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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No fee required effective October 7, 1996]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
For the transition period from to
COMMISSION FILE NUMBER 001-12621
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GRANCARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4336136
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
ONE RAVINIA DRIVE, SUITE 1500
ATLANTA, GEORGIA 30346
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (770) 393-0199
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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COMMON STOCK, PAR VALUE $0.001 PER NEW YORK STOCK EXCHANGE
SHARE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes No X
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of March 31, 1997, there were 23,804,988 shares of the registrant's
Common Stock outstanding. The aggregate market value of the voting stock held
by nonaffiliates of the registrant on March 31, 1997 was $181,426,278.
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PART I
For financial reporting purposes, the reporting entity is the successor to
GranCare, Inc., a California corporation (the "Predecessor"). Effective
February 12, 1997, Vitalink Pharmacy Services, Inc. ("Vitalink") acquired the
Predecessor's institutional pharmacy business ("TeamCare" or the
"Institutional Pharmacy Business") through the merger (the "Merger") of the
Predecessor with and into Vitalink. Immediately prior to the Merger, all of
the Predecessor's non-institutional pharmacy businesses, including its skilled
nursing, home health care, assisted living and contract management businesses
and related assets (collectively, the "Skilled Nursing Business"), were
transferred to GranCare, Inc., a Delaware corporation (the "Successor") (then
a wholly owned subsidiary of the Predecessor) and all of the then outstanding
stock of the Successor was distributed (the "Distribution") to the
shareholders of the Predecessor. While the Successor is not the successor to
the Predecessor for Securities and Exchange Commission reporting purposes, it
is the successor to the Predecessor for financial reporting purposes.
Accordingly, unless the context otherwise requires, "GranCare" and the
"Company" refer to GranCare, Inc., a California corporation, and its
subsidiaries for periods on or prior to February 12, 1997 and to GranCare,
Inc., a Delaware corporation, and its subsidiaries for periods subsequent to
February 12, 1997.
ITEM 1. BUSINESS.
GENERAL
In February 1997, the Predecessor engaged in a series of transactions, the
practical effect of which was to transfer on a tax-advantaged basis the
Predecessor's Institutional Pharmacy Business to Vitalink in exchange for
shares of Vitalink common stock (the "Shares") and the assumption of certain
of the Predecessor's indebtedness by Vitalink and distribute the share portion
of the consideration for such transfer to the Predecessor's shareholders. To
achieve this result, the Predecessor engaged in an internal restructuring
whereby its non-Institutional Pharmacy Business operations were transferred to
the Successor, a newly formed subsidiary of the Predecessor, and the shares of
the Successor were distributed to the Predecessor's shareholders on a one-for-
one basis (the "Distribution"). The Institutional Pharmacy Business was then
acquired by Vitalink through a merger of the Predecessor with and into a
wholly-owned subsidiary of Vitalink (the "Merger," and collectively with the
Distribution, the "Transactions"). As consideration for the Merger, Vitalink
distributed 0.478 shares of Vitalink common stock to the Predecessor's
shareholders for each share of common stock of the Predecessor and assumed a
portion of the Predecessor's consolidated indebtedness.
The Company is a leading provider of comprehensive post-acute health care
services, primarily skilled nursing care, subacute and medically complex care,
long-term acute hospital care, inpatient/outpatient therapy, hospital contract
management, assisted living, hospice, home health care and adult day care. The
Company provides these services through 126 long-term care facilities (122
skilled nursing facilities and four assisted living facilities) in 15 states,
and 12 home health care agencies providing home health, hospice and private
duty services in four states. Through its contract management business,
GranCare also manages approximately 145 programs in acute care hospitals. In
select markets, the Company seeks to operate these businesses as an
interrelated network of services to provide a continuum of cost-effective,
post-acute care. GranCare's vision is to become the preeminent health care
provider in select markets by offering a full continuum of care to address the
needs of patients from the time of their discharge from acute care hospitals
until their recovery.
To focus on its core businesses and to capitalize on the ongoing
consolidation in the long-term care industry, GranCare completed the
Transactions, the practical effect of which was to transfer GranCare's
Institutional Pharmacy Business to Vitalink. As a result of the Transactions,
outstanding consolidated indebtedness of the Company was reduced by
approximately $85 million.
GranCare's focus on the post-acute level of health care responds to general
demographic trends and health care cost containment initiatives of third-party
payors. As the number of people over the age of 65 continues to grow
significantly faster than the overall population, and advances in medicine and
technology continue to
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increase life expectancies, GranCare anticipates that the need for long-term
care facilities and related services will continue to increase. Additionally,
the growing emphasis on cost containment measures in the health care industry
has caused third-party payors to seek lower cost alternatives to hospital-
based care. The subacute care and other post-acute services provided by
GranCare respond to cost containment initiatives of third-party payors by
providing a lower cost alternative for patients who continue to require a high
level of medical and nursing care, but whose medical condition permits
discharge from the traditional acute care hospital setting. Based on its
experience, GranCare believes the long-term care facilities that it operates
have substantially lower capital and operating costs than acute care
hospitals. GranCare believes that it is able to offer complex subacute medical
services to these patients generally at a lower cost than acute care
hospitals.
GranCare's strategies are to: (i) develop "cluster markets" comprised of a
significant concentration of skilled nursing and subacute beds and/or the
provision of diverse subacute services in selected markets, (ii) provide a
continuum of post-acute care comprised of medical and rehabilitative
treatments in a variety of alternative sites, (iii) establish relationships
with acute care hospitals and physicians to provide a basis for the provision
of higher margin services, (iv) continue to shift to a higher acuity and
higher quality mix patient population, (v) continue to grow through selective
acquisitions, (vi) expand specialty medical services, including
rehabilitation, respiratory, psychiatric, home health, hospice and adult day
care and (vii) grow through new construction of skilled nursing facilities in
select clusters.
GranCare has successfully expanded its revenue base beyond routine skilled
nursing care to include higher margin specialty medical revenue from subacute,
rehabilitation and other services provided to patients in its facilities, as
well as from home health and other services provided to patients outside its
facilities. For the year ended December 31, 1996, specialty medical services
accounted for 30% of net patient revenue compared to 23% for the year ended
December 31, 1995.
LONG-TERM CARE INDUSTRY
The demand for long-term health care is increasing because acute care
hospitals are driven by third-party payor cost containment initiatives to
discharge patients at earlier stages of recovery and because an increasing
number of patients have ailments that require extended recovery periods. This
is due not only to general demographic trends in the United States but also to
advances in medical technology. New technologies are increasing the life
expectancy of a growing number of patients who require a high degree of care
traditionally not available outside of acute care hospitals. As life
expectancies increase, the likelihood of contracting diseases or ailments
involving a protracted period of medical care and recovery increases. As a
result, individuals over the age of 65, particularly those over 85, are the
primary recipients of long-term post-acute care. Although demand is
increasing, industry data indicate that the total supply of licensed skilled
nursing beds available in the United States, currently approximately 1.7
million, is growing substantially slower than the overall population. Also,
the addition of new beds in long-term care facilities is presently restricted
by regulation in many states, most of which require entities that desire to
enter the local long-term care market to apply for and obtain Certificates of
Need ("CON") or other approvals. The application and approval process for a
CON generally involves approval by a state regulatory agency of the
construction, acquisition or closure of a long-term care facility, the
addition or reduction of beds at a facility, or the addition of services
provided by a facility. The significant construction costs and start-up
expenses in some markets may further limit the number of new beds. Market
share data reflect that the industry is fragmented, with the 30 largest
operators accounting for approximately 25% of the total beds available.
According to the U.S. Bureau of the Census, approximately 1.4% of the people
65 to 74 years of age received care in long-term care facilities in 1990. This
percentage increased to 6% for people 75-84 years of age and to 25% for those
85 years of age and over. According to the U.S. Bureau of the Census, the
number of individuals over age 75 was approximately 11 million (4.6% of the
total population in the United States) in 1993. Although there is limited
growth projected for the population of individuals over 65 years of age
between 1990 and 2000, a significant increase in the proportion of people over
age 85 is anticipated. The segment of the population over 85 years of age,
which comprises the largest percentage of residents at long-term care
facilities
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(53%), is the fastest-growing segment of the population, projected to increase
by more than 26%, from approximately 3.4 million, or 1.3% of the total
population in the United States in 1993, to more than 4.3 million, or 1.6% of
the total population in the U.S. in the year 2000.
These demographic changes, coupled with increasing cost containment
initiatives by governmental and managed care payors have changed medical
practices, resulting in an increasing proportion of complex medical care being
delivered outside the acute care hospital setting. The health care industry
has responded by developing a range of post-acute care services, including
skilled nursing care and home health therapy to provide care following a
patient's hospital-based acute care treatment. The complex medical care and
intensive nursing care provided to patients with higher acuity disorders are
categorized as subacute care. This level of care is appropriately delivered in
a skilled nursing environment where the Company believes clinical outcomes
compare favorably to those achieved in acute care settings and where the cost
structure is significantly lower. The Company believes that subacute care
provided in a skilled nursing facility is often less expensive than hospital-
based care. Skilled nursing facilities are significantly less capital
intensive and do not require the specialized equipment used in acute care
hospitals. Labor costs are also lower than in hospitals, which typically have
a higher physician-to-nursing staff ratio and significantly more
administrative personnel, including nursing staff not fully dedicated to
providing care. The Company believes that subacute care providers are able to
achieve successful outcomes at a lower cost than acute care hospitals.
Accordingly, hospital discharge planners, physicians and managed care and
insurance company case managers are referring an increasing number of patients
to long-term care facilities.
BUSINESS STRATEGY
GranCare's principal objective is to continue developing a continuum of
post-acute health care services in order to address market demands created by
ongoing changes in the health care delivery system, changes in patient
demographics and pressures to contain the cost of delivering care. In order to
take advantage of the growth of the post-acute health care market, GranCare's
strategy is to:
. Develop Cluster Markets. The Company has sought to establish a
significant presence in regional markets by establishing clusters of
skilled nursing facilities and related specialty medical businesses that
together form a continuum of care. Each cluster is developed where
relationships with key acute care hospitals and physicians provide a
strong referral base and where other favorable market characteristics
exist. GranCare evaluates the needs within each cluster and addresses
these demands by developing specialized programs in facilities most
capable of serving a particular market need. The Company's experience
indicates that local expertise coupled with a critical mass of
facilities allows the Company to negotiate more effectively with large
contract payors (including managed care organizations), achieve
operating efficiencies, and gain access to critical referral sources.
Once a cluster market is developed with one or more services, additional
services can be introduced to further expand the continuum of care. The
Company intends to expand its eight cluster markets located in Arizona,
Colorado, Northern and Southern California, Illinois, Wisconsin,
Michigan, and South Carolina. The Company also operates concentrations
of facilities in Iowa and Mississippi that form a base for the expansion
of services in these areas.
. Provide a Continuum of Care. The Company's services focus on the needs
of patients with medically complex conditions who do not require acute
care hospitalization. To serve these patients' needs fully, the Company
aims to offer a full continuum of care whereby it provides medical and
rehabilitative treatments in a variety of alternative sites. These
settings include skilled nursing and assisted living facilities,
subacute care and other specialty care units operated in conjunction
with acute care hospitals and home health. As patients progress through
stages of recovery, they may be served by different elements of the
continuum. Medical services provided include physical, occupational,
speech, respiratory and psychological therapies; pharmaceutical
treatments; and laboratory and radiology services. The primary benefit
of offering a full continuum of care is to provide patients and payor
sources with the most appropriate level of care in the most cost-
effective setting.
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. Establish Relationships. The Company has placed strategic emphasis on
establishing referral with acute care hospitals and physicians. A
substantial portion of the Company's patients are admitted upon
discharge from acute care hospitals. As part of its effort to strengthen
the relationships established with acute care hospitals, the Company's
contract management subsidiary operates subacute medical units in under-
utilized space within acute care hospitals. GranCare expects that this
contract business will strengthen its relationship with a given
hospital, while allowing the hospital or its physicians to place a
patient in a lower cost environment thus expanding GranCare's revenue
base. The Company's wholly owned subsidiary Cornerstone Health
Management Company ("Cornerstone") manages approximately 145 medical
programs in acute care hospitals. Cornerstone is a company that
specializes in implementing and managing subacute and other specialized
medical programs.
. Improve Payor Mix. By expanding its subacute and home health care
services, GranCare intends to shift its payor mix away from state-
reimbursed Medicaid programs toward a higher quality mix consisting of
Medicare, managed care and private-pay business. Generally, the
profitability of caring for private-pay and Medicare patients is higher
than that of Medicaid. Historically, the Company has been successful in
increasing the quality of its payor mix (Medicare, private, and other
pay) as a percent of total gross patient revenues from 48% in 1994 to
55% in 1995 and 62% in 1996. GranCare believes that opportunities still
exist to continue to improve the quality of the Company's current payor
mix.
. Grow through Acquisitions. The Company intends to continue to pursue a
strategy of growth through selected acquisitions in order to accelerate
the achievement of its objectives, including developing its continuum of
care in existing markets and expanding into new markets where
demographics, economic conditions, and regulatory and reimbursement
policies are considered favorable.
. Expand Specialty Medical Services. The Company seeks to expand the range
of specialty medical services offered at its facilities and increase the
utilization of specialty medical services at acquired facilities in
order to expand the continuum of care. The Company's specialty medical
services currently include providing home health care, laboratory,
radiology, subacute care, and other specialized services. The Company is
expanding subacute services by developing innovative programs with
managed care providers, acute care hospitals and physician groups, which
may include sharing the costs and benefits of providing subacute
services. The Company believes that providing a higher level of care
through the expansion of its specialty medical services should improve
its payor mix, expand its customer base and generate increased operating
margins.
. Grow through New Construction. The Company intends to grow through new
construction of skilled nursing facilities. The Company believes that
construction of new skilled nursing facilities, as well as new programs
such as long term acute care wings in its existing facilities in
selective cluster markets, can have a significant positive impact on the
Company's operations. New skilled nursing facilities generally
experience a higher occupancy rate than older facilities and receive a
greater percentage of revenue from private pay sources. In September
1996 the Company opened SouthPointe HealthCare Center, its first newly
constructed facility, in Milwaukee, Wisconsin.
SKILLED NURSING SERVICES AND SUBACUTE CARE
As of April 1, 1997, the Company operated 126 long-term care facilities,
including 122 skilled nursing and four assisted living facilities, with 15,189
licensed beds in 15 states. Revenues from skilled nursing and subacute care
(including revenue from service centers and rehabilitation services)
represented 67% of net patient revenues in 1996. All of the Company's long-
term care facilities are certified as "skilled nursing facilities" by
appropriate regulatory agencies, other than the four assisted living
facilities, which are located in states that do not require such
certification. The Company's facilities focus on the care of medically
dependent patients with multiple medical or behavioral problems requiring
continuing special care and treatment. Skilled nursing care is rendered in
such facilities 24 hours a day by registered, licensed practical or vocational
nurses and nurses' aides
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administering prescribed medical services. Patients in the facilities also
receive assistance in matters such as bathing, dressing, medication and diet.
All patients in such facilities receive routine care which includes basic
nursing care, room and board, housekeeping and laundry services and dispensing
of medication. These basic services are a platform for the delivery of more
intensive medical rehabilitative and subacute care. The Company provides
physical, occupational, speech, respiratory and psychological therapy services
in each of its long-term care facilities, a majority of which are outsourced.
Each facility operated by GranCare has a Medical Director who assesses patient
needs, coordinates care plans and, as a member of the local medical community,
is familiar with the local health care concerns. The assisted living
facilities operated by GranCare provide furnished rooms and suites designed
for individuals who are either able to live independently within a sheltered
community or who require minimal nursing attention. The ADL services
(assistance with activities of daily life) provided in the assisted living
facilities include protective oversight, food, shelter, bathing, dressing,
eating, transportation, toiletry and related services that enhance the quality
of a resident's life.
The Company has implemented certain specialty medical programs in all of its
skilled nursing facilities certified to provide care to Medicare patients
(including more extensive subacute programs) in order to provide additional
services and accelerate growth and profitability. The Company also operates 34
specialized units with 710 beds located in certain long-term care facilities,
which provide higher acuity, subacute and other care to medically complex
patients. These units presently include transitional rehabilitation programs
and specialized units for cancer, HIV and wound care patients, as well as
Alzheimer's care, subacute rehabilitation and hospice care. These specialized
units compete with acute care and rehabilitation hospitals which the Company
believes typically charge rates that are often twice the rates historically
charged by the Company for comparable services. The Company intends to expand
its capabilities in this area through collaborative efforts with acute care
specialists.
CONTRACT MANAGEMENT
Through Cornerstone, the Company manages as of April 1, 1997 approximately
145 medical programs in acute care hospitals located in 20 states (with an
additional approximately 10 contracts pending). Revenues from contract
management services represented 6% of net patient revenues in 1996.
Cornerstone develops, manages and operates specialty geriatric programs on
behalf of acute care hospitals which include subacute skilled nursing,
geriatric mental health, specialty acute hospitals and geriatric primary care
networks and other ancillary programs. In addition, Cornerstone operates four
long-term acute care hospitals through lease or management arrangements.
Cornerstone is generally responsible for managing the clinical and operational
aspects, including quality control, of the programs it administers.
Cornerstone receives a monthly management fee, typically based on the number
of beds it manages under a contract. Program design and implementation is
handled by a team of clinical, financial and reimbursement experts employed by
Cornerstone. Following implementation, Cornerstone provides a program
administrator who is supported by a centralized staff of experts, who are
employed by Cornerstone, with care being provided primarily by employees of
the hospital. The number of experts provided by Cornerstone depends on the
type of program being administered, with routine subacute skilled nursing
generally requiring only a Cornerstone program administrator who oversees the
hospitals' employees, and geriatric mental health generally requiring a
Cornerstone program administrator as well as up to seven Cornerstone experts
who administer care.
OTHER SERVICES
The Company's home health care operation was established in 1992 to provide
skilled nursing services, rehabilitation therapy and home health aides.
Revenues from other services represented 3% of net patient revenues in 1996.
This operation is comprised of home health care agencies located in
California, Indiana, Michigan and Wisconsin encompassing twelve agencies (home
health, hospice and private duty in each of the aforementioned states).
Services include intermittent visits, hourly care, infusion therapy and a
specialty program for terminally ill patients. The Company believes that it is
positioned to expand these existing home health services as well as adult day
care operations in current and additional markets.
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The Company is developing a variety of laboratory services at several
facilities, including pathology and gastrointestinal analysis. The Company
operates a wholly-owned subsidiary that provides such services in South
Carolina. It also has an equity ownership interest in an X-ray provider which
serves certain of the facilities operated by it in Michigan. Additionally,
GranCare provides a variety of therapy services to outpatients at certain of
its facilities. These services include physical, occupational, speech,
respiratory and psychological therapies.
MARKETING AND DEVELOPMENT OF PAYOR SOURCES
GranCare's marketing strategy is to establish and maintain cooperative
relationships and networks with physicians, acute care hospitals and other
health care providers, with an emphasis on specialists who treat ailments
involving long-term care and rehabilitation. These referral networks form a
strong basis for increasing occupancy levels at skilled nursing facilities
operated by the Company and for improving the payor mix of such facilities.
The Company maintains an incentive program that motivates facility
administrators to spend time in the community developing relationships in
order to increase awareness of facilities and services that are offered by the
Company. The Company utilizes promotional literature focusing on its
philosophy of care, service capabilities, quality of employees and family
assistance programs to support local marketing efforts.
