on Retirement of Assets........... -- -- 33,539
Changes In:
Patient Related Receivables............ (34,112) (146,373) (95,239)
Prepaid Expenses....................... 164 13,228 (32,685)
Due from Affiliate..................... (1,974) 39,981 232,533
Accounts Payable....................... 31,750 (61,372) 13,193
Accrued Rent........................... 115,000 (315,000) (250,000)
Accrued Expenses....................... 246,016 (26,745) 90,393
---------- ---------- ----------
Net Cash Flows Provided By Operating Ac-
tivities................................ 706,163 405,125 675,602
---------- ---------- ----------
Cash Flows From Investing Activities
Additions to Property and Equipment...... (337,663) (371,608) (174,388)
Proceeds From Disposal of Property and
Equipment............................... -- -- 7,950
---------- ---------- ----------
Net Cash Flows Used In Investing Activi-
ties.................................... (337,663) (371,608) (166,438)
---------- ---------- ----------
Cash Flows From Financing Activities
Payments on Bank Debt.................... (111,856) (114,445) (114,777)
Payments of Capital Lease Obligations.... (43,490) (56,101) (58,464)
Payments to Stockholder.................. (185,000) 25,000 (75,000)
Loans From Affiliate..................... 75,000 25,000 41,000
Additions to Capital Lease Obligations... 73,854 -- --
---------- ---------- ----------
Net Cash Flows Used In Financing Activi-
ties.................................... (191,492) (120,546) (207,241)
---------- ---------- ----------
Net Increase (Decrease) in Cash............ 177,008 (87,029) 301,923
Cash--Beginning of Year.................... 1,082,983 1,259,991 1,172,962
---------- ---------- ----------
CASH--END OF YEAR.......................... $1,259,991 $1,172,962 $1,474,885
========== ========== ==========
Supplemental Disclosure Of Cash Flow Infor-
mation....................................
Cash Payment for Interest................ $ 189,395 $ 193,204 $ 199,313
========== ========== ==========
Cash Payment for Taxes................... $ 1,132 $ 37,850 $ 26,400
========== ========== ==========
</TABLE>
See Accompanying Notes to Combined Financial Statements
F-26
<PAGE>
SOWERBY ENTERPRISES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Sowerby Enterprises operates a group of six nursing homes with a total of
537 beds throughout New Hampshire. The combined financial statements include
the accounts of Westwood Healthcare Center, Inc., Crestwood Healthcare Center,
Inc., Milford Nursing Home, Inc., Northwood Healthcare Center, Inc., Applewood
Healthcare Center, Inc. and Pheasant Wood Nursing Home, Inc. A summary of the
Company's significant accounting policies follows.
Nature of the Business
The combined Companies are licensed proprietary health care providers,
organized under corporate charter in the State of New Hampshire. Their
services are available to qualified in-state and out-of-state private and
welfare recipients in accordance with the State of New Hampshire Department of
Human Services Principles of Reimbursement.
Patient Revenues and Accounts Receivable
Patient service revenue is reported at the estimated net realizable amounts
from residents, third-party payors and others for services rendered. Revenue
under third-party payor agreements is subject to audit and retroactive
adjustment. Provisions for estimated third-party payor settlements are
provided in the period the related services are rendered. Differences between
the estimated amounts accrued and interim and final settlements are reported
in operations in the year of settlement.
Accounts Receivable and Revenue Recognition
The combined Companies are on the specific charge off method of accounting
for bad debts, charging bad accounts to expense as management deems them
worthless. Collection of accounts written off in prior periods is treated as
income in the period of collection.
Cash and Cash Equivalents
Cash and cash equivalents include investments in highly liquid debt
instruments with a maturity of three months or less.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets. Assets
lives range from 4 to 20 years. Depreciation expense for the years ended
December 31, 1993, 1994 and 1995 was $210,346, $240,299 and $262,889,
respectively.
Income Taxes
The Companies, with the consent of their stockholder, have elected under the
Internal Revenue Code to be taxed as an "S' corporation. In lieu of Federal
corporate income taxes, the stockholder of the "S' corporation is taxed on the
taxable income of the Company. Therefore, no provision for Federal income
taxes has been included in these financial statements. The provision for State
income taxes consists of the current income taxes due to the State of New
Hampshire since New Hampshire does not recognize "S' Corporation status.
Intangible Assets
Amortization of intangibles is calculated by the straight-line method.
Start-up costs are amortized over sixty (60) months. Closing costs incurred in
securing the mortgages are amortized over 22 years, the term of the mortgage.
F-27
<PAGE>
SOWERBY ENTERPRISES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
Amortization expense for the years ended December 31, 1993, 1994 and 1995
was $10,305.
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Unamortized Start-up Costs.......................... $33,039 $23,819 $14,599
Unamortized Closing Costs........................... 15,628 14,544 13,460
------- ------- -------
Total Intangible Assets........................... $48,667 $38,363 $28,059
======= ======= =======
</TABLE>
Concentration of Credit Risk
The Companies invest excess cash in debt instruments of a financial
institution with strong credit ratings that maintain safety and liquidity. The
Companies have not experienced any losses on cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Reclassification
Certain previously reported amounts have been reclassified to conform with
the current period presentation. There was no change in profit arising from
these changes.
NOTE 2--RELATED PARTY TRANSACTIONS
The sole stockholder and principal officer of the combined Companies
personally owns the real estate used by several of the facilities. Rent
accrued at December 31, 1993 and 1994 amounted to $565,000 and $250,000,
respectively. No rent was payable to the sole stockholder at December 31,
1995. Rent expense for the years ended December 31, 1993, 1994 and 1995
amounted to $2,734,000, $2,526,000 and $2,382,000, respectively.
Management fees are paid to a related management corporation and amounted to
$1,460,000, $1,726,500 and $1,832,000 for the years ended December 31, 1993,
1994 and 1995, respectively. The combined Companies and the related management
company are under the common ownership of Dwight D. Sowerby.
Amounts due from affiliate represent over-funding of the self-insured health
insurance program controlled through a related management company and loans to
the related management company. No terms for interest have been made. For the
years ended December 31, 1993, 1994 and 1995 the amount due from affiliate
amounted to $727,514, $687,533 and $455,000, respectively. Loans to affiliate
made by Pheasant Wood Nursing Home amounted to $675,000, $675,000 and $455,000
for the years ended December 31, 1993, 1994 and 1995, respectively.
Loan Payable--Affiliate, represents monies advanced to the Company from a
related management organization. For the years ended December 31, 1993, 1994
and 1995 the loan payable to affiliate amounted to $345,000, $370,000 and
$411,000, respectively.
Amounts advanced to the combined Companies by its sole stockholder for the
years ended December 31, 1993, 1994 and 1995 amounted to $705,000, $730,000
and $655,000, respectively.
F-28
<PAGE>
SOWERBY ENTERPRISES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
NOTE 3--LONG-TERM DEBT
Long-term debt at December 31, 1993, 1994 and 1995 consisted of the
following:
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Note payable to a Bank, in monthly
installments of $834 including interest at
9%. Final payment due November 1995,
collateralized by a motor vehicle............ $ 17,514 $ 8,754 $ --
First Mortgage, Peterborough Savings Bank, due
December 2008, secured by building and
equipment. Interest is adjusted yearly each
June, rates at December 31, 1995, 1994 and
1993 were 9.42%, 8.73% and 6.90%,
respectively................................. 2,082,831 $2,002,810 1,923,423
Note Payable, Peterborough Savings Bank, due
in monthly installments of $3,045 including
interest at 1% above prime (9.75%, 9.5% and
7% at December 31, 1995, 1994 and 1993,
respectively), refinanced on January 10,
1992, final payment due January 1999. This
note is secured by all furniture and
fixtures..................................... 155,992 130,328 103,692
---------- ---------- ----------
Total Long-Term Debt........................ 2,256,337 2,141,892 2,027,115
Less: Current Portion ...................... 120,380 113,954 106,600
---------- ---------- ----------
Total Long-Term Debt--Net of Current
Portion.................................... $2,135,957 $2,027,938 $1,920,515
========== ========== ==========
</TABLE>
On January 1, 1996 all long-term debt was repaid in full in a transaction
related to the sale of the company's assets, see Note 7.
NOTE 4--CAPITAL LEASE COMMITMENTS
The combined Companies lease computer equipment under long-term capital
leases. During the year ended December 31, 1995, rentals under long-term lease
obligations were $66,285 of which $58,464 was recorded as principal and $7,821
as interest. Future obligations over the terms of the Corporation's long-term
leases as of December 31, 1995 are:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -------
<S> <C>
1996................................................................ $16,000
Less: Amounts Representing Interest............................... (777)
-------
15,223
Less: Current Maturities of Capitalized Lease Obligations......... (15,223)
-------
Capitalized Lease Obligations, Less Current Maturities.............. $ --
=======
</TABLE>
The computer equipment is recorded at a cost of $195,301 with related
accumulated depreciation of $117,498.
NOTE 5--OPERATING LEASE ARRANGEMENTS
The Northwood Healthcare Center, Inc. facility leases its real estate under
a ten year lease which began in June of 1992. The lease calls for minimum
annual lease payments amounting to $1,080,000 due on the first day
F-29
<PAGE>
SOWERBY ENTERPRISES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
of each month with additional lease payments sufficient to pay all mortgage
payments including payments to reserves for betterments, insurance, taxes and
necessary repairs. Per a regulatory agreement signed with the United States
Department of Housing and Urban Development, the agreement is subject and
subordinate to the mortgage security note with Reilly Mortgage Group, Inc. The
mortgage note is for 40 years commencing in September 1991 in the amount of
$7,469,800 as amended on August 19, 1993 and again on April 29, 1994.
Principal and interest in the amount of $51,336 are due and payable monthly.
The interest rate at December 31, 1995 was 7.875%.
On January 1, 1996, this note was assumed by Medi Trust of Bedford, Inc., in
a transaction related to the sale of the company.
NOTE 6--401(K) PROFIT SHARING PLAN
The combined Companies maintain a 401(K) Profit Sharing Plan. Under the
plan, employees eligible to participate are permitted to make salary reduction
contributions equal to a percentage of annual salary up to 15%. The Plan
allows for a discretionary company matching contribution in an amount equal to
50% of contributions made by the employee, up to a maximum of 5% of the
employee's salary. For the year ended December 31, 1995 the Company did not
make a contribution to the plan and for the years ended December 31, 1993 and
1994 the company contributed $28,628 and $87,756, respectively.
NOTE 7--SUBSEQUENT EVENT--SALE OF BUSINESS
During July of 1995, the combined Companies entered into an agreement with
KHI Corporation to sell substantially all of the assets of the Corporations.
The sale was completed on January 1, 1996.
NOTE 8--CONTINGENCIES
The combined Companies are a guarantor of certain debt of its sole
stockholder totalling $1,385,130. This debt is secured by various business
assets of the Company and a second mortgage on the certain real estate owned
by Pheasant Wood Nursing Home, Inc. This debt was repaid on January 1, 1996 in
a transaction related to the sale of the Company's assets.
F-30
<PAGE>
INDEPENDENT AUDITORS' REPORT
Partners
Beachwood Care Center, Westbay Manor
Company, Westbay Manor II Development
Company, Royalview Manor Company,
and Royalview Manor Development Company
(all Ohio Partnerships)
Cleveland, Ohio
We have audited the combined balance sheets of Beachwood Care Center,
Westbay Manor Company, Westbay Manor II Development Company, Royalview Manor
Company, and Royalview Manor Development Company (all Ohio partnerships), as
of December 31, 1995 and 1994 and the related combined statements of income,
partners' equity and cash flows for the years ended December 31, 1995, 1994
and 1993. These combined financial statements are the responsibility of the
Partnerships' management. Our responsibility is to express an opinion on these
combined 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 audits to
obtain reasonable assurance about whether the combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall combined financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Beachwood
Care Center, Westbay Manor Company, Westbay Manor II Development Company,
Royalview Manor Company, and Royalview Manor Development Company as of
December 31, 1995 and 1994, and the results of its combined operations,
changes in partners' equity and cash flows for the years ended December 31,
1995, 1994 and 1993, in conformity with generally accepted accounting
principles.
Howard, Wershbale & Co.
Beachwood, Ohio
March 15, 1996
F-31
<PAGE>
BEACHWOOD CARE CENTER,
WESTBAY MANOR COMPANY, WESTBAY MANOR II DEVELOPMENT COMPANY, ROYALVIEW MANOR
COMPANY, AND
ROYALVIEW MANOR DEVELOPMENT COMPANY
COMBINED BALANCE SHEETS
----------------
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............ $ 6,741,168 $ 6,879,695 $ 8,186,746
Receivables:
Residents.......................... 1,874,206 2,214,225 1,829,377
Estimated settlements from
government programs............... 42,300 66,400 146,200
Note receivable, related party....... 50,000 -- --
Prepaid expenses and other current
assets.............................. 123,194 209,184 190,470
----------- ----------- -----------
Total current assets............. 8,830,868 9,369,504 10,352,793
Restricted investments................. 1,389,382 1,268,721 1,112,168
Property and equipment, net............ 16,283,603 15,522,011 15,331,275
Deferred costs, net.................... 598,584 560,239 554,177
----------- ----------- -----------
Total assets..................... $27,102,437 $26,720,475 $27,350,413
=========== =========== ===========
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Current maturities:
Mortgage notes payable............. $ 277,328 $ 297,877 $ 317,073
Note payable, bank................. 300,000 -- --
Accounts payable..................... 1,329,158 1,929,787 1,556,390
Accrued employee compensation and
benefits............................ 1,268,061 1,282,970 1,276,931
Accrued interest..................... 134,067 131,345 130,886
Other accrued liabilities............ 595,782 560,004 509,996
Estimated settlements due government
programs............................ 792,500 395,700 296,100
Due to affiliated management compa-
nies................................ 1,335,384 691,220 1,227,666
----------- ----------- -----------
Total current liabilities........ 6,032,280 5,288,903 5,315,042
----------- ----------- -----------
Long-term debt:
Mortgage notes payable, net of cur-
rent portion........................ 18,700,446 18,267,603 18,172,626
Note payable, bank, net of current
portion............................. 75,000 -- --
Loans and interest payable, related
parties............................. 695,552 401,984 406,957
----------- ----------- -----------
19,470,998 18,669,587 18,579,583
----------- ----------- -----------
Total liabilities................ 25,503,278 23,958,490 23,894,625
Partners' equity....................... 1,599,159 2,761,985 3,455,788
----------- ----------- -----------
$27,102,437 $26,720,475 $27,350,413
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-32
<PAGE>
BEACHWOOD CARE CENTER,
WESTBAY MANOR COMPANY, WESTBAY MANOR II DEVELOPMENT COMPANY, ROYALVIEW MANOR
COMPANY, AND
ROYALVIEW MANOR DEVELOPMENT COMPANY
COMBINED STATEMENTS OF INCOME
----------------
<TABLE>
<CAPTION>
THREE
YEAR ENDED DECEMBER 31, MONTHS ENDED
----------------------------------- MARCH 31,
1993 1994 1995 1996
----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating revenue:
Net resident service reve-
nue........................ $28,724,617 $29,103,836 $32,165,648 $8,242,306
Other....................... 179,746 180,129 151,040 29,317
----------- ----------- ----------- ----------
Total operating revenue... 28,904,363 29,283,965 32,316,688 8,271,623
----------- ----------- ----------- ----------
Expenses:
Operating expenses.......... 21,664,216 23,005,764 24,660,055 6,342,664
Management fees to affili-
ates....................... 2,373,530 2,320,226 2,663,818 742,390
Depreciation and amortiza-
tion....................... 851,849 875,071 881,749 203,478
Interest.................... 1,977,252 1,863,098 1,626,695 398,091
----------- ----------- ----------- ----------
Total expenses............ 26,866,847 28,064,159 29,832,317 7,686,623
----------- ----------- ----------- ----------
Income from operations........ 2,037,516 1,219,806 2,484,371 585,000
Investment earnings........... 275,445 285,778 440,395 108,803
----------- ----------- ----------- ----------
Net income.................... $ 2,312,961 $ 1,505,584 $ 2,924,766 $ 693,803
=========== =========== =========== ==========
</TABLE>
See notes to financial statements.
F-33
<PAGE>
BEACHWOOD CARE CENTER,
WESTBAY MANOR COMPANY, WESTBAY MANOR II DEVELOPMENT COMPANY, ROYALVIEW MANOR
COMPANY, AND
ROYALVIEW MANOR DEVELOPMENT COMPANY
COMBINED STATEMENTS OF PARTNERS' EQUITY
----------------
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNERS PARTNERS TOTAL
---------- ----------- -----------
<S> <C> <C> <C>
Balance, December 31, 1992................ $1,215,908 $ 1,365,918 $ 2,581,826
Net income................................ 448,238 1,864,723 2,312,961
Distributions............................. (424,708) (1,275,292) (1,700,000)
---------- ----------- -----------
Balance, December 31, 1993................ 1,239,438 1,955,349 3,194,787
---------- ----------- -----------
Net income................................ 486,425 1,019,159 1,505,584
Distributions............................. (448,710) (2,652,502) (3,101,212)
---------- ----------- -----------
Balance, December 31, 1994................ 1,277,153 322,006 1,599,159
---------- ----------- -----------
Net income................................ 627,169 2,297,597 2,924,766
Distributions............................. (622,439) (1,288,301) (1,910,740)
Contributions............................. -- 148,800 148,800
---------- ----------- -----------
Balance, December 31, 1995................ 1,281,883 1,480,102 2,761,985
---------- ----------- -----------
Net income (unaudited).................... 273,741 420,062 693,803
---------- ----------- -----------
Balance, March 31, 1996 (unaudited)....... $1,555,624 $ 1,900,164 $ 3,455,788
========== =========== ===========
</TABLE>
See notes to financial statements.
F-34
<PAGE>
BEACHWOOD CARE CENTER,
WESTBAY MANOR COMPANY, WESTBAY MANOR II DEVELOPMENT COMPANY, ROYALVIEW MANOR
COMPANY, AND
ROYALVIEW MANOR DEVELOPMENT COMPANY
COMBINED STATEMENTS OF CASH FLOWS
----------------
<TABLE>
<CAPTION>
THREE
YEAR ENDED DECEMBER 31, MONTHS ENDED
------------------------------------- MARCH 31,
1993 1994 1995 1996
----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operat-
ing activities:
Net income............. $ 2,312,961 $ 1,505,584 $ 2,924,766 $ 693,803
Adjustments to recon-
cile net income to net
cash provided by oper-
ating activities:
Depreciation and amor-
tization.............. 851,849 875,071 881,749 203,478
----------- ----------- ----------- ----------
3,164,810 2,380,655 3,806,515 897,281
Change in receivables
and estimated settle-
ments from/due govern-
ment programs......... 2,604,649 (467,324) (436,168) 205,448
(Increase) decrease in
prepaid expenses and
other current assets.. 52,337 (44,584) (85,990) 18,714
Increase (decrease) in
accounts payable...... (148,926) (203,896) 275,878 (373,397)
Increase in accrued em-
ployee compensation
and benefits.......... 298,465 100,941 14,909 (6,039)
Decrease in accrued in-
terest................ (1,449) (23,719) (2,722) (459)
Increase (decrease) in
other
accruedliabilities.... 117,965 (2,829) (35,778) (50,008)
Increase (decrease) due
to affiliated manage-
ment companies........ 57,262 (53,982) (644,164) 536,446
----------- ----------- ----------- ----------
Net cash provided by
operating activities.. 6,145,113 1,685,262 2,892,480 1,227,986
----------- ----------- ----------- ----------
Investing activities:
Additions to property
and equipment......... (30,615) (296,475) (81,812) (6,680)
(Increase) decrease in
note receivable....... -- (50,000) 50,000 --
----------- ----------- ----------- ----------
Net cash used for fi-
nancing activities.... (30,615) (346,475) (31,812) (6,680)
----------- ----------- ----------- ----------
Financing activities:
Payments of note pay-
able.................. (225,000) (300,000) (375,000) --
Payments of mortgage
notes payable......... (177,775) (212,064) (412,294) (75,000)
Distributions to part-
ners.................. (1,700,000) (3,101,212) (1,910,740) --
Net decrease (increase)
in restricted cash.... (228,588) 381,718 120,661 156,553
Contribution from part-
ner................... -- -- 148,800 --
Decrease in loans and
interest, related par-
ties.................. 14,304 (175,021) (293,568) 4,192
Increase in deferred
costs................. -- (20,348) -- --
----------- ----------- ----------- ----------
Net cash used for fi-
nancing activities.... (2,317,059) (3,426,927) (2,722,141) 85,745
----------- ----------- ----------- ----------
Net increase (decrease)
in cash and cash equiv-
alents................. 3,797,439 (2,088,140) 138,527 1,307,051
Cash and cash equiva-
lents, beginning....... 5,031,869 8,829,308 6,741,168 6,879,695
----------- ----------- ----------- ----------
Cash and cash equiva-
lents, ending.......... $ 8,829,308 $ 6,741,168 $ 6,879,695 $8,186,746
=========== =========== =========== ==========
</TABLE>
See notes to financial statements.
F-35
<PAGE>
BEACHWOOD CARE CENTER,
WESTBAY MANOR COMPANY, WESTBAY MANOR II DEVELOPMENT
COMPANY, ROYALVIEW MANOR COMPANY, AND
ROYALVIEW MANOR DEVELOPMENT COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1996 IS UNAUDITED)
----------------
1. DESCRIPTION OF PARTNERSHIPS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Description of Partnerships:
Beachwood Care Center, Westbay Manor Company, Westbay Manor II Development
Company (all limited partnerships) and Royalview Manor Company (a general
partnership) are organized as Ohio partnerships for the purpose of operating
nursing facilities under Section 232 of the National Housing Act. The
Partnerships located in Cleveland, Ohio, operate four nursing facilities
consisting of 692 beds. Royalview Manor Development Company, organized as an
Ohio limited partnership, leases its nursing facility to Royalview Manor
Company. The entities are collectively referred to as the "Partnerships" in
these combined financial statements.
Principles of combination:
The Partnerships were combined based on common ownership. All material
intercompany transactions and balances have been eliminated.
Unaudited Interim Financial Data:
The interim financial data at March 31, 1996 and for the three months then
ended included herein are unaudited and, in the opinion of management, reflect
all adjustments (consisting of only normal recurring adjustments) necessary
for a fair presentation of financial position and the results of operations
and cash flows for such interim periods.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the combined
financial statements, and the reported amounts of revenue and expenses during
the reporting period. Revisions in estimates are recorded in the period in
which the facts which require the revisions become known.
Cash and cash equivalents:
Cash and cash equivalents consist of highly liquid investments with
maturities of three months or less at the date of their acquisition by the
Partnerships. Included in cash and cash equivalents are interest bearing
advances to an affiliate's joint investment account, which is primarily
invested in overnight repurchase agreements. Cash held and invested by the
affiliate, amounted to $6,705,524 at December 31, 1994, $6,793,307 at December
31, 1995 and $7,881,625 at March 31, 1996. For purposes of the statements of
cash flows, the Partnerships consider cash held by the affiliate to be cash
equivalents.
Resident service revenue/accounts receivable:
Resident service revenue is recorded at established billing rates as
services are rendered. Reductions are currently provided for as contractual
adjustments representing the difference between established billing rates and
amounts advanced under the Medicaid and Medicare programs.
Estimated amounts management believes will result from audits and
settlements by the appropriate governmental authority in the determination of
final reimbursement rates are included in these statements. Revisions in
estimates are reflected in the period in which the facts which require the
revisions become known. Net resident service revenue increased as a result of
such adjustments by $116,000 in 1993, decreased by $251,700 in 1994, increased
by $439,000 in 1995 and $176,000 in the three months ended March 31, 1996.
F-36
<PAGE>
BEACHWOOD CARE CENTER,
WESTBAY MANOR COMPANY, WESTBAY MANOR II DEVELOPMENT COMPANY,
ROYALVIEW MANOR COMPANY, AND
ROYALVIEW MANOR DEVELOPMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
----------------
Two of the Partnerships have filed Medicare routine cost limit exceptions
for the years ended 1991 through 1993 with the Medicare Intermediary. If
granted, these exceptions would retroactively increase the Partnerships'
Medicare reimbursement rates. The exception requests require approval by both
the Intermediary and the Health Care Financing Administration (HCFA). The
Partnerships' will record these amounts to income when approval is obtained.
In the opinion of management, amounts received, if any, could be material to
the financial statements.
In addition, based on the Medicare routine cost limit exceptions filed for
1991 through 1993 by the two Partnerships and an interim Medicare routine cost
limit exception filed by another Partnership for the year ended December 31,
1994, the Partnerships' 1994 and 1995 Medicare reimbursement rates were
adjusted by the Intermediary during 1995 to include an estimated amount for
1994 and 1995 exception limitations. The Partnerships have recorded these
amounts in revenue in the 1995 financial statements less an estimate of
amounts considered overadvanced using the guidance under Statement of
Financial Accounting Standards (SFAS) No. 5, "Accounting for Contingencies".
Revisions in these estimates which could be material to the financial
statements, will be reflected in the period the rates are final settled by the
Intermediary.
Accounts receivable, residents are due both from residents and governmental
agencies. Accounts receivable from governmental agencies are recorded net of
credit balances due to those agencies since legal right of setoff exists. The
Partnerships provide an allowance for billing adjustments and bad debts
relating to accounts receivable balances. The allowance amounted to $20,000 at
December 31, 1994 and 1995 and March 31, 1996.
Restricted investments:
Included in restricted investments are certificates of deposit and
marketable debt securities consisting of government securities. These
securities are classified as held-to-maturity and are carried at amortized
cost, which approximates market value at December 31, 1994 and 1995 and March
31, 1996.
Property and equipment:
The assets are recorded at cost and depreciated using the straight-line and
accelerated methods over the following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Land improvements...................................................... 20
Building and improvements.............................................. 30-32
Furniture, fixtures and equipment...................................... 5-10
</TABLE>
Deferred costs:
Deferred costs include financing and organization costs. Deferred financing
costs resulted from charges incurred in obtaining the mortgage notes payable
and are being amortized using the straight-line method over the terms of the
mortgages. Organization costs are being amortized using the straight-line
method over five years.
F-37
<PAGE>
BEACHWOOD CARE CENTER,
WESTBAY MANOR COMPANY, WESTBAY MANOR II DEVELOPMENT COMPANY,
ROYALVIEW MANOR COMPANY, AND
ROYALVIEW MANOR DEVELOPMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
----------------
Income taxes:
The Partnerships are not subject to federal and state income taxes. Instead,
the partners are taxed on their share of the Partnerships' taxable income,
whether or not distributed. Therefore, no provision for income taxes has been
made in these combined financial statements.
2. MEDICARE AND MEDICAID REIMBURSEMENT:
Three of the Partnerships received a portion of their net resident service
revenue from the Medicare and Ohio Medicaid programs. Combined Medicare and
Medicaid revenue was approximately 66% in 1993 and 1994, 67% in 1995, and 68%
in the three months ended March 31, 1996 of total combined net resident
service revenue.
Collection of accounts receivable in the normal course of business is
dependent on payment by the Medicare and Medicaid programs. Net combined
amounts included in accounts receivable and estimated settlements due from/to
third party payors amounted to approximately $827,400, $905,400 and $1,042,700
at December 31, 1994, 1995, and March 31, 1996, respectively.
3. RESTRICTED INVESTMENTS:
Restricted investments consisted of the following at December 31, 1994 and
1995:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
---------- ----------
<S> <C> <C>
Mortgage escrow deposits.............................. $ 276,611 $ 211,450
Replacement reserve................................... 985,312 1,057,271
Other................................................. 127,459 --
---------- ----------
$1,389,382 $1,268,721
========== ==========
</TABLE>
Included in restricted investments are amounts invested in certificates of
deposit totalling $362,255, and $443,974, and government securities totalling
$473,540 and $522,645 at December 31, 1994 and 1995, respectively. At December
31, 1995 government securities mature within one year.
4. DEFERRED COSTS:
Deferred costs consisted of the following at December 31, 1994 and 1995.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Deferred financing costs............................... $ 842,139 $ 842,139
Organization costs..................................... 109,410 109,410
--------- ---------
951,549 951,549
Less accumulated amortization.......................... (352,965) (391,310)
--------- ---------
$ 598,584 $ 560,239
========= =========
</TABLE>
F-38
<PAGE>
BEACHWOOD CARE CENTER,
WESTBAY MANOR COMPANY, WESTBAY MANOR II DEVELOPMENT COMPANY,
ROYALVIEW MANOR COMPANY, AND
ROYALVIEW MANOR DEVELOPMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
----------------
5. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at December 31, 1994 and
1995:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
----------- -----------
<S> <C> <C>
Land and improvements............................. $ 2,507,813 $ 2,515,513
Buildings and improvements........................ 17,987,730 17,912,730
Furniture, fixtures and equipment................. 2,606,978 2,640,534
----------- -----------
23,102,521 23,068,777
Less accumulated depreciation and amortization.... 6,818,918 7,546,766
----------- -----------
$16,283,603 $15,522,011
=========== ===========
</TABLE>
6. NOTE PAYABLE, BANK:
A Partnership had a revolving line of credit amounting to $1,000,000 with
interest at the bank's prime plus 1% which was converted to a note payable
effective April, 1993. The note required monthly installments of $25,000 plus
interest through April, 1996. The interest rate at December 31, 1994 was 9.5%.
The loan was collateralized by the accounts receivable of the Partnership and
guaranteed by certain partners of the Partnership. The note payable amounted
to $375,000 at December 31, 1994 which was repaid during 1995.
7. MORTGAGE NOTES PAYABLE:
Property and equipment are pledged as collateral on mortgage notes payable,
which are insured by the FHA and have the following terms:
<TABLE>
<S> <C>
Original amount.............................................. $20,335,500
Monthly payments............................................. $156,453
Interest rates............................................... 6.45% to 9.7%
</TABLE>
The mortgage notes payable mature at various dates as follows:
<TABLE>
<CAPTION>
BALANCE,
PARTNERSHIP MATURITY DATE DECEMBER 31, 1995
----------- ---------------- -----------------
<S> <C> <C>
Beachwood Care Center.................... December 1, 2030 $10,909,165
Westbay Manor Company.................... October 1, 2010 2,346,298
Westbay Manor II Development Company..... July 1, 2013 2,155,206
Royalview Manor Development Company...... June 1, 2013 3,154,811
-----------
$18,565,480
===========
</TABLE>
During 1994, certain Partnerships entered into mortgage modification
agreements reducing the interest rates and principal and interest payments.
F-39
<PAGE>
BEACHWOOD CARE CENTER,
WESTBAY MANOR COMPANY, WESTBAY MANOR II DEVELOPMENT COMPANY,
ROYALVIEW MANOR COMPANY, AND
ROYALVIEW MANOR DEVELOPMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
----------------
Future principal payment requirements of the mortgages at December 31, 1995
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1996......................................................... $ 297,877
1997......................................................... 319,981
1998......................................................... 343,768
1999......................................................... 369,350
2000......................................................... 396,887
Later Years.................................................. 16,837,617
-----------
$18,565,480
===========
</TABLE>
Beachwood Care Center's mortgage note payable is held by an affiliated
company.
Under agreements with the mortgage lenders and FHA, the Partnerships are
required to make monthly escrow deposits for taxes, insurance and replacement
of Partnership assets, and are subject to restrictions for their release and
as to operating policies and distributions to partners. These deposits are
included in restricted cash in the accompanying combined financial statements.
Certain of the Partnerships' mortgages contain prepayment penalties decreasing
annually at various dates through September, 1998.
The liability of the Partnerships under the mortgage notes payable is
limited to the underlying value of the real estate collateral, plus other
amounts deposited with the lenders.
Based on borrowing rates currently available to the Partnerships for FHA
insured loans with similar terms and maturities, the approximate fair value of
the mortgages is $20,930,800 at December 31, 1995.
8. RELATED PARTY TRANSACTIONS:
During the years ended December 31, 1993, 1994, 1995, affiliated companies
performed admitting, administrative and other services in their capacity as
managing agents of the facilities. The management companies earn a 7% base
management fee and, if applicable, an incentive management fee. The management
companies earned fees of $2,373,530 in 1993, $2,320,226 in 1994, $2,663,818 in
1995, and $742,390 in the three months ended March 31, 1996. Amounts due to
the affiliated management companies totalled $1,335,384, $691,220 and
$1,227,666, at December 31, 1994 and 1995, and March 31, 1996, respectively.
The Partnerships were advanced funds from partners of the Partnerships. At
December 31, 1994 and 1995 and March 31, 1996, amounts due to the related
parties totalled $695,552, $401,984, and $406,957, respectively, which
included accrued interest totalling $428,236, $211,497, and $216,470,
respectively.
During 1994, a partner was advanced $50,000. The advance was non-interest
bearing and was received during 1995.
A Partnership leases corporate and medical office facilities to an
affiliated company under a five-year operating lease expiring January 1, 1997.
The lease requires monthly payments of $11,000. Total rental income received
from the affiliated company amounted to $132,000 in 1993, 1994 and 1995 and
$33,000 in the three months ended March 31, 1996. Future minimum lease
receipts under the noncancelable operating lease are $132,000 to be received
in the year ending December 31, 1996.
F-40
<PAGE>
BEACHWOOD CARE CENTER,
WESTBAY MANOR COMPANY, WESTBAY MANOR II DEVELOPMENT COMPANY,
ROYALVIEW MANOR COMPANY, AND
ROYALVIEW MANOR DEVELOPMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
----------------
9. SUBSEQUENT EVENT:
During May of 1996, the Partnerships entered into an agreement to lease
their four nursing facilities to an affiliate of Harborside Healthcare
Corporation ("Harborside") for an initial term of five years which is expected
to commence on July 1, 1996. During the first six months of the final year of
the initial term, Harborside may exercise an option to purchase the four
facilities for $57,125,000. Under certain conditions the lease may be extended
for up to two additional years, during which time Harborside must obtain
financing and complete the acquisition. The annual aggregate base rent will be
$5,000,000 during the initial term and $5,500,000 during the extension term,
if any. Harborside has agreed to pay $8,000,000 for its option to purchase the
facilities, which will be applied toward the purchase price. Of this amount,
$5,000,000 will be paid at or prior to the closing of the lease agreement and
the remainder will be paid upon the closing of the purchase or termination of
the lease.
F-41
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Bowie Center Limited Partnership:
We have audited the accompanying balance sheets of Bowie Center Limited
Partnership (the "Partnership") as of December 31, 1994 and 1995, and the
related statements of operations and partners' equity and cash flows for the
period from April 7, 1993 (date of inception) through December 31, 1993 and
the years ended December 31, 1994 and 1995. These financial statements are the
responsibility of the General Partners of the Partnership. 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 the General Partners of the Partnership, 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 Bowie Center Limited
Partnership as of December 31, 1994 and 1995, and the results of its
operations and its cash flows for the period from April 7, 1993 (date of
inception) through December 31, 1993 and the years ended December 31, 1994 and
1995 in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 19, 1996
F-42
<PAGE>
BOWIE CENTER LIMITED PARTNERSHIP
BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
(IN THOUSANDS OF DOLLARS)
----------------
<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 87 $ 286
Accounts receivable, net of allowance for doubtful accounts of
$89 in 1994 and $389 in 1995.................................. 818 2,322
Prepaid expenses and other..................................... 95 93
------ ------
Total current assets......................................... 1,000 2,701
Property and equipment, net...................................... 4,917 4,678
Intangible assets, net........................................... 590 367
------ ------
Total assets................................................. $6,507 $7,746
====== ======
LIABILITIES
Current liabilities:
Current maturities of long-term debt........................... $ 123 $ 249
Accounts payable............................................... 265 233
Employee compensation and benefits............................. 173 276
Other accrued liabilities...................................... 19 67
Payable to related party....................................... 80 --
Demand note payable to affiliate............................... -- 1,255
------ ------
Total current liabilities.................................... 660 2,080
Long-term debt................................................... 5,002 4,973
------ ------
Total liabilities............................................ 5,662 7,053
Commitments and contingencies (Note H)
PARTNERS' EQUITY
Partners' equity................................................. 845 693
------ ------
Total liabilities and partners' equity....................... $6,507 $7,746
====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-43
<PAGE>
BOWIE CENTER LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS AND PARTNERS' EQUITY
FOR THE PERIOD FROM APRIL 7, 1993 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1993
AND FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
(IN THOUSANDS OF DOLLARS)
----------------
<TABLE>
<CAPTION>
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Revenues:
Net patient service revenues........................... $ -- $2,515 $7,574
Other patient related services......................... -- 8 21
------ ------ ------
Total revenues....................................... -- 2,523 7,595
------ ------ ------
Expenses:
Facility operating..................................... -- 2,407 6,485
Depreciation and amortization.......................... -- 353 537
Interest............................................... -- 286 518
Management fees to an affiliate........................ -- 80 214
------ ------ ------
Total expenses....................................... -- 3,126 7,754
------ ------ ------
Loss from operations..................................... -- (603) (159)
Investment income........................................ -- 5 7
------ ------ ------
Net loss............................................. -- (598) (152)
Contributions............................................ 1,327 116 --
Partners' equity, beginning of period.................... -- 1,327 845
------ ------ ------
Partners' equity, end of period.......................... $1,327 $ 845 $ 693
====== ====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-44
<PAGE>
BOWIE CENTER LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM APRIL 7, 1993 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1993
AND THE YEARS ENDED DECEMBER 31, 1994 AND 1995
(IN THOUSANDS OF DOLLARS)
----------------
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Operating activities:
Net loss.......................................... $ -- $ (598) $ (152)
Adjustments to reconcile net loss to net cash
provided by (used by)
operating activities:
Depreciation and amortization..................... -- 353 537
------- ------- -------
-- (245) 385
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable...... -- (818) (1,504)
(Increase) decrease in prepaid expenses and
other.......................................... (2) (93) 2
Increase (decrease) in accounts payable......... 439 (174) (32)
Increase in employee compensation and benefits.. 2 171 103
Increase (decrease) in payable to related
party.......................................... 3 77 (80)
Increase (decrease) in other accrued
liabilities.................................... 170 (151) 48
------- ------- -------
Net cash provided by (used by) operating
activities................................. 612 (1,233) (1,078)
------- ------- -------
Investing activities:
Additions to property and equipment............... (3,192) (1,916) (75)
Transfers (to) from restricted funds.............. (291) 291 --
Additions to intangible assets.................... (15) (722) --
------- ------- -------
Net cash used by investing activities....... (3,498) (2,347) (75)
------- ------- -------
Financing activities:
Contributions..................................... 1,327 116 --
Proceeds from construction loan................... 1,569 2,800 --
Principal payments on long-term debt.............. -- (13) (149)
Demand note payable to affiliate.................. -- -- 1,255
Borrowings on line of credit...................... -- 754 246
------- ------- -------
Net cash provided by financing activities... 2,896 3,657 1,352
------- ------- -------
Net increase in cash and cash equivalents........... 10 77 199
Cash and cash equivalents, beginning of period...... -- 10 87
------- ------- -------
Cash and cash equivalents, end of period............ $ 10 $ 87 $ 286
======= ======= =======
Supplemental disclosure:
Interest paid..................................... $ -- $ 286 $ 474
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-45
<PAGE>
BOWIE CENTER LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
----------------
A.ORGANIZATION
Bowie Center Limited Partnership (the "Partnership") was formed on April 7,
1993 (date of inception) to develop and operate a 120 bed nursing facility
(the "facility") in Bowie, Maryland. The facility commenced operations on
April 30, 1994. Harborside Healthcare Limited Partnership ("HHLP") was formed
to acquire and operate healthcare facilities and to provide related healthcare
management services for affiliates of The Berkshire Group Limited Partnership
and its subsidiaries. HHLP holds a 74.25% limited partnership interest in the
Partnership, while an affiliate of HHLP holds a 0.75% general partnership
interest in the Partnership. The remaining 24.75% limited partner interest and
0.25% general partner interest are held by Madison Manor, Inc., an affiliate
of Dimensions Health Corporation, a non-profit corporation which owns and
operates two acute care hospitals and related enterprises.
Profits and losses of the Partnership are allocated to the partners in
accordance with their percentage of ownership. Certain items of income, gain,
loss, deduction, and credit are allocated to the partners in accordance with
Section 4.3.2 of the partnership agreement.
The Partnership is required to make quarterly cash distributions to the
partners in amounts equal to the partners' tax liabilities arising from their
respective shares of the Partnership's net income. The partnership agreement
also calls for distributions to the partners based on the Partnership's
achievement of certain quarterly cash flow objectives as defined in the
partnership agreement.
B.SIGNIFICANT ACCOUNTING POLICIES
The Partnership uses the following accounting policies for financial
reporting purposes:
Cash Equivalents
The Partnership includes all liquid investments with maturities of three
months or less from the date of acquisition in cash and cash equivalents.
Net Patient Service Revenues
Net patient service revenues payable by patients at the facility are
recorded at established billing rates. Net patient service revenues to be
reimbursed by contracts with third-party payors, primarily the Medicare and
Medicaid programs, are recorded at the amount estimated to be realized under
these contractual arrangements. Revenues from Medicare and Medicaid are
generally based on reimbursement of the reasonable direct and indirect costs
of providing services to program participants or a prospective payment system.
The Partnership separately estimates revenues due from each third party with
which it has a contractual arrangement and records anticipated settlements
with these parties in the contractual period during which services were
rendered. The amounts actually reimbursable under Medicare and Medicaid are
determined by filing cost reports which are then audited and generally
retroactively adjusted by the payor. Legislative changes to state or federal
reimbursement systems may also retroactively affect recorded revenues. Changes
in estimated revenues due in connection with Medicare and Medicaid may be
recorded by the Partnership subsequent to the year of origination and prior to
final settlement based on improved estimates. Such adjustments and final
settlements with third party payors, which could materially and adversely
affect the Partnership, are reflected in operations at the time of the
adjustment or settlement.
F-46
<PAGE>
BOWIE CENTER LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
----------------
B.SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Concentrations
A significant portion of the Partnership's revenues are derived from the
Medicare and Medicaid programs. There have been, and the Partnership expects
that there will continue to be, a number of proposals to limit reimbursement
allowable to long-term care facilities under these programs. The Partnership
cannot predict at this time whether any of these proposals will be adopted, or
if adopted and implemented, what effect such proposals would have on the
Partnership. Approximately 81% and 77% of the Partnership's net patient
service revenues in 1994 and 1995, respectively, are from the Partnership's
participation in the Medicare and Medicaid programs. As of December 31, 1994
and 1995, $760,743 and $2,261,295 respectively, of net accounts receivable
were due from the Medicare and Medicaid programs.
Provision for Doubtful Accounts
Bad debt expense of $89,000 and $300,000 is included in facility operating
expenses for the year ended December 31, 1994 and 1995, respectively.
Individual patient accounts deemed to be uncollectible are written off against
the allowance for doubtful accounts.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the General Partners to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the period reported.
Actual results could differ from those estimates. Estimates are used when
accounting for the collectibility of receivables, depreciation and
amortization, employee benefit plans and contingencies.
Income Taxes
The Partnership is not liable for federal or state income taxes because the
Partnership's income or loss is allocated to the partners for income tax
purposes. If the Partnership's tax returns are examined by the Internal
Revenue Service or a state taxing authority and such an examination results in
a change in Partnership taxable income or loss, such change will be reported
to the partners.
Property and Equipment
Property and equipment are stated at cost. Expenditures that extend the
lives of affected assets are capitalized, while maintenance and repairs are
charged to expense as incurred. Upon retirement or sale of an asset the cost
of the asset and any related accumulated depreciation are removed from the
balance sheet, and any resulting gain or loss is included in net income.
Depreciation expense is estimated using the straight-line method. These
estimates are calculated using the following estimated useful lives:
<TABLE>
<S> <C>
Land improvements.............................................. 8-40 years
Buildings and improvements..................................... 5-40 years
Equipment, furnishings and fixtures............................ 5-15 years
</TABLE>
F-47
<PAGE>
BOWIE CENTER LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
----------------
Intangible Assets
Costs incurred in obtaining the Partnership's long-term debt are being
amortized over the life of the loan. Pre-opening costs for the facility are
being amortized on a straight-line basis over a two-year period beginning with
the facility's commencement of operations.
Assessment of Long-Lived Assets
Effective for the year ended December 31, 1995 the Partnership has adopted
the provisions of Statement of Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." Accordingly, the Partnership periodically reviews the carrying value of
its long-lived assets (primarily property and equipment and intangible assets)
to assess the recoverability of these assets; any impairments would be
recognized in operating results if a diminution in value considered to be
other than temporary were to occur. The adoption of this Statement had no
impact on the Partnership's results of operations for the year ended December
31, 1995. As part of this assessment, the Partnership reviews the expected
future net operating cash flows from its facility.
C.LONG-TERM DEBT
The Partnership obtained a $4,377,000 construction loan from a bank to fund
the construction of the facility. Monthly principal payments of approximately
$5,000 began in September 1994 with the balance of $4,061,000 due in September
1999. As of December 31, 1994, the full amount of the construction loan had
been used. In connection with this loan, the Partnership capitalized interest
of $30,000 and $91,000 during the period from April 7, 1993 (date of
inception) through December 31, 1993 and year ended December 31, 1994,
respectively. In addition to the construction loan, the Partnership also
obtained a $700,000 line of credit from the bank to finance certain pre-
opening costs and initial working capital requirements. During 1994, the
Partnership increased the maximum amount of the line of credit to $1,000,000.
The Partnership borrowed $246,000 under this line of credit in 1995, bringing
the total amount owed under this facility to the $1,000,000 maximum. In July,
1995, the line of credit converted to a term loan. Monthly principal payments
of approximately $16,000 plus interest began in August 1995; a balance of
$262,000 will be due in July 1999.
Interest on each of these loans is at the bank's prime rate (8.50% at
December 31, 1995) plus 1%. Among other requirements, these loans limit the
Partnership's borrowings, acquisitions, dispositions and distributions.
Additionally, the maintenance of specified levels of net worth, working
capital, occupancy at the nursing facility and debt service coverage are also
requirements of the loans. Management believes the Partnership is in
compliance with the loan covenants.
The loans are collateralized by each partner's partnership interest as well
as by all of the assets of the Partnership. Additionally, the loans described
above are supported by the guarantee of HHLP as well as collateral pledged by
the unaffiliated partner. The Partnership agreement states that any liability
incurred by a partner in connection with a guarantee of the Partnership's debt
is limited to that partner's proportionate share of the liability based on its
percentage ownership of the Partnership.
Long-term debt consists of the following at December 31, 1994 and 1995 (in
thousands of dollars):
<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
Construction loan.......................................... $4,359 $4,305
Line of Credit............................................. 754 906
Capital lease obligation................................... 12 11
------ ------
Total.................................................... $5,125 $5,222
====== ======
</TABLE>
F-48
<PAGE>
BOWIE CENTER LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
----------------
The scheduled repayment of long-term debt is as follows (in thousands of
dollars):
<TABLE>
<S> <C>
1996............................................................... $ 249
1997............................................................... 255
1998............................................................... 261
1999............................................................... 4,457
------
Total............................................................ $5,222
======
</TABLE>
D.MANAGEMENT FEES AND EXPENSE REIMBURSEMENTS DUE TO AFFILIATES
Under the terms of a management agreement, HHLP manages the facility in
return for a monthly fee of $10,000, which commenced in May, 1994. When the
facility reached a normal occupancy level in September 1995, the fee was
changed to an amount equal to 5.5% of the facility's net revenues. The
management agreement also defines certain expense reimbursements which the
Partnership pays to affiliated entities for accounting, computer, travel,
legal and payroll expenses incurred on its behalf. These charges amounted to
$29,000 and $51,000 in 1994 and 1995, respectively. These costs have been
charged to operating expenses.
E.PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and consist of the following (in
thousands):
<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
Land improvements......................................... $ 694 $ 694
Buildings and improvements................................ 3,932 3,940
Equipment, furnishings and fixtures....................... 497 564
------ ------
5,123 5,198
Less: accumulated depreciation and amortization........... 206 520
------ ------
$4,917 $4,678
====== ======
F.INTANGIBLE ASSETS
Intangible assets are stated at cost and consist of the following (in
thousands):
1994 1995
------ ------
Loan costs................................................ $ 433 $ 433
Pre-opening costs......................................... 304 304
------ ------
737 737
Less: accumulated amortization............................ 147 370
------ ------
$ 590 $ 367
====== ======
</TABLE>
G.RETIREMENT PLAN
Employees of the Partnership may participate in an employee 401(k) defined
contribution plan along with employees of other entities affiliated with HHLP.
All employees of the facility who have worked at least one thousand hours and
completed one year of continuous service are eligible to participate in the
plan. The plan is subject to the provisions of the Employee Retirement Income
Security Act of 1974. The Partnership did not make any contributions to the
plan in 1993, 1994 or 1995.
F-49
<PAGE>
BOWIE CENTER LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
----------------
H.CONTINGENCIES
The Partnership is involved in legal actions and claims in the ordinary
course of its business. It is the opinion of the General Partners, based on
the advice of legal counsel, that such litigation and claims will be resolved
without material effect on the Partnership's financial position, results of
operations or liquidity.
I.DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The methods and assumptions used to estimate the fair value of each class of
financial instruments, for those instruments for which it is practicable to
estimate that value, and the estimated fair values of the financial
instruments are as follows:
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short effective
maturity of these instruments.
Long-term Debt
The fair value of the Partnership's long-term debt is estimated based on the
current rates offered to the Partnership for similar debt. The carrying value
of the Partnership's long-term debt approximates its fair value as of December
31, 1994 and 1995.
J.DEMAND NOTE PAYABLE TO AFFILIATE
On December 28, 1995, HHLP advanced $1,255,000 to fund working capital
requirements of the Partnership by means of a demand note bearing interest at
9.0% per annum.
F-50
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRIT-
ER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION
OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RE-
LATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURI-
TIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UN-
DER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CON-
TAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
The Company.............................................................. 13
The Reorganization....................................................... 13
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 14
Dilution................................................................. 16
Capitalization........................................................... 17
Pro Forma Combined Financial Information................................. 18
Selected Combined Financial and Operating Data........................... 26
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 29
Business................................................................. 39
Management............................................................... 60
Certain Transactions..................................................... 67
Stock Ownership of Directors, Executive Officers and Principal Holders... 69
Description of Capital Stock............................................. 70
Shares Eligible for Future Sale.......................................... 72
Underwriting............................................................. 74
Legal Matters............................................................ 75
Experts.................................................................. 76
Additional Information................................................... 76
Index to Financial Statements............................................ F-1
</TABLE>
----------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDI-
TION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UN-
DERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,600,000 SHARES
[LOGO] HARBORSIDE
HEALTHCARE CORPORATION
COMMON STOCK
----------------
PROSPECTUS
----------------
NATWEST SECURITIES LIMITED
DEAN WITTER REYNOLDS INC.
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses payable in connection
with the Offering of the shares being registered hereby, other than
underwriting discounts and commissions. All the amounts shown are estimates,
except the Securities and Exchange Commission registration fee and the NASD
filing fee. All of such expenses are being borne by the Company.
<TABLE>
<S> <C>
SEC registration fee............................................... $ 19,273
NASD filing fee.................................................... 6,089
New York Stock Exchange Listing Fee................................ 102,100
Blue Sky fees and expenses......................................... 20,000
Accounting fees and expenses....................................... *
Legal fees and expense............................................. *
Printing and engraving expenses.................................... *
Registrar and transfer agent's fees................................ *
Miscellaneous fees and expenses.................................... *
--------
Total............................................................ *
========
</TABLE>
- --------
* To be filed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 102(b)(7) of the Delaware General Corporation Law ("Delaware Law")
permits a provision in the certificate of incorporation of each corporation
organized thereunder, eliminating or limiting, with certain exceptions, the
personal liability of a director to the corporation or its stockholders for
monetary damages for certain breaches of fiduciary duty as a director. The
Certificate of Incorporation of the Company eliminates the personal liability
of directors to the fullest extent permitted by Delaware Law.
Section 145 of Delaware Law ("Section 145"), in summary, empowers a Delaware
corporation, within certain limitations, to indemnify its officers, directors,
employees and agents against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement, actually and reasonably incurred by them
in connection with any suit or proceeding other than by or on behalf of the
corporation, if they acted in good faith and in a manner reasonably believed
to be in or not opposed to the best interest of the corporation, and, with
respect to a criminal action or proceeding, had no reasonable cause to believe
their conduct was unlawful.
With respect to actions by or on behalf of the corporation, Section 145
permits a corporation to indemnify its officers, directors, employees and
agents against expenses (including attorneys' fees) actually and reasonably
incurred in connection with the defense or settlement of such action or suit,
provided such person meets the standard of conduct described in the preceding
paragraph, except that no indemnification is permitted in respect of any claim
where such person has been found liable to the corporation, unless the Court
of Chancery or the court in which such action or suit was brought approves
such indemnification and determines that such person is fairly and reasonably
entitled to be indemnified.
Section 8 of the Certificate of Incorporation of the Company provides for
the indemnification of officers and directors and certain other parties (the
"Indemnitees") of the Company to the fullest extent permitted under Delaware
law.
The Underwriting Agreement provides for indemnification by the Underwriters
of the Company, its directors and officers, and persons who control the
Company within the meaning of Section 15 of the Securities Act for certain
liabilities, including liabilities arising thereunder.
II-1
<PAGE>
Each of the employment agreements described in the Prospectus under the
captions "Executive Compensation--Employment Agreements and Change of Control
Arrangements" and "Executive Compensation--Directors' Compensation" contains
provisions entitling the executive to indemnification for losses incurred in
the course of service to the Company or its subsidiaries, under certain
circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In connection with the Reorganization, the Contributors will receive an
aggregate of 4,400,000 shares of Common Stock in consideration for the
transfer of their ownership interests in the Company's predecessors. Of these
shares, 1,000 shares were issued to Berkshire upon the formation of the
Company in March 1996. The remaining shares to be issued in connection with
the Reorganization will be issued immediately prior to the completion of the
Offering. These securities will be issued in reliance on the exemption from
registration contained in Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1** Form of Underwriting Agreement.
2.1** Reorganization Agreement.
3.1* Amended and Restated Certificate of Incorporation of the Company.
3.2* Amended and Restated By-laws of the Company.
4.1* Specimen Common Stock certificate.
5.1* Opinion of Paul, Weiss, Rifkind, Wharton & Garrison.
10.1(a) Facility Lease Agreement, dated as of December 31, 1995 between
Meditrust Tri-States, Inc. and HHCI Limited Partnership (New Haven
Facility).
10.1(b) Facility Lease Agreement, dated as of December 31, 1995 between
Meditrust Tri-States, Inc. and HHCI Limited Partnership (Indianapolis
Facility).
10.1(c) Facility Lease Agreement, dated as of December 31, 1995 between
Meditrust of Ohio, Inc. and HHCI Limited Partnership (Troy Facility).
10.1(d) Facility Lease Agreement, dated as of December 31, 1995 between
Meditrust of Florida, Inc. and HHCI Limited Partnership (Sarasota
Facility).
10.1(e) Facility Lease Agreement, dated as of December 31, 1995 between
Meditrust of Florida, Inc. and HHCI Limited Partnership (Pinebrook
Facility).
10.1(f) Facility Lease Agreement, dated as of December 31, 1995 between
Meditrust of Florida, Inc. and HHCI Limited Partnership (Naples
Facility).
10.1(g) Facility Lease Agreement, dated as of December 31, 1995 between
Meditrust of New Jersey, Inc. and HHCI Limited Partnership (Woods Edge
Facility).
10.2(a) Loan Agreement among Meditrust Mortgage Investments, Inc. and Bay Tree
Nursing Center Corporation, Belmont Nursing Center Corporation,
Countryside Care Center Corporation, Oakhurst Manor Nursing Center
Corporation, Orchard Ridge Nursing Center Corporation, Sunset Point
Nursing Center Corporation, West Bay Nursing Center Corporation and
Harborside Healthcare Limited Partnership, dated October 13, 1994.
10.2(b) Guaranty, dated October 14, 1994, to Meditrust Mortgage Investments,
Inc. from Harborside Healthcare Limited Partnership.
10.2(c) Environmental Indemnity Agreement, dated October 13, 1994, by and
among Bay Tree Nursing Center Corporation, Belmont Nursing Center
Corporation, Countryside Care Center Corporation, Oakhurst Manor
Nursing Center Corporation, Orchard Ridge Nursing Center Corporation,
Sunset Point Nursing Center Corporation, West Bay Nursing Center
Corporation, Harborside Healthcare Limited Partnership and Meditrust
Mortgage Investments, Inc.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.2(d) Consolidated and Renewal Promissory Note, dated October 13, 1994,
from Belmont Nursing Center Corporation, Countryside Care Center
Corporation, Oakhurst Manor Nursing Center Corporation, Orchard Ridge
Nursing Center Corporation, Sunset Point Nursing Center Corporation,
West Bay Nursing Center Corporation to Meditrust Mortgage
Investments, Inc.
10.2(e) Negative Pledge Agreement, dated October 13, 1994, by and among
Douglas Krupp, George Krupp, Bay Tree Nursing Center Corporation,
Belmont Nursing Center Corporation, Countryside Care Center
Corporation, Oakhurst Manor Nursing Center Corporation, Orchard Ridge
Nursing Center Corporation, Sunset Point Nursing Center Corporation,
West Bay Nursing Center Corporation and Meditrust Mortgage
Investments, Inc.
10.2(f) Affiliated Party Subordination Agreement, dated October 13, 1994, by
and among Bay Tree Nursing Center Corporation, Belmont Nursing Center
Corporation, Countryside Care Center Corporation, Oakhurst Manor
Nursing Center Corporation, Orchard Ridge Nursing Center Corporation,
Sunset Point Nursing Center Corporation, West Bay Nursing Center
Corporation, Harborside Healthcare Limited Partnership, Harborside
Rehabilitation Limited Partnership and Meditrust Mortgage
Investments, Inc.
10.2(g)* First Amendment to Loan Agreement, dated May , 1996, by and among
Meditrust Mortgage Investments, Inc. and Bay Tree Nursing Center
Corporation, Belmont Nursing Center Corporation, Countryside Care
Center Corporation, Oakhurst Manor Nursing Center Corporation,
Orchard Ridge Nursing Center Corporation, Sunset Point Nursing Center
Corporation, West Bay Nursing Center Corporation and Harborside
Healthcare Limited Partnership.
10.3(a) Facility Lease Agreement, dated as of January 1, 1996 between
Meditrust of New Hampshire, Inc. and Harborside New Hampshire Limited
Partnership (Westwood Facility).
10.3(b) Facility Lease Agreement, dated as of January 1, 1996 between
Meditrust of New Hampshire, Inc. and Harborside New Hampshire Limited
Partnership (Pheasant Woods Facility).
10.3(c) Facility Lease Agreement, dated as of January 1, 1996 between
Meditrust of New Hampshire, Inc. and Harborside New Hampshire Limited
Partnership (Crestwood Facility).
10.3(d) Facility Lease Agreement, dated as of January 1, 1996 between
Meditrust of New Hampshire, Inc. and Harborside New Hampshire Limited
Partnership (Milford Facility).
10.3(e) Facility Lease Agreement, dated as of January 1, 1996 between
Meditrust of New Hampshire, Inc. and Harborside New Hampshire Limited
Partnership (Applewood Facility).
10.3(f) Facility Lease Agreement, dated as of December 31, 1995 between
Meditrust of Bedford, Inc. and Harborside New Hampshire Limited
Partnership (Northwood Facility).
10.4(a) Facility Lease Agreement, dated as of March 31, 1995 between
Meditrust of Ohio, Inc. and Harborside Toledo Limited Partnership
(Swanton Facility).
10.4(b) First Amendment of Facility Lease Agreement, dated as of December 31,
1995, by and between Harborside Toledo Limited Partnership and
Meditrust of Ohio Inc. (Swanton Facility).
10.5 Amended and Restated Agreement of Limited Partnership of Bowie Center
Limited Partnership, dated April 7, 1993.