Most of the facilities operated by the Company are currently operated as
part of a marketing cluster. The marketing program of each cluster is tailored
to the health care needs, referral sources and demographic and economic
characteristics of the local market in which the cluster is located. Each
facility administrator is expected to contribute to the development of a
detailed strategic plan and specific operating goals for each cluster. Local
managers of Cornerstone and home health operations are expected to participate
in the strategic planning and marketing process to coordinate the Company's
efforts across the continuum of post-acute care. Moreover, each of the
regional service centers is expected to coordinate the activities of the
clusters within the region, as well as manage key relationships with managed
care providers and promote GranCare's expertise in rehabilitation and subacute
services. GranCare's therapy providers are also expected to promote the
capabilities of its facilities within their local market area, in addition to
promoting their individual therapy services.
The Company also plans to take advantage of other opportunities for
increased profitability, including joint ventures with health care providers
such as health maintenance organizations ("HMOs"). The Company is establishing
relationships with managed care providers which it believes will increase its
subacute care business. The cluster market approach is expected to enhance
GranCare's ability to serve large providers of managed care within its
targeted markets. Typically, patients referred by managed care providers
(including HMOs and preferred provider organizations) generate higher revenues
per patient day than Medicaid patients. The Company believes that its ability
to provide subacute and specialty medical services at a lower cost than acute
care hospitals will be a competitive advantage in becoming the provider of
choice for managed care providers.
INDIANA DISPOSITION
In connection with the Company's ongoing review of its portfolio of
facilities to identify those which are underperforming or no longer fit within
the Company's strategic focus, the Company has disposed of 18 facilities
effective April 1, 1997 by entering into a Release and Settlement Agreement
with the lessor thereof pursuant to which the leases for such facilities were
assigned to a third party (the "Indiana Disposition"). These facilities, 17 of
which are located in Indiana and one in West Virginia, were obtained by the
Company as part of its acquisition of Evergreen in July 1995. These facilities
generally experienced lower occupancy rates, lower operating margins, and a
less favorable payor mix than the Company's other facilities. Costs associated
with the Indiana Disposition were included in the $18.4 million charge to
operations recognized in the third quarter of 1996. The Company continues to
evaluate certain long-term care facilities which are underperforming or do not
fit within the Company's long-term strategic plans. All or a portion of these
facilities may be divested in the future.
COMPETITION
The Company is one of the largest publicly traded nursing home companies in
the country in terms of the number of beds owned, managed or leased. The long-
term care facilities operated by GranCare compete in
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fifteen states on a local and regional basis with other long-term health care
providers. Some competing operators have greater financial resources than
GranCare and some are non-profit or charitable organizations. The Company's
management expects that significant competitive factors will include the
quality and spectrum of care and services provided, the reputation of the
medical personnel employed, the physical appearance of the facilities and, in
the case of private-pay patients, the level of charges for services. The
Company's management also believes that GranCare's facilities compete on a
local and regional basis, rather than on a national basis. As a result,
GranCare seeks to meet competition in each locality or region, as the case may
be, by improving the quality and type of services provided, by improving the
appearance of its facilities, by establishing a reputation within the local
medical communities for providing quality care, and by responding
appropriately to regional variations in demographics and preferences.
Historically, regulations such as building code requirements and CON
requirements have often deterred the construction of long-term care
facilities. There is no price competition with respect to Medicare and
Medicaid patients since revenues for services administered to such patients
are based on strictly controlled fixed rates and cost reimbursement
principles.
Cornerstone is one of the nation's premier contract providers of specialty
health care services for the elderly and is generally recognized as the only
"full service" geriatric provider within the industry. Although the Company is
not aware of any companies that compete with Cornerstone on a national basis
or which offer the same array of services provided by Cornerstone, other
contract management companies may compete with Cornerstone in some markets
along discrete product lines.
The Company's home health care operations currently operate in four states.
The competition among home health organizations is intense and is based on
quality and breadth of service and price. Competitors vary from large national
chains to regional and local agencies as well as hospital-based organizations.
REGULATION
Licensing. All of the long-term care facilities and home health agencies
operated by GranCare are required to be licensed on an annual basis by state
health care agencies and are subject to extensive federal, state, and local
regulatory and inspection requirements. License and certification standards
vary from jurisdiction to jurisdiction and undergo periodic revision. These
requirements relate to, among other things, the quality of the professional
care provided, the qualification of administrative personnel and professional
or licensed staff, the adequacy of the facility and its equipment, and
continuing compliance with laws and regulations relating to the operation of
the facilities. The failure to obtain, renew or maintain any of the required
regulatory approvals or licenses could adversely affect expansion of
GranCare's business and could prevent the location involved from offering
services to patients. The Company believes it is currently in substantial
compliance with licensing requirements; however, there can be no assurance
that GranCare will be able to maintain such licenses for its facilities or
that GranCare will not be required to expend significant funds in order to
meet such requirements.
Medicare and Medicaid. The Company derives a significant portion of its
revenues from federal and state reimbursement programs. Substantially all of
the skilled nursing facilities and home health agencies operated by GranCare
are certified to receive benefits under Medicare and under joint federal and
state funded programs administered by the various states to provide health
care assistance to low income individuals, generally known as "Medicaid."
These programs are highly regulated and subject to periodic change.
Medicare utilizes a cost-based reimbursement system for nursing facilities,
long-term acute care hospitals and home health agencies which, subject to
limits fixed for the particular geographic area, reimburse nursing facilities
and home health agencies for reasonable direct and indirect allowable costs
incurred in providing "routine services" (as defined by the program) as well
as capital costs and ancillary costs. The Company is filing Routine Cost Limit
Exception appeals for the facilities which exceed the limits and fit the
criteria as exception candidates. GranCare may benefit from exceptions to the
routine cost limits. Allowed costs include nursing, administrative and
general, dietary, housekeeping, laundry, social services, activities, central
supply, maintenance and plant operations as well as ancillary and capital
costs.
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For federal fiscal years 1994 and 1995, the Omnibus Budget Reconciliation
Act of 1993 ("OBRA '93") froze the routine cost limits for nursing facilities
and the per visit limits on reasonable costs imposed on home health agencies.
In addition, OBRA '93 imposed new restrictions on the amount of relief which
can be realized through the Routine Cost Limit Exception appeal process. For
fiscal 1996, the 1993 imposed freeze on routine cost limits expired.
Medicaid programs currently exist in all of the states in which the Company
has health care facilities. While these programs differ in certain respects
from state to state, they are all subject to requirements imposed by the
federal government, which provides approximately 50% of the funds available
under these programs. California provides reimbursement for skilled nursing
services at a flat daily rate, as determined by the responsible state agency.
In all other states in which the Company operates, payments are based upon
specific cost reimbursement formulas established by that state, which formulas
are generally based on historical costs with adjustments for inflation.
For the years ended December 31, 1994, 1995 and 1996 the Company derived
approximately 25%, 30% and 39%, respectively, of its gross patient revenues
from Medicare and approximately 52%, 45% and 38% of its gross patient revenues
from Medicaid. Both governmental and private-payor sources have instituted
cost containment measures designed to limit payments made to long-term health
care providers, and there can be no assurance that future measures will not
adversely affect reimbursements to the Company. Furthermore, government
reimbursement programs are subject to statutory and regulatory changes,
retroactive rate adjustments, administrative rulings and government funding
restrictions, all of which could materially decrease the services covered or
the rates paid to GranCare for its services. There has been, and the Company
expects that there will continue to be, a number of proposals to limit
Medicare and Medicaid reimbursement for long-term care services and other
services provided by GranCare. While they differ in significant respects, both
the Clinton Administration and Congress have proposed restrictions on the
growth of Medicare payments for skilled nursing facilities and specialty
medical programs within acute care hospitals. In addition, Congress passed a
fiscal year 1996 budget reconciliation bill that contained a provision that
would have required Medicare to pay skilled nursing facilities on a
prospective payment basis beginning in October 1997. Although this bill was
ultimately vetoed by the President, the Clinton Administration had proposed
adopting prospective payment for skilled nursing facilities in 1999. Other
legislative proposals, including one adopted by the U.S. Senate, have called
for developing a prospective payment system for specialty medical care
programs within acute care hospitals. Proposals to reduce the growth in
Medicare and Medicaid expenditures are under active consideration in the
current session of Congress. GranCare 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 GranCare. 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, particularly
with respect to the Medicaid programs, which generally provide lower
reimbursement rates than the Medicare program. In addition, there can be no
assurance that facilities operated by, and the services and supplies provided
by, the Company will meet or continue to meet the requirements for
participation in such programs.
Although federal regulations do not recognize state budget deficiencies as a
legitimate ground to curtail funding of their Medicaid cost reimbursement
programs, states have nevertheless curtailed such funding in the past. No
assurance can be given that states will not do so in the future or that the
future funding of Medicaid programs will remain at levels comparable to
present levels. Federal law currently recognizes that Medicaid and Medicare
reimbursement rates for nursing facilities must be reasonable and adequate to
meet the costs that must be incurred by efficiently operated facilities in
order to provide care and services in conformity with applicable laws,
regulations and quality and safety standards. However, legislative proposals
in Congress which have been endorsed by the National Governors' Association
would eliminate that protection. Medicare and Medicaid programs are subject to
statutory and regulatory changes, administrative rulings and interpretations,
determinations by reimbursement intermediaries, and governmental funding
restrictions, all of which may materially increase or decrease the rate of
program payments to long-term care facilities operated by GranCare. In
addition, there can be no assurance that facilities owned, leased or managed
by GranCare, now or in the future, will initially meet or continue to meet the
requirements for participation in such programs.
8
<PAGE>
GranCare believes that the facilities it operates are in substantial
compliance with the various Medicare and Medicaid regulatory requirements
currently applicable to them, including the requirements of the Omnibus Budget
Reconciliation Act of 1987 ("OBRA"). In the ordinary course of its business,
however, the Company has received notices of deficiencies for failure to
comply with various regulatory requirements. The Company reviews such notices
and takes appropriate corrective action. Historically, in most cases, the
Company and the reviewing agency have been able to agree upon the steps to be
taken to bring a facility into compliance with regulatory requirements. In
some cases or upon repeat violations, the reviewing agency may take a number
of actions against a facility. Effective October 1, 1990, OBRA increased the
enforcement powers of state and federal certification agencies. Additional
sanctions have been authorized to correct noncompliance with regulatory
requirements, including fines, temporary suspension of admission of new
patients to the facility, decertification from participation in the Medicare
or Medicaid programs and, in extreme circumstances, revocation of a facility's
license. In certain circumstances, conviction of abusive or fraudulent
behavior with respect to one facility may subject other facilities under
common control or ownership to disqualification from participation in Medicare
and Medicaid programs.
The Department of Health and Human Services ("DHS") has released new survey
and certification regulations under OBRA, which went into effect July 1, 1995.
These new regulations make significant changes in the process of surveying
skilled nursing facilities under Medicare and Medicaid federal requirements
for participation in the Medicare and Medicaid programs and impose a graduated
system of penalties to match the severity of violations of laws passed by
Congress and DHS which implement health, safety and quality standards for
residents of long-term care facilities. These new regulations also set forth a
number of alternative remedies, in addition to those set forth above, which
may be imposed by surveying agencies on facilities that do not comply with the
federal requirements (instead of, or in addition to, termination of such
facilities' participation in Medicare and Medicaid) and specify remedies for
state survey agencies that do not meet surveying requirements. These
regulations have not had a material adverse effect on the Company's
operations.
Certificate of Need. Of the states in which the Company operates skilled
nursing facilities, Georgia, Iowa, Michigan, Mississippi, North Carolina,
Ohio, South Carolina, Tennessee and Wisconsin have a CON statute. In states
that have such statutes, approval by the appropriate state health regulatory
agencies must be obtained and a CON or similar authorization issued prior to
certain changes in the management of a long-term care facility, the addition
of new beds or services or the making of certain capital expenditures. To the
extent CON approvals are required for expansion of GranCare's operations, such
expansion may be delayed or otherwise affected. Furthermore, certain states,
including Mississippi, North Carolina, Ohio, and Wisconsin have now or in the
past imposed moratoriums on the development of new nursing facility beds. Some
states require separate approval to obtain Medicare and Medicaid reimbursement
for facility costs. Some states also require approval of capital expenditures
under Section 1122 of the Social Security Act and provide Medicare and
Medicaid reimbursements of capital costs (depreciation, interest and lease
expense) for approved capital expenditures only.
Referral Restrictions. The Company is also subject to federal and state laws
which govern financial and other arrangements between health care providers.
These laws often prohibit certain direct and indirect payments or fee
splitting arrangements between health care 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. Such laws include the
anti-kickback provisions of the federal Medicare and Medicaid Patients and
Program Protection Act of 1987. These provisions prohibit, among other things,
payment, solicitation or receipt of any form of remuneration in return for the
referral of Medicare and Medicaid patients. In addition, some states restrict
certain business relationships between physicians and pharmacies, and many
states prohibit business corporations from providing, or holding themselves
out as a provider of, Medicaid care. Possible sanctions for violation of any
of these restrictions or prohibitions include loss of licensure or eligibility
to participate in reimbursement programs as well as civil and criminal
penalties. These laws vary from state to state and have seldom been
interpreted by the courts or regulatory agencies. Additionally, OBRA '93
contains provisions that expand the list of health care services subject to
existing federal referral prohibitions. This expanded referral ban became
effective on January 1, 1995.
9
<PAGE>
OBRA '93 also contains referral restrictions related to physician ownership
interests, and restricts referrals by a physician to an entity with which he
has a "compensation arrangement," which is broadly defined to include any
arrangement involving "remuneration." However, there are a number of
exceptions for certain types of compensation arrangements, including
exceptions for personal service arrangements, space and equipment leases,
employment relationships, certain prepaid health plans, isolated transactions
and certain other payment arrangements that are consistent with the fair
market value, so long as these arrangements meet certain specific criteria.
With respect to physician ownership interests, an exception exists for
ownership of investment securities that may be purchased on terms generally
available to the public and that are listed on a national exchange, including
the New York Stock Exchange, Inc. ("NYSE") or any regional exchange, provided
that the corporation issuing such investment securities has at the end of its
most recent fiscal year, or on average for its previous three fiscal years,
shareholders' equity exceeding $75.0 million. The Company's Common Stock is
traded on the NYSE and its shareholders' equity exceeds the minimum
shareholders' equity. Although it is possible that certain arrangements
between the Company and physicians may be affected by these referral
restrictions, such restrictions have not had a material adverse effect on
revenues in the past.
The Medicare program reimburses skilled nursing facility services, pharmacy
services and home health services based on reasonable costs of care, subject
to certain limitations. In determining allowable costs, the Medicare program
will not recognize as allowable the charge made for services provided to the
skilled nursing facility or home health agency by an entity that is related
through substantial ownership or substantial control, unless it qualifies for
an exception. Instead, Medicare will recognize as allowable only the
supplier's cost of (rather than its charge for) supplying the service.
Contract Management Regulation. Contract managers of geriatric mental health
centers, subacute care units, specialty acute hospitals and senior health
centers are not typically subject to direct regulation, although the Company
may be held responsible for violations of certain federal and state laws, such
as the referral restrictions described above. Further, the facilities managed
by GranCare are subject to regulation. Management contracts with these
facilities may hold GranCare accountable in certain instances to a facility
which is cited for non-compliance with regulatory requirements. Further, there
can be no assurance that the facilities managed by GranCare will not be
subject to statutory or regulatory changes which might adversely impact these
facilities and, indirectly, GranCare's contract management business.
GranCare furnishes therapy services on a contract basis to certain
providers, and the providers bill Medicare for reimbursement of the amounts
paid to GranCare for these services. The Health Care Financing Administration
("HCFA") has the authority to establish limits on the amount Medicare
reimburses for therapy services. For services other than inpatient hospital
services, these limits are equivalent to the reasonable amount that would have
been paid if provider employees had furnished the services. HCFA has exercised
this authority by publishing "salary equivalency guidelines" for physical
therapy and respiratory therapy services. HCFA does not currently have salary
equivalency guidelines for other therapy services, but Medicare auditors may
nonetheless impose disallowances if particular rates paid to these therapists
are substantially greater than the rates paid to other contract therapy
companies by other providers in the same locality. On March 28, 1997, HCFA
issued a proposed regulation that would revise the salary equivalency
guidelines for physical therapy and respiratory therapy and establish salary
equivalency guidelines for speech-language pathology and occupational therapy
services. HCFA estimates that the proposed regulation would increase the
reimbursement rates for physical therapy by 30.5 percent and for respiratory
therapy by 8.1 percent. The proposed salary equivalency rates for occupational
therapy and speech-language pathology, however, would reduce current
reimbursement rates by 42.7 percent and 28.1 percent, respectively. The
Company cannot predict whether this proposed regulation will be adopted or, if
adopted, the effect they would have on the Company.
Home Health Regulation. Home health agencies must be certified by HCFA to
receive reimbursement for services and supplies from Medicare and Medicaid. As
a condition of participation in the Medicare and Medicaid home health care
program, HCFA requires compliance with certain standards with respect to
personnel, services and supervision; the preparation of annual budgets, cost
reports, and quarterly cost and visit analyses; and the establishment of a
professional advisory group that includes at least one practicing physician,
one registered
10
<PAGE>
nurse and other representatives from related disciplines or consumer groups.
Home health agencies are surveyed for compliance with these requirements at
least once every 15 months. Failure to comply may result in termination of the
agency's Medicare and Medicaid provider agreements. In 1989, Congress directed
the DHS to develop and implement a range of intermediate, or alternative,
sanctions for home health agencies. DHS published proposed rules to implement
this authority in 1991; however, these rules have not been finalized and thus
have not taken effect. The proposed sanctions would include civil monetary
penalties, temporary management, suspension of payment for new admissions, and
other sanctions.
Health Care Reform. While neither the present administration's health care
reform proposals nor alternative health care reform proposals introduced by
certain members of Congress were adopted in 1995 or 1996, the Health Insurance
Portability and Accountability Act of 1996 (the "Accountability Act") was
passed by Congress and signed into law by President Clinton on August 21, 1996
and will generally take effect July 1, 1997. While the Accountability Act
contains provisions regarding health insurance or health plans, such as
portability and limitations on pre-existing condition exclusions, guaranteed
availability and renewability, it also contains several anti-fraud measures
that significantly change health care fraud and abuse provisions. Some of those
provisions include (i) creation of an anti-fraud and abuse trust fund and
coordination of fraud and abuse efforts by federal, state and local
authorities, (ii) extension of the criminal anti-kickback statute to all
federal health programs, (iii) expansion of and increase in the amount of civil
monetary penalties and establishment of a knowledge standard for individuals or
entities potentially subject to civil monetary penalties, and (iv) revisions to
current sanctions for fraud and abuse, including mandatory and permissive
exclusion from participation in the Medicare or Medicaid programs.
Additionally, the Accountability Act provides mechanisms for further guidance
to health care providers on health care fraud and abuse issues in the form of
additional safe harbors or modifications to existing safe harbors, fraud alerts
and the issuance of advisory opinions by DHS. The Company does not believe that
the Accountability Act will have a material adverse effect on the Company's
operations.
Health care reform remains an issue for health care providers. Many states
are currently evaluating various proposals to restructure the health care
delivery system within their jurisdictions. It is uncertain at this time what
legislation on health care reform will ultimately be implemented or whether
other changes in the administration or interpretation of governmental health
care programs will occur. GranCare anticipates that federal and state
legislatures will continue to review and assess various health care reform
proposals and alternative health care systems and payment methodologies.
GranCare is unable to predict the ultimate impact of any federal or state
restructuring of the health care system, but such changes could have a material
adverse impact on the operations, financial condition and prospects of
GranCare.
EMPLOYEE TRAINING AND DEVELOPMENT
As a policy matter, the Company believes that nursing and professional staff
retention and development is a critical factor in the success of the Company.
Accordingly, the Company's compensation program provides ongoing performance
evaluations and salary reviews. Additionally, GranCare provides financial
incentives to its employees to encourage facility staff motivation and
productivity and to reduce turnover rates. The Company believes that its wage
rates for professional nursing staff currently being used by the Company are
commensurate with market rates. GranCare also provides employee benefit
programs that the Company believes, as a package, exceed industry standards. In
the past, the Company has not experienced any significant difficulty in
attracting or retaining qualified personnel, and the Company does not
anticipate any difficulty in this regard in the future.
In addition, the Company provides for ongoing informal training and education
programs for its nursing staff, both professional and non-professional, as well
as its non-nursing staff, both professional and non-professional. With respect
to education and training programs conducted by entities other than the
Company, the Company provides tuition reimbursement to all levels of staff to
encourage continual learning in all aspects of facility operations.
Examples of training, development and education programs offered by the
Company to its management employees include the following: (i) communication
skills, (ii) supervisory skills, (iii) conflict-resolution skills, (iv)
diversity training, (v) performance management skills, and (vi) hiring skills.
11
<PAGE>
The Company has offered certification programs to its nursing assistants for
a considerable period of time. This three-week program, conducted on site at
the Company's facilities, consists of two weeks of classroom work and one week
of clinical preparation. Upon completion, graduates are generally hired into
one of the Company's facilities located near the facility where the
certification course was offered.
EMPLOYEES
As of December 31, 1996, the Company had approximately 13,800 full-time and
part-time non-pharmacy related employees, with 250 full-time non-pharmacy
related employees at its corporate and regional offices. Approximately 20% of
these employees are physicians, nurses and professional staff. In addition,
the Company has collective bargaining agreements with unions representing
employees at 21 facilities. Currently, the Company is negotiating two
collective bargaining contracts involving facilities in two states. The
Company cannot predict the effect continued union representation or
organizational activities will have on its future activities. However, the
Company has never experienced any material work stoppages and believes that
its relations with its employees and the Service Employees International Union
are good.
INSURANCE
The Company maintains, on behalf of itself and its subsidiaries, annual
Blanket Property Damage/Business Interruption insurance in the amount of
$750.0 million and annual General/Professional Liability insurance in the
amount of $100.0 million, subject to certain deductibles, exclusions and other
terms. Both of these policies are on an occurrence form. The Company also
requires that physicians practicing at its long-term care facilities carry
medical malpractice insurance to cover their individual practice. The Company
maintains a captive insurance company for the purposes of paying worker's
compensation claims as well as reinsurance contracts to minimize its insurance
exposure.
ITEM 2. PROPERTIES.
As of April 1, 1997, the Company operated 126 long-term care facilities (122
skilled nursing facilities and four assisted living facilities). The average
occupancy rate for the Company's long-term health care facilities (based on
number of operating beds) was 87.9% for the year ended December 31, 1996
(89.6% after giving effect to the Indiana Disposition). The Company owns 39 of
the long-term care facilities that it operates, including one assisted living
facility and rehabilitation center. Eighty-five other facilities (including
three assisted living facilities) are operated under long-term leases.
12
<PAGE>
The following chart shows the geographic distribution of the facilities
operated by GranCare as of April 1, 1997:
<TABLE>
<CAPTION>
STATE FACILITIES(1) BEDS PERCENTAGE OF TOTAL BEDS
- ----- ------------- ------ ------------------------
<S> <C> <C> <C>
Arizona(1)........................ 7 982 6.5%
California(1)..................... 31 3,480 22.8
Colorado.......................... 4 655 4.3
Georgia........................... 1 100 0.7
Illinois.......................... 20 2,089 13.8
Indiana........................... 3 471 3.1
Iowa.............................. 7 547 3.6
Louisiana......................... 3 240 1.6
Michigan.......................... 13 1,863 12.2
Mississippi....................... 10 1,104 7.3
North Carolina.................... 1 142 0.9
Ohio.............................. 1 100 0.7
South Carolina.................... 9 964 6.3
Tennessee......................... 2 226 1.5
Wisconsin......................... 14 2,226 14.7
--- ------ -----
Total........................... 126 15,189 100.0%
=== ====== =====
CLASSIFICATION
Owned............................. 39 4,968 32.7%
Leased............................ 85 9,932 65.4
Managed........................... 2 289 1.9
--- ------ -----
Total........................... 126 15,189 100.0%
=== ====== =====
</TABLE>
- --------
(1) Includes two assisted living facilities in the State of Arizona comprising
170 licensed beds and two assisted living facilities in the State of
California comprising 218 licensed beds.
CONTRACT MANAGEMENT AND HOME HEALTH
Subject to the exceptions set forth below, the Company's contract management
business enters into contracts with acute care hospitals for the management of
geriatric specialty programs, generally located inside such hospitals. Such
management contracts do not generally involve the lease or purchase of any
property. Cornerstone does, however, lease two properties in connection with
its operations. The two leased facilities are The Specialty Hospital of Austin
(Texas) and The Specialty Hospital of Houston (Texas), which as of the end of
fiscal 1996 had 104 beds and 45 beds, respectively, and an average occupancy
rate of 42.8% and 45.4%, respectively. Cornerstone's corporate headquarters
are located in Dallas, Texas.
The Company owns and operates home health, private duty and hospice agencies
located in California, Michigan, Wisconsin and Indiana. The agencies are
operated by subsidiaries of the Company and lease the space for their
operations; all such leases are immaterial in amount.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company has been a party to various legal proceedings
in the ordinary course of its business. In the opinion of the Company, there
are no proceedings which, individually or in the aggregate, after taking into
account the insurance coverage maintained by the Company, are reasonably
likely to have a material adverse effect on the Company's financial position
or results of operations.
On September 9, 1996, a shareholder of the Company filed a civil complaint
in the Superior Court of the State of California, County of Los Angeles:
Howard Gunty Profit Sharing v. Gene E. Burleson, Charles M. Blalack,
Antoinette Hubenette, Joel S. Kanter, Ronald G. Kenny, Robert L. Parker,
William G. Petty, Jr., Edward
13
<PAGE>
V. Regan, Gary U. Rolle and GranCare, Inc., Case No. BC156996. This complaint
alleged, generally, that the defendants breached their fiduciary duties owed
to the Company's shareholders by failing to take all reasonable steps
necessary to ensure that the Company's shareholders received maximum value for
their shares of Company common stock in connection with the Distribution and
Merger. The complaint further alleged that the directors of the Company acted
in concert as part of a scheme to deprive the putative class who owned shares
from August 29, 1996 through December 19, 1996 unfairly of its investment in
the Company and to unjustly enrich themselves. The plaintiffs sought to have
the Transactions rescinded and set aside, as well as an order requiring the
defendants to account to the plaintiff for all profits realized as a result of
such transactions. In addition, the plaintiffs sought unspecified compensatory
damages and costs, and to have the complaint certified as a class action.
On December 19, 1996, a Conditional Agreement and Stipulation of Settlement
(the "Settlement Agreement") was reached in this litigation, subject to notice
to the proposed class and a final hearing before the court, among other
conditions and considerations. On May 9, 1997, the Court certified the class
for settlement purposes only, approved the Settlement Agreement, and entered
its judgment dismissing this litigation.
The effect of the Settlement Agreement and the judgment was to extinguish
the claims contained in the action with prejudice, along with granting of a
general release from other claims, whether asserted or not, known or unknown,
as allowed by law. Pursuant to the judgment, the Settlement Agreement is
binding on all class members who were not previously excluded from the
settlement class. Plaintiff's counsel submitted an application seeking an
award of attorney's fees and expenses in an aggregate amount of $350,000, and
the Company will pay this amount which was awarded by the Court. The
Defendants vigorously denied and continue to deny all liability and
allegations of wrongdoing, and the settlement is not to be construed for any
purpose as an inference or admission of liability or wrongdoing by them.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Special Meeting of the Shareholders of the Predecessor (the "Special
Meeting") was held on February 8, 1997 in order to approve the Transactions.
At the Special Meeting, the shareholders of the Predecessor voted on the
following proposals:
1) approve the Amended and Restated Agreement and Plan of Distribution
dated as of September 3, 1996 between the Predecessor and the Successor;
2) approve the Agreement and Plan of Merger dated as of September 3, 1996
by and between the Predecessor and Vitalink;
3) approve the Successor's 1996 Stock Incentive Plan; and
4) approve the Successor's Annual Incentive Plan and Stockholder Value
Program.
The tabulation of votes with respect to the foregoing proposals are as
follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
---------- --------- -------
<S> <C> <C> <C>
Proposal 1......................................... 14,580,961 15,777 18,138
Proposal 2......................................... 14,569,257 20,732 24,887
Proposal 3......................................... 13,415,061 1,164,510 35,305
Proposal 4......................................... 13,467,313 1,085,178 62,385
</TABLE>
14
<PAGE>
PART II
ITEM 5. MARKET FOR PREDECESSOR'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS.
The Predecessor was, and the Successor is, quoted on the NYSE under the
symbol "GC." The information provided below represents the high and low sale
prices of the Predecessor's common stock as reported on the NYSE Composite
Tape for the periods indicated. The Successor did not start publicly trading
until February 13, 1997.
<TABLE>
<CAPTION>
PRICE
------------
HIGH LOW
---- ----
<S> <C> <C>
CALENDAR YEAR 1995
First quarter........................................... $18 5/8 $14 7/8
Second quarter.......................................... 17 3/8 15 1/4
Third quarter........................................... 19 1/8 15 1/2
Fourth quarter.......................................... 17 3/8 12 3/4
CALENDAR YEAR 1996
First quarter........................................... $19 1/4 $ 13
Second quarter.......................................... 19 7/8 16 5/8
Third quarter........................................... 21 5/8 16
Fourth quarter.......................................... 19 1/2 16 7/8
</TABLE>
As of March 31, 1997, there were 971 holders of record of the Company's
common stock. The Company has never paid dividends on its common stock and
does not intend to pay dividends on its common stock in the foreseeable
future. The Company intends to retain any earnings to provide funds for the
operation and expansion of the Company's business. Additionally, certain
covenants in the Company's credit facility with a syndicate of banks lead by
First Union and The Chase Manhattan Bank limit the ability of the Company and
its subsidiaries to pay dividends.
15
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AND
STATISTICAL DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(5&6):
Net revenues............... $434,638 $611,689 $717,471 $816,462 $1,003,123
Expenses:
Operating expenses
(excluding items shown
below)................... 357,189 506,542 589,245 669,512 813,446
Rent and property......... 35,998 42,446 44,291 51,206 56,895
Depreciation and
amortization............. 6,922 12,349 16,440 21,611 25,949
Interest expense and
financing charges........ 7,908 19,601 21,481 27,054 35,659
Nonrecurring costs--other
(1992 & 1996); merger and
other (1993 & 1995)(1)... 1,114 4,573 -- 11,750 18,400
Restructuring costs(2).... -- -- 8,200 -- --
-------- -------- -------- -------- ----------
Total expenses............ 409,131 585,511 679,657 781,133 950,349
-------- -------- -------- -------- ----------
Income before income taxes
and extraordinary charge.. 25,507 26,178 37,814 35,329 52,774
Income taxes............... 8,701 10,089 13,524 14,765 20,054
-------- -------- -------- -------- ----------
Income before extraordinary
charge.................... 16,806 16,089 24,290 20,564 32,720
Extraordinary charge--loss
on extinguishment of
debt(3)................... -- 1,285 -- -- --
-------- -------- -------- -------- ----------
Net income................. $ 16,806 $ 14,804 $ 24,290 $ 20,564 $ 32,720
======== ======== ======== ======== ==========
Pro forma income tax
data(4):
Income before income taxes
and extraordinary
charge................... $ 25,507 $ 26,178 n/a n/a n/a
Income taxes.............. 10,157 10,874 n/a n/a n/a
-------- --------
Income before
extraordinary charge(3).. 15,350 15,304 n/a n/a n/a
Extraordinary charge(3)... -- 1,285 n/a n/a n/a
-------- --------
Pro forma net income....... $ 15,350 $ 14,019 n/a n/a n/a
======== ========
Net income per common and
common equivalent
share(4):
Primary:
Income before
extraordinary item....... $ 0.97 $ 0.84 $ 1.07 $ 0.86 $ 1.36
Extraordinary item........ -- (.07) -- -- --
-------- -------- -------- -------- ----------
Net income................ $ 0.97 $ 0.77 $ 1.07 $ 0.86 $ 1.36
======== ======== ======== ======== ==========
Fully diluted:
Income before
extraordinary item....... $ 0.90 $ 0.80 $ 1.07 $ 0.86 $ 1.33
Extraordinary item........ -- (.07) -- -- --
-------- -------- -------- -------- ----------
Net income................ $ 0.90 $ 0.73 $ 1.07 $ 0.86 $ 1.33
======== ======== ======== ======== ==========
STATISTICAL DATA(5&6):
Average licensed beds..... 11,358 15,103 16,112 16,148 16,097
Average occupancy......... 86% 87% 88% 87% 85%
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(5&6):
Working capital........... $ 31,483 $ 59,688 $ 89,626 $123,030 $ 200,569
Total assets.............. 242,656 390,881 520,193 645,161 748,039
Long-term debt, including
current portion.......... 96,770 202,650 243,231 339,605 389,777
Shareholders' equity...... 54,230 86,971 161,417 172,599 214,300
Partners equity........... 4,988 -- -- -- --
</TABLE>
16
<PAGE>
(Footnotes from the preceding page)
- --------
(1) The $1.1 million non-recurring charge in 1992 consisted of expenses
related to a retirement agreement reached with an employee of CompuPharm
and terminated negotiations regarding the possible sale of CompuPharm.
Such expenses were incurred prior to the merger of GranCare and CompuPharm
in December 1993 (the "CompuPharm Merger"), after which CompuPharm became
a wholly owned subsidiary of GranCare. The $4.6 million merger costs in
1993 relate to the CompuPharm Merger. The $11.75 million charge in 1995
relates to the merger with Evergreen Healthcare, Inc. in July 1995 (the
"Evergreen Merger") and other one-time costs. The $18.4 million charge in
1996 relates to one-time charges for the planned disposition of assets and
leasehold improvements or closure of certain long-term care facilities and
write off of notes receivable related thereto; amounts required to present
TeamCare's separate financial statements on a stand-alone basis in
connection with the merger with Vitalink Pharmacy Services, Inc. in
February 1997 and other one-time costs.
(2) The $8.2 million restructuring charge in 1994 is related to the Company's
formal plan of restructuring announced in August 1994. See Note 13 of
Notes to the Consolidated Financial Statements for information on the 1994
restructuring.
(3) The Company's extraordinary debt extinguishment charge of $1.3 million in
1993 resulted from debt repayments associated with the CompuPharm Merger.
(4) Prior to June 30, 1993, the Evergreen predecessor entity consisted of two
partnerships and, accordingly, Evergreen was not subject to federal or
state income taxes. For informational purposes, the selected historical
consolidated financial data for the years 1992 through 1993 include a pro
forma presentation that includes a provision for income taxes as if
Evergreen had been a taxable corporation for these periods. Such pro forma
calculations were based on the income tax laws and rates in effect during
those periods, and FASB Statement No. 109. Earnings per share for 1992 and
1993 are based on pro forma net income.
(5) All acquisitions which occurred in 1992, 1993, 1994, 1995 and 1996, except
for the CompuPharm Merger and Evergreen Merger, are reflected from the
date of each acquisition in the historical operating results of the
Company and the assets and liabilities relating to these acquisitions are
included in the balance sheets of the Company since that time. See Note 4
of Notes to the Consolidated Financial Statements for a discussion of the
Evergreen Merger.
(6) All years have been restated for the December 28, 1993 merger with
CompuPharm and for the July 20, 1995 Evergreen Merger. See Notes 1 and 4
of Notes to the Consolidated Financial Statements for a description of
these combinations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
On May 8, 1997, the Company announced execution of agreements for a business
combination (the "LCA Merger") of Living Centers of America, Inc. ("LCA") with
the Company immediately following a leveraged recapitalization of LCA by
Apollo Management, L.P. ("Apollo"). The Company believes the combined company
will be the second-largest long term care provider in the country, operating
over 330 facilities with more than 38,000 beds in 21 states. In addition to
operating skilled nursing facilities, the combined company will provide
pharmaceutical and rehabilitation services, assisted living, contract
management and geriatric specialty healthcare services nationwide.
GENERAL
On February 12, 1997, the Company completed the Transactions, the practical
effect of which was to transfer on a tax advantaged basis the Company's
Institutional Pharmacy Business to Vitalink and distribute the consideration
for such transfer to the Company's shareholders. For financial reporting
purposes, the Company is the successor to GranCare, Inc., a California
corporation.
The Predecessor was incorporated in September 1987. Since inception, the
Predecessor has grown rapidly through acquisitions of long-term care
facilities and specialty medical businesses such as institutional pharmacy
17
<PAGE>
operations. During 1996 the Predecessor acquired RN Health Care Services,
Inc., a home health agency in Michigan and Jennings Visiting Nurse
Association, Inc., a home health agency in Indiana. Also in 1996, the
Predecessor acquired Emery Pharmacy, Inc., a provider of institutional
pharmacy services in upstate New York and RX Corporation, a provider of
institutional pharmacy services in Southern California.
The Company's revenues and profitability are affected by ongoing efforts of
third-party payors to contain health care costs by limiting reimbursement
rates, increasing case management review and negotiating reduced contract
pricing. Government payors, such as state-administered Medicaid programs and,
to a lesser extent, the federal Medicare program, generally provide more
restricted coverage and lower reimbursement rates than private pay sources.
For the year ended December 31, 1996, the percentage of the Company's total
gross patient revenues derived from Medicaid and Medicare programs were 38%
and 39%, respectively.
Excluding the Institutional Pharmacy Business, for the year ended December
31, 1996, the percentage of the Company's total patient revenues derived from
the Medicaid and Medicare programs were 37% and 41%, respectively.
The Company derives its revenues by providing (i) skilled nursing, (ii)
pharmacy (through January 31, 1997), therapy, subacute and other specialty
medical services and (iii) contract management of specialty medical programs
for acute care hospitals. In general, the Company generates higher revenues
and profitability from the provision of specialty medical services than from
routine skilled nursing care, and the Company believes that this trend will
continue. The Company seeks to enhance its operating margins by increasing the
proportion of its revenues derived from specialty medical services.
While the initial results of the Merger will be a decrease in the percentage
of revenue from specialty medical services received by the Company because of
the loss of the revenue from TeamCare, the Company believes that opportunities
exist to increase the percentage of its revenue derived from specialty medical
services from other sources such as specialty medical service revenue from
therapy and subacute care.