10.6 Agreement of Lease, dated March 16, 1993, between Bryan Nursing Home,
Inc. and Harborside of Ohio Limited Partnership (Defiance and
Northwestern Ohio Facilities).
10.7 First Amendment to Agreement of Lease, dated June 1, 1993, by and
between Bryan Nursing Home, Inc. and Harborside Ohio Limited
Partnership.
10.8 Option to Purchase Agreement, dated March 16, 1993, by and between
Bryan Nursing Home, Inc. and Harborside Ohio Limited Partnership.
10.9(a) Lease, dated September 30, 1994, between Rockledge T. Limited
Partnership and Harborside of Florida Limited Partnership (Brevard
Facility).
10.9(b) Lease Guaranty, dated September 30, 1994, to Rockledge T. Limited
Partnership from Harborside Healthcare Limited Partnership.
10.9(c) Indemnity Agreement, dated September 30, 1994, between Rockledge T.
Limited Partnership, Harborside of Florida Limited Partnership,
Harborside Healthcare Limited Partnership and Southtrust Bank of
Alabama.
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.9(d) Assignment and Security Agreement, dated September 30, 1994, between
Rockledge T. Limited Partnership, Harborside of Florida Limited
Partnership, and Southtrust Bank of Alabama.
10.9(e) Subordination Agreement (Lease), dated September 30, 1994, by and
among Rockledge T. Limited Partnership, Harborside of Florida
Limited Partnership, Harborside Healthcare Limited Partnership and
Southtrust Bank of Alabama.
10.9(f) Subordination Agreement (Management), dated September 30, 1994, by
and among Rockledge T. Limited Partnership, Harborside of Florida
Limited Partnership, Harborside Healthcare Limited Partnership and
Southtrust Bank of Alabama.
10.10(a)* Form of Employment Agreement between the Company and Stephen L.
Guillard.
10.10(b)* Form of Employment Agreement between the Company and Damian
Dell'Anno.
10.10(c)* Form of Employment Agreement between the Company and Bruce
Beardsley.
10.10(d)* Form of Employment Agreement between the Company and William
Stephan.
10.11 * 1996 Stock Option Plan for Non-Employee Directors.
10.12 * 1996 Long-Term Stock Incentive Plan.
10.13 * Retirement Savings Plan of the Company.
10.14 ** Supplemental Executive Retirement Plan of the Company.
10.15 ** Form of Administrative Services Agreement between the Company and
Berkshire.
10.16 ** Agreement to Lease, dated as of May 3, 1996 among Westbay Manor
Company, Westbay Manor II Development Company, Royal View Manor
Development Company, Beachwood Care Center Limited Partnership,
Royalview Manor Company, Harborside Health I Corporation, and
Harborside Healthcare Limited Partnership.
21.1 * Subsidiaries of the Company.
23.1 ** Consent of Coopers & Lybrand L.L.P.
23.2 ** Consent of Leverone & Company
23.3 ** Consent of Howard, Wershbale & Co.
23.4 * Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in
Exhibit 5.1).
24.1 Power of Attorney.
27.1 ** Financial Data Schedule
99.1 Consent of David F. Benson
99 2 ** Consent of Robert T. Barnum
99.3 ** Consent of Robert M. Bretholtz
99.4 ** Consent of Sally W. Crawford
</TABLE>
- --------
* To be filed by amendment.
** Filed herewith.
ITEM 17. UNDERTAKINGS
The Company hereby undertakes to provide to the underwriters at the closing
specified in the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to its Certificate of Incorporation, By-Laws, the
Underwriting Agreement or otherwise, the Company has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company 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 Company 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 Act and will be governed by the
final adjudication of such issue.
The Company hereby undertakes that:
II-4
<PAGE>
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be a part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus 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.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF BOSTON, COMMONWEALTH OF MASSACHUSETTS, ON THE 17TH DAY OF MAY, 1996.
HARBORSIDE HEALTHCARE CORPORATION
/s/ Stephen L. Guillard
By: _________________________________
STEPHEN L. GUILLARD President and
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
NAME TITLE DATE
---- ----- ----
President, Chief
* Executive Officer May 17, 1996
- ------------------------------------- and Director
STEPHEN L. GUILLARD (Principal
Executive Officer)
/s/ William H. Stephan Chief Financial
- ------------------------------------- Officer (Principal May 17, 1996
WILLIAM H. STEPHAN Financial and
Accounting Officer)
Director
* May 17, 1996
- -------------------------------------
LAURENCE GERBER
Director
* May 17, 1996
- -------------------------------------
DOUGLAS KRUPP
/s/ William H. Stephan
By: _________________________________
NAME: WILLIAM H. STEPHAN Attorney-
in-Fact
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NO.
------- ----------- --------
<C> <S> <C>
1.1** Form of Underwriting Agreement.
2.1** Reorganization Agreement.
3.1* Amended and Restated Certificate of Incorporation of the
Company.
3.2* Amended and Restated By-laws of the Company.
4.1* Specimen Common Stock certificate.
5.1* Opinion of Paul, Weiss, Rifkind, Wharton & Garrison.
10.1(a) Facility Lease Agreement, dated as of December 31, 1995
between Meditrust Tri-States, Inc. and HHCI Limited
Partnership (New Haven Facility).
10.1(b) Facility Lease Agreement, dated as of December 31, 1995
between Meditrust Tri-States, Inc. and HHCI Limited
Partnership (Indianapolis Facility).
10.1(c) Facility Lease Agreement, dated as of December 31, 1995
between Meditrust of Ohio, Inc. and HHCI Limited
Partnership (Troy Facility).
10.1(d) Facility Lease Agreement, dated as of December 31, 1995
between Meditrust of Florida, Inc. and HHCI Limited
Partnership (Sarasota Facility).
10.1(e) Facility Lease Agreement, dated as of December 31, 1995
between Meditrust of Florida, Inc. and HHCI Limited
Partnership (Pinebrook Facility).
10.1(f) Facility Lease Agreement, dated as of December 31, 1995
between Meditrust of Florida, Inc. and HHCI Limited
Partnership (Naples Facility).
10.1(g) Facility Lease Agreement, dated as of December 31, 1995
between Meditrust of New Jersey, Inc. and HHCI Limited
Partnership (Woods Edge Facility).
10.2(a) Loan Agreement among Meditrust Mortgage Investments, Inc.
and Bay Tree Nursing Center Corporation, Belmont Nursing
Center Corporation, Countryside Care Center Corporation,
Oakhurst Manor Nursing Center Corporation, Orchard Ridge
Nursing Center Corporation, Sunset Point Nursing Center
Corporation, West Bay Nursing Center Corporation and
Harborside Healthcare Limited Partnership, dated October
13, 1994.
10.2(b) Guaranty, dated October 14, 1994, to Meditrust Mortgage
Investments, Inc. from Harborside Healthcare Limited
Partnership.
10.2(c) Environmental Indemnity Agreement, dated October 13, 1994,
by and among Bay Tree Nursing Center Corporation, Belmont
Nursing Center Corporation, Countryside Care Center
Corporation, Oakhurst Manor Nursing Center Corporation,
Orchard Ridge Nursing Center Corporation, Sunset Point
Nursing Center Corporation, West Bay Nursing Center
Corporation, Harborside Healthcare Limited Partnership and
Meditrust Mortgage Investments, Inc.
10.2(d) Consolidated and Renewal Promissory Note, dated October 13,
1994, from Belmont Nursing Center Corporation, Countryside
Care Center Corporation, Oakhurst Manor Nursing Center
Corporation, Orchard Ridge Nursing Center Corporation,
Sunset Point Nursing Center Corporation, West Bay Nursing
Center Corporation to Meditrust Mortgage Investments, Inc.
10.2(e) Negative Pledge Agreement, dated October 13, 1994, by and
among Douglas Krupp, George Krupp, Bay Tree Nursing Center
Corporation, Belmont Nursing Center Corporation,
Countryside Care Center Corporation, Oakhurst Manor Nursing
Center Corporation, Orchard Ridge Nursing Center
Corporation, Sunset Point Nursing Center Corporation, West
Bay Nursing Center Corporation and Meditrust Mortgage
Investments, Inc.
10.2(f) Affiliated Party Subordination Agreement, dated October 13,
1994, by and among Bay Tree Nursing Center Corporation,
Belmont Nursing Center Corporation, Countryside Care Center
Corporation, Oakhurst Manor Nursing Center Corporation,
Orchard Ridge Nursing Center Corporation, Sunset Point
Nursing Center Corporation, West Bay Nursing Center
Corporation, Harborside Healthcare Limited Partnership,
Harborside Rehabilitation Limited Partnership and Meditrust
Mortgage Investments, Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NO.
------- ----------- --------
<C> <S> <C>
10.2(g)* First Amendment to Loan Agreement, dated May , 1996, by
and among Meditrust Mortgage Investments, Inc. and Bay
Tree Nursing Center Corporation, Belmont Nursing Center
Corporation, Countryside Care Center Corporation, Oakhurst
Manor Nursing Center Corporation, Orchard Ridge Nursing
Center Corporation, Sunset Point Nursing Center
Corporation, West Bay Nursing Center Corporation and
Harborside Healthcare Limited Partnership.
10.3(a) Facility Lease Agreement, dated as of January 1, 1996
between Meditrust of New Hampshire, Inc. and Harborside
New Hampshire Limited Partnership (Westwood Facility).
10.3(b) Facility Lease Agreement, dated as of January 1, 1996
between Meditrust of New Hampshire, Inc. and Harborside
New Hampshire Limited Partnership (Pheasant Woods
Facility).
10.3(c) Facility Lease Agreement, dated as of January 1, 1996
between Meditrust of New Hampshire, Inc. and Harborside
New Hampshire Limited Partnership (Crestwood Facility).
10.3(d) Facility Lease Agreement, dated as of January 1, 1996
between Meditrust of New Hampshire, Inc. and Harborside
New Hampshire Limited Partnership (Milford Facility).
10.3(e) Facility Lease Agreement, dated as of January 1, 1996
between Meditrust of New Hampshire, Inc. and Harborside
New Hampshire Limited Partnership (Applewood Facility).
10.3(f) Facility Lease Agreement, dated as of December 31, 1995
between Meditrust of Bedford, Inc. and Harborside New
Hampshire Limited Partnership (Northwood Facility).
10.4(a) Facility Lease Agreement, dated as of March 31, 1995
between Meditrust of Ohio, Inc. and Harborside Toledo
Limited Partnership (Swanton Facility).
10.4(b) First Amendment of Facility Lease Agreement, dated as of
December 31, 1995, by and between Harborside Toledo
Limited Partnership and Meditrust of Ohio Inc. (Swanton
Facility).
10.5 Amended and Restated Agreement of Limited Partnership of
Bowie Center Limited Partnership, dated April 7, 1993.
10.6 Agreement of Lease, dated March 16, 1993, between Bryan
Nursing Home, Inc. and Harborside of Ohio Limited
Partnership (Defiance and Northwestern Ohio Facilities).
10.7 First Amendment to Agreement of Lease, dated June 1, 1993,
by and between Bryan Nursing Home, Inc. and Harborside
Ohio Limited Partnership.
10.8 Option to Purchase Agreement, dated March 16, 1993, by and
between Bryan Nursing Home, Inc. and Harborside Ohio
Limited Partnership.
10.9(a) Lease, dated September 30, 1994, between Rockledge T.
Limited Partnership and Harborside of Florida Limited
Partnership (Brevard Facility).
10.9(b) Lease Guaranty, dated September 30, 1994, to Rockledge T.
Limited Partnership from Harborside Healthcare Limited
Partnership.
10.9(c) Indemnity Agreement, dated September 30, 1994, between
Rockledge T. Limited Partnership, Harborside of Florida
Limited Partnership, Harborside Healthcare Limited
Partnership and Southtrust Bank of Alabama.
10.9(d) Assignment and Security Agreement, dated September 30,
1994, between Rockledge T. Limited Partnership, Harborside
of Florida Limited Partnership, and Southtrust Bank of
Alabama.
10.9(e) Subordination Agreement (Lease), dated September 30, 1994,
by and among Rockledge T. Limited Partnership, Harborside
of Florida Limited Partnership, Harborside Healthcare
Limited Partnership and Southtrust Bank of Alabama.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NO.
------- ----------- --------
<C> <S> <C>
10.9(f) Subordination Agreement (Management), dated September 30,
1994, by and among Rockledge T. Limited Partnership,
Harborside of Florida Limited Partnership, Harborside
Healthcare Limited Partnership and Southtrust Bank of
Alabama.
10.10(a)* Form of Employment Agreement between the Company and
Stephen L. Guillard.
10.10(b)* Form of Employment Agreement between the Company and
Damian Dell'Anno.
10.10(c)* Form of Employment Agreement between the Company and
Bruce Beardsley.
10.10(d)* Form of Employment Agreement between the Company and
William Stephan.
10.11 * 1996 Stock Option Plan for Non-Employee Directors.
10.12 * 1996 Long-Term Stock Incentive Plan.
10.13 * Retirement Savings Plan of the Company.
10.14 * Supplemental Executive Retirement Plan of the Company.
10.15 * Form of Administrative Services Agreement between the
Company and Berkshire.
10.16 ** Agreement to Lease, dated as of May 3, 1996 among Westbay
Manor Company, Westbay Manor II Development Company,
Royal View Manor Development Company, Beachwood Care
Center Limited Partnership, Royalview Manor Company,
Harborside Health I Corporation, and Harborside
Healthcare Limited Partnership.
21.1 * Subsidiaries of the Company.
23.1 ** Consent of Coopers & Lybrand L.L.P.
23.2 ** Consent of Leverone & Company
23.3 ** Consent of Howard, Wershbale & Co.
23.4 * Consent of Paul, Weiss, Rifkind, Wharton & Garrison
(included in Exhibit 5.1).
24.1 Power of Attorney.
27.1 ** Financial Data Schedule
99.1 Consent of David F. Benson
99 2 ** Consent of Robert T. Barnum
99.3 ** Consent of Robert M. Bretholtz
99.4 ** Consent of Sally W. Crawford
</TABLE>
- --------
* To be filed by amendment.
** Filed herewith.
<PAGE>
EXHIBIT 1.1
[DRAFT- 05/17/96]
3,600,000 Shares
HARBORSIDE HEALTHCARE CORPORATION
Common Stock
UNDERWRITING AGREEMENT
----------------------
__________ __, 1996
NATWEST SECURITIES LIMITED
DEAN WITTER REYNOLDS INC.
As Representatives of the
several Underwriters
c/o NatWest Securities Limited
135 Bishopsgate
London EC2M 3XT
England
Ladies and Gentlemen:
HARBORSIDE HEALTHCARE CORPORATION, a Delaware corporation (the "Company"),
proposes to issue and sell an aggregate of 3,600,000 shares (the "Firm Shares")
of the Company's common stock, par value $.01 per share (the "Common Stock"), to
you and the other underwriters named in Schedule I hereto (collectively, the
----------
"Underwriters"), for whom you are acting as representatives (the
"Representatives"). The Company has also agreed to grant to you and the other
Underwriters an option (the "Option") to purchase up to an additional 540,000
shares of Common Stock (the "Option Shares") on the terms and for the purposes
set forth in Section 1(b) hereto. The Firm Shares and the Option Shares are
hereinafter collectively referred to as the "Shares."
The Company hereby confirms as follows its agreements with the
Representatives and the several other Underwriters.
1. Agreement to Sell and Purchase.
------------------------------
(a) On the basis of the representations, warranties and agreements of the
Company herein contained and subject to all the terms and conditions of this
Agreement, (i) the Company agrees to sell to the several Underwriters and (ii)
each of the Underwriters, severally and not jointly, agrees
<PAGE>
to purchase from the Company at a purchase price of $_____ per share, the number
of Firm Shares set forth opposite the name of such Underwriter in Schedule I
hereto, plus such additional number of Firm Shares which such Underwriter may
become obligated to purchase pursuant to Section 10 hereof.
(b) Subject to all the terms and conditions of this Agreement, the Company
grants the Option to the several Underwriters to purchase, severally and not
jointly, the Option Shares at the same price per share as the Underwriters shall
pay for the Firm Shares. This option may be exercised only to cover over-
allotments in the sale of the Firm Shares by the Underwriters and may be
exercised in whole or in part at any time and from time to time on or before the
30th day after the date of this Agreement (or on the next business day if the
30th day is not a business day), upon notice (the "Option Shares Notice") in
writing or by telephone (confirmed in writing) by the Representatives to the
Company no later than 5:00 p.m., New York City time, at least two and no more
than five business days before the date specified for closing in the Option
Shares Notice (the "Option Closing Date") setting forth the aggregate number of
Option Shares to be purchased and the time and date for such purchase. On the
Option Closing Date, the Company will issue and sell to the Underwriters the
number of Option Shares set forth in the Option Shares Notice and each
Underwriter will purchase such percentage of the Option Shares as is equal to
the percentage of Firm Shares that such Underwriter is purchasing, as adjusted
by the Representatives in such manner as they deem advisable to avoid fractional
shares.
2. Delivery and Payment. Delivery of the Firm Shares shall be made to the
--------------------
Representatives for the accounts of the Underwriters against payment of the
purchase price by certified or official bank checks payable in New York Clearing
House (next-day) funds to the order of the Company (the "Closing") at the office
of Paul, Weiss, Rifkind, Wharton & Garrison, counsel to the Company, 1285 Avenue
of the Americas, New York, New York 10019. Such payment shall be made at 10:00
a.m., New York City time, on the third full business day following the date of
this Agreement, or at such other time on such other date, not later than seven
business days after the date of this Agreement, as may be agreed upon by the
Company and the Representatives (such date is hereinafter referred to as the
"Closing Date").
To the extent the Option is exercised, delivery of the Option Shares
against payment by the Underwriters (in the manner specified above) will take
place at the offices specified above for the Closing Date at the time and date
(which may be the Closing Date) specified in the Option Shares Notice.
Certificates evidencing the Shares shall be in definitive form and shall be
registered in such names and in
-2-
<PAGE>
such denominations as the Representatives shall request at least two business
days prior to the Closing Date or the Option Closing Date, as the case may be,
by written notice to the Company. For the purpose of expediting the checking and
packaging of certificates for the Shares, the Company agrees to make such
certificates available for inspection at least 24 hours prior to the Closing
Date or the Option Closing Date, as the case may be.
The cost of original issue tax stamps, if any, in connection with the
issuance, sale and delivery of the Firm Shares and Option Shares by the Company
to the respective Underwriters shall be borne by the Company. The Company will
pay and save each Underwriter and any subsequent holder of the Shares harmless
from any and all liabilities, interest and penalties with respect to or
resulting from any failure or delay in paying Federal or state stamp and other
transfer taxes, if any, which may be payable or determined to be payable in
connection with the original issuance, sale or delivery to such Underwriter of
the Firm Shares and Option Shares.
3. Representations, Warranties and Covenants of the Company. The Company
--------------------------------------------------------
represents, warrants and covenants to each Underwriter that:
(a) A registration statement on Form S-1 (Registration No. 333-3096)
relating to the Shares, including a preliminary prospectus relating to the
Shares and such amendments to such registration statement as may have been
required to the date of this Agreement, has been prepared by the Company under
the provisions of the Securities Act of 1933, as amended (the "Act"), and the
rules and regulations (collectively referred to as the "Rules and Regulations")
of the Securities and Exchange Commission (the "Commission") thereunder, and has
been filed with the Commission. The Commission has not issued any order
preventing or suspending the use of the Prospectus (as defined below) or any
Preliminary Prospectus (as defined below). The term "Preliminary Prospectus" as
used herein means a preliminary prospectus relating to the Shares included at
any time as part of the foregoing registration statement or any amendment
thereto before it became effective under the Act and any prospectus filed with
the Commission by the Company pursuant to Rule 424(a) of the Rules and
Regulations. Copies of such registration statement and amendments and of each
related Preliminary Prospectus have been delivered to the Representatives. If
such registration statement has not become effective, a further amendment to
such registration statement, including a form of final prospectus, necessary to
permit such registration statement to become effective will be filed promptly by
the Company with the Commission. If such registration statement has become
effective, a final prospectus relating to the Shares containing information
permitted to be
-3-
<PAGE>
omitted at the time of effectiveness by Rule 430A will be filed by the Company
with the Commission in accordance with Rule 424(b) of the Rules and Regulations
promptly after execution and delivery of this Agreement. The term "Registration
Statement" means the registration statement as amended at the time it becomes or
became effective (the "Effective Date"), including all financial statements and
schedules and all exhibits, and all information contained in any final
prospectus filed with the Commission pursuant to Rule 424(b) of the Rules and
Regulations or in a term sheet described in Rule 434 of the Rules and
Regulations in accordance with Section 5 hereof and deemed to be included
therein as of the Effective Date by Rule 430A of the Rules and Regulations. The
term "Prospectus" means the prospectus relating to the Shares as first filed
with the Commission pursuant to Rule 424(b) of the Rules and Regulations or, if
no such filing is required, the form of final prospectus relating to the Shares
included in the Registration Statement at the Effective Date.
(b) On the date that any Preliminary Prospectus was filed with the
Commission, the date the Prospectus is first filed with the Commission pursuant
to Rule 424(b) (if required), at all times subsequent to and including the
Closing Date and, if later, the Option Closing Date and when any post-effective
amendment to the Registration Statement becomes effective or any amendment or
supplement to the Prospectus is filed with the Commission, the Registration
Statement, each Preliminary Prospectus and the Prospectus (as amended or as
supplemented if the Company shall have filed with the Commission any amendment
or supplement thereto), including the financial statements included in the
Prospectus, did or will comply in all material respects with all applicable
provisions of the Act and the Rules and Regulations and did or will contain all
material statements required to be stated therein in accordance with the Act and
the Rules and Regulations. On the Effective Date and when any post-effective
amendment to the Registration Statement becomes effective, no part of the
Registration Statement or any such amendment did or will contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein not
misleading. At the Effective Date, the date the Prospectus or any amendment or
supplement to the Prospectus is filed with the Commission and at the Closing
Date and, if later, the Option Closing Date, the Prospectus did not or will not
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading. The foregoing representations and
warranties in this Section 3(b) do not apply to any statements or omissions made
in reliance on and in conformity with information furnished in writing to the
Company by the Representatives specifically for inclusion in the Registration
Statement or Prospectus or any
-4-
<PAGE>
amendment or supplement thereto. The Company has not distributed, and, prior to
the later to occur of (i) the Closing Date or, if later, the Option Closing Date
and (ii) completion of the distribution of the Shares, will not distribute, any
offering material in connection with the offering or sale of the Shares other
than the Registration Statement, the Preliminary Prospectus, the Prospectus or
any other materials, if any, permitted by the Act.
(c) At or prior to the Closing Date, the Company will complete a series of
transactions (collectively, the "Reorganization Transactions") contemplated
under that certain Reorganization Agreement dated as of May 15, 1996 (the
"Reorganization Agreement") among the Company, The Berkshire Companies Limited
Partnership, Krupp Enterprises Limited Partnership, The Douglas Krupp 1994
Family Trust, The George Krupp 1994 Family Trust, Laurence Gerber, Stephen
Guillard and Damian Dell'Anno, a copy of which has been filed as Exhibit 2.1 to
the registration statement described in Section 3(a) hereof (the "Reorganization
Agreement") pursuant to which, among other things: (A) KHI Corp., a Delaware
corporation ("KHI"), will become a wholly owned subsidiary of the Company, (B)
the Company will become the owner, directly or indirectly, of all of the
outstanding limited partnership interests of (I) Harborside Healthcare Advisors
Limited Partnership, a Massachusetts limited partnership ("HH Advisors"), of
which KHI is the sole general partner and (II) Riverside Retirement Limited
Partnership, a Massachusetts limited partnership ("Riverside"), of which a
wholly-owned subsidiary of HH Advisors is the sole general partner and (C) each
of Bay Tree Nursing Center Corp., a Massachusetts corporation, Oakhurst Manor
Nursing Center Corp., a Massachusetts corporation, Belmont Nursing Center Corp.,
a Massachusetts corporation, Sunset Point Nursing Center Corp., a Massachusetts
corporation, Countryside Care Center Corp., a Massachusetts corporation, West
Bay Nursing Center Corp., a Massachusetts corporation, and Orchard Ridge Nursing
Center Corp., a Massachusetts corporation (collectively, the "Krupp
Subsidiaries"), will become wholly owned subsidiaries of the Company. Prior to
the date that the first amendment to the registration statement described in
Section 3(a) hereof was filed with the Commission, the Reorganization Agreement
was executed and delivered by all of the parties thereto. The Reorganization
Transactions shall have closed, been fully consummated and be effective for all
purposes prior to or simultaneous with the Closing in accordance with the terms
of the Reorganization Agreement.
(d) The Company has no subsidiaries on the date hereof and will, at the
Closing Date and, if later, the Option Closing Date, have the subsidiaries
listed in Exhibit 21.1 to the Registration Statement (collectively, the
"Subsidiaries" and individually, a "Subsidiary"). Each of the Subsidiaries will
be
-5-
<PAGE>
a direct or indirect wholly owned subsidiary of the Company, except for Bowie
Center Limited Partnership, a Maryland limited partnership, of which Madison
Manor Inc., a Maryland corporation, will own a 0.25% general partnership
interest and a 24.75% limited partnership interest (the "Madison Manor
Interest"). The Company is, and at the Closing Date and the Option Closing Date
will be, duly organized, validly existing and in good standing under the laws of
the State of Delaware. Each of the Subsidiaries is, and at the Closing Date and
the Option Closing Date will be, duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization. Each of the
Company and the Subsidiaries has, and at the Closing Date and the Option Closing
Date, will have, full corporate or partnership power and authority to conduct
all the activities conducted by it, to own or lease all the assets owned or
leased by it and to conduct its business as described in the Registration
Statement and Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus), assuming and giving effect to, in each case, the
consummation of the Reorganization Transactions. Each of the Company and the
Subsidiaries is, and at the Closing Date and the Option Closing Date will be,
duly licensed or qualified to do business and in good standing as a foreign
organization in all jurisdictions in which the nature of the activities
conducted by it or the character of the assets owned or leased by it makes such
licensing or qualification necessary, except where the failure to be so
qualified does not and, upon consummation of the Reorganization Transactions
will not, have a material adverse effect, singly or in the aggregate, on the
business, properties, condition (financial or otherwise), or results of
operations of the Company and the Subsidiaries taken as a whole (a "Material
Adverse Effect"). Upon completion of the Reorganization Transactions on the
Closing Date, the Company will beneficially own, directly or indirectly, all of
the outstanding equity interests in each of the Subsidiaries, free and clear of
all liens, security interests, pledges, encumbrances, charges or equities
(collectively, "Encumbrances"), except (i) for the Madison Manor Interest, (ii)
as disclosed in the Registration Statement and Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus) and (iii)
Encumbrances which are immaterial both individually and in the aggregate. Except
with respect to the Subsidiaries upon completion of the Reorganization
Transactions on the Closing Date, the Company does not own, and at the Closing
Date and Option Closing Date will not own, directly or indirectly, any shares of
stock or any other equity or long-term debt securities of any corporation or
have any equity interest in any firm, partnership, joint venture, association or
other entity of a nature required to be disclosed in the Registration Statement
and Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) that has not been so disclosed. Complete and correct
copies of the charter and
-6-
<PAGE>
bylaws or partnership certificates and agreements or other governing documents
of the Company and each Subsidiary and all amendments thereto have been
delivered or made available to the Representatives, and no changes therein will
be made subsequent to the date hereof and prior to the Closing Date or, if
later, the Option Closing Date, except as contemplated by the Reorganization
Transactions or as are not material, either individually or in the aggregate, to
the Company.
(e) The outstanding shares of capital stock of the Company have been duly
authorized and validly issued and are fully paid and nonassessable and are not
subject to any preemptive rights under the Company's Certificate of
Incorporation and By-Laws, the General Corporation Law of the State of Delaware
(the "GCL") or any agreement, contract or other instrument to which the Company
or any Subsidiary is bound. The Shares to be issued and sold by the Company
will be, upon such issuance and payment therefor, duly authorized, validly
issued, fully paid and nonassessable and will not be subject to any preemptive
or similar rights. The Company has, and, upon completion of the sale of the
Shares and the Reorganization Transactions, will have, an authorized, issued and
outstanding capitalization as set forth in the Registration Statement and
Prospectus (or, if the Prospectus is not in existence, in the most recent
Preliminary Prospectus). The description of the securities of the Company in
the Registration Statement and Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), is complete and accurate in
all material respects, and except as described in the Registration Statement and
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), the Company does not have outstanding, and at the
Closing Date and, if later, the Option Closing Date will not have outstanding,
any options to purchase, or any rights or warrants to subscribe for, or any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, any shares of its capital stock or any such warrants, convertible
securities or obligations.
(f) The combined financial statements and the related notes of the Company
and the Subsidiaries set forth in the Registration Statement and Prospectus (or,
if the Prospectus is not in existence, the most recent Preliminary Prospectus)
present fairly, in all material respects, the combined financial position of the
Company and the Subsidiaries as of the dates indicated and the combined results
of operations, changes in stockholders' equity and cash flows of the Company and
the Subsidiaries for the periods covered thereby, all in conformity with
generally accepted accounting principles ("GAAP") applied on a consistent basis
throughout the entire period involved. The combined financial statements and
the related notes of Sowerby Enterprises ("Sowerby") set forth in the
Registration
-7-
<PAGE>
Statement and Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus) present fairly, in all material respects, the
combined financial position of Sowerby as of the dates indicated and the
combined results of operations, retained earnings (deficit) and cash flows of
Sowerby for the periods covered thereby, all in conformity with GAAP applied on
a consistent basis throughout the entire period involved. The combined financial
statements and related notes of Beachwood Care Center, Westbay Manor Company,
Westbay Manor II Development Company, Royalview Manor Company and Royalview
Manor Development Company (collectively, the "Ohio Sellers") set forth in the
Registration Statement and Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) present fairly, in all
material respects, the combined financial position of the Ohio Sellers as of the
dates indicated and the combined results of operations, partners' equity and
cash flows of the Ohio Sellers for the periods covered thereby, all in
conformity with GAAP applied on a consistent basis throughout the entire period
involved. The selected historical combined financial data for the Company and
the Subsidiaries set forth under the captions "Prospectus Summary--Summary
Combined Financial and Operating Data" and "Selected Combined Financial and
Operating Data" in the Registration Statement and Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus) have
been prepared on a basis consistent with the combined financial statements of
the Company and the Subsidiaries. The pro forma combined financial statements of
the Company and the Subsidiaries and the related notes included in the
Registration Statement and Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) comply in all material
respects with the applicable requirements of Rule 11-02 of Regulation S-X of the
Commission and present fairly the information shown therein, and all of the
correct pro forma adjustments have been properly applied to the historical
amounts in the compilation of such statements. No other financial statements or
schedules of or pro forma information relating to the Company, any Subsidiary or
any other entity are required by the Act or the Rules and Regulations to be
included in the Registration Statement or Prospectus (or, if the Prospectus is
not in
-8-
<PAGE>
existence, the most recent Preliminary Prospectus). The pro forma financial
data set forth in the Registration Statement and Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus), under
the captions "Prospectus Summary--Summary Combined Financial and Operating Data"
and "Selected Combined Financial and Operating Data" have been prepared on a
basis consistent with the pro forma combined financial statements of the Company
and the Subsidiaries included therein. Coopers & Lybrand L.L.P. (the
"Accountants"), who have reported on the combined financial statements of the
Company and the Subsidiaries included in the Registration Statement and
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), are independent accountants with respect to the
Company, as required by the Act and the Rules and Regulations. Leverone &
Company, who have reported on the combined financial statements of Sowerby
included in the Registration Statement and Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus), are independent
accountants with respect to Sowerby, as required by the Act and the Rules and
Regulations. Howard, Wershbale & Co. (the "Ohio Sellers Accountants"), who have
reported on the combined financial statements of the Ohio Sellers included in
the Registration Statement and Prospectus (or, of the Prospectus is not in
existence, the most recent Preliminary Prospectus), are independent accountants
with respect to the Ohio Sellers, as required by the Act and the Rules and
Regulations.
(g) The Company and each of the Subsidiaries maintains a system of
internal accounting control sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorization, (ii) transactions are recorded as necessary to permit preparation
of financial statements in conformity with GAAP and to maintain accountability
for assets, (iii) access to assets is permitted only in accordance with
management's general or specific authorization, and (iv) the recorded
accountability for assets is compared with existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
(h) Except as set forth in the Registration Statement and Prospectus (or,
if the Prospectus is not in existence, the most recent Preliminary Prospectus),
subsequent to the respective dates as of which information is given in the
Registration Statement and the Prospectus and prior to the Closing Date and, if
later, the Option Closing Date, (i) there has not been, and will not have been
(after giving effect to the consummation of the Reorganization Transactions),
any change in the capitalization of the Company (other than (x) the exercise of
outstanding stock options described in the Registration Statement and Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus) and (y) as otherwise contemplated by this Agreement or the
Reorganization Agreement) or any Material Adverse Effect, (ii) neither the
Company nor any of the Subsidiaries has incurred, nor will it have incurred
(after giving effect to the consummation of the Reorganization Transactions),
any material liabilities or obligations, direct or contingent, (iii) neither the
Company nor any of the Subsidiaries has entered into, nor will it have entered
into (after giving effect to the consummation of the Reorganization
Transactions), any material transactions other than pursuant to this Agreement
or the Reorganization Agreement, and (iv) neither the Company nor any of the
Subsidiaries has,
-9-
<PAGE>
nor will it have (after giving effect to the consummation of the Reorganization
Transactions), paid or declared any dividends or other distributions of any kind
on any class of its capital stock, partnership interests or other equity
securities except for amounts paid or payable to the Company or another
Subsidiary.
(i) Each Subsidiary has good and marketable title to those facilities owned
by it as described in the Registration Statements and Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus) (all
such facilities owned by the Subsidiaries are hereinafter referred to
collectively as the "Owned Facilities"), in each case free and clear of all
Encumbrances or leases and without title company exceptions, disclaimers of
liability or objections (other than standard exceptions or disclaimers of
liability contained in the standard form of title insurance policy of the issuer
of the title policies with respect to such Owned Facilities), except (i) as set
forth in the Registration Statement and Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus) and (ii) for those which
could not reasonably be expected to affect the Company's (or such Subsidiary's)
intended use of such Owned Facilities in a manner that would have a Material
Adverse Effect. Each of the Subsidiaries has valid, subsisting and enforceable
leases for the facilities leased by it as described in the Registration
Statement and Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus) (all such facilities leased by the Subsidiaries
are hereinafter referred to collectively as the "Leased Facilities"), in each
case free and clear of all Encumbrances, except (i) as set forth in the
Registration Statement and Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) and (ii) for those which
could not reasonably be expected to affect the Company's (or such Subsidiary's)
intended use of such Leased Facilities in a manner that would have a Material
Adverse Effect.
(j) Each of Harborside Healthcare Limited Partnership, a Massachusetts
limited partnership ("HH Partners"), and Harborside Health I Corp., a Delaware
corporation ("HH Corp."), has entered into that certain Agreement to Lease dated
as of May 3, 1996 among the Ohio Sellers, HH Partners and HH Corp. (the "Ohio
Acquisition Agreement"). Each of HH Advisors and HH Corp. has full right, power
and authority to enter into the Ohio Acquisition Agreement and to consummate the
transactions contemplated therein. The Ohio Acquisition Agreement has been duly
authorized, executed and delivered by each of HH Advisors and HH Corp. and
constitutes the valid and binding agreement of HH Advisors and HH Corp.,
enforceable against each of such parties in accordance with the terms thereof,
except as limited by applicable
-10-
<PAGE>
bankruptcy, insolvency, reorganization, moratorium or other laws now or
hereafter in effect relating to or affecting creditors' rights generally or by
general principles of equity relating to the availability of remedies. The
description of the Ohio Acquisition Agreement in the Registration Statement and
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) set forth under the caption "Business-The Ohio
Transaction" contains a fair and accurate description of the Ohio Acquisition
Agreement in all material respects. None of the execution or delivery of the
Ohio Acquisition Agreement by HH Partners or HH Corp., the performance by HH
Partners or HH Corp. of its obligations thereunder, or the consummation by HH
Partners or HH Corp. of the transactions contemplated therein, conflicts with or
results in any breach or violation of any of the terms or provisions of, or
constitutes a default under, or results in the creation or imposition of any
Encumbrance upon, any property or assets of the Company or any of the
Subsidiaries pursuant to (A) the charter or bylaws or the certificate or
agreement of limited partnership, as applicable, of the Company or any
Subsidiary; (B) (subject to obtaining any required approvals) the terms of any
indenture, mortgage, deed of trust, voting trust agreement, loan agreement,
bond, debenture, note or other evidence of indebtedness, lease, contract or
other agreement or instrument (collectively, a "contract or other agreement") to
which the Company or any of the Subsidiaries is (or, upon consummation of the
Reorganization Transactions and the transactions contemplated by the Ohio
Acquisition Agreement, will be) a party or by which it or any of the
Subsidiaries is (or, upon consummation of the Reorganization Transactions and
the transactions contemplated by the Ohio Acquisition Agreement, will be) bound
or to which any of their respective assets or properties is (or, upon
consummation of the Reorganization Transactions and the transactions
contemplated by the Ohio Acquisition Agreement, will be) subject, the conflict,
breach or violation of which would have a Material Adverse Effect; (C) (subject
to the issuance of any required regulatory approvals or consents) any statute,
rule or regulation of any Governmental Body having (or that, upon consummation
of the Reorganization Transactions and the transactions contemplated by the Ohio
Acquisition Agreement, will have) jurisdiction over the Company or any of its
Subsidiaries or any of their respective activities or properties, the conflict,
breach or violation of which would have a Material Adverse Effect; or (D) the
terms of any judgment, decree or order of any arbitrator or Federal or state
court, commission, regulatory body, administrative agency or other governmental
body, domestic or foreign (collectively, a "Governmental Body") having (or that,
upon consummation of the Reorganization Transactions and the transactions
contemplated by the Ohio Acquisition Agreement, will have) such jurisdiction,
the conflict, breach or violation of which would have a Material Adverse Effect;
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(k) The Company is not an "investment company" or an "affiliated person"
of, or "promoter" or "principal underwriter" for, an "investment company," as
such terms are defined in the Investment Company Act of 1940, as amended (the
"Investment Company Act").
(l) Except as set forth in the Registration Statement and Prospectus (or,
if the Prospectus is not in existence, the most recent Preliminary Prospectus),
there are no actions, suits or proceedings pending or, to the knowledge of
the Company, threatened, against or affecting the Company, any Subsidiary or any
directors or officers of any of the foregoing in their capacity as such, before
or by any Governmental Body, wherein an unfavorable ruling, decision or finding
could reasonably be expected to have a Material Adverse Effect.
(m) Except as otherwise described in the Registration Statement and
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), each of the Company and the Subsidiaries has, and at
the Closing Date, the Option Closing Date (if any) and upon consummation of the
Reorganization Transactions will have, all governmental licenses, permits,
consents, orders, approvals and other authorizations (collectively, the
"Licenses"), including, but not limited to, (i) valid and subsisting
Certificates of Need for each Facility and (ii) valid and subsisting
authorizations for each Facility to participate in all applicable Federal and
State Medicare and Medicaid programs, which are necessary to carry on its
business and own or lease its properties, including the Facilities, as
contemplated in the Registration Statement and Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus), except where the
failure to have such Licenses would not have a Material Adverse Effect. Except
as otherwise described in the Registration Statement and Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus), to the
best knowledge of the Company, each of the Ohio Sellers has, and at the Closing
Date and the Option Closing Date (if any) will have, all Licenses which are
necessary to carry on its business at the Ohio Facilities as contemplated in the
Registration Statement and Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), except where the failure to
have such Licenses would not have a Material Adverse Effect. Each of the
Company and the Subsidiaries has, and at the Closing Date and the Option Closing
Date (if any) and upon consummation of the Reorganization Transactions will
have, complied in all material respects with all laws, regulations, Licenses and
orders (including, but not limited to, those pertaining to Medicare and Medicaid
programs) applicable to it or its business and properties, including the
Facilities, except for such noncompliance as would not have a Material Adverse
Effect. None of the Company or any Subsidiary is, and, at the Closing Date,
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the Option Closing Date (if any) and upon consummation of the Reorganization
Transactions, will be, in default (nor has any event occurred which, with notice
or lapse of time or both, would constitute a default) under any contract or
other agreement to which it is a party or by which any of its property is, or,
upon consummation of the Reorganization Transactions, will be, bound or
affected, the violation of which would have a Material Adverse Effect. To the
best knowledge of the Company, no other party under any such contract or other
agreement is, or, at the Closing Date, the Option Closing Date (if any) and upon
consummation of the Reorganization Transactions, will be, in default in any
material respect thereunder, except for such defaults as would not have a
Material Adverse Effect. With respect to two of the Facilities located in New
Hampshire which have not been certified for participation in the Medicare
program, the Company has applied for participation of such facilities in such
program. There are no governmental proceedings or actions pending or, to the
knowledge of the Company, threatened for the purpose of suspending or revoking
any License held, or, upon consummation of the Reorganization Transactions, to
be held, by the Company or any Subsidiary or Facility, or, to the knowledge of
the Company, any of the Ohio Sellers or the Ohio Facilities (including, without
limitation, any proceeding or action to decertify any of the Facilities or Ohio
Facilities from participation in any Medicare or Medicaid program). None of the
Company or any Subsidiary is in violation of any provision of its charter or
bylaws or certificate or agreement of limited partnership, as applicable.
(n) No consent, approval, authorization or order of, or any filing or
declaration with, any Governmental Body is required for the consummation of the
transactions contemplated by this Agreement or the Reorganization Agreement or
in connection with the issuance and sale of the Shares by the Company or the
issuance of shares of Common Stock by the Company in the Reorganization
Transactions, except such as have been obtained from, or such filings as have
been made (i) with Governmental Bodies as of the date hereof or (ii) under the
Act or the Rules and Regulations, and such as may be required under state
securities or Blue Sky laws or the bylaws and rules of the National Association
of Securities Dealers, Inc. (the "NASD") in connection with the purchase and
distribution by the Underwriters of the Shares to be sold by the Company. All
consents of the partners or shareholders of the Company and all Subsidiaries
required for the consummation of the Reorganization Transactions have been duly
and validly obtained, have not been revoked and remain in full force and effect;
(o) The Company has full corporate power and authority to enter into this
Agreement and the Reorganization Agreement and to carry out all the terms and
provisions hereof and thereof to be carried out by it. This Agreement has been
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duly authorized, executed and delivered by the Company and constitutes a valid
and binding agreement of the Company and is enforceable against the Company in
accordance with the terms hereof, except as limited by applicable bankruptcy,
insolvency, moratorium or other laws now or hereafter in effect relating to or
affecting creditors' rights generally or by general principles of equity
relating to the availability of remedies and except as rights to indemnity or
contribution may be limited by Federal or state securities laws and the public
policy underlying such laws or any order of the Commission. The Reorganization
Agreement has been duly authorized, executed and delivered and constitutes the
valid and binding agreement of the Company and, to the Company's knowledge, the
other parties thereto, and is enforceable against the Company and, to the
Company's knowledge, the other parties' thereto, in accordance with the terms
thereof, except as limited by applicable bankruptcy, insolvency, moratorium or
other laws now or hereafter in effect relating to or affecting creditors' rights
generally or by general principles of equity relating to the availability of
remedies. Except as disclosed in the Registration Statement and Prospectus (or,
if the Prospectus is not in existence, the most recent Preliminary Prospectus),
the execution, delivery and performance of this Agreement and the Reorganization
Agreement and the consummation of the transactions contemplated hereby and
thereby by the Company will not result in the creation or imposition of any
Encumbrance upon any property or assets of the Company or any Subsidiary
pursuant to the terms or provisions of, or result in a breach or violation of,
or conflict with, any of the terms or provisions of, or constitute a default
under, or give any other party a right to terminate any of its obligations
under, or result in the acceleration of any obligation under, (i) the charter or
bylaws or the certificate or agreement of limited partnership of the Company or
any Subsidiary, as applicable, (ii) any contract or other agreement to which the
Company or any Subsidiary is a party or by which the Company or any Subsidiary,
or any of their assets or properties are, or, upon consummation of the
Reorganization Transactions, will be, bound, which Encumbrance, breach,
violation, conflict, default, termination or acceleration would have a Material
Adverse Effect, or (iii) any judgment, ruling, decree, order, law, statute, rule
or regulation of any Governmental Body applicable to the Company, the
Subsidiaries, or the business or properties of the Company or any Subsidiary
which Encumbrance, breach, violation, conflict, default, termination or
acceleration would have a Material Adverse Effect. The Company has full
corporate power and authority to authorize, issue, offer and sell the Shares, as
contemplated by this Agreement, free of any preemptive rights under the
Company's Certificate of Incorporation and By-Laws, the GCL or any agreement,
contract or other instrument to which the Company or any Subsidiary is bound.
The offer, issuance and sale by the Company of any shares of Common Stock and
all
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options or rights to purchase Common Stock prior to the date hereof was and
is, or in the Reorganization Transactions will be, exempt from the registration
requirements of the Act and applicable state securities, real estate syndication
and blue sky laws and are or will be in full compliance with all requirements of
such laws.
(p) There is no document or contract of a character required to be
described in the Registration Statement or Prospectus (if the Prospectus is not
in existence, the most recent Preliminary Prospectus) or to be filed as an
exhibit to the Registration Statement which is not described or filed as
required.
(q) Neither the Company nor any of its directors, officers or affiliates
(within the meaning of the Rules and Regulations) has taken, nor will he, she or
it take, directly or indirectly, any action designed, or which might reasonably
be expected in the future, to cause or result in, under the Act or otherwise, or
which has constituted, stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Shares or
otherwise.
(r) No holder of securities of the Company or any Subsidiary has rights to
register any such securities with the Shares pursuant to the Registration
Statement.
(s) The Shares have been approved for listing on the New York Stock
Exchange (the "NYSE"), subject only to notice of issuance.
(t) Neither the Company nor any Subsidiary is involved in any labor dispute
that would have a Material Adverse Effect. The Company has no knowledge of
union organization activities affecting any of its employees except for those
covered by collective bargaining agreements described in the Registration
Statement and Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus).
(u) To the Company's knowledge, no claims have been asserted by any person
to the use of any material trademarks or trade names used in or necessary for
the conduct of the Company's business or challenging or questioning the validity
or effectiveness of any such trademark or trade name. The use, in connection
with the business and operations of the Company and the Subsidiaries, of such
trademarks and trade names does not, to the Company's knowledge, infringe on the
rights of any person.
(v) None of the Company, any Subsidiary or, to the Company's knowledge, any
employee or agent of the Company or
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any Subsidiary has made any payment of funds of the Company or any Subsidiary or
received or retained any funds of the Company or any Subsidiary in violation of
any law, rule or regulation or of a character required to be disclosed in the
Registration Statement and Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(w) The descriptions of the Company's insurance coverages as set forth in
the Registration Statement and Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) are true and complete in all
material respects and the Company has not received any notice to the effect that
it will not be able to renew its and its Subsidiaries' existing insurance
coverage (or such coverage as will be in effect upon consummation of the
Reorganization Transactions) as and when such coverage expires.
(x) Except as described in the Registration Statement and Prospectus (or,
if the Prospectus is not in existence, the most recent Preliminary Prospectus),
the business, operations and Facilities of the Company and each Subsidiary
comply with all applicable laws, ordinances, rules, regulations, Licenses and
permits relating to occupational safety and health, or environmental matters,
and none of the Company or any Subsidiary has received any written notice from
any Governmental Body or third party alleging any violation thereof or liability
thereunder (including, without limitation, liability for costs of investigating
or remediating sites containing hazardous substances), except for such
noncompliances, violations or liabilities that would not have a Material Adverse
Effect. The intended use and occupancy of each of the Facilities complies with
all material applicable codes and zoning laws and regulations and there is no
pending or, to the knowledge of the Company, threatened condemnation, zoning
change, environmental or other proceeding or action that would, if determined
adversely to the Company, have a Material Adverse Effect.
(y) Upon the lease by ________ of the Ohio Facilities, ___________ will
receive a valid leasehold estate to the Ohio Facilities, in each case, free and
clear of all Encumbrances, other than those described in the Registration
Statement and Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus) and those that will not interfere with the use
made or proposed to be made of such properties by the Company as contemplated by
the Registration Statement and Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) in a manner that would have a
Material Adverse Effect.
(z) Each of the Company and the Subsidiaries has (i) filed all material
foreign, Federal, state and local tax
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returns that are required to be filed or has requested extensions thereof and
(ii) paid all taxes required to be paid by it and any other assessment, fine or
penalty levied against it, to the extent that any of the foregoing is due and
payable, except for taxes, fines and penalties which would not have a Material
Adverse Effect.
4. Representations and Warranties of the Underwriters. Upon your
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authorization of the release of the Firm Shares, the several Underwriters
propose to offer the Firm Shares for sale to the public upon the terms set forth
in the Prospectus. NatWest Securities Limited represents and agrees that (i) it
has not offered or sold and will not offer or sell any Shares to persons in the
United Kingdom, except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (whether as principal
or agent) for the purposes of their businesses or otherwise in circumstances
which have not resulted and will not result in an offer to the public in the
United Kingdom within the meaning of the Public Offers of Securities Regulations
1995 or the Financial Services Act 1986 (the "UK Act"); (ii) it has complied and
will comply with all applicable provisions of the UK Act with respect to
anything done by it in relation to the Shares in, from or otherwise involving
the United Kingdom; and (iii) it has only issued or passed on, and will only
issue or pass on, in the United Kingdom any document which consists of or any
part of listing particulars, supplementary listing particulars, supplementary
listing particulars, or any other document required or permitted to be published
by listing rules under Part IV of the UK Act, to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1995 or is a person to whom the document may
otherwise lawfully be issued or passed on.
5. Agreements of the Company. The Company covenants and agrees with each
-------------------------
of the several Underwriters as follows:
(a) The Company will not, either prior to the Effective Date or thereafter
during such period as the Prospectus is required by law to be delivered in
connection with sales of the Shares by an Underwriter or dealer, file any
amendment or supplement to the Registration Statement or the Prospectus, unless
a copy thereof shall first have been submitted to the Representatives within a
reasonable period of time prior to the filing thereof and the Representatives
shall not have objected thereto in good faith.
(b) If the Registration Statement is not yet effective, the Company will
use its best efforts to cause the Registration Statement to become effective not
later than the time indicated in Section 7(a) hereof. The Company will notify
the Representatives promptly, and will confirm such advice in
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writing, (i) when the Registration Statement has become effective and when any
post-effective amendment thereto becomes effective, (ii) of any request by the
Commission for amendments or supplements to the Registration Statement or the
Prospectus or for additional information, (iii) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or the initiation of any proceedings for that purpose or the threat
thereof, (iv) of the happening of any event during the period mentioned in the
second sentence of Section 5(f) that in the judgment of the Company makes any
statement made in the Registration Statement or the Prospectus untrue in any
material respect or that requires the making of any changes in the Registration
Statement or the Prospectus in order to make the statements therein, in light of
the circumstances in which they are made, not misleading in any material respect
and (v) of receipt by the Company or any representative or attorney of the
Company of any other communication from the Commission relating to the Company,
the Registration Statement, any Preliminary Prospectus or the Prospectus. If at
any time the Commission shall issue any order suspending the effectiveness of
the Registration Statement, the Company will use its best efforts to obtain the
withdrawal of such order at the earliest possible moment. The Company will
prepare the Prospectus in a form approved timely and in good faith by the
Representatives and will file such Prospectus pursuant to Rule 424(b) under the
Act not later than the Commission's close of business on the second business day
following the execution and delivery of this Agreement or, if applicable, such
earlier time as may be required by Rule 430A(a)(3) under the Securities Act. If
the Company has omitted any information from the Registration Statement pursuant
to Rule 430A, the Company will use its best efforts to comply with the
provisions of, and make all requisite filings with, the Commission pursuant to
Rule 430A and to notify the Representatives promptly of all such filings.
(c) (i) If, at any time when a Prospectus relating to the Shares is
required to be delivered under the Act, any event occurs as a result of which,
in the good faith opinion of the Representatives, the Prospectus, as then
amended or supplemented, would include any untrue statement of a material fact
or omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, or the Registration Statement, as then amended or supplemented,
would include any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein not misleading, or (ii)
if for any other reason it is necessary at any time to amend or supplement the
Prospectus or the Registration Statement to comply with the Act or the Rules and
Regulations, the Company will promptly notify the Representatives thereof.
Subject to Section 5(b) hereof, the
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Company, in either such case, will prepare and file with the Commission, at the
Company's expense, an amendment to the Registration Statement or an amendment or
supplement to the Prospectus that corrects such statement or omission or effects
such compliance, and will deliver to each of the Underwriters, without charge,
such number of copies thereof as the Representatives may reasonably request.
(d) The Company will furnish to the Representatives, without charge, two
signed copies of the Registration Statement and of any post-effective amendment
thereto, including financial statements and schedules, and all exhibits thereto
and will furnish to the Representatives, without charge, for transmittal to each
of the other Underwriters, copies of the registration statement referred to in
Section 3(a) and each pre-and post-effective amendment thereto, including
financial statements and schedules but without exhibits.
(e) The Company will comply with all the provisions of all undertakings
contained in the Registration Statement.
(f) On the Effective Date, and thereafter from time to time for such period
as the Prospectus is required by the Act to be delivered, the Company will
deliver to each of the Underwriters, without charge, as many copies of the
Prospectus or any amendment or supplement thereto as the Representatives may
reasonably request. The Company consents to the use of the Prospectus or any
amendment or supplement thereto by the several Underwriters and by all dealers
to whom the Shares may be sold, both in connection with the offering or sale of
the Shares and for any period of time thereafter during which the Prospectus is
required by law to be delivered in connection therewith.
(g) Prior to any public offering of the Shares by the Underwriters, the
Company will cooperate with the Representatives and counsel to the Underwriters
in connection with the registration or qualification of the Shares for offer and
sale under the securities or Blue Sky laws of such jurisdictions as the
Representatives may request; provided, that in no event shall the Company be
obligated to qualify to do business in any jurisdiction where it is not now so
qualified or to take any action which would subject it to general service of
process in any jurisdiction where it is not now so subject.
(h) During the period of three years commencing on the Effective Date, the
Company will furnish to each of the Representatives and each other Underwriter
who may so request copies of such financial statements and other periodic and
special reports as the Company may from time to time distribute generally to the
holders of any publicly traded class of its
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capital stock, and will furnish to each of the Representatives and each other
Underwriter who may so request a copy of each annual or other report it shall be
required to file with the Commission.
(i) The Company will make generally available to holders of its securities,
as soon as may be practicable, but in no event later than the last day of the
fifteenth full calendar month following the calendar quarter in which the
Effective Date falls, a consolidated earnings statement (which need not be
audited but shall be in reasonable detail) for a period of 12 months commencing
after the Effective Date, and satisfying the provisions of Section 11(a) of the
Act (including Rule 158 of the Rules and Regulations).
(j) The Company will not at any time, directly or indirectly, take any
action intended, or which might reasonably be expected, to cause or result in,
or which will constitute, stabilization of the price of the shares of Common
Stock to facilitate the sale or resale of any of the Shares.
(k) The Company will apply the net proceeds from the offering and sale of
the Shares to be sold by the Company in the manner set forth in the Prospectus
under "Use of Proceeds" and shall file such reports with the Commission with
respect to the sale of the Shares and the application of the proceeds therefrom
as may be required in accordance with Rule 463 of the Rules and Regulations.
(l) The Company will not, directly or indirectly, for a period of 180 days
after the date hereof, without the prior written consent of NatWest Securities
Limited, offer to sell, sell, contract to sell, grant any option to purchase or
otherwise dispose (or announce any offer to sell, sale, contract to sell, grant
of any option to purchase or other disposition) of any shares of Common Stock or
any securities convertible into, or exchangeable or exercisable for, shares of
Common Stock, except for specific grants of options to purchase shares of Common
Stock described in the Registration Statement and Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus) and for
the issuance of shares of Common Stock in connection with the Reorganization
Transactions, and except for option grants under the Company's stock option
plans as described in the Registration Statement and Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus) provided
that no such option shall vest or become exercisable during the 180 day period
from the date hereof.
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6. Expenses.
--------
(a) Whether or not the transactions contemplated by this Agreement are
consummated or this Agreement is terminated, the Company will pay, or reimburse
if paid by the Representatives, all costs and expenses incident to the
performance of the obligations of the Company under this Agreement, including
but not limited to costs and expenses of or relating to (1) the preparation,
printing and filing of the Registration Statement and exhibits thereto, each
Preliminary Prospectus, the Prospectus and any amendment or supplement to the
Registration Statement or the Prospectus, (2) the preparation and delivery of
certificates representing the Shares and the shares of Common Stock to be issued
in the Reorganization Transactions, (3) furnishing (including costs of shipping
and mailing) such copies of the Registration Statement, the Prospectus and any
Preliminary Prospectus, and all amendments and supplements thereto, as may be
requested for use in connection with the offering and sale of the Shares by the
Underwriters or by dealers to whom Shares may be sold, (4) the listing of the
Shares on the NYSE, (5) any filings required to be made by the Underwriters with
the NASD, (6) the registration or qualification of the Shares for offer and sale
under the securities or Blue Sky laws of such jurisdictions designated pursuant
to Section 5(g), including the reasonable fees, disbursements and other charges
of counsel to the Underwriters in connection therewith, and the preparation and
printing of preliminary, supplemental and final Blue Sky memoranda, (7) counsel
and accountants to the Company and (8) the transfer agent for the Shares.
(b) If this Agreement shall be terminated by the Company pursuant to any
of the provisions hereof (otherwise than pursuant to Section 10) or if for any
reason the Company shall be unable to perform its obligations hereunder, the
Company will reimburse the several Underwriters for all out-of-pocket expenses
(including the fees, disbursements and other charges of counsel to the
Underwriters) incurred by them in connection herewith.
7. Conditions of the Obligations of the Underwriters. The obligations of
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each Underwriter hereunder are subject to the following conditions:
(a) Notification that the Registration Statement has become effective shall
be received by the Representatives not later than 12:00 p.m., New York City
time, on the date of this Agreement or at such later date and time as shall be
consented to in writing by the Representatives and all filings required by Rule
424 of the Rules and Regulations and Rule 430A shall have been made.
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(b) (i) No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall be
pending or threatened by the Commission, (ii) no order suspending the
effectiveness of the Registration Statement or the qualification or registration
of the Shares under the securities or Blue Sky laws of any jurisdiction shall be
in effect and no proceeding for such purpose shall be pending before or
threatened or contemplated by the Commission or the authorities of any such
jurisdiction, (iii) any request for additional information on the part of the
staff of the Commission or any such authorities shall have been complied with to
the satisfaction of the staff of the Commission or such authorities and (iv)
after the date hereof no amendment or supplement to the Registration Statement
or the Prospectus shall have been filed unless a copy thereof was first
submitted to the Representatives and the Representatives did not object thereto
in good faith, and the Representatives shall have received certificates, dated
the Closing Date and the Option Closing Date and signed by the Chief Executive
Officer of the Company and the Chief Financial Officer of the Company (who may,
as to proceedings threatened, rely upon the best of their information and
belief), to the effect of the foregoing clauses (i), (ii) and (iii).
(c) Since the respective dates of the Registration Statement and the
Prospectus, (i) there shall not have been a material adverse change in the
business, properties, condition (financial or otherwise) or results of
operations of the Company and the Subsidiaries, taken as a whole, whether or not
arising from transactions in the ordinary course of business, (ii) none of the
Company or any Subsidiary shall have sustained any loss or interference with its
business or properties from fire, explosion, flood or other casualty, or from
any labor dispute or any court or legislative or other governmental action,
order or decree which would have a Material Adverse Effect and (iii) there shall
have been no litigation or other proceeding instituted against the Company, any
Subsidiary, or any of their respective officers or directors in their capacities
as such, before or by any Governmental Body which would have a Material Adverse
Effect, in each case which is not set forth in the Registration Statement and
the Prospectus, if in the judgment of the Representatives any such development
makes it impracticable or inadvisable to consummate the sale and delivery of the
Shares by the Underwriters at the initial public offering price.