In April 1997, the Company disposed of 18 underperforming facilities that no
longer fit within the Company's strategic focus. The Company continues to
evaluate certain long-term care facilities which are underperforming or do not
fit within the Company's long-term strategic plans. All or a portion of these
facilities may be divested in the future.
RESULTS OF OPERATIONS
The following tables set forth, as a percentage of patient revenues, certain
revenue data for the periods indicated:
REVENUE COMPOSITION/PERCENTAGE OF PATIENT REVENUES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994(1)
------- ------- ---------
<S> <C> <C> <C>
Skilled nursing and subacute care:
Routine services............................... 44.4% 53.8% 57.6%
Therapy, subacute and other ancillary
services(2)................................... 26.1 19.8 18.3
------- ------- -------
70.5 73.6 75.9
------- ------- -------
Pharmacy(2)..................................... 26.1 23.5 23.8
Contract management............................. 3.4 2.9 0.3
------- ------- -------
100.0% 100.0% 100.0%
======= ======= =======
</TABLE>
18
<PAGE>
REVENUES PER PATIENT DAY DERIVED FROM SKILLED NURSING AND SUBACUTE CARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994(1)
------- ------- -------
<S> <C> <C> <C>
Routine skilled nursing............................. $ 89.67 $ 87.07 $ 79.52
Specialty medical services(3)....................... 59.84 35.65 27.69
------- ------- -------
$149.51 $122.72 $107.21
======= ======= =======
</TABLE>
- --------
(1) Excludes results of operations from August 1 through December 31, 1994 for
facilities divested or to be divested as part of the restructuring plan.
(2) Before elimination of intercompany sales.
(3) Excludes pharmacy and other specialty medical revenue from beds not
operated by the Company.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
The Company's net revenues for 1996 were $1,003.1 million compared to $816.5
million for 1995, an increase of $186.6 million, or 22.9%. Included in net
revenues and classified as investment and other revenue is the approximate
$18.4 million gain on the sale of the Company's investment in an
unconsolidated affiliate that occurred in the third quarter of 1996. On a
gross basis, $103.5 million of the increase is attributable to acquisitions
completed, which includes $22.3 million due to the acquisition of TeamCare's
contract with the State of New Jersey. Same-store growth increased, on a gross
basis, $123.0 million from increases in specialty medical services provided
and an increase in average daily rates due to an improved payor mix. Specialty
medical revenues increased, on a gross basis, $180.7 million over the same
period in 1995. This was the result of growth in the number of Medicare
residents which utilize higher margin ancillary services (physical,
respiratory, occupational and speech therapy). Included in net revenues for
1996 and 1995 were $3.1 million and $1.8 million, respectively, relating to
routine cost limit exceptions. While the Company has applied for these
exceptions, and has only recognized a portion of the estimated recovery, there
can be no assurance that the actual revenues from routine cost limit
exceptions will equal those amounts recognized by the Company in 1996 and
1995.
Excluding the Institutional Pharmacy Business, the Company's net revenues
for 1996 were $774.0 million compared to $639.8 million for 1995, an increase
of $134.2 million, or 21.0%. Of the foregoing change $89.1 million resulted
from same store growth and $45.1 million resulted from acquisitions. Specialty
medical revenues increased $110.9 million over the same period in 1995. This
was the result of growth in the number of Medicare residents which utilize
higher margin ancillary services (physical, respiratory, occupational and
speech therapy).
Operating expenses (excluding rent and property expenses) for 1996 were
$813.4 million compared to $669.5 million for 1995, an increase of $143.9
million, or 21.5%. On a gross basis, $88.2 million of the increase was
attributable to acquisitions, as well as costs associated with an increase of
specialty medical services provided. On a same-store basis, operating expenses
increased $79.1 million, on a gross basis. Specialty medical revenues generate
additional costs from the higher staffing levels required to care for the
higher acuity Medicare residents. The additional ancillary services (physical,
respiratory, occupational and speech therapy) utilized generate additional
costs in line with the growth realized in the specialty medical revenues. This
increase was partially offset by a reduction in costs from more appropriate
staffing given patient acuity levels at skilled nursing facilities and an
increased use of third-party vendors for therapy services.
Excluding the Institutional Pharmacy Business, operating expenses (excluding
rent and property expenses) for 1996 were $625.3 million compared to $519.5
million for 1995, an increase of $105.8 million, or 20.4%. Of the foregoing
increase, $67.1 million was attributable to same-store increases in expenses
and $38.7 million was attributable to acquisitions completed.
Rent and property expenses for 1996 were $56.9 million compared to $51.2
million for 1995, an increase of $5.7 million, or 11.1%. This increase was
primarily attributable to additional facilities operated and scheduled
increases in rental expense.
Excluding the Institutional Pharmacy Business, rent and property expenses
for 1996 were $51.6 million compared to $47.1 million for 1995, an increase of
$4.5 million, or 9.6%.
19
<PAGE>
Depreciation and amortization expenses for 1996 were $25.9 million compared
to $21.6 million for 1995, an increase of $4.3 million, or 19.9%. This
increase was primarily the result of depreciation and amortization expenses
attributable to businesses acquired and additions to property and equipment.
Excluding the Institutional Pharmacy Business, depreciation and amortization
expenses for 1996 were $19.7 million compared to $16.9 million for 1995, an
increase of $2.8 million, or 16.6%.
Interest expense and financing charges for 1996 were $35.7 million compared
to $27.1 million in 1995, an increase of $8.6 million, or 31.7%. This increase
was primarily due to interest on additional indebtedness incurred in
connection with acquisitions, the issuance of $100 million of Senior
Subordinated Notes in September 1995 and borrowings to fund working capital.
Excluding the Institutional Pharmacy Business, interest expenses and
financing charges for 1996 were $34.8 million compared to $26.6 million for
1995, an increase of $8.2 million, or 30.8%.
During the third quarter of 1996, the Company recorded exit and other one-
time costs of $18.4 million as a charge to operations. Approximately $10.6
million of this charge relates to management's decision to close five
facilities which are operated under long term operating leases, as these
facilities did not fit the Company's operating strategies. The $10.6 million
reflects the remaining net book value of leasehold improvements at the dates
of closure and the remaining rent due to the landlord for periods after the
dates of closure. On March 6, 1997, the Company modified its plan from closing
five Indiana facilities to terminating most of its lease obligations and
operations in Indiana involving a total of 18 facilities. This modification
did not significantly impact the exit costs previously accrued in the third
quarter of 1996. Management completed the lease terminations effective April
1, 1997. The revenues and income before taxes of these facilities and related
regional offices during 1996 were $57.1 million and $0.7 million,
respectively. Approximately $3 million of the charge relates to the write-off
of notes receivable for loans made by the Company to a sublease lessee to fund
working capital. Accounts receivable from the facility under lease serve as
collateral for the working capital loans. During the third quarter of 1996,
the loans to the lessee began to significantly exceed the collateral,
indicating that the loan would not be recoverable. Accordingly, the Company
decided to terminate the sublease arrangement and to write off the loans which
it concluded would not be recoverable. In addition, in the third quarter of
1996, the Company recorded $4.8 million of other charges which included $2.9
million of additional bad debt expense related to TeamCare. The charge for bad
debt expense was necessary to provide for the increased risk of collection
resulting from the deterioration in the financial condition of certain
customers in the third quarter of 1996. (See Note 13 to the Consolidated
Financial Statements.) These charges do not have a negative effect on short-
term cash flow. In the third quarter of 1995, the Company incurred certain
costs related to the completion of the pooling-of-interests with Evergreen on
July 20, 1995 and other one-time costs.
Income taxes for 1996 were $20.1 million compared to $14.8 million for 1995.
Excluding the Institutional Pharmacy Business, income taxes for 1996 were
$9.7 million compared to $7.8 million for 1995.
As a result of the foregoing, net income for 1996 was $32.7 million compared
to $20.6 million for 1995, an increase of $12.1 million, or 58.7%.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
The Company's net revenues for 1995 were $816.5 million compared to $717.5
million for 1994, an increase of $99.0 million, or 13.8%. $112.0 million of
the increase is attributable to acquisitions completed. Same-store growth
increased $27.8 million from increases in specialty medical services provided
and an increase in average daily rates due to an improved payor mix, but was
adversely affected by a decrease in the level of reimbursement rates
implemented in the State of Indiana in August 1994. Specialty medical revenues
increased $88.6 million over the same period in 1994. This was the result of
growth in the number of Medicare residents which utilize higher margin
ancillary services (physical, respiratory, occupational and speech therapy).
The overall increase was partially offset by a $40.8 million decrease in
revenues resulting from the divestiture of certain business units and the loss
of the pharmacy division's contract with the State of New Jersey. Included in
20
<PAGE>
net revenues for 1995 and 1994 were $1.8 million and $0.8 million,
respectively, relating to routine cost limit exceptions. While the Company has
applied for these exceptions, and has only recognized a portion of the
estimated recovery, there can be no assurance that the actual revenues from
routine cost limit exceptions will equal those amounts recognized by the
Company in 1994 and 1995.
Excluding the Institutional Pharmacy Business, the Company's net revenues for
1995 were $639.8 million compared to $559.0 million for 1994, an increase of
$80.8 million, or 14.5%. Of the foregoing change $33.4 million resulted from
same store growth and $67.1 million resulted from acquisitions. The overall
increase was partially offset by a $19.7 million decrease in revenues resulting
from the divestiture of certain business units. Specialty medical revenues
increased $64.9 million over the same period in 1994. This was the result of
growth in the number of Medicare residents which utilize higher margin
ancillary services (physical, respiratory, occupational and speech therapy).
Operating expenses (excluding rent and property expenses) for 1995 were
$669.5 million compared to $589.2 million for 1994, an increase of $80.3
million, or 13.6%. $92.6 million of the increase was attributable to
acquisitions, as well as costs associated with an increase of specialty medical
services provided, and the duplicate Evergreen overhead incurred prior to the
merger of the Company with Evergreen. On a same-store basis, operating expenses
increased $29.2 million. The increases were partially offset by reduction of
expenses of $41.5 million from facilities divested. Specialty medical revenues
generate additional costs from the higher staffing levels required to care for
the higher acuity Medicare residents. The additional ancillary services
(physical, respiratory, occupational and speech therapy) utilized generate
additional costs in line with the growth realized in the specialty medical
revenues. This increase was partially offset by a reduction in costs from more
appropriate staffing given patient acuity levels at skilled nursing facilities
and an increased use of third-party vendors for therapy services.
Excluding the Institutional Pharmacy Business, operating expenses (excluding
rent and property expenses) for 1995 were $519.5 million compared to $457.0
million for 1994, an increase of $62.5 million, or 13.7%. Of the foregoing
increase, $31.0 million was attributable to same-store increases in expenses
and $51.0 million was attributable to acquisitions completed. These increases
were partially offset by a reduction of expenses of $19.5 million from the
divestiture of certain business units.
Rent and property expenses for 1995 were $51.2 million compared to $44.3
million for 1994, an increase of $6.9 million, or 15.6%. This increase was
primarily attributable to additional facilities operated and scheduled
increases in rental expense, partially offset by the divestiture of certain
business units.
Excluding the Institutional Pharmacy Business, rent and property expenses for
1995 were $47.1 million compared to $41.5 million for 1994, an increase of $5.6
million, or 13.5%.
Depreciation and amortization expenses for 1995 were $21.6 million compared
to $16.4 million for 1994, an increase of $5.2 million, or 31.7%. This increase
was primarily the result of depreciation and amortization expenses attributable
to businesses acquired and additions to property and equipment, partially
offset by depreciation and amortization expenses related to divested business
units.
Excluding the Institutional Pharmacy Business, depreciation and amortization
expenses for 1995 were $16.9 million compared to $12.9 million for 1994, an
increase of $4.0 million, or 31.0%.
Interest expense and financing charges for 1995 were $27.1 million compared
to $21.5 million in 1994, an increase of $5.6 million, or 26.0%. This increase
was primarily due to interest on additional indebtedness incurred in connection
with acquisitions, the issuance of $100 million of Senior Subordinated Notes
and, to a lesser extent, borrowings to fund working capital.
Excluding the Institutional Pharmacy Business, interest expenses and
financing charges for 1995 were $26.6 million compared to $20.8 million for
1994, an increase of $5.8 million, or 27.9%.
21
<PAGE>
In 1995, the Company recorded a merger and other one-time costs charge of
$11.8 million. Those costs include professional fees (legal, accounting and
investment bankers) of $5.1 million, personnel costs (severance and relocation)
of $3.2 million, a directors and officers policy of $0.5 million, other
deferred acquisition costs of $1.1 million, a divestiture charge of $1.5
million for certain Evergreen facilities which do not fit the Company's
strategy and another charge of $0.4 million relating to TeamCare converting
Evergreen's pharmacy to their system. In 1994, the Company recorded a
restructuring charge of $8.2 million in connection with a restructuring plan
adopted by the Board of Directors in August 1994. See "Liquidity and Capital
Resources."
Income taxes for 1995 were $14.8 million compared to $13.5 million for 1994.
Excluding the Institutional Pharmacy Business, income taxes for 1995 were
$7.8 million compared to $5.8 million for 1994.
As a result of the foregoing, net income for 1995 was $20.6 million compared
to $24.3 million for 1994, a decrease of $3.7 million, or 15.2%.
Excluding the Institutional Pharmacy Business, net income for 1995 was $10.2
million compared to $12.8 million for 1994, a decrease of $2.6 million, or
20.3%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity at December 31, 1996 was $14.5
million in cash and cash equivalents compared to $17.7 million at December 31,
1995, a decrease of $3.2 million. On August 5, 1996, the Company sold its
entire interest in Alternative Living Services, Inc. ("ALS"), resulting in net
proceeds to the Company of approximately $24.6 million and an approximate $18.0
million gain on the sale. The decrease in cash and cash equivalents was due
primarily to an increase in accounts receivable offset by proceeds realized
from the sale of ALS and working capital borrowing. Payments received by the
Company from the Medicaid and Medicare programs are the Company's largest
source of cash from operations.
Accounts receivable at December 31, 1996 were $233.3 million compared to
$173.1 million at December 31, 1995, an increase of $60.2 million or 34.8%.
This increase was due to increases in revenues, systems conversion and
acquisitions completed. The Company's accounts receivable include receivables
from third-party reimbursement programs, primarily Medicaid and Medicare
settlements. The Company receives payment for skilled nursing services based on
rates set by individual state Medicaid programs. Although payment cycles for
these programs vary, payments generally are made within 30 to 60 days of
services provided, except in Illinois, where the Medicaid program delays
payments for 120 days. The federal Medicare program, a cost-reimbursement
system, pays interim rates, based on estimated costs of services, on a 30 to
45-day basis. Final cost settlements, based on the difference between audited
costs and interim rates, are paid following final cost report audits by
Medicare fiscal intermediaries. Because of the cost report and audit process,
final settlement may not occur until up to 24 months after services are
provided. The Company accounts for such open cost reports by taking appropriate
reserves to offset potential audit adjustments. Specialty medical services
generally increase the amount of payments received on a delayed basis.
Excluding the Institutional Pharmacy Business, accounts receivable at
December 31, 1996 were $184.4 million compared to $135.3 million at December
31, 1995, an increase of $49.1 million.
While federal regulations do not provide states with grounds to curtail
payments under their Medicaid reimbursement programs due to state budget
deficiencies or delays in enactment of new budgets, states have nevertheless
curtailed payments in such circumstances in the past. In particular, some
states have delayed the payment of significant amounts owed to health care
providers such as the Company for health care services provided under their
respective Medicaid programs.
In addition to principal and interest payments on its long-term indebtedness,
the Company has significant rent obligations relating to its leased facilities,
as well as property expenses (principally property taxes and insurance)
relating to all of its facilities. The Company's estimated principal payments,
cash interest payments, rent and property expense obligations for 1997 are
approximately $83.2 million.
22
<PAGE>
Excluding the Institutional Pharmacy Business, the Company's estimated
principal payments, cash interest payments, rent and property expense
obligations for 1997 are approximately $81.7 million.
The Company's operations require capital expenditures for renovations of
existing facilities in order to continue to meet regulatory requirements, to
upgrade facilities for the treatment of subacute patients and to accommodate
the addition of specialty medical services, and to improve the physical
appearance of its facilities for marketing purposes. Total capital
expenditures for the year ended December 31, 1996 were $32.4 million. The
Company estimates that capital expenditures for the year ending December 31,
1997, will be approximately $35.0 million.
Excluding the Institutional Pharmacy Business, total capital expenditures
for the year ended December 31, 1996 were $27.2 million.
The Company maintained a $150.0 million credit facility (the "Predecessor
Credit Facility") with a syndicate of banks for whom First Union acted as lead
bank, which was used for working capital, other general corporate purposes and
acquisitions. In order to complete the Distribution, the Company replaced the
Predecessor Credit Facility with a new credit facility in the aggregate amount
of $300.0 million, with First Union and Chase each committing to $150.0
million (the "Credit Facility"). The Credit Facility consists of two
components: a $200.0 million 5-year revolving credit facility (which includes
a $40.0 million sub-limit for the issuance of standby letters of credit) and a
$100.0 million 5-year term loan. Borrowings for working capital and general
corporate purposes may not exceed $75.0 million. The first $25.0 million of
exposure for letters of credit issued under the letter of credit sub-facility
will correspondingly reduce availability under the working capital sub-
facility. As of March 31, 1997, the Company had approximately $15.0 million,
excluding letters of credit, outstanding under the working-capital sub-
facility. The revolving credit portion of the Credit facility matures in
February 2002. The term loan portion of the Credit Facility will be amortized
in ten quarterly installments of $7.0 million each commencing in February
1999, thereafter increasing to $10.0 million per quarter. All remaining
principal and accrued, unpaid interest shall be due and payable in full in
February 2002. Interest on outstanding borrowing shall accrue, at the option
of the Company, at the base rate or at the Eurodollar rate plus, in each case,
an applicable margin. As of March 31, 1997, approximately $196.0 million was
outstanding under the Credit Facility. On April 18, 1997, the Company amended
the Credit Facility in order to provide the Company with greater flexibility
to pursue potential acquisitions.
In connection with the February 12, 1997 Distribution and Merger, the
Company completed a tender offer for its 9 3/8% Senior Subordinated Notes due
2005 (the "9 3/8% Notes"), substantially all of which were purchased in the
tender offer with funds provided by Vitalink. The remaining 9 3/8% Notes
became obligations of Vitalink in connection with the Merger. Also in
connection with the Distribution and Merger, the Company redeemed all of its
outstanding 6 1/2% Convertible Debentures due 2003 (the "Convertible
Debentures"). Accordingly, neither the 9 3/8% Notes nor the Convertible
Debentures remain obligations of the Company following the Transactions.
In April 1997, the Company agreed to pay the seller of Long Term Care
Pharmaceutical Services Corporation I and Long Term Care Pharmaceutical
Services Corporation III (collectively, "LTC") $5.4 million in settlement of a
contingent earnout provision in the purchase agreement relating to the
Company's 1994 acquisition of LTC. Pursuant to the Distribution Agreement,
Vitalink is obligated to fund $2.5 million of this payment.
The Company previously announced a pending acquisition with respect to the
purchase of 18 nursing facilities and ancillary businesses from an affiliated
group in the State of Alabama. While the Company continues to have discussions
with the sellers, the Company at this time is unsure if the acquisition will
be consummated. In the event that the acquisition is consummated, the Company
will be required to obtain additional financing.