(d) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, (i) there shall have been no
litigation or other proceeding instituted against any of the Ohio Sellers before
or by any Governmental Body which would materially and adversely affect the
business, properties, condition (financial or
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otherwise), or results of operations of the Company and the Subsidiaries, taken
as a whole, assuming, for this purpose, that the transactions contemplated by
the Ohio Acquisition Agreement had been consummated, and (ii) none of the Ohio
Facilities shall have sustained any material loss or interference with its
business, assets or properties from fire, explosion, flood or other casualty, or
from any labor dispute or any court or legislative or other governmental action,
order or decree, which loss or interference arising from any such causes also
constitutes a material loss or interference with the business or properties of
the Company and the Subsidiaries, taken as a whole, assuming, for this purpose,
that the transactions contemplated by the Ohio Acquisition Agreement had been
consummated, in each case which is not set forth in the Registration Statement
and Prospectus, if in the judgment of the Representatives any such development
makes it impracticable or inadvisable to consummate the sale and delivery of the
Shares by the Underwriters at the initial public offering price.
(e) Each of the representations and warranties of the Company contained
herein shall be true and correct at the Closing Date and, with respect to the
Option Shares, at the Option Closing Date, as if made on such date, and all
covenants and agreements herein contained to be performed on the part of the
Company and all conditions herein contained to be fulfilled or complied with by
the Company at or prior to the Closing Date and, with respect to the Option
Shares, at or prior to the Option Closing Date, shall have been fully performed,
fulfilled or complied with.
(f) The Representatives shall have received an opinion, dated the Closing
Date and the Option Closing Date, from Paul, Weiss, Rifkind, Wharton & Garrison,
counsel for the Company, to the following effect:
(i) Each of the Company and the Subsidiaries (A) has been duly
incorporated (or, in the case of partnerships, organized) and is a validly
existing corporation or partnership in good standing under the laws of its
jurisdiction of incorporation or organized with full corporate or
partnership power and authority to own or lease its properties and to
conduct its business as described in the Prospectus (in the case of the
Company, as to be owned, leased or conducted upon consummation of the
Reorganization Transactions) and (B) is duly qualified to do business as a
foreign corporation or partnership and is in good standing in each
jurisdiction in which it owns or leases property as set forth in the
Registration Statement or Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) or as set forth in an
officer's certificate satisfactory to the Representatives;
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(ii) To such counsel's knowledge, the Company owns no capital
stock or other beneficial interest in any corporation, partnership, joint
venture or other business entity except for its interest in its
Subsidiaries;
(iii) The Company has authorized capital stock as set forth in
the Prospectus; the securities of the Company conform in all material
respects to the description thereof contained in the Prospectus; the
outstanding shares of Common Stock have been duly authorized and validly
issued by the Company, are fully paid and nonassessable and are free of any
preemptive or other rights to subscribe for any of the Shares under the
Company's Certificate of Incorporation and By-Laws, the GCL or any
agreement, contract or instrument to which the Company or any Subsidiary is
bound which is listed as an Exhibit to the Registration Statement or
Prospectus (or, if the Prospectus is not then in existence, the most recent
Preliminary Prospectus) or as set forth in an officer's certificate
satisfactory to the Representatives; the Company has duly authorized the
issuance and sale of the Shares to be sold by it hereunder; such Shares,
when issued by the Company and paid for in accordance with the terms
hereof, will be validly issued, fully paid and nonassessable and will
conform in all material respects to the description thereof contained in
the Prospectus and will not be subject to any preemptive, subscription or
other similar rights under the Company's Certificate of Incorporation and
By-Laws, the GCL or any agreement, contract or instrument to which the
Company or any Subsidiary is bound which is listed as an Exhibit to the
Registration Statement or Prospectus (or, if the Prospectus is not then in
existence, the most recent Preliminary Prospectus) or as set forth in an
officer's certificate satisfactory to the Representatives; and the Shares
have been duly authorized for listing, subject to official notice of
issuance, on the NYSE;
(iv) Based solely on telephonic advice of a staff attorney of the
Commission, the Registration Statement is effective under the Act; any
required filing of the Prospectus pursuant to Rule 424(b) has been made in
the manner and within the time period required by Rule 424(b) and no stop
order suspending the effectiveness of the Registration Statement or any
amendment thereto has been issued, and to such counsel's knowledge, no
proceedings for that purpose have been instituted or are pending or, are
threatened under the Act the registration statement originally filed with
respect to the Shares and each amendment thereto and the Prospectus and, if
any, each amendment and supplement thereto (except for the financial
statements, schedules and other financial data included therein, as to
which such counsel need not express any
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opinion), complied as to form in all material respects with the
requirements of the Act and the Rules and Regulations (except matters that
were corrected by supplement or amendment); the descriptions contained and
summarized in the Registration Statement and the Prospectus of material
contracts and other material documents are accurate and fair in all
material respects; to the knowledge of such counsel based on an officer's
certificate satisfactory to the Representatives, there is not pending or
threatened against the Company or any Subsidiary, Facility or Ohio Facility
any action, suit, proceeding or investigation before or by any Governmental
Body of a character required to be disclosed in the Registration Statement
or the Prospectus which is not so disclosed therein; and the statements set
forth under the heading "Description of Capital Stock" in the Prospectus,
insofar as such statements constitute a summary or the legal matters,
documents or proceedings therein, provide an accurate summary of such legal
matters, documents and proceedings;
(v) The Company has full corporate power, and authority to enter
into this Agreement and to consummate the transactions provided for herein;
this Agreement has been duly authorized, executed and delivered by the
Company; this Agreement, assuming due authorization, execution and delivery
by each other party hereto, is a valid and binding agreement of the
Company, enforceable against the Company in accordance with its terms,
except as limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws now or hereafter in effect relating to or
affecting creditors' rights generally or by general principles of equity
relating to the availability of remedies and except as rights to indemnity
and contribution may be limited by federal or state securities laws or the
public policy underlying such laws or any order of the Commission; none of
the Company's execution or delivery of this Agreement, its performance
hereof, its consummation of the transactions contemplated herein or its
application of the net proceeds of the offering in the manner set forth in
the Prospectus under the caption "Use of Proceeds" (other than the
application of proceeds for the Company's working capital), conflicts or
will conflict with or results or will result in any breach or violation of
any of the terms or provisions of, or constitute a default under, or result
in the creation or imposition of any Encumbrance upon, any property or
assets of the Company or any of the Subsidiaries pursuant to (A) the terms
of the charter or bylaws or certificate or agreement of limited
partnership, as applicable, of the Company or any Subsidiary; (B) the terms
of any contract or other agreement filed as an exhibit to the Registration
Statement; (C) any statute, rule or regulation of any
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Governmental Body having (or that, upon consummation of the Reorganization
Transactions, will have) jurisdiction over the Company or any Subsidiary or
any of their respective activities or properties pursuant to Applicable
Law; or (D) the terms of any judgment, decree or order, known to such
counsel (such knowledge to be based on a certificate of an appropriate
officer of the Company), of any arbitrator or Governmental Body having (or
that, upon consummation of the Reorganization Transactions, will have) such
jurisdiction; and no consent, approval, authorization or order of any
Governmental Body under Applicable Law has been or is required for the
Company's performance of this Agreement or the consummation of the
transactions contemplated hereby, except such as have been obtained under
the Act or may be required under state securities or blue sky laws in
connection with the purchase and distribution by the Underwriters of the
Shares. As used herein, "Applicable Law" shall mean the Federal laws of the
United States of America, the laws of the State of New York, the
Commonwealth of Massachusetts and the GCL and shall expressly exclude
Medicare, Medicaid and State healthcare laws;
(vi) The Company is not (after giving effect to the
Reorganization Transactions and the sale of the Shares) an "investment
company," as such term is defined in the Investment Company Act.
(vii) The Company has the corporate power and authority to enter
into the Reorganization Agreement and to consummate the transactions
provided for therein; the Reorganization Agreement has been duly
authorized, executed and delivered by the Company; the Reorganization
Agreement is a valid and binding agreement of the Company, enforceable
against the Company in accordance with the terms thereof, except as limited
by applicable bankruptcy, insolvency, reorganization, moratorium or other
laws now or hereafter in effect relating to or affecting creditors' rights
generally or by general principles of equity relating to the availability
of remedies; none of the execution or delivery of the Reorganization
Agreement by the Company, the performance by it of its obligations
thereunder, or the consummation by it of the transactions contemplated
therein, conflicts or will conflict with or results or will result in any
breach or violation of any of the terms or provisions of, or constitutes a
default under, or results in the creation or imposition of any Encumbrance
upon, any property or assets of the Company or any of the Subsidiaries
pursuant to (A) the terms of the charter or bylaws or certificate or
agreement of limited partnership, as applicable, of the Company or any
Subsidiary; (B) the terms of any contract or other agreement filed as an
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exhibit to the Registration Statement; (C) any statute, rule or regulation
of any Governmental Body having (or that, upon consummation of the
Reorganization Transactions, will have) jurisdiction over any of them or
any of their respective activities or properties pursuant to Applicable
Law; or (D) the terms of any judgment, decree or order, known to such
counsel (such knowledge to be based on a certificate of an appropriate
officer of the Company), of any arbitrator or Governmental Body under
Applicable Law having (or that, upon consummation of the Reorganization
Transactions, will have) such jurisdiction; and no consent, approval,
authorization or order of any Governmental Body has been or is required for
the performance of the Reorganization Agreement or the consummation of the
transactions contemplated thereby or the consummation of any of the
Reorganization Transactions, in each case by the Company or any Subsidiary,
except such as have been obtained under the Act or may be required under
state securities or blue sky laws in connection with the purchase and
distribution by the Underwriters of the Shares; and
(viii) Each of HH Partners and HH Corp. has full legal right,
power, and authority to enter into the Ohio Acquisition Agreement and to
consummate the transactions provided for therein; the Ohio Acquisition
Agreement has been duly authorized, executed and delivered by each of HH
Partners and HH Advisors; the Ohio Acquisition Agreement is a valid and
binding agreement of each of HH Partners and HH Advisors, enforceable
against them in accordance with its terms, except as limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws now or
hereafter in effect relating to or affecting creditors' rights generally or
by general principles of equity relating to the availability of remedies;
none of the execution or delivery of the Ohio Acquisition Agreement by each
of HH Partners or HH Corp., the performance by them of their obligations
thereunder, or their consummation of the transactions contemplated therein,
conflicts or will conflict with or results or will result in any breach or
violation of any of the terms or provisions of, or constitutes a default
under, or results in the creation or imposition of any Encumbrance upon,
any property or assets of the Company or any of the Subsidiaries pursuant
to (A) the terms of the charter or bylaws or certificate or agreement of
limited partnership, as applicable, of the Company or any Subsidiary; (B)
the terms of any contract or other agreement known to such counsel after
reasonable investigation to which any of them is (or, upon consummation of
the Reorganization
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Transactions, will be) a party or by which any of them is or may be (or,
upon consummation of the Reorganization Transactions, will or may be) bound
or to which any of their assets or properties is or may be (or, upon
consummation of the Reorganization Transactions, will or may be) subject;
(C) any statute, rule or regulation of any Governmental Body having (or
that, upon consummation of the Reorganization Transactions, will have)
jurisdiction over any of them or any of their respective activities or
properties; or (D) the terms of any judgment, decree or order, known to
such counsel after reasonable investigation, of any arbitrator or
Governmental Body having (or that, upon consummation of the Reorganization
Transactions, will have) such jurisdiction;
(ix) The offer, issuance and sale by the Company of shares of
Common Stock (other than the Shares) on or prior to the date hereof is
exempt from the registration requirements of the Act;
Provided that, to the extent that any of the foregoing opinions are
dependant upon matters of law other than Federal, New York or Delaware law, then
the opinion of other counsel that is nationally recognized or satisfactory to
the Representatives, may be provided in lieu (as to such matters only) of the
opinion of Paul, Weiss, Rifkind, Wharton & Garrison.
In addition, such counsel shall state that in the course of the
preparation of the Registration Statement and the Prospectus, such counsel has
participated in conferences with officers and representatives of the Company and
with the Company's independent public accountants, at which conferences such
counsel made inquiries of such officers, representatives and accountants and
discussed the contents of the Registration Statement and the Prospectus and
(without taking any further action to verify independently the statements made
in the Registration Statement and the Prospectus other than the Sections
relating to Applicable Healthcare Law (as such term is defined and such Sections
are identified in Section 5(g)(i) below), relying to a significant degree on
such officers, representatives and accountants as to materiality and without
assuming responsibility for the accuracy, completeness or fairness of such
statements), nothing has come to such counsel's attention that causes such
counsel to believe that the Registration Statement as of the date it was
declared effective and as of the Closing Date contained or contains any untrue
statement of a material fact or omitted or omits to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading or that the Prospectus as of the date thereof and as of the Closing
Date contained or contains any untrue statement of a material fact or omitted or
omits to state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading (it
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being understood that such counsel need not express any opinion with respect to
the financial statements, statistical information, schedules and other financial
data included in the Registration Statement or the Prospectus.
In rendering any such opinion, such counsel need not opine on
Medicare, Medicaid or State healthcare licensing or regulatory matters. Such
counsel may rely, as to matters of fact, to the extent such counsel deems
proper, on certificates of responsible officers of the Company and public
officials and, as to matters involving the application of laws of any State
other than one in which such counsel does not maintain an office (to the extent
satisfactory in form and scope to counsel for the Underwriters) such counsel may
rely upon the opinion of local counsel to the Company. The foregoing opinion
shall also state that the Underwriters are justified in relying upon such
opinion of local counsel, and copies of such opinion shall be delivered to the
Representatives and counsel for the Underwriters.
Such opinion shall contain such other limitations, assumptions, qualifications
and restrictions as shall be acceptable to the Representatives and their
counsel.
References to the Registration Statement and the Prospectus in this
paragraph (f) shall include any amendment or supplement thereto at the date of
such opinion, but shall be deemed to exclude any matter amended, modified or
supplemented in a later amendment or supplement filed after the date of such
opinion.
(g) The Representatives shall have received an opinion, dated the
Closing Date and the Option Closing Date, from each of (i) Sheehan, Phinney,
Bass & Green, special healthcare counsel for the State of New Hampshire, (ii)
Hahn, Loeser & Parks, special healthcare counsel for the States of Indiana and
Ohio, (iii) McDermott, Will & Emery, special healthcare counsel for the States
of Maryland and Florida and the Federal laws of the United States of America
relating to Medicare, and (iv) Norris, McLaughlin & Marcus, special healthcare
counsel for the State of New Jersey.
(i) The statements set forth under the headings "Risk Factors-
Risk of Adverse Effect of Healthcare Reform," "Risk Factors-Reimbursement
by Third-Party Payors," "Risk Factors-Government Regulation," "Business-
Sources of Revenues" and "Business-Government Regulation" in the
Prospectus, insofar as such statements constitute a summary of matters
relating to Applicable Healthcare Law, therein, provide an accurate summary
of such legal matters, documents and proceedings; As used herein,
"Applicable Healthcare Law" shall mean the Medicaid
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and healthcare laws, rules and regulations of the State for which such
counsel serves as special healthcare counsel and, in the case of McDermott,
Will & Emery, the Federal laws of the United States of America relating to
Medicare;
(ii) None of the Company's execution or delivery of this Agreement
or the Reorganization Agreement, its performance hereof or thereof, its
consummation of the transactions contemplated herein or therein or its
application of the net proceeds of the offering in the manner set forth in
the Prospectus under the caption "Use of Proceeds" (other than the
application of proceeds for the Company's working capital) conflicts or
will conflict with or results or will result in any breach or violation of
any of the terms or provisions of, or constitute a default under, or result
in the creation or imposition of any Encumbrance upon, any property or
assets of the Company or any Subsidiary pursuant to (A) any Applicable
Healthcare Law, of any Governmental Body having (or that, upon consummation
of the Reorganization Transactions, will have) jurisdiction over any of
them or any of their respective activities or properties; or (B) the terms
of any judgment, decree or order, known to such counsel (such knowledge to
be based on a certificate of an appropriate officer of the Company), of any
arbitrator or Governmental Body under Applicable Healthcare Law having (or
that, upon consummation of the Reorganization Transactions, will have) such
jurisdiction; and no consent, approval, authorization or order of any
Governmental Body under Applicable Healthcare Law has been or is required
for the Company's performance of this Agreement or the consummation of the
transactions contemplated hereby, except such as have been obtained prior
to the date hereof;
(iii) To such counsel's knowledge, based solely on a review of
applicable state agency records, the conduct of the business of each of the
Company and the Subsidiaries is not, and upon consummation of the
Reorganization Transactions, will not be, in violation of any Applicable
Healthcare Law, which violation is likely to have a Material Adverse Effect
on the Company and the Subsidiaries, taken as a whole; and each of the
Company and the Subsidiaries has obtained all Licenses as are necessary or
required under Applicable Healthcare Law for the ownership, leasing and
operation of its properties and the conduct of its business as presently
conducted and, in the case of the Company, as contemplated in the
Prospectus upon consummation of the Reorganization Transactions;
(iv) Each of the Company, the Subsidiaries and the Facilities, as
applicable, is, and upon consummation of the
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Reorganization Transactions will be, organized, licensed and operated in
conformity with the requirements for qualification as a long-term
healthcare facility under Applicable Healthcare Law, and each of the
Company, the Subsidiaries and the Facilities, as applicable, is, and upon
consummation of the Reorganization Transactions will be, certified or
approved as a provider under the Federal Medicare and State Medicaid
programs in which such Facilities are located.
In addition, such counsel shall state that in the course of the
preparation of the portions of the Registration Statement and the Prospectus set
forth in clause (i) above, such counsel has reviewed such portions of the
Registration Statement and the Prospectus and made inquiries of such officers
and representatives of the Company and the Subsidiaries and discussed the
contents of the above-referenced portions of the Registration Statement and the
Prospectus and (without taking any further action to verify independently the
statements made in the Registration Statement and the Prospectus and, except as
stated in the foregoing opinion, without assuming responsibility for the
accuracy, completeness or fairness of such statements) nothing has come to such
counsel's attention that causes such counsel to believe that either the
statements contained in the Registration Statement under the headings set forth
in clause (i) above as of the date it was declared effective and as of the
Closing Date contained or contains any untrue statement of a material fact or
omitted or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or that the statements
contained in the Prospectus under the headings set forth in clause (i) above as
of the date thereof and as of the Closing Date contained or contains any untrue
statement of a material fact or omitted or omits to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading (it
being understood that such counsel need not express any opinion with respect to
the financial statements, schedules and other financial data included in the
Registration Statement or the Prospectus).
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company and public officials.
References to the Registration Statement and the Prospectus in this
paragraph (g) shall include any amendment or supplement thereto at the date of
such opinion.
(h) The Representatives shall have received an opinion, dated the
Closing Date and the Option Closing Date,
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from Stroock & Stroock & Lavan, counsel to the Underwriters, which opinion shall
be satisfactory in all respects to the Representatives. In rendering such
opinion, such counsel may rely as to all matters of Massachusetts and
______________ law upon the opinion of _____________.
(i) Concurrently with the execution and delivery of this Agreement,
or, if the Company elects to rely on Rule 430A, on the date of the Prospectus,
the Accountants shall have furnished to the Representatives a letter, dated the
date of its delivery (the "Original Letter"), addressed to the Representatives
and in form and substance satisfactory to the Representatives, confirming that
(i) they are independent public accountants with respect to the Company and its
Subsidiaries within the meaning of the Act and the Rules and Regulations; (ii)
in their opinion, the financial statements included in the Registration
Statement and examined by them comply as to form in all material respects with
the applicable accounting requirements of the Act and the Rules and Regulations;
(iii) on the basis of procedures, not constituting an examination in accordance
with generally accepted auditing standards, set forth in detail in the Original
Letter (which procedures shall include a "SAS 71" review), including a reading
of the unaudited financial statements and other information referred to below, a
reading of the latest available interim financial statements of the Company and
its Subsidiaries, inspections of the minute books and partnership records of the
Company and its Subsidiaries since the latest audited financial statements
included in the Prospectus, inquiries of officials of the Company and the
Subsidiaries responsible for financial and accounting matters and such other
inquiries and procedures as may be specified in the Original Letter to a date
not more than five days prior to the date of the Original Letter, nothing came
to their attention that caused them to believe that: (A) the unaudited financial
statements and schedules of the Company and its Subsidiaries included in the
Prospectus do not comply as to form in all material respects with the applicable
accounting requirements of the Act and the Rules and Regulations, or are not
fairly presented in conformity with GAAP applied on a basis substantially
consistent with the basis for the audited financial statements included in the
Prospectus; (B) any other unaudited income statement
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data and balance sheet items included in the Prospectus do not agree with the
corresponding items in the unaudited financial statements of the Company and its
Subsidiaries from which such data and items were derived, and any such unaudited
data and items were not determined on a basis substantially consistent with the
basis for the corresponding amounts in the audited financial statements of the
Company and its Subsidiaries included in the Prospectus; (C) the unaudited
financial statements which were not included in the Prospectus but from which
were derived any unaudited financial statements referred to in Clause (A) and
any unaudited income statement data and balance sheet items included in the
Prospectus and referred to in Clause (B) were not determined on a basis
substantially consistent with the basis for the audited financial statements
included in the Prospectus; (D) the unaudited pro forma financial statements of
the Company and its Subsidiaries included in the Prospectus do not comply as to
form in all material respects with the applicable accounting requirements of the
Act and the Rules and Regulations, or the pro forma adjustments have not been
properly applied to the historical amounts in the compilation of those
statements; (E) as of a specified date not more than five days prior to the date
of the Original Letter, there have been any changes in the capital stock or
partnership interests of the Company or the Subsidiaries, or any increase in the
long-term debt of the Company or the Subsidiaries, or any decreases in net
current assets or net assets or other items specified by the Representatives, or
any increases in any items specified by the Representatives, in each case as
compared with amounts shown in the latest balance sheet included in the
Prospectus, except in each case for changes, increases or decreases which the
Prospectus discloses have occurred or may occur or which are described in the
Original Letter; and (F) for the period from the date of the latest financial
statements of the Company and its Subsidiaries included in the Prospectus to the
specified date referred to in Clause (E), there were any decreases in revenues
or operating profit or the total or per share amounts of net income or other
items specified by the Representatives, or any increases in any items specified
by the Representatives, in each case as compared with the comparable period of
the preceding year and with any other period of corresponding length specified
by the Representatives, except in each case for decreases or increases which the
Prospectus discloses have occurred or may occur or which are described in the
Original Letter; and (iv) in addition to the examination referred to in their
reports included in the Prospectus and the procedures referred to in clause
(iii) above, they have carried out certain specified procedures, not
constituting an examination in accordance with generally accepted auditing
standards, with respect to certain amounts, percentages and financial
information specified by the Representatives, which are derived from the general
accounting, financial or other records of the Company or the Subsidiaries, as
the case may be, which appear in the Prospectus or in Part II of, or in exhibits
or schedules to, the Registration Statement, and have compared such amounts,
percentages and financial information with such accounting, financial and other
records and have found them to be in agreement. At the Closing Date and, as to
the Option Shares, the Option Closing Date, the Accountants shall have furnished
to the Representatives a letter, dated the date of its delivery, which shall
confirm, on the basis of a review in accordance with the procedures set forth in
the Original Letter, that nothing has come to their attention during the period
from the date of
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the Original Letter referred to in the prior sentence to a date (specified in
the letter) not more than five days prior to the Closing Date or the Option
Closing Date, as the case may be, which would require any change in the Original
Letter if it were required to be dated and delivered at the Closing Date or the
Option Closing Date, as the case may be.
(j) Concurrently with the execution and delivery of this Agreement,
or, if the Company elects to rely on Rule 430A, on the date of the Prospectus,
the Ohio Sellers Accountants shall have furnished to the Representatives a
letter, dated the date of its delivery (the "Original Ohio Letter"), addressed
to the Representatives and in form and substance satisfactory to the
Representatives, confirming that (i) they are independent public accountants
with respect to the Ohio Sellers within the meaning of the Act and the Rules and
Regulations; (ii) in their opinion, the financial statements and any
supplementary financial information and schedules included in the Registration
Statement and examined by them comply as to form in all material respects with
the applicable accounting requirements of the Act and the Rules and Regulations;
and (iii) they have conducted a "SAS 71" review of the unaudited financial
statements of the Ohio Sellers included in the Registration Statement. At the
Closing Date and, as to the Option Shares, the Option Closing Date, the Ohio
Sellers Accountants shall have furnished to the Representatives a letter, dated
the date of its delivery, which shall confirm, on the basis of a review in
accordance with the procedures set forth in the Original Ohio Letter, that
nothing has come to their attention during the period from the date of the
Original Ohio Letter referred to in the prior sentence to a date (specified in
the letter) not more than five days prior to the Closing Date or the Option
Closing Date, as the case may be, which would require any change in the Original
Ohio Letter if it were required to be dated and delivered at the Closing Date or
the Option Closing Date, as the case may be.
(k) At the Closing Date and, as to the Option Shares, the Option
Closing Date, there shall be furnished to the Representatives an accurate
certificate, dated the date of its delivery, signed by each of the Chief
Executive Officer or a Senior Vice President and the Chief Financial Officer of
the Company, in form and substance satisfactory to the Representatives, to the
effect that:
(i) Each signer of such certificate has carefully examined the
Registration Statement and the Prospectus and (A) as of the date of
such certificate, (x) the Registration Statement does not contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the
statements therein not
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misleading and (y) the Prospectus does not contain any untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading and (B) since the Effective Date no event has occurred as a
result of which it is necessary to amend or supplement the Prospectus
in order to make the statements therein not untrue or misleading in
any material respect;
(ii) Each of the representations and warranties of the Company
contained in this Agreement were, when originally made, and are, at
the time such certificate is delivered and as if made on the date of
such certificate, true and correct in all material respects; and
(iii) Each of the covenants required herein to be performed by the
Company on or prior to the date of such certificate has been performed
and each condition herein required to be complied with by the Company
on or prior to the delivery of such certificate has been duly, timely
and fully complied with.
(l) The Shares shall be qualified for sale in such states as the
Representatives may reasonably request, each such qualification shall be in
effect and not subject to any stop order or other proceeding on the Closing Date
and the Option Closing Date.
(m) Prior to the Closing Date, the Shares shall have been approved for
listing on the NYSE, subject only to notice of issuance.
(n) All of the Reorganization Transactions shall have been fully
consummated or shall be fully consummated simultaneously with the closing of the
purchase and sale of the Shares hereunder in accordance with the terms of the
Reorganization Agreement and the Company shall have delivered to the
Representatives copies of all of the documents relating to the closing of the
Reorganization Transactions.
(o) Each officer, director and person named in the table set forth in
the section of the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus) captioned "Stock Ownership of Directors,
Executive Officers and Principal Holders" has delivered to NatWest Securities
Limited an agreement in the form set forth as Exhibit A hereto (a "Lockup
---------
Agreement") to the effect that he or she will not, directly or indirectly, for a
period of one hundred eighty (180) days after the date hereof, without the prior
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written consent of NatWest Securities Limited, offer to sell, sell, contract to
sell, grant any option to purchase or otherwise dispose (or announce any offer
to sell, sale, contract to sell, grant of any option to purchase or other
disposition) of any shares of Common Stock or securities convertible into, or
exchangeable or exercisable for, shares of Common Stock.
(p) The Company shall have furnished to the Representatives such
certificates, letters and other documents, in addition to those specifically
mentioned herein, as the Representatives may have reasonably requested as to the
accuracy and completeness at the Closing Date and the Option Closing Date of any
statement in the Registration Statement or the Prospectus, as to the accuracy at
the Closing Date and the Option Closing Date of the representations and
warranties of the Company, as to the performance by the Company of its
obligations hereunder, or as to the fulfillment of the conditions concurrent and
precedent to the obligations hereunder of the Underwriters.
All such opinions, certificates, letters and other documents will be
in compliance with the provisions hereof only if they are reasonably
satisfactory in form and substance to counsel for the Representatives. The
Company will furnish to the Representatives such conformed copies of such
opinions, certificates, letters and other documents as the Representatives shall
reasonably request.
8. Indemnification and Contribution.
--------------------------------
(a) The Company agrees to indemnify and hold harmless each
Underwriter, the directors, officers, employees and agents of each Underwriter
and each person, if any, who controls each Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), from and against any and all losses, claims,
fines, penalties, settlements, damages or liabilities, joint or several (and
actions in respect thereof), to which they, or any of them, may become subject
under the Act or other Federal or state statutory law or regulation, at common
law or otherwise, insofar as such losses, claims, fines, penalties, settlements,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon (i) any untrue statement or alleged untrue statement made by the Company in
Section 3 of this Agreement, (ii) any untrue statement or alleged untrue
statement of any material fact contained in (A) any Preliminary Prospectus, the
Registration Statement or the Prospectus or any amendment or supplement to the
Registration Statement or the Prospectus or (B) any application or other
document, or any amendment or supplement thereto, executed by the Company or
based upon written information furnished by or on behalf of the Company filed in
any jurisdiction in order to qualify the Shares under the securities or blue sky
laws thereof
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<PAGE>
or filed with the Commission or any securities association or securities
exchange (each, an "Application"), or (iii) the omission or alleged omission to
state in any Preliminary Prospectus, the Registration Statement or the
Prospectus or any amendment or supplement to the Registration Statement or the
Prospectus or any Application a material fact required to be stated therein or
necessary to make the statements therein (A) in the case of the Registration
Statement, any amendment or supplement to the Registration Statement or any
Application, not misleading, and (B) in the case of the Preliminary Prospectus
or the Prospectus or any amendment or supplement thereto, not misleading in
light of the circumstances in which they were made, and will reimburse, as
incurred, each Underwriter and each such other person for any legal or other
expenses reasonably incurred by such Underwriter or such other person in
connection with investigating, defending or appearing as a third-party witness
in connection with any such loss, claim, fines, penalties, settlement, damage,
liability or action; provided, however, that the Company will not be liable in
-------- -------
any such case to the extent that any such loss, claim, fines, penalties,
settlements, damage or liability is based solely upon an untrue statement or
omission or alleged untrue statement or omission in any of such documents made
in reliance upon and in conformity with information relating to any Underwriter
furnished in writing to the Company by the Representatives on behalf of any
Underwriter expressly for inclusion therein; provided, further, that such
-------- -------
indemnity with respect to any Preliminary Prospectus shall not inure to the
benefit of any Underwriter (or any such other person) from whom the person
asserting any such loss, claim, fine, penalty, settlements, damage, liability or
action purchased Shares which are the subject thereof to the extent that any
such loss, claim, fine, penalty, settlement, damage or liability (i) results
from the fact that such Underwriter failed to send or give a copy of the
Prospectus (as amended or supplemented) to such person at or prior to the
confirmation of the sale of such Shares to such person in any case where such
delivery is required by the Act and (ii) arises out of or is based upon an
untrue statement or omission of a material fact contained in such Preliminary
Prospectus that was corrected in the Prospectus (or any amendment or supplement
thereto), unless such failure to deliver the Prospectus (as amended or
supplemented) was the result of noncompliance by the Company with Section 5(f).
This indemnity agreement will be in addition to any liability that the Company
might otherwise have. The Company will not, without the prior written consent of
each Underwriter, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action, suit or proceeding in respect of
which indemnification may be sought hereunder (whether or not such Underwriter
or any person who controls such Underwriter within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act is a party to each claim, action, suit
or proceeding), unless such settlement,
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<PAGE>
compromise or consent includes an unconditional release of each Underwriter and
each such other person from all liability arising out of such claim, action,
suit or proceeding.
(b) Each Underwriter will indemnify and hold harmless the Company,
each person, if any, who controls the Company within the meaning of Section 15
of the Act or Section 20 of the Exchange Act, each director of the Company and
each officer of the Company who signed the Registration Statement against any
losses, claims, fines, penalties, settlements, damages or liabilities (or
actions in respect thereof) to which the Company and any such director, officer
or controlling person may become subject under the Act or other federal or state
statutory law or regulation, at common law or otherwise, insofar as such losses,
claims, fines, penalties, settlements, damages or liabilities (or actions in
respect thereof) arise out of or are based upon (i) any untrue statement or
alleged untrue statement of a material fact contained in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any amendment or
supplement to the Registration Statement or the Prospectus or any Application,
or material fact required to be stated therein or (ii) the omission or the
alleged omission to state in the Registration Statement, any Preliminary
Prospectus or the Prospectus or any amendment or supplement to the Registration
Statement or the Prospectus, or any Application, a material fact required to be
stated therein or necessary to make the statements therein (A) in the case of
the Registration Statement, any amendment or supplement to the Registration
Statement or any Application, not misleading, and (B) in the case of any
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto,
not misleading in light of the circumstances in which they were made, in each
case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company by such
Underwriter through the Representatives expressly for use therein; and, subject
to the limitation set forth immediately preceding this clause, will reimburse,
as incurred, any legal or other expenses reasonably incurred by the Company and
any such director, officer or controlling person in connection with
investigating or defending any such loss, claim, fine, penalty, settlement,
damage, liability or any action in respect thereof. The Company acknowledges
that, for all purposes under this Agreement, the statements set forth in the
third, eighth and ninth paragraphs under the heading "Underwriting" and the
information in the first two paragraphs below the map on the inside front cover
of any Preliminary Prospectus and the Prospectus constitute the only information
relating to any Underwriter furnished in writing to the Company by the
Representatives on behalf of the Underwriters expressly for inclusion in the
Registration Statement, any Preliminary Prospectus or the Prospectus. This
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<PAGE>
indemnity agreement will be in addition to any liability that each Underwriter
might otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
8 of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party or parties
under this Section 8, notify such indemnifying party or parties of the
commencement thereof; but the omission so to notify the indemnifying party or
parties will not relieve it or them from any liability which it or they may have
to any indemnified party under the foregoing provisions of this Section 8 or
otherwise unless, and only to the extent that, such omission results in the
forfeiture of substantive rights or defenses by the indemnifying party. If any
such action is brought against an indemnified party and it notifies an
indemnifying party or parties of its commencement, the indemnifying party or
parties against which a claim is made will be entitled to participate therein
and, to the extent that it or they may wish, to assume the defense thereof with
counsel reasonably satisfactory to such indemnified party; provided, however,
-------- -------
that if the defendants in any such action include both the indemnified party and
the indemnifying party and the indemnified party shall have reasonably concluded
that there may be one or more legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party, the indemnifying party shall not have the right to
direct the defense of such action on behalf of such indemnified party or parties
and such indemnified party or parties shall have the right to select separate
counsel to defend such action on behalf of such indemnified party or parties.
After notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof and approval by such indemnified party
of counsel appointed to defend such action, the indemnifying party will not
be liable to such indemnified party under this Section 8 for any legal or other
expenses other than reasonable costs of investigation subsequently incurred by
such indemnified party in connection with the defense thereof, unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the immediately preceding sentence (it being understood, however,
that in connection with such action the indemnifying party shall not be liable
for the expenses of more than one separate counsel (in addition to local
counsel) in any one action or separate but substantially similar actions in the
same jurisdiction arising out of the same general allegations or circumstances,
designated by the Representatives in the case of paragraph (a) of this Section
8, representing the indemnified parties under such paragraph (a) who are parties
to such action or actions), (ii) a conflict or potential conflict exists (based
on advice of counsel to the indemnified party) between the indemnified party and
the indemnifying party (in which case the
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<PAGE>
indemnifying party will not have the right to direct the defense of such action
on behalf of the indemnified party), (iii) the indemnifying party has not in
fact employed counsel within a reasonable time after receiving notice of the
commencement of the action, or (iv) the indemnifying party has authorized in
writing the employment of counsel for the indemnified party at the expense of
the indemnifying party. After such notice from the indemnifying party to such
indemnified party, the indemnifying party will not be liable for the costs and
expenses of any settlement of such action effected by such indemnified party
without the consent of the indemnifying party, unless such indemnified party
waived its rights under this Section 8 in which case the indemnified party may
effect such a settlement without such consent.
(d) If the indemnification provided for in the foregoing paragraphs of
this Section 8 is unavailable or insufficient to hold harmless an indemnified
party under paragraph (a) or (b) above in respect of any losses, claims, fines,
penalties, settlements, damages or liabilities (or actions in respect thereof)
referred to therein, then each indemnifying party shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
fines, penalties, settlements, damages or liabilities (or actions in respect
thereof) (i) in such proportion as is appropriate to reflect the relative
benefits received by the indemnifying party or parties, on the one hand, and the
indemnified party, on the other, from the offering of the Shares or (ii) if, but
only if, the allocation provided by the foregoing clause (i) is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the indemnifying party or parties, on the one hand, and the indemnified party,
on the other, in connection with the statements or omissions or alleged
statements or omissions that resulted in such losses, claims, damages or
liabilities (or actions in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company, on the
one hand, and the Underwriters, on the other, shall be deemed to be in the same
proportion as the total proceeds from the offering of the Shares (before
deducting expenses) bear to the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on the
cover page of the Prospectus. Relative fault shall be determined by reference to
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Representatives on behalf of the Underwriters,
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission. The Company and the
Underwriters agree that it would not be just and equitable if
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<PAGE>
contributions pursuant to this Section 8(d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to herein. The amount paid or payable by
an indemnified party as a result of the losses, claims, damages, liabilities (or
actions in respect thereof) referred to above in this Section 8(d) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this Section 8(d), no Underwriter
shall be required to contribute any amount in excess of the total underwriting
discounts received by it with respect to the Shares purchased by such
Underwriter under this Agreement, less the aggregate amount of any damages that
such Underwriter has otherwise been required to pay in respect of the same or
any substantially similar claim. No person found guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) will be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute as provided in
this Section 8(d) are several in proportion to their respective underwriting
obligations and not joint. For purposes of this Section 8(d), each person, if
any, who controls an Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act will have the same rights to contribution as such
Underwriter, and each director of the Company, each officer of the Company who
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, will have the same rights to contribution as the Company, subject
in each case to the provisions of this paragraph (d). Any party entitled to
contribution will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect of which a claim for
contribution may be made under this Section 8(d), will notify any such party or
parties from whom contribution may be sought, but the omission so to notify will
not relieve the party or parties from whom contribution may be sought from any
other obligation(s) it or they may have hereunder or otherwise than under this
paragraph (d). The contribution agreement set forth above shall be in addition
to any liabilities which any indemnifying party may otherwise have. No party
will be liable for contribution with respect to any action or claim settled
without its written consent (which consent will not be unreasonably withheld).
9. Termination. The obligations of the several Underwriters under
-----------
this Agreement may be terminated at any time prior to the Closing Date (or, with
respect to the Option Shares, on or prior to the Option Closing Date), by notice
to the Company from the Representatives, without liability on the part of any
Underwriter to the Company if, prior to delivery and
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<PAGE>
payment for the Firm Shares (or the Option Shares, as the case may be), in the
sole judgment of the Representatives, (i) trading in any of the equity
securities of the Company shall have been suspended by the Commission or by an
exchange that lists the Shares, (ii) trading in securities generally on the
NYSE, the American Stock Exchange or the International Stock Exchange of the
United Kingdom and the Republic of Ireland, Limited shall have been suspended or
limited or minimum or maximum prices shall have been generally established on
any of such exchanges, or additional material governmental restrictions, not in
force on the date of this Agreement, shall have been imposed upon trading in
securities generally by any of such exchanges or by order of the Commission or
any court or other governmental authority, (iii) a general banking moratorium
shall have been declared by Federal, New York State or United Kingdom
authorities or (iv) any material adverse change in the financial or securities
markets in the United States or United Kingdom or any outbreak or material
escalation of hostilities or declaration by the United States or the United
Kingdom of a national emergency or war or other calamity or crisis shall have
occurred, the effect of any of which is such as to make it, in the sole judgment
of the Representatives, impracticable or inadvisable to market the Shares on the
terms and in the manner contemplated by the Prospectus. Any termination pursuant
to Section 9 shall be without liability of any party to any other party except
as provided in Sections 6(a) and 8.
10. Default of Underwriters. If one or more Underwriters default in
-----------------------
their obligations to purchase Firm Shares or Option Shares hereunder and the
aggregate number of such Shares that such defaulting Underwriter or Underwriters
agreed but failed to purchase is ten percent or less of the aggregate number of
Firm Shares or Option Shares to be purchased by all of the Underwriters at such
time hereunder, the other Underwriters may make arrangements satisfactory to the
Representatives for the purchase of such Shares by other persons (who may
include one or more of the non-defaulting Underwriters, including the
Representatives), but if no such arrangements are made by the Firm Closing Date
or the related Option Closing Date, as the case may be, the other Underwriters
shall be obligated severally in proportion to their respective commitments
hereunder to purchase the Firm Shares or Option Shares that such defaulting
Underwriter or Underwriters agreed but failed to purchase. If one or more
Underwriters so default with respect to an aggregate number of Shares that is
more than ten percent of the aggregate number of Firm Shares or Option Shares,
as the case may be, to be purchased by all of the Underwriters at such time
hereunder, and if arrangements satisfactory to the Representatives are not made
within 36 hours after such default for the purchase by other persons (who may
include one or more of the non-defaulting Underwriters, including either or both
of the Representatives) of the Shares
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<PAGE>
with respect to which such default occurs, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter or the Company other
than as provided in Section 11 hereof. In the event of any default by one or
more Underwriters as described in this Section 10, the Representatives shall
have the right to postpone the Firm Closing Date or the Option Closing Date, as
the case may be, established as provided in Section 2 hereof for not more than
seven business days in order that any necessary changes may be made in the
arrangements or documents for the purchase and delivery of the Firm Shares or
Option Shares, as the case may be. As used in this Agreement, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 10. Nothing herein shall relieve any defaulting Underwriter from
liability for its default.
11. Survival. The respective representations, warranties,
--------
agreements, covenants, indemnities and other statements of the Company, its
officers and the several Underwriters set forth in this Agreement or made by or
on behalf of them, respectively, pursuant to this Agreement shall remain in full
force and effect, regardless of (i) any investigation made by or on behalf of
the Company, any of its officers or directors, any Underwriter or any
controlling person referred to in Section 8 hereof and (ii) delivery of and
payment for the Shares. The respective agreements, covenants, indemnities and
other statements set forth in Sections 6 and 8 hereof shall remain in full force
and effect, regardless of any termination or cancellation of this Agreement.
12. Notices. Notice given pursuant to any of the provisions of this
-------
Agreement shall be in writing and, unless otherwise specified, shall be mailed
or delivered (a) if to the Company, at the office of the Company, 470 Atlantic
Avenue, Boston, Massachusetts 02210, Attention: President, or (b) if to the
Underwriters, to the Representatives at the offices of (i) NatWest Securities
Limited, 135 Bishopsgate, London EC2M 3XT England, Attention: Melvyn Rowe and
(ii) Dean Witter Reynolds Inc., Two World Trade Center, New York, New York
10048, Attention: Samuel H. Wolcott, III. Any such notice shall be effective
only upon receipt. Any notice under Section 8 or 9 may be made by telex or
telephone, but if so made shall be subsequently confirmed in writing.
13. Successors. This Agreement shall inure to the benefit of and
----------
shall be binding upon the several Underwriters, the Company and their respective
successors and legal representatives, and nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any other person any legal
or equitable right, remedy or claim under or in respect of this Agreement, or
any provisions herein contained, this Agreement and all conditions and
provisions hereof being intended to be and being for the sole and exclusive
benefit of
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such persons and for the benefit of no other person except that (i) the
indemnities of the Company contained in Section 8 of this Agreement shall also
be for the benefit of any person or persons who control any Underwriter within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act and (ii)
the indemnities of the Underwriters contained in Section 8 of this Agreement
shall also be for the benefit of the directors of the Company, the officers of
the Company who have signed the Registration Statement and any person or persons
who control the Company within the meaning of Section 15 of the Act or Section
20 of the Exchange Act. No purchaser of Shares from any Underwriter shall be
deemed a successor because of such purchase. This Agreement shall not be
assignable by either party hereto without the prior written consent of the other
party.
14. APPLICABLE LAW. THE VALIDITY AND INTERPRETATION OF THIS
--------------
AGREEMENT, AND THE TERMS AND CONDITIONS SET FORTH HEREIN, SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT
GIVING EFFECT TO ANY PROVISIONS RELATING TO CONFLICTS OF LAWS.
15. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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Please confirm that the foregoing correctly sets forth the agreement
among the Company and the several Underwriters.
Very truly yours,
HARBORSIDE HEALTHCARE CORPORATION
By: ______________________________
Name:
Title:
Confirmed as of the date first
above mentioned:
By: NATWEST SECURITIES LIMITED
By: __________________________
Name:
Title:
By: DEAN WITTER REYNOLDS INC.
By: __________________________
Name:
Title:
Acting on behalf of
themselves and as the
Representatives of the
other several Underwriters
named in Schedule I hereof.
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SCHEDULE I
UNDERWRITERS
Number of Firm
Shares to be
Purchased
---------------
NatWest Securities
Limited.....................
Dean Witter Reynolds
Inc. .......................
---------
Total 3,600,000
=========
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<PAGE>
EXHIBIT A
__________ __, 1996
NATWEST SECURITIES LIMITED
135 Bishopsgate
London EC2M 3XT England
Ladies and Gentlemen:
In order to induce the several underwriters, for which NatWest
Securities Limited ("NatWest") and Dean Witter Reynolds Inc. intend to act as
the representatives, to underwrite a proposed initial public offering (the
"Offering") of shares of common stock, par value $.01 per share (the "Common
Stock"), of Harborside Healthcare Corporation, a Delaware corporation (the
"Company"), as contemplated by a registration statement filed with the
Securities and Exchange Commission on Form S-1 (Registration No. 333-3096), the
undersigned hereby agrees that the undersigned will not, directly or indirectly,
for a period of one hundred eighty (180) days after the commencement of the
Offering, without the prior written consent of NatWest, offer to sell, sell,
contract to sell, grant any option to purchase or otherwise dispose (or announce
any offer, sale, grant of any option to purchase or other disposition) of any
shares of Common Stock or any securities convertible into, or exercisable or
exchangeable for, shares of Common Stock.
This letter shall have no further force or effect if the Company and
the several underwriters shall not have executed and delivered an underwriting
agreement related to the Offering by July 31, 1996 or if any underwriting
agreement entered into by such parties shall be terminated prior to the initial
closing date provided for therein.
This letter agreement shall not prohibit the undersigned from
transferring any shares of Common Stock to members of his or her immediate
family or to a trust for their benefit, provided that such persons or trust
agree to be bound by the terms hereof.
Very truly yours,
By:_________________________
A-1
<PAGE>
EXHIBIT 2.1
REORGANIZATION AGREEMENT
REORGANIZATION AGREEMENT, dated as of May 15, 1996, by and among Harborside
Healthcare Corporation, a Delaware corporation (the "Corporation"), The
Berkshire Companies Limited Partnership ("Berkshire"), Krupp Enterprises Limited
Partnership ("Enterprises"), The Douglas Krupp 1994 Family Trust ("DKFT"), The
George Krupp 1994 Family Trust ("GKFT"), Laurence Gerber ("Gerber"), Stephen L.
Guillard ("Guillard") and Damian N. Dell'Anno ("Dell'Anno"). Berkshire,
Enterprises, DKFT, GKFT, Gerber, Guillard and Dell'Anno are sometimes
hereinafter collectively referred to as the "Subscribers."
The Subscribers, through the various corporations and partnerships
identified in Schedule 1 hereto (the "Contributed Entities") and the
corporations listed in Schedule 2 hereto (the "Merged Entities"), are engaged in
the business of owning and operating certain long-term care facilities and
ancillary businesses (collectively, the "Business"). The Subscribers and the
Corporation desire to consolidate the Business under the control of the
Corporation. In furtherance thereof, the Subscribers and the Corporation desire
that the Subscribers contribute all of their respective interests in the
Contributed Entities to the Corporation and that certain subsidiaries of the
Corporation (the "Subsidiaries") be merged with and into the Merged Entities, in
each case in consideration of the issuance of or in exchange for common stock of
the Corporation.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties hereto agree as follows:
1. Agreement to Contribute and Issue Shares. The Corporation hereby
----------------------------------------
agrees to issue, and the Subscribers identified in clauses (a) through (d) below
hereby agree to acquire, upon the terms and conditions hereinafter set forth, an
aggregate of 3,001,152 shares of common stock, par value $.01 per share (the
"Common Stock"), of the Corporation. The number of Shares to be acquired by
each Subscriber, and the consideration to be contributed to the Corporation by
each Subscriber therefor, is as follows:
(a) Berkshire hereby subscribes for 2,695,903 shares of Common Stock of the
Corporation (the "Berkshire Shares"). Berkshire hereby acknowledges that it has
previously received 1,000 additional shares in connection with the formation of
the Corporation. In consideration of the issuance to Berkshire of the Berkshire
Shares, Berkshire shall contribute to the Corporation all of its right, title
and interest in and to the assets set forth with respect to Berkshire on
Schedule 1 hereto (the "Berkshire Contributed Assets").
<PAGE>
2
(b) Enterprises hereby subscribes for 63,360 shares of Common Stock of the
Corporation (the "Enterprises Shares"). In consideration of the issuance to
Enterprises of the Enterprises Shares, Enterprises shall contribute to the
Corporation all of its right, title and interest in and to the assets set forth
with respect to Enterprises on Schedule 1 hereto (the "Enterprises Contributed
Assets").
(c) Guillard hereby subscribes for 176,289 shares of Common Stock of the
Corporation (the "Guillard Shares"). In consideration of the issuance of the
Guillard Shares, Guillard shall contribute to the Corporation all of his right,
title and interest in and to the assets set forth with respect to Guillard on
Schedule 1 hereto (the "Guillard Contributed Assets").
(d) Dell'Anno hereby subscribes for 65,600 shares of Common Stock of the
Corporation (the "Dell'Anno Shares"). In consideration of the issuance of
47,563 of the Dell'Anno Shares, Dell'Anno shall contribute to the Corporation
all of his right, title and interest in and to the assets set forth with respect
to Dell'Anno on Schedule 1 hereto (the "Dell'Anno Contributed Assets"). The
remaining 18,037 Dell'Anno Shares shall be issued in consideration of the
"Equity Interest" referred to in section 4(c) of the Employment Agreement, dated
as of September 12, 1994, by and between Dell'Anno and Harborside Healthcare
Limited Partnership, as amended by the First Amendment thereto, effective as of
July 1, 1995.
(e) The Berkshire Contributed Assets, the Enterprises Contributed Assets,
the Guillard Contributed Assets and the Dell'Anno Contributed Assets are
hereinafter collectively referred to as the "Contributed Assets."
2. Mergers. DKFT, GKFT, Gerber and Guillard (the shareholders of the
-------
Merged Entities) and the Corporation hereby agree to take, or cause to be taken,
all actions necessary to effect the merger of the Subsidiaries with and into the
Merged Entities (the "Mergers"), pursuant in each case to an agreement of merger
in substantially the form of Exhibit A hereto (the "Merger Agreements").
Pursuant to the Merger Agreements, DKFT, GKFT, Gerber and Guillard shall receive
an aggregate of 622,042, 622,042, 69,892 and 83,872 shares of Common Stock,
respectively, in connection with the Mergers and the Corporation shall become
the sole shareholder of the Merged Entities. The shares of Common Stock
received in connection with the Mergers, together with the shares of Common
Stock to be issued pursuant to Section 1 hereof, are hereinafter collectively
referred to as the "Shares."
3. Shares Fully Paid. The Corporation represents to each Subscriber that
-----------------
the issuances of Common Stock pursuant to this Agreement or the Merger
Agreements, as the case may be, have been duly authorized and, when issued in
accordance with the terms of this Agreement or the Merger Agreements, as the
case may be, will be, fully paid and non-assessable and free of preemptive
rights.
<PAGE>
3
4. Representations and Warranties of the Subscribers. Each of the
-------------------------------------------------
Subscribers, as to itself, hereby:
(a) represents and warrants that (i) he or it has good and marketable title
to all of his or its respective Contributed Assets and interest in the Merged
Entities, free and clear of any liens or other encumbrances other than those
certain negative pledge agreements among the Merged Entities, the stockholders
of the Merged Entities and Meditrust Mortgage Investments Inc. (which Agreement
expressly permits the transactions contemplated hereby) and liens and
encumbrances arising in the ordinary course of business that do not materially
affect their value and (ii) all Contributed Assets which constitute capital
stock and the capital stock of the Merged Entities were duly authorized and
validly issued and are fully paid, non-assessable and free of preemptive rights;
(b) represents and warrants that the Contributed Entities and the Merged
Entities have paid in full or will pay in full on a timely basis all federal or
state income taxes incurred by such entities for the taxable periods ending on
or before the Closing (defined below);
(c) acknowledges that he or it or his or its representative has had access
to the same kind of information concerning the Corporation that is required by
Schedule A of the Securities Act of 1933, as amended (the "Act"), to the extent
that the Corporation possesses such information;
(d) represents and warrants that he or it has such knowledge and experience
in financial and business matters that he or it is capable of utilizing the
information that is available to him or it concerning the Corporation to
evaluate the risks of investment in the Corporation and that he or it is able to
bear the economic risk of his or its investment in the common stock;
(e) acknowledges that he or it has been advised that the Shares have not
been registered under the Act and, accordingly, that he or it may not be able to
sell or otherwise dispose of the Shares when he or it wishes to do so;
(f) represents and warrants that the Shares are being acquired by him or it
for his or its own sole benefit and account for investment and not with a view
to, or for resale in connection with, a public offering or distribution thereof
except in compliance with all applicable securities laws;
(g) agrees that the Shares will not be resold (i) without registration
thereof under the Act (unless an exemption from such registration is available
and the Subscriber has provided to the Corporation an opinion of counsel
reasonably acceptable to the Corporation to such effect) or (ii) in violation of
any law;
<PAGE>
4
(h) consents that the certificate or certificates representing the Shares
may be impressed with a legend indicating that the Shares are not registered
under the Act and reciting that transfer thereof is restricted; and
(i) consents that stop transfer instructions in respect of the Shares may
be issued to any transfer agent, transfer clerk or other agent at any time
acting for the Corporation.
5. Closing. The closing (the "Closing") of the transactions contemplated
-------
by this Agreement shall be held at the offices of Paul, Weiss, Rifkind, Wharton
& Garrison, 1285 Avenue of the Americas, New York, New York on the same date as,
and immediately prior to, the sale of Common Stock upon consummation of the
public offering of Common Stock contemplated by the Registration Statement (No.
333-3096) on Form S-1 filed by the Corporation with the Securities and Exchange
Commission on April 2, 1996 (the "Offering"). The parties shall deliver
executed copies of all documents at a pre-closing to be held not later than the
day such Registration Statement is declared effective, such documents to be held
in escrow by the Corporation's counsel pending the Closing. At the Closing:
(a) The Mergers will be effected;
(b) Each of the Subscribers shall deliver to the Corporation:
(i) certificates, duly endorsed for transfer, representing shares of stock
constituting Contributed Assets to be contributed by such Subscriber to the
Corporation;
(ii) such assignments and other instruments of transfer or title as the
Corporation may reasonably request with respect to the other Contributed Assets
to be contributed by such Subscriber to the Corporation;
(iii) certificates representing shares of stock constituting such
Subscriber's interest in the Merged Entities (which, in accordance with the
Merger Agreements, shall be canceled); and
(iv) such other documents as the Corporation shall reasonably request; and
(c) The Corporation shall issue and deliver to each Subscriber a
certificate or certificates representing the Shares specified with respect to
such Subscriber in Section 1 and Section 2.
<PAGE>
5
6. Survival of Representations and Warranties; Obligation of Subscribers
---------------------------------------------------------------------
to Indemnify.
- ------------
(a) The representations and warranties of each of the Subscribers set forth
in Section 4 of this Agreement shall survive execution and delivery hereof and
shall thereafter terminate and expire at the end of the one-year period
commencing on the date of the Closing with respect to any claim based upon,
arising out of or otherwise in respect of any fact, circumstance, action or
proceeding of which the Corporation shall not have given notice to each
Subscriber prior to the end of such one-year period; provided, however, that the
-------- -------
representations and warranties of each Subscriber set forth in Section 4(b)
shall survive for such period as is provided by any statute of limitations
applicable thereto.
(b) Subject to paragraph (a) of this Section 6, each of the Subscribers
agrees, severally and not jointly, to indemnify and hold harmless the
Corporation, its directors, officers and agents (in their capacity as such) from
and against any costs and expenses (including, without limitation, the
reasonable fees, disbursements and other charges of counsel) based upon, arising
out of or otherwise in respect of any inaccuracy in or any breach of any
representation, warranty, covenant or agreement of such Subscriber contained in
this Agreement or the enforcement of this Agreement.
7. Obligation of the Corporation to Indemnify. The Corporation hereby
------------------------------------------
agrees to indemnify, defend and hold harmless each Subscriber and its directors,
officers, partners and agents (in their capacity as such) from and against any
and all liabilities and obligations of the Contributed Entities and the Merged
Entities incurred or otherwise relating to the period from and after the Closing
(the "Assumed Liabilities"). Without limiting the generality of the foregoing,
the Company shall indemnify each Subscriber against any and all costs and
expenses (including, without limitation, the reasonable fees, disbursements and
other charges of counsel) incurred by each Subscriber in connection with the
investigation or defense of any Assumed Liability or the enforcement of this
Agreement.
8. Registration Rights of Pledgees. In the event that, subsequent to the
-------------------------------
Closing, any of the Subscribers pledges his or its respective Shares (the
"Pledged Shares") to a financial institution (a "Pledgee"), the Corporation
agrees that it shall, at the request of the Subscriber, enter into an agreement
with such Pledgee providing that the Corporation will register the Pledged
Shares under the Act in the event that the Pledgee gives notice to the
Corporation that such registration is necessary in order to sell or otherwise
dispose of the Pledged Shares following foreclosure or other exercise of similar
rights and remedies of the Pledgee to acquire the Pledged Shares. Such
agreement shall be on reasonable and customary terms for agreements of its type
(including customary limitations and restrictions) and shall provide that (i)
the Company shall be responsible for all costs and expenses related to such
registration and
<PAGE>
6
(ii) the rights granted by such agreement may be exercised no more than once by
a particular Pledgee with respect to Pledged Shares pledged by a particular
Subscriber.
9. Indemnification of Guarantor. The Corporation and Douglas Krupp hereby
----------------------------
acknowledge that Douglas Krupp is and shall remain the guarantor under that
certain Guaranty, dated as of March 1, 1988, from Douglas Krupp to Bank One,
Indianapolis, NA (the "Guaranty"), relating to certain indebtedness of Riverside
Retirement Limited Partnership, one of the Contributed Entities. The
Corporation hereby agrees to indemnify, defend and hold harmless Douglas Krupp
from and against any and all actual expenses (including, without limitation,
reasonable fees, disbursements and other charges of counsel), losses, claims,
damages, suits, proceedings and liabilities incurred by or threatened against
him in connection with the Guaranty or in enforcing his rights hereunder.
10. Notices. Any notice or other communication required or permitted
-------
hereunder shall be in writing and shall be delivered personally, telecopied or
sent by recognized overnight courier. Any such notice shall be deemed given
when so delivered personally or telecopied or, if delivered by recognized
overnight courier, one day after the date of delivery to such courier, as
follows:
(i) if to the Company, to:
Harborside Healthcare Corporation
470 Atlantic Avenue
Boston, MA 02210
Attention: Board of Directors
(ii) if to a Subscriber, to him or it at the address shown on the records
of the Corporation.
Any party may change such party's address for notice hereunder by notice to
the other parties in accordance with this Section 10.
11. Termination. This Agreement may be terminated at the election of any
-----------
party upon written notice to the other parties if the closing of the issuance
and sale of the Common Stock pursuant to the Offering shall not have been
completed on or prior to August 30, 1996 or such later date as the parties may
hereafter agree and, if so terminated, no party shall have any further liability
or obligation hereunder.