The Company believes that its cash from operations, existing working capital
and available borrowings under its line of credit together with the proceeds
of this Offering will be sufficient to fund the fixed obligations, capital
expenditures and other obligations referred to above (other than the LCA
Merger and Alabama acquisition), as well as to repay certain indebtedness when
due. At this time the Company believes that any additional required financing
could be obtained at market rates on terms that are acceptable to the Company,
although no assurance can be given regarding the terms or availability of
additional financing in the future.
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<PAGE>
In conjunction with a 1990 acquisition, the Company borrowed $15.0 million
under a promissory note agreement with Health and Retirement Properties Trust
("HRPT"). The note is secured by mortgages on two facilities and 1,000,000
shares of HRPT common stock owned by the Company. The HRPT note had a balance
of $8.7 million, with an interest rate of 13.75% at December 31, 1994. During
1995, the Company renegotiated the note with HRPT, whereby the principal
balance of the promissory note was increased to $11.5 million, resulting in
additional proceeds to the Company. Minimum interest on the note is 11.5% per
year payable monthly in arrears. Additional interest is payable commencing on
January 1, 1996, in an amount equal to 75% of the percentage increase in the
Consumer Price Index, with certain defined limitations. Principal payments will
begin two years after the date of the note on a 30-year direct reduction basis,
with the remaining balance due December 31, 2010.
The Company has operating leases for 24 facilities, including land,
buildings, and equipment from HRPT under two Master Lease Documents. Subsequent
to December 31, 1994, the existing Master Lease Documents were amended. Under
the amended lease arrangements, minimum rent for the aggregate facilities is
the annual sum of $11,550,000, payable in equal monthly installments. In
addition, beginning January 1, 1996, the amended lease agreement provides for
additional rent to be paid monthly, in advance, based on 75% of the increase in
the Consumer Price Index multiplied by the minimum rent due, provided, however,
that the maximum rent (minimum rent plus additional rent) each January shall be
limited to a 2% increase over the total monthly rent paid in the prior
December. The operating leases for 17 facilities expire on December 28, 2010,
and there are two 10 year renewal options. The leases for seven facilities
expire in June 2006 and there are two 10 1/2 year renewal options. The Company
has subleased six of the 24 facilities to unrelated parties.
The Company is a beneficial owner of 1,000,000 shares of stock of HRPT, which
are held in trust and pledged as collateral for the obligations of two of the
Company's subsidiaries under mortgage notes and lease obligations with HRPT.
The pledge agreement strictly limits the Company's ability to sell the shares
until its obligations to HRPT are satisfied, which will not be until the year
2010. As a result, these shares cannot be sold to meet other financial
obligations. In addition, such mortgage notes and lease obligations contain
provisions that restrict, upon the occurrence of an event of default
thereunder, the ability of such subsidiaries to make dividends, loans or
advances to the Company. In accordance with FASB Statement No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," the HRPT stock is
carried at fair market value, with unrealized gains and losses reported as a
separate component of equity. The Credit Facility contains restrictions on the
ability of the Company to pay dividends to its shareholders upon the failure to
satisfy certain financial covenants.
The Company maintains a captive insurance subsidiary to provide reinsurance
for its obligations under workers' compensation and general and professional
liability plans. These obligations are funded with long-term, fixed income
investments, which are not available to satisfy other obligations of the
Company.
Capital Resources. The Company believes that its cash from operations,
existing working capital and available borrowings under the Credit Facility
will be sufficient to fund the fixed obligations, capital expenditures and
other obligations referred to above, as well as to repay any required
indebtedness when due, and further expand GranCare's business. Also in
connection with the Distribution and Merger, Vitalink assumed (as part of the
Merger) certain items of the Predecessor's consolidated indebtedness
aggregating approximately $108.0 million (which includes the Predecessor's
obligations in respect of the 9 3/8% Notes). However, in the event that the
Company continues to grow through acquisitions, the Company may need to raise
additional capital, either through borrowings, sale-leaseback financings or the
sale of debt or equity securities, to finance the acquisition price and any
additional working capital and capital expenditure requirements related to such
acquisitions. At this time, the Company believes that any additional required
financing may be obtained at market rates on terms that are acceptable to the
Company, although no assurance can be given regarding the terms that are
available of additional financing in the future.
IMPACT OF INFLATION
The health care industry is labor-intensive. Wages and other labor costs are
especially sensitive to inflation. In addition, the Company operates a majority
of its facilities pursuant to operating leases which contain
24
<PAGE>
provisions for increased rent, based upon inflation. Increases in wages and
other labor costs and rent expense as a result of inflation, without a
corresponding increase in Medicare and Medicaid reimbursement rates, could
adversely impact the Company.
Both the Medicare and Medicaid programs operate under routine cost limits or
targeted ceilings. These limits are usually adjusted on an annual basis
utilizing numerous inflation indices. Each state can operate under a different
index resulting in the adjustments to the targeted ceilings being different in
each state. The Company cannot predict the level of the expected increase each
year and each of these programs is subject to changes in regulation,
retroactive rate adjustments and government funding which could adversely
affect the amounts paid to the Company.
FORWARD LOOKING INFORMATION
This document contains certain "Forward-Looking Statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended
concerning future operations of the Company. When used in this document, the
words "anticipate," "believe," "estimate" and "'expect" and similar expressions
are generally intended to identify forward-looking statements. Forward-looking
statements, including statements regarding intent, belief or current
expectations of the Company or its management, are not guarantees of future
performance and involve risks and uncertainties. Actual results may differ
materially from those expressed in the forward-looking statements as a result
of various factors, among others, the Company's ability to successfully
integrate acquisitions, the Company's ability to manage growth, the difficulty
of controlling health care costs and the Company's ability to comply with
governmental and other regulations, laws and licenses. Specific reference is
made to the risks and uncertainties described under "Risk Factors" in the
Company's registration statement on Form S-1 (File No. 333-19091).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and the notes thereto are contained in pages F-1 through
F-30 hereto and are incorporated herein by reference. Supplementary Financial
Information is contained on page S-1 hereto and is incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
25
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The executive officers and directors of the Company, as well as their ages
as of January 1, 1997, are listed below, followed by brief accounts of their
business experience and certain other information.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Gene E. Burleson............. 56 Chairman of the Board (Resigned as President
and Chief Executive Officer effective
February 12, 1997)
M. Scott Athans.............. 50 President, Chief Executive Officer and
Director (Promoted effective February 12,
1997)
Charles M. Blalack........... 69 Director
Antoinette Hubenette, M.D. .. 48 Director
Joel S. Kanter............... 40 Director
Ronald G. Kenny.............. 41 Director
Robert L. Parker............. 62 Director
William G. Petty, Jr. ....... 51 Director
Edward V. Regan.............. 66 Director
Gary U. Rolle................ 55 Director
Evrett W. Benton............. 48 Executive Vice President, Chief
Administrative Officer, General Counsel and
Secretary
Executive Vice President and Chief Financial
Jerry A. Schneider........... 49 Officer--Treasurer
Kay L. Brown................. 43 Senior Vice President and Director of
Corporate Communications and Investor
Relations (Resigned effective June 30, 1997)
Senior Vice President, Chief Information
Dennis J. Hansen............. 49 Officer
Dennis G. Johnston........... 49 Senior Vice President, President of
Cornerstone Health Management Company
Aruna Poddatoori............. 42 Senior Vice President, Western Operations
Senior Vice President, Director of Human
Mark H. Rubenstein........... 51 Resources
Senior Vice President, Director of Risk
Richard J. Spinello.......... 50 Management
R. Jeffrey Taylor............ 47 Senior Vice President, GCI Rehab
Dennis W. Wheeler............ 45 Senior Vice President, Eastern Operations
Senior Vice President, Corporate Medical
Frank E. Scott, D.O. ........ 51 Director
Keith J. Yoder............... 44 Senior Vice President, Controller and
Treasurer (Resigned effective April 30, 1997)
Vice President, Director of Materials
Thomas J. Benes.............. 43 Management
Vice President, Director of Facility
David R. Borchers............ 45 Management
James G. Burkhart............ 32 Vice President, Operational Finance
Vice President, Assistant General Counsel
M. Henry Day, Jr. ........... 43 and Assistant Secretary
Victoria A. Eberle........... 32 Vice President, Director of Tax
Clark D. Hettinga............ 32 Vice President, Assistant Controller
(Promoted to Controller, effective May 1,
1997)
Vice President, Sales and Marketing
Sandra L. Long............... 45 (Resigned effective July 15, 1997)
Jeffrey L. Petersen.......... 42 Vice President, Business Development
Vice President, Director of Business
Michael H. Rosen............. 47 Compliance and Controls
Vice President, Collections and
Robert E. Schmidt............ 38 Reimbursement
</TABLE>
Gene E. Burleson has served as Chairman of the Board of the Company since
January 1994 and has been a member of the Board since 1989. Additionally, Mr.
Burleson served as President and Chief Executive Officer of the Company from
December 1990 to February 1997. Upon completion of the Transactions, Mr.
Burleson
26
<PAGE>
became Chief Executive Officer and a director of Vitalink. From 1974 to
September 1989, Mr. Burleson was employed by American Medical International,
Inc. ("AMI"), a provider of health care services, where from early 1988 to
March 1989 he served as President while continuing his role as Chief Operating
Officer, a position he assumed in 1986. Prior to serving as President of AMI,
Mr. Burleson was President and Chief Executive Officer of American Medical
International--European Operations for nine years. Mr. Burleson currently
serves
on the boards of directors of four other public companies: Alternative Living
Services, Inc. ("ALS"), a developer and manager of assisted living facilities;
Deckers Outdoor Corp., a footwear manufacturer; EquiMed, Inc., a medical
practice management service and outsourcing company; and Walnut Financial
Services, a provider of financial services.
Charles M. Blalack became a director of the Company in March 1989. From
March 1993 to the present, Mr. Blalack has been Chairman and Chief Executive
Officer of Blalack & Company, a member of the National Association of
Securities Dealers, Inc. ("NASD"). From September 1969 to March 1993, Mr.
Blalack was Chairman of the Board and Chief Executive Officer of Blalack-Loop,
Incorporated, a member of the NASD and a registered investment advisor. Mr.
Blalack was a director of Beverly Enterprises, Inc. ("Beverly Enterprises"),
the largest operator of long-term care facilities in the United States, from
1964 to 1975, and he currently serves on the board of directors of Advanced
Micro Devices, Inc., a publicly held company.
Antoinette Hubenette, M.D. became a director of the Company in April 1992.
Dr. Hubenette is a medical doctor who specializes in internal medicine and
geriatric care. Since 1982, Dr. Hubenette has been a partner with the Medical
Group of Beverly Hills, and recently became the President of the group. In
1968, Dr. Hubenette received her bachelor's degree from the University of
California, Berkeley, and in 1976 completed her M.D. at George Washington
University. Currently, Dr. Hubenette serves on the board of directors of
Cedars-Sinai Medical Care Foundation and is a member of several professional
organizations, including the American Medical Association.
Joel S. Kanter became a director of the Company in December 1990. Upon
completion of the Transactions in February 1997, Mr. Kanter also became a
director of Vitalink. From 1986 to the present, Mr. Kanter has been the
President of Windy City, Inc., a private investment company, and from 1988 to
February 27, 1995 he served as a consultant to Walnut Capital Corporation
("WCC"), a closely held investment management and advisory firm. From February
27, 1995 to the present, Mr. Kanter has served as the President of WCC and
Walnut Financial Services. Prior to 1986, Mr. Kanter was Managing Director of
the Investors' Washington Service, an investment advisory company specializing
in providing advice to institutional clients about the impact of federal
legislative and regulatory decisions on debt and equity markets. Mr. Kanter
serves on the board of directors of five other publicly held companies, I-Flow
Corporation (a home infusion pump manufacturer), TransGlobal Services, Inc.
(an engineering personnel temporary firm), Walnut Financial Services, Inc. (a
provider of small business financial and consulting services), Healthcare
Acquisition Corp. (a corporation involved in acquiring healthcare related
companies) and Osteoimplant Technology, Inc. (a manufacturer of shoulder and
hip implant devices), and several privately held companies.
Ronald G. Kenny became a director of the Company in July 1995 in connection
with the Company's merger with Evergreen. Mr. Kenny served as a director of
Evergreen from June 1993 up to the time of the Evergreen merger and currently
serves as Executive Vice President of Huizenga Capital Management, a privately
held investment management company, since 1990. Mr. Kenny was a director of
National Heritage, Inc. ("NHI") from October 1992 to June 1993. Mr. Kenny
serves on the board of directors of Alternative Living Services, Inc. ("ALS"),
a public corporation that owns and manages assisted living facilities.
Robert L. Parker became a director of the Company in July 1995 in connection
with the Company's merger with Evergreen. Upon completion of the Transactions
in February 1997, Mr. Parker became a director of Vitalink. Mr. Parker served
as Chairman of the Board of Directors of Omega Healthcare Investors, Inc., a
real estate investment trust ("Omega") from March 1992 to July 1995 and was a
Managing Director of Omega Capital, Ltd., a private health care investment
fund ("Omega Capital"), from 1986 to 1992. From 1972 through 1983, Mr. Parker
was a senior officer of Beverly Enterprises. At the time of his retirement in
1983, Mr. Parker
27
<PAGE>
was Executive Vice President of Beverly Enterprises. Mr. Parker is a
registered architect, licensed in California and Oklahoma. Mr. Parker
continues to serve as a director of Omega and also serves as a director of
First National Bank of Bethany, Oklahoma, a private commercial bank.
William G. Petty, Jr. became a director of the Company in July 1995 in
connection with the Company's merger with Evergreen. Since July 1, 1996, Mr.
Petty has been a principal of Beecken, Petty & Company LLC, which is the
general partner of Healthcare Equity Partners, a venture capital partnership.
Mr. Petty served as Chairman of the Board of Directors, President and Chief
Executive Officer of Evergreen from June 30, 1993 to July 1995. He served as
Chairman of the Board, Chief Executive Officer and President of NHI from
October 1992 to June 1993. From 1988 to 1992, he served as President and Chief
Executive Officer of Evergreen Healthcare Ltd., L.P. ("EHL"), an affiliate of
Evergreen, and has been a Managing Director of Omega Capital, Ltd., a private
health care investment fund since 1986. Mr. Petty has been the Chairman of the
Board of ALS since 1993. Mr. Petty also served as the Chief Executive Officer
of ALS from 1993 until February 1996.
Edward V. Regan became a director of the Company in January 1994. From 1979
to 1993, Mr. Regan served as New York State Comptroller. From 1992 to the
present, Mr. Regan has been associated with the Jerome Levy Economics
Institute, a non-partisan research center generating public policy
alternatives through the study of economics. Mr. Regan is a member of the U.S.
Competitiveness Policy Council. From 1988 to 1992, Mr. Regan was an adjunct
professor at New York University's Stern Graduate School of Business. Mr.
Regan currently serves on the board of directors of the Oppenheimer Funds,
Inc. and River Bank America, a publicly held company and Offitbank, a
professional money management firm and a publicly held company.
Gary U. Rolle became a director of the Company in February 1994. Upon
completion of the Transactions, Mr. Rolle became a director of Vitalink. From
1983 to the present, Mr. Rolle has been the Executive Vice President and Chief
Investment Officer of Transamerica Investment Services, a subsidiary of
Transamerica Corp., a financial services company. Mr. Rolle is currently the
Chairman and President of Transamerica Income Shares, director of Transamerica
Investors, Transamerica Occidental Life Insurance Company, Transamerica Life
Insurance & Annuity, Transamerica Assurance Company, Transamerica Realty
Services and Arbor Life Insurance Company and Chairman of Separate Account
Funds B & C. Mr. Rolle is also a member of the Board of Trustees of Harvey
Mudd College.
M. Scott Athans has served as President, Chief Executive Officer and a
director of the Company since February 1997. Mr. Athans joined the Company in
November 1993 as Executive Vice President and Chief Operating Officer. Prior
to joining the Company, Mr. Athans was the Chief Operating Officer of
Healthfield Inc., a home health care business with operations in Georgia,
Tennessee, Alabama, Massachusetts and Florida. From March 1990 to July 1991,
Mr. Athans served as the Chief Executive Officer of the Georgia Baptist
Medical Center. Prior to that, Mr. Athans spent six years as Senior Vice
President and Regional Director of AMI.
Evrett W. Benton joined the Company in January 1992 and shortly thereafter
became Executive Vice President, General Counsel and Secretary. Mr. Benton
became Chief Administrative Officer of the Company in February 1997. Prior to
joining the Company, he was with a national law firm, Andrews & Kurth L.L.P.,
where he began his legal career in Houston in 1975. In 1989, he moved to the
firm's Los Angeles office where he served as managing partner. His practice
specialized in business law, with an emphasis on finance, mergers and
acquisitions and general corporate law.
Jerry A. Schneider joined the Company in January 1995 as Executive Vice
President and Chief Financial Officer. Mr. Schneider served as President of
J&K Alan Company, Ltd., London, England, an investment management company,
from 1991 to 1994. From 1985 to 1991, Mr. Schneider was the Chief Financial
Officer and Legal Counsel to Eugene V. Klein, dba Del Rayo Racing Stables, a
major thoroughbred racing and breeding operation. Prior to 1985, he spent
seven years as the Vice President of Taxes and International Chief Financial
Officer of AMI.
Kay L. Brown, resigned from the Company effective June 30, 1997. Prior to
her resignation, she served as a Senior Vice President since February 1993 and
Director of Corporate Communications and Investor Relations of the Company.
From June 1992 through February 1993, Ms. Brown was Vice President, Home
Health of the Company. Prior to joining the Company in 1992, Ms. Brown served
as President and Chief Executive Officer of Visiting Nurse Associations of
America ("VNAA"), the organization representing visiting nurse associations
28
<PAGE>
throughout the United States from December 1988 to June 1992. From February
1987 to December 1988, Ms. Brown was VNAA's Vice President and Chief Operating
Officer.
Dennis J. Hansen joined the Company in February 1993 as the Director of
Reimbursement and in August 1993 became the Director of Reimbursement and
Management Information Services. Currently, Mr. Hansen serves as Senior Vice
President and Chief Information Officer. In January 1994, Mr. Hansen was
promoted to Vice President and in January 1995 he became a Senior Vice
President of the Company. Prior to joining the Company, Mr. Hansen spent ten
years as the Corporate Vice President, Director of Reimbursement Services of
AMI.
Dennis G. Johnston joined the Company as President of Cornerstone in April
1995 and became Senior Vice President of the Company in July 1995. Mr.
Johnston co-founded Cornerstone in 1990, and served as its President and Chief
Executive Officer from 1990 to 1995. From 1984 to 1989, Mr. Johnston held
various positions with the management subsidiary of Republic Health
Corporation, including that of Senior Development Officer.
Aruna Poddatoori became Senior Vice President, Western Operations, of the
Company in January 1997 after having served as Vice President, Western
Division Operations of the Company since October 1995. Ms. Poddatoori joined
the Company in 1991 when the Company acquired certain facilities from ARA
Living Centers where she served as Executive Director of Driftwood Health Care
Center in Torrence, California.
Mark H. Rubenstein became a Senior Vice President of the Company in January
1997. Prior to that, Mr. Rubenstein was employed by AMS for eleven years and
joined the Company as Vice President, Director of Human Resources in
connection with the acquisition of AMS in December 1990.