<PAGE>
7
12. Waivers and Amendments. This Agreement may be amended, modified,
----------------------
superseded or canceled, and the terms and conditions hereof may be waived, only
by a written instrument signed by the parties or, in the case of a waiver, by
the party waiving compliance. No delay on the part of any party in exercising
any right or remedy hereunder shall operate as a waiver thereof, nor shall any
waiver on the part of any party of any such right or remedy, nor any single or
partial exercise of any such right or remedy preclude any other or further
exercise thereof or the exercise of any other right or remedy.
13. Governing Law. This Agreement shall be governed by, and construed in
-------------
accordance with, the laws of the State of New York applicable to agreements made
and to be performed entirely within such State.
14. Assignment. This Agreement, and any rights obligations hereunder, may
----------
not be assigned by any party hereto without the prior written consent of the
other parties.
15. Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original, but all such counterparts shall together
constitute one and the same instrument.
IN WITNESS WHEREOF, each party hereto has executed or caused the execution
of this Agreement as the date first above written.
HARBORSIDE HEALTHCARE CORPORATION
By: /s/ Stephen L. Guillard
------------------------------
Name: Stephen L. Guillard
Title: President
THE BERKSHIRE COMPANIES LIMITED PARTNERSHIP
By: KGP-1 INCORPORATED
Its General Partner
By: /s/ Laurence Gerber
------------------------------
Name: Laurence Gerber
Title: President
<PAGE>
8
KRUPP ENTERPRISES LIMITED PARTNERSHIP
By: KGP-1 Incorporated
------------------------------
Its General Partner
By: /s/ Laurence Gerber
------------------------------
Name: Laurence Gerber
Title: President
THE DOUGLAS KRUPP 1994 FAMILY TRUST
By: /s/ LAWRENCE I. SILVERSTEIN
---------------------------------
LAWRENCE I. SILVERSTEIN, Trustee
By: /s/ PAUL KRUPP
------------------------------
PAUL KRUPP, Trustee
By: /s/ M. GORDON EHRLICH
------------------------------
M. GORDON EHRLICH, Trustee
THE GEORGE KRUPP 1994 FAMILY TRUST
By: /s/ LAWRENCE I. SILVERSTEIN
--------------------------------
LAWRENCE I. SILVERSTEIN, Trustee
By: /s/ PAUL KRUPP
------------------------------
PAUL KRUPP, Trustee
By: /s/ M. GORDON EHRLICH
------------------------------
M. GORDON EHRLICH, Trustee
<PAGE>
9
/s/ LAURENCE GERBER
------------------------------
LAURENCE GERBER
/s/ STEPHEN L. GUILLARD
------------------------------
STEPHEN L. GUILLARD
/s/ DAMIAN DELL'ANNO
------------------------------
DAMIAN DELL'ANNO
The undersigned acknowledges and accepts this agreement with respect to
Section 9 only.
/s/ DOUGLAS KRUPP
------------------------------
DOUGLAS KRUPP
<PAGE>
SCHEDULE 1
----------
Contributed Assets
------------------
<TABLE>
<CAPTION>
BERKSHIRE ENTERPRISES GUILLARD DELL'ANNO
----------- ------------ --------- ----------
<S> <C> <C> <C> <C>
Stock
- -----
KHI Corporation 100 shares ---- ---- ----
Limited Partnership Interests
- -------------------------------
Harborside Healthcare 99.0% ---- ---- ----
Advisors Limited
Partnership
Riverside Retirement ---- 99.0% ---- ----
Limited Partnership
Harborside Healthcare ---- ---- 6.0% 2.0%
Limited Partnership
</TABLE>
SCHEDULE 2
----------
Merged Entities
---------------
Bay Tree Nursing Center Corporation
Belmont Nursing Center Corporation
Countryside Care Center Corporation
Oakhurst Manor Nursing Center Corporation
Orchard Ridge Nursing Center Corporation
Sunset Point Nursing Center Corporation
West Bay Nursing Center Corporation
<PAGE>
EXHIBIT A
AGREEMENT OF MERGER made and entered into on the date hereinafter set
forth by and among Harborside Healthcare Corporation ("HHC"), a Delaware
Corporation, [Merger Vehicle], a business corporation of the Commonwealth of
Massachusetts, as approved by vote of its Board of Directors on said date, and
[Existing S. Corp.], a business corporation of the Commonwealth of
Massachusetts, as approved by vote of its Board of Directors on said date.
WHEREAS, all of the issued shares of common stock of [Merger Vehicle]
are owned by HHC;
WHEREAS [Merger Vehicle] and [Existing S. Corp.] and the respective
Boards of Directors thereof deem it advisable and to the advantage, welfare, and
best interests of said corporations and their respective stockholders to merge
[Merger Vehicle] with and into [Existing S. Corp.] pursuant to the provisions of
the Business Corporation Law of the Commonwealth of Massachusetts; and
WHEREAS HHC and its Boards of Directors deem it advisable and to the
advantage, welfare, and best interests of HHC and its stockholders that [Merger
Vehicle] merge with and into [Existing S. Corp.] pursuant to the provisions of
the Business Corporation Law of the Commonwealth of Massachusetts.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements of the parties hereto, this Agreement and the terms and conditions
thereof and the mode of carrying the same into effect, together with any
provisions required or permitted to be set forth therein, are hereby determined
and agreed upon for submission to the stockholders of [Merger Vehicle] and
[Existing S. Corp.] as required by the provisions of the Business Corporation
Law of the Commonwealth of Massachusetts.
1. [Merger Vehicle] and [Existing S. Corp.] shall, pursuant to the
provisions of the Business Corporation Law of the Commonwealth of Massachusetts,
be merged with and into a single corporation, to wit [Existing S. Corp.], which
shall be the surviving corporation upon the effective date of the merger and
which is sometimes hereinafter referred to as the "surviving corporation", and
which shall continue to exist as said surviving corporation under its present
name pursuant to the provisions of the Business Corporation Law of the
Commonwealth of Massachusetts. The separate existence of Merger Vehicle, which
is sometimes hereinafter referred to as the "terminating corporation", shall
cease upon said effective date of the merger in accordance with the provisions
of the Business Corporation law of the Commonwealth of Massachusetts.
2. The purposes of the surviving corporation shall be those contained in
the Articles of Organization of said surviving corporation upon the effective
date of the merger.
<PAGE>
2
3. The total number of shares which the surviving corporation is
presently authorized to issue is 200,000 shares, all of which are of one class,
and all of which are without par value; and the total number of shares which the
surviving corporation shall be authorized to issue upon the effective date of
the merger is 200,000 shares, all of which are of one class, and all of which
are without par value.
4. The Articles of Organization of the surviving corporation shall be the
Articles of Organization of said surviving corporation and said Articles of
Organization shall continue in full force and effect until amended and changed
in the manner prescribed by the provisions of the Business Corporation law of
the Commonwealth of Massachusetts.
5. The present by-laws of the surviving corporation will be the by-laws
of said surviving corporation and will continue in full force and effect until
changed, altered, or amended as therein provided and in the manner prescribed by
the provisions of the Business Corporation Law of the Commonwealth of
Massachusetts.
6. The persons holding the offices of directors, of President, of
Treasurer, and of Clerk, respectively, of the surviving corporation upon the
effective date of the merger shall constitute the Board of Directors and the
president, the treasurer, and the Clerk of the surviving corporation, all of
whom shall hold their directorships and offices until the election and
qualification of their respective successors or until their tenure is otherwise
terminated in accordance with the by-laws of the surviving corporation; and each
person holding any other office of the surviving corporation upon said effective
date shall continue to hold his office in like manner.
7. All of the issued shares of the surviving corporation shall, upon the
effective date of the merger, be converted into shares of common stock, par
value $.01 per share, of HHC in accordance with Schedule 1 hereto. Each issued
share of the terminating corporation shall, upon the effective date of the
merger, be converted into one share of the surviving corporation.
8. The Agreement of Merger herein made, entered into and approved shall
be submitted to the stockholders of the terminating corporation and of the
surviving corporation for their approval or rejection in the manner prescribed
by the provisions of the Business Corporation Law of the Commonwealth of
Massachusetts.
9. The effective date of the merger shall be the date of the filing of
articles of merger in the office of the State Secretary of the Commonwealth of
Massachusetts.
10. In the event that this Agreement shall have been fully approved on
behalf of the terminating corporation and of the surviving corporation in the
manner prescribed by the provisions of the Business Corporation Law of the
Commonwealth of
<PAGE>
3
Massachusetts, the terminating corporation and the surviving corporation do
hereby agree that they will cause to be executed and filed and/or recorded any
document or documents prescribed by the laws of the Commonwealth of
Massachusetts, and that they will cause to be performed all necessary acts
within said Commonwealth and elsewhere to effectuate the merger herein provided
for.
11. The Board of Directors and the proper officers of the terminating
corporation and of the surviving corporation, respectively are hereby
authorized, empowered, and directed to do any and all acts and things, and to
make, execute, deliver, file, and/or record any and all instruments, papers, and
documents which shall be or become necessary, proper or convenient to carry out
or put into effect any of the provisions of the Agreement of Merger or of the
merger herein provided for.
12. Notwithstanding anything to the contrary contained herein, the merger
provided for hereunder shall not occur unless and until the following shall have
occurred on or prior to the date of effectiveness of the merger: (i) the
consummation of the public offering of common stock of HHC as contemplated by
the Registration Statement on Form S-1 filed by HHC with the Securities and
Exchange Commission on April 2, 1996; (ii) the contribution of assets
contemplated by the Reorganization Agreement, dated as of May 15, 1996 by and
among HHC, The Berkshire Companies Limited Partnership, Krupp Enterprises
Limited Partnership, The Douglas Krupp 1994 Irrevocable Family Trust, The George
Krupp 1994 Irrevocable Family Trust, Laurence Gerber, Stephen L. Guillard and
Damian N. Dell'Anno and (iii) the filing with the Secretary of State of the
Commonwealth of Massachusetts of articles of merger relating to the mergers of
the corporations listed on Schedule 2 hereto other than Existing S. Corp.
<PAGE>
4
IN WITNESS WHEREOF, this Agreement has been signed by and upon behalf
of the terminating corporation and of the surviving corporation upon the date
hereinafter set forth.
Dated: _________, 1996 [Merger Vehicle]
By:
--------------------------
Its President
--------------------------
Its Treasurer
[corporate seal]
Dated: _________, 1996 [Existing S. Corp.]
By:
--------------------------
Its President
--------------------------
Its Treasurer
[corporate seal]
Dated: ____________, 1996 Harborside Healthcare Corporation
By:
--------------------------
Its President
--------------------------
Its Treasurer
[corporate seal]
<PAGE>
5
SCHEDULE 1
----------
Conversion of Shares
--------------------
Shares of Surviving Shares of HHC
Corporation Converted Following Conversion
--------------------- --------------------
The 1994 Douglas Krupp 50,000
Family Trust
The 1994 George Krupp 50,000
Family Trust
Stephen L. Guillard 6,742
Laurence Gerber 5,618
SCHEDULE 2
----------
Merged Entities
---------------
Bay Tree Nursing Center Corporation
Belmont Nursing Center Corporation
Countryside Care Center Corporation
Oakhurst Manor Nursing Center Corporation
Orchard Ridge Nursing Center Corporation
Sunset Point Nursing Center Corporation
West Bay Nursing Center Corporation
<PAGE>
THE CORPORATE PLAN
FOR RETIREMENT
FIDELITY BASIC PLAN DOCUMENT NO. 07
6/4/91 ED.
<PAGE>
THE CORPORATE PLAN FOR RETIREMENT
ARTICLE 1
ADOPTION AGREEMENT
ARTICLE 2
DEFINITIONS
2.01. Definitions...............................................1
ARTICLE 3
PARTICIPATION
3.01. Date of Participation.....................................9
3.02. Reemployment of Participants...............................9
3.03. Participation by Owner-Employee; Controlled Businesses....9
ARTICLE 4
CONTRIBUTIONS
4.01. Deferral Contributions...................................10
4.02. Additional Limit on Deferral Contributions...............11
4.03. Matching Contributions...................................15
4.04. Limit on Matching Contributions..........................15
4.05. Special Rules............................................19
4.06. Discretionary Contributions..............................19
4.07. Time of Making Employer Contributions....................19
4.08. Return of Employer Contributions.........................19
4.09. No Contributions by Participants.........................20
4.10. Rollover Contributions...................................20
ARTICLE 5
PARTICIPANTS' ACCOUNTS
5.01. Individual Accounts......................................21
5.02. Valuation of Accounts....................................21
5.03. Code Section 415 Limitations.............................21
ARTICLE 6
INVESTMENT OF CONTRIBUTIONS
6.01. Manner of Investment.....................................28
6.02. Investment Decisions.....................................28
6.03. Direction to Trustee.....................................28
(i)
<PAGE>
ARTICLE 7
RIGHT TO BENEFITS
7.01. Normal or Early Retirement...............................29
7.02. Late Retirement..........................................29
7.03. Disability Retirement....................................29
7.04. Death....................................................29
7.05. Other Termination of Employment..........................30
7.06. Separate Account.........................................30
7.07. Forfeitures..............................................31
7.08. Adjustment for Investment Experience.....................31
7.09. Participant Loans........................................31
7.10. Hardship Distributions...................................33
7.11. Prior Plan In-Service Distribution Rules.................34
ARTICLE 8
DISTRIBUTION OF BENEFITS PAYABLE AFTER TERMINATION
OF SERVICE
8.01. Distribution of Benefits to Participants and Beneficiaries34
8.02. Annuity Distributions....................................35
8.03. Joint and Survivor Annuities.............................35
8.04. Installment Distributions................................38
8.05. Immediate Distribution...................................40
8.06. Determination of Method of Distribution..................41
8.07. Notice to Trustee........................................41
8.08. Time of Distribution.....................................41
8.09. Whereabouts of Participants and Beneficiaries............42
ARTICLE 9
TOP-HEAVY PROVISIONS
9.01. Application..............................................43
9.02. Definitions..............................................43
9.03. Minimum Contribution.....................................46
9.04. Adjustment to the Limitation on Contributions and Benefits46
ARTICLE 10
AMENDMENT AND TERMINATION
10.01. Amendment by Employer...................................47
10.02. Amendment by Prototype Sponsor..........................48
10.03. Amendments Affecting Vested and/or Accrued Benefits.....48
10.04. Retroactive Amendments..................................48
10.05. Termination.............................................49
(ii)
<PAGE>
10.06. Distribution upon Termination of the Plan...............49
10.07. Merger or Consolidation of Plan; Transfer of Plan
Assets................................................49
ARTICLE 11
AMENDMENT AND CONTINUATION OF PREDECESSOR PLAN;
TRANSFER OF FUNDS TO OR FROM OTHER QUALIFIED PLANS
11.01. Amendment and Continuation of Predecessor Plan..........49
11.02. Transfer of Funds from an Existing Plan.................50
11.03. Acceptance of Assets by Trustee.........................51
11.04. Transfer of Assets from Trust...........................51
ARTICLE 12
MISCELLANEOUS
12.01. Communications to Participants..........................51
12.02. Limitation of Rights....................................51
12.03. Nonalienability of Benefits.............................51
12.04. Facility of Payment.....................................52
12.05. Information between Employer and Trustee................52
12.06. Effect of Failure to Qualify under Code.................52
12.07. Notices.................................................52
12.08. Governing Law...........................................53
ARTICLE 13
PLAN ADMINISTRATION
13.01. Powers and responsibilities of the Administrator........53
13.02. Nondiscriminatory Exercise of Authority.................54
13.03. Claims and Review Procedures............................54
13.04. Named Fiduciary.........................................55
13.05. Costs of Administration.................................55
ARTICLE 14
TRUST AGREEMENT
14.01. Acceptance of Trust Responsibilities....................55
14.02. Establishment of Trust Fund.............................55
14.03. Exclusive Benefit.......................................55
14.04. Powers of Trustee.......................................55
14.05. Accounts................................................56
14.06. Approving of Accounts...................................57
14.07. Distribution from Trust Fund............................57
14.08. Transfer of Amounts from Qualified Plan.................57
14.09. Transfer of Assets from Trust...........................57
(iii)
<PAGE>
14.10. Voting; Delivery of Information.........................58
14.11. Compensation and Expenses of Trustee....................58
14.12. Reliance by Trustee on Other Persons....................58
14.13. Indemnification by Employer.............................59
14.14. Consultation by Trustee with Counsel....................59
14.15. Persons Dealing with the Trustee........................59
14.16. Resignation or Removal of Trustee.......................59
14.17. Fiscal Year of the Trust................................60
14.18. Discharge of Duties by Fiduciaries......................60
14.19. Amendment...............................................60
14.20. Plan Termination........................................60
14.21. Permitted Reversion of Funds to Employer................60
14.22. Governing Law...........................................61
(iv)
<PAGE>
The CORPORATEplan for Retirement /SM/
(Profit Sharing/401(k) Plan)
A Fidelity Prototype Plan
Non-Standardized Adoption Agreement 002
Basic Plan No. 07
<PAGE>
ADOPTION AGREEMENT
ARTICLE 1
NON-STANDARDIZED PROFIT SHARING PLAN
1.01 PLAN INFORMATION
----------------
(a) Name of this Plan: This is the Harborside Healthcare, Limited
Partnership Retirement Savings Plan (the "Plan").
(b) Type of Plan: 401(k) and Profit Sharing.
(c) The Plan Administrator is the Employer.
Address: 470 Atlantic Ave. Boston, MA 02210
Phone Number: 617-556-1515
The Plan Administrator is the agent for service of legal process
for Plan.
(d) Limitation Year: Calendar Year
(e) Three Digit Plan Number: 001
(f) Plan Year End (month/day): 12/31
(g) Plan Status: Amendment Effective Date: 1/1/93. This is an
amendment of the CORPORATEplan for Retirement Adoption Agreement
previously executed by the Employer. The original effective date
of the Plan was January 1, 1992.
The substantive provisions of the Plan shall apply prior to the
Effective Date to the extent required by the Tax Reform Act of 1986
or other applicable laws.
1.02 EMPLOYER
--------
(a) The Employer is: Harborside Healthcare, Limited Partnership, et
al.
Address: 470 Atlantic Avenue, 13th Floor, Boston, MA 02210
Contact's Name: Ronald W. Stutzman
Telephone: 617-556-1515
2
<PAGE>
(1) Employer's Tax Identification Number: 04-2985687
(2) Business form of Employer: Sole proprietor or partnership
and Subchapter S Corporation
(3) Employer's fiscal year end: December 31
(4) Date business commenced: See attached list
(b) The term "Employer" includes the following Related Employer(s) (as
defined in Section 2.01(a)(26)): See attached list
1.03 COVERAGE
--------
(a) All Employees who meet the conditions specified below will be
eligible to participate in the Plan:
(1) Service requirement: one Year of Service (1,000 Hours of
Service is required during the Eligibility Computation
Period).
(2) Age requirement: no age requirement.
(3) The class of Employees eligible to participate in the Plan:
includes all Employees of the Employer.
(b) The Entry Date(s) shall be: the first day of each Plan Year and
the first day of the fourth, seventh, and tenth months.
(c) Date of Initial Participation - An Employee will become a
Participant unless excluded by Section 1.03(a)(3) above on the
Entry Date immediately following the date the Employee completes
the service and age requirement(s) in Section 1.03(a), if any,
except: Employees who meet the age and service requirement(s) of
Section 1.03(a) on the Effective Date in Section 1.01(g) will
become Participants on that date.
1.04 COMPENSATION
------------
(a) For purposes of determining Contributions under the Plan,
Compensation shall be as defined in Section 2.019(a)(7).
3
<PAGE>
(b) Compensation for the First Year of Participation
Contributions for the Plan Year in which an Employee first becomes
a Participant shall be determined based on the Employee's
Compensation: for the entire Plan Year.
1.05 CONTRIBUTIONS
-------------
(a) Employer Contributions:
(1) [Reserved]
(2) Discretionary Formula
The Employer may decide each Plan Year whether to make a
Discretionary Employer Contribution on behalf of eligible
Participants in accordance with Section 4.06. Such
contributions may only be funded by the Employer after the
Plan Year ends and shall be allocated to eligible
Participants based upon the following:
Nonintegrated Allocation Formula:
In the ratio that each eligible Participant's
Compensation bears to the total Compensation paid to
all eligible Participants for the Plan Year.
(3) Eligibility Requirement(s)
A Participant shall be entitled to Employer Contributions for
a Plan Year under this Subsection (a) if the Participant is
employed by the Employer of the last day of the Plan Year.
Employer Contributions can only be funded by the Employer
after Plan Year end.
(b) Deferral Contributions
(1) Regular Contributions
The Employer shall make a Deferral Contribution in accordance
with Section 4.01 on behalf of each Participant who has an
executed salary reduction agreement in effect with the
Employer for the payroll period in question, not to exceed
15% of Compensation for that period.
4
<PAGE>
(A) A Participant may increase or decrease, on a
prospective basis, his salary reduction agreement
percentage as of the beginning of each payroll period.
(B) A Participant may revoke, on a prospective basis, a
salary reduction agreement at any time upon proper
notice to the Administrator but in such case may not
file a new salary reduction agreement until any
subsequent Plan Entry Date.
(2) Catch-Up Contributions
The Employer may allow Participants upon proper notice and
approval to enter into a special salary reduction agreement
to make additional Deferral Contributions in an amount up to
100% of their Compensation for the payroll period(s) in the
final month of the Plan Year.
A Participant's Contributions under (2) may not cause the
Participant to exceed the percentage limit specified by the
Employer in (1) after the Plan Year. The Employer has the
right to restrict a Participant's right to make Deferral
Contributions if they will adversely effect the Plan's
ability to pass the Actual Deferral Percentage and/or the
Actual Contribution Percentage test.
(3) [Reserved]
(4) Qualified Discretionary Contributions
The Employer may contribute an amount which it designates as
a Qualified Discretionary Contribution to be included in the
Actual Deferral Percentage or Actual Contribution Percentage
test. Qualified Discretionary Contributions shall be
allocated to Non-highly Compensated Employees in the ratio
which each such Participant's Compensation for the Plan Year
bears to the total of all such Participants' Compensation for
the Plan Year.
(c) Matching Contributions
(1) The Employer shall make a Matching Contribution on behalf of
each Participant in an amount equal to the percentage of a
Participant's Deferral Contributions during the Plan Year
declared for the year, if any, by a Board of Directors'
resolution.
5
<PAGE>
(2) [Reserved]
(3) [Reserved]
(4) Eligibility Requirement(s)
A Participant who makes Deferral Contributions during the
Plan Year under Section 1.05(b) shall be entitled to Matching
Contributions for that Plan Year if the Participant is
employed by the Employer on the last day of the Plan Year.
Matching Contributions can only be funded by the Employer
after the Plan Year ends. Any Matching Contribution funded
before Plan Year end shall not be subject to the eligibility
requirements of this Section 1.05(c)(4)).
(d) [Reserved]
1.06 RETIREMENT AGE(S)
-----------------
(a) The Normal Retirement Age under the Plan is age 65.
(b) The Early Retirement Age is the first day of the month after the
Participant attains age 55 and completes six Years of Service for
Vesting.
(c) A Participant is eligible for Disability Retirement if he/she
satisfies the requirements for Social Security disability benefits.
1.07 VESTING SCHEDULE
----------------
(a) The Participant's vested percentage in Employer Contributions
(Fixed or Discretionary) elected in Section 1.05(a) and/or Matching
Contributions elected in Section 1.05(c) shall be based upon the
schedule below, except with respect to any Plan Year during which
the Plan is Top-Heavy. The schedule elected in Section 1.12(d)
shall automatically apply for a Top-Heavy Plan Year and all Plan
Years thereafter unless the Employer has already elected a more
favorable vesting schedule below.
6
<PAGE>
Employer Contributions and Matching Contributions
Years of
Service for
Vesting Vesting Schedule
----------- ----------------
0 0%
1 0%
2 20%
3 40%
4 60%
5 80%
6 100%
7 100%
1.08 [Reserved]
1.09 PARTICIPANT LOANS
-----------------
Participant loans will be allowed in accordance with Section 7.09,
subject to a $1,000 minimum amount and will be granted for any purpose.
1.10 HARDSHIP WITHDRAWALS
--------------------
Participant withdrawals for hardship prior to termination of employment
will be allowed in accordance with Section 7.10, subject to a $1,000
minimum amount.
1.11 DISTRIBUTIONS
-------------
(a) Subject to Articles 7 and 8 and (b) below, distributions under the
Plan will be paid as a lump sum.
(b) Participants will be entitled to receive a distribution of all or
any portion of all Accounts without terminating employment upon
attainment of age 59 1/2.
1.12 TOP HEAVY STATUS
----------------
7
<PAGE>
(a) The Plan shall be subject to the Top-Heavy Plan requirements of
Article 9 for each Plan Year, if any, for which the Plan is
Top-Heavy as defined in Section 9.02.
(b) [Not Applicable]
(c) In the event that the Plan is treated as Top-Heavy for a Plan Year,
each non-key Employee shall receive an Employer Contribution of at
least 3% of Compensation for the Plan Year in accordance with
Section 9.03 under this Plan only if the Participant is not
entitled to such contribution under another qualified plan of the
Employer.
Such minimum Employer contribution may be less than the percentage
indicated in (c) above to the extend provided in Section 9.03(a).
(d) In the event that the Plan is treated as Top-Heavy for a Plan Year,
the following vesting schedule shall apply instead of the schedule
elected in Section 1.07(a) for such Plan Year and each Plan Year
thereafter.
Years of Service for Vesting Vesting Percentage
---------------------------- ------------------
0 0
1 0
2 20%
3 40%
4 60%
5 80%
6 100%
1.13 [Not Applicable]
1.14 ESTABLISHMENT OF TRUST AND INVESTMENT DECISIONS
-----------------------------------------------
(a) Investment Directions
Participant Accounts will be invested in accordance with investment
directions provided to the Trustee by each Participant for
-----------
allocating his entire Account among the options listed in (b)
below.
8
<PAGE>
(b) Plan Investment Options
The Employer hereby establishes a Trust under the plan in
accordance with the provisions of Article 14, and the Trustee
signifies acceptance of its duties under Article 14 by its
signature below. Participant Accounts under the Trust will be
invested among the Fidelity Funds listed below pursuant to
Participant and/or Employer directions.
(1) Fund Name Fund Number
--------- -----------
(2) Puritan Fund 004
(3) Magellan Fund 021
(4) Intermediate Bond Fund 032
(5) Retirement Govt. Money Market 631
(6) Magellan Growth Co. 025
To the extent that the Employer selects as an investment option the
Managed Income Portfolio of the Fidelity Group Trust for Employee
Benefit Plans (the "Group Trust"), the Employer hereby (A) agrees
to the terms of the Group Trust and adopts said terms as a part of
this Agreement and (B) acknowledges that it has received from the
Trustee a copy of the Group Trust, the Declaration of Separate Fund
for the Managed Income Portfolio of the Group Trust, and the
Circular for the Managed Income Portfolio.
The method and frequency for change of investments will be
determined under the rules applicable to the selected funds or, if
applicable, the rules of the Employer adopted in accordance with
Section 6.03. Information will be provided regarding expenses, if
any, for changes in investment options.
1.15 RELIANCE ON OPINION LETTER
--------------------------
An adopting Employer may not rely on the opinion letter issued by the
National Office of the Internal Revenue Service as evidence that this
Plan is qualified under Section 401 of the Code. If the Employer wishes
to obtain reliance that his or her plan(s) are qualified, application for
a determination letter should be made to the appropriate Key District
Director of the Internal Revenue Service. Failure to properly fill out
the Adoption Agreement may result in disqualification of the Plan.
9
<PAGE>
This Adoption Agreement may be used only in conjunction with Fidelity
Prototype Plan Basic Plan Document No. 07. The Prototype Sponsor shall
inform the adopting Employer of any amendments made to the Plan or of the
discontinuance or abandonment of the prototype plan document.
1.16 PROTOTYPE INFORMATION:
---------------------
Name of Prototype Sponsor: Fidelity Management & Research Co.
Address of Prototype Sponsor: 82 Devonshire Street
Boston, MA 02109
Questions regarding this prototype document may be directed to the
following telephone number: 1-(800) 3443-9184.
10
<PAGE>
EXECUTION PAGE
IN WITNESS WHEREOF, the Employer has caused this Adoption Agreement to be
executed this 23rd day of December, 1993.
Employer: Harborside Healthcare L.P.
By: Ronald W. Stutzman
Title: V. P. Human Resources
Employer: ________________________________
By: ________________________________
Title: ________________________________
Accepted by
Fidelity Management Trust Company, as Trustee
By_________________________ Date __________________________
Title_______________________
11
<PAGE>
ARTICLE 1. ADOPTION AGREEMENT.
------------------
ARTICLE 2. DEFINITIONS.
-----------
2.01. Definitions.
-----------
(a) Wherever used herein, the following terms have the meanings set
forth below, unless a different meaning is clearly required by the
context:
(1) "Account" means an account established on the books of the
Trust for the purpose of recording contributions made on behalf of
a Participant and any income, expenses, gains or losses incurred
thereon.
(2) "Administrator" means the Employer, or other person
designated by the Employer in the Adoption Agreement.
(3) "Adoption Agreement" means Article 1 under which the Employer
establishes and adopts, or amends, the Plan and Trust and
designates the optional provisions selected by the Employer, and
the Trustee accepts its responsibilities under Article 14. The
provisions of the Adoption Agreement shall be an integral part of
the Plan.
(4) "Annuity Starting Date" means the first day of the first
period for which an amount is payable as an annuity or in any other
form.
(5) "Beneficiary" means the person or persons entitled under
Section 7.04 to receive benefits under the Plan upon the death of a
Participant, provided that for purposes of Section 7.04 such term
shall be applied in accordance with Section 401(a)(9) of the Code
and the regulations thereunder.
(6) "Code" means the Internal Revenue Code of 1986, as amended
from time to time.
(7) "Compensation" shall mean compensation as that term is
defined in Section 5.03(e)(2) of the Plan. Compensation shall
include only that compensation which is actually paid to the
Participant during the Plan Year or, for purposes of Section 5.03,
Limitation Year. In addition, except for purposes of Section 5.03
(relating to Code Section 415 limitations) or Article 9 (relating
to top-heavy plans), the term "Compensation" shall include amounts
that are not includable in the gross income of a Participant under
a salary reduction agreement by reason of the application of
Sections 125, 402(a)(8), 402(h) or 403(b) of the Code.
<PAGE>
In the case of any Self-Employed Individual, Compensation
shall include the Individual's Earned Income.
For years beginning after December 31, 1988, the annual
Compensation of each Participant taken into account under the plan
for any year shall not exceed $200,000. This limitation shall be
adjusted by the Secretary at the same time and in the same manner
as under Section 415(d) of the Code, except that the dollar
increase in effect on January 1 of any calendar year is effective
for years beginning in such calendar year and the first adjustment
to the $200,000 limitation is effected on January 1, 1990. If a
plan determines Compensation on a period of time that contains
fewer than 12 calendar months, then annual Compensation limit is an
amount equal to the annual Compensation limit for the calendar year
in which the Compensation period begins multiplied by the ratio
obtained by dividing the number of full months in the period by 12.
If Compensation for any prior plan year is taken into account
in determining an employee's contributions or benefits for the
current year, the Compensation for such prior year is subject to
the applicable annual compensation limit in effect for that prior
year. For this purpose, for years beginning before January 1,
1990, the applicable annual compensation limit is $200,000.
In determining the Compensation of a Participant for purposes
of this limitation, the rules of Section 414(q)(6) of the Code
shall apply, except that in applying such rules, the term "family"
shall include only the spouse of the Participant and any lineal
descendants of the Participant who have not attained age 19 before
the close of the year. If the $200,000 limitation is exceeded as a
result of the application of these rules, then the limitation shall
be prorated among the affected individuals in proportion to each
such individual's Compensation as determined under this Section
prior to the application of this limitation.
(8) "Earned Income" means the net earnings of a Self-Employed
Individual derived from the trade or business with respect to which
the Plan is established and for which the personal services of such
individual are a material income-providing factor, excluding any
items not included in gross income and the deductions allocated to
such items, except that for taxable years beginning after December
31, 1989 net earnings shall be determined with regard to the
deduction allowed under Section 164(f) of the Code, to the extent
applicable to the Employer. Net earnings shall be reduced by
contributions of the
(2)
<PAGE>
Employer to any qualified plan, to the extent a deduction is allowed
to the Employer for such contributions under Section 404 of the
Code.
(9) "Eligibility Computation Period" means each 12-consecutive
month period beginning with the Employment Commencement Date and
each anniversary thereof.
(10) "Employee" means any individual employed by the Employer.
For purposes of the Plan, an individual shall be considered to
become an Employee on the date on which he first completes an Hour
of Service and he shall be considered to have ceased to be an
Employee on the date on which he last completes an Hour of Service.
The term also includes a Leased Employee, such that contributions
or benefits provided by the leasing organization which are
attributable to services performed for the Employer shall be
treated as provided by the Employer. Notwithstanding the above, a
Leased Employee shall not be considered an Employee if Leased
Employees do not constitute more than 20 percent of the Employer's
non-highly compensated work force (taking into account all Related
Employers) and the Leased Employee is covered by a money purchase
pension plan maintained by the leasing organization which plan
provides (i) a nonintegrated employer contribution rate of at least
10 percent of compensation, as defined for purposes of Section
415(c)(3) of the Code, but including amounts contributed pursuant
to a salary reduction agreement which are excludable from gross
income under Section 125, Section 402(a)(8), Section 402(h) or
Section 403(b) of the Code, (ii) full and immediate vesting, and
(iii) immediate participation by each employee of the leasing
organization.
(11) "Employer" means the employer named in the Section 1.02(a),
and any Related Employers designated by Section 1.02(b).
(12) "Employment Commencement Date" means the date on which the
Employee first performs an Hour of Service.
(13) "ERISA" means the Employee Retirement Income Security Act of
1974, as from time to time amended.
(14) "Fidelity Fund" means any Registered Investment Company, and
the GIC Open-End Portfolio of the Fidelity Group Trust for Employee
Benefit Plans.
(15) "Fund Share" means the share, unit, or other evidence of
ownership in a Fidelity Fund.
(3)
<PAGE>
(16) "Highly Compensated Employee" means both highly compensated
active Employees and highly compensated former Employees.
A highly compensated active Employee includes any Employee
who performs service for the Employer during the determination year
and who, during the look-back year: (i) received compensation from
the Employer in excess of $75,000 (as adjusted pursuant to Section
415(d) of the Code); (ii) received compensation from the Employer
in excess of $50,000 (as adjusted pursuant to Section 415(d) of the
Code) and was a member of the top-paid group for such year, or
(iii) was an officer of the Employer and received compensation
during such year that is greater than 50 percent of the dollar
limitation in effect under Section 415(b)(l)(A) of the Code. The
term highly compensated Employee also includes: (i) Employees who
are both described in the preceding sentence if the term
"determination year" is substituted for the term "look-back year"
and the Employee is one of the 100 Employees who received the most
compensation from the Employer during the determination year, and
(ii) Employees who are 5 percent owners at any time during the
look-back year or determination year.
If no officer has satisfied the compensation of (iii) above
during either a determination year or look-back year, the highest
paid officer for such year shall be treated as a highly compensated
Employee.
For this purpose, the determination year shall be the Plan
Year. The look-back year shall be the twelve-month period
immediately preceding the determination year.
A highly compensated former Employee includes any Employee
who separated from service (or was deemed to have separated) prior
to the determination year, performs no service for the Employer
during the determination year, and was a highly compensated active
Employee for either the separation year or any determination year
ending on or after the Employee's 55th birthday.
If an Employee is, during a determination year or look-back
year, a family member of either a 5 percent owner who is an active
or former Employee or a highly compensated Employee who is one of
the 10 most highly compensated Employees ranked on the basis of
compensation paid by the Employer during such year, then the family
member and the 5 percent owner or top-ten highly compensated
Employee shall be aggregated. In such case, the family member and
5 percent owner or top-ten highly compensated Employee shall be
treated as a single Employee receiving compensation and plan
contributions or benefits
(4)
<PAGE>
equal to the sum of such compensation and contributions or benefits
of the family member and 5 percent owner or top-ten highly
compensated Employee. For purposes of this Section, family member
includes the spouse, lineal ascendants and descendants of the
Employee or former Employee and the spouses of such lineal
ascendants and descendants.
The determination of who is a highly compensated Employee,
including the determinations of the number and identity of
Employees in the top-paid group, the top 100 Employees, the number
of Employees treated as officers and the compensation that is
considered, will be made in accordance with Section 414(q) of the
Code and the regulations thereunder.
(17) "Hour of Service" means, with respect to any Employee,
(A) Each hour for which the Employee is directly or
indirectly paid, or entitled to payment, for the performance
of duties for the Employer or a Related Employer, each such
hour to be credited to the Employee for the Eligibility
Computation Period in which the duties were performed;
(B) Each hour for which the Employee is directly or
indirectly paid, or entitled to payment, by the Employer or
Related Employer (including payments made or due from a trust
fund or insurer to which the Employer contributes or pays
premiums) on account of a period of time during which no
duties are performed (irrespective of whether the employment
relationship has terminated) due to vacation, holiday,
illness, incapacity, disability, layoff, jury duty, military
duty, or leave of absence, each such hour to be credited to
the Employee for the Eligibility Computation Period in which
such period of time occurs, subject to the following rules:
(i) No mom than 501 Hours of Service shall be credited
under this paragraph (B) on account of any single
continuous period during which the Employee performs no
duties;
(ii) Hours of Service shall not be credited under this
paragraph (B) for a payment which solely reimburses the
Employee for medically-related expenses, or which is
made or due under a plan maintained solely for the
purpose of complying with applicable workmen's
compensation, unemployment compensation or disability
insurance laws; and
(5)
<PAGE>
(iii) If the period during which the Employee performs
no duties falls within two or more Eligibility
Computation Periods and if the payment made on account
of such period is not calculated on the basis of units
of time, the Hours of Service credited with respect to
such period shall be allocated between not more than the
first two such Eligibility Computation Periods on any
reasonable basis consistently applied with respect to
similarly situated Employees; and
(C) Each hour not counted under paragraph (A) or (B) for
which back pay, irrespective of mitigation of damages, has
been either awarded or agreed to be paid by the Employer or a
Related Employer, each such hour to be credited for the
Eligibility Computation Period to which the award or
agreement for back pay pertains.
For purposes of determining Hours of Service, Employees of
the Employer and of all Related Employers will be treated as
employed by a single employer. For purposes of paragraphs (B) and
(C) above, Hours of Service will be calculated in accordance with
the provisions of Section 2530.200b-2(b) of the Department of Labor
regulations which are incorporated herein by reference.
(18) "Leased Employee" means any individual who provides services
to the Employer or a Related Employer (the "recipient") but is not
otherwise an employee of the recipient if (i) such services are
provided pursuant to an agreement between the recipient and any
other person (the "leasing organization"), (ii) such individual has
performed services for the recipient (or for the recipient and any
related persons within the meaning of Section 414(n)(6) of the
Code) on a substantially full-time basis for at least one year, and
(iii) such services are of a type historically performed by
employees in the business field of the recipient.
(19) "Normal Retirement Age" means the normal retirement age
specified in Section 1.05(a). If the Employer enforces a mandatory
retirement age, the Normal Retirement Age is the lesser of that
mandatory age or the age specified in Section 1.05(a).
(20) "Owner-Employee" means, if the Employer is a sole
proprietorship, the individual who is the sole proprietor, or if
the Employer is a partnership, a partner who owns more than 10
percent of either the capital interest or the profits interest of
the partnership.
(6)
<PAGE>
(21) "Participant" means any Employee who participates in the Plan
in accordance with Article 3 hereof.
(22) "Plan" means the plan established by the Employer in the form
of the prototype plan as set forth herein as a new plan or as an
amendment to an existing plan, by executing the Adoption Agreement,
together with any and all amendments hereto.
(23) "Plan Year" means the 12-consecutive month period designated
by the Employer in Section 1.01(f).
(24) "Prototype Sponsor" means Fidelity Management and Research
Company, or its successor.
(25) "Registered Investment Company" means any one or more
corporations, partnerships or trusts registered under the
Investment Company Act of 1940 for which Fidelity Management and
Research Company serves as investment advisor.
(26) "Related Employer" means any employer other than the Employer
named in Section 1.02(a), if the Employer and such other employer
are members of a controlled group of corporations (as defined in
Section 414(b) of the Code) or an affiliated service group (as
defined in Section 414(m)), or are trades or businesses (whether or
not incorporated) which are under common control (as defined in
Section 414(c)), or such other employer is required to be
aggregated with the Employer pursuant to regulations issued under
Section 414(o).
(27) "Self-Employed Individual" means an individual who has Earned
Income for the taxable year from the Employer or who would have had
Earned Income but for the fact that the trade or business had no
net profits for the taxable year.
(28) "Trust" means the trust created by the Employer in accordance
with the provisions of Section 14.01.
(29) "Trust Agreement" means the agreement between the Employer
and the Trustee, as set forth in Article 14, under which the assets
of the Plan are held, administered, and managed.
(30) "Trust Fund" means the property held in Trust by the Trustee
for the Accounts of the Participants and their Beneficiaries.
(31) "Trustee" means the Fidelity Management Trust Company, or its
successor.
(7)
<PAGE>
(32) "Year of Service for Participation" means, with respect to
any Employee, an Eligibility Computation Period during which the
Employee has been credited with at least 1,000 Hours of Service.
If the Plan maintained by the Employer is the plan of a predecessor
employer, an Employee's Years of Service for Participation shall
include years of service with such predecessor employer. In any
case in which the Plan maintained by the Employer is not the plan
maintained by a predecessor employer, service for such predecessor
shall, to the, extent provided by regulations, be treated as
service for the Employer.
(33) "Years of Service for Vesting" means, with respect to any
Employee, the number of whole years of his periods of service with
the Employer or a Related Employer. An employee will receive
credit for the aggregate of all time period(s) commencing with the
employee's first day of employment or reemployment and ending on
the date a break in service begins. The first day of employment or
reemployment is the first day the employee performs an Hour or
Service. An employee will also receive credit for any period of
severance of less than 12 consecutive months. Fractional periods
of a year will be expressed in terms of days.
Period of severance is a continuous period of time during
which the employee is not employed by the employer. Such period
begins on the date the employee retires, quits or is discharged, or
if earlier, the 12 month anniversary of the date on which the
employee was otherwise first absent from service. A break in
service is a period of severance of at least 12 consecutive months.
In the case of an individual who is absent from work for
maternity or paternity reasons, the 12-consecutive month period
beginning on the first anniversary of the first date of such
absence shall not constitute a break in service. For purposes of
this paragraph, an absence from work for maternity or paternity
reasons means an absence (1) by reason of the pregnancy of the
individual, (2) by reason of the birth of a child of the
individual, (3) by reason of the placement of a child with the
individual in connection with the adoption of such child by such
individual, or (4) for purposes of caring for such child for a
period beginning immediately following such birth or placement.
If the Plan maintained by the Employer is the plan of a
predecessor employer, an Employee's Years of Service for Vesting
shall include years of service with such predecessor employer. In
any case in which the Plan maintained by the Employer is not the
plan maintained by a predecessor employer, service for such
predecessor shall be
(8)
<PAGE>
treated as service for the Employer to the extent provided in
Section 1.06(e).
(b) Pronouns used in the Plan are in the masculine gender but include
the feminine gender unless the context clearly indicates otherwise.
ARTICLE 3. PARTICIPATION.
-------------
3.01. Date of Participation. All Employees who are in the service of the
---------------------
Employer on the Effective Date will become Participants on the date elected by
the Employer in Section 1.03(b)(1). Any other Employee will become a
Participant in the Plan as of the first Entry Date on which he first satisfies
the eligibility requirements set forth in Section 1.03(a).
3.02. Reemployment of Participants. If a Participant ceases to be an
----------------------------
Employee and thereafter returns to the employ of the Employer, he will be as
follows:
(a) he will again become a Participant on the date on which he
completes an Hour of Service for the Employer following his reemployment;
and
(b) any distribution which he is receiving under the Plan will continue
to be made to him in accordance with the provisions of the Plan.
3.03. Participation by Owner-Employee; Controlled Businesses. If the Plan
------------------------------------------------------
provides contributions or benefits for one or more Owner-Employees who control
both the trade or business with respect to which the Plan is established and
one or more other trades or businesses, the Plan and any plan established with
respect to such other trades or businesses must, when looked at as a single
plan, satisfy Sections 401(a) and 401(d) of the Code with respect to the
employees of this and all such other trades or businesses. If the Plan
provides contributions or benefits for one or more Owner-Employees who control
one or more other trades or businesses, the employees of each such other trade
or business must be included in a plan which satisfies Sections 401(a) and
401(d) of the Code and which provides contributions and benefits not less
favorable than provided for Owner-Employees under the Plan.
If an individual is covered as an owner-employee under the plans of two
or more trades or businesses which are not controlled and the individual
controls a trade or business, then the contributions or benefits of the
employees under the plan of the trades or businesses which are controlled must
be as favorable as those provided for him under the most favorable plan of the
trade or business which is not controlled.
For purposes of this Section, an Owner-Employee, or two or more
Owner-Employees, shall be considered to control a trade or business if such
Owner-Employee, or such Owner-Employees together, (i) own the entire interest
in an unincorporated trade or business, or (ii) in the case of a partnership,
own more than
(9)
<PAGE>
50 percent of either the capital interest or the profits interest in such
partnership. For this purpose, an Owner-Employee, or two or more Owner-
Employees, shall be treated as owning any interest in a partnership which is
owned, directly or indirectly, by a partnership controlled by such Owner-
Employee or such Owner-Employees.
ARTICLE 4. CONTRIBUTIONS.
-------------
4.01. Deferral Contributions.
----------------------
(a) If so provided by the Employer in Section 1.04(a), each Participant
may elect to execute a salary reduction agreement with the Employer to
reduce his Compensation by a specified percentage equal to a whole number
multiple of one (1) percent. Such agreement shall become effective on
the first day of the first payroll period for which the Employer can
reasonably process the request. The Employer shall make a Deferral
Contribution on behalf of the Participant corresponding to the amount of
said reduction, subject to the restrictions set forth below. Under no
circumstances may a salary reduction agreement be adopted retroactively.
(b) A Participant may elect to change or discontinue the percentage by
which his Compensation is reduced by notice to the Employer. Any such
change or discontinuance shall be effective the first pay period for
which the Employer can reasonably process the request. After a
Participant's discontinuance of salary reduction, a Participant may
execute a new salary reduction agreement, but such new agreement shall
not be effective until the first day of the first payroll period for
which the Employer can reasonably process the request.
(c) No participant shall be permitted to have Deferral Contributions
made under this plan, or any other qualified plan maintained by the
Employer, during the taxable year, in excess of the dollar limitation
contained in Section 402(g) of the Code in effect at the beginning of
such taxable year.
A participant may assign to this plan any Excess Deferrals made
during the taxable year of the participant by notifying the plan
administrator on or before March 15 following the taxable year of the
amount of the Excess Deferrals to be assigned to the plan.
Notwithstanding any other provision of the plan, Excess Deferrals, plus
any income and minus any loss allocable thereto, shall be distributed no
later than April 15 to any participant to whose account Excess Deferrals
were so assigned for the preceding year and who claims Excess Deferrals
for such taxable year.
"Excess Deferrals" shall mean those Deferral Contributions that are
includable in a participant's gross income under Section 402(g) of the
Code to the extent such participant's Deferral Contributions for a
taxable year exceed
(10)
<PAGE>
the dollar limitation under such Code section. For purposes of determining
Excess Deferrals, the term "Deferred Contributions" include the sum of all
employer contributions made on behalf of such participant pursuant to an
election to defer under any qualified CODA as described in Section 401(k)
of the Code, any simplified employee pension cash or deferred arrangement
as described in Section 402(h)(1)(B), any eligible deferred compensation
plan under Section 457, any plan as described under Section 501(c)(18),
and any employer contributions made on the behalf of a participant for the
purchase of an annuity contract under Section 403(b) pursuant to a salary
reduction agreement.
Excess Deferrals shall be treated as annual additions under the
plan.
Excess Deferrals shall be adjusted for any income or loss up to the
date of distribution. The income or loss allocable to Excess Deferrals
is the sum of: (1) income or loss allocable to the participant's
Deferral Contributions account for the taxable year multiplied by a
fraction, the numerator of which is such participant's Excess Deferrals
for the year and the denominator is the participant's account balance
attributable to Deferral Contributions without regard to any income or
loss occurring during such taxable year; and (2) ten percent of the
amount determined under (1) multiplied by the number of whole calendar
months between the end of the participant's taxable year and the date of
distribution, counting the month of distribution if distribution occurs
after the 15th day of such month.
(d) In order for the Plan to comply with the requirements of Sections
401(k), 402(g) and 415 of the Code and the regulations promulgated
thereunder, at any time in a Plan Year the Administrator may reduce the
rate of Deferral Contributions to be made on behalf of any Participant,
or class of Participants, for the remainder of that Plan Year, or the
Administrator may require that all Deferral Contributions to be made on
behalf of a Participant be discontinued for the remainder of that Plan
Year. Upon the close of the Plan Year or such earlier date as the
Administrator may determine, any reduction or discontinuance in Deferral
Contributions shall automatically cease until the Administrator again
determines that such a reduction or discontinuance of Deferral
Contributions is required.
4.02. Additional Limit on Deferral Contributions.
------------------------------------------
(a) The Actual Deferral Percentage (hereinafter "ADP") for participants
who are Highly Compensated Employees for each Plan Year and the ADP for
participants who are Non-highly Compensated Employees for the same Plan
Year must satisfy one of the following tests:
(11)
<PAGE>
(1) The ADP for participants who are Highly Compensated Employees
for the Plan Year shall not exceed the ADP for participants who are
Non-highly Compensated Employees for the same Plan Year multiplied
by 1.25; or
(2) The ADP for participants who are Highly Compensated Employees
for the Plan Year shall not exceed the ADP for participants who are
Non-highly Compensated Employees for the same Plan Year multiplied
by 2.0, provided that the ADP for participants who are Highly
Compensated Employees does not exceed the ADP for participants who
are Non-highly Compensated Employees by more than two (2)
percentage points.
(b) The following special rules apply for the purposes of this Section:
(1) The ADP for any participant who is a Highly Compensated
Employee for the Plan Year and who is eligible to have Deferral
Contributions (and Qualified Discretionary Contributions if treated
as Deferral Contributions for purposes of the ADP test) allocated
to his or her accounts under two or more arrangements described in
Section 401(k) of the Code, that are maintained by the employer,
shall be determined as if such Deferral Contributions (and, if
applicable, such Qualified Discretionary Contributions) were made
under a single arrangement. If a Highly Compensated Employee
participates in two or more cash or deferred arrangements that have
different Plan Years, all cash or deferred arrangements ending with
or within the same calendar year shall be treated as a single
arrangement.
(2) In the event that this plan satisfies the requirements of
Sections 401(k), 401(a)(4), or 410(b) of the Code only if
aggregated with one or more other plans, or if one or more other
plans satisfy the requirements of such Sections of the Code only if
aggregated with this plan, then this section shall be applied by
determining the ADP of employees as if all such plans were a single
plan. For Plan Years beginning after December 31, 1989, plans may
be aggregated in order to satisfy Section 401(k) of the Code only
if they have the same Plan Year.
(3) For purposes of determining the ADP of a participant who is a
5-percent owner or one of the ten most highly-paid Highly
Compensated Employees, the Deferral Contributions (and Qualified
Discretionary Contributions if treated as Deferral Contributions
for purposes of the ADP test) and Compensation of such participant
shall include the Deferral Contributions (and, if applicable,
Qualified Discretionary Contributions) and Compensation for the
Plan Year of Family Members
(12)
<PAGE>
(as defined in Section 414(q)(6) of the Code). Family Members, with
respect to such Highly Compensated Employees, shall be disregarded
as separate employees in determining the ADP both for participants
who are Non-highly Compensated Employees and for participants who
are Highly Compensated Employees.
(4) For purposes of determining the ADP test, Deferral
Contributions and Qualified Discretionary Contributions must be
made before the last day of the twelve-month period immediately
following the Plan Year to which contributions relate.
(5) The employer shall maintain records sufficient to demonstrate
satisfaction of the ADP test and the amount of Qualified
Discretionary Contributions used in such test.
(6) The determination and treatment of the ADP amounts of any
participant shall satisfy such other requirements as may be
prescribed by the Secretary of the Treasury.
(c) The following definitions shall apply for purposes of this Section:
(1) "Actual Deferral Percentage" shall mean, for a specified
group of participants for a Plan Year, the average of the ratios
(calculated separately for each participant in such group) of (1)
the amount of employer contributions actually paid over to the
trust on behalf of such participant for the Plan Year to (2) the
participant's Compensation for such Plan Year (whether or not the
employee was a participant for the entire Plan Year). Employer
contributions on behalf of any participant shall include: (1) any
Deferral Contributions made pursuant to the participant's deferral
election, including Excess Deferrals of Highly Compensated
Employees, but excluding Deferral Contributions that are taken into
account in the Contribution Percentage test (provided the ADP test
is satisfied both with and without exclusion of these Deferral
Contributions); and (2) at the election of the employer, Qualified
Discretionary Contributions. For purposes of computing Actual
Deferral Percentages, an employee who would be a participant but
for the failure to make Deferral Contributions shall be treated as
a participant on whose behalf no Deferral Contributions are made.
(2) "Excess Contributions" shall mean, with respect to any Plan
Year, the excess of:
(a) The aggregate amount of employer contributions actually
taken into account in computing the ADP of Highly Compensated
Employees for such Plan Year, over
(13)
<PAGE>
(b) The maximum amount of such contributions permitted by
the ADP test (determined by reducing contributions made on
behalf of Highly Compensated Employees in order of the ADPs,
beginning with the highest of such percentages).
(3) "Qualified Discretionary Contributions" shall mean
contributions made by the Employer as elected in Section 1.04(d) in
order to satisfy the ADP tests, and allocated to Participants'
accounts that the Participants may not elect to receive in cash
until distributed from the plan; that are nonforfeitable when made;
and that are distributable only in accordance with the distribution
provisions that are applicable to Deferral Contributions.
(d) Notwithstanding any other provision of this plan, Excess
Contributions, plus any income and minus any loss allocable thereto,
shall be distributed no later than the last day of each Plan Year to
participants to whose accounts such Excess Contributions were allocated
for the preceding Plan Year. If such excess amounts are distributed more
than 2-1/2 months after the last day of the Plan Year in which such
excess amounts arose, a ten (10) percent excise tax will be imposed on
the employer maintaining the plan with respect to such amounts. Such
distributions shall be made to Highly Compensated Employees on the basis
of the respective portions of the Excess Contributions attributable to
each of such employees. Excess Contributions shall be allocated to
Participants who are subject to the family member aggregation rules of
Section 414(q)(6) of the Code in the manner prescribed by the
regulations.
Excess Contributions shall be treated as annual additions under the
plan.
Excess Contributions shall be adjusted for any income or loss up to
the date of distribution. The income or loss allocable to Excess
Contributions is the sum of: (1) income or loss allocable to the
participant's Deferral Contribution account (and, if applicable, the
Qualified Discretionary Contribution account) for the Plan Year
multiplied by a fraction, the numerator of which is such participant's
Excess Contributions of the year and the denominator is the participant's
account balance attributable to Deferral Contributions (and Qualified
Discretionary Contributions if any of such contributions are included in
the ADP test) without regard to any income or loss occurring during such
Plan Year, and (2) ten percent of the amount determined under (1)
multiplied by the number of whole calendar months between the end of the
Plan Year and the date of distribution, counting the month of
distribution if distribution occurs after the 15th of such month.
Excess Contributions shall be distributed from the participant's
Qualified Discretionary Contribution account only to the extent that such
Excess
(14)
<PAGE>
Contributions exceed the balance in the participant's Deferral
Contributions account.
4.03. Matching Contributions. If so provided by the Employer in Section
----------------------
1.04(2), the Employer shall make a Matching Contribution on behalf of each
Participant who had Deferral Contributions made on his behalf during the year.
The amount of the Matching Contribution shall be determined in accordance with
Section 1.04(2), subject to the limitations set forth in Section 4.04.
4.04. Limit on Matching Contributions.
-------------------------------
(a) The ACP for participants who am Highly Compensated Employees for
each Plan Year and the ACP for participants who are Non-highly
Compensated Employees for the same Plan Year must satisfy one of the
following tests:
(1) The ACP for participants who are Highly Compensated Employees
for the Plan Year shall not exceed the ACP for participants who are
Non-highly Compensated Employees for the same Plan Year multiplied
by 1.25; or
(2) The ACP for participants who are Highly Compensated Employees
for the Plan Year shall not exceed the ACP for participants who are
Non-highly Compensated Employees for the same Plan Year multiplied
by two (2), provided that the ACP for participants who are Highly
Compensated Employees does not exceed the ACP for participants who
are Non-highly Compensated Employees by more than two (2)
percentage points.
(b) The following special rules apply for purposes of this section:
(1) If one or more Highly Compensated Employees participate in
both a CODA and a plan subject to the ACP test maintained by the
employer and the sum of the ADP and ACP of those Highly Compensated
Employees subject to either or both tests exceeds the Aggregate
Unit, then the ACP of those Highly Compensated Employees who also
participate in a CODA will be reduced (beginning with such Highly
Compensated Employee whose ACP is the highest) so that the limit is
not exceeded. The amount by which each Highly Compensated
Employee's Contribution Percentage Amounts is reduced shall be
treated as an Excess Aggregate Contribution. The ADP and ACP of
the Highly Compensated Employees are determined after any
corrections required to meet the ADP and ACP tests. Multiple use
does not occur if either the ADP or ACP of the Highly Compensated
Employees does not exceed 1.25 multiplied by the ADP and ACP of the
Non-highly Compensated Employees.
(15)
<PAGE>
(2) For purposes of this section, the Contribution Percentage for
any participant who is a Highly Compensated Employee and who is
eligible to have Contribution Percentage Amounts allocated to his
or her account under two or more plans described in section 401(a)
of the Code, or arrangements described in section 401(k) of the Code
that are maintained by the employer, shall be determined as if the
total of such Contribution Percentage Amounts was made under each
plan. If a Highly Compensated Employee participates in two or more
cash or deferred arrangements that have different plan years, all
cash or deferred arrangements ending with or within the same
calendar year be treated as a single arrangement
(3) In the event that this plan satisfies the requirements of
Sections 401(m), 401(a)(4) or 410(b) of the Code only if aggregated
with one or more other plans, or if one or more other plans satisfy
the requirements of such sections of the Code only if aggregated
with this plan, then this section shall be applied by determining
the Contribution Percentage of employees as if all such plans were
a single plan. For plan years beginning after December 31, 1989,
plans may be aggregated in order to satisfy Section 401(m) of the
Code only if they have the same Plan Year.
(4) For purposes of determining the Contribution percentage of a
participant who is a five-percent owner or one of the ten most
highly-paid Highly Compensated Employees, the Contribution
Percentage Amounts and Compensation of such participant shall
include the Contribution Percentage Amounts and Compensation for
the Plan Year of Family Members (as defined in Section 414(q)(6) of
the Code). Family Members, with respect to Highly Compensated
Employees, shall be disregarded as separate employees in
determining the Contribution Percentage both for participants who
are Non-highly Compensated Employees and for participants who are
Highly Compensated Employees.
(5) For purposes of determining the Contribution Percentage test,
Matching Contributions and Qualified Discretionary Contributions
will be considered made for a Plan Year if made no later than the
end of the twelve-month period beginning on the day after the close
of the Plan Year.
(6) The employer shall maintain records sufficient to demonstrate
satisfaction of the ACP test and the amount of Qualified
Discretionary Contributions or Qualified Matching Contributions, or
both, used in such test.