Frank E. Scott, D.O. became a Senior Vice President of the Company in
January 1997. Prior to this, he served as the Company's Executive Vice
President of Clinical Affairs and National Medical Director since 1995. Since
completing his fellowship in rheumatology and clinical immunology at Walter
Reed Army Medical Center in 1983, Dr. Scott has served as a clinical professor
at various medical universities and currently is on the teaching staff as an
Associate Professor at the College of Osteopathic Medicine of the Pacific in
Ponomo, California and at Kirksville College of Osteopathic Medicine,
Kirksville, Missouri. Since 1985, Dr. Scott has maintained a private practice
and served as President of the Southwest Arthritis Center in Phoenix, Mesa and
Chandler, Arizona.
Richard J. Spinello became a Senior Vice President in January 1996. Prior to
this, he served as Vice President and Director of Risk Management and in
various other capacities since joining the Company in 1991. Prior to joining
the Company, Mr. Spinello was Director of both Professional Liability Claims
and Loss Control at AMI.
R. Jeffrey Taylor joined the Company in February 1996 as President of GCI
Renal Care, Inc., became President of the Company's ancillary services
division in November 1996 and was appointed Senior Vice President of the
Company in January 1997. Prior to joining the Company, Mr. Taylor was Chief
Executive Officer of American Outpatient Services Corporation, a dialysis
company, from July 1995 to February 1996. From January 1992 to June 1994 he
was President of Weisman, Taylor, Simpson & Sabatino, a health care merchant
banking firm based in California. From 1982 through 1992 Mr. Taylor served in
several executive capacities with AMI including General Counsel and Executive
Vice President, Chief Administrative Officer.
Dennis W. Wheeler joined the Company in 1992 when the Company acquired
International Health Care Management, Inc., where he was Director of
Operations. Following the acquisition, he was appointed as the Company's
director of operations for Georgia and South Carolina when the Company
expanded into those markets. Mr. Wheeler was elected Senior Vice President,
Eastern Operations, of the Company in January 1997.
Keith J. Yoder resigned from the Company effective April 30, 1997. Mr. Yoder
joined the Company in July 1995 as Senior Vice President, Controller and
Treasurer. He previously served as Vice President, Chief Financial Officer of
Evergreen since January 1992, Secretary of Evergreen since June 1993 and as
Treasurer of Evergreen
29
<PAGE>
since December 1993. He served as Vice President of NHI from December 1992 to
June 1993 and as the Chief Financial Officer and Secretary of NHI from January
1993 to June 1993. Prior to joining Evergreen, Mr. Yoder served as Area
Controller for ARA from 1989 to 1992.
Thomas J. Benes joined the Company in March 1995 as Director of Materials
Management. In January 1996, Mr. Benes was promoted to Vice President. Prior
to joining the Company, Mr. Benes served in several capacities with Main Line
Health, Inc. from 1987 to 1994.
David R. Borchers joined the Company in November 1993, as Director of
Facility Management, and became Vice President in January 1995. Prior to
joining the Company, Mr. Borchers served as Vice President of Facilities
Development and Engineering for Dole Food Company since 1988.
James G. Burkhart joined the Company in May 1996 as Chief Financial Officer
of TeamCare and became Vice President in January 1997. Prior to joining the
Company, Mr. Burkhart served as Senior Vice President of Finance of Community
Care of America from 1995 to 1996. Prior to this, Mr. Burkhart served as
Executive Vice President and Chief Financial Officer of Nationwide Care from
1993 to 1995. Prior to 1993, Mr. Burkhart worked for the accounting firm of
Ernst & Young LLP for seven years.
M. Henry Day, Jr. became a Vice President of the Company in January 1996.
Prior to this, he served as Assistant General Counsel and Assistant Secretary
of the Company since September 1994. Before joining the Company, Mr. Day was
General Counsel of Life Care Centers of America, Inc., a privately-owned
Cleveland, Tennessee based long-term healthcare provider.
Victoria A. Eberle joined the Company in January 1992 as Corporate Tax
Manager and became Vice President in January 1994. Prior to joining the
Company, Ms. Eberle worked for the accounting firm of Deloitte & Touche LLP
for five years.
Clark D. Hettinga was elected Vice President in January 1996 and was
promoted to Vice President-Controller effective May 1, 1997. Previously, Mr.
Hettinga served as Director of Accounting, Assistant Controller, Director of
Financial Reporting and Corporate Reporting and SEC Compliance Supervisor for
the Company from 1992 to present. From 1989 to 1992, Mr. Hettinga was an
auditor with Ernst & Young LLP in Milwaukee, Wisconsin.
Sandra L. Long resigned from the Company effective July 15, 1997. Ms. Long
became Vice President, Sales and Marketing of the Company in October 1995
after serving as Director of Operations--Midwest Region since 1993.
Previously, Ms. Long served as the Executive Director of The Shores
Transitional Care and Rehabilitation Institute during 1992 and 1993.
Jeffrey L. Petersen became a Vice President of the Company in January 1997.
Previously, Mr. Petersen served as Director of Acquisitions and Facility
Development since 1995. In 1994, Mr. Petersen served as a consultant to the
Acquisition Department of the Company. Prior to joining the Company, Mr.
Petersen served as the General Partner of RPR Partnership 1, a real estate
partnership, and was a medical practice management consultant for 15 years.
Michael H. Rosen joined the Company in October 1991 as Controller. In
January 1994 he was promoted to Vice President of the Company. In 1995, Mr.
Rosen became Director of Business Compliance and Controls.
Robert E. Schmidt became a Vice President of the Company in January 1997.
Prior to this, he served as Vice President, Operational Finance of the
Company's facilities division since August 1995. Prior to this, he served as
Vice President--Corporate Controller for Transitional Health Services during
1995. Before joining Transitional Health Services, Mr. Schmidt served in
various capacities at MedRehab, Inc., the country's largest privately held
medical rehabilitation company, from 1990 to 1994.
30
<PAGE>
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, officers and greater than ten percent shareholders to file with the
SEC initial reports of ownership and reports of changes in ownership of Common
Stock and other equity securities of the Company. Such persons are required to
provide to the Company a copy of each such report they file with the SEC.
To the Company's knowledge, based solely on a review of the copies of such
reports provided to the Company and written representations that no other
reports were required, during 1995, all Section 16(a) filing requirements
applicable to the Company's officers, directors and greater than ten percent
shareholders were complied with, except that two reports relating to the
purchase of stock were filed late by Dennis J. Hansen and Helayne O'Keiff,
each an officer of the Company. All such transactions were later reported on
Form 3, Form 4 or Form 5 filings.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
The Company's compensation program for its non-employee directors is
identical to the compensation program maintained prior to the Transactions.
Under this program, each non-employee director receives cash and restricted
stock and option awards.
Stock Awards
The compensation plan that the Company maintains for its non-employee
directors (the "Directors Plan") provides for the automatic annual grant of
shares of common stock to each non-employee director. The number of shares of
common stock issued to each non-employee director will equal the result
obtained by dividing 12,000 by the fair market value of the shares of common
stock on the first trading day in April 1997 (the "Effective Date"). On the
third anniversary of the Effective Date of the Directors Plan and each third
anniversary thereafter, the denominator of the formula will be revised so that
it equals the fair market value of the common stock on the first trading date
in April of such year. Prior to the consummation of the Transactions, the plan
maintained by the Predecessor for the benefit of its non-employee directors
(the "Old Directors Plan") provided for the automatic annual grant to each
non-employee director of a number of shares of the Predecessor's common stock
equal to the result obtained by dividing 12,000 by $15.00 (which approximates
the fair market value of the Predecessor's common stock on the date the Old
Directors Plan was approved by the board of directors of the Predecessor).
Option Awards
Under the Directors Plan, each non-employee director also receives options
to purchase 15,000 shares of common stock upon his or her initial appointment
as a director and receives options to purchase an additional 6,000 shares of
common stock at each of the next two annual meetings of stockholders. After a
non-employee director has received options to purchase 27,000 shares of common
stock, he or she will then receive options to purchase an additional 2,000
shares of common stock at each succeeding annual meeting of stockholders. The
exercise price of all of such options will be the fair market value of the
common stock on the date of grant (or a higher price, as determined by the
Committee) and such options will vest in equal annual increments over a three
year period.
In the event of the death or disability of a non-employee director while
serving as a member of the Board of Directors, or upon the occurrence of a
"change in control" (as defined in the Directors Plan) of the Company, all
outstanding options granted under the Directors Plan vest and become
immediately exercisable. Each option expires ten years from the date of grant,
but expires earlier to the extent not vested upon the cessation of a non-
employee director's service on the Board of Directors for reasons other than
death or disability.
31
<PAGE>
Cash Awards
The non-employee directors also receive annual cash compensation of $12,000
consisting of four payments of $3,000 each for each of the four regularly
scheduled Board Meetings attended. Each non-employee director also receives
$1,000 per day for committee meetings attended on a date when a regular board
meeting or retreat is not also scheduled.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth certain summary information concerning
compensation paid or accrued by the Company on behalf of the Chief Executive
Officer and the four most highly compensated executive officers of the Company
other than the Chief Executive Officer for the fiscal years ended December 31,
1994, 1995 and 1996. The titles listed below for the named individuals are
their titles as of December 31, 1996.
COMPANY SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------- ------------
OTHER SECURITIES ALL OTHER
SALARY BONUS ANNUAL UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(1) ($) COMPENSATION ($) OPTIONS/SARS (#) ($)(2)
- --------------------------- ---- -------- -------- ---------------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Gene E. Burleson......... 1996 $430,000 $ -- $ -- 56,760(3) $ 25,234(4)
Chairman of the Board,
Chief 1995 385,000 -- -- -- 65,263
Executive Officer and
President 1994 350,000 -- 180,542(5) -- 66,933
M. Scott Athans.......... 1996 $350,000 $ -- $ -- 28,000(3) $ 16,769(6)
Executive Vice President
and 1995 330,000 -- -- -- 55,756
Chief Operating Officer 1994 300,000 -- -- -- 13,312
Evrett W. Benton......... 1996 $350,000 $ -- $ -- 28,000(3) $ 13,556(7)
Executive Vice Presi-
dent, 1995 330,000 -- --(8) -- 33,163
General Counsel and Sec-
retary 1994 300,000 -- -- -- 32,657
Jerry A. Schneider....... 1996 $275,000 $ -- $ -- 22,000(3) $ 13,073(9)
Executive Vice President
and 1995 239,583(10) -- 34,375(11) 125,000(12) 13,417
Chief Financial Officer 1994 -- -- -- -- --
Donald D. Finney(13)..... 1996 $240,000 $ -- $ -- 15,600(3) $293,989(14)
Senior Vice President
and 1995 217,405(15) -- -- 25,000(16) 1,227
President of Long Term 1994 189,035(17) 119,843(17) -- 42,004(17) 1,169(17)
Care Division
</TABLE>
- --------
(1) The Company has a deferred compensation program (the "Deferred
Compensation Program") that is applicable to compensation paid or payable
to eligible employees of the Company. Under such program the Company may
elect to match a portion of any compensation amounts deferred. Deferred
salary amounts are reported in this table under the "Salary" column and
matching amounts paid or accrued are reported in this table under the "All
Other Compensation" column.
(2) The amounts shown in this column include the Company's contributions in
respect of the Company's profit sharing plan (the "Profit Sharing Plan");
all non-union employees who have completed two years of employment with
the Company can participate in the Profit Sharing Plan. The Company makes
an annual contribution to the Profit Sharing Plan in an amount equal to 2%
of each participating employee's salary for the previous year, plus an
additional 2% of any portion of the employee's salary that exceeds one-
half of the social security wage base, subject to certain limitations.
Amounts shown also include the Company's payment in respect of the
Company's 401(k) Plan; all non-union employees who have completed one year
of employment with the Company can participate in the 401(k) Plan.
Eligible employees may contribute from 1% to 15% percent of their salary
to the 401(k) Plan, subject to certain limitations. The Company
contributes a matching amount each year to the 401(k) Plan equal to 25% of
the first 4% of each participant's contribution for that year. This column
also includes benefits to the Company's officers relating to premiums paid
by the Company with respect to the Executive Split Dollar Life Insurance
Plan and long-term disability insurance, for which only the Company's
officers are eligible and Group Life Term Insurance, which is provided to
all of the Company's employees ("Group Term Life Insurance"). The
Executive Split Dollar Life Insurance Plan became effective in fiscal year
1993 and provides that premiums are returned to the Company upon
termination of each policy.
32
<PAGE>
(3) Represents stock options granted on January 23, 1996 at an exercise price
of $14.75.
(4) Represents the Company's contribution of $1,215 to the 401(k) Plan and
$5,388 to the Profit Sharing Plan, $47 for Group Term Life Insurance and
$11,892 for long-term disability insurance. Also includes $6,692 under the
Executive Split Dollar Life Insurance Plan. The amount of benefit received
under the Executive Split Dollar Life Insurance Plan was determined by
subtracting the total premiums paid under the Plan during 1996 ($11,100)
from the increase in the cash surrender value of the Plan from December
31, 1995 to December 31, 1996 ($17,792).
(5) Represents $162,542 in relocation expense and $18,000 in car allowance.
(6) Represents the Company's contribution of $1,286 to the 401(k) Plan,
$1,823 pursuant to the Company's Deferred Compensation Program, $47 for
Group Term Life Insurance and $12,886 for long-term disability insurance.
Also includes $727 under the Executive Split Dollar Life Insurance Plan.
The amount of benefit received under the Executive Split Dollar Life
Insurance was determined by subtracting the total premiums paid under the
Plan during 1996 ($17,400) from the increase in the cash surrender value
of the Plan from December 31, 1995 to December 31, 1996 ($18,127).
(7) Represents the Company's contribution of $1,286 to the 401(k) Plan and
$5,388 to the Profit Sharing Plan, $47 for Group Term Life Insurance and
$6,845 for long-term disability insurance. Does not include any amounts
under the Executive Split Dollar Life Insurance Plan as the premiums paid
under the Plan during 1996 ($17,800) exceeded the increase in the cash
surrender value of the Plan from December 31, 1995 to December 31, 1996
($17,311).
(8) Mr. Benton received certain benefits in 1995 that are properly not
reflected in this table. For a description of these benefits, see
"Certain Relationships and Related Party Transactions."
(9) Represents the Company's contribution of $1,100 to the 401(k) Plan, $47
for Group Term Life Insurance, $8,888 for long-term disability insurance
and the Company's contribution of $3,038 to the Company's Deferred
Compensation Program. Does not include any amounts under the Executive
Split Dollar Life Insurance Plan as the premiums paid under the Plan
during 1996 ($54,400) exceeded the increase in the cash surrender value
of the Plan from December 31, 1995 to December 31, 1996 ($37,474).
(10) Mr. Schneider joined the Company in January 1995 and his salary for 1995
reflects a partial year of service.
(11) Represents $20,000 paid to Mr. Schneider in respect of relocation
expenses and $14,375 in respect of Mr. Schneider's car allowance.
(12) Represents stock options granted on January 27, 1995 at an exercise price
of $15.75 per share.
(13) Resigned effective January 1, 1997.
(14) Represents the Company's payment of premiums of $47 for Group Term Life
Insurance, $2,442 for long-term disability insurance and the Company's
contribution of $1,500 to the 401(k) Plan. Also includes $290,000 paid to
Mr. Finney in connection with the termination of his employment agreement
with Evergreen HealthCare, Inc. ("Evergreen") in July 1995. Mr. Finney
received this termination payment in 1996 upon his execution of an
employment agreement with the Company. Does not include any amounts under
the Executive Split Dollar Life Insurance Plan as the premiums paid under
the Plan during 1996 ($23,717) exceeded the increase in the cash
surrender value of the Plan from December 31, 1995 to December 31, 1996
($14,390).
(15) Mr. Finney became an employee of the Company on July 21, 1995 in
connection with the merger with Evergreen, which was treated as a pooling
of interests for financial reporting purposes. Represents $98,436
received from the Company after the merger with Evergreen and $118,969
received from Evergreen prior to such merger. The amounts shown for the
years 1993 and 1994 were paid entirely by Evergreen.
(16) Represents stock options granted on July 21, 1995 at an exercise price of
$17.25.
(17) Represents amounts and options paid by Evergreen, the acquisition of
which was treated as a pooling of interests for financial reporting
purposes.
33
<PAGE>
Employment Agreements
Messrs. Athans, Benton and Schneider all had employment agreements with the
Predecessor. All such employment agreements contain change in control
provisions that were triggered in connection with the Transactions.
Accordingly, Messrs. Athans, Benton and Schneider are each entitled to receive
three years compensation, or $1,050,000, $1,050,000 and $825,000,
respectively. Messrs. Athans, Benton and Schneider are currently evaluating
their new employment agreements with the Company which, if executed, will
waive the rights of Messrs. Athans, Benton and Schneider to these change in
control payments.
The Management Compensation Committee (the "Committee") has established
Messrs. Athans', Benton's and Schneider's salaries at $415,000, $385,000 and
$305,000 for 1997, although such amounts are not currently embodied in
employment agreements with the Company, In addition, the Committee
contemplates entering into a consulting agreement with Mr. Burleson pursuant
to which Mr. Burleson will receive $100,000 annually in order to obtain his
assistance in transitioning control of the Company to a new Chief Executive
Officer.
Mr. Finney no longer has an employment agreement with the Company. Mr.
Finney resigned effective January 1, 1997 and was paid $240,000 in connection
with such resignation (one year's compensation). In connection with such
resignation, the Company permitted Mr. Finney to retain his rights under the
shareholder value program and his options, all of which rights vested in
connection with the Transactions.
STOCK OPTIONS
The following tables provide information on options to purchase Company
Common Stock granted to the executive officers named in the Summary
Compensation Table above since December 31, 1995 and summarize the value of
Company Options held by the executive officers named in the Summary
Compensation Table as of December 31, 1996. As a result of the Transactions,
each option to purchase the common stock of the Predecessor became an option
to purchase 0.478 of a share of Vitalink common stock and an option to
purchase one share of common stock of the Successor.
AGGREGATED OPTION/SAR EXERCISES SINCE DECEMBER 31, 1995
AND VALUE OF PREDECESSOR OPTIONS AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
SHARES FISCAL YEAR-END(2) FISCAL YEAR-END($)(2)(3)
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gene E. Burleson........ 0 $ 0 158,000 136,760 $ 859,000 $547,375
Evrett W. Benton........ 0 0 190,000 88,000 1,216,250 365,000
M. Scott Athans......... 2,000 1,000 163,000 88,000 753,875 365,000
Jerry A. Schneider...... 0 0 59,895 87,105 127,277 207,098
Donald D. Finney(4)..... 0 0 59,715 31,746 358,562 58,841
</TABLE>
- --------
(1) Calculated on the basis of the fair market value of the underlying
securities at the exercise date minus the exercise price.
(2) All outstanding options become exercisable as a result of the Distribution
and Merger. See "The Distribution--Consummation of the Distribution;
Treatment of Company Stock Options."
(3) Calculated on the basis of the closing price of the underlying securities
on December 31, 1996 ($17.875 per share) minus the exercise price.
(4) Resigned effective January 1, 1997.