(16)
<PAGE>
(7) The determination and treatment of the Contribution
Percentage of any participant shall satisfy such other requirements
as may be prescribed by the Secretary of Treasury.
(c) The following definitions shall apply for purposes of this Section:
(1) "Aggregate Limit" shall mean the sum of (i) 125 percent of
the greater of the ADP of the Non-highly Compensated Employees for
the Plan Year or the ACP of Non-highly Compensated Employees under
the plan subject to Code Section 401(m) for the Plan Year beginning
with or within the Plan Year of the CODA and (ii) the lesser of 200%
or two plus the lesser of such ADP or ACP. "Lesser" is substituted
for "greater" in "(i)," above, and "greater" is substituted for
"lesser" after "two plus the" in "(ii)" if it would result in a
larger Aggregate Limit.
(2) "Average Contribution Percentage" shall mean the average of
the Contribution Percentages of the Eligible Participants in a
group.
(3) "Contribution Percentage" shall mean the ratio (expressed as
a percentage) of the participant's Contribution Percentage Amounts
to the participant's Compensation for the Plan Year (whether or not
the employee was a participant for the entire Plan Year).
(4) "Contribution Percentage Amounts" shall mean the sum of the
Matching Contributions made under the plan on behalf of the
participant for the Plan Year. Such Contribution Percentage
Amounts shall include forfeitures of Excess Aggregate Contributions
or Matching Contributions allocated to the participant's account
which shall be taken into account in the year in which such
forfeiture is allocated. The employer also may elect to use
Deferral Contributions in the Contribution Percentage Amounts so
long as the ADP test is met before the Deferral Contributions are
used in the ACP test and continues to be met following the
exclusion of those Deferral Contributions that are used to meet the
ACP test.
(5) "Eligible Participant" shall mean any employee who is
eligible to make a Deferral Contribution (if the employer takes
such contributions into account in the calculation of the
Contribution Percentage), or to receive a Matching Contribution
(including forfeitures).
(6) "Matching Contribution" shall mean an employer contribution
made to this or any other defined contribution plan on behalf of a
participant on account of a participant's Deferral Contribution.
(17)
<PAGE>
(7) "Excess Aggregate Contributions" shall mean, with respect to
any Plan Year, the excess of:
(a) The aggregate Contribution Percentage Amounts taken
into account in computing the numerator of the Contribution
Percentage actually made on behalf of Highly Compensated
Employees for such Plan Year, over
(b) The maximum Contribution Percentage Amounts permitted
by the ACP test (determined by reducing contributions made on
behalf of Highly Compensated Employees in order of their
Contribution Percentages beginning with the highest of such
percentages).
Such determination shall be made after first
determining Excess Deferrals pursuant to Section 4.01 and
then determining Excess Contributions pursuant to Section
4.02.
(d) Notwithstanding any other provision of this plan,
Excess Aggregate Contributions, plus any income and minus any
loss allocable thereto, shall be forfeited, if forfeitable,
or if not forfeitable, distributed no later than the last day
of each Plan Year to participants to whose accounts such
Excess Aggregate Contributions were allocated for the
preceding Plan Year. Excess Aggregate Contributions shall be
allocated to participants who are subject to the family
member aggregation rules of Section 414(g)(6) of the Code in
the manner prescribed by the regulations. If such Excess
Aggregate Contributions are distributed more than 2-1/2
months after the last day of the Plan Year in which such
excess amounts arose, a ten (10) percent excise tax will be
imposed on the employer maintaining the plan with respect to
those amounts. Excess Aggregate Contributions shall be
treated as annual additions under the plan.
Excess Aggregate Contributions shall be adjusted for
any income or loss up to the date of distribution. The
income or loss allocable to Excess Contributions is the sum
of: (1) income or loss allocable to the participant's
Matching Contribution account (if any, and if all amounts
therein are not used in the ADP test) and, if applicable,
Qualified non-elective Contribution account and Deferral
Contribution account for the Plan Year multiplied by a
fraction, the numerator of which is such participant's Excess
Aggregate Contributions for the year and the denominator is
the participant's account balance(s) attributable to
Contribution Percentage Amounts without regard to any
(18)
<PAGE>
income or loss occurring during such Plan Year; and (2) ten
percent of the amount determined under (1) multiplied by the
number of whole calendar months between the end of the Plan
Year and the date of distribution, counting the month of
distribution if distribution occurs after the 15th of such
month.
Forfeitures of Excess Aggregate Contributions shall be
applied to reduce employer contributions; the forfeitures
shall be held in the money market fund, if any, listed in
Section 1.12(b) pending such application.
Excess Aggregate Contributions shall be forfeited, if
forfeitable, or distributed from the participant's Matching
Contribution account and (if applicable, the participant's
Qualified Discretionary Contribution account on a pro rata
basis).
4.05. Special Rules. Deferral Contributions and Qualified Discretionary
-------------
Contributions and income allocable to each are not distributable to a
participant or his or her beneficiary or beneficiaries, in accordance with such
participant's or beneficiary or beneficiaries election, earlier than upon
separation from service, death, or disability, except as otherwise provided in
Section 7.10, 7.11 or 10.06. The Participant's accrued benefit derived from
Deferral Contributions, Qualified Discretionary Contributions and Employee
Contributions is nonforfeitable. Separate accounts for Deferral Contributions,
Qualified Discretionary Contributions, employee contributions and Matching
Contributions will be maintained for each participant. Each account will be
credited with the applicable contributions and earnings thereon.
4.06. Discretionary Contributions. If so provided by the Employer in
---------------------------
Section 1.04(c)(l), for the Plan Year in which the Plan is adopted and for each
Plan Year thereafter, the Employer will make Discretionary Contributions to the
Trust in accordance with Section 1.04(c). Discretionary Contributions shall be
allocated among eligible Participants, as determined in accordance with Section
1.04(c)(2), on the basis of compensation as defined in Section 2.01(a)(7).
4.07. Time of Making Employer Contributions. The Employer will pay its
-------------------------------------
contribution for each Plan Year not later than the time prescribed by law for
filing the Employer's federal income tax return for the fiscal (or taxable)
year with or within which such Plan Year ends (including extensions thereof).
The Trustee will have no authority to inquire into the correctness of the
amounts contributed and paid over to the Trustee, to determine whether any
contribution is payable under Article 4, or to enforce, by suit or otherwise,
the Employer's obligation, if any, to make a contribution to the Trustee.
4.08. Return of Employer Contributions. To the extent a deduction is
--------------------------------
available to the Employer under Section 404 of the Code, contributions under
the Plan are condi-
(19)
<PAGE>
tioned on their deductibility under Section 404. If a contribution by the
Employer to the Trust is made by reason of a good faith mistake of fact, or, in
the case of an Employer for which a deduction is available under Section 404 of
the Code, by reason of a good faith belief as to the deductibility of the
contribution under Section 404, but the deduction is disallowed, the Trustee
shall, upon request by the Employer, return to the Employer the excess of the
amount contributed over the amount, if any, that would have been contributed had
there not occurred a mistake of fact or mistake in determining the deduction.
Such excess shall be reduced by amounts attributable thereto which have been
credited to the Accounts of Participants who have since received distributions
from the Trust, except to the extent such amounts continue to be credited to
such Participants' Accounts at the time the excess is returned to the Employer.
Such excess shall also be reduced by the losses of the Trust attributable
thereto, if and to the extent such losses exceed the gains and income
attributable thereto, but will not be increased by the gains and income of the
Trust attributable thereto, if and to extent such gains and income exceed the
losses attributable thereto. In no event will the return of a contribution
hereunder cause the balance of the individual Account of any Participant to be
reduced to less than the balance which would have been credited to the Account
had the mistaken amount not been contributed. No return of a contribution
hereunder will be made more than one year after the mistaken payment of the
contribution.
4.09. No Contributions by Participants. Except as provided in Section
--------------------------------
4.01, no Participant is required or permitted to make contributions under the
Plan.
4.10. Rollover Contributions.
----------------------
(a) Rollover of Distributed Property.
--------------------------------
(1) An Employee who was formerly a participant of an employees'
trust described in Section 501(a) of the Code (the "Distributing
Trust"), and who receives a distribution from the Distributing
Trust or from an individual retirement account funded by a
distribution from the Distributing Trust (the "Distribution") may
transfer the Distribution to the Trust within sixty (60) days to
the extent that the Distribution qualifies for tax-free rollover
treatment.
(b) Treatment of Rollover Amount.
----------------------------
(1) An account will be established for the transferring Employee
under Article 6, the rollover amount will be credited to the
account and such amount will be subject to the terms of the Plan,
including Section 8.01, except as otherwise provided in this
Section 4.10.
(2) The Rollover Account will at all times be fully vested in and
nonforfeitable by the Employee.
(20)
<PAGE>
(c) Entry into Plan by Transferring Employee. Although an amount
----------------------------------------
may be transferred to the Trust Fund under this Section 4.10 by an
Employee who has not yet become a Participant in accordance with Article
4, and such amount is subject to the terms of the Plan as described in
paragraph (b) above, the Employee will not become a Participant entitled
to share in Employer contributions until he has satisfied such
requirements.
(d) Monitoring of Rollovers.
-----------------------
(1) The Administrator shall develop such procedures and require
such information from transferring Employees as it deems necessary
to insure that amounts transferred under this Section 4.10 meet the
requirements for tax-free rollovers established by such Section and
by Section 402(a)(5) of the Code. No such amount may be
transferred until approved by the Administrator.
(2) If a transfer made under this Section 4.10 is later
determined by the Administrator not to have met the requirements of
this Section or of the Code or Treasury regulations, the Trustee
shall, within a reasonable time after such determination is made,
and on instructions from the Administrator, distribute to the
Employee the amounts then held in the Trust attributable to the
Transferred Amount.
ARTICLE 5. PARTICIPANTS' ACCOUNTS.
----------------------
5.01. Individual Accounts. The Administrator will establish and maintain
-------------------
an Account for each Participant which will reflect Employer contributions made
on behalf of the Participant and earnings, expenses, gains and losses
attributable thereto, and investments made with amounts in the Participant's
Account. The Administrator will establish and maintain such other accounts and
records as it decides in its discretion to be reasonably required or
appropriate in order to discharge its duties under the Plan.
5.02. Valuation of Accounts. Participant Accounts will be valued at their
---------------------
fair market value at least annually as of a date specified by the Sponsor in
accordance with a method consistently followed and uniformly applied, and on
such date earnings, expenses, gains and losses on investments made with amounts
in each Participant's Account will be allocated to such Account. Participants
will be furnished statements of their Account values at least once each Plan
Year.
5.03. Code Section 415 Limitations. Notwithstanding any other provisions
----------------------------
of the Plan:
(21)
<PAGE>
Subsections (a)(1) through (a)(4)--(These subsections apply to
---------------------------
Employers who do not maintain any qualified plan including a Welfare Benefit
- -----------------------------------------------------------------------------
Fund or an Individual Medical Account in addition to this Plan.)
- --------------------------------------------------------------
(a)(1)If the Participant does not participate in, and has never
participated in any other qualified plan, Welfare Benefit Fund or
Individual Medical Account maintained by the Employer, the amount of
Annual Additions to a Participant's Account for a Limitation Year shall
not exceed the lesser of the Maximum Permissible Amount or any other
limitation contained in this Plan. If the Employer contribution that would
otherwise be contributed or allocated to the participant's account would
cause the annual additions for the limitation year to exceed the maximum
permissible amount, the amount contributed or allocated will be reduced so
that the annual additions for the limitation year will equal the maximum
permissible amount.
(a)(2)Prior to the determination of the Participant's actual Compensation
for a Limitation Year, the Maximum Permissible Amount may be determined
on the basis of a reasonable estimation of the Participant's compensation
for such Limitation Year, uniformly determined for all Participants
similarly situated. Any Employer contributions based on estimated annual
compensation shall be reduced by any Excess Amounts carried over from
prior years.
(a)(3)As soon as is administratively feasible after the end of the
Limitation Year, the Maximum Permissible Amount for such Limitation Year
shall be determined on the basis of the Participant's actual Compensation
for such Limitation Year.
(a)(4)If, pursuant to subsection (a)(3) or as a result of the allocation
of forfeitures, there is an Excess Amount with respect to a Participant
for a Limitation Year, such Excess Amount shall be disposed of as
follows:
(A) In the event that the Participant is in the service of the
Employer which is covered by the Plan at the end of the Limitation
Year, then such Excess Amount shall be reapplied to reduce future
Employer contributions under this Plan for the next Limitation Year
(and for each succeeding year, as necessary) for such Participant,
so that in each such Year the sum of actual Employer contributions
plus the reapplied amount shall equal the amount of Employer
contributions which would otherwise be made to such Participant's
Account.
(B) In the event that the Participant is not in the service of
the Employer which is covered by the Plan at the end of a
Limitation Year, then such Excess Amount will be held unallocated
in a suspense account. The suspense account will be applied to
reduce future
(22)
<PAGE>
Employer contributions for all remaining Participants in the next
Limitation Year and each succeeding Limitation Year if necessary.
(C) If a suspense account is in existence at any time during the
Limitation Year pursuant to this subsection, it will not
participate in the allocation of the Trust Fund's investment gains
and losses. All amounts in the suspense account must be allocated
to the Accounts of Participants before any Employer contribution may
be made for the Limitation Year. Excess Amounts may not be
distributed to Participants or former Participants.
Subsections (b)(1) through (b)(6)--(These subsections apply to Employers who,
------------------------------------------
in addition to this Plan, maintain one or more plans, all of which are
- -----------------------------------------------------------------------
qualified Master or Prototype defined contribution Plans, any Welfare Benefit
- ------------------------------------------------------------------------------
Fund or any Individual Medical Account.)
- --------------------------------------
(b)(1)If, in addition to this Plan, the Participant is covered under any
other qualified defined contribution plans (all of which are qualified
Master or Prototype Plans) maintained by the Employer, the amount of
Annual Additions to a Participant's Account for a Limitation Year, not
exceed the lesser of:
(A) the Maximum Permissible Amount, reduced by the sum of any
Annual Additions to the Participant's accounts for the same
Limitation Year under such other defined contribution plans and
Welfare Benefit Funds; or
(B) any other limitation contained in this Plan.
If the annual additions with respect to the participant under other
defined contribution plans and welfare benefit funds maintained by the
employer are less than the maximum permissible amount and the employer
contribution that would otherwise be contributed or allocated to the
participant's account under this plan would cause the annual additions
for the limitation year to exceed this limitation, the amount contributed
or allocated will be reduced so that the annual additions under all such
plans and funds for the limitation year will equal the maximum
permissible amount. If the annual additions with respect to the
participant under such other defined contribution plans and welfare
benefit funds in the aggregate are equal to or greater than the maximum
permissible amount, no amount will be contributed or allocated to the
participant's account under this plan for the limitation year.
(b)(2)Prior to the determination of the Participant's actual Compensation
for the Limitation Year, the amounts referred to in (b)(l)(A) above may
be determined on the basis of a reasonable estimation of the
Participant's compensation for such Limitation Year, uniformly determined
for all Participants similarly
(23)
<PAGE>
situated. Any Employer contribution based on estimated annual compensation
shall be reduced by any Excess Amounts carried over from prior years.
(b)(3)As soon as is administratively feasible after the end of the
Limitation Year, the amounts referred to in (b)(1)(A) shall be determined
on the basis of the Participant's actual Compensation for such Limitation
Year.
(b)(4)If a Participant's Annual Additions under this Plan and all such
other plans result in an Excess Amount, such Excess Amount shall be
deemed to consist of the Annual Additions last allocated, except that
Annual Additions attributable to a Welfare Benefit Fund or Individual
Medical Account will be deemed to have been allocated first regardless of
the actual allocation date.
(b)(5)If an Excess Amount was allocated to a Participant on an allocation
date of this Plan which coincides with an allocation date of another
plan, the Excess Amount attributed to this Plan will be the product of:
(A) the total Excess Amount allocated as of such date (including
any amount which would have been allocated but for the limitations
of Section 415 of the Code), times
(B) the ratio of (i) the Annual Additions allocated to the
Participant as of such date under this Plan, divided by (ii) the
Annual Additions allocated as of such date under all qualified
defined contribution plans (determined without regard to the
limitations of Section 415 of the Code).
(b)(6)Any Excess Amounts attributed to this Plan shall be disposed of as
provided in subsection (a)(4).
Subsection (c)--(This subsection applies only to Employers who, in
--------------------------------------------------
addition to this Plan, maintain one or more qualified plans which are
----------------------------------------------------------------------
qualified defined contribution plans other than Master or Prototype
--------------------------------------------------------------------
Plans.)
-----
(c) If the Employer also maintains another plan which is a qualified
defined contribution plan other than a Master or Prototype Plan, Annual
Additions allocated under this Plan on behalf of any Participant shall be
limited in accordance with the provisions of (b)(l) through (b)(6), as
though the other plan were a Master or Prototype Plan, unless the
Employer provides other limitations in the Adoption Agreement.
Subsection (d)--(This subsection applies only to Employers who, in
--------------------------------------------------
addition to this Plan, maintain or at any time maintained a qualified defined
- ------------------------------------------------------------------------------
benefit plan.)
- ------------
(d) If the Employer maintains, or at any time maintained, a qualified
defined benefit plan, the sum of any Participant's Defined Benefit
Fraction and
(24)
<PAGE>
Defined Contribution Fraction shall not exceed the combined plan
limitation of 1.0 in any Limitation Year. The combined plan limitation
will be met as provided by the Employer in the Adoption Agreement.
Subsections (e)(1) through (e)(9)--(Definitions.)
-------------------------------------------------
(e)(1)"Annual Additions" means the sum of the following amounts credited
to a Participant for a Limitation Year:
(A) all Employer contributions,
(B) all Employee contributions, and
(C) all forfeitures.
For purposes of this Section 5.03, amounts reapplied to reduce
Employer contributions under subsection (a)(4) shall also be included as
Annual Additions.
Amounts allocated, after March 31, 1984, to an Individual Medical
Account which is part of a pension or annuity plan maintained by the
Employer are treated as Annual Additions to a defined contribution plan.
Also, amounts derived from contributions paid or accrued after December
31, 1985, in taxable years ending after such date, which are attributable
to post-retirement medical benefits allocated to the separate account of
a key employee, as defined in Section 419A(d)(3) of the Code, under a
Welfare Benefit Fund maintained by the Employer are treated as Annual
Additions to a defined contribution plan.
(e)(2)"Compensation" means wages as defined in Section 3401(a) for the
purposes of income tax withholding at the source but determined without
regard to any rules that limit the remuneration included in wages based
on the nature or location of the employment or the services performed
(such as the exception for agricultural labor in Section 3401(a)(2)).
(e)(3)"Defined Benefit Fraction" means a fraction, the numerator of which
is the sum of the Participant's annual benefits (adjusted to an
actuarially equivalent straight life annuity if such benefit is expressed
in a form other than a straight life annuity or qualified joint and
survivor annuity) under all the defined benefit plans (whether or not
terminated) maintained by the Employer, each such annual benefit computed
on the assumptions that the Participant will remain in employment until
the normal retirement age under each such plan (or the Participant's
current age, if later) and that all other factors used to determine
benefits under such plan will remain constant for all future Limitation
Years, and the denominator of which is the lesser of 125 percent of the
(25)
<PAGE>
dollar limitation determined for the Limitation Year under Sections
415(b)(1)(A) and 415(d) of the Code or 140 percent of the Participant's
average Compensation for the 3 highest consecutive calendar years of
service during which the Participant was active in each such plan,
including any adjustments under Section 415(b) of Code. However, if the
Participant was a participant as of the first day of the first Limitation
Year beginning after December 31, 1986 in one or more defined benefit
plans maintained by the Employer which were in existence on May 6, 1986
then the denominator of the Defined Benefit Fraction shall not be less
than 125 percent of the Participant's total accrued benefit as of the
close of the last Limitation Year beginning before January 1, 1987,
disregarding any changes in the terms and conditions of the plan after May
5, 1986, under all such defined benefit plans as met, individually and in
the aggregate, the requirements of Section 415 of the Code for all
Limitation Years beginning before January 1, 1987.
(e)(4)"Defined Contribution Fraction" means a fraction, the numerator of
which is the sum for the current and all prior Limitation Years of (A)
all Annual Additions (if any) to the Participant's accounts under each
defined contribution plan (whether or not terminated) maintained by the
Employer, and (B) all Annual Additions attributable to the Participant's
nondeductible employee contributions to all defined benefit plans
(whether or not terminated) maintained by the Employer, and the
Participant's Annual Additions under each Welfare Benefit Fund or amounts
attributable to an Individual Medical Account, and the denominator of
which is the sum for the current and all prior Limitation Years during
which the Participant was an Employee (regardless of whether the Employer
maintained a defined contribution plan in any such year).
The maximum aggregate amount in any Limitation Year is the lesser
of 125 percent of the dollar limitation in effect under Section
415(c)(1)(A) of the Code for each such year or 35 percent of the
Participant's Compensation for each such year.
If the Participant was a participant as of the first day of the
first Limitation Year beginning after December 31, 1986 in one or more
defined contribution plans maintained by the Employer which were in
existence on May 6, 1986 then the numerator of the Defined Contribution
Fraction shall be adjusted if the sum of this fraction and the Defined
Benefit Fraction would otherwise exceed 1.0 under the terms of this Plan.
Under the adjustment an amount equal to the product of (i) the excess of
the sum of the fractions over 1.0 times (ii) the denominator of this
fraction will be permanently subtracted from the numerator of this
fraction. The adjustment is calculated using the fractions as they would
be computed as of the end of the last Limitation Year beginning before
January 1, 1987, and disregarding any changes in the terms and conditions
of the plan made after May 6, 1986, but using the Section 415
(26)
<PAGE>
limitation applicable to the first Limitation Year beginning on or after
January 1, 1987.
(e)(5)"Employer" means the Employer and any Related Employer that adopts
this Plan. In the case of a group of employers which constitutes a
controlled group of corporations (as defined in Section 414(b) of the
Code as modified by Section 415(h)) or which constitutes trades or
businesses (whether or not incor porated) which are under common control
(as defined in Section 414(c) as modified by Section 415(h)) or which
constitutes an affiliated service group (as defined in Section 414(m)) and
any other entity required to be aggregated with the Employer pursuant to
regulations issued under Section 414(o) of the Code, all such employers
shall be considered a single employer for purposes of applying the
limitations of this Section 5.03.
(e)(6)"Excess Amount" means the excess of the Participant's Annual
Additions for the Limitation Year over the Maximum Permissible Amount,
less loading and other administrative charges allocable to such excess.
(e)(7)"Individual Medical Account" means an individual medical account as
defined in Section 415(l)(2) of the Code.
(e)(8)"Limitation Year" means the Plan Year. All qualified plans of the
Employer must use the same Limitation Year. If the Limitation Year is
amended to a different 12-consecutive month period, the new Limitation
Year must begin on a date within the Limitation Year in which the
amendment is made.
(e)(9)"Master or Prototype Plan" means a plan the form of which is the
subject of a favorable opinion letter from the Internal Revenue Service.
(e)(10) "Maximum Permissible Amount" means for a Limitation Year with
respect to any Participant the lesser of (i) $30,000 or, if greater, 25
percent of the dollar limitation set forth in Section 415(b)(1) of the
Code, as in effect for the Limitation Year, or (ii) 25 percent of the
Participant's Compensation for the Limitation Year. If a short
Limitation Year is created because of an amendment changing the
Limitation Year to a different 12-consecutive month period, the Maximum
Permissible Amount will not exceed the limitation in (e)(9)(i) multiplied
by a fraction whose numerator is the number of months in the short
Limitation Year and whose denominator is 12.
The compensation limitation referred to in subsection (e)(9)(ii)
shall not apply to any contribution for medical benefits within the
meaning of Section 401(h) or Section 419A(f)(2) of the Code after
separation from service which is otherwise treated as an Annual Addition
under Section 419A(d)(2) or Section 415(t)(1) of the Code.
(27)
<PAGE>
(e)(l1) "Welfare Benefit Fund" means a welfare benefit as defined in
Section 419(e) of the Code.
ARTICLE 6. INVESTMENT OF CONTRIBUTIONS.
---------------------------
6.01. Manner of Investment. All contributions made to the Accounts of
--------------------
Participants shall be held for investment by the Trustee. The Accounts of
Participants shall be invested and reinvested only in eligible investments
selected by the Employer in Section 1.12(b).
6.02. Investment Decisions.
--------------------
(a) Each Participant shall direct the investment of his Account among
the Fidelity Funds listed in Section 1.12(b). The Participant shall file
initial investment instructions with the Administrator, on such form as
the Administrator may provide, selecting the Funds in which amounts
credited to his Account will be invested.
While any balance remains in the Account of a Participant after
this death, the Beneficiary of the Participant shall make decisions as to
the investment of the Account as though the Beneficiary were the
Participant. To the extent required by a qualified domestic relations
order as defined in Section 414(p) of the Code, an alternate payee shall
make investment decisions with respect to a Participant's Account as
though such alternate payee were the Participant.
All dividends, interest, gains and distributions of any nature
received in respect of Fund Shares shall be reinvested in additional
shares of that Fidelity Fund.
(b) If the Trustee receives any contribution under the Plan as to which
investment instructions have not been provided, the Trustee shall
promptly notify the Administrator and the Administrator shall take steps
to elicit instructions from the Participant. The Trustee shall credit
any such contribution to the Participant's Account and such amount shall
be invested in the Fidelity Fund selected by the Employer for such
purposes until investment instructions have been received by the Trustee.
(c) Expenses attributable to the acquisition of investments shall be
charged to the Account of the Participant for which such investment is
made.
6.03. Direction to Trustee. All Participant investment instructions and
--------------------
changes thereto filed with the Administrator pursuant to the provisions of
Section 6.02 shall be promptly transmitted by the Administrator to the Trustee.
A Participant shall transmit subsequent investment instructions directly to the
Trustee by means of the Telephone
(28)
<PAGE>
Exchange System maintained by the Trustee for such purposes. The Trustee shall
have no duty to inquire into the investment decision of a Participant or to
advise him regarding the purchase, retention or sale of assets credited to his
Account.
ARTICLE 7. RIGHT TO BENEFITS.
-----------------
7.01. Normal or Early Retirement. Each Participant who attains his Normal
--------------------------
Retirement Age or, if so provided by the Employer in Section 1.05(b), Early
Retirement Age will have a 100 percent nonforfeitable (vested) interest in his
Account regardless of any vesting schedule elected in Section 1.06. If a
Participant retires upon the attainment of Normal or Early Retirement Age, such
retirement is referred to as a normal retirement. Upon his normal retirement
the balance of the Participant's Account, plus any amounts thereafter credited
to his Account, subject to the provisions of Section 7.08, will be distributed
to him in accordance with Article 8 below.
If a Participant separates from service before satisfying the age
requirements for early retirement, but has satisfied the service requirement,
the Participant will be entitled to elect an early retirement distribution upon
satisfaction of such age requirement.
7.02. Late Retirement. If a Participant continues in the service of the
---------------
Employer after attainment of Normal Retirement Age, he will continue to have a
100 percent nonforfeitable interest in his Account and will continue to
participate in the Plan until the date he establishes with the Employer for his
late retirement. Upon the earlier of his late retirement or the distribution
date required under Section 8.08, the balance of his Account, plus any amounts
thereafter credited to his Account, subject to the provisions of Section 7.08,
will be distributed to him in accordance with Article 8 below.
7.03. Disability Retirement. If so provided by the Employer in Section
---------------------
1.05(c), a Participant who becomes disabled so that he cannot engage in any
substantial, gainful activity because of a medically determinable physical or
mental impairment likely to result in death or to be of a continuous period of
not less than 12 months, and terminates his employment with the employer, will
have a 100 percent nonforfeitable interest in his Account, the balance of which
Account, plus any amounts thereafter credited to his Account, subject to the
provisions of Section 7.08, will be distributed to him in accordance with
Article 8 below. Such termination of employment is referred to as a disability
retirement. Determinations with respect to disability shall be made by the
Administrator on the basis set forth in Section 1.05(c).
7.04. Death. Subject, if applicable, to Section 8.04 below, if a
-----
Participant dies before the distribution of his Account has commenced, or
before such distribution has been completed, his designated Beneficiary or
Beneficiaries will be entitled to receive the balance or remaining balance of
his Account, plus any amounts thereafter credited to his Account, subject to
the provisions of Section 7.08. Distribution to the Beneficiary or
Beneficiaries will be made in accordance with Article 8 below.
(29)
<PAGE>
A Participant may designate a Beneficiary or Beneficiaries, or change any
prior designation of Beneficiary or Beneficiaries by giving notice to the
Administrator on a form designated by the Administrator. If more than one
person is designated as the Beneficiary, their respective interests shall be as
indicated on the designation form. In the case of a married Participant the
Participant's spouse shall be deemed to be the designated Beneficiary unless the
Participant's spouse has consented to another designation in the manner
described in Section 8.03(d).
If upon the death of the Participant there is, in the opinion of the
Administrator, no designated Beneficiary for part or all of the Participant's
Account, such amount will be paid to his surviving spouse or, if none, to his
estate (such spouse or estate shall be deemed to be the Beneficiary for
purposes of the Plan). If a Beneficiary dies after benefits to such
Beneficiary have commenced, but before they have been completed, and, in the
opinion of the Administrator, no person has been designated to receive such
remaining benefits, then such benefits shall be paid in a lump sum to the
deceased Beneficiary's estate.
7.05. Other Termination of Employment. If a Participant terminates his
-------------------------------
employment for any reason other than death or normal, late, or disability
retirement, he will be entitled to a termination benefit equal to (i) the
vested percentage of the value of the Matching and Discretionary Contributions
to his Account, as adjusted for income, expense, gain, or loss, such percentage
determined in accordance with the vesting schedule selected by the Employer in
Section 1.06, and (ii) the value of the Deferral and Rollover Contributions to
his Account as adjusted for income, expense, gain or loss. The amount payable
under this Section 7.05 will be subject to the provisions of Section 7.08 and
will be distributed in accordance with Article 8 below.
7.06. Separate Account. If a distribution from a Participant's Account
----------------
has been made to him at a time when he has a nonforfeitable right to less than
100 percent of his Account, the vesting schedule in Section 1.06 will
thereafter apply only to amounts in his Account attributable to Employer
contributions allocated after such distribution. The balance of his Account
immediately after such distribution will be transferred to a separate account
which will be maintained for the purpose of determining his interest therein
according to the following provisions.
At any relevant time prior to a forfeiture of any portion thereof under
Section 7.07 a Participant's nonforfeitable interest in his Account held in a
separate account described in the preceding paragraph will be equal to P(AB +
(RxD))-(RxD), where P is the nonforfeitable percentage at the relevant time
determined under Section 7.05; AB is the account balance of the separate
account at the relevant time; D is the amount of the distribution; and R is the
ratio of the account balance at the relevant time to the account balance after
distribution. Following a forfeiture of any portion of such separate account
under Section 7.07 below, any balance in the Participant's separate account
will remain fully vested and nonforfeitable.
(30)
<PAGE>
7.07. Forfeitures. If a Participant terminates his employment, any
-----------
portion of his Account (including any amounts credited after his termination of
employment) not payable to him under Section 7.05 will be forfeited by him upon
the complete distribution to him of the vested portion of his Account, if any,
subject to the possibility of reinstatement as described in the following
paragraph. For purposes of this paragraph, if the value of an Employee's vested
account balance is zero, the Employee shall be deemed to have received a
distribution of his vested interest immediately following termination of
employment. Such forfeitures will be applied to reduce the contributions of the
Employer next payable under the Plan (or administrative expenses of the Plan);
the forfeitures shall be held in the money market fund, if any, listed in
Section 1.12(b) pending such application.
If a Participant forfeits any portion of his Account under the preceding
paragraph but does again become an Employee prior to such date, then the amount
so forfeited, without any adjustment for the earnings, expenses, or losses or
gains of the assets credited to his Account since the date forfeited, will be
recredited to his Account (or to a separate account as described in Section
7.06, if applicable) as of the last day of the Plan Year in which he again
becomes an Employee, but only if he repays to the Plan within five years after
the date of his reemployment the amount previously distributed to him, without
interest, under Section 7.05. The provisions of the Plan (including Section
7.06) will thereafter apply as if no forfeiture had occurred. The amount to be
recredited pursuant to this paragraph will be derived first from the
forfeitures, if any, which as of the date of recrediting have yet to be applied
as provided in the preceding paragraph and, to the extent such forfeitures are
insufficient, from a special Employer contribution to be made by the Employer.
No forfeitures will occur solely as a result of an Employee's withdrawal
of Employee contributions.
7.08. Adjustment for Investment Experience. If any distribution under
------------------------------------
Sections 7.01, 7.02, 7.03, 7.04 or 7.05 is not made in a single payment, the
amount retained by the Trustee after the distribution will be subject to
adjustment until distributed to reflect the income and gain or loss on the
investments in which such amount is invested and any expenses properly charged
under the Plan and Trust to such amounts.
7.09. Participant Loans. If permitted under Section 1.07, the
-----------------
Administrator shall allow Participants to apply for a loan from the Plan,
subject to the following:
(a) Loans shall be made available to all Participants and beneficiaries
on a reasonably equivalent basis.
(b) Loans shall not be made available to highly compensated employees
(as defined in section 414(q) of the Code) in an amount greater than the
amount made available to other employees.
(31)
<PAGE>
(c) Loans must be secured by the Participant's accounts, must not
exceed 50 percent of the Participant's vested Account balance, and must
bear a reasonable interest rate.
(d) All loans shall by their terms require that repayment (principal
and interest) be amortized in level payments, not less than quarterly,
over a period not extending beyond five years from the date of the loan.
(e) A participant must obtain the consent of his or her spouse, if any,
to use a Transferred Account as security for the loan if so required
under Article 8. Spousal consent shall be obtained no earlier than the
beginning of the 90-day period that ends on the date on which the loan is
to be so secured. The consent must be in writing, must acknowledge the
effect of the loan, and must be witnessed by a plan representative or
notary public. Such consent shall thereafter be binding with respect to
the consenting spouse or any subsequent spouse with respect to that loan.
A new consent be required if the account balance is used for
renegotiation, extension, renewal, or other revision of the loan.
(f) In the event of a default, foreclosure on the note and attachment
of security will not occur until a distributable event occurs in the
plan.
(g) No loans will be made to any shareholder-employee or
Owner-Employee. For purposes of this requirement, a shareholder-employee
means an employee or officer of an electing small business (Subchapter S)
corporation who owns (or is considered as owning within the meaning of
section 318(a)(1) of the Code), on any day during the taxable year of
such corporation, more than 5% of the outstanding stock of the
corporation.
(h) No participant shall be permitted to maintain more than one loan at
any time; provided that this restriction shall not apply to any loans
made before the Employer adopted this prototype document.
Notwithstanding any other provision of this plan, the portion of
the Participant's vested account balance used as a security interest held
by the plan by reason of a loan outstanding to the participant shall be
taken into account for purposes of determining the amount of the account
balance payable at the time of death or distribution, but only if the
reduction is used as repayment of the loan. If less than 100% of the
participant's vested account balance (determined without regard to the
preceding sentence) is payable to the surviving spouse, then the account
balance shall be adjusted by first reducing the vested account balance by
the amount of the security used as repayment of the loan, and then
determining the benefit payable to the surviving spouse.
(32)
<PAGE>
No loan to any participant or beneficiary can be made to the extent
that such loan when added to the outstanding balance of all other loans
to the participant or beneficiary would exceed the lesser of (a) $50,000
reduced by the excess (if any) of the highest outstanding balance of
loans during the one year period ending on the day before the loan is
made over the outstanding balance of loans from the plan on the date the
loan is made, or (b) one-half the present value of the nonforfeitable
accrued benefit of the Participant. For the purpose of the above
limitation, all loans from all plans of the Employer and Related
Employers are aggregated.
7.10. Hardship Distributions. If permitted under Section 1.08, a
----------------------
Participant may apply to the Administrator to withdraw some or all or his
Deferral Contributions (and earnings thereon accrued as of December 31, 1988)
and, if applicable, Rollover Contributions in the event of hardship. For
purposes of this Section, "hardship" is defined as an immediate and heavy
financial need of the Employee where such Employee lacks other available
resources. Determinations with respect to hardship shall be made by the
Administrator and shall be conclusive for purposes of the Plan, and shall be
based on the following special rules:
(a) The following are the only financial needs considered immediate and
heavy: deductible medical expenses (within the meaning of section 213(d)
of the Code) of the employee, the employee's spouse, children, or
dependents; the purchase (excluding mortgage payments) of a principal
residence for the employee; payment of tuition for the next quarter or
semester of postsecondary education for the employee, the employee's
spouse, children or dependents; or the need to prevent the eviction of
the employee from, or a foreclosure on the mortgage of, the employee's
principal residence.
(b) A distribution will be considered as necessary to satisfy an
immediate and heavy financial need of the employee only if:
(1) The employee has obtained all distributions, other than the
hardship distributions, and all nontaxable loans under all plans
maintained by the employer,
(2) All plans maintained by the employer provide that the
employee's Elective Deferrals (and Employee Contributions) will be
suspended for twelve months after the receipt of the hardship
distribution;
(3) The distribution is not in excess of the amount of an
immediate and heavy financial need; and
(4) All plans maintained by the employer provide that the
employee may not make Elective Deferrals for the employee's taxable
year
(33)
<PAGE>
immediately following the taxable year of the hardship distribution
in excess of the applicable limit under section 402(g) of the Code
for such taxable year less the amount of such employee's Elective
Deferrals for the taxable year of the hardship distribution.
(c) A Participant must obtain the consent of his or her spouse, if any,
to obtain a hardship withdrawal from a Transferred Account if so required
under Article 8.
7.11. Prior Plan In-Service Distribution Rules. If so designated by the
----------------------------------------
Employer in Section 1.09(b)(3) by the Employer in Section 1.09(b)(3), a
Participant shall be entitled to withdraw all or a portion of his Account
balance upon the Attainment of Age 59-1/2. If designated by the Employer in
Section 1.09(b)(4), a Participant shall be entitled to withdraw any after-tax
contributions made prior to the adoption of this Plan, at any time prior to his
termination of employment. In either case, such withdrawal shall be subject to
the provisions of Section 8.05.
ARTICLE 8. DISTRIBUTION OF BENEFITS PAYABLE AFTER TERMINATION OF SERVICE.
-------------------------------------------------------------
8.01. Distribution of Benefits to Participants and Beneficiaries.
----------------------------------------------------------
(a) Distributions from the Trust to a Participant or to the Beneficiary
of the Participant shall be made in a lump sum in cash upon retirement,
death, or other termination of employment, unless another form of
distribution is permitted in accordance with Section 1.09(b) and Sections
8.02, 8.03 or 8.04 or in accordance with Section 11.02. A distribution
may be made in Fund Shares, at the election of the Participant, pursuant
to the qualifying rollover of such distribution to a Fidelity Investments
individual retirement account.
(b) In the event that the Plan was adopted by amendment from another
defined contribution plan, the following forms of benefit may also be
available:
(1) if permitted under Section 1.09(b)(1), in substantially equal
annual, or more frequent, installments, in cash, over a period
certain which does not extend beyond the life expectancy of the
Participant or the joint life expectancies of the Participant and
his Beneficiary, or, if the Participant dies prior to the
commencement of his benefits, the life expectancy of the
Participant's Beneficiary, as further described in Section 8.04.
(2) if permitted under Section 1.09(b)(2), by the purchase and
delivery of an annuity described in Sections 8.02 or 8.03.
(34)
<PAGE>
(c) Notwithstanding the provisions of Section 8.01(b) above, if a
Participant's Account is, and at the time of any prior distribution was,
$3,500 or less, the balance of such Account shall be distributed in a lump
sum as soon as practicable following retirement, disability, death or
other termination of employment.
8.02. Annuity Distributions. If so provided in Section 1.09(b)(2), a
---------------------
Participant may elect distributions made in whole or in part in the form of an
annuity contract subject to the provisions of Section 8.03.
(a) An annuity contract distributed under the Plan must be purchased
from an insurance company and must be nontransferable. The terms of an
annuity contract shall comply with the requirements of the Plan and
distributions under such contract shall be made in accordance with
Section 401(a)(9) of the Code and the regulations thereunder.
(b) The payment period of an annuity contract distributed to the
Participant pursuant to this Section may be as long as the Participant
lives. If the annuity is payable to the Participant and his spouse or
designated Beneficiary, the payment period of an annuity contract may be
for as long as either the Participant or his spouse or designated
Beneficiary lives. Such an annuity may provide for an annuity certain
feature for a period not exceeding the life expectancy of the
Participant. If the annuity is payable to the Participant and his spouse
such period may not exceed the joint life and last survivor expectancy of
the Participant and his spouse, or, if the annuity is payable to the
Participant and a designated Beneficiary, the joint life and last
survivor expectancy of the Participant and such Beneficiary. If the
Participant dies prior to the commencement of his benefits, the payment
period of an annuity contract distributed to the Beneficiary of the
Participant may be as long as the Participant's Beneficiary lives, and
may provide for an annuity certain feature for a period not exceeding the
life expectancy of the Beneficiary. Any annuity contract distributed
under the Plan must provide for non-increasing payments.
8.03. Joint and Survivor Annuities.
----------------------------
(a) Application. The provisions of this Section supersede any
-----------
conflicting provisions of the Plan; provided, however, that this Section
shall not apply if the Participant's Account does not exceed $3,500 prior
to the commencement of a distribution of any benefits under the Plan. A
Participant is described in this Section only if (i) the Participant has
elected distribution of his Account in the form of an annuity contract in
accordance with Section 8.02, or (ii) the Trustee has directly or
indirectly received a transfer of assets from another plan (including a
predecessor plan) to which Code section 401(a)(11) applies with respect
to such Participant.
(35)
<PAGE>
(b) Retirement Annuity. Unless the Participant elects to waive the
------------------
application of this subsection in a manner satisfying the requirements of
subsection (d) below, to the extent applicable to the Participant, within
the 90-day period preceding his Annuity Starting Date (which election may
be revoked, and if revoked, remade, at any time in such period), the
vested Account balance due any Participant to whom this subsection (b)
applies will be paid to him by the purchase and delivery to him of an
annuity contract described in Section 8.02 providing a life annuity only
form of benefit or, if the Participant is married as of his Annuity
Starting Date, providing an immediate annuity for the life of the
Participant with a survivor annuity for the life of the Participant's
spouse (determined as of the date of distribution of the contract) which
is 50 percent of the amount of the annuity which is payable during the
joint lives of the Participant and such spouse. The Participant may elect
to receive distribution of his benefits in the form of such annuity as of
the earliest date on which he could elect to receive retirement benefits
under the Plan. Within the period beginning 90 days prior to the
Participant's Annuity Starting Date and ending 30 days prior to such Date,
the Administrator will provide such Participant with a written explanation
of (i) the terms and conditions of the annuity contract described herein,
(ii) the Participant's right to make and the effect of an election to
waive application of this subsection, (iii) the rights of the
Participant's spouse under subsection (d), and (iv) the right to revoke
and the period of time effect of a revocation of the election to waive
application of this subsection.
(c) Annuity Death Benefit. Unless the Participant elects to waive
---------------------
the application of this subsection in a manner satisfying the
requirements of subsection (d) below at any time within the applicable
election period (which election may be revoked, and if revoked, remade,
at any time in such period), if a married Participant to whom this
Section applies dies before, his Annuity Starting Date, then
notwithstanding any designation of a Beneficiary to the contrary, 50
percent of his vested Account balance will be applied to purchase an
annuity contract described in Section 8.03 providing an annuity for the
life of the Participant's surviving spouse, which contract will then be
promptly distributed to such spouse. In lieu of the purchase of such an
annuity contract, the spouse may elect in writing to receive
distributions under the Plan as if he or she had been designated by the
Participant as his Beneficiary with respect to 50 percent of his Account.
For purposes of this subsection, the applicable election period will
commence on the first day of the Plan Year in which the Participant
attains age 35 and will end on the date of the Participant's death,
provided that in the case of a Participant who terminates his employment
the applicable election period with respect to benefits accrued prior to
the date of such termination will in no event commence later than the
date of his termination of employment. A Participant may elect to waive
the application of this subsection prior to the Plan Year in which he
attains age 35,
(36)
<PAGE>
provided that any such waiver will cease to be effective as of the day of
the Plan Year in which the Participant attains age 35.
The Administrator will provide a Participant to whom this
subsection applies with a written explanation with respect to the annuity
death benefit described in this subsection (c) comparable to that
required under subsection (b) above. Such explanation shall be furnished
within whichever of the following periods ends last: (i) the period
beginning with the first day of the Plan Year in which the Participant
reaches age 32 and ending with the end of the Plan Year preceding the
Plan Year in which he reaches age 35, (ii) a reasonable period ending
after the Employee becomes a Participant, (iii) a reasonable period
ending after this Section 8.04 first becomes applicable to the
Participant in accordance with Section 8.04(a), (iv) in the case of a
Participant who separates from service before age 35, a reasonable period
of time ending after separation from service. For purposes of the
preceding sentence, the two-year period beginning one year prior to the
date of the event described in clause (ii), (iii) or (iv), whichever is
applicable, and ending one year after such date shall be considered
reasonable, provided, that in the case of a Participant who separates
from service under (iv) above and subsequently recommences employment
with the Employer, the applicable period for such Participant shall be
redetermined in accordance with this subsection.
(d) Retirements of Elections. This subsection will be satisfied
------------------------
with respect to a waiver or designation which is required to satisfy this
subsection if such waiver or designation is in writing and either
(1) the Participant's spouse consents thereto in writing, which
consent must acknowledge the effect of such waiver or designation
and be witnessed by a notary public or Plan representative, or
(2) the Participant establishes to the satisfaction of the
Administrator that the consent of the Participant's spouse cannot
be obtained because there is no spouse, because the spouse cannot
be located or because of such other circumstances as the Secretary
of Treasury may prescribe.
Any consent by a spouse, or establishment that the consent of a
spouse may not be obtained, will be effective only with respect to a
specific Beneficiary (including any class of beneficiaries or any
contingent beneficiaries) or form of benefits identified in the
Participant's waiver or designation, unless the consent of the spouse
expressly permits designations by the Participant without any requirement
of further consent by the spouse. A consent which permits such
designations by the Participant shall acknowledge that the spouse has the
right to limit consent to a specific Beneficiary and form of benefits and
that the spouse voluntarily elects to relinquish both such rights. A
consent by a spouse shall be irrevocable once made. Any such consent, or
establishment that such
(37)
<PAGE>
consent may not be obtained, will be effective only with respect to such
spouse. For purposes of subsections (b) and (c) above, no consent of a
spouse shall be valid unless the notice required by such subsection,
whichever is applicable, has been provided to the Participant.
(e) Former Spouse. For purposes of this Section 8.03, a former
-------------
spouse of a Participant will be treated as the spouse or surviving spouse
of the Participant, and a current spouse will not be so treated, to the
extent required under a qualified domestic relations order, as defined in
section 414(p) of the Code.
(f) Vested Account Balance. For purposes of this Section, vested
----------------------
Account balance shall include the aggregate value of the Participant's
vested Account balance derived from employer and employee contributions
(including rollovers), whether vested before or upon death. The
provisions of this Section shall apply to a Participant who is vested in
amounts attributable to employer contributions, employee contributions,
or both, at the time of death or distribution.
8.04. Installment Distributions. This Section shall be interpreted and
-------------------------
applied in accordance with the regulations under Section 401(a)(9) of the Code,
including the minimum distribution incidental benefit requirement of Section
1.401(a)(9)-2 of the regulations.
(a) In General. If a Participant's benefit may be distributed in
----------
accordance with Section 8.01(b)(1), the amount to be distributed for each
calendar year for which a minimum distribution is required shall be at
least an amount equal to the quotient obtained by dividing the
Participant's interest in his Account by the life expectancy of the
Participant or Beneficiary or the joint life and last survivor expectancy
of the Participant and his Beneficiary, whichever is applicable. For
calendar years beginning before January 1, 1989, if a Participant's
Beneficiary is not his spouse, the method of distribution selected must
insure that at least 50 percent of the present value of the amount
available for distribution is paid within the life expectancy of the
Participant. For calendar years beginning after January 1, 1989 the
amount to be distributed for each calendar year shall not be less than an
amount equal to the quotient obtained by dividing the Participant's
interest in his Account by the lesser of (i) the applicable life
expectancy under Section 8.01(b), or (ii) if a Participant's Beneficiary
is not his spouse, the applicable divisor determined under section
1.401(a)(9)-2, Q&A 4 of the Proposed Treasury Regulations, or any
successor regulations of similar import. Distributions after the death
of the Participant shall be made using the applicable life expectancy
under (i) above, without regard to section 1.401 (a)(9)-2 of such
regulations.
The minimum distribution required under this subsection (a) for the
calendar year immediately preceding the calendar year in which the
(38)
<PAGE>
Participant's required beginning date, as determined under Section
8.09(a)(2), occurs shall be made on or before the Participant's required
beginning date, as so determined. Minimum distributions for other calendar
years shall be made on or before the close of such calendar year.
(b) Additional Requirements for Distributions After Death of
---------------------------------------------------------
Participant.
---------
(1) Distribution beginning before Death. If the Participant
-----------------------------------
dies before distribution of his benefits has begun, distributions
shall be made in accordance with the provisions of this paragraph.
Distributions under Section 8.01(a) shall be completed by the close
of the calendar year in which the fifth anniversary of the death of
the Participant occurs. Distributions under Section 8.01(b) shall
commence, if the Beneficiary is not the Participant's spouse, not
later than the close of the calendar year immediately following the
calendar year in which the death of the Participant occurs.
Distributions under Section 8.01(b) to a Beneficiary who is the
Participant's surviving spouse shall commence not later than the
close of the calendar year in which the Participant would have
attained age 70 1/2 or, if later, the close of the calendar year
immediately following the calendar year in which the death of the
Participant occurs. In the event such spouse dies prior to the
date distribution to him or her commences, he or she will be
treated for purposes of this subsection (other than the preceding
sentence) as if he or she were the Participant. If the Participant
has not designated a Beneficiary, or the Participant or Beneficiary
has not effectively selected a method of distribution, distribution
of the Participant's benefit shall be completed by the close of the
calendar year in which the fifth anniversary of the death of the
Participant occurs.
Any amount paid to a child of the Participant will be treated as if
it had been paid to the surviving spouse if the amount becomes
payable to the surviving spouse when the child reaches the age of
majority.
For purposes of this subsection (b)(1), the life expectancy of a
Beneficiary who is the Participant's surviving spouse be
recalculated annually unless the Participant's spouse irrevocably
elects otherwise prior to the time distributions are required to
begin. Life expectancy shall be computed in accordance with the
provisions of subsection (a) above.
(2) Distribution beginning after Death. If the Participant
----------------------------------
dies after distribution of his benefits has begun, distributions to
the Participant's Beneficiary will be made at least as rapidly as
under the method of distribution being used as of the date of the
Participant's death.
(39)
<PAGE>
For purposes of this Section 8.04(b), distribution of a
Participant's interest in his Account will be considered to begin as of
the Participant's required beginning date, as determined under Section
8.08(b). If distribution in the form of an annuity irrevocably commences
prior to such date, distribution will be considered to begin as of the
actual date distribution commences.
(c) Life Expectancy. For purposes of this Section, life
---------------
expectancy shall be recalculated annually in the case of the Participant
or a Beneficiary who is the Participant's spouse unless the Participant
or Beneficiary irrevocably elects otherwise prior to the time
distributions are required to begin. If not calculated in accordance
with the foregoing, life expectancy shall be calculated using the
attained age of the Participant or Beneficiary, whichever is applicable,
as of such individual's birth date in the first year for which a minimum
distribution is required reduced by one for each elapsed calendar year
since the date life expectancy was first calculated. For purposes of
this Section, the expectancy and joint life and last survivor expectancy
shall be computed by use of the expected return multiples in Table V and
VI of Section 1.72-9 of the income tax Regulations.
A Participant's interest in his Account for purposes of this
Section 8.04 shall be determined as of the last valuation date in the
calendar year immediately preceding the calendar year for which a minimum
distribution is required, increased by the amount of any contributions
allocated to, and decreased by any distributions from, such Account after
the valuation date. Any distribution for the first year for which a
minimum distribution is required made after the close of such year shall
be treated as if made prior to the close of such year.
8.05. Immediate Distribution. If the Account balance distributable to a
----------------------
Participant exceeds, or at the time of any prior distribution exceeded, $3,500,
no distribution will be made to the Participant before he reaches his Normal
Retirement Age (or age 62, if later), unless the written consent of the
Participant has been obtained. Such consent shall be made in writing within
the 90-day period ending on the Participant's Annuity Starting Date. Within
the period beginning 90 days before the Participant's Annuity Starting Date and
ending 30 days before such Date, the Administrator will provide such
Participant with written notice comparable to the notice described in Section
8.04(b) containing a general description of the material features and an
explanation of the relative values of the optional forms of benefit available
under the Plan and Participant of his right to defer receipt of the
distribution until his Normal Retirement Age (or age 62, if later).
The consent of the Participant's spouse must also be obtained if the
Participant is subject to the provisions of Section 8.03(a), unless the
distribution will be made in the form of the applicable retirement annuity
contract described in Section 8.03(b). A
(40)
<PAGE>
spouse's consent to early distribution, if required, must satisfy the
requirements of Section 8.03(d).
Neither the consent of the Participant nor the Participant's spouse shall
be required to the extent that a distribution is required to satisfy Section
401(a)(9) or Section 415 of the Code. In addition, upon termination of this
Plan, if the Plan does not offer an annuity option (purchased from a commercial
provider) and if the employer or entity within the same controlled group as the
employer does not maintain another defined contribution plan (other then an
employee stock ownership plan as defined in Section 4975(e)(7) of the Code), the
Participants account balance will, without the Participant's consent, be
distributed to the Participant. However, if any entity within the same
controlled group as the employer maintains another defined contribution plan
(other than an employee stock ownership plan as defined in Section 4975(e)(7) of
the Code) then the Participants account balance will be transferred, without the
Participants consent, to the other plan if the Participant does not consent to
an immediate distribution.
8.06. Determination of Method of Distribution. The Participant will
---------------------------------------
determine the method of distribution of benefits to himself and may determine
the method of distribution to his Beneficiary. Such determination will be made
prior to the time benefits become payable under the Plan. If the Participant
does not determine the method of distribution to his Beneficiary or if the
Participant permits his Beneficiary to override his determination, the
Beneficiary, in the event of the Participant's death, will determine the method
of distribution of benefits to himself as if he were the Participant. A
determination by the Beneficiary must be made no later than the close of the
calendar year in which distribution would be required to begin under Section
8.04(b) or, if earlier the close of the calendar year in which the fifth
anniversary of the death of the Participant occurs.
8.07. Notice to Trustee. Administrator will notify the Trustee in writing
-----------------
whenever any Participant or Beneficiary is entitled to receive benefits under
the Plan. The Administrator's notice shall indicate the form of benefits that
such Participant or Beneficiary shall receive and (in the case of distributions
to a Participant) the name of any designated Beneficiary or Beneficiaries.
8.08. Time of Distribution. In no event will distribution to a
--------------------
Participant be made later than the earlier of the dates described in (a) and
(b) below:
(a) Absent the consent of the Participant (and his spouse, if
appropriate), the 60th day after the close of the Plan Year in which
occurs the later of the date on which the Participant age 65, the date on
which the Participant ceases to be employed by the Employer, or the 10th
anniversary of the year in which the Participant commenced participation
in the Plan; and
(41)
<PAGE>
(b) April 1 of the calendar year first following the calendar year in
which the Participant attains age 70 1/2 or, in the case of a Participant
who had attained age 70 1/2 before January 1, 1988, the required
beginning date determined in accordance with (1) or (2) below:
(1) The required beginning date of a participant who is not a
5-percent owner is the first day of April of the calendar year
following the calendar year in which the later of retirement or
attainment of age 70-1/2 occurs.
(2) The required beginning date of a participant who is a
5-percent owner during any year beginning after December 31, 1979,
is the first day of April following the later of:
(i) the calendar year in which the participant attains age
70-1/2, or
(ii) the earlier of the calendar year with or within which
ends the plan year in which the participant becomes a
5-percent owner, or the calendar year in which the
participant retires.
Notwithstanding the foregoing, in the case of a Participant who attained
age 70 1/2 during 1988 and who had not retired prior to January 1, 1989, the
required beginning date described in this paragraph shall be April 1, 1990.
Notwithstanding (a) above, the failure of a Participant (and spouse) to
consent to a distribution while a benefit is immediately distributable, within
the meaning of Section 8.05, shall be deemed to be an election to defer
commencement of payment of any benefit sufficient to satisfy (a) above.
Once distributions have begun to a 5-percent owner under (b) above, they
must continue to be distributed, even if the Participant ceases to be a
5-percent owner in a subsequent year.
For purposes of (b) above, a participant is treated as a 5-percent owner
if such participant is a 5-percent owner as defined in Section 416(i) of the
Code (determined in accordance with section 416 but without regard to whether
the plan is top-heavy) at any time during the plan year ending with or within
the calendar year in which such owner attains age 66-1/2 or any subsequent plan
year.
8.09. Whereabouts of Participants and Beneficiaries. The Administrator
---------------------------------------------
will at all times be responsible for determining the whereabouts of each
Participant or Beneficiary who may be entitled to benefits under the Plan and
will at all times be responsible for instructing the Trustee in writing as to
the current address of each such Participant or Beneficiary. The Trustee will
be entitled to rely on the latest written
(42)
<PAGE>
statement received from the Administrator as to such addresses. The Trustee will
be under no duty to make any distributions under the Plan unless and until it
has received written instructions from the Administrator satisfactory to the
Trustee containing the name and address of the distributee, the time when the
distribution is to occur, and the form which the distribution will take.
Notwithstanding the foregoing, if the Trustee attempts to make a distribution in
accordance with the Administrator's instructions but is unable to make such
distribution because the whereabouts of the distributee is unknown, the
Trustee will notify the Administrator of such situation and thereafter the
Trustee will be under no duty to make any further distributions to such
distributee until it receives further written instructions from the
Administrator. If a benefit is forfeited because the Participant or beneficiary
cannot be found, such benefit will be reinstated if a claim is made by the
Participant or Beneficiary.
ARTICLE 9. TOP-HEAVY PROVISIONS.
--------------------
9.01. Application. If the Plan is or becomes a Top-Heavy Plan in any Plan
-----------
Year or is automatically deemed to be Top-Heavy in accordance with the
Employer's election in Section 1.10(a)(1), the provisions of this Article 9
shall supersede any conflicting provision in the Plan.
9.02. Definitions. For purposes of this Article 9, the following terms
-----------
have the meanings set forth below:
(a) Key Employee. Any Employee or former Employee (and the
------------
Beneficiary of any such Employee) who at any time during the
determination period was (i) an officer of the Employer whose annual
compensation exceeds 50 percent of the dollar limitation under section
415(b)(1)(A) of the Code, (ii) an owner (or considered an owner under
section 318 of the Code) of one of the ten largest interests in the
Employer if such individual's annual compensation exceeds the dollar
limitation under section 415(c)(1)(A) of the Code, (iii) a 5-percent
owner of the Employer, or (iv) a 1-percent owner of the Employer who has
annual compensation of more than $150,000. For purposes of this
paragraph, the determination period is the Plan Year containing the
Determination Date and the four preceding Plan Years. The determination
of who is a Key Employee shall be made in accordance with section
416(i)(1) of the Code and the regulations thereunder. Annual
compensation means compensation as defined in Section 415(c)(3) of the
Code, but including amounts contributed by the Employer pursuant to a
salary reduction agreement which are excludable from the employee's gross
income under Section 125, Section 402(a)(8), Section 403(b) of the Code.
(b) Top-Heavy Plan. The Plan is a Top-Heavy Plan if any of the
--------------
following conditions exists:
(43)
<PAGE>
(1) the Top-Heavy Ratio for the Plan exceeds 60 percent and the
Plan is not part of any Required Aggregation Group or Permissive
Aggregation Group;
(2) the Plan is a part of a Required Aggregation Group but not
part of a Permissive Aggregation Group and the Top-Heavy Ratio for
the Required Aggregation Group exceeds 60 percent; or
(3) the Plan is a part of a Required Aggregation Group and a
Permissive Aggregation Group and the Top-Heavy Ratio for both
Groups exceeds 60 percent.
(c) Top-Heavy Ratio.
---------------
(1) With respect to this Plan, or with respect to any Required
Aggregation Group or Permissive Aggregation Group that consists
solely of defined contribution plans (including any simplified
employee pension plans) and the Employer has not maintained any
defined benefit plan which during the 5-year period ending on the
determination date(s) has or has had accrued benefits, the
Top-Heavy Ratio is a fraction, the numerator of which is the sum of
the account balances of all Key Employees under the plans as of the
Determination Date (including any part of any account balance
distributed in the 5-year period ending on the Determination Date),
and the denominator of which is the sum of all account balances
(including any part of any account balance distributed in the
5-year period ending on the Determination Date) of all participants
under the plans as of the Determination Date. Both the numerator
and denominator of the Top-Heavy Ratio shall be increased, to the
extent required by Code Section 416, to reflect any contribution
which is due but unpaid as of the Determination Date.
(2) With respect to any Required Aggregation Group or Permissive
Aggregation Group that includes one or more defined benefit plans
which, during the 5-year period ending on the Determination Date,
has covered or could cover a Participant in this Plan, the
Top-Heavy Ratio is a fraction, the numerator of which is the sum of
the account balances under the defined contribution plans for all
Key Employees and the present value of accrued benefits under the
defined benefit plans for all Key Employees, and the denominator of
which is the sum of the account balances under the defined
contribution plans for all participants and the present value of
accrued benefits under the defined benefit plans for all
participants. Both the numerator and denominator of the Top-Heavy
Ratio shall be increased for any distribution of an account balance
or an accrued benefit made in the 5-year period ending
(44)
<PAGE>
on the Determination Date and any contribution due but unpaid as of
the Determination Date.
(3) For purposes of (1) and (2) above, the value of account
balances and the present value of accrued benefits will be
determined as of the most recent Valuation Date that falls within
or ends with the 12-month period ending on the Determination Date,
except as provided in section 416 of the Code and the regulations
thereunder for the first and second plan years of a defined benefit
plan. The account balances and accrued benefits of a participant (i)
who is not a Key Employee but who was a Key Employee in a prior
Year, or (ii) who has not been credited with at least one Hour of
Service with the Employer at any time during the 5-year period
ending on the Determination Date, will be disregarded. The
calculation of the Top-Heavy Ratio, and the extent to which
distributions, rollovers, and transfers are taken into account,
shall be made in accordance with section 416 of the Code and the
regulations thereunder. Deductible employee contributions shall not
be taken into account for purposes of computing the Top-Heavy Ratio.
When aggregating plans, the value of account balances and accrued
benefits shall be calculated with reference to the Determination
Dates that fall within the same calendar year.
For purposes of determining if the Plan, or any other plan
included in a Required Aggregation Group of which this Plan is a
part, is a Top-Heavy Plan, the accrued benefit in a defined benefit
plan of an employee other than a Key Employee shall be determined
under (a) the method, if any, that uniformly applies for accrual
purposes under all plans maintained by the Employer, or (b) if
there is no such method, as if such benefit accrued not more
rapidly than the slowest accrual rate permitted under the
fractional accrual rate of section 411(b)(1)C) of the Code.
(d) Permissive Aggregation Group. The Required Aggregation Group
----------------------------
plus any other qualified plans of the Employer or a Related Employer
which, when considered as a group with the Required Aggregation Group,
would continue to satisfy the requirements of sections 401(a)(4) and 410
of the Code.
(e) Required Aggregation Group.
--------------------------
(1) Each qualified plan of the Employer or Related Employer in
which at least one Key Employee participates, or has participated
at any time during the determination period (regardless of whether
the plan has terminated), and
(45)
<PAGE>
(2) any other qualified plan of the Employer or Related Employer
which enables a plan described in (1) above to meet the
requirements of sections 401(a)(4) or 410 of the Code.
(f) Determination Date. For any Plan Year of the Plan subsequent
------------------
to the first Plan Year, the last day of the preceding Plan Year. For the
first Plan Year of the Plan, the last day of that Plan Year.
(g) Valuation Date. The Determination Date.
--------------
(h) Present Value. Present value shall be based only on the
-------------
interest rate and mortality table specified in the Adoption Agreement.
9.03. Minimum Contribution.
--------------------
(a) Except as otherwise provided in (b) and (c) below, the
Discretionary Contributions made on behalf of any Participant who is not
a Key Employee shall not be less than the lesser of 3 percent of such
Participant's Compensation or, in the case where the Employer has no
defined benefit plan which designates this Plan to satisfy section 401 of
the Code, the largest percentage of Employer contributions, as a
percentage of the first $200,000 of the Key Employee's Compensation, made
on behalf of any Key Employee for that year. The minimum contribution
under this Section 9.03 shall be determined without regard to any Social
Security contribution, and be made even though, under other Plan
provisions, the Participant would not otherwise be entitled to receive a
contribution, or would have received a lesser contribution for the year,
because (i) the Participant failed to complete 1,000 Hours of Service or
any equivalent service requirement provided in the Adoption Agreement; or
(ii) the Participant's Compensation was less than a stated amount.
(b) The provisions of (a) above shall not apply to any Participant who
was not employed by the Employer on the last day of the Plan Year.
(c) The Employer contributions for the Plan Year made on behalf of each
Participant who is not a Key Employee and who is a participant in a
defined benefit plan maintained by the Employer shall not be less than 5
percent of such Participant's Compensation.
(d) The minimum contribution required under (a) above (to the extent
required to be nonforfeitable under section 416(b) of the Code) may not
be forfeited under section 411(a)(3)(B) or 411(a)(3)(D) of the Code.
9.04. Adjustment to the Limitation on Contributions and Benefits. If this
----------------------------------------------------------
Plan is in Top-Heavy status, the number 100 shall be substituted for the number
125 in subsections (e)(3) and (e)(4) of Section 5.03. However, this
substitution shall not take effect
(46)
<PAGE>
with respect to this Plan in any Plan Year in which the following requirements
are satisfied:
(a) The Employer contributions for such Plan Year made on behalf of
each Participant who is not a Key Employee and who is a participant in a
defined benefit plan maintained by the Employer is not less than 7 1/2
percent of such Participant's Compensation.
(b) The sum of the present value as of the Determination Date of (i)
the aggregate accounts of all Key Employees under all defined
contribution plans of the Employer and (ii) the cumulative accrued
benefits of all Key Employees under all defined benefit plans of the
Employer does not exceed 90 percent of the same amounts determined for all
participants under all plans of the Employer that are Top-Heavy Plans,
excluding account values and accrued benefits for Employees who formerly
were but are no longer Key Employees.
The substitutions of the number 100 for 125 shall not take effect
in any limitation Year with respect to any Participant for whom no
benefits are accrued or contributions made for such Year.
ARTICLE 10. AMENDMENT AND TERMINATION.
-------------------------
10.01. Amendment by Employer. The Employer reserves the authority,
---------------------
subject to the provisions of Article 1 and Section 10.03, to amend the Plan:
(a) Changing Elections Contained in the Adoption Agreement. By
------------------------------------------------------
filing with the Trustee an amended Adoption Agreement, executed by the
Employer only, on which said Employer has indicated a change or changes
in provisions previously elected by it, such changes to be effective on
the effective date of such amended Adoption Agreement (except that, any
such change notwithstanding, no Participant's Account shall be reduced by
such change below the amount to which the Participant would have been
entitled if he had voluntarily left the employ of the Employer
immediately prior to the date of the change). The Employer may from time
to time make any amendment to the Plan that may be necessary to satisfy
sections 415 or 416 of the Code because of the required aggregation of
multiple plans by completing overriding Plan language in the Adoption
Agreement. The Employer may also add certain model amendments published
by the Internal Revenue Service which specifically provide that their
adoption will not cause the Plan to be treated as an individually
designed plan; or
Other Changes. By amending any provision of the Plan for any reason
-------------
other than those specified in (a) above. However, upon making such amendment,
including a waiver of the minimum funding requirement under Section 412(d) of
the Code, the Employer may no longer participate in this prototype plan
arrangement and will be
(47)
<PAGE>
deemed to have an individually designed plan. Following such amendment, the
Trustee will transfer the assets of the Trust to the trust forming part of such
newly adopted plan upon receipt of sufficient evidence (such as a determination
letter or opinion letter from the Internal Revenue Service or an opinion of
counsel satisfactory to the Trustee) that such trust will be a qualified trust
under the Code.
10.02. Amendment by Prototype Sponsor. The Prototype Sponsor may in its
------------------------------
discretion amend the Plan or the Adoption Agreement at any time, subject to the
provisions of Article 1 and Section 10.03, and provided that the Prototype
Sponsor mails a copy of such amendment to the Employer at its last known
address as shown on the books of the Prototype Sponsor. For purposes of
sponsoring organization amendments, the mass submitter shall be recognized as
the agent of the sponsoring organization. If the sponsoring organization does
not adopt the amendments made by the mass submitter, it will no longer be
identical to or a minor modifier of the mass submitter plans.
10.03. Amendments Affecting Vested and/or Accrued Benefits.
---------------------------------------------------
(a) Except as permitted by Section 10.04, no amendment to the Plan
shall be effective to the extent that it has the effect of decreasing a
Participant's Account balance or eliminating an optional form of benefit
with respect to benefits attributable to service before the amendment.
Furthermore, if the vesting schedule of the Plan is amended, the
nonforfeitable interest of a Participant in his Account, determined as of
the later of the date the amendment is adopted or the date it becomes
effective, will not be less than the Participant's nonforfeitable
interest in his Account determined without regard to such amendment.
(b) If the Plan's vesting schedule is amended, including any amendment
resulting from a change to or from Top-Heavy Plan status, or the Plan is
amended in any way that directly or indirectly affects the computation of
a Participant's nonforfeitable interest in his Account, each Participant
with at least three (3) Years of Service for Vesting with the Employer
may elect, within a reasonable period after the adoption of the
amendment, to have the nonforfeitable percentage of his Account computed
under the Plan without regard to such amendment. The Participant's
election may be made within 60 days from the latest of (i) the date the
amendment is adopted; (ii) the date the amendment becomes effective; or
(iii) the date the Participant is issued written notice of the amendment
by the Employer or the Administrator.
10.04. Retroactive Amendments. An amendment made by the sponsor in
----------------------
accordance with Section 10.02 may be made effective on a date prior to the
first day of the Plan Year in which it is adopted if such amendment is
necessary or appropriate to enable the Plan and Trust to satisfy the applicable
requirements of the Code or to conform the Plan to any change in federal law,
or to any regulations or ruling thereunder.
(48)
<PAGE>
Any retroactive amendment by the Employer shall be subject to the provisions of
Section 10.01.
10.05. Termination. The Employer has adopted the Plan with the intention
-----------
and expectation that contributions will be continued indefinitely. However,
said Employer has no obligation or liability whatsoever to maintain the Plan
for any length of time and may discontinue contributions under the Plan or
terminate the Plan at any time by written notice delivered to the Trustee
without any liability hereunder for any such discontinuance or termination.
10.06. Distribution upon Termination of the Plan. Upon termination or
-----------------------------------------
partial termination of the Plan or complete discontinuance of contributions
thereunder, each Participant (including a terminated Participant in respect of
amounts not previously forfeited by him) who is affected by such termination or
partial termination or discontinuance will have a fully vested interest in his
Account, and, subject to Sections 8.03 and 8.04, the Trustee will distribute to
each Participant or other person entitled to distribution the balance of the
Participant's Account in a single lump sum payment. In the absence of such
instructions, the Trustee will notify the Administrator of such situation and
the Trustee will be under no duty to make any distributions under the Plan until
it receives written instructions from the Administrator. Upon the completion of
such distributions, the Trust will terminate, the Trustee will be relieved from
all liability under the Trust, and no Participant or other person will have any
claims thereunder, except as required by applicable law.
10.07. Merger or Consolidation of Plan; Transfer of Plan Assets. In case
--------------------------------------------------------
of any merger or consolidation of the Plan with, or transfer of assets and
liabilities of the Plan to, any other plan, provision must be made so that each
Participant would, if the Plan then terminated, receive a benefit immediately
after the merger, consolidation or transfer which is equal to or greater than
the benefit he would have been entitled to receive immediately before the
merger, consolidation or transfer if the Plan had then terminated.
ARTICLE 11. AMENDMENT AND CONTINUATION OF PREDECESSOR PLAN; TRANSFER OF
------------------------------------------------------------
FUNDS TO OR FROM OTHER QUALIFIED PLANS.
- --------------------------------------
11.01. Amendment and Continuation of Predecessor Plan. In the event the
----------------------------------------------
Employer has previously established a plan (the "predecessor plan") which is a
defined contribution plan under the Code and which on the date of adoption of
the Plan meets the applicable requirements of section 401(a) of the Code, the
Employer may, in accordance with the provisions of the predecessor plan, amend
and continue the predecessor plan in the form of the Plan and become the
Employer hereunder, subject to the following:
(a) Subject to the provisions of the Plan, each individual who was a
participant or former participant in the predecessor plan immediately
prior to
(49)
<PAGE>
the effective date of such amendment and continuation will become a
Participant or former Participant in the Plan;
(b) No election may be made under the vesting provisions of the
Adoption Agreement if such election would reduce the benefits of a
Participant under the Plan to less than the benefits to which he would
have been entitled if he voluntarily separated from the service of the
Employer immediately prior to such amendment and continuation;
(c) No amendment to the Plan shall decrease a participant's accrued
benefit or eliminate an optional form of benefit;
(d) The amounts standing to the credit of a participant's account
immediately prior to such amendment and continuation which represent the
amounts properly attributable to (i) contributions by the participant and
(ii) contributions by the Employer and forfeitures will constitute the
opening balance of his Account or Accounts under the Plan;
(e) Amounts being paid to a former participant or to a beneficiary in
accordance with the provisions of the predecessor plan will continue to
be paid in accordance with such provisions;
(f) Any beneficiary designation in effect after August 23, 1984, under
the predecessor plan immediately before such amendment and continuation
will be deemed a valid designation of Beneficiary under Section 8.04 if
such designation satisfies the requirements of Section 8.04(d), unless
and until the Participant revokes such designation or designates a new
Beneficiary under the Plan; and
(g) Unless the Employer and the Trustee agree otherwise, all assets of
the predecessor trust will be deemed to be assets of the Trust as of the
effective date of such amendment. Such assets will invested by the
Trustee as soon as reasonably practicable pursuant to Article 6. The
Employer agrees to assist the Trustee in any way requested by the Trustee
in order to facilitate the transfer of assets from the predecessor trust
to the Trust Fund.
11.02. Transfer of Funds from an Existing Plan. The Employer may from
---------------------------------------
time to time direct the Trustee, in accordance with such rules as the Trustee
may establish, to accept funds transferred for the benefit of Participants from
a trust forming part of another qualified plan under the Code, provided such
plan is a defined contribution plan. Such transferred assets will become
assets of the Trust as of the date they are received by the Trustee. Such
transferred amounts will be credited to Participants' Accounts in accordance
with their respective interests immediately upon receipt by the Trustee. A
Participant's interest under the Plan in transferred amounts which were fully
vested and
(50)
<PAGE>
nonforfeitable under the transferring plan will be fully vested and
nonforfeitable at all times. Such transferred assets will be invested by the
Trustee in accordance with the provisions of paragraph (f) of Section 11.01 as
if such assets were transferred from a predecessor plan.
11.03. Acceptance of Assets by Trustee. The Trustee will not accept
-------------------------------
assets which are not either in a medium proper for investment under the Plan,
as set forth in Section 1.12(b), or in cash. Such assets shall be accompanied
by written instructions showing separately the respective contributions by the
prior employer and by the employee, and identifying the assets attributable to
such contributions. The Trustee shall establish such accounts as may be
necessary or appropriate to reflect such contributions under the Plan. The
Trustee shall hold such assets for investment in accordance with the provisions
of Article 6, and shall in accordance with the written instructions of the
Employer make appropriate credits to the Accounts of the Participants for whose
benefit assets have been transferred.
11.04. Transfer of Assets from Trust. The Employer may direct the Trustee
-----------------------------
to transfer all or a specified portion of the Trust assets to any other plan or
plans maintained by the Employer or the employer or employers of a former
Participant or Participants, provided that the Trustee has received evidence
satisfactory to it that such other plan meets all applicable requirements of
the Code. The assets so transferred shall be accompanied by written
instructions from the Employer naming the persons for whose benefit such assets
have been transferred, showing separately the respective contributions by the
Employer and by each Participant, if any, and identifying the assets
attributable to the various contributions. The Trustee shall have no further
liabilities with respect to assets so transferred.
ARTICLE 12. MISCELLANEOUS.
-------------
12.01. Communications to Participants. The Plan will be communicated to
------------------------------
all Participants by the Employer promptly after the Plan is adopted.
12.02. Limitation of Rights. Neither the establishment of the Plan and
--------------------
the Trust, nor any amendment thereof, nor the creation of any fund or account,
nor the payment of any benefits, will be construed as giving to any Participant
or other person any legal or equitable right against the Employer,
Administrator or Trustee, except as provided herein; and in no event will the
terms of employment or service of any Participant be modified or in any way
affected hereby. It is a condition of the Plan, and each Participant expressly
agrees by his participation herein, that each Participant will look solely to
the assets held in the Trust for the payment of any benefit to which he is
entitled under the Plan.
12.03. Nonalienability of Benefits. The benefits provided hereunder will
---------------------------
not be subject to alienation, assignment, garnishment, attachment, execution or
levy of any kind, either voluntarily or involuntarily, and any attempt to cause
such benefits to be so subjected will not be recognized, except to such extent
as may be required by law.
(51)
<PAGE>
The preceding sentence shall also apply to the creation, assignment, or
recognition of a right to any benefit payable with respect to a Participant
pursuant to a domestic relations order, unless such order is determined by the
Plan Administrator to be a qualified domestic relations order, as defined in
section 414(p) of the Code, or any domestic relations order entered before
January 1, 1985. A domestic relations order will not fail to be deemed a
qualified domestic relations order merely because it requires the distribution
or segregation of all or part of a Participant's Account with respect to an
alternate payee before the Participant's death, disability, hardship or
termination of employment, and distributions shall be made, or Accounts
segregated, pursuant to the terms of any qualified domestic relations order.
12.04. Facility of Payment. In the event the Administrator determines, on
-------------------
the basis of medical reports or other evidence satisfactory to the
Administrator, that the recipient of any benefit payments under the Plan is
incapable of handling his affairs by reason of minority, illness, infirmity or
other incapacity, the Administrator may direct the Trustee to disburse such
payments to a person or institution designated by a court which has jurisdiction
over such recipient or a person or institution otherwise having the legal
authority under State law for the care and control of such recipient. The
receipt by such person or institution of any such payments shall be complete
acquittance therefor, and any such payment to the extent thereof, shall
discharge the liability of the Trust for the payment of benefits hereunder to
such recipient.
12.05. Information between Employer and Trustee. The Employer agrees to
----------------------------------------
furnish the Trustee, and the Trustee agrees to furnish the Employer with such
information relating to the Plan and Trust as may be required by the other in
order to carry out their respective duties hereunder, including without
limitation information required under the Code and any regulations issued or
forms adopted by the Treasury Department thereunder or under the provisions of
ERISA and any regulations issued or forms adopted by the Labor Department
thereunder.
12.06. Effect of Failure to Qualify under Code. Notwithstanding any other
---------------------------------------
provision contained herein, if the Employer fails to obtain or retain approval
of the Plan by the Internal Revenue Service as a qualified Plan under the Code,
the Employer may no longer participate in this prototype Plan arrangement and
will be deemed to have an individually designed plan.
12.07. Notices. Any notice or other communication in connection with this
-------
Plan shall be deemed delivered in writing if addressed as provided below and if
either actually delivered at said address or, in the case of a letter, three
business days shall have elapsed after the same shall have been deposited in
the United States mails, first-class postage prepaid and registered or
certified:
(a) If to the Employer or Administrator, to it at the address set forth
in the Adoption Agreement, to the attention of the person specified to
receive notice in the Adoption Agreement;
(52)
<PAGE>
(b) If to the Trustee, to it at the address set forth in the Adoption
Agreement;.
or, in each case at such other address as the addressee shall have specified by
written notice delivered in accordance with the foregoing to the addressor's
then effective notice address.
12.08. Governing Law. The Plan and the accompanying Adoption Agreement
-------------
will be construed, administered and enforced according to ERISA, and to the
extent not preempted thereby, the laws of the Commonwealth of Massachusetts.
ARTICLE 13. PLAN ADMINISTRATION.
-------------------
13.01. Powers and responsibilities of the Administrator. The
------------------------------------------------
Administrator has the full power and the full responsibility to administer the
Plan in all of its details, subject, however, to the requirements of ERISA.
The Administrator's powers and responsibilities include, but are not limited
to, the following:
(a) To make and enforce such rules and regulations as it deems
necessary or proper for the efficient administration of the Plan;
(b) To interpret the Plan, its interpretation thereof in good faith to
be final and conclusive on all persons claiming benefits under the Plan;
(c) To decide all questions concerning the Plan and the eligibility of
any person to participate in the Plan;
(d) To administer the claims and review procedures specified in Section
13.03;
(e) To compute the amount of benefits which will be payable to any
Participant, former Participant or Beneficiary in accordance with the
provisions of the Plan;
(f) To determine the person or persons to whom such benefits will be
paid;
(g) To authorize the payment of benefits;
(h) To comply with the reporting and disclosure requirements of Part 1
of Subtitle B of Title I of ERISA;
(i) To appoint such agents, counsel, accountants, and consultants as
may be required to assist in administering the Plan;
(53)
<PAGE>
(j) By written instrument, to allocate and delegate its fiduciary
responsibilities in accordance with Section 405 of ERISA.
13.02. Nondiscriminatory Exercise of Authority. Whenever, in the
---------------------------------------
administration of the Plan, any discretionary action by the Administrator is
required, the Administrator shall exercise its authority in a nondiscriminatory
manner so that all persons similarly situated will receive substantially the
same treatment.
13.03. Claims and Review Procedures.
----------------------------
(a) Claims Procedure. If any person believes he is being denied
----------------
any rights or benefits under the Plan, such person may file a claim in
writing with the Administrator. If any such claim is wholly or partially
denied, the Administrator will notify such person of its decision in
writing. Such notification will contain (i) specific reasons for the
denial, (ii) specific reference to pertinent Plan provisions, (iii) a
description of any additional material or information necessary for such
person to perfect such claim and an explanation of why such material or
information is necessary, and (iv) information as to the steps to be taken
if the person wishes to submit a request for review. Such notification
will be given within 90 days after the claim is received by the
Administrator (or within 180 days, if special circumstances require an
extension of time for processing the claim, and if written notice of such
extension and circumstances is given to such person within the initial 90-
day period). If such notification is not given within such period, the
claim will be considered denied as of the last day of such period and such
person may request a review of his claim.
(b) Review Procedure. Within 60 days after the date on which a
----------------
person receives a written notice of a denied claim (or, if applicable,
within 60 days after the date on which such denial is considered to have
occurred), such person (or his duly authorized representative) may (i)
file a written request with the Administrator for a review of his denied
claim and of pertinent documents and (ii) submit written issues and
comments to the Administrator. The Administrator will notify such person
of its decision in writing. Such notification will be written in a
manner calculated to be understood by such person and will contain
specific reasons for the decision as well as specific references to
pertinent Plan provisions. The decision on review will be made within 60
days after the request for review is received by the Administrator (or
within 120 days, if special circumstances require an extension of time
for processing the request, such as an election by the Administrator to
hold a hearing, and if written notice of such extension and circumstances
is given to such person within the initial 60-day period). If the
decision on review is not made within such period, the claim will be
considered denied.
(54)
<PAGE>
13.04. Named Fiduciary. The Administrator is a "named fiduciary" for
---------------
purposes of Section 402(a)(1) of ERISA and has the powers and responsibilities
with respect to the management and operation of the Plan described herein.
13.05. Costs of Administration. Unless paid by the Employer, all
-----------------------
reasonable costs and expenses incurred by the Administrator and the Trustee in
administering the Plan and Trust will be paid from the Trust Fund and will,
unless allocable to the Accounts of particular Participants, be charged against
the Accounts of all Participants on a pro rata basis.
ARTICLE 14. TRUST AGREEMENT.
---------------
14.01. Acceptance of Trust Responsibilities. By executing the Adoption
------------------------------------
Agreement, the Employer establishes a trust to hold the assets of the plan. By
executing the Adoption Agreement, the Trustee agrees to accept the rights,
duties and responsibilities set forth in this Article 14.
14.02. Establishment of Trust Fund. A trust is hereby established under
---------------------------
the Plan and the Trustee will open and maintain a Trust account for the Plan
and, as part thereof, Participants' Accounts for such individuals as the
Employer shall from time to time give written notice to the Trustee are
Participants in the Plan. The Trustee will accept and hold in the Trust Fund
such contributions on behalf of Participants as it may receive from time to
time from the Employer. The Trust Fund shall be fully invested and reinvested
in accordance with the applicable provisions of the Plan in Fund Shares.
14.03. Exclusive Benefit. The Trustee shall hold the assets of the Trust
-----------------
Fund for the exclusive purpose of providing benefits to Participants and
Beneficiaries and defraying the reasonable expenses of administering the Plan.
No assets of the Plan shall revert to the Employer except as specifically
permitted by the terms of the Plan.
14.04. Powers of Trustee. In addition to and not in limitation of such
-----------------
powers as the Trustee has by law or under any other provisions of the Plan, the
Trustee will have the following powers, provided that no such power shall be
exercised in any manner inconsistent with the provisions of ERISA:
(a) to deal with all or any part of the Trust Fund and to invest all or
a part of the Trust Fund in investments available under the Plan, without
regard to the law of any state regarding proper investment;
(b) to retain uninvested such cash as it may deem necessary or
advisable, without liability for interest thereon, for the administration
of the Trust;
(c) to sell, convert, redeem, exchange, or otherwise dispose of all or
any part of the assets constituting the Trust Fund;
(55)
<PAGE>
(d) to enforce by suit or otherwise, or to waive, its rights on behalf
of the Trust, and to defend claims asserted against it or the Trust,
provided that the Trustee is indemnified to its satisfaction against
liability and expenses;
(e) to employ such agents and counsel as may be reasonably necessary in
collecting, managing, administering, investing, distributing and
protecting the Trust Fund or the assets thereof and to pay them
reasonable compensation;
(f) to compromise, adjust and settle any and all claims against or in
favor of it or the Trust;
(g) to oppose, or participate in and consent to the reorganization,
merger, consolidation, or readjustment of the finances of any enterprise,
to pay assessments and expenses in connection therewith, and to deposit
securities under deposit agreements;
(h) to apply for or purchase annuity contracts in accordance with
Section 8.02;
(i) to hold securities unregistered, or to register them in its own
name or in the name of nominees;
(j) to appoint custodians to hold investments within the jurisdiction
of the district courts of the United States and to deposit securities
with stock clearing corporations or depositories or similar
organizations;
(k) to make, execute, acknowledge and deliver any and all investments
that it deems necessary or appropriate to carry out the powers herein
granted; and
(l) generally to exercise any of the powers of an owner with respect to
all or any part of the Trust Fund.
The Employer specifically acknowledges and authorizes that affiliates of
the Trustee may act as its agent in the performance of ministerial,
non-fiduciary duties under the Trust. The expenses and compensation of such
agent shall be paid by the Trustee.
14.05. Accounts. The Trustee will keep full accounts of all receipts and
--------
disbursements and other transactions hereunder. Within 60 days after the close
of each Plan Year, within 60 days after termination of the Trust, and at such
other times as may be appropriate, the Trustee will determine the then net fair
market value of the Trust Fund as of the close of the Plan Year, as of the
termination of the Trust, or as of such other time, whichever is applicable,
and will render to the Employer and Plan Administrator an account of its
administration of the Trust during the period since the last such accounting,
including all allocations made by it during such period.
(56)
<PAGE>
14.06. Approving of Accounts. To the extent permitted by law, the written
---------------------
approval of any account by the Employer or Plan Administrator will be final and
binding, as to all matters and transactions stated or shown therein, upon the
Employer, Plan Administrator, Participants and all persons who then are or
thereafter become interested in the Trust. The failure of the Employer or Plan
Administrator to notify the Trustee within six (6) months after the receipt of
any account of its objection to the account will, to the extent permitted by
law, be the equivalent of written approval. If the Employer or Plan
Administrator files any objections within such six (6) month period with
respect to any matters or transactions stated or shown in the account, and the
Employer or Plan Administrator and the Trustee cannot amicably settle the
question raised by such objections, the Trustee will have the right to have such
questions settled by judicial proceedings. Nothing herein contained will be
construed so as to deprive the Trustee of the right to have judicial settlement
of its accounts. In any proceeding for a judicial settlement of any account or
for instructions, the only necessary parties will be the Trustee, the Employer
and the Plan Administrator.
14.07. Distribution from Trust Fund. The Trustee shall make such
----------------------------
distribution from the Trust Fund as the Employer or Plan Administrator may in
writing direct, as provided by the terms of the Plan, upon certification by the
Employer or Plan Administrator that the same is for the exclusive benefit of
Participants or their Beneficiaries, or for the payment of expenses of
administering the Plan.
14.08. Transfer of Amounts from Qualified Plan. If the Plan provides that
---------------------------------------
amounts may be transferred to the Plan from another qualified plan or trust
under section 401(a) of the Code, such transfer shall be made in accordance
with the provisions of the Plan and with such rules as may be established by
the Trustee. The Trustee will not accept assets which are not either in a
medium proper for investment under this Agreement or in cash. Such amounts
shall be accompanied by written instructions showing separately the respective
contributions by the prior employer and the transferring Employee, and
identifying the assets attributable to such contributions. The Trustee shall
hold such assets for investment in accordance with the provisions of this
Agreement.
14.09. Transfer of Assets from Trust. Subject to the provisions of the
-----------------------------
Plan, the Employer may direct the Trustee to transfer all or a specified
portion of the Trust assets to any other plan or plans maintained by the
Employer or the employer or employers of a former Participant or Participants,
provided that the Trustee has received evidence satisfactory to it that such
other plan meets all applicable requirements of the Code. The assets so
transferred shall be accompanied by written instructions from the Employer
naming the persons for whose benefit such assets have been transferred, showing
separately the respective contributions by the Employer and by each
Participant, if any, and identifying the assets attributable to the various
contributions. The Trustee shall have no further liabilities with respect to
assets so transferred.
(57)
<PAGE>
14.10. Voting; Delivery of Information. The Trustee shall deliver, or
-------------------------------
cause to be executed and delivered, to the Employer or Plan Administrator all
notices, prospectuses, financial statements, proxies and proxy soliciting
materials received by the Trustee relating to securities held by the Trust, and
the Employer or Plan Administrator shall deliver these to the appropriate
Participant or the Beneficiary of a deceased Participant. The Trustee shall
not vote any securities held by the Trust except in accordance with the written
instructions of the Participant or the Beneficiary of the Participant, if the
Participant is deceased; provided, however, that the Trustee may, in the
absence of instructions, vote "present" for the sole purpose of allowing such
shares to be counted for establishment of a quorum at a shareholders' meeting.
14.11. Compensation and Expenses of Trustee. The Trustee's fee for
------------------------------------
performing its duties hereunder will be such reasonable amounts as the Trustee
may from time to time specify by written agreement with the Employer. Such
fee, any taxes of any kind which may be levied or assessed upon or in respect
of the Trust Fund and any and all expenses, including without limitation legal
fees and expenses of administrative and judicial proceedings, reasonably
incurred by the Trustee in connection with its duties and responsibilities
hereunder will, unless paid by said Employer, be paid from the Trust Fund and
will, unless allocable to the Accounts of particular Participants, be charged
against the respective Accounts of all Participants, in such reasonable manner
as the Trustee may determine.
14.12. Reliance by Trustee on Other Persons. The Trustee may rely upon
------------------------------------
and act upon any writing from any person authorized by the Employer or Plan
Administrator to give instructions concerning the Plan and may conclusively
rely upon and be protected in acting upon any written order from the Employer
or Plan Administrator or upon any other notice, request, consent, certificate,
or other instructions or paper reasonably believed by it to have been executed
by a duly authorized person, so long as it acts in good faith in taking or
omitting to take any such action. The Trustee need not inquire as to the basis
in fact of any statement in writing received from the Employer or Plan
Administrator.
The Trustee will be entitled to rely on the latest certificate it has
received from the Employer or Plan Administrator as to any person or persons
authorized to act for the Employer or Plan Administrator hereunder and to sign
on behalf of the Employer or Plan Administrator any directions or instructions,
until it receives from the Employer or Plan Administrator written notice that
such authority has been revoked.
Notwithstanding any provision contained herein, the Trustee will be under
no duty to take any action with respect to any Participant's Account (other
than as specified herein) unless and until the Employer or Plan Administrator
furnishes the Trustee with written instructions on a form acceptable to the
Trustee, and the Trustee agrees thereto in writing. The Trustee will not be
liable for any action taken pursuant to the Employer or Plan Administrator's
written instructions (nor for the collection of
(58)
<PAGE>
contributions under the Plan, nor the purpose or propriety of any distribution
made thereunder).
14.13. Indemnification by Employer. Unless resulting from the Trustee's
---------------------------
negligence or willful misconduct, Employer shall indemnify and save harmless
the Trustee from any and all liabilities and expenses, including without
limitation, reasonable attorney's fees, incurred or required to be paid by the
Trustee in connection with the Plan or this Trust Agreement.
14.14. Consultation by Trustee with Counsel. The Trustee may consult with
------------------------------------
legal counsel (who may be but need not be counsel for the Employer or the Plan
Administrator) concerning any question which may arise with respect to its
rights and duties under the Plan and Trust, and the opinion of such counsel
will, to the extent permitted by law, be full and complete protection in respect
of any action taken or omitted by the Trustee hereunder in good faith and in
accordance with the opinion of such counsel.
14.15. Persons Dealing with the Trustee. No person dealing with the
--------------------------------
Trustee will be bound to see to the application of any money or property paid
or delivered to the Trustee or to inquire into the validity or propriety of any
transactions.
14.16. Resignation or Removal of Trustee. The Trustee may resign at any
---------------------------------
time by written notice to the Employer, which resignation shall be effective 60
days after delivery to the Employer. The Trustee may be removed by the
Employer by written notice to the Trustee, which removal shall be effective 60
days after delivery to the Trustee.
Upon resignation or removal of the Trustee, the Employer may appoint a
successor trustee. Any such successor trustee will, upon written acceptance of
his appointment, become vested with the estate, rights, powers, discretion,
duties and obligations of the Trustee hereunder as if he had been originally
named as Trustee in this Agreement.
Upon resignation or removal of the Trustee, the Employer will no longer
participate in this prototype plan and will be deemed to have adopted an
individually designed plan. In such event, the Employer shall appoint a
successor trustee within said 60-day period and the Trustee will transfer the
assets of the Trust to the successor trustee upon receipt of sufficient
evidence (such as a determination letter or opinion letter from the Internal
Revenue Service or an opinion of counsel satisfactory to the Trustee) that such
trust will be a qualified trust under the Code.
The appointment of a successor trustee shall be accomplished by delivery
to the Trustee of written notice that the Employer has appointed such successor
trustee, and written acceptance of such appointment by the successor trustee.
The Trustee may, upon transfer and delivery of the Trust Fund to a successor
trustee, reserve such
(59)
<PAGE>
reasonable amount as it shall deem necessary to provide
for its fees, compensation, costs and expenses, or for the payment of any other
liabilities chargeable against the Trust Fund for which it may be liable. The
Trustee shall not be liable for the acts or omissions of any successor trustee.
14.17. Fiscal Year of the Trust. The fiscal year of the Trust will
------------------------
coincide with the Plan Year.
14.18. Discharge of Duties by Fiduciaries. The Trustee and the Employer
----------------------------------
and any other fiduciary shall discharge their duties under the Plan and this
Trust Agreement solely in the interests of Participants and their Beneficiaries
in accordance with the requirements of ERISA.
14.19. Amendment. In accordance with provisions of the Plan, and subject
---------
to the limitations set forth therein, this Trust Agreement may be amended by an
instrument in writing signed by the Employer and the Trustee. No amendment to
this Trust Agreement shall divert any part of the Trust Fund to any purpose
other than as provided in Section 2 hereof.
14.20. Plan Termination. Upon termination or partial termination of the
----------------
Plan or complete discontinuance of contributions thereunder, the Trustee will
make distributions to the Participants or other persons entitled to
distributions as the Employer or Plan Administrator directs in accordance with
the provisions of the Plan. In the absence of such instructions and unless the
Plan otherwise provides, the Trustee will notify the Employer or Plan
Administrator of such situation and the Trustee will be under no duty to make
any distributions under the Plan until it receives written instructions from
the Employer or Plan Administrator. Upon the completion of such distributions,
the Trust will terminate, the Trustee will be relieved from all liability under
the Trust, and no Participant or other person will have any claims thereunder,
except as required by applicable law.
14.21. Permitted Reversion of Funds to Employer. If it is determined by
----------------------------------------
the Internal Revenue Service that the Plan does not initially qualify under
section 401 of the Code, all assets then held under the Plan will be returned
by the Trustee, as directed by the Plan Administrator, to the Employer, but
only if the application for determination is made by the time prescribed by law
for filing the Employer's return for the taxable year in which the Plan was
adopted or such later date as may be prescribed by regulations. Such
distribution will be made within one year after the date the initial
qualification is denied. Upon such distribution the Plan will be considered to
be rescinded and to be of no force or effect.
In the event the deduction of a contribution made by the Employer is
disallowed under Section 404 of the Code, such contribution (to the extent
disallowed) must be returned to the Employer within one year of the
disallowance of the deduction.
(60)
<PAGE>
Any contribution made by the Employer because of a mistake of fact must
be returned to the Employer within one year of the disallowance of the
deduction.
14.22. Governing Law. This Trust Agreement will be construed,
-------------
administered and enforced according to ERISA and, to the extent not preempted
thereby, the laws of the Commonwealth of Massachusetts.
(61)
<PAGE>
EXHIBIT 10.14
Harborside Healthcare Supplemental Executive Retirement Plan
===============================================================================
HARBORSIDE HEALTHCARE
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
EFFECTIVE SEPTEMBER 15, 1995
================================================================================
Harborside HEALTHCARE September 15, 1995
<PAGE>
Harborside Healthcare Supplemental Executive Retirement Plan
================================================================================
HARBORSIDE HEALTHCARE
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
EFFECTIVE SEPTEMBER 15, 1995
ARTICLE I - PURPOSE OF PLAN
1.1 PURPOSE OF PLAN. The Company intends and desires by the adoption of the
Harborside Healthcare Supplemental Executive Retirement Plan (the "Plan") to
recognize the value to Harborside Healthcare, Limited Partnership (the
Employer") of the past and present services of Eligible Employees covered by the
Plan and to encourage and assure their continued service with the Employer by
making more adequate provision for their future retirement security.
This Plan is adopted by the Employer for certain of its executive employees.
The purpose of the Plan is to provide Eligible Employees with supplemental
retirement income and to offer Eligible Employees an opportunity to elect to
defer the receipt of compensation in order to provide termination of employment
and related benefits taxable pursuant to section 451 of the Internal Revenue
Code of 1986, as amended (the "Code"). The Plan is intended to be a "top-hat"
plan (i.e., an unfunded deferred compensation plan maintained for a select group
of management or highly compensated employees) under Sections 201(2), 301(a)(3),
and 401(a)(1) of the Employee Retirement Income Security Act of 1974 ("ERISA").
ARTICLE II - DEFINITIONS
2.1 ACCOUNTS means the accounts maintained under this Plan on the books of the
Employer (also referred in this document to as the "Company") for the benefit
of an Eligible Employee.
2.2 ADMINISTRATOR means the person appointed by the Executive Committee to
administer the Plan.
2.3 CODE means the Internal Revenue Code of 1986, as amended.
2.4 COMPANY means Harborside Healthcare, Limited Partnership or any company
which is a successor as a result of merger, consolidation, liquidation, transfer
of assets, or other reorganization.
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Harborside HEALTHCARE September 15, 1995
<PAGE>
Harborside Healthcare Supplemental Executive Retirement Plan
================================================================================
2.5 COMPENSATION means the total of the base salary related to a calendar year
for an Eligible Employee and any bonus which would have been available for
payment during that calendar year to an Eligible Employee with respect to
services provided by an Eligible Employee to the Company, prior to giving effect
to any deferral elections made by an Eligible Employee.
2.6 ELIGIBLE EMPLOYEE means for any Plan Year, an employee of the Company whose
Compensation during a Plan Year, prior to giving effect to any deferral
elections, is expected to exceed $100,000, and who is selected by the Executive
Committee to participate in this Plan.
2.7 EXECUTIVE COMMITTEE means the Executive Committee of the Company charged
with the administration of the Plan.
2.8 PLAN means this Harborside Healthcare Supplemental Executive Retirement
Plan.
2.9 PLAN YEAR means the twelve (12) month period ending the last day of
December during which the Plan is in effect.
2.10 SALARY OR BONUS DEFERRAL ACCOUNT means the account on the books of the
Company to which an Eligible Employee's salary or bonus deferrals described in
Section 3.1, plus allocated investment earnings, are credited.
2.11 SUPPLEMENTAL EMPLOYER MATCHING ACCOUNT means the account on the books of
the Company to which Employer deemed contributions described in Section 4.1,
plus allocated investment earnings, are credited.
2.12 VALUATION DATE means the date of the end of the first payroll period
following the end of each quarter within the Plan Year or any date designated
by the Executive Committee as of which a valuation of Plan credits is performed.
ARTICLE III - SALARY REDUCTION AND BONUS REDUCTION DEFERRALS
3.1 An Eligible Employee, as defined in Section 2.6, may for any Plan Year in
which he or she is an Eligible Employee, elect to defer receipt of any whole
percentage of his or her Compensation, such whole percentage not to exceed
twenty-five percent (25%) of the Eligible Employee's Compensation for any Plan
Year, except in the case of the initial Plan Year in which the limit shall be
100% of any Compensation not received by an Eligible Employee prior to
enrollment in the Plan.
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Harborside HEALTHCARE September 15, 1995
<PAGE>
Harborside Healthcare Supplemental Executive Retirement Plan
================================================================================
An Eligible Employee may select different deferral percentages for Compensation
to be paid in the form of base salary (Salary Reduction Deferrals) and
Compensation to be paid in the form of a bonus (Bonus Reduction Deferrals). An
Eligible Employee electing to defer Compensation may elect to defer it to either
(a) the earlier of an Eligible Employee's retirement or termination of
--
employment, death, permanent disability, or (b) the earlier of a specific
calendar year selected by the Eligible Employee (such selection be made from a
list of years, as periodically made available by the Executive Committee) or an
--
Eligible Employee's termination of employment, death, permanent disability, or
retirement. The year in which the deferred payment is to be made must be at
least at least two calendar years later than the calendar year in which the
Eligible Employee is selecting the date of deferred payment.
3.2 Deferral elections allowable under this Plan may be periodically
adjusted by the Executive Committee and must be made by each Eligible Employee
before the beginning of the Plan Year to which such deferral elections apply
except: (1) that in the case of the initial Plan Year, such elections must be
made prior to September 15, 1995, (2) upon an employee's initial selection as
an Eligible Employee under the Plan, such elections must be made within thirty
days of his or her notification as an Eligible Employee. At the earlier of (a)
the beginning of each Plan Year or (b) within thirty days of an employee's
initial selection , each Eligible Employee shall complete and forward to the
Plan Administrator an Enrollment and Election Form (and such other forms as the
Plan Administrator periodically determines are necessary for administration of
the Plan) which shall indicate the Eligible Employee's deferral elections for
that Plan Year.
3.3 Once a Plan Year begins, deferral elections may only be amended if the
Executive Committee determines that an Eligible Employee has experienced a
worthy event (such as a change in marital status, family death, significant
change in economic circumstances, or a similar event), in which case the
Eligible Employee may: (a) elect to revoke future deferrals with respect to
Compensation attributable to services not yet performed, or (b) elect to change
the deferral elections made with respect to Compensation attributable to
services performed on or after July 1 of that Plan Year by submitting amended
elections at least 30 days prior to July 1 of that Plan Year. An Eligible
Employee who has revoked future deferrals may only elect to resume deferrals at
the beginning of the next Plan Year.
ARTICLE IV - EMPLOYER DEEMED CONTRIBUTIONS
4.1 During each Plan Year the Company will credit to each Eligible Employee's
Supplemental Employer Matching Account an amount equal to fifty percent (50%) of
the Compensation deferred by an Eligible Employee during that year, said credit
not to exceed five percent (5%) of such Eligible Employee's base salary for that
year prior to giving effect to Salary Reduction Deferrals made during
================================================================================
Harborside HEALTHCARE September 15, 1995
<PAGE>
Harborside Healthcare Supplemental Executive Retirement Plan
================================================================================
the Plan Year.
ARTICLE V - VESTING
5.1 SALARY REDUCTION CONTRIBUTIONS. An Eligible Employee shall always be one
hundred percent (100%) vested in amounts credited to his or her Salary Or Bonus
Deferral Account.
5.2 EMPLOYER DEEMED CONTRIBUTIONS. An Eligible Employee shall become one
hundred percent (100%) vested in amounts deemed to be credited to his or her
Supplemental Employer Matching Account during each Plan Year at the earliest of:
(a) the second January 1st following the end of the Plan Year for which such
Employer Deemed Contributions are credited, provided such Eligible Employee is
employed by the Company on the date vesting is scheduled to occur; (b) the date
of the Eligible Employee's death, permanent disability (as determined by the
Administrator) or retirement from the Company; or (c) any other accelerated date
as determined by the Executive Committee.
If such Eligible Employee is not employed (employment shall include cases of
leaves of absence approved by the Executive Committee) on the date specified in
Section 5.2 (a) above, and the events provided for in Sections 5.2 (b) and 5.2
(c) have not occurred, such Employer Deemed Contributions shall be forfeited by
that former Eligible Employee and shall be used to reduce future Employer Deemed
Contributions.
ARTICLE VI - PAYMENTS OF BENEFITS
6.1 PAYMENTS OF BENEFITS. The benefit payable under this Plan shall be paid in
accordance with the payment option selected by an Eligible Employee in
accordance with Article III of this Plan as follows:
(a) Upon the earlier of an Eligible Employee's retirement or termination of
--
employment, death, or determination of permanent disability by the Plan
Administrator, in which case it shall be paid in a cash lump sum as soon as
practicable and no later than sixty (60) days after the earlier of such
retirement, termination of employment, death, or determination of disability,
unless such Eligible Employee elects to receive the benefit in annual
installments made over a period of five (5) years. Each Eligible Employee must
select a lump sum or annual installment distribution when selecting a payment
option in accordance with Section 3.1 of this Plan.
================================================================================
Harborside HEALTHCARE September 15, 1995
<PAGE>
Harborside Healthcare Supplemental Executive Retirement Plan
================================================================================
(b) The earlier of a specific calendar year selected by the Eligible
Employee or an Eligible Employee's retirement, termination of employment, death,
--
determination of permanent disability by the Plan Administrator. In the case of
a payment deferred to a specific calendar year, such payment shall be made in a
lump sum during the first month of the calendar year selected by the Eligible
Employee unless the Eligible Employee elects to receive his or her benefit in
annual installments made over a period not to exceed five (5) years, the first
such installment then occurring during the first month of the calendar year
selected by the Eligible Employee. Each Eligible Employee must select a lump sum
or annual installment distribution when selecting a payment option in accordance
with Section 3.1 of this Plan.
Any death benefit payable under this Plan shall be payable to the one or more
beneficiaries who are named in the Election and Enrollment Form completed by
each Eligible Employee.
ARTICLE VII - HARDSHIP DISTRIBUTIONS
7.1 HARDSHIP DISTRIBUTIONS. In the event of financial hardship of an Eligible
Employee, as hereinafter defined, the Eligible Employee may apply to the
Executive Committee for the distribution of all or any part of his or her Salary
or Bonus Deferral Account. The Executive Committee shall consider the
circumstances of each such case, and the best interest of the Eligible Employee
and his or her family, and shall have the right, in its sole discretion, to
allow such distribution, or to direct a distribution of part of the amount
requested, or to refuse to allow any distribution. Upon a finding of financial
hardship, the Administrator shall instruct the Trustee (defined in Article X) to
make the appropriate distribution to the Eligible Employee from amounts
contributed to the Trust (defined in Article X) by the Administrator in respect
of the Eligible Employee's Salary or Bonus Deferral Account. In no event shall
the aggregate amount of the distribution exceed either the full value of the
Eligible Employee's Salary Or Bonus Deferral Account or the amount determined by
the Administrator to be necessary to alleviate the Eligible Employee's financial
hardship (which financial hardship may be considered to include any taxes due as
the result of the distribution occurring because of this Section), and which is
not reasonably available from other resources of the Eligible Employee. For
purposes of this Section, the value of the Eligible Employee's Salary Or Bonus
Deferral Account shall be determined as of the date of the distribution.
"Financial hardship" means (a) a severe financial hardship to the Eligible
Employee resulting from a sudden and unexpected illness or accident of the
Eligible Employee or of a dependent (as defined) in Code Section 152(a) of the
Eligible Employee, (b) loss of the Eligible Employee's property due to casualty,
or (c) other similar extraordinary and unforeseeable circumstances arising as a
result of
================================================================================
Harborside HEALTHCARE September 15, 1995
<PAGE>
Harborside Healthcare Supplemental Executive Retirement Plan
================================================================================
events beyond the control of the Eligible Employee, each as determined to exist
by the Executive Committee. A distribution may be made under this Article only
with the consent of the Executive Committee.
ARTICLE VIII - ACCOUNTS
8.1 ACCOUNTS. The Company will maintain on its books a Salary Or Bonus
Deferral Account and a Supplemental Employer Matching Account for each Eligible
Employee, to which shall be credited, as appropriate, Salary Reduction Deferrals
and Bonus Reduction Deferrals under Section 3.1, Employer Deemed Contributions
under Article IV, and Allocated Investment Earnings as provided in Section 8.2.
8.2 ALLOCATED INVESTMENT EARNINGS. For purposes of measuring the Allocated
Investment Earnings to be credited to each Participant's Salary Or Bonus
Deferral Account and each Participant's Supplemental Employer Matching Account,
a Participant may select from the investment funds selected by the Plan
Administrator and approved by the Executive Committee, the investment funds in
which the Participant's Salary Or Bonus Deferral Account and Supplemental
Employer Matching Account shall be deemed to be invested. Each Participant
shall make a designation on a form provided by the Plan Administrator specifying
the percentage of the Account balances deemed to be invested in each of the
investment choices then offered by the Plan. This form will remain effective
until another valid form has been made by the Participant and received by the
Plan Administrator. Each Participant may amend these investment designations
once per quarter by providing written notification to the Plan Administrator at
least thirty (30) days prior to the end of the quarter or at such other times as
periodically allowed by the Plan Administrator in its sole discretion. If given
timely notification is provided to the Plan Administrator, a change to a
Participant's investment designation shall become effective on the first day of
the calendar quarter or such other period as determined by the Plan
Administrator following receipt by the Plan Administrator of the written
direction.
8.3 The investment funds deemed to be made available to the Participants, and
any limitation on the minimum or maximum percentages of a Participant's Accounts
that may be deemed to be invested in any particular investment fund shall be the
same as the Plan Administrator periodically communicates to the Plan
Participants. If (a) the Participant does not furnish the Plan Administrator
with complete, written instructions, or (b) the written investment instructions
from the Participant are unclear, then the Participant's election to defer
Compensation as allowed by this Plan shall be held in abeyance and have no force
or effect until; such time as the Participant shall provide the Plan
Administrator with complete investment instructions.
================================================================================
Harborside HEALTHCARE September 15, 1995
<PAGE>
Harborside Healthcare Supplemental Executive Retirement Plan
================================================================================
ARTICLE IX - ADMINISTRATION
9.1 ADMINISTRATOR. The Executive Committee and the Administrator shall
administer, construe, and interpret this Plan and shall determine, subject to
the provisions of this Plan in a manner consistent with the terms of the Plan,
the Eligible Employees who shall participate in the Plan from time to time and
the amount, if any, due an Eligible Employee (or his or her beneficiary) under
this Plan. The Administrator shall not be liable for any act done or
determination made in good faith. If a member of the Executive Committee is a
Eligible Employee in this Plan he or she may not vote on matters affecting his
or her personal benefit under this Plan, but any such member shall otherwise be
fully entitled to act in matters arising out of or affecting this Plan
notwithstanding his or her participation herein. In carrying out his or her
duties herein, the Administrator shall have discretionary authority to exercise
all powers and to make all determinations, consistent with the terms of the
plan, in all matters entrusted to him or her, and his or her determinations
shall be given deference and shall be final and binding on all interested
parties.
9.2 CLAIMS PROCEDURES
(a) Notice of Claim. Any Eligible Employee or beneficiary, or the duly
authorized representative of an Eligible Employee or beneficiary, may file with
the Administrator a claim for a Plan benefit. Such a claim must be in writing
on a form provided by the Administrator and must be delivered to the
Administrator, in person or by mail, postage prepaid. Within thirty (30) days
after the receipt of such a claim, the Administrator shall send to the claimant,
by mail, postage prepaid, a notice of the granting or the denying, in whole or
in part, of such claim, unless special circumstances require an extension of
time for processing the claim. In no event may the extension exceed thirty (30)
days from the end of the initial period. If such an extension is necessary, the
claimant will be given a written notice to this effect prior to the expiration
of the initial thirty (30) day period. The Administrator shall have full
discretion to deny or grant a claim in whole or in part in accordance with the
terms of the plan. If notice of the denial of a claim is not furnished in
accordance with this Section, the claim shall be deemed denied and the claimant
shall be permitted to exercise his or her right to review pursuant to paragraphs
2 (c) and 2 (d) of Article IX of the Plan, as applicable.
(b) Action on Claim. The Administrator shall provide to every claimant who
is denied a claim for benefits a written notice setting forth, in a manner
calculated to be understood by the claimant;
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Harborside HEALTHCARE September 15, 1995
<PAGE>
Harborside Healthcare Supplemental Executive Retirement Plan
================================================================================
(i) The specific reason or reasons for the denial;
(ii) A specific reference to the pertinent Plan provisions on which
the denial is based;
(iii) A description of any additional material or information
necessary of the claimant to perfect the claim and an explanation of why such
material or information is necessary; and
(iv) An explanation of the Plan's claim review procedure.
(c) Review of Denial. Within thirty (30) days after the receipt by a
claimant of written notification of the denial (in whole or in part) of a claim,
the claimant or the claimant's duly authorized representative, upon written
application to the Administrator, delivered in person or by certified mail,
postage prepaid, may review pertinent documents and may submit to the
Administrator, in writing, a request for the Administrator to review the denial.
(d) Decision on Review. Upon the Administrator's receipt of a notice of a
request for review, the Administrator shall make a prompt decision on the review
and shall communicate the decision on review in writing to the claimant. The
decision on review shall be written in a manner calculated to be understood by
the claimant and shall include specific reasons for the decision and specific
references to the pertinent Plan provisions on which the decision is based. The
decision on review shall be made not later than thirty (30) days after the
Administrator's receipt of a request for a review, unless special circumstances
require an extension of time for processing, in which case a decision shall be
rendered not later than sixty (60) days after receipt of the request for review.
If an extension is necessary, the claimant shall be given written notice of the
extension by the Administrator prior to the expiration of the initial thirty
(30) day period. If notice of the decision on review is not furnished in
accordance with this Article, the claim shall be deemed denied on review.
ARTICLE X - TRUST
10.1 ESTABLISHMENT OF TRUST. The Company shall establish a Trust with a
Trustee, pursuant to such terms and conditions as are set forth in the Trust
Agreement to be entered into
================================================================================
Harborside HEALTHCARE September 15, 1995
<PAGE>
Harborside Healthcare Supplemental Executive Retirement Plan
================================================================================
between the Company and the Trustee. The Trust is intended to be treated as a
Grantor Trust
under the Code, and the establishment of the Trust is not intended to cause an
Eligible Employee to realize current income on amounts contributed thereto, and
the Trust shall be so interpreted.
ARTICLE XI - MISCELLANEOUS PROVISIONS
11.1 LIMITATIONS OF RIGHTS. Nothing contained in this Plan shall be construed
to:
(a) Limit in any way the right of the Company to terminate an Eligible
Employee's employment at any time; or
(b) Be evidence of any agreement or understanding, express or implied, that
the Company will employ an Eligible Employee in any particular position or at
any particular rate of remuneration.
11.2 NONALIENATION OF BENEFITS; NO WITHDRAWALS. Except as herein after provided
with respect to family disputes, the rights of any Participant under this Plan
are personal and may not be assigned, transferred, pledged, mortgaged, or
hypothecated. Any attempt to do so shall be void. In cases of family disputes,
the Plan Administrator and the Company will observe the terms of the Plan unless
and until ordered to do otherwise by a state or Federal court. As a condition
of participation, each Participant agrees to hold the Plan Administrator and
the Company harmless from any claim that arises out of their compliance with any
final order of any state or Federal court, whether such order effects a
judgement of such court or is issued to enforce a judgement or order of another
court. For purposes of this Section 11.2, "family dispute" means a dispute
relating to provision of child support, alimony payments, or marital property
rights to a spouse, former spouse or other dependent of a Participant. No
amounts credited to an Eligible Employee's Accounts may be withdrawn or paid to
the Eligible Employee prior to termination of employment, retirement, death,
disability or prior to the attainment of a specific year to which Compensation
was deferred in accordance with Article III, except in the case of demonstrated
financial hardship as described in Article VII.
11.3 AMENDMENT OR TERMINATION OF PLAN. Although it is expected that this Plan
shall continue indefinitely, the Executive Committee may amend this Plan from
time to time in any respect, and may at any time terminate the Plan in its
entirety; provided, however, that an Eligible Employee's Accounts as of the date
of any such amendment or termination may not be reduced nor may any such
amendment or termination adversely affect an Eligible Employee's entitlement to
his
================================================================================
Harborside HEALTHCARE September 15, 1995
<PAGE>
Harborside Healthcare Supplemental Executive Retirement Plan
================================================================================
or her Accounts as of such date. In the event of the termination of the Plan,
all benefit payments shall be made within sixty days.
11.4 CONSTRUCTION OF PLAN. This Plan is unfunded. The obligations of the
Company with respect to the amounts payable hereunder shall be paid out of the
Company's general assets and shall be secured by a grantor trust within the
meaning of the subpart E, part 1, subchapter J, chapter 1, schedule A of the
Code, escrow or otherwise. This Plan shall be so construed that it will be
"unfunded" and maintained "primarily for the purpose of providing deferred
compensation for a select group of management or highly compensated employees",
as those terms are used in the Employee Retirement Income Security Act of 1974.
11.5 GENDER AND NUMBER. Wherever used in this Plan, the masculine shall be
deemed to include the feminine and the singular shall be deemed to include the
plural, unless the context clearly indicates otherwise.
================================================================================
Harborside HEALTHCARE September 15, 1995
<PAGE>
Harborside Healthcare Supplemental Executive Retirement Plan
================================================================================
11.6 LAW GOVERNING. This Plan shall be construed in accordance with and
governed by the laws of the Commonwealth of Massachusetts to the extent such
laws are not preempted by federal law.