34
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
----------------------------------- ---------------------
NUMBER OF
SECURITIES
UNDERLYING % OF TOTAL EXERCISE
OPTIONS/SARS OPTIONS/SARS OR BASE
GRANTED GRANTED IN PRICE EXPIRATION
NAME (#)(1) FISCAL YEAR ($/SH)(1) DATE 5% ($) 10% ($)
- ---- ------------ ------------ --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Gene E. Burleson........ 56,760(2) 14.1% $14.75 1/23/06 $ 526,732 $ 1,334,427
1996
Evrett W. Benton........ 28,000(2) 7.0 14.75 1/23/06 259,840 658,280
1996
M. Scott Athans......... 28,000(2) 7.0 14.75 1/23/06 259,840 658,280
1996
Jerry A. Schneider...... 22,000(2) 5.5 14.75 1/23/06 204,160 517,220
1996
Donald D. Finney(3)..... 15,600(2) 3.9 14.75 1/23/06 144,768 366,756
1996
</TABLE>
- --------
(1) In connection with the Transactions, the exercise price of the
Predecessor's options was adjusted by allocating 38.432% of the exercise
prices set forth above to Company options and allocating 61.568% of the
exercise prices set forth above to Vitalink options. The information set
forth below reflects Predecessor options prior to the Transactions.
(2) Represents options granted January 23, 1996.
(3) Resigned effective January 1, 1997.
LONG-TERM INCENTIVE PLANS AWARDS IN LAST FISCAL YEAR
The Senior Executive Shareholder Value Program for the Predecessor's senior
level executive officers and the Shareholder Value Program for all other
executive officers and employees (collectively, the "Shareholder Value
Program") were adopted by the Board of Directors in January 1996 and approved
by the shareholders at the 1996 annual meeting. The Shareholder Value Program
provided for the payment of cash incentives based upon the performance of the
Company over a three year performance period vis-a-vis a peer group and the
S&P 500. After the performance period, the value of each unit was to be
determined by comparing the Predecessor's stock price to the stock prices of
the companies comprising the peer group and S&P 500. At the threshold level
(fiftieth percentile), each unit was worth $500. At the superior level
(ninetieth percentile), each unit was worth $3,000. The Shareholder Value
Program vested upon consummation of the Transactions.
Upon consummation of the Transactions, each of the named executive officers
received payment under the Senior Executive Shareholder Value Program at the
superior level, resulting in payments of $852,000, $420,000, $420,000,
$330,000 and $234,000 to Messrs. Burleson, Athans, Benton, Schneider and
Finney, respectively, and all other plan participants received, in the
aggregate, approximately $2.2 million.
REPORT OF THE MANAGEMENT COMPENSATION COMMITTEE
The compensation of the Company's Executive Officers is determined and
administered by the Management Compensation Committee of the Board of
Directors (the "Committee"), which is composed entirely of outside Directors.
In making its decisions, the Committee has strived to maintain the philosophy
that executive compensation should be competitive and consistent with that
provided to other executives in for-profit major health care management
companies while at the same time should be structured so as to enhance
shareholder value. The Committee believes that this philosophy serves the
goals of enabling the Company to attract and retain qualified Executives
critical to the Company's long-term success and motivating the Company's
Executives to attain the Company's performance goals and strategic objectives.
35
<PAGE>
Accordingly, the Committee, following the Transactions, determined to
implement a compensation program consisting of a base salary in line with
industry averages, annual cash incentive awards and long term incentive awards
consisting of the annual grant of stock option awards and stockholder value
units. This compensation program mirrors the compensation program of the
Predecessor. Additionally, the annual incentive awards will only be paid to
the Company's Executive Officers, senior management and key employees if the
Company attains certain levels of operating results which, in turn, will also
benefit the Company's shareholders.
BASE SALARY STRUCTURE AND SALARY ADJUSTMENTS
Externally competitive and internally equitable base salary ranges were
established for Executive Officers, senior management and other senior
professional positions (the "Base Salary Range"). Information regarding
salaries for comparable companies was obtained through a comprehensive
compensation survey, analysis and recommendation by KPMG Peat Marwick LLP
("KPMG"). The recommendation was supplemented by information from published
survey sources relating to senior professional positions. Additionally, each
position was evaluated to determine such position's level of responsibility
and potential to impact operating results.
A salary structure was then established composed of ten salary range tiers
and all senior employment positions were assigned to one of the tiers based
upon the external compensation survey data and the internal worth analysis,
discussed above. Each tier corresponds to a Base Salary Range, which has a 50%
spread from its minimum to its maximum. Midpoints are closely aligned with the
"median" levels indicated in the aforementioned industry survey conducted by
KPMG. The Committee then examined the individual contributions the various
individuals had made in the past to the success of the Company.
As a consequence of the aforementioned process, all of the Named Executive
Officers continuing their employment with the Company received upward salary
adjustments from the salaries that they received from the Predecessor.
In the case of the Chief Executive Officer ("CEO"), Mr. Athans' base salary
was raised from $350,000 to $415,000. This represented an increase from Mr.
Athans former salary when he served as Chief Operating Officer of the Company.
The Base Salary Range established for the CEO position has a minimum of
$380,000, a midpoint of $475,000, and a maximum of $570,000. The new salary
for the CEO is within the first quartile of this range. The Committee also
gave significant consideration to its assessment of the CEO's past-
contribution (while serving as COO) to the continued growth and operating
results of the Company during the fiscal year ended December 31, 1996. The
Committee determined that Mr. Athans' performance in all aspects of his job as
COO enabled the Company to further its strategic and operational goals and
that this also warranted the increase in his base salary.
ANNUAL INCENTIVES
The Annual Incentive Plan is intended to promote the attainment of financial
objectives at the corporate level and realize budgeted performance
improvements at the operating unit level, reinforce a strong pay-for-
performance relationship and provide opportunities for above average annual
incentive compensation for operating results that meet or exceed the Company's
high performance standards.
The performance measure for Annual Incentives is based upon the Company's
attaining a pre-determined level of earnings per share at the corporate level
and attaining a pre-determined level of earnings before interest, taxes,
depreciation, amortization and rent (EBITDAR) at divisional, regional and
facility levels. The Committee believes that fulfilling EPS expectations is
the most essential short-term object for those having corporate
responsibilities. It also is simple for participants, members of the Company's
Board of Directors and the investment community to understand and is a
prevalent performance measure in the healthcare management industry.
Each year the CEO recommends and the Committee reviews and determines a
target, threshold and superior EPS goal at the corporate level, which are used
to determine whether an Annual Incentive has been earned. In establishing the
pre-determined EPS goals consideration is given to business plan goals, past
performance, peer company performance and investment community expectations.
Upon the attainment by the Company of these
36
<PAGE>
performance goals, a participant will receive a stated percentage of base
salary depending upon such participant's responsibility tier level and the EPS
goal attained by the Company. The Committee also considers the individual's
performance contribution in making bonus awards. No awards were paid under the
Annual Incentive Plan at the corporate level for fiscal 1996 because the
Company did not meet its aggressive EPS objectives.
LONG-TERM INCENTIVES
The long-term component of the Company's executive compensation program
consists of an annual grant of stock options under the Company's 1996 Stock
Incentive Plan and an annual grant of stockholder value units under the
Company's Stockholder Value Program. Stock options are granted at fair market
value at the time of grant. The number of options granted is typically based
on a percentage of an Executive Officer's base salary, although the Committee
retains the ability to increase or decrease the number of options granted.
The Stockholder Value Program is designed to link long-term incentive awards
to the Company's performance. Participants in the Stockholder Value Program
are the officers and other employees of the Company nominated by the
Committee. The Stockholder Value Program is intended to reward participants
based upon the Company's relative total shareholder return ("TSR"). In order
to receive an award, the Company's TSR must be in the upper half of the
defined comparison group over a specified three-year period. The Stockholder
Value Program replaces the shareholder value program that was in effect for
the officers of the Predecessor and the terms of the Stockholder Value Program
are similar in all material respects to the terms of the Predecessor's
shareholder value program.
The Annual Incentive Plan and the Stockholder Value Program also permit
participants to convert their annual cash bonus and stockholder value unit
cash awards to restricted stock valued at 117% of the surrendered cash
compensation. If a participant makes this election, the restricted stock
received pursuant thereto will vest three years from the date such stock is
awarded. Thus, the participant must remain an employee during the three years
immediately following the date of grant. Termination before the three year
period is completed will result in forfeiture of the entire restricted stock
grant except in the event that the termination is by the Company without
cause, the result of death, total disability, retirement or a change in
control.
******
The Committee hopes this detailed report will help our shareholders better
understand the Company's Executive compensation program, the decisions and
activities of the Committee and the Company's commitment to a pay-for-
performance compensation philosophy.
This Management Compensation Committee Report shall not be deemed
incorporated by reference by any general statement incorporating by reference
this Form 10-K into any filing under the Securities Act of 1933 (the
"Securities Act") or under the Securities Exchange Act of 1934 (the "Exchange
Act"), except to the extent that the Company specifically incorporates this
information by reference, and shall not otherwise be deemed filed under such
act.
MANAGEMENT COMPENSATION COMMITTEE
Gary U. Rolle (Chairman)
Charles M. Blalack
Antoinette Hubenette, M.D.
Robert L. Parker
37
<PAGE>
STOCK PRICE PERFORMANCE GRAPH
The following graph compares the yearly percentage change of the cumulative
total shareholder return of the Predessor's common stock with the cumulative
total return of the Standard & Poor's ("S & P") 500 and the S & P Healthcare
Composite indices over the period from December 31, 1991 through December 31,
1996 and February 8, 1996. This graph assumes an initial investment of $100.
The comparisons in the graph are required by the Securities and Exchange
Commission and are not intended to forecast or be indicative of possible
future price performance of the Company's common stock.
In July 1993 the Predecessor listed its common stock on the New York Stock
Exchange ("NYSE") and on February 12, 1997 the Predecessor's common stock
ceased trading on the NYSE. Accordingly, the last date reflected on the below
graph for the Predecessor's common stock is February 12, 1997. The Company's
common stock commenced trading on the NYSE on February 13, 1997 under the
symbol "GC."
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
COMPARISON OF 62 MONTH CUMULATIVE TOTAL RETURN*
AMONG THE PREDECESSOR, S&P 500 INDEX AND THE S&P HEALTH CARE SECTOR INDEX
Measurement period Measurement PT -
(Fiscal Year Covered) 12/91 FYE 12/92 FYE 12/93 FYE 12/94 FYE 12/95 FYE 12/96 212/97** 2/97
- --------------------- ---------------- --------- --------- --------- --------- --------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PREDECESSOR $100 $169 $142 $137 $165 $203 $155
S&P 500 INDEX $100 $108 $118 $120 $114 $140 $217
S&P HEALTH CARE
SECTOR INDEX $100 $ 84 $ 77 $ 87 $137 $165 $188
</TABLE>
- ------------------
* $100 invested on 12/31/91 in stock or index -- including reinvestment of
dividends. Fiscal year ending December 31.
** Date of merger of Predecessor with and into VitaLink.
The above graph shall not be deemed incorporated by reference by any general
statement incorporating by reference this Form 10-K into any filing under the
Securities Act or under the Exchange Act, except to the extent that the
Company specifically incorporates this information by reference, and shall not
otherwise be deemed filed under such Acts.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
For the Company's fiscal year ended December 31, 1996, Messrs. Blalack,
Rolle and Parker and Dr. Hubenette were the members of the Company's
Management Compensation Committee. None of the directors of the Company had
any "interlock" relationship to report during the Company's fiscal year ended
December 31, 1996.
38
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 31, 1997, the number and
percentage of shares of Common Stock beneficially owned (as defined in Rule
13d-3 adopted under the Securities Exchange Act of 1934) by (a) all persons
known to the Company to own beneficially more than 5% of any class of voting
security of the Company, (b) each of the Company's directors and nominees for
director, (c) the Company's officers named in the Summary Compensation Table
set forth hereinabove and (d) all directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENTAGE
BENEFICIAL OWNER OWNED(1) OWNED(1)
---------------- ------------ ----------
<S> <C> <C>
Wellington Management Company
75 State Street
Boston, Massachusetts 02109.......................... 1,615,776(2) 6.8%
Gene E. Burleson
Chairman of the Board................................ 867,060(3) 3.6%
Charles M. Blalack
Director............................................. 61,014(4) *
Antoinette Hubenette, M.D.
Director............................................. 24,800(5) *
Joel S. Kanter
Director............................................. 315,010(6) 1.3%
Ronald G. Kenny
Director............................................. 55,937(7) *
Robert L. Parker
Director............................................. 219,962(8) 1.0%
William G. Petty, Jr.
Director............................................. 665,981(9) 2.8%
Edward V. Regan
Director............................................. 22,800(10) *
Gary U. Rolle
Director............................................. 172,800(11) *
M. Scott Athans
Executive Vice President and Chief Operating Offi-
cer.................................................. 255,000(12) 1.1%
Evrett W. Benton
Executive Vice President, General Counsel and Secre-
tary................................................. 292,130(13) 1.2%
Jerry A. Schneider
Executive Vice President and Chief Financial Offi-
cer.................................................. 154,500(14) *
All directors and executive officers as a group (33
persons)............................................. 3,612,544(15) 15.2%
</TABLE>
- --------
* Less than 1%.
(1) In determining the number of issued and outstanding shares of the Company
as of January 1, 1997, the Company Common Stock obtainable upon
conversion of the outstanding common stock of Evergreen and National
Heritage, Inc., a predecessor of Evergreen, have been assumed to be
shares of issued and outstanding Company Common Stock. In addition, the
number of shares of New GranCare Common Stock outstanding following the
Distribution include all Company Options, which vest upon a Change in
Control. Except as otherwise indicated, each of the persons included in
the table above has sole voting and investment power over the shares
owned except as to the rights of his or her spouse under applicable
community property laws.
39
<PAGE>
(2) Wellington Management Company ("WMC") is an investment adviser registered
with the Securities and Exchange Commission under the Investment Advisers
Act of 1940, as amended. As of January 1, 1997, WMC, in its capacity as
investment adviser, may be deemed to have beneficial ownership of
1,615,776 shares that are owned by numerous investment advisory clients,
none of which is known to have such interest with respect to more than
five percent of the class. As of January 1, 1997, WMC had voting power
and investment power as follows:
<TABLE>
<S> <C>
Sole Voting Power: 0 shares
Shared Voting
Power: 658,276 shares
Sole Investment
Power: 0 shares
Shared Investment
Power: 1,615,776 shares
</TABLE>
(3) Includes 294,760 which may be acquired within 60 days after January 1,
1997, pursuant to the exercise of stock options.
(4) Includes 24,000 shares which may be acquired within 60 days after January
1, 1997, pursuant to the exercise of stock options.
(5) Includes 24,000 shares which may be acquired within 60 days after January
1, 1997, pursuant to the exercise of stock options.
(6) Includes 24,000 shares which may be acquired within 60 days after January
1, 1997, pursuant to the exercise of stock options. Also includes 47,400
shares owned by Windy City, Inc, 200,000 shares owned by Walnut Capital
Corporation and 40,110 shares owned by the Kanter Family Foundation. Mr.
Kanter serves as President and Director of such companies. In addition,
the number includes 400 shares held by the Ricki Kanter IRA, 1,050 shares
owned by 21 Club Trust I, 150 shares owned by 21 Club Trust II and 100
shares owned by 21 Club Trust III. The beneficiaries of such trusts are
Mr. Kanter's minor children. Mr. Kanter has shared voting and investment
powers in the shares held by such corporations, such foundation and such
trusts. Mr. Kanter disclaims beneficial ownership of such shares.
(7) Includes 16,000 shares which may be acquired within 60 days after January
1, 1997, pursuant to the exercise of stock options. Also includes 4,560
shares held by trusts for the benefit of Mr. Kenny's children. Mr. Kenny
has no voting or investment power over such shares and disclaims
beneficial ownership of such shares. In addition, 387 shares are held by
the Ronald Kenny IRA over which Mr. Kenny has sole voting and investment
power.
(8) Includes 16,000 shares which may be acquired within 60 days after January
1, 1997, pursuant to the exercise of stock options. Also includes 13,438
shares of Common Stock held by the Parker Charitable Trust of 1991. Mr.
Parker has shared voting and investment power with respect to such shares
and disclaims beneficial ownership of such shares.
(9) Includes 103,740 shares which may be acquired within 60 days after
January 1, 1997, pursuant to the exercise of stock options. Also includes
415,147 shares held by a trust of which Mr. Petty is a beneficiary. Also
includes 150,894 shares owned by Mr. Petty's wife, over which Mr. Petty
has shared voting and investment power. Mr. Petty disclaims beneficial
ownership of shares. Also includes 62,430 shares held by trusts for the
benefit of Mr. Petty's children over which Mr. Petty has shared voting
and investment power. Mr. Petty disclaims beneficial ownership of such
shares.
(10) Includes 22,000 shares which may be acquired within 60 days after January
1, 1997, pursuant to the exercise of stock options.
(11) Includes 22,000 shares which may be acquired within 60 days after January
1, 1997, pursuant to the exercise of stock options. Also includes 150,000
shares of Common Stock owned by Transamerica Investment Services
("Transamerica"). Mr. Rolle is the Chief Investment Officer of
Transamerica and in such capacity, he has voting and management authority
over such shares.
(12) Includes 251,000 shares which may be acquired within 60 days after
January 1, 1997, pursuant to the exercise of stock options.
(13) Includes 278,000 shares which may be acquired within 60 days after
January 1, 1997, pursuant to the exercise of stock options.
(14) Includes 147,000 shares which may be acquired within 60 days after
January 1, 1997, pursuant to the exercise of stock options.
(15) Includes 1,912,111 shares which may be acquired within 60 days after
January 1, 1997, pursuant to the exercise of stock options.
40
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
VITALINK
In connection with the Transactions, Manor Care, Inc. ("Manor Care") (the
owner of approximately 82% of the Vitalink common stock prior to the
Transactions and the owner of approximately 45% of the Vitalink common stock
immediately after the consummation of the Transactions), Vitalink and the
Company entered into a Non-competition Agreement whereby Manor Care and the
Company agreed not to engage in the institutional pharmacy business within the
United States prior to February 12, 2000 except temporarily in connection with
future acquisitions of skilled nursing businesses that have an established
pharmacy operation imbedded in the acquired skilled nursing business.
Similarly, Vitalink agreed not to engage in the skilled nursing business.
In the event that Manor Care or the Company shall, during the term of the
Non-competition Agreement, acquire a skilled nursing business that has as a
component, a pharmacy operation, the acquiror must offer to sell such pharmacy
operation to Vitalink at a purchase price not to exceed 120% of the product of
(i) EBITDA for such pharmacy component of the acquisition and (ii) a fraction,
the numerator of which is the aggregate purchase price for the proposed
acquisition and the denominator of which is the EBITDA for the proposed
acquisition taken as a whole. If the parties do not agree on a purchase price
for such pharmacy operations, then the acquiror may complete the proposed
acquisition but must use commercially reasonable efforts to sell such pharmacy
operations within one year at a purchase price equal to or greater than the
formula purchase price referenced above. If the proposed sale to a third party
is at a price less than the price derived pursuant to the formula purchase
price described above, then Vitalink shall have a right of first refusal at
such lesser price.
In the event Vitalink acquires a skilled nursing business in conjunction
with the acquisition of a pharmacy business, Vitalink must use commercially
reasonable efforts to divest itself of such skilled nursing business within
one year.
As a result of the Transactions, the Company has pharmaceutical supply
agreements with Vitalink respecting substantially all of the Company's
facilities. The terms of such agreements are for five years and are
automatically extended for an additional year on each anniversary of the
commencement date thereof unless written notice to the contrary is given not
more than 120 days and not less than 90 days prior to any such anniversary.