ATTEST/WITNESS HARBORSIDE HEALTHCARE
LIMITED PARTNERSHIP
/s/ Julie Savard By: /s/ William H. Stephan
- --------------------------- -------------------------------
Print Name: Julie Savard Print Name: William H. Stephan
--------------- -----------------------
Date: September 15, 1995
-----------------------------
[SEAL]
<PAGE>
EXHIBIT 10.16
AGREEMENT TO LEASE
AGREEMENT made and entered into as of the 3d day of May, 1996 (herein
called the "Effective Date") among WESTBAY MANOR COMPANY, an Ohio limited
partnership ("Westbay"), WESTBAY MANOR II DEVELOPMENT COMPANY, an Ohio limited
partnership ("Westbay II"), ROYALVIEW MANOR DEVELOPMENT COMPANY, an Ohio limited
partnership ("Royalview LP"), BEACHWOOD CARE CENTER LIMITED PARTNERSHIP, an Ohio
limited partnership ("Beachwood") (Westbay, Westbay II, Royalview LP and
Beachwood are referred to hereinafter collectively as the "Landlords" and
individually as a "Landlord"), ROYALVIEW MANOR COMPANY, an Ohio general
partnership ("Royalview GP"), (the Landlords and Royalview GP hereinafter are
individually referred to as an "Associated Company" and collectively referred to
as the "Associated Companies"), as parties of the first part, and HARBORSIDE
HEALTH I CORPORATION, a Delaware corporation (herein called the "Tenant"), and
HARBORSIDE HEALTHCARE LIMITED PARTNERSHIP, a Massachusetts limited partnership
(the "Guarantor"), as parties of the Second Part.
WITNESSETH:
-----------
WHEREAS, Westbay is the owner and operator of Westbay Manor I, a 153-bed
nursing home facility located in Westlake, Ohio on land more particularly
described in Schedule A attached hereto; and
----------
WHEREAS, Westbay II is the owner and operator of Westbay Manor II, a 106-
bed nursing home facility located in Westlake, Ohio on land more particularly
described in Schedule B attached hereto; and
----------
WHEREAS, Royalview LP is the owner of Royalview Manor, a 159-bed nursing
home located in Broadview Heights, Ohio on land more particularly described in
Schedule C attached hereto; and
- ----------
WHEREAS, Beachwood is the owner and operator of Parkland Nursing Center
(which, together with Westbay Manor I, Westbay Manor II, and Royalview Manor
shall be referred to collectively as the "Facilities", or each as a "Facility"),
a 274-bed nursing home located in Beachwood, Ohio on land more particularly
described in Schedule D attached hereto (which land, together with the land
----------
described in Schedules A, B and C shall be referred to collectively as the
--------------------
"Land"); and
WHEREAS, Royalview GP, is the lessee and operator of Royalview Manor; and
WHEREAS, Landlords desire to lease to Tenant, and Tenant desires to lease
from Landlords, the Land, the Facilities and certain other assets used in or in
connection with the operation
<PAGE>
of the Facilities, all upon the terms and conditions hereinafter set forth; and
WHEREAS, Tenant and Guarantor are affiliated through common ownership by
Harborside Healthcare Advisors Limited Partnership, and Guarantor will guaranty
the obligations of Tenant under this Agreement pursuant to a form of Guaranty
attached hereto as Schedule D (the "Guaranty"), the Leases (defined
hereinafter), the Option to Purchase Agreements (as defined hereinafter) and
other agreements required hereunder; and
WHEREAS, Paul S. Dennis ("Dennis") is a general partner of all of the
Associated Companies and Jeffrey I. Friedman ("Friedman") is a general partner
of Westbay, Westbay II and Beachwood.
NOW, THEREFORE, for and in consideration of the mutual covenants and
agreements herein contained, the parties hereto do hereby covenant and agree as
follows:
1. LEASE OF ASSETS. On the Closing Date (as defined in Section 10.1 of this
Agreement, Landlords and Tenant shall enter into leases in the form attached
hereto as Schedules E, F, G and H (each a "Lease", collectively the "Leases")
-----------------------
pursuant to which Landlords shall lease to Tenants the real property described
therein (the "Premises") together with all of the other tangible assets used in
or in connection with the operation of the Premises and the Facilities (except
those assets listed in Schedule 1.1 attached hereto which are hereinafter
------------
referred to as the "Excluded Assets") (the "Assets"), upon the terms and
conditions set forth therein. To the extent that any tangible assets (other
than the Excluded Assets) used in or in connection with the operation of the
Facilities as of the Effective Date or any addition thereto or replacement
thereof made prior to the Lease commencement date are owned, in whole or in
part, by any Persons other than the Landlords, such assets shall be transferred
by such Person to the applicable Landlord prior to the Closing Date and such
transfer shall be a condition precedent to Tenant's obligation to close the
transaction contemplated hereunder.
Attached hereto as Schedule 1.2 is a comprehensive list (by Facility) of
------------
the vehicles, fixtures, machinery, equipment, and certain furniture and
furnishings owned by the Associated Companies and used in or in connection with
the operation of the Premises.
Attached hereto as Schedule 1.3 is a complete and accurate list (by
------------
Facility) of all vehicles, machinery, equipment, furniture and fixtures which
the Associated Companies use under any lease or license agreement.
- 2 -
<PAGE>
2. CERTAIN ASSETS AND LIABILITIES. In consideration of the license, transfer
or assignment to Tenant of the rights to the Intangible Assets set forth in
Section 2.1 below for the term of the Leases (the "Lease Term") and of the
agreement herein by the Associated Companies to perform each of their other
respective obligations hereunder, Tenant will assume from the Associated
Companies at Closing the liabilities set forth in Section 2.3 below.
2.1. Intangible Assets. At the Closing, the Associated Companies will
-----------------
license or transfer and assign all of their right, title and interest in and to
the following intangible assets (the "Intangible Assets") to Tenant for the
Lease Term:
(a) To the extent transferable under Ohio law, all licenses, permits,
certificates and franchises necessary to operate and conduct the business
conducted in each of the Premises and all waivers of any requirements pertaining
to such licenses, permits, certificates and franchises, excluding the respective
certificates of need for the Facilities, which shall be transferred to Tenant or
its permitted assignee upon the purchase of each Facility by Tenant or its
permitted assignee pursuant to the Option to Purchase Agreements (as hereinafter
defined) in consideration of the Exercise Price thereunder.
(b) Licenses to all registered or unregistered trademarks, trade or brand
names, service marks and similar intangible property pertaining to the
Facilities.
2.2. License. At the Closing, the Associated Companies shall grant to
-------
Tenant or its permitted assignee a non-assignable license in the form attached
thereto as Schedule 2.2 to all of the Associated Companies' right, title and
------------
interest to use any words indicating that the business of the Facilities is
being carried on, including the right to use the trade names "Parkland Centre",
"Westbay Manor II", "Westbay Manor", and "Royalview Manor", or any variation
thereof, as part of the name or in connection with any of the Facilities or any
part thereof.
2.3. Assumed Liabilities. Subject to the second paragraph of this
-------------------
Section 2.3, Tenant will assume from Landlords at the Closing only those
----
liabilities and obligations which are related to (i) the Facilities which accrue
or otherwise are to be performed on or after the Closing in respect of the
contracts and agreements listed in Schedule 2.3 attached hereto (collectively
------------
referred to herein as the "Assumed Contracts"), in each case as in effect at the
Closing and solely to the extent that the existence at or after the Closing of
such liabilities or obligations does not constitute a breach of any
representation or warranty made by the Associated Companies herein or in
connection herewith; (ii) the Parkland Ancillary Medical Leases; (iii) the pro-
ratable items which are not yet due and payable by the Associated Companies
prior to or at the Closing and for which
- 3 -
<PAGE>
Tenant receives a credit at Closing; and (iv) obligations with respect to any
security deposits or patient trust funds held by the Associated Companies and
transferred to Tenant on the Closing Date, all of which liabilities and
obligations shall be appropriately adjusted for in the Closing Settlement at
Closing. Notwithstanding anything to the contrary herein, or in any other
writing delivered in connection herewith, nothing herein or in any such other
writing shall be construed to constitute the assumption, express or implied, by
Tenant of any obligations or liability of the Associated Companies, except
solely for the obligations and liabilities expressly agreed to be assumed at the
Closing by Tenant pursuant to the first sentence of this Section 2.3.
To the extent that any of the Assumed Contracts are not assignable without
the consent of a third party, this Agreement shall not of itself constitute an
assignment or an attempted assignment of such Assumed Contracts if such
assignment or attempted assignment would constitute a breach thereof. The
Associated Companies will use their respective best efforts to obtain the
consent to the assignment to Tenant of each such Assumed Contract with respect
to which such consent is required for such assignment provided that no
Associated Company shall thereby become obligated to make any expenditures to
obtain such consents. If such consent is not obtained on or prior to the
Closing Date in respect of any such Assumed Contract, each party hereto will
cooperate with the other party hereto in any reasonable arrangement consistent
with the representations and warranties set forth herein to enable Landlords to
perform their obligations under such Assumed Contract, and to provide Tenant the
benefits thereunder, including without limitation by the enforcement thereof at
the expense of the Tenant.
2.4. Records and Plans. At the Closing, the Associated Companies will
-----------------
transfer custody of the following records and plans to Tenant for the Lease
Term:
(a) All of the patient, medical, clinical and personnel records of the
Facilities, and all of the operating manuals, procedures manuals, training
manuals and other books and records used by the Associated Companies in
operating the Premises, but excluding any corporate and partnership financial
books and records.
(b) All plans, specifications and architectural renderings of the Premises,
if any.
2.5. Parkland Nursing Center Subleases. There currently exists at
---------------------------------
Parkland Nursing Center a Lease between Beachwood, as lessor, and Associated
Healthcare Management Company, Inc. ("AHCM, Inc."), as lessee (as heretofore
----------
amended and supplemented the "Parent Lease"), and a Lease, dated November 17,
------------
1995, between Beachwood, as lessor, and Barrie Galvin OTR/L and
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<PAGE>
Associates, Ltd. (the "Current Galvin Lease)". AHMC, Inc., as sublessor, has
--------------------
subleased to various parties portions of the leasable space in the first floor
of Parkland Nursing Center pursuant to the leases identified on Schedule 2.5
------------
attached hereto (the "Parkland Nursing Center Subleases"). At Closing, the
---------------------------------
Associated Companies shall cause AHMC, Inc. to assign all of its right, title
and interest in and to the Parkland Nursing Center Subleases to Beachwood,
whereupon the Parent Lease shall be terminated. Immediately following such
termination, and as part of the Closing, Beachwood shall assign to Harborside
for the Term, and Harborside shall assume for the Term, all of Beachwood's
right, title and interest as landlord under the Galvin Lease, as hereinafter
defined, and the Parkland Nursing Center Subleases (collectively, the "Parkland
--------
Ancillary Medical Leases"), retaining and reserving, however, such interest in
- -----------------------
the Parkland Ancillary Medical Leases as is necessary for Beachwood to ensure
that such tenants comply with the terms and conditions of any regulatory
agreement between Beachwood and the United States Department of Housing and
Urban Development ("HUD") with respect to Parkland Nursing Center and with the
---
terms and conditions of any mortgage encumbering the fee owner's interest in
Parkland Nursing Center. The "Galvin Lease" shall mean either the Current Galvin
------------
Lease, or if Tenant objects thereto, a lease in substitution thereof as
contemplated in Section 2(C) of the Current Galvin Lease.
Guarantor and Tenant acknowledge that the Parkland Ancillary Medical
Leases, as of the date hereof, have not been approved by HUD. Beachwood agrees
to seek to obtain HUD approval for the Ancillary Medical Leases prior to the
Closing, but failure to obtain such approval shall not constitute a breach of
contract by any party hereunder or a failure of condition entitling any party
not to proceed with Closing. In such instance, the Closing shall proceed as
otherwise provided herein and Beachwood, not Tenant or Guarantor, shall have the
responsibility for either obtaining HUD approval for the Parkland Ancillary
Medical Leases or, if not obtainable with reasonable efforts, responsibility for
terminating the Parkland Ancillary Medical Leases, all at Beachwood's cost and
expense. Notwithstanding the foregoing, each of Tenant and Guarantor agree that
neither they, any tenant under the Leases, any optionee under the Option to
Purchase Agreements, or any other party affiliated with any one of more of any
of the foregoing, shall have any claim against Beachwood or any other Associated
Company in the event that Beachwood terminates any of the Parkland Ancillary
Medical Leases because HUD approval thereof is not obtainable with reasonable
efforts or in the event rent under any of the Parkland Ancillary Medical Leases
is reduced (notice thereof promptly shall be given to the Parkland Tenant) in
order to obtain modifications thereof in order to obtain HUD approval thereof.
3. DEPOSIT. Subject to the terms of this Section 3, Tenant has of even date
herewith deposited with Ohio Title Insurance Company
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<PAGE>
(the "Escrow Agent"), by bank check or wire transfer, the amount of Six Hundred
Thousand Dollars ($600,000) (together with any interest earned thereon, the
"Initial Deposit"), and agrees to deposit the additional amount of Six Hundred
Thousand Dollars ($600,000) (together with any interest earned thereon, the
"Second Deposit") with the Escrow Agent, by bank check or wire transfer, if the
transaction contemplated by this Agreement is approved by the Board of Directors
of Tenant pursuant to Section 8.7 hereof, within five (5) business days after
such approval (the Initial Deposit and the Second Deposit shall collectively be
referred to herein as the "Deposit"). The Escrow Agent will invest the Deposit
in federally-insured money market accounts or bank certificates of deposit
having a maturity not exceeding thirty (30) days. Upon the Closing contemplated
hereunder, the entire amount of the Deposit shall be paid over to Landlords and
applied to the Option Price payable by Tenant under the Option to Purchase
Agreements.
In the event that Tenant is not satisfied with the results of the due
diligence to be conducted pursuant to Section 4 hereof, and Tenant and Landlords
are unable to mutually agree upon a satisfactory resolution of the same, the
Initial Deposit shall promptly be refunded to the Tenant. If the transaction is
not consummated at Tenant's election because any condition precedent to Tenant's
obligation to consummate the transaction set forth in Section 8 hereof is not
satisfied as required therein, or because of a material breach of any warranty
or covenant by the Associated Companies, or because of any material
misrepresentation by the Associated Companies or other material default by the
Associated Companies hereunder, subject to the Associated Companies' right to
cure such misrepresentation, breach or default pursuant to Section 13 hereof,
the Deposit shall be promptly returned to Tenant upon written demand. In the
event the transaction is not consummated because any condition precedent to the
Associated Companies' obligation to consummate the transaction set forth in
Section 9.1, 9.2, 9.5, or 9.6 hereof is not satisfied as required therein, or
because of a material breach of any warranty or covenant by Tenant or Guarantor
or because of any material misrepresentation by Tenant or Guarantor or other
material default by Tenant or Guarantor hereunder, subject to Tenant's and
Guarantor's right to cure such misrepresentation, breach or default pursuant to
Section 13 hereof, the Deposit shall be paid to the Associated Companies in
accordance with Section 13 hereof.
The terms of this Section 3 have been incorporated into an escrow agreement
entered into by Landlords, Tenant, Guarantor and the Escrow Agent of even date
herewith (the "Deposit Escrow Agreement").
- 6 -
<PAGE>
4. DUE DILIGENCE
4.1. Tenant's Inspectional Due Diligence. The Associated Companies
-----------------------------------
hereby grant to Tenant and its agents the right to conduct such due diligence
regarding the Premises and the Assets as Tenant deems necessary or appropriate
("Inspectional Due Diligence"), including, without limitation, investigation of
title, survey, zoning, environmental, physical plant, reimbursement, licensure,
certification and labor matters, and in connection therewith the Associated
Companies shall provide Tenant with access to the Premises, the Assets and all
such materials reasonably required for Tenant's Inspectional Due Diligence
review at any reasonable time or times during the sixty (60) day period
following the Effective Date, including but not limited to any existing title
policy commitments, property surveys, environmental studies and reports, and all
books, records, business documents, auditor's work papers, regulatory surveys,
licenses, contracts and other items which Tenant deems necessary or relevant to
its Inspectional Due Diligence hereunder. Tenant agrees to provide Dennis or
his designee(s) with not less than two (2) days written or oral notice prior to
authorizing any representative to conduct any Inspectional Due Diligence at the
Premises. In conducting its due diligence hereunder, Tenant will take
reasonable efforts to maintain the confidentiality of the transaction
contemplated herein. At the reasonable request of Tenant, Associated Companies
will make available personnel necessary to respond to Tenant's due diligence
requests. Tenant shall complete its Inspectional Due Diligence under this
Section 4.1 within sixty (60) days after the Effective Date.
If as a result of Tenant's Inspectional Due Diligence hereunder, Tenant
becomes aware of any unsatisfactory condition or circumstance at any of the
Premises or in connection with the inspection of any of the Facilities (any such
condition or circumstance hereinafter being referred to as a "Deficiency"),
including but not limited to the need to make capital expenditures, the Tenant
shall provide written notice of the same to the Associated Companies (a
"Deficiency Letter") within seventy (70) days after the Effective Date. The
Associated Companies and Tenant shall negotiate in good faith with respect to
the appropriate means of addressing each such Deficiency, including without
limitation whether to undertake any remedy of such Deficiency at the cost of the
Associated Companies and/or the Tenant or to amend the terms of the Leases
and/or Option to Purchase Agreements (including the rental or option purchase
price provision thereof). If, notwithstanding the parties' good faith efforts,
the Associated Companies and Tenant are not able to agree upon the appropriate
means of addressing any Deficiency, then Tenant may terminate this Agreement by
written notice to the Associated Companies within thirty (30) days after receipt
of the Deficiency Letter, in which event the Escrow Agent shall promptly
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<PAGE>
return the Deposit to Tenant and the parties shall have no further liability to
each other.
Notwithstanding anything in this Section 4 to the contrary, Tenant
maintains the right to terminate this Agreement if the conditions of Section 8.7
below are not fulfilled.
4.2. Tenant's Operational Due Diligence. The Associated Companies shall
----------------------------------
deliver to Tenant the operational information set forth on Schedule 4.2 attached
------------
hereto within ten (10) business days following the Effective Date. Tenant shall
complete its due diligence review of such operational information ("Operational
Due Diligence") under this Section 4.2 within sixty (60) days after the
Effective Date.
5. COVENANTS, REPRESENTATIONS AND WARRANTIES OF ASSOCIATED COMPANIES. As an
inducement to Tenant's entering into this Agreement, the Associated Companies
make the following covenants, representations and warranties, in addition to
those contained elsewhere herein:
5.1. Partnership Matters.
-------------------
5.1.1. Organization, Power and Standing. Each of the Associated
--------------------------------
Companies is a general partnership or limited partnership duly organized and
validly existing and, its certificate of partnership is in full force and
effect, as such under the laws of the State of Ohio, and has all requisite power
and authority to execute, deliver and perform this Agreement, to carry on the
business of the Facilities which it owns as now conducted, to own, lease or
otherwise use its property, and to consummate the transactions contemplated
hereby. The partners of the Associated Companies which are general and limited
partnerships are as shown on Schedule 5.1.1 hereto.
--------------
5.1.2. Authorization and Enforceability. This Agreement and each of the
--------------------------------
other agreements contemplated hereunder has been or will have been duly
authorized, executed and delivered by each Associated Company, constitutes or
will constitute the legal, valid and binding obligation of each Associated
Company and is or will be enforceable against each Associated Company in
accordance with its terms, except to the extent such enforceability may be
limited or affected by bankruptcy, reorganization, insolvency, moratorium,
fraudulent conveyance or other similar laws of general applicability governing
the enforcement of the rights of creditors and by the general principles of
equity (regardless of whether considered in a proceeding at law or in equity).
- 8 -
<PAGE>
5.1.3. Compliance with Charter Documents. The execution, delivery and
---------------------------------
performance of this Agreement by the Associated Companies and the consummation
by the Associated Companies of the transactions contemplated hereby will not
violate or conflict with or constitute a default under any term of the
Partnership Agreement of any of the Associated Companies. True and complete
copies of each Associated Company's Partnership Agreements in effect as of the
Effective Date have been delivered to Tenant.
5.1.4. No Breach, Etc. The execution, delivery and performance of this
---------------
Agreement will not conflict with or result in a breach of or default by any
Associated Company under any material term, condition, or provision of any
order, writ, injunction, decree, material contract, material agreement, or
material instrument to which any Associated Company is a party or by which the
Premises or Assets are bound, will not result in the creation or imposition of
any lien, charge, or encumbrance upon any of the Premises or Assets, and will
not give to others any interest or rights in, or with respect to, any of the
Premises or Assets assuming Tenant secures all necessary licenses,
certifications and approvals from federal, state and local governmental and
administrative agencies having jurisdiction thereof required for the operation
of the Facilities by Tenant.
5.2. Financial Statements.
--------------------
5.2.1. The Landlords' and Operators' Financial Statements. True,
--------------------------------------------------
complete and accurate copies of the financial statements of the Associated
Companies for the years ending December 31, 1992, December 31, 1993, and
December 31, 1994 which have been audited by Howard, Wershbale & Co. (the
"Annual Financial Statements") have been delivered to Tenant. The Annual
Financial Statements (including the notes thereto) present fairly and, to the
Associated Companies' knowledge, in the case of Beachwood, in conformity with
generally accepted accounting principles consistently applied and in the case of
Westbay, Westbay II and Royalview, in conformity with an income tax basis
presentation, the financial condition of the Associated Companies at the dates
thereof and the results of their respective operations for the periods covered
thereby. The Associated Companies shall make the books and records of the
Associated Companies available to Tenant and Tenant's auditors and otherwise
cooperate with Tenant in order to permit Tenant to conduct a compliance audit of
such Annual Financial Statements at Tenant's expense. True, complete and
accurate copies of the unaudited annual financial statements of the Associated
Companies through December 31, 1995 (the "Interim Financial Statements") have
been delivered to Tenant. The Interim Financial Statements
- 9 -
<PAGE>
present fairly and in the case of Beachwood, in conformity within generally
accepted accounting principles consistently applied and in the case of Westbay,
Westbay II and Royalview, in conformity with an income tax basis presentation,
the financial position of the Associated Companies as of December 31, 1995 and
the results of their respective operations for the twelve (12) month period then
ended subject to audit adjustments. The Associated Companies agree to provide
Tenant with audited financial statements in the same form and by the same
auditing firm as the Annual Financial Statements for the fiscal year ending
December 31, 1995 within ninety (90) days of the end of such fiscal year (which
financial statements shall constitute Annual Financial Statements hereunder )
and to provide Tenant with year-to-date unaudited operating financial statements
for each month following December 31, 1995 through Closing which are the
statements used by the Associated Companies in the ordinary course of business.
5.3. Character of Operations, Compliance with Laws.
---------------------------------------------
5.3.1. Compliance Generally. Neither the execution and delivery of this
--------------------
Agreement by any Associated Company nor the consummation by any Associated
Company of any transaction contemplated hereby does or will violate or give rise
to any violations or default under any Legal Requirement assuming Tenant secures
all necessary licenses, certifications and approvals from federal, state and
local governmental and administrative agencies having jurisdiction thereof
required for the continued operation of the Facilities by Tenant. To the best
of each Associated Company's knowledge, the operation of the Facilities as
heretofore or currently conducted was not and is not in violation of, nor is any
Associated Company in default under, any Legal Requirement except that the
Parent Lease and the Parkland Ancillary Medical Leases have not been approved by
HUD. To the best of each Associated Company's knowledge, there exists no
condition or event pertaining to the Premises or the Assets which after notice
or lapse of time, or both, would be held so to violate or to give rise to any
such default. Except as disclosed on Schedule 5.3.1, no Associated Company has
--------------
received any notice, and no Associated Company has knowledge, of any impending
order or requirement which would cause additional expenditures to be made to
bring the Premises or the Assets into compliance with Legal Requirements.
5.3.2. No Bribes, Illegal Payments. No Associated Company and, to the
---------------------------
best of each Associated Company's knowledge, no officer, employee or agent of
any Associated Company, has directly or indirectly given or agreed to give any
gift, contribution, payment or similar benefit to any supplier, customer,
governmental employee or other Person
- 10 -
<PAGE>
who was, is or may be in a position to help or hinder any Associated Company or
any Facility (a) which could subject any Associated Company or Tenant to any
damage or penalty in any civil, criminal, or governmental litigation or
proceeding, or (b) the non-continuation of which in the future could result in a
material adverse effect on the business, operations, assets, prospects or
condition, financial or otherwise, of any Facility or Tenant. To the best of
each Associated Company's knowledge, no Associated Company and no officer,
employee or agent of any Associated Company has (a) established or maintained
any unrecorded fund or asset for any purpose, or (b) made any false entries on
any books or records furnished in connection herewith to Tenant.
5.3.3. Operating Licenses. Schedule 5.3.3 attached hereto contains true
------------------ --------------
and complete copies of all nursing home licenses which have been issued to the
Associated Companies by the State of Ohio Department of Health and all other
material licenses, permits, approvals, certificates of need, Medicare and
Medicaid certifications, which have been issued to the Associated Companies by
any governmental agency (whether federal, state, local or other) in connection
with the ownership of the Assets and the operation of the Facilities
(collectively, the "Licenses"). The Licenses are all of the material licenses,
permits, approvals, certificates of need, Medicare and Medicaid certifications
and the like which are necessary for the ownership and operation by each
Associated Company of the Premises and Assets which it owns, and to the best of
their knowledge, each Associated Company has fulfilled all material requirements
of same. Each of the Licenses is in full force and effect and none of the
Licenses are conditional or restricted except as to conditions and restrictions
described on Schedule 5.3.3 hereto. To their knowledge, the Licenses and the
--------------
Facilities are all in good standing with the governmental agencies which issued
the Licenses.
5.3.4. Compliance of Facility with State Licensure and Medicare and
------------------------------------------------------------
Medicaid Certification Requirements. To their knowledge, except as otherwise
- -----------------------------------
set forth in Schedule 5.3.4 attached hereto, each Facility currently meets, and
--------------
as of the Closing in all material respects shall meet, all regulatory standards
and conditions for the operation and licensure of skilled nursing facilities (to
the extent such standards and conditions are applicable to the Facility) and for
participation in the Medicare and Medicaid programs under federal, state and
local governmental laws, rules, regulations, guidelines, standards and
conditions, and is not, and as of the Closing will not be, subject to any
variances or waivers with respect to licensure or operational requirements,
except as to variances and waivers
- 11 -
<PAGE>
described on Schedule 5.3.4 hereto, all of which variances and waivers are
--------------
transferable to Tenant.
5.3.5. Returns, Reports, etc. All Medicare and Medicaid cost reports,
---------------------
tax returns, plans and filings of any kind or nature which the Associated
Companies have filed or will file prior to the Closing Date with any
governmental authorities have been or will be properly completed in all material
respects and timely filed (including extensions thereof) and are or will be true
and correct and comply in all material respects with all applicable
requirements.
5.3.6. Work Orders; Statements of Deficiencies. Except as set forth in
---------------------------------------
Schedule 5.3.6 attached hereto, there are no pending work orders or statements
- --------------
of deficiencies relating to the Premises which have been required or issued by
any state department of health or state or local licensure agency or Medicare or
Medicaid certification agency, or police or fire department, sanitation, health
or work authorities or any other federal, state or municipal authority. The
Associated Companies shall provide to Tenant a copy of any such work order or
statement of deficiency received by any Associated Company after the Effective
Date within three (3) business days after receipt thereof.
5.3.7. Environmental Matters. Except as otherwise set forth in Schedule
--------------------- --------
5.3.7 attached hereto, to their knowledge, no Associated Company is subject to
- -----
any type of enforcement action or compliance order for any violation or alleged
violation of any environmental laws, rules, standards or regulations, including,
but not limited to, those related to waste-management, air pollution control,
waste-water treatment or noise abatement. Except as otherwise set forth in
Schedule 5.3.7 hereto, no Associated Company has received any written notice or
- --------------
citation for noncompliance by it with respect to any of the foregoing relating
to any of the Premises or has any knowledge of any circumstance which could
reasonably be expected to result in any such enforcement action or compliance
order. Except as set forth in Schedule 5.3.7 hereto, to their knowledge:
--------------
(i) There are no Contaminants which have at any time been generated,
transported, disposed of, recycled or otherwise handled in any way by any
Associated Company or others in or about any of the Premises, except as occurs
in the ordinary course of the lawful operation of a nursing home facility in the
State of Ohio.
(ii) There are no locations in or about any of the Premises where
Contaminants or Infectious Wastes from the operation of the Facilities or the
Premises have been disposed of.
- 12 -
<PAGE>
(iii) There has been no prior use (including uses by any predecessor) of
any of the Premises whereby Contaminants were at any time located on or
contained within the Facilities or the Premises, except as occurs in the
ordinary course of the lawful operation of a nursing home facility in the State
of Ohio.
(iv) There are no past or continuing releases of Contaminants from any of
the Premises, except as occurs in the ordinary course of the lawful operation of
a nursing home facility in the State of Ohio.
(v) No Associated Company has been notified that any person's health has or
may have been impaired (including any past or present employee) as the result of
the use, existence or disposal of Contaminants or Infectious Wastes on the
Premises.
(vi) Since operated by Associated Companies, all Infectious Wastes have
been stored, transported and disposed of in accordance with all laws, licensure
and certification standards applicable to the Associated Companies and the
Facilities.
(vii) There are no underground storage tanks ("USTs") at any of the
----
Premises nor has any of the Associated Companies removed any such USTs from any
of the Premises.
(viii) There has been no leakage from any of the USTs identified on
Schedule 5.3.7 (as opposed to surface spills associated with the filling, or
- --------------
"topping off", of any of such USTs).
5.3.8. Litigation. There is no litigation, at law or in equity, or any
----------
proceeding before or, to their knowledge, investigation by any federal, state or
municipal court, board or other governmental or administrative agency or any
arbitrator, against any Associated Company in connection with the ownership or
operation of any Facility, the Premises or the Assets, pending or to the best of
each Associated Company's knowledge, threatened, except for such of the
foregoing as are described in Schedule 5.3.8 attached hereto. The matters
--------------
described in Schedule 5.3.8 will not, individually or in the aggregate, result
--------------
in any material liability or expense or otherwise result in any material adverse
effect upon the business, operations, assets, prospects or conditions, financial
or otherwise, of any Associated Company, or the operation of any Facility. No
judgment, decree or order of any federal, state or municipal court, board or
other governmental or administrative agency or any arbitrator (i) to their
knowledge has been issued against any Person other than one of the Associated
- 13 -
<PAGE>
Companies which could have any material adverse effect on the business,
operations, assets or condition, financial or otherwise, of any Associated
Company or the operation of any Facility as currently operated, or (ii) has been
issued against any Associated Company.
5.3.9. No Bankruptcy or Insolvency Proceedings. There are no bankruptcy
---------------------------------------
or insolvency proceedings, at law or in equity, pending or, to the Associated
Companies' knowledge, threatened or filed by or against any of the Associate
Companies in any federal, state or municipal court or before any other board or
governmental or administrative agency. Each Associated Company has existed and
continues to exist for the sole purpose of owning and/or operating the
respective Facilities.
5.4. Assets and Liabilities.
----------------------
5.4.1. Conditions of Certain Assets. To their knowledge, except as set
----------------------------
forth in Schedule 5.4.1 attached hereto, all machinery and equipment included in
--------------
the Assets, including without limitation, all heating, air conditioning,
electrical and life safety equipment/systems installed on the Premises, are in
all material respects in good working order, ordinary wear and tear excepted,
and, to their knowledge, the roof of each Facility is in good repair. Except as
described on Schedule 5.4.1 hereto, there are no known defects, damage or
--------------
dangerous conditions existing in or with respect to any buildings or other
improvements located on the Premises.
5.4.2. Warranties and Guarantees. Schedule 5.4.2 attached hereto
------------------------- --------------
contains true and complete copies of all written warranties and guarantees
currently in effect in connection with the roofs of the buildings and any
warranties and guarantees in connection with any heating, air conditioning, or
other major equipment in, on or about said buildings or improvements
(collectively, the "Warranties and Guarantees"). The Associated Companies shall
assign the Warranties and Guaranties to Tenant, at Closing, to the extent such
Warranties and Guaranties are transferable or assignable.
5.4.3. Inventory. To their knowledge, all items of inventory to be
---------
purchased by Tenant and included in the Assets consist and will consist as of
the Closing of items of a quality usable in the ordinary course of the business
of the Facilities and conform to generally accepted standards in the long-term
care industry.
5.4.4. Ingress and Egress. To their knowledge, existing ingress and
------------------
egress to each of the Premises are from public streets, or if such access is
through private
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<PAGE>
property, the same is in accordance with valid easements of record benefiting
such Premises.
5.4.5. Utility Access. To their knowledge, all public utilities required
--------------
for the operation of each of the Premises either enter such Premises through
adjoining public streets, or if they pass through adjoining private land, do so
in accordance with valid and assignable easements benefiting such Premises.
5.4.6. Trade Names. The respective Associated Company has the right to
-----------
use the names "Parkland Nursing Centre", "Westbay Manor II", "Westbay Manor I",
and "Royalview Manor" in the market area of the respective Facilities, and has
not licensed or entered into any agreement to permit any person or entity to use
such names or any variation thereof. To the best of each Associated Company's
knowledge, the use of such names by the Associated Companies does not, and the
use of such names by Tenant in such market area will not, conflict with any
rights to any similar name owned by any other person or entity known to any
Associated Company.
5.4.7. Liabilities. Except as set forth in Schedule 5.4.7 attached
----------- --------------
hereto, to their knowledge, there are no material liabilities of any Associated
Company or any material liabilities affecting the Premises or the Assets,
whether absolute, contingent or fixed, liquidated or unliquidated, matured or
not yet due, of any nature, including tax liabilities, other than (i)
liabilities expressly accounted for and disclosed in the Annual Financial
Statements or the Interim Financial Statements, or (ii) liquidated,
noncontingent liabilities incurred by any Associated Company in the ordinary
course of business since the Effective Date.
5.4.8. Liens. The Premises and Assets are not subject to any Lien except
-----
as described in Schedule 5.4.8 attached hereto and except for the Parent Lease
--------------
and the Parkland Ancillary Medical Leases. After the execution of Leases at the
Closing, the Premises and Assets will not be subject to any Lien created by,
from, through, or under any Associated Company except (i) the Leases, (ii) any
Lien included in the Permitted Encumbrances as defined in the Leases, (iii) any
Lien created by, from, through or under Tenant, and (iv) the Parent Lease and
the Parkland Ancillary Medical Leases. If, subsequent to the Closing, any
mechanics or other lien, charge or order for the payment of money shall be filed
against the Premises or the Assets or against Tenant or its assigns, based upon
any act or omission of any Associated Company, or its agents, servants, or
employees, or any contractor or subcontractor connected with construction on the
Premises prior to Closing (whether
- 15 -
<PAGE>
or not such lien, charge or order shall be valid or enforceable as such), within
sixty (60) days after notice to the Associated Companies of the filing thereof,
the Associated Companies shall take such action, by bonding, deposit, payment or
otherwise, as will remove and satisfy such lien of record as against the
Premises.
5.4.9. Taxes. Each Associated Company has filed all Tax Returns that it
-----
was required to file. All such Tax Returns were correct and complete in all
material respects. All Taxes owed by each Associated Company (whether or not
shown on any Tax Return) have been paid. No Associated Company is currently the
beneficiary of any extension of time within which to file any Tax Return. There
are no liens or security interests on any of the Premises or Assets arising in
connection with any failure (or alleged failure) to pay any Tax. The Associated
Companies have withheld and paid all Taxes required to have been withheld and
paid in connection with amounts paid or owing to any employee, independent
contractor, creditor or other third party. There are no actions, suits,
proceedings, investigations or claims for additional Taxes asserted by any
taxing authority of which any Associated Company has notice.
5.4.10. Certain Real Estate Matters. Except as set forth on Schedule
--------------------------- --------
5.4.10, there are no pending real estate tax abatement actions or proceedings,
- ------
and there are no pending or, to the best of each Associated Company's knowledge,
threatened eminent domain or condemnation proceedings, with respect to the
Premises.
5.4.11. Trade Payables. At the Closing, the Associated Companies shall
--------------
provide Tenant with a substantially complete listing (by Facility) of all of the
known outstanding trade payables of the Associated Companies relating to the
Facilities (the "Trade Payables") identifying the amount of Trade Payables due
and payable or paid to each trade creditor as of a date not earlier than the
last day of the second month prior to the Closing Date. The Associated Companies
shall pay all such Trade Payables when and as due in accordance with past
practices unless they are disputed in good faith, in which case such Associated
Company, upon prior written notice to Tenant, shall be entitled to contest
payment of same.
5.4.12. Patient Accounts. At the Closing, the Associated Companies
----------------
shall provide Tenant with a true and complete listing of any patients at the
Facility who are delinquent in the payment of their bills as of a date not more
than ten (10) days prior to the Closing.
- 16 -
<PAGE>
5.5. Contractual Matters.
-------------------
5.5.1. Contracts. Schedule 5.5.1 attached hereto contains true and
--------- --------------
complete copies of all material written contracts, agreements and leases (other
than (i) agreements described in Section 5.6.1 hereto (the "Labor Contracts");
and (ii) occupancy agreements with existing patients of each Facility (the
"Occupancy Agreements")), between each Associated Company and any other person
or entity currently in effect in connection with the Premises or the operation
of the Facilities (together with the Labor Contracts and Occupancy Agreements
collectively referred to herein as the "Contracts"). Each Contract is in full
force and effect and, to the best of each Associated Company's knowledge and
except as set forth in Schedule 5.5.1.2, no Associated Company or any other
----------------
party to any Contract is in material default of its respective obligations
thereunder, and to the best of each Associated Company's knowledge, no event
exists which, with notice or passage of time, would become an event of default
by any Associated Company or such other party thereunder.
5.5.2. Transactions with Affiliates. Except as set forth in Schedule
---------------------------- --------
5.5.2 hereto, no Affiliate of any Associated Company is a party to any Contract
- -----
for goods or services with, or has other material arrangements with, any
Associated Company in connection with the operation of any Facility
(collectively, "Affiliate Arrangements"). Unless Tenant otherwise agrees in
writing, each Associated Company shall terminate or cause to be terminated each
such Affiliate Arrangement described in Schedule 5.5.2 hereto on or before the
--------------
Closing. Except as set forth on Schedule 5.5.2 hereto, there are no trade
--------------
names, proprietary knowledge or licenses that any such Affiliate owns or is
licensed or otherwise has the right to use and which is used or useful in, or
necessary to the operation of any Facility; and the right to use any such trade
names, proprietary knowledge or license so owned or leased, licensed or used by
any such Affiliate shall be assigned or licensed to the Associated Companies
prior to Closing, and by the Associated Companies to Tenant at Closing in
accordance with Section 2.1 hereof.
5.5.3. Occupancy Agreements and Tenant Leases. Schedule 5.5.3.1 attached
-------------------------------------- ----------------
hereto is a true and complete copy of the standard form of occupancy agreement
entered into by patients at each Facility (the "Occupancy Agreement Forms").
There are no occupancy or residency agreements under which patients currently
occupy all or any part of any Facility which materially deviate from the
Occupancy Agreement Forms. There are no material undisclosed amendments or
agreements to any such occupancy agreements, nor any special rates, services or
concessions promised by any Associated Company
- 17 -
<PAGE>
to any patients of any Facility except as disclosed in Schedule 5.5.3.2 attached
----------------
hereto.
5.5.4. Insurance. Attached as Schedule 5.5.4 hereto is a list of all
--------- --------------
insurance coverage maintained by each Associated Company as of the Effective
Date in connection with the Premises and the operation of the Facilities. All
such insurance coverage is in full force and effect (with no overdue premium) in
the amounts set forth on Schedule 5.5.4. The Associated Companies agree to
--------------
maintain the insurance coverage listed in Schedule 5.5.4 without material change
--------------
thereto through the Closing Date. The Associated Companies further agree that
if any of the coverages listed on Schedule 5.5.4 are on a claims-made basis, the
--------------
Associated Companies shall purchase and maintain sufficient tail coverage to
cover claims which may be brought after the Closing Date with regard to
occurrences on or prior to the Closing Date. Certificates evidencing such
insurance coverage will be supplied by each Associated Company to the Tenant at
the Tenant's request. The Associated Companies shall promptly inform the Tenant
of any non-renewal, material change, cancellation or replacement of any such
insurance coverage prior to the Closing. In the event of any non-renewal,
material change or cancellation of the insurance coverage currently maintained
by any Associated Company hereunder, Tenant shall have the right during the
period prior to Closing to provide replacement insurance generally comparable to
the insurance coverage currently maintained by such Associated Company at the
Associated Companies' expense and to deduct the cost thereof from the Associated
Companies' Base Rent due under the Lease Agreement.
5.6. Labor Matters.
-------------
5.6.1. Employment Related Contracts. Attached hereto as Schedule 5.6.1.1
---------------------------- ----------------
are true and complete copies of all collective bargaining agreements and labor
agreements relating to any employee of the Associated Companies; all employment
agreements relating to any employee of the Associated Companies; all
compensation, pension, retirement, welfare, profit sharing, incentive or other
similar plans relating to any employee of the Associated Companies; and all
plans, agreements, arrangements or practices which constitute "fringe benefits"
to any of the employees of the Associated Companies, including without
limitation, group medical insurance, group life insurance, workers compensation
coverage, disability insurance and related benefits. Landlords' and Operators'
Pension Plan(s) in effect for employees are in the Summary Plan Description(s)
attached hereto in Schedule 5.6.1.2. Each Welfare Plan, if any, is in material
----------------
compliance with the applicable provisions of ERISA and the Code. Tenant shall
not assume
- 18 -
<PAGE>
any liabilities or obligations of any Associated Company whatsoever
under or with respect to any profit sharing plan and trust established by any
Associated Company for the benefit of Facility employees, each of which plan
shall be terminated by the Associated Companies on or before the Closing Date.
5.6.2. Employee Compensation and Benefits. Attached hereto as Schedule
---------------------------------- --------
5.6.2 is a true and complete list of all current Facility employees of the
- -----
Associated Companies (by Facility), including employees on authorized leaves of
absence, and their current levels of compensation, and this list shall be true
and correct as of the Closing except for those changes specifically authorized
by SECTION 7.1 hereof and except for the addition or removal of employees in the
ordinary course.
5.6.3. Labor Relations. To their knowledge, no employee of any
---------------
Associated Company is currently part of any collective bargaining unit or
represented by any collective bargaining representative. The Associated
Companies have not received notice of, and to their knowledge there has not
been, any petition filed or proceeding instituted by any such employee or group
of employees with any labor relations board seeking recognition of a bargaining
representative. To their knowledge, there are no strikes, grievances, disputes
or controversies with individual employees, except for disputes and
controversies with individual employees arising in the ordinary course of
business consistent with past experience which do not and will not, individually
or in the aggregate, have a material adverse effect on the business, operations,
assets, prospects or conditions, financial or otherwise, of any Associated
Company, Operator, Tenant or the operation of the Facilities.
5.7. Other Representations.
---------------------
5.7.1. Completeness and Accuracy of Contracts and Documents. To their
------------------------------------------ ---------
knowledge, all copies of contracts and documents delivered by the Associated
Companies to Tenant in connection with the transactions contemplated hereby are
complete and accurate in all material respects, and no such contract or
agreement has been amended or modified by any oral agreements.
5.7.2. No Misrepresentations. No Associated Company has made an untrue
---------------------
statement of material fact in any representation or warranty by such Associated
Company in this Agreement, any schedule or exhibit attached hereto or delivered
pursuant hereto, to Tenant nor has any Associated Company omitted to state a
material fact necessary to make the statements contained herein or therein not
misleading.
- 19 -
<PAGE>
5.8. Unfunded Liabilities for Workers' Compensation or Group Health
--------------------------------------------------------------
Plans. No Associated Company has any unfunded liabilities (including without
limitation contingent liabilities) in connection with any workers' compensation,
employers' liability, or group health plan, except as described in Schedule 5.8
------------
attached hereto. The matters described in Schedule 5.8 will not, individually
------------
or in the aggregate, have any material adverse effect upon the business or
operations of any Associated Company, Tenant, or the operation of any Facility
as presently operated. The Associated Companies hereby acknowledge and warrant
that each of the liabilities listed on Schedule 5.8, as well as any other
------------
liabilities arising out of the operations of the Facilities prior to closing
which may become payable in the future, will remain the obligation of the
Associated Companies.
5.9. Definition of Associates Companies' Knowledge. As used in this
---------------------------------------------
Agreement, all references to "the best of Associated Companies' knowledge," "to
their knowledge," or similar phrases, shall mean to (i) the actual knowledge of
Dennis, Friedman and the management personnel of the Associated Companies and
Associated Health Care Management Company, Inc. set forth on Schedule 5.9
------------
attached hereto and (ii) to any knowledge that could have been obtained
(constructive knowledge) by such management personnel based upon a review of any
documents or records which are or have been in the possession of the Associated
Companies. The management personnel listed on Schedule 5.9 attached hereto are
------------
all of the persons currently serving in the following positions for the
Facilities: administrators, operations directors, controllers and nurse
consultants.
6. TENANT'S AND GUARANTOR'S COVENANTS, REPRESENTATIONS AND WARRANTIES. As an
inducement to Landlords' entering into this Agreement, Tenant and Guarantor make
the following covenants, representations and warranties, in addition to those
contained elsewhere herein:
6.1. Organization, Power and Standing of Tenant. Tenant is a corporation
------------------------------------------
duly organized, validly existing and in good standing under the laws of the
State of Delaware, is currently or will be qualified to do business in the State
of Ohio prior to the Closing, and has all requisite power and authority,
corporate and otherwise, to execute, deliver and perform this Agreement and to
consummate the transactions contemplated hereby.
6.2. Organization, Power and Standing of Guarantor. Guarantor is a
---------------------------------------------
limited partnership duly formed under the laws of the Commonwealth of
Massachusetts, is currently or will be qualified to do business in the State of
Ohio prior to the Closing, and has all requisite power and authority,
partnership
- 20 -
<PAGE>
and otherwise, to execute, deliver and perform this Agreement and to consummate
the transactions contemplated hereby.
6.3. Authorization and Enforceability. This Agreement and each of the
--------------------------------
other agreements contemplated hereunder when executed and delivered has been or
will have been duly authorized, executed and delivered by Tenant and Guarantor,
constitutes the legal, valid and binding obligation of Tenant and Guarantor and
is enforceable against Tenant and Guarantor in accordance with its terms, except
to the extent such enforceability may be limited or affected by bankruptcy,
reorganization, insolvency, moratorium, fraudulent conveyance or other similar
laws of general applicability governing the enforcement of the rights of
creditors and by the general principles of equity (regardless of whether
considered in a proceeding at law or in equity).
6.4. Compliance with Charter Documents. The execution, delivery and
---------------------------------
performance of this Agreement by Tenant and Guarantor and the consummation by
Tenant and Guarantor of the transactions contemplated hereby will not violate or
conflict with or constitute a default under any term of the Articles of
Incorporation or By-laws or Partnership Agreement of Tenant or Guarantor,
respectively. True and complete copies of the Articles of Incorporation, By-
laws and the Partnership Agreement of Tenant and Guarantor, respectively, have
been delivered to Associated Companies.
6.5. No Breach, Etc. The execution, delivery and performance of this
--------------
Agreement will not conflict with or result in a breach of or default by Tenant
or Guarantor under any material term, condition, or provision of any order,
writ, injunction, decree, material contract, material agreement, or material
instrument to which Tenant or Guarantor is a party.
6.6. Litigation. There is no litigation, at law or in equity, or any
----------
proceeding before or, to their knowledge, investigation by any federal, state or
municipal court, board of arbitrator, against Tenant or Guarantor, pending or,
to the best of Tenant's or Guarantor's knowledge, threatened, except as
described in Schedule 6.6 attached hereto.
------------
6.7. No Misrepresentation. Neither Tenant nor Guarantor has made an
--------------------
untrue statement of a material fact in any representation or warranty by Tenant
or Guarantor to the Associated Companies, nor has Tenant or Guarantor omitted to
state a material fact necessary to make the statements contained herein or
therein not misleading.
6.8. Guarantor's Financial Statements. True, complete and accurate
--------------------------------
copies of the financial statements of Guarantor for the years ending December
31, 1994 and December 31, 1995 which have been audited by Coopers and Lybrand,
LLP ("Guarantor's Financial Statements") have been delivered to the Associated
Companies.
- 21 -
<PAGE>
The Guarantor's Financial Statements (including the notes thereto) present
fairly and, to the Guarantor's knowledge, in conformity with generally accepted
accounting principles consistently applied the financial condition of Guarantor
at the dates thereof and the results of its operation for the periods covered
thereby.
6.9. No Pending Bankruptcy or Insolvency Procedures. There are no
----------------------------------------------
bankruptcy or insolvency proceedings at law or in equity, pending or to Tenant's
or Guarantor's knowledge threatened or filed by or against Tenant or Guarantor
in any federal state or municipal court or before any other board or
governmental or administrative agency.
6.10. Definition of Tenant's or Guarantor's Knowledge. As used in this
-----------------------------------------------
Agreement, all references to "the best of Tenant's knowledge," "to the best of
Guarantor's knowledge," "to their knowledge," or similar phrases, shall mean to
(i) the actual knowledge of the corporate officers of Tenant and officers of
Guarantor and (ii) any knowledge that could have been obtained (constructive
knowledge) by such officers based upon a review of any documents or records
which are or have been in the possession of Tenant or Guarantor.
7. CERTAIN AGREEMENTS OF THE PARTIES.
7.1. Conduct of Landlords Prior to Closing. The Associated Companies
-------------------------------------
covenant and agree that, through the period prior to Closing: (i) the Premises
and the Assets, including without limitation each Facility, shall be operated in
the ordinary course of business and in a manner consistent with the Associated
Companies' past practice; (ii) no sale, disposition, removal or encumbrance of
any material furniture, fixtures or equipment located at the Premises shall be
made without the approval of Tenant which will not be unreasonably withheld;
(iii) except in accordance with established practice and rates of increase, no
Associated Company shall pay or obligate itself to pay any bonus, pension,
retirement, insurance, death or other form of incentive or special compensation
to any employee or agent or make any increase in rates of pay of any employees
or agents, without the approval of Tenant which will not be unreasonably
withheld; (iv) no contract, agreement, lease or other obligation providing for
the payment of consideration or the incurrence of indebtedness of more than
Twenty Five Thousand Dollars ($25,000) shall be executed, entered into or made
by any Associated Company in connection with the operation of the Facilities,
without the approval of Tenant which will not be unreasonably withheld; (v) no
material change shall be made in the usual rates charged to patients at any
Facility without the approval of Tenant which will not be unreasonably withheld;
(vi) the Associated Companies will replace the inventory used in the operation
of the Facilities as and when required in the ordinary course of business and
the quantity of the inventory at Closing shall be
- 22 -
<PAGE>
substantially the same as exists on the Effective Date; (vii) Associated
Companies shall use their reasonable efforts to preserve the business operation
of the Facilities and to preserve for the Tenant the good will of Facilities'
suppliers, the patients in the Facilities, and others having business relations
with the Facilities, provided, however, that the Associated Companies shall not
be required to do anything not in the ordinary course of business; and (viii)
the Associated Companies shall use their reasonable efforts to retain the
services of the Facilities' current management-level and professional employees
and to maintain existing Facility staffing patterns, provided, however, that the
Associated Companies shall not be required to do anything not in the ordinary
course of business.
7.2. Preparation for Closing. The Associated Companies shall use
-----------------------
reasonable and diligent efforts to assist the Tenant and Tenant agrees to use
its best efforts to apply for and obtain any such permits, licenses,
authorization and approvals required of the Tenant under applicable Ohio and
federal law in order to lease the Assets and operate the Facilities as
contemplated hereby. Each of the parties hereto shall use its reasonable and
diligent efforts to bring about the fulfillment of each of the conditions
precedent to the obligations of the other party hereto set forth in this
Agreement.
7.3. Prohibited Acts. The Associated Companies covenant and agree that,
---------------
through the period prior to Closing, except for the merger or other combination
of Royalview GP and Royalview LP, as contemplated by Section 7.12 below, and the
issuance or transfer of limited partnership interests (but not general partner
interests) in the Landlords to AHMC, Inc., or to and among existing limited
partners or in connection with a limited partners' estate planning, as the case
may be, the Associated Companies will not merge or consolidate with or into any
other corporation, partnership or trust, sell, lease or otherwise dispose of any
of the Premises or the Assets (except in accordance with Section 7.1 hereof),
sell any additional partnership or equity interests, liquidate or dissolve
(except if the same constitutes a statutory dissolution and such Landlord
promptly makes an election, if required, to continue Landlord's business) and
shall not agree to do any of the foregoing, without the consent of Tenant.
7.4. Access to Premises and Information. Prior to the Closing Date, upon
----------------------------------
not less than two (2) days prior notice to Dennis or his designee(s), the
Associated Companies shall permit Tenant and Tenant's counsel, accountants,
engineers, consultants and other authorized representatives to have full and
complete access to the Premises and the Associated Companies' documents, books
and records (including auditor's work papers) and to make copies during normal
business hours of such financial and operating data and other information with
respect to the Facilities as Tenant or any of its authorized representatives
- 23 -
<PAGE>
shall reasonably request. In making any investigation hereunder, Tenant will,
and will cause any representative of Tenant, to use discretion so as not to
cause any undue disruption of the operation of the Facilities. Any
investigation undertaken by Tenant hereunder shall not diminish Tenant's right
to rely on the Associated Companies' representations and warranties herein. In
the event the transaction does not close for any reason, Tenant shall return to
the Associated Companies all written materials and copies provided by the
Associated Companies to Tenant hereunder.
7.5. Expenses of Transaction. The Associated Companies and Tenant each
-----------------------
agree to be responsible for all fees of their respective attorneys and
accountants for services rendered in connection with this transaction.
7.6. No Finder's or Broker's Fees. Each of the parties hereto represents
----------------------------
and warrants to the other party hereto that its conduct has not given and will
not give rise to any liability for any fee, compensation or reimbursement of
expenses to any agent, finder or broker, either in the nature of a finder's fee
or otherwise, in connection with the transaction contemplated hereby.
7.7. Certain Post-Closing Agreements. The Associated Companies
-------------------------------
acknowledge that the success of the business of Tenant depends upon both the
absence of competition from the Associated Companies and the continued
preservation of the confidentiality of certain information possessed by the
Associated Companies, that an absence of such competition and the preservation
of the confidentiality of such information is an essential premise of the
bargain between the Associated Companies and Tenant, and that Tenant would be
unwilling to enter into this Agreement in the absence of this Section 7.7.
Accordingly, the Associated Companies hereby agree with Tenant as follows:
7.7.1. Confidentiality Covenant. No Associated Company or any Affiliate
------------------------
of any Associated Company will, at any time from and after the Closing Date,
directly or indirectly, without the prior written consent of Tenant, disclose or
use, in any way harmful to the business, operations, assets, prospects or
condition, financial or otherwise, of Tenant or Guarantor, or otherwise contrary
to the interests of Tenant or Guarantor, any confidential information involving
or relating to the operation of any Facility ("Confidential Facility
Information") or Tenant or Guarantor, or any business, venture or other activity
of Tenant or Guarantor, past, present or future, actual or prospective
("Confidential Tenant Information"); provided, however, that such information
-----------------
shall not include any information known generally to the public (other than as a
result of disclosure in violation hereof by any Associated Company or any
Affiliate of any Associated Company), or as
- 24 -
<PAGE>
to Confidential Tenant Information, was available to the Associated Companies,
or any Affiliate thereof, on a nonconfidential basis prior to the disclosure in
connection with the transactions contemplated hereby, or is lawfully obtained by
the Associated Companies, or any Affiliate thereof, from a third party under no
duty of confidentiality to Tenant or Guarantor; and provided, further, that the
-----------------
provisions of this Section 7.7.1 shall not prohibit any disclosure required by
law in connection with any judicial or administrative proceeding or inquiry.
This Confidentiality Covenant shall survive the Closing for a period of two
years with respect to Confidential Tenant Information and for the term of the
Lease plus two (2) years with respect to Confidential Facility Information.
7.7.2. Non-Competition Covenant. During the term of the Lease neither
------------------------
Dennis, Friedman nor any Associated Company nor any Affiliate of any Associated
Company, other than Friedman in his capacity as an officer and director of
Associated Estates REIT, shall, directly or indirectly, (i) acquire, own,
manage, operate, control or participate in any manner in the ownership,
management, operation or control of, or be connected as an officer, employee,
partner, director, principal, consultant, agent or otherwise with, or have any
financial interest in, or aid or assist anyone else in the conduct of, any
nursing home, assisted or congregate living or residential care facility, or
nursing home, assisted or congregate living or residential care business,
venture or activity operating within a radius of fifteen (15) miles from any of
the Premises, provided that such non-competition covenant shall not apply to (A)
--------
the ownership, operation or management by the Associated Companies or any
Affiliate of the Associated Companies of the nursing homes and congregate care
centers listed on Schedule 7.7.2, or (B) Friedman or Dennis serving as a
--------------
director or trustee on the board of a non-profit organization, or (C) Dennis
providing consulting services to a non-profit organization operating within such
radius if, and only if, Tenant in its sole discretion consents thereto, or (D)
the ownership, operation or management by Royalview GP, Royalview LP or
Associated Health Care Management Company, Inc. of Royalview Manor, if and only
if, a Royalview Removal occurs as defined in Section 7.12 of this Agreement, or
(ii) recruit or otherwise seek to induce any employee of any Facility, Tenant or
any Affiliate of Tenant, to terminate his or her employment or violate any
agreement with or duty to Tenant or any Affiliate of Tenant or (iii) solicit or
encourage any Person who to the best of any the Associated Company's knowledge
is a customer, resident or supplier of any of the Facilities, Tenant or any
Affiliate of Tenant to terminate its relationship with such Facility, Tenant or
Affiliate of Tenant. For purposes of clause (ii) above, a person shall not be
deemed to be an employee of any Facility if s/he is
- 25 -
<PAGE>
not an employee of any Facility at any time within the six (6) month period
- ---
prior to the date such person is recruited, engaged or hired by any Associated
Company or any Affiliate of any Associated Company, or if his/her employment is
terminated by Tenant or an Affiliate of Tenant due to layoffs, cutbacks or lack
of work. This Non-Competition Covenant shall survive the Closing until
termination of the Lease.
7.7.3. Enforcement. The Associated Companies, Dennis and Friedman
-----------
acknowledge and agree that, because the legal remedies of Tenant may be
inadequate in the event of a breach of, or other failure to perform, any of the
covenants and obligations set forth in this SECTION 7.7, Tenant may, in addition
to obtaining any other remedy or relief available to it (including without
limitation consequential and other damages at law), enforce this SECTION 7.7 by
injunction and other equitable remedies. The Associated Companies also
acknowledge and agree that no breach by Tenant of, or other failure by Tenant to
perform, any of the covenants and obligations of Tenant under this Agreement or
otherwise shall relieve the Associated Companies of any of their obligations
under this SECTION 7.7.
7.7.4. Severability; etc. The parties agree that the provisions set
-----------------
forth in this SECTION 7.7, including without limitation as to duration and
geographic scope, are reasonable to protect the legitimate interests of Tenant
and the good will of the Facilities during the Lease Term. The provisions of
this SECTION 7.7 are severable, and in the event that any provision hereof
should, for any reason, be held invalid or unenforceable in any respect, it
shall not invalidate, render unenforceable or otherwise affect any other
provision hereof, and such invalid or unenforceable provision shall be construed
by limiting it so as to be valid and enforceable to the maximum extent
compatible with, and possible under, applicable law.
7.7.5. Tax Reporting. The parties hereto agree that each of them which
-------------
is a party to one of the Leases shall report the Lease as an "operating lease"
and not as a "capital lease" for federal income tax purposes.
7.8. Consulting Arrangement. At Closing, Guarantor shall enter into a
----------------------
consulting agreement with Dennis in the form which the parties have agreed to,
pursuant to which Dennis will provide the consulting services described therein.
7.9. Post-Closing Confidentiality Covenant of Tenant and Guarantor.
-------------------------------------------------------------
Neither Tenant nor Guarantor or any Affiliate of Tenant or Guarantor will,
directly or indirectly, without the prior written consent of the Associated
Companies, disclose or use, in any way harmful to the business, operations,
assets,
- 26 -
<PAGE>
prospects or condition, financial or otherwise, of the Associated Companies, or
otherwise contrary to the interests of the Associated Companies, any
confidential information involving or relating to the operation of any Facility
("Confidential Operation Information") or the Associated Companies, or any
business, venture or other activity of the Associated Companies, past, present
or future, actual or prospective ("Confidential Associated Company
Information"); provided, however, that such information shall not include any
-----------------
information known generally to the public (other than as a result of disclosure
in violation hereof by any Tenant or Guarantor or any Affiliate of any Tenant or
Guarantor), or as to Confidential Associated Company Information, which was
available to Tenant or Guarantor or any Affiliate of Tenant or Guarantor on a
nonconfidential basis prior to the disclosure in connection with the
transactions contemplated hereby, or is lawfully obtained by Tenant or Guarantor
or any of their Affiliates from a third party under no duty of confidentiality
to the Associated Companies; and provided, further, that the provisions of this
-----------------
Section 7.9 shall not prohibit any disclosure which Tenant or Guarantor or any
of their Affiliates reasonably deems necessary or appropriate in connection with
(i) any judicial or administrative proceeding or inquiry, (ii) regulatory or
governmental approvals required to complete the transactions contemplated under
this Agreement after Tenant Board of Director authorization has been obtained
pursuant to Section 8.7 of this Agreement, (iii) governmental filings or other
disclosure in connection with any securities filings to be made by Tenant,
Guarantor or any of their Affiliate, or (iv) other disclosure in the ordinary
course of operation of the Facilities after the Closing. This Confidentiality
Covenant shall survive the Closing for a period of two (2) years with respect to
Confidential Associated Company Information and for the term of the Lease plus
two (2) years with respect to Confidential Operation Information.
7.9.1. Enforcement Tenant and Guarantor acknowledge and agree that,
-----------
because the legal remedies of the Associated Companies may be inadequate in the
event of a breach of, or other failure to perform, any of the covenants and
obligations set forth in this Section 7.9, the Associated Companies may, in
addition to obtaining any other remedy or relief available to it (including
without limitation consequential and other damages at law), enforce this Section
7.9 by injunction and other equitable remedies. Tenant and Guarantor also
acknowledge and agree that no breach by the Associated Companies of, or other
failure by the Associated Companies to perform any of the covenants and
obligations of the Associated Companies under this Agreement or otherwise shall
relieve Tenant or Guarantor of any of their obligations under this Section 7.9.
7.10. Option to Purchase Agreements. At Closing, Landlords and Tenant or
-----------------------------
an Affiliate of Tenant shall enter into Option to
- 27 -
<PAGE>
Purchase Agreements in the form attached to this Agreement as Schedules 7.10.1,
-----------------
7.10.2, 7.10.3 and 7.10.4 attached hereto pursuant to which Landlords shall
- -------------- ------
grant Tenant (or Tenant's designee) the option to purchase the Premises and
Assets at the end of the Lease Term in accordance with the terms and provisions
therein.
7.11. Further Assurances. Each of the parties hereto, both before and
------------------
after the Closing, upon the request from time to time of any other party hereto
and without further consideration, will do each and every act and thing as may
be necessary or reasonably requested to consummate the transactions contemplated
hereby and to effect an orderly transfer to Tenant of operational control of the
Facilities under the Leases and assumption by Tenant of the Assumed Contracts,
including without limitation executing, acknowledging and delivering assurances,
assignments, powers of attorney and other documents and instruments, furnishing
information and copies of documents, books and records (including without
limitation tax records); filing reports, returns, applications, filings and
other documents and instruments with governmental authorities; and cooperating
with each other party hereto in exercising any right or pursuing any claim,
whether by litigation or otherwise, other than rights and claims running against
the party from whom or which such cooperation is requested.
7.12. Agreement of the Parties re Royalview LP and Royalview. Royalview
------------------------------------------------------
GP shall promptly use reasonable and diligent efforts to achieve a plan of
reorganization of the ownership interests of Royalview LP acceptable to the
partners of Royalview LP (a "Royalview LP Reorganization Plan"). If by May 3,
1996, a Royalview LP Reorganization Plan has not been agreed to by the Royalview
LP partners, following written notice to Tenant and Guarantor, the parties will
take the following actions:
(a) the parties will proceed to effect the Closing on the Closing Date;
provided, however,
i) Royalview GP and Royalview LP will be released as parties to this
Agreement (such event hereinafter referred to as the "Royalview Removal") and as
a result, the Lease and the Option to Purchase Agreement for the Royalview
Facility will not be executed and delivered at the Closing; and
ii) any and all assets relating to the operation of Royalview Manor shall
be excluded from the transaction effected at the Closing, including, without
limitation, the Premises leased to Tenant at the Closing shall not include the
Land described in Schedule C hereto, the Assets shall not include any assets
relating to the operation
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<PAGE>
of Royalview Manor, the License shall not include the right to use the tradename
"Royalview Manor," the Assumed Contracts shall not include any contracts
identified on Schedule 2.2 as relating to the operation of Royalview Manor or
the assumed liabilities described in Section 2.3 above relating to the operation
of Royalview Manor, the records and plans described in Section 2.4 above
relating to Royalview Manor shall not be delivered to Tenant, and Tenant will
not be granted an option to purchase the Premises relating to Royalview Manor
pursuant to an Option Purchase Agreement; and
(b) all amounts payable to Dennis under the Consulting Agreement referenced in
Section 7.8 above shall be reduced by 18.25%.
7.13. Covenants, Representations and Warranties to Guarantor.
------------------------------------------------------
Notwithstanding anything to the contrary in this Agreement, all representations,
warranties and covenants made by the Associated Companies to the Tenant in this
Agreement shall inure to the benefit of the Guarantor as though made directly to
the Guarantor.
7.14. Removal of Underground Storage Tanks. Tenant shall have the right,
------------------------------------
prior to Closing (and at any time after Closing), to remove the USTs disclosed
on Schedule 5.3.7. In the event Tenant undertakes such removal, Tenant shall
--------------
remove the USTs in accordance with all applicable laws and regulations and, as
part of such removal, shall remediate, to the extent required by all applicable
laws and regulations, any hydrocarbon contamination of soil and groundwater
caused by any leaking of the USTs or by the removal process, and shall install,
in replacement thereof, above-ground tanks of the same capacity as those removed
or of such other capacity as may be agreed upon by the parties hereto. Such
removal, remediation, and installation shall be at the cost and expense of
Tenant and Guarantor without contribution from any of the Associated Companies,
whether or not the same is performed prior to Closing and, if such work is
performed prior to Closing, regardless of whether the Closing occurs. Such work
shall be performed by such contractor or contractors as are retained by Tenant,
subject, however, to approval by the Associated Companies of the identity of any
such contractor or contractors.
8. CONDITIONS TO TENANT'S OBLIGATION TO CLOSE. The obligations of Tenant at
the Closing to lease the Premises and Assets from the Landlords and to assume
the Assumed Contracts are subject to the satisfaction, at or prior to Closing,
of all of the following conditions, compliance with which, or the occurrence of
which, may be waived in whole or in part by Tenant:
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<PAGE>
8.1. Representations, Warranties and Covenants.
-----------------------------------------
8.1.1. Continued Accuracy of Representations and Warranties. All
----------------------------------------- ----------
representations and warranties of the Associated Companies contained in this
Agreement shall be true and correct in all material respects as of the Closing
with the same force and effect as if made at and as of the Closing.
8.1.2. Performance of Agreements. The Associated Companies shall have
-------------------------
performed and satisfied all covenants, agreements and conditions required by
this Agreement to be performed or satisfied by the Associated Companies at or
prior to Closing.
8.1.3. Closing Certificate. At the Closing, the Associated Companies
-------------------
shall furnish to Tenant a certificate signed by the Associated Companies dated
the Closing Date, to the effect that the conditions specified in SECTIONS 8.1.1
and 8.1.2 hereof have been satisfied.
8.2. Licenses and Approvals. To the extent that they can be obtained by
----------------------
Tenant under applicable law prior to the actual transfer of operational control
of the Facilities to Tenant on or before the one hundred and twentieth (120th)
day following the Effective Date, Tenant shall have secured all necessary
licenses, permits, certifications and approvals from federal, state and local
governmental or administrative agencies having jurisdiction thereof required for
the operation of the Facilities by Tenant on substantially the same basis as the
Associated Companies are currently operating the same and without the imposition
of material conditions on the Tenant or the Facilities, and on or before the one
hundred and eightieth (180th) day following the Effective Date, Landlords and
Tenant shall have obtained all necessary consents from HUD and any fee mortgagee
to lease the Premises pursuant to the Leases without the imposition of material
conditions on the Tenant or the Facilities.
8.3. Legality; No Change in Law. Tenant's lease of the Premises and the
--------------------------
Assets, operations of the Facilities and assumption of the Assumed Contracts
shall not be prohibited by any Legal Requirement (except any Legal Requirements
in the HUD mortgages and Regulatory Agreements which Tenant can reasonably
satisfy). No Legal Requirement shall have been enacted nor shall any
legislation have been introduced in either house of Congress or of the
legislature of Ohio and favorably reported for passage to either house of
Congress or the legislature of Ohio or by any committee of any thereof, nor
shall any investigation against an Associated Company by any governmental
authority or administrative agency have been commenced, nor shall any decision
of any court of competent jurisdiction have been rendered against any Associated
Company or any of the Premises, which materially and adversely affects,
restrains, prevents or
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<PAGE>
changes the transactions contemplated by this Agreement, or has a material
adverse effect on the business, operations, assets, prospects or condition,
financial or otherwise, of any of the Facilities as presently operated.
8.4. Litigation. No action or proceeding shall have been instituted at
----------
or prior to the Closing before any court, arbitrator or other governmental body,
or instituted or threatened by any public authority, pertaining to Tenant's
lease of the Premises and Assets, operation of the Facilities and assumption of
the Assumed Contracts or any of the other transactions contemplated hereby, the
results of which action or proceeding could prevent or make illegal the
consummation of such transactions, or which could otherwise have a material
adverse effect on the business, operations, assets, prospects or condition,
financial or otherwise, of any of the Facilities as presently operated.
8.5. Opinion of the Associated Companies' Counsel. The Tenant shall have
--------------------------------------------
received an opinion of Jones, Day, Reavis & Pogue, legal counsel to the
Associated Companies dated as of the Closing Date, addressed to Tenant, in form
and substance satisfactory to the Tenant in substantially the form of Schedule
--------
8.5 attached hereto.
- ---
8.6. Change in Occupancy or Payor Mix. The monthly occupancy (as
--------------------------------
measured on an average daily census basis) at any Facility for the calendar
month which precedes the Effective Date will not exceed the monthly occupancy at
such Facility for the calendar month which precedes the Closing Date by more
than the number of patients set forth for such Facility on Schedule 8.6 attached
hereto. The aggregate monthly occupancy at all of the Facilities for the
calendar month which precedes the Effective Date will not exceed the aggregate
monthly occupancy at all of the Facilities for the calendar month which precedes
the Closing Date by more than the number of patients set forth for all
Facilities on Schedule 8.6 attached hereto. The private pay patient monthly
occupancy in any Facility for the calendar month which precedes the Effective
Date will not exceed the private pay patient monthly occupancy in such Facility
for the calendar month which precedes the Closing Date by more than the number
of private pay patients set forth for such Facility on Schedule 8.6 attached
hereto. The aggregate private pay patient monthly occupancy in all of the
Facilities for the calendar month which precedes the Effective Date will not
exceed the aggregate private pay patient monthly occupancy in all of the
Facilities for the calendar month which precedes the Closing Date by more than
the number of private pay patients set forth for all the Facilities on Schedule
8.6 attached hereto.
8.7. Board Approval. On or before the seventieth (70th) day after the
--------------
Effective Date, the Board of Directors of Tenant shall have voted to approve the
transactions contemplated by this
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<PAGE>
Agreement provided that the Board may only disapprove the transactions if the
Board deems the results of the due diligence under Section 4 to be
unsatisfactory, in which case Tenant shall in writing advise the Associated
Companies of the basis of any such disapproval.
9. CONDITIONS TO THE ASSOCIATED COMPANIES' OBLIGATION TO CLOSE. The
obligations of the Associated Companies at the Closing to lease the Premises and
Assets to Tenant and to assign the Assumed Contracts to Tenant are subject to
the satisfaction at or prior to Closing, of all of the following conditions,
compliance with which, or the occurrence of which, may be waived in whole or in
part by the Associated Companies:
9.1. Representations, Warranties and Covenants.
-----------------------------------------
9.1.1. Continued Accuracy of Representations and Warranties. All
----------------------------------------- ----------
representations and warranties of Tenant and Guarantor contained in this
Agreement shall be true and correct in all material respects as of the Closing
with the same force and effect as if made at and as of the Closing.
9.1.2. Performance of Agreements. The Tenant and Guarantor shall have
-------------------------
performed and satisfied all covenants, agreements and conditions required by
this Agreement to be performed or satisfied by it at or prior to Closing.
9.1.3. Closing Certificate. At the Closing, Tenant and Guarantor shall
-------------------
furnish to the Associated Companies a certificate signed by the President or a
Vice President of Tenant and Guarantor dated the Closing Date, to the effect
that the conditions specified in Sections 9.1.1 and 9.1.2 hereof have been
satisfied.
9.2. Litigation. No action or proceeding shall have been instituted at or
----------
prior to the Closing before any court, arbitrator or other governmental body, or
instituted or threatened by any public authority, pertaining to the lease of the
Premises and the Assets to Tenant and the assumption of the Assumed Contracts by
Tenant or any of the other transactions contemplated hereby, the results of
which action or proceeding could prevent or make illegal the consummation of
such transactions.
9.3. Licenses and Approvals. To the extent that they can be obtained by
----------------------
Tenant under applicable law prior to the actual transfer of operational control
of the Facilities to Tenant, Tenant on or before the one hundred and twentieth
(120th) day following the Effective Date, shall have secured all necessary
licenses, permits, certifications and approvals from federal, state and local
governmental or administrative agencies having jurisdiction thereof required for
the operation of the Facilities by Tenant, and on or before the one hundred and
eightieth (180th)
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<PAGE>
day following the Effective Date Landlords and Tenant shall have obtained all
necessary consents from HUD and any fee mortgagee to lease the Premises to
Tenant; provided, that, all such licenses, permits, certifications and approvals
necessary to effectuate the transfer in accordance with applicable law shall
have been obtained.
9.4. Opinion of Tenant's and Guarantor's Counsel. The Associated
-------------------------------------------
Companies shall have received an opinion of McDermott, Will & Emery, legal
counsel to the Tenant and the Guarantor, dated as of the Closing Date, addressed
to the Associated Companies, in form and substance satisfactory to the
Associated Companies, and in substantially the form of Schedule 9.4 attached
------------
hereto.
9.5. Guaranty Matters. The Associated Companies shall have received
----------------
either:
(a) The Guaranty and evidence that the Guarantor has a Net Worth, as
hereinafter defined, of not less than $5,000,000; or
(b) The Guaranty and an additional guaranty (the "Additional Guaranty")
from a Public Company, as hereinafter defined.
9.6. Security Deposit. Landlords shall have received either:
----------------
(a) A security deposit under the Leases aggregating $5,000,000 (the
"Security Deposit"), which Security Deposit shall be held by National City Bank
pursuant to a Security Deposit Agreement (the "Security Deposit Agreement") by
and among the Associated Companies, Tenant, Guarantor, and National City Bank,
as trustee; or
(b) The Guaranty and the Additional Guaranty from a Public Company.
10. CLOSING.
10.1. Closing Date. The closing of the transaction contemplated herein
------------
(the "Closing") shall be consummated as of the first day of the month following
the date on which Landlord and Tenant have secured all of the necessary licenses
and approvals described in Section 8.2 above (i.e., that can be obtained by the
----
parties under applicable law prior to the lease of the Facilities to Tenant),
provided that, if the last of such approvals is received after the twentieth
(20th) day of a month either party may extend the Closing Date to the first day
of the second month following such month or on such other date as may be
mutually agreed upon by the Associated Companies and the Tenant
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<PAGE>
(the "Closing Date"), at a place mutually agreeable to the Associated Companies
and Tenant.
10.2. Landlords' Deliveries at Closing. At the Closing, the Associated
--------------------------------
Companies shall execute (if applicable) and deliver to Tenant:
(1) The Certificate described in Section 8.1.3 hereof, and the lists required
under Sections 5.4.11 and 5.4.12 hereof.
(2) The Leases, Option to Purchase Agreements and License Agreements.
(3) Unless the Parkland Ancillary Medical Leases theretofore have been
terminated, the assignments of the Parkland Ancillary Medical Leases (and
evidence that the Parent Lease has been terminated).
(4) The opinion of counsel required under Section 8.5 hereof.
(5) Certificate of Full Force and Effect, as applicable, for each Associated
Company issued by the Secretary of State of Ohio (dated within ten (10)
days of the Closing).
(6) The settlement statement of this transaction as approved by the parties
hereto.
(7) Partnership resolutions of each Associated Company authorizing it to
undertake the transactions contemplated by this Agreement and authorizing
its signatories to execute this Agreement and all other documents required
to effect the Closing, certified as of the Closing Date by a managing
partner as appropriate of such Associated Company as having been duly
adopted and being in full force and effect on the Closing Date and a
Certificate of Incumbency as to the partners executing and delivering said
documents.
10.3. Tenant's and Guarantor's Deliveries at Closing. At the Closing,
----------------------------------------------
Tenant and Guarantor shall execute (if applicable) and deliver to the Associated
Companies:
(1) The Certificate described in Section 9.1.3 hereof.
(2) The Leases, Option to Purchase Agreements, the Guaranty, the Additional
Guaranty, if applicable, evidence of the Net Worth of Guarantor, if
applicable, and evidence, if applicable, that the
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<PAGE>
guarantor under the Additional Guaranty is a Public Company.
(3) Unless the Parkland Ancillary Medical Leases theretofore have been
terminated, the assignments of the Parkland Ancillary Medical Leases joined
in by the tenant under the Lease for Parkland Nursing Center in order to
evidence assumption by such tenant of the obligations of the lessor or
sublessor thereunder (exclusive of the obligations retained by Beachwood as
provided above).
(4) The opinion of counsel required under Section 9.4 hereof.
(5) A corporate resolution of Tenant and partnership resolutions of Guarantor
authorizing the transaction contemplated by this Agreement and authorizing
its signatories to execute this Agreement and all other documents required
to effect the Closing, certified as of the Closing Date by an officer of
Tenant and Guarantor, respectively, as having been duly adopted and being
in full force and effect on the Closing Date and a Certificate of
Incumbency as to the officers and partners executing and delivering said
documents.
(6) Certificate of Legal Existence and Good Standing of Tenant and a
Certificate of Legal Existence for Guarantor issued by the Secretary of the
State of Ohio and the Secretary of State of Massachusetts, respectively.
(7) The settlement statement of this transaction as approved by the parties
hereto.
10.4. Personal Property Tax Prorations. Personal property taxes shall be
--------------------------------
prorated at the Closing based upon the last available tax duplicate, which
prorations shall thereafter be adjusted directly between the Associated
Companies and Tenant based upon the actual amount of taxes for the year in which
the Closing occurs, promptly following receipt of the official statement
therefor and notice thereof by Tenant to the Associated Companies.
10.5. Disposition of Certain Employee Benefit Obligations Before and
--------------------------------------------------------------
After the Closing Date. The Associated Companies' accrued and vested employee
- ----------------------
vacation pay and sick leave expense and associated employment-related taxes and
benefit expense for each Facility's employees through the Closing Date shall be
paid by the Associated Companies at Closing or at Tenant's option, assumed by
Tenant at Closing, in which case the
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<PAGE>
amount of such expenses assumed by Tenant shall be paid by the Associated
Companies to the Tenant at Closing and reflected on the Closing settlement
statement and shall be determined in accordance with the method described in
Schedule 10.5 attached hereto.
- -------------
10.6. Other Closing Adjustments. All expenses attributable to the
--------------------------
operation of the Facility (measured on an accrual basis) and all income
(measured on an accrual basis) through 11:59 p.m. on the day before the Closing
shall be for the account of the Associated Companies. Thereafter, such income
and expense shall be for the account of Tenant. Such income will include, but
shall not be limited to, all payments under Occupancy Agreements, including
Medicare and Medicaid reimbursement and other insurance payments or advances.
The Associated Companies shall retain title to all accounts receivable for
services rendered at each Facility through 11:59 p.m. on the day before the
Closing and governmental reimbursements for same. Tenant shall provide
reasonable assistance to the Associated Companies in the collection of such
accounts receivable. Except as otherwise expressly provided in this Agreement,
the Associated Companies shall remain responsible for all accounts payable
through 11:59 p.m. on the day before the Closing. As of the Closing, the
Associated Companies shall calculate wages and payroll taxes accrued through
11:00 p.m. on the day before the Closing Date (the "Outstanding Payroll") which
Outstanding Payroll shall be paid by Landlord on the immediately following
scheduled payroll date. To secure Landlord's obligation to pay the Outstanding
Payroll, Landlord shall deposit with the Escrow Agent the amount of the
Outstanding Payroll (as reasonably estimated by the parties) which shall be held
in escrow by the Escrow Agent in the same manner as the Deposit until the
Outstanding Payroll has been paid by Landlords; provided, however, that funds
already held in escrow by the Escrow Agent may be applied for this purpose.
Except as otherwise provided below, all apportionable items of operating income
and expense applicable to any periods commencing before the Closing Date and
continuing after the Closing Date shall be prorated between the Associated
Companies and Tenant as of 11:59 p.m. on the day before the Closing. In
effecting the proration, the Associated Companies shall be credited for items of
expense paid in advance and debited for items of expense accrued but not paid
for as of the Closing Date. Apportionable operating expenses shall not include
prepaid insurance premiums. In addition, on or about the Closing, the
Associated Companies and/or Tenant shall cause final utility meter readings to
be made for all utilities serving the Premises and the Associated Companies
shall pay or cause to be paid all final bills rendered from such meter readings.
All deposits and other patient funds held in trust by the Associated
Companies shall be accounted for (including any interest required on such funds)
and transferred to Tenant at
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<PAGE>
Closing. The Associated Companies shall furnish to Tenant on or before the
Closing, lists, by Facility, of all such deposits and other patient funds held
by the Associated Companies, each certified to by an officer of the appropriate
Associated Company, which lists the Associated Companies warrant will be true
and correct. Tenant shall assume the obligation to maintain, repay and/or return
such deposits in accordance with the terms and subject to the conditions and
requirements under which they are being held by the Associated Companies or
imposed by applicable law or regulation.
10.7. Inventory. At Closing, Tenant shall purchase linens, food, non-
---------
prescription drugs and medical and office supplies and maintenance, housekeeping
and dietary supplies at the Facilities (the "Inventory") from the Associated
Companies for an amount equal to the actual cost to the Associated Companies of
the Inventory, based upon a list of the Inventory compiled within five (5) days
prior to the Closing Date by representatives of both the Associated Companies
and Tenant, which list shall state the actual cost to the Associated Companies
of the Inventory based upon applicable invoices and accounting records of the
Associated Companies. The purchase price for the Inventory shall be paid by
Tenant to the Associated Companies at the Closing and reflected on the Closing
settlement statement. Notwithstanding the foregoing, Purchaser shall not be
required under this Section 10.7 to purchase more than a thirty (30) day supply
------------
of any item in the Inventory (or a sixty day supply with respect to those items
for which the Associated Companies maintain a sixty (60) day supply in the
ordinary course of business) nor any item that does not conform to the generally
accepted standards of the long-term care industry in Ohio. Any item of
Inventory not so purchased by Purchaser shall remain the property of the
Associated Companies and may be removed from the Premises by the Associated
Companies as of the Closing Date.
10.8. Termination. This Agreement may be terminated, and the transactions
-----------
contemplated hereby may be abandoned, at any time before the Closing:
(a) by mutual written consent of the Associated Companies, Tenant and
Guarantor; or
(b) by Tenant and Guarantor if any of the conditions set forth in Section 8
shall not have been complied with or performed in any material respect and
such noncompliance or nonperformance shall not have been cured or
eliminated (or by its nature cannot be cured or eliminated) by the
Associated Companies within one hundred and eighty (180) days following the
Effective Date; or
(c) by the Associated Companies, if any of the conditions set forth in Section
9 shall not have been complied with or performed in any material respect
and such noncompliance or
- 37 -
<PAGE>
nonperformance shall not have been cured or eliminated (or by its nature
cannot be cured or eliminated) by Tenant or Guarantor within one hundred
and eighty (180) days following the Effective Date; or
(d) by the Associated Companies, Tenant, or Guarantor, in the event the Closing
Date has not occurred on or prior to the close of business on October 31,
1996 or such later date as the parties hereto may agree in writing (unless
such event has been caused by the breach of this Agreement by the party
seeking such termination).
11. CASUALTY.
11.1. Major Damage. If any of the Premises, or any portion thereof,
------------
shall be damaged or destroyed by reason of any casualty or other cause prior to
the Closing and the cost of restoration thereof is equal to or in excess of One
Hundred Thousand Dollars ($100,000) ("Major Damage"), then Tenant, at Tenant's
option, may either: (A) terminate this Agreement upon written notice of same to
the Associated Companies; or (B) proceed to complete the transactions
contemplated under this Agreement (i) upon written notice of same to the
Associated Companies and an agreement to an equitable abatement of the Annual
Rent applicable to the damaged Premises which abatement shall be effective for
the period from the commencement date of the Lease to the date such damaged
Premises are restored and the patient occupancy and private pay occupancy is
substantially restored to the status immediately preceding the casualty, but
not to exceed one hundred and eighty (180) days after completion of the
restoration, and (ii) receipt by Tenant of satisfactory assurance that the
insurance proceeds payable in the event of such damage or destruction will be
made available to Tenant and are in an amount reasonably sufficient to restore
the damaged Premises to the condition preceding the casualty. Except as
otherwise specifically set forth in this Section 11, any notice of termination
under this Section 11 shall be made by Tenant within thirty (30) days after the
cost of repairing the damage and/or destruction has been determined but not
later than the sixtieth (60th) day following the occurrence of the damage. If
Tenant does not elect to terminate this Agreement within such thirty (30) day
period, then Tenant shall be deemed to have elected option (B) set forth above.
Upon the termination of this Agreement by Tenant as a result of Major Damage,
Tenant shall be entitled to the return of the Deposit and the parties hereto
shall be free of any further liability hereunder, except as otherwise set forth
in this Agreement.
11.2. Other Damage. If the cost of repair of such damage or destruction
------------
is less than One Hundred Thousand Dollars ($100,000.00) and such damage or
destruction is covered by the Associated Companies' insurance coverage, the
Associated Companies shall pay such applicable insurance proceeds, plus the
amount of any applicable deductible, to Tenant and upon an
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<PAGE>
equitable abatement of the applicable portion of the Annual Rent, Tenant shall
consummate the transaction contemplated under this Agreement. If (i) such damage
or destruction is not covered by the Associated Companies' insurance coverage,
or (ii) such insurance proceeds are insufficient to cover the cost of repairing
such damage or destruction and the Associated Companies do not pay the
applicable deficiency to Tenant, then there shall be an abatement of rent until
Tenant has recouped (A) an amount equal to the cost of restoring the Premises in
the case of subparagraph (i); or (B) an amount equal to such deficiency in the
case of subparagraph (ii), in either event, as determined by the architect
selected in accordance with Section 11.3 hereof.
11.3. Determination of Repair Cost. In the event of a dispute between
----------------------------
the Associated Companies and Tenant regarding the cost of repairing such damage
or destruction, the Associated Companies and Tenant agree that an architect
acceptable to both the Associated Companies and Tenant shall be retained, the
cost of such appraisal being borne equally by the Associated Companies and
Tenant, and such architect shall determine the cost of repairing such damage or
destruction, which cost shall include all professional fees incurred in
connection therewith. The Associated Companies and Tenant agree that the
determination by such architect of the cost of repair shall be conclusive as to
both the Associated Companies and Tenant.
12. CONDEMNATION.
(a) If prior to the Closing any proceedings are commenced by any
governmental agency to effect a taking of any part of the Premises in or by
condemnation or other eminent domain proceedings (or by conveyance in lieu
thereof), and the loss of such part of the Premises would materially interfere
with the Tenant's ability to operate the Facilities in substantially the same
manner as the Associated Companies currently operate the Facilities, Tenant may
terminate this Agreement, whereupon the Deposit shall be returned to Tenant and
all rights and obligations of the parties hereto shall expire and terminate,
provided that, if Tenant does not exercise its right to terminate in such event,
this Agreement shall continue in full force and effect, without adjustment to
the Annual Rent and Option Purchase Price.
(b) If such taking of a part of the Premises in or by condemnation or other
eminent domain proceedings (or by conveyance in lieu thereof), would not
materially interfere with Tenant's ability to operate the Facilities in
substantially the same manner as the Associated Companies currently operate the
Facilities, this Agreement shall continue in full force and effect, without
adjustment to the Annual Rent and Option Purchase Price.
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<PAGE>
13. DEFAULT. Prior to Closing, in the event of a material misrepresentation
by any Associated Company, or by Tenant or Guarantor in this Agreement, or a
material breach of any warranty or covenant by any Associated Company or by
Tenant or Guarantor, or other default by any Associated Company or by Tenant or
Guarantor, and the defaulting party's failure to rectify such misrepresentation,
breach or default within thirty (30) days after receipt of written notice
thereof from the non-defaulting party, then the nondefaulting party shall have
the right, upon written notice to the defaulting party, to rescind this
Agreement, and upon rescission, (a) if any Associated Company is in default, the
Deposit then held by the Escrow Agent shall be promptly returned to Tenant and
Tenant shall be entitled to such remedies as shall be provided by law, including
the recovery of reasonable attorney's fees; provided, however, in no case shall
Tenant or Guarantor be entitled to special or consequential damages, which shall
include, without limitation, damages, other than actual and direct costs,
relating to or arising from any adverse effect on any planned or effective
registration or offering of securities, and any judgments or settlements against
Tenant, Guarantor or any of their Affiliates arising from claims under federal
or state securities laws in excess of Five Million Dollars ($5,000,000); and (b)
if Tenant or Guarantor is in default, the Associated Companies shall be paid the
Deposit then held by the Escrow Agent as full liquidated damages of the
Associated Companies, it being understood that the Associated Companies' damages
would not be subject to accurate calculation and the amount established hereby
as liquidated damages is a reasonable estimate of the damages which would be
incurred by the Associated Companies. In lieu of rescission, the Tenant shall
be entitled to specific performance of this Agreement and, in addition, the
recovery of reasonable attorneys' fees.
14. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All statements of fact
contained in this Agreement, or in any certificate delivered by or on behalf of
one party to the other pursuant to this Agreement or in connection with the
transaction contemplated hereby, shall be deemed representations and warranties
by such party making such statement of fact. Each party understands that the
other party has relied on each of said representations and warranties in
entering into this Agreement. Notwithstanding any investigations made by or on
behalf of the Associated Companies or Tenant or any distribution in liquidation,
dissolution or other voluntary or involuntary act of the Associated Companies or
Tenant, (i) the representations and warranties of Associated Companies set forth
in Section 7.7 hereof shall survive the Closing as set forth therein; (ii) the
representations and warranties set forth in Sections 5.3.7, 5.3.8 and 5.4.7
shall survive the Closing for the term of the Lease, (iii) the representations
and warranties set forth in Section 5.4.9 shall survive the Closing for the
applicable periods of the statutes of limitations, (iv) all other
representations and warranties of the Associated Companies herein shall survive
the Closing for a
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<PAGE>
period of 24 months notwithstanding the execution and delivery of the Leases or
the consummation of the other transactions contemplated herein, whereupon such
representations and warranties shall become unenforceable except to the extent
that notice of a claim relating to such representations and warranties has been
given pursuant to Section 15.3 hereof prior to the expiration of the Lease Term
(each termination date an "Expiration Date").
15. INDEMNIFICATION PROVISIONS.
15.1. Indemnification of Tenant. Subject to Section 15.5, the Associated
-------------------------
Companies shall defend, indemnify and hold harmless Tenant and Guarantor and any
Affiliate of Tenant and Guarantor against all damages, punitive damages, civil
and criminal monetary penalties, losses and reasonable expenses, including any
reasonable attorneys' and other professional fees (hereinafter referred to
collectively as "Liabilities"), but not including special or consequential
damages relating to, or arising from, any adverse effect on any planned or
effective registration, offering or sale of securities which shall include,
without limitation, any judgments or settlements against Tenant, Guarantor or
any of their Affiliates arising from claims under federal or state securities
laws, in connection with any of the following matters:
15.1.1. Material Misrepresentation, etc. Any and all Liabilities arising
--------------------------------
out of or related to any material breach of the agreements, representations,
warranties or covenants of the Associated Companies in this Agreement, provided,
--------
however, that Tenant's right to indemnification hereunder for Liabilities
- -------
arising out of or related to any material breach of the Associated Companies'
representations and warranties shall be limited to claims asserted by Tenant in
accordance with Section 15.3 hereof during the period during which said
representations and warranties survive the Closing as provided under Section 14
hereof.
15.1.2. Audits, Investigations, Refund Obligations and Other Pre-Closing
----------------------------------------------------------------
Liabilities. Any and all Liabilities arising out of or related to any of the
- -----------
following: (i) any audit or investigation conducted at any time by any
governmental authority or administrative agency concerning the operation of the
Facility or the Premises or any other Assets by the Associated Companies prior
to the Closing or any amounts paid to the Associated Companies prior to the
Closing; (ii) any assessments, adjustments or offsets made against Tenant or any
Facility or the Premises or other Assets as a result of such an audit or
investigation or in connection with the recovery by any governmental authority
or administrative agency of any overpayments made to any Associated Company for
services performed prior to Closing or any depreciation recapture liability
applicable to the
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<PAGE>
period prior to Closing; (iii) any reasonable costs of defense of, and any
judgment against Tenant with respect to, any litigation relating to the
operation of the Premises or the Assets prior to the Closing; (iv) any suit,
claim or proceeding of any nature seeking to recover damages for personal
injury, death or property damage due in connection with the operation of the
Premises or the Assets prior to the Closing; and (v) any other liability,
damage, cost, claim, expense or assessment asserted against Tenant or the
Premises or the Assets as a result of, or with respect to, the Associated
Companies' ownership or operation of the Premises or the Assets prior to the
Closing.
15.2. Indemnification of the Associated Companies. Tenant and Guarantor
-------------------------------------------
shall jointly and severally defend, indemnify and hold harmless the Associated
Companies and any Affiliate of the Associated Companies against all Liabilities
in connection with any of the following matters:
15.2.1. Misrepresentations, etc. Any and all Liabilities arising out of
-----------------------
or related to any breach of the agreements, representations, warranties or
covenants of Tenant or Guarantor in this Agreement, provided, however, that the
-------- -------
Associated Companies' right to indemnification hereunder for Liabilities arising
out of or related to any breach of Tenant's or Guarantor's representations and
warranties shall be limited to claims asserted by the Associated Companies in
accordance with Section 15.3 hereof during the period during which said
representations and warranties survive the Closing as provided in Section 14
hereof.
15.2.2. Audits, Investigations and Other Post-Closing Liabilities. Any
----------------------------------------------------------
and all Liabilities arising out of or related to any of the following: (i) any
audit or investigation conducted at any time by any governmental authority or
administrative agency concerning the operation of the Facilities and the
Premises or the other Assets by Tenant subsequent to the Closing or any amounts
paid to Tenant subsequent thereto; (ii) any assessments, adjustments or offsets
made against the Associated Companies as a result of any such audit or
investigation or in connection with the recovery by any governmental authority
or administrative agency of any other payments made to Tenant for services
performed after Closing; (iii) any reasonable costs of defense of, and any
judgment against the Associated Companies with respect to, any litigation
relating to the operation of the Premises or the Assets by Tenant subsequent to
the Closing; (iv) any suit, claim or proceeding of any nature seeking to recover
damages, for personal injury, death or property damage due or alleged to be due
to occurrences in connection with the operation of the Premises or the Assets
subsequent to the Closing; and (v) any other
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<PAGE>
liability, damage, cost, claim, expense or assessment asserted against the
Associated Companies as a result of, or with respect to, Tenant's operation of
the Premises or the Assets subsequent to the Closing, and (vi) any and all
Liabilities in connection with or as a result of claims arising under, or a
registration statement filed by an Affiliate of Tenant pursuant to federal or
state securities laws, including, without limitation, any liability arising as a
result of any inclusion of financial statements or other information with
respect to the Facilities furnished by the Associated Companies in such
registration statement.
15.2.3. Contribution In Lieu of Indemnification. In order to provide for
---------------------------------------
just and equitable contribution in circumstances in which the indemnity
agreement provided for in subsection 15.2.2(vi) is for any reason held to be
unenforceable by the indemnified parties although applicable in accordance with
its terms, the Tenant and the Guarantor shall contribute to the aggregate
Liabilities contemplated by such indemnity agreement as incurred. For purposes
of this Section, each Affiliate of an Associated Company shall have the same
rights to contribution as the Associated Company.
15.3. Notice and Defense of Claims. A party claiming indemnification
----------------------------
under this Agreement (the "Asserting Party") must promptly notify in writing the
party from which indemnification is sought (the "Defending Party") of the nature
and basis of such claim for indemnification. In the event Tenant is the
Asserting Party, Tenant shall concurrently send a copy of such notice to the
Escrow Agent if such claim is made at any time prior to the Expiration Date. If
such claim relates to a claim, litigation or other action by a third party
against the Asserting Party, or any fixed or contingent liability to a third
party (a "Third Party Claim"), the Defending Party may elect to assume the
defense of the Third Party Claim within a reasonable time after receipt of the
notice referred to above at its own expense with counsel selected by the
Defending Party and approved by the Asserting Party, which approval shall not be
unreasonably withheld; provided, however, that if any claim for indemnification
under this Agreement is covered by the Defending Party's applicable insurance
coverage, then the assumption of such defense and the selection of counsel shall
be governed by the applicable insurance coverage. Subject to the foregoing
sentence, the Defending Party may not assume the defense if the named parties to
the Third Party Claim (including any impleaded parties) include both the
Defending Party and the Asserting Party and representation of both parties by
the same counsel would be inappropriate due to actual or potential differing
interests between them, in which case the Asserting Party shall have the right
to employ counsel approved by the Defending Party at the expense of the
Defending Party. If the Defending Party, or the Defending Party's applicable
insurer, assumes the defense of the
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<PAGE>
Third Party Claim, the Defending Party shall not be liable for any fees and
expenses of counsel for the Asserting Party incurred thereafter in connection
with the Third Party Claim.
15.4. Partners' Indemnification in the Event of Liquidation or
--------------------------------------------------------
Dissolution of the Associated Companies. In addition to any and all rights
- ---------------------------------------
accorded to Tenant under applicable law, in the event subsequent to Closing any
of the Associated Companies proposes a plan of liquidation, dissolution or other
transaction having the effect of distributing to its partners a substantial
portion of its assets, then, as a condition of such proposal, and in
consideration of the proceeds to be received by said partners upon consummation
of such proposal, the Associated Company shall secure from said partners an
undertaking acknowledging and agreeing to stand in the shoes of the Associated
Company to the extent of the Net Proceeds, as defined in Section 15.5(b),
---------------
received by said partners in the event of a claim for indemnification from
Tenant subject to the limitations of Section 15.5. Such partner undertaking
shall be in the form attached hereto as Schedule 15.4. Each Associated Company
-------------
further agrees to provide notice to Tenant of any such proposal not less than
thirty (30) days in advance of the anticipated effective date thereof
accompanied by documents reasonably sufficient to demonstrate compliance with
the provisions hereof.
15.5. Limitations on Indemnity by Associated Companies. Notwithstanding
------------------------------------------------
any other provision of this Agreement, including Section 15.1 hereof, the rights
of Tenant and Guarantor to be indemnified and held harmless under this Agreement
or pursuant hereto and the liability of the Associated Companies, shall be
limited as follows:
(a) Each of the Associated Companies shall indemnify and hold harmless the
Tenant, Guarantor and their Affiliates only with respect to the Facility
actually owned or operated by such Associated Company, and shall not indemnify
and hold harmless the Tenant, Guarantor and their Affiliates with respect to any
damages incurred by Tenant, Guarantor or their Affiliates with respect to any of
the other Facilities.
(b) No claim for indemnity by Tenant or Guarantor pursuant to Section
15.1.1 shall be made against any Associated Company, unless and until the
aggregate dollar amount of the claims against the Associated Companies,
collectively, shall have exceeded $50,000, in which case the applicable
indemnitors shall be obligated to indemnify, defend and hold harmless the Tenant
and Guarantor for all damages in excess of $50,000, but any indemnification
liability of an Associated Company under Section 15.1.1 hereof shall not exceed
the Net Proceeds (as defined herein) of the Associated Company from and after
the Closing Date. The term "Net Proceeds" as used herein shall mean the amount
calculated in accordance with Schedule 15.5(b).
----------------
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<PAGE>
(c) The liability of the Associated Companies, Dennis and Friedman with
respect to any claim for indemnity by the Tenant or Guarantor pursuant to
Section 15.1 shall be offset dollar for dollar by (i) any insurance proceeds
received by the Tenant after the Closing in respect of the damages for which
indemnification is claimed, and (ii) any other recovery made by the Tenant from
any third-party on account of the damages for which indemnification is claimed,
provided Tenant shall not be obligated to pursue any recovery from any other
party.
15.6. Survival. The Indemnification Provisions set forth in Section 15
--------
of this Agreement shall survive the Closing.
16. DEFINITIONS. For purposes of this Agreement:
16.1. Cross Reference Table. The following terms defined elsewhere in
---------------------
this Agreement in the Sections set forth below shall have the respective
meanings therein defined:
Term Definition
"Additional Guaranty" Section 9.5(b)
"Affiliate Arrangements" Section 5.5.2
"AHCM, Inc." Section 2.5
"Annual Financial Statements" Section 5.2.1
"Asserting Party" Section 15.3
"Assets" Section 1
"Associated Company" and
"Associated Companies" Preamble
"Assumed Contracts" Section 2.3
"Beachwood" Preamble
"Closing" Section 10.1
"Closing Date" Section 10.1
"Confidential Associated
Company Information" Section 7.9
"Confidential Facility
Information" Section 7.7.1
"Confidential Operation
Information" Section 7.9
"Confidential Tenant
Information" Section 7.7.1
"Contracts" Section 5.5.1
"Current Galvin Lease" Section 2.5
"Defending Party" Section 15.3
"Deficiency" Section 4.1
"Deficiency Letter" Section 4.1
"Dennis" Eighth Whereas Clause
"Deposit" Section 3
"Deposit Escrow Agreement" Section 3
"Effective Date" Preamble
"Escrow Agent" Section 3
"Excluded Assets" Section 1
- 45 -
<PAGE>
"Expiration Date" Section 14
"Facility" and "Facilities" Fourth Whereas Clause
"Friedman" Eighth Whereas Clause
"Galvin Lease" Section 2.5
"Guarantor" Preamble
"Guarantor's Financial
Statements" Section 6.8
"Guaranty" Seventh Whereas Clause
"HUD" Section 2.5
"Initial Deposit" Section 3
"Inspectional Due Diligence" Section 4.1
"Intangible Assets" Section 2.1
"Interim Financial
Statements" Section 5.2.1
"Inventory" Section 10.7
"Labor Contracts" Section 5.5.1
"Landlord" and "Landlords" Preamble
"Land" Third Whereas Clause
"Lease" and "Leases" Section 1
"Lease Term" Section 2
"Liabilities" Section 15.1
"Licenses" Section 5.3.3
"Major Damage" Section 11.1
"Net Proceeds" Section 15.5(b)
"Occupancy Agreements" Section 5.5.1
"Occupancy Agreement Forms" Section 5.5.3
"Operational Due Diligence" Section 4.2
"Outstanding Payroll" Section 10.6
"Parent Lease" Section 2.5
"Parkland Ancillary
Medical Leases" Section 2.5
"Parkland Nursing Center
Subleases" Section 2.5
"Premises" Section 1
"Royalview GP" Preamble
"Royalview LP" Preamble
"Royalview LP
Reorganization Plan" Section 7.12
"Royalview Removal" Section 7.12(a)(i)
"Second Deposit" Section 3
"Security Deposit" Section 9.6(a)
"Security Deposit Agreement" Section 9.6(a)
"Tenant" Preamble
"Third Party Claim" Section 15.3
"Trade Payables" Section 5.4.11
"USTs" Section 5.3.7(vii)
"Warranties and Guarantees" Section 5.4.2
"Westbay" Preamble
"Westbay II" Preamble
16.2. Affiliate. The term "Affiliate" shall mean (i) any Person directly
---------
or indirectly controlling, controlled by or
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<PAGE>
under direct or indirect common control with any Associated Company (or other
specified Person), (ii) any Person who is an officer, director or a general
partner of any Associated Company or any holder of twenty-five percent (25%) or
more of a limited partnership interest of in any Associated Company (or other
specified Person), (iii) any person of which the Associated Company (or other
specified Person) shall, directly or indirectly, beneficially own at least 25%
of any class of outstanding capital stock or other evidence of beneficial
interest.
16.3. Articles of Incorporation. The term "Articles of Incorporation"
-------------------------
shall mean the certificate or articles of incorporation or organization,
statute, constitution, joint venture or articles or other charter documents of
any Person (other than an individual), each as from time to time in effect.
16.4. Regulations. The term "Regulations" shall mean all written rules,
-----------
regulations and by-laws, and all other documents (other than the Articles of
Incorporation), relating to the management, governance or internal regulation of
a Person (other than an individual) or interpretative of the Articles of
Incorporation of such Person, each as from time to time in effect.
16.5. Code. The term "Code" shall mean the federal Internal Revenue Code
----
of 1986 or any successor statute, and the rules and regulations thereunder, and
in the case of any referenced section of any such statute, rule or regulation,
any successor section thereto, collectively and as from time to time amended and
in effect.
16.6. Contaminants. The term "Contaminants" shall mean (i) any
------------
pollutant, contaminant or hazardous substance (within the meaning of such terms
under the federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, and any implementing regulations) but
excepting Infectious Wastes or (ii) any hazardous or toxic substance or material
within the meaning of any federal, state or local law applicable to the
Associated Companies or the Premises, but excepting Infectious Wastes.
16.7. ERISA. The term "ERISA" shall mean the federal Employee Retirement
-----
Income Security Act of 1974 or any successor statute, and the rules and
regulations thereunder, and in the case of any referenced section of any such
statute, rule or regulation, any successor section thereto, collectively and as
from time to time amended and in effect.
16.8. Generally Accepted Accounting Principles. The term "generally
----------------------------------------
accepted accounting principles" shall mean generally accepted accounting
principles, as defined by the Financial Accounting Standards Board and as
applied by the
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<PAGE>
Associated Company in preparing the Financial Statements and consistently
followed.
16.9. Infectious Wastes. The term "Infectious Wastes" shall have the
-----------------
meaning assigned to the term "Infectious Wastes" as such term is defined in
Chapter 3734, Section 3734.01 of the Ohio Revised Code.
16.10. Legal Requirement. The term "Legal Requirement" shall mean any
-----------------
federal, state, local or foreign law, statute, ordinance, code, order, rule,
regulation, or any order, judgment or decree of any court, arbitrator, tribunal
or governmental authority, or any license, franchise, permit or similar right
granted under any of the foregoing, or any similar provision having the force
and effect of law.
16.11. Lien. The term "Lien" shall mean (i) any encumbrance, mortgage,
----
pledge, lien, charge or other security interest of any kind upon any property or
assets of any character, or upon the income or profits therefrom; or (ii) any
arrangement or agreement which prohibits the creation of such encumbrances,
mortgages, pledges, liens, charges or other security interests or which
restricts transfer of capital stock (other than restrictions on transfer imposed
by applicable securities laws) or other property or assets.
16.12. Partnership Agreement. The term "Partnership Agreement" shall
---------------------
mean the partnership agreement of any Person which is a partnership, each as
from time to time in effect.
16.13. Pension Plan. The term "Pension Plan" shall mean each pension
------------
plan (as defined in Section 3(2) of ERISA) established or maintained in
connection with the business, or to which contributions are or were made to the
Associated Company, or by any Person which is a member of the same Controlled
Group with the Associated Company.
16.14. Person. The term "Person" shall mean any individual, partnership,
------
corporation, association, trust, joint venture, unincorporated organization, or
entity, and any government, governmental department or agency or political
subdivision thereof.
16.15. Tax. The term "tax" shall mean any federal, state, local, or
---
foreign income, gross receipts, license, payroll, employment, excise, severance,
stamp, occupation, premium, windfall profits, environmental (including taxes
under Code (S)59A), customs duties, capital stock, franchise, profits,
withholding, social security (or similar), unemployment, disability, real
property, personal property, sales, use, transfer, registration, value added,
alternative or add-on minimum, estimated, or other tax of any kind whatsoever,
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<PAGE>
including any interest, penalty, or addition thereto, whether disputed or not.
16.16. Tax Return. The term "Tax Return" shall mean any return,
----------
declaration, report, claim for refund, or information return or statement
relating to Taxes, including any schedule or attachment thereto, and including
any amendment thereof.
16.17. Welfare Plan. The term "Welfare Plan" shall mean each welfare
------------
plan (as defined in Section 3(1) of ERISA) established or maintained in
connection with the Business, or to which any contributions are or were made, by
the Associated Company, or by any Person which is a member of the same
Controlled Group with the Associated Company.
16.18. Net Worth. "Net Worth" shall mean the total assets of the party
--------- ---------
in question and its subsidiaries which would be shown as assets on a
consolidated balance sheet of the party in question and its subsidiaries as of
such time prepared in accordance with generally accepted accounting principles,
consistently applied, after deducting any amounts for intangible assets and good
will and eliminating all amounts properly attributable to minority interests, if
any, in the stock and surplus of subsidiaries, minus the total liabilities of
-----
the party in question and its subsidiaries which would be shown as liabilities
on a consolidated balance sheet of the party in question and its subsidiaries as
of such time prepared in accordance with generally accepted accounting
principles, consistently applied, plus the aggregate amount payable by the party
----
in question to its affiliates, the payment of which is subordinate to the party
in question's obligations to the party or parties who are entitled to the
protection of any net worth covenant of the party in question under this
Agreement or any document executed pursuant hereto pursuant to a subordination
agreement acceptable to the Associated Companies, or, in the case of Guarantor,
pursuant to a subordination agreement among such affiliates of Guarantor,
Guarantor, and the Associated Companies in form substantially identical to
Exhibit F attached to the Guaranty.
- ---------
16.19. Public Company. "Public Company" shall mean a company which owns
-------------- --------------
all or substantially all of the partnership interests in Guarantor or a company
which owns all or substantially all of the issued and outstanding stock of a
corporation, all or substantially all of the partnership interests in a
partnership, or all or substantially all of the membership interests in a
limited liability company which, in turn, owns all or substantially all of the
partnership interests in Guarantor, and whose initial public offering was
substantially similar to that described in Form S-1 filed on behalf of
Harborside Healthcare Corporation with the Securities and Exchange Commission on
April 2, 1996.
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<PAGE>
17. MISCELLANEOUS
17.1. Headings. Section and subsection headings are not to be considered
--------
part of this Agreement, are included solely for convenience, are not intended to
be full or accurate descriptions of the content thereof and shall not affect the
construction hereof.
17.2. Schedules; Exhibits; Contemplated Transactions. Schedules,
----------------------------------------------
exhibits, agreements and documents expressly referred to in, or having been
delivered pursuant to, this Agreement are an integral part of this Agreement.
For all purposes of this Agreement, the transactions contemplated hereby shall
be deemed to include, without limitation, all transactions contemplated by any
agreement entered into by the Associated Company and Tenant at the Closing.
17.3. Severability. The provisions of this Agreement are severable, and
------------
in the event that any provision hereof should, for any reason, be held invalid
or unenforceable in any respect, it shall not invalidate, render unenforceable
or otherwise affect any other provision hereof, and such invalid or
unenforceable provision shall be construed by limiting it so as to be valid and
enforceable to the maximum extent compatible with, and possible under,
applicable law.
17.4. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute but one and the same instrument.
17.5. Integration. This Agreement and the schedules and exhibits hereto
-----------
constitute the entire agreement among the parties and supersede all prior
agreements, whether written or oral, with respect to the subject matter hereof.
Neither this Agreement, nor the provisions hereof may be waived, modified,
amended, discharged, or terminated except by an instrument in writing signed by
the party against which the enforcement or such waiver, modification, amendment,
discharge or termination is sought, and then only to the extent set forth in
such instrument.
18. ASSIGNMENT. The rights and obligations of the Associated Companies,
Tenant and Guarantor hereunder shall not be assignable without the express
written consent of the other parties, except that Tenant shall have the right,
without the Associated Companies' consent, to assign its interests herein to an
Affiliate of Tenant or Guarantor as defined in Subsection 16.2(i); provided,
however, that if any such entity shall default in its performance hereunder,
Tenant and Guarantor shall continue to be obligated for such performance.
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<PAGE>
19. NOTICES. All notices required to be given hereunder shall be given in
writing to the appropriate party or parties at the following addresses:
To the Associated
Companies: Paul Dennis
30 Pebblebrook Lane
Moreland Hills, OH 44022
and
3800 Park East
Beachwood, Ohio 44122
With a copy to: David W. Sloan, Esq.
JONES, DAY, REAVIS & POGUE
North Point
901 Lakeside Avenue
Cleveland, OH 44114
Jeffrey I. Friedman
President
Associated Estates Realty Corp.
5025 Swetland Court
Richmond Heights, Ohio 44143
To Tenant: Harborside Health I Corp.
c/o Harborside Healthcare
Harbor Plaza
470 Atlantic Avenue
Boston, MA 02210
Attn: Stephen L. Guillard, President
To Guarantor: Harborside Healthcare Limited Partnership
c/o Harborside Healthcare
Harbor Plaza
470 Atlantic Avenue
Boston, MA 02210
Attn: Stephen L. Guillard, President
With a copy to: Martin R. Leinwand, Esq.
McDermott, Will & Emery
75 State Street
Boston, MA 02109
or at such other place as such party may designate in writing to the other
party. All notices shall be deemed to have been delivered (a) upon delivery if
hand-delivered, (b) on the next business day after deposit with a recognized
overnight courier, or (c) on the date shown on the return receipt if delivered
by registered mail, return receipt requested.
20. SUCCESSORS AND ASSIGNS. All of the terms and provisions of this
Agreement shall be binding upon and shall inure to the benefit of the
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<PAGE>
parties hereto and their respective transferees, delegatees, heirs, devisees,
successors and assigns.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first set forth above.
Tenant: HARBORSIDE HEALTH I CORPORATION
By: /s/ Bruce J. Beardsley
---------------------------
Its: Vice President
Guarantor: HARBORSIDE HEALTHCARE LIMITED
PARTNERSHIP
By: KHI Corporation
Its General Partner
By: /s/ Bruce J. Beardsley
---------------------------
Its: Vice President
---------------------------
Associated Companies:
WESTBAY MANOR COMPANY
By: /s/ Paul S. Dennis
---------------------------
Its General Partner
By: /s/ Jeffrey Friedman
---------------------------
Its: Managing General Partner
-----------------------
By:
---------------------------
Its:
-----------------------
WESTBAY MANOR DEVELOPMENT II
COMPANY, L.P.
By: /s/ Paul S. Dennis
---------------------------
Its General Partner
By: /s/ Jeff Friedman
---------------------------
Its: Managing General Partner
-----------------------
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<PAGE>
ROYALVIEW MANOR DEVELOPMENT COMPANY
By: /s/ Paul S. Dennis
---------------------------
Its General Partner
By:
---------------------------
Its:
-----------------------
By:
---------------------------
Its:
-----------------------
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<PAGE>
BEACHWOOD CARE CENTER LIMITED PARTNERSHIP
By: /s/ Paul S. Dennis
---------------------------
Its General Partner
By: /s/ Jeffrey Friedman
---------------------------
Its:
By:
---------------------------
Its:
ROYALVIEW MANOR COMPANY
By: /s/ Paul S. Dennis
---------------------------
Its: General Partner
By:
---------------------------
Its:
The undersigned agree to the provisions of
Sections 7.7.2 and 7.7.3 of this Agreement:
/s/ Paul S. Dennis
___________________________________
Paul S. Dennis, individually
/s/ Jeffrey I. Friedman
___________________________________
Jeffrey I. Friedman, individually
- 54 -
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 (File
No. 333-3096) of our reports dated March 19, 1996, on our audits of the
combined financial statements of Harborside Healthcare Corporation and
Combined Affiliates and the financial statements of Bowie Center Limited
Partnership. We also consent to the reference to our firm under the caption
"Experts."
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
May 16, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 (File
No. 333-3096) of our report dated February 9, 1996, on our audits of the
combined financial statements of Sowerby Enterprises. We also consent to the
reference to our firm under the caption "Experts".
/s/ Leverone & Company
LEVERONE & COMPANY
Billerica, Massachusetts
May 16, 1996
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 (File
No. 333-3096) of our report dated March 15, 1996, on our audits of the combined
financial statements of Beachwood Care Center, Westbay Manor Company, Westbay
Manor II Development Company, Royalview Manor Company, and Royalview Manor
Development Company. We also consent to the reference to our firm under the
caption "Experts".
/s/ Howard, Wershbale & Co.
Howard, Wershbale & Co.
Cleveland, Ohio
May 16, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 MAR-31-1996
<CASH> 40,157 10,000
<SECURITIES> 0 0
<RECEIVABLES> 9,967 11,354
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 56,169 24,573
<PP&E> 30,139 30,185
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 92,632 63,378
<CURRENT-LIABILITIES> 45,434 12,178
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 4,130 5,001
<TOTAL-LIABILITY-AND-EQUITY> 92,632 63,378
<SALES> 109,425 34,931
<TOTAL-REVENUES> 109,425 34,931
<CGS> 0 0
<TOTAL-COSTS> 101,446 33,624
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 5,107 975
<INCOME-PRETAX> 1,234 205
<INCOME-TAX> 481 80
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 753 125
<EPS-PRIMARY> 0.17 0.03
<EPS-DILUTED> 0.17 0.03
</TABLE>
<PAGE>
Exhibit 99.2
CONSENT
The undersigned hereby consents to serve as a director of Harborside
Healthcare Corporation (the "Company"), if duly elected. The undersigned
further consents pursuant to Rule 438 promulgated under the Securities Act of
1933, as amended, to being named in the Registration Statement on Form S-1 of
the Company (the "Registration Statement") and to the presentation of
information concerning the undersigned in the Registration Statement in
accordance with the rules and regulations of the Securities and Exchange
Commission.
/s/ Robert T. Barnum
-----------------------
Name: Robert T. Barnum
Dated: 5/2/96
<PAGE>
EXHIBIT 99.3
CONSENT
The undersigned hereby consents to serve as a director of Harborside
Healthcare Corporation (the "Company"), if duly elected. The undersigned
further consents pursuant to Rule 438 promulgated under the Securities Act of
1933, as amended, to being named in the Registration Statement on Form S-1 of
the Company (the "Registration Statement") and to the presentation of
information concerning the undersigned in the Registration Statement in
accordance with the rules and regulations of the Securities and Exchange
Commission.
/s/ Robert M. Bretholtz
-------------------------
Name: Robert M. Bretholtz
Dated: 4/20/96
<PAGE>
EXHIBIT 99.4
CONSENT
The undersigned hereby consents to serve as a director of Harborside
Healthcare Corporation (the "Company"), if duly elected. The undersigned
further consents pursuant to Rule 438 promulgated under the Securities Act of
1933, as amended, to being named in the Registration Statement on Form S-1 of
the Company (the "Registration Statement") and to the presentation of
information concerning the undersigned in the Registration Statement in
accordance with the rules and regulations of the Securities and Exchange
Commission.
/s/ Sally W. Crawford
-----------------------
Name: Sally W. Crawford
Dated: 2 May 1996