The supplies and services to be provided pursuant to such agreements include
specified pharmaceutical and related goods required by each Company facility
and the residents thereof.
Depending upon the payor source, either Vitalink will bill the payor source
directly or the skilled nursing facility will bill the payor source and then
pay Vitalink. In the event that Vitalink does not service at least 90% of the
residents of a skilled nursing facility during a given month, the skilled
nursing facility will pay to Vitalink an additional $10 per month for each
resident not serviced by Vitalink; provided, however, that if Vitalink has
elected not to furnish pharmaceutical goods or related goods for any resident,
such resident will be disregarded for purposes of this calculation.
The Company cannot transfer ownership or control of a skilled nursing
facility during the term of the supply agreement relating to such facility
unless and until the proposed transferee (i) agrees to accept and comply with
the supply agreement or (ii) an agreement is reached between Vitalink and the
Company for the payment of damages by the Company to Vitalink to compensate
Vitalink for losses over the remaining term of the subject supply agreement.
So long as Vitalink's limited guaranty of certain obligations to HRPT is in
effect, the Company does not intend to terminate any of the supply agreements.
The scheduled expiration of such obligations to HRPT is December 31, 2010.
Upon any subsequent acquisition by the Company of a skilled nursing
business, the Company shall have no obligation to contract with Vitalink to
provide pharmaceutical supplies and services at such facility and the Company
will not be required to terminate any then existing agreements providing for
the provision of pharmaceutical supplies and services to such facility by an
alternative supplier.
41
<PAGE>
As of the Effective Time of the Transactions, Vitalink succeeded to all of
the Predecessor's existing pharmaceutical supply agreements with the various
facilities operated by the Company. Gene E. Burleson, Chairman of the Company,
became Chief Executive Officer of Vitalink upon consummation of the Merger.
Mr. Burleson and three other directors of the Predecessor (Messrs. Parker,
Kanter & Rolle) became directors of Vitalink upon the consummation of the
Transactions. The Company has agreed that it will not compete with Vitalink in
the institutional pharmacy business for a period of three years. The Company
has entered into a consulting agreement with Mr. Burleson in the amount of
$100,000 per year in order to induce Mr. Burleson to assist the Company during
its transition to a new chief executive officer.
OFFICER RELOCATIONS
In connection with the consolidation of the Company's headquarters in
Atlanta, Georgia, the Company assisted certain of its senior level executive
officers with their relocations to Atlanta. The assistance was in the form of
loans to and, in certain instances, the purchase of residences from, the
affected senior level executive officers.
In connection with Mr. Benton's (the Company's Executive Vice President,
Chief Administrative Officer, General Counsel and Secretary) relocation to
Atlanta from the Company's former corporate headquarters in Culver City,
California, the Company loaned Mr. Benton $100,000. Prior to the consummation
of the Transactions, this loan to Mr. Benton was forgiven. Mr. Benton will
recognize taxable income on this forgiven loan.
In connection with Kay Brown's (the Company's Senior Vice President and
Director of Corporate Communications and Investor Relations) relocation to
Atlanta from the Company's former corporate headquarters in Culver City,
California, the Company loaned Ms. Brown $75,000. Prior to the consummation of
the Transactions, this loan to Ms. Brown was forgiven. Ms. Brown will
recognize taxable income on this forgiven loan.
OTHER
Robert L. Parker was formerly Chairman of the Board of Directors of Omega
Healthcare Investors, Inc. ("Omega"), a creditor of the Company. In connection
with his appointment to the Board of Directors of the Company, Mr. Parker
resigned as Chairman of the Board of Directors of Omega but continues to serve
as a director of Omega. Omega is the mortgagee on the Company's facilities
located in the State of Michigan. The Company's indebtedness to Omega as of
December 31, 1996 was approximately $58.8 million. During the year ended
December 31, 1996, the Company made or accrued interest payments to Omega
totaling approximately $8.5 million.
Mr. Gene E. Burleson, the Company's Chairman of the Board, (and prior to the
Transactions, Chairman of the Board, President and Chief Executive Officer of
the Predecessor) and Messrs. Ronald G. Kenny and William G. Petty, Jr., both
directors of the Company (and prior to the Transactions, directors of the
Predecessor) are also directors of Alternative Living Services, Inc. ("ALS").
The Company previously owned a 19% equity interest in ALS, which the Company
sold in August 1996 in connection with the initial public offering of ALS's
common stock. In addition, Mr. Petty is Chairman of the Board and was formerly
Chief Executive Officer of ALS. ALS owns and manages assisted living
facilities. At the time of the ALS public offering, Mr. Kenny owned .5% of a
limited liability corporation that owned a 63% equity interest in ALS and Mr.
Kenny's employer, Huizenga Capital Management, owned 5.0% of such corporation.
In December 1993 the Company sold two of its long-term care facilities and
related accounts receivable to Charles H. Hargis, who was engaged by the
Company during 1993 to act as a consultant on various acquisitions and
divestitures. The Company financed $1,050,000 of the $1,250,000 purchase price
of the facilities, and the Company financed the entire $1,100,000 purchase
price of the accounts receivable. On October 1, 1996, the
42
<PAGE>
Company (i) repurchased one of the long-term care facilities it sold to
Charles H. Hargis in December 1993 for $3,110,000 in cash, and (ii) purchased
from an entity owned or controlled by Mr. Hargis the management agreement for
a long-term care facility leased by the Company for $100,000 in cash. As part
of the aforesaid transaction, Mr. Hargis and entities owned or controlled by
him entered into a three year non-competition agreement with the Company, and
the Company entered into a three year consulting agreement with an entity
owned or controlled by Mr. Hargis providing for payments of $108,000 per year.
Subsequent to October 1, 1996, Mr. Hargis satisfied all obligations to the
Company.
Keith J. Yoder, the Company's Senior Vice President and Controller, and Kay
L. Brown, the Company's Senior Vice President and Director of Corporate
Communications and Investor Relations, resigned from the Company effective May
1, 1997 and June 30, 1997, respectively. In order to obtain their assistance
in transitioning their positions and, in the case of Mr. Yoder to assist the
Company in connection with certain contemplated transactions, it is
contemplated that Mr. Yoder and Ms. Brown will enter into consulting
agreements with the Company in an amount to be determined.
43
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) DOCUMENTS FILES AS PART OF THIS REPORT:
1. CONSOLIDATED FINANCIAL STATEMENTS.
Reports of Independent Auditors
Consolidated Statements of Income for the years ended December 31,
1996, 1995 and 1994
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Shareholders' and Partners' Equity for the
years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
II. Valuation and Qualifying Accounts.
Note: All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and have
therefore been omitted.
3. EXHIBITS
<TABLE>
<C> <S>
3.1 Amended and Restated Certificate of Incorporation (Note 13)
3.2 Bylaws (Note 13)
4.1 Specimen of Common Stock Certificate (Note 13)
10.1 Acquisition Agreement, Agreement to Lease and Mortgage Loan
Agreement, dated December 28, 1990 by and among Health and
Rehabilitation Properties Trust ("HRPT") and HostMaster, Inc.,
AMS Holding Co., American Medical Services, Inc. and AMS
Properties, Inc. ("AMS"), as amended through December 29, 1993
(Note 1)
10.2 Master Lease Document, dated December 28, 1990, between HRPT and
AMS (Note 1)
10.3 Form of Guaranty, dated December 28, 1990, by American Medical
Services, Inc. and each of its subsidiaries in favor of HRPT
(Note 1)
10.4 Deed of Trust and Security Agreement, dated as of January 28,
1993, from GCI Colter Village, Inc. in favor of Bell Atlantic
TriCon Leasing Corporation ("Bell Atlantic"), with respect to the
Colter Village complex (Note 5)
10.5 Deed of Trust and Security Agreement, dated April 7, 1993 from
GCI Bella Vita, Inc. in favor of Bell Atlantic with respect to
the Bella Vita skilled nursing facility (Note 5)
10.6 Mortgage and Security Agreement and Fixture Financing Statement,
dated as of May 7, 1993 from GCI-Wisconsin Properties, Inc. in
favor of Bell Atlantic (Note 5)
10.7 Mortgage and Security Agreement and Fixture Financing Statement,
dated as of May 7, 1993 from GCI-Wisconsin Properties, Inc. in
favor of Bell Atlantic (Note 5)
</TABLE>
44
<PAGE>
<TABLE>
<C> <S>
10.8 Amendment to Acquisition Agreement, Agreement to Lease and
Mortgage Loan Agreement among HRPT, GranCare, Inc., AMS and GCI
Health Care Centers, Inc., dated as of December 29, 1993 (Note
7)
10.9 Amendment to Master Lease between HRPT and AMS, dated as of
December 29, 1993 (Note 7)
10.10 First Amendment to Lease and Security Agreement dated October
28, 1994, by and among Nationwide Health Properties, Inc., as
Landlord and GCI Palm Court, Inc. and GranCare, Inc. as Tenant
(Note 7)
10.11 Agreement and Plan of Merger among GranCare, Inc., GW
Acquisition Corp. and Evergreen Healthcare, Inc., dated as of
May 2, 1995 (Note 8)
10.12 Plan and Agreement of Merger by and among GranCare, Inc.,
Healthtrust, Inc.--The Hospital Company and Coralstone
Management, Inc. with respect to Cornerstone Health Management
Company, Inc. (Note 9)
10.13 Credit Agreement between the Company and First Union National
Bank of North Carolina, as Administrative Agent and LC Bank and
The Chase Manhattan Bank as Syndication Agent, dated as of
February 12, 1997 (the Registrant hereby undertakes to provide
exhibits omitted from the Credit Agreement upon request)
10.14 First Amendment to Credit Agreement, dated as of April 18, 1997
*10.15 GranCare, Inc. 1996 Annual Incentive Plan, Long Term Incentive
Plan and Stockholder Value Program (Note 14)
*10.16 GranCare, Inc. Outside Directors Stock Incentive Plan (Note 14)
*10.17 GranCare, Inc. 1996 Replacement Stock Option Plan (Note 14)
*10.18 Executive Split Dollar Life Insurance Plan (Note 14)
*10.19 Executive Deferred Compensation Plan (Note 14)
*10.20 401(k) Savings Plan and Trust (Note 12)
10.21 Assignment, Assumption and Amendment of the GranCare, Inc.
401(k) Savings Plan (Note 14)
*10.22 GranCare, Inc. 1996 Stock Incentive Plan (Note 14)
10.23 Amendment to Master Lease Document and Facility Lease between
GHI Health Care Center, Inc. And HRPT, dated as of October 1,
1994 (Note 12)
10.24 Amendment to Master Lease Document and Facility Lease between
AMS and HRPT, dated as of October 1, 1994 (Note 12)
10.25 Promissory Note from AMS to HRPT in the principal amount of
$11.5 million, dated October 1, 1994 (Note 12)
10.26 Mortgage and Security Agreement from AMS to HRPT for the
Northwest and River Hills West Health Care Centers, dated as of
March 31, 1995 (Note 12)
10.27 Master Settlement Agreement between GranCare, Inc. and the
Service Employees International Union ("SEIU"), dated as of
November 6, 1995 (Note 12)
10.28 Settlement Agreement between GranCare and the SEIU with respect
to four of GranCare's facilities located in the State of
Michigan, dated as of January 29, 1996 (Note 12)
10.29 Settlement Agreement between GranCare, Inc. and the SEIU with
respect to seven of GranCare's facilities located in the State
of Wisconsin (Note 12)
10.30 Settlement Agreement between GranCare, Inc. and the SEIU with
respect to seven of GranCare's facilities located in the State
of California (Note 12)
</TABLE>
45
<PAGE>
<TABLE>
<C> <S>
10.31 Form of Mortgage and Security Agreement with respect to five of
GranCare's facilities located in the State of Illinois to
secure a loan in the aggregate principal amount of $16.5
million from Health Care Capital Finance, Inc. (the "Health
Care Capital Loan"), each agreement dated as of March 23, 1995
(Note 12)
10.32 Deed to Secure Debt and Security Agreement with respect to
GranCare, Inc.'s facility located in Georgia to secure the
Health Care Capital Loan, dated as of March 23, 1995 (Note 12)
10.33 Bond Trust Indenture between Health Care Fund II, Ltd., and
LaSalle National Trust, N.A., as bond Trustee, dated as of June
1, 1993 (Note 12)
10.34 Form of Direct Note Obligation, Series 1993 (Health Care Fund
II, Ltd.), dated June 23, 1993 (Note 12)
10.35 Form of Direct Note Obligation, Series 1993A (Health Care Fund
II, Ltd.), dated June 23, 1993 (Note 12)
10.36 Bond Trust Indenture between Health Care Fund II, Ltd., and
LaSalle National Trust, N.A., as Bond Trustee, dated as of
August 1, 1993 (Note 12)
10.37 Direct Note Obligation, Series 1993B-1 (Health Care Fund II,
Ltd.) dated June 23, 1993 (Note 12)
10.38 Direct Note Obligation, Series 1993B-2 (Health Care Fund II,
Ltd.) dated June 23, 1993 (Note 12)
10.39 Tax Allocation and Indemnification Agreement by and among the
Company, Vitalink and certain subsidiaries of the Company dated
as of February 12, 1997
10.40 Non-Competition Agreement between Vitalink and the Company
dated as of February 12, 1997
*10.41 Form of employment Agreement between the Company and M. Scott
Athans (Note 13)
*10.42 Form of Employment Agreement for Executive Vice Presidents
(Note 13)
10.43 Consent and Amendment to Transaction Documents dated as of
December 31, 1996 (the "Consent and Amendment") among GCI
Health Care Centers, Inc., the Company, Vitalink, HRPT and AMS
Properties, Inc. (the Company hereby undertakes to provide all
exhibits omitted from the Consent and Amendment to the
Commission upon request) (Note 14)
10.44 Limited Guaranty between Vitalink and HRPT dated as of February
12, 1997
10.45 Assumption Agreement (the "Assumption Agreement") by the
Company in favor of HRPT (the Registrant hereby undertakes to
provide all exhibits omitted from the Assumption Agreement to
the Commission upon request) (Note 14)
10.46 Release and Settlement Agreement dated as of April 1, 1997 with
respect to leases for 17 facilities located in the State of
Indiana
10.47 Amended and Restated Agreement and Plan of Distribution dated
as of September 3, 1996 (the "Distribution Agreement") between
the Predecessor and the Successor (the Registrant hereby
undertakes to provide all schedules omitted from the
Distribution Agreement to the Commission upon request) (Note
14)
11.1 Computation of Earnings Per Share
12.1 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP, independent auditors
23.2 Consent of KPMG Peat Marwick LLP, independent auditors
</TABLE>
- --------
* Management contracts or compensatory plans or arrangements required to be
filed as exhibits to this Form 10-K by Item 601(b)(10)(iii) of Regulation S-K,
previously filed where indicated and incorporated herein by reference.
46
<PAGE>
REFERENCE DOCUMENT
(1) Incorporated by reference to the Predecessor's registration statement on
Form S-1 (Registration No. 33-42595), as amended, which was filed with
the Commission on September 11, 1991.
(2) Incorporated by reference to the Predecessor's Annual Report on Form 10-K
for the year ended December 31, 1991.
(3) Incorporated by reference to the Predecessor's Quarterly Report on Form
10-Q for the period ended December 31, 1993.
(4) Incorporated by reference to the Predecessor's Current Report on Form 8-K
which was filed with the Commission on July 15, 1994.
(5) Incorporated by reference to the Predecessor's Current Report on Form 8-K
for which was filed with the Commission on July 15, 1994.
(6) Incorporated by reference to the Predecessor's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1994.
(7) Incorporated by reference to the Predecessor's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1994.
(8) Incorporated by reference to the Predecessor's Annual Report on Form 10-K
for the quarterly period ended December 31, 1994.
(9) Incorporated by reference to the Predecessor's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1994.
(10) Incorporated by reference to the Predecessor's Current Report on Form 8-K
which was filed with the Commission on April 19, 1995.
(11) Incorporated by reference to the Predecessor's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1995.
(12) Incorporated by reference to the Predecessor's Annual Report on Form 10-K
for the year ended December 31, 1995.
(13) Incorporated by reference to the Successor's Registration Statement on
Form S-1 (Registration No. 333-19097) which was filed with the Commission
on December 31, 1996.
(14) Incorporated by reference to the Successor's Amendment No. 1 to
Registration Statement on Form S-1 (Registration No. 333-19097) which was
filed with the Commission on January 8, 1997.
(B) FORMS 8-K
On September 5, 1996, the Predecessor filed a Form 8-K with the
Commission announcing the execution of the merger agreement by the
Predecessor and Vitalink Pharmacy Services, Inc.
(C) EXHIBITS
The response to this portion of Item 14 is contained in Item 14(a)(3)
of this report.
(D) FINANCIAL STATEMENT SCHEDULE
The response to this portion of Item 14 is submitted as a separate
section of this report.
47
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
GRANCARE, INC.
/s/ M. Scott Athans
By: _________________________________
M. SCOTT ATHANS CHIEF EXECUTIVE
OFFICER
Dated: May 9, 1997
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURES TITLE DATE
/s/ M. Scott Athans President and Chief May 9, 1997
- ------------------------------------- Executive Officer
M. SCOTT ATHANS (Principal
Executive Officer)
/s/ Jerry A. Schneider Executive Vice May 9, 1997
- ------------------------------------- President and Chief
JERRY A. SCHNEIDER Financial Officer
(Principal
Financial and
Accounting Officer)
/s/ Gene E. Burleson Chairman of the May 9, 1997
- ------------------------------------- Board and Director
GENE E. BURLESON
/s/ Charles M. Blalack Director May 9, 1997
- -------------------------------------
CHARLES M. BLALACK
/s/ Joel S. Kanter Director May 9, 1997
- -------------------------------------
JOEL S. KANTER
/s/ Antoinette T. Hubenette Director May 9, 1997
- -------------------------------------
ANTOINETTE T. HUBENETTE, M.D.
/s/ Robert L. Parker Director May 9, 1997
- -------------------------------------
ROBERT L. PARKER
/s/ William G. Petty, Jr. Director May 9, 1997
- -------------------------------------
WILLIAM G. PETTY, JR.
/s/ Ronald G. Kenny Director May 9, 1997
- -------------------------------------
RONALD G. KENNY
/s/ Edward V. Regan Director May 9, 1997
- -------------------------------------
EDWARD V. REGAN
/s/ Gary U. Rolle Director May 9, 1997
- -------------------------------------
GARY U. ROLLE
48
<PAGE>
GRANCARE, INC.
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
CONTENTS
<TABLE>
<S> <C>
Reports of Independent Auditors............................................. F-2
Audited Consolidated Financial Statements
Consolidated Balance Sheets............................................... F-4
Consolidated Statements of Income......................................... F-5
Consolidated Statements of Shareholders' Equity........................... F-6
Consolidated Statements of Cash Flows..................................... F-7
Notes to Consolidated Financial Statements................................ F-9
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
GranCare, Inc.
We have audited the consolidated balance sheets of GranCare, Inc. (the
Company) as of December 31, 1996 and 1995, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. Our audits included the
financial statement schedule listed in the index at Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits. We did not audit the financial
statements of Evergreen Healthcare, Inc. (Evergreen) which became a wholly-
owned subsidiary in 1995, as of December 31, 1994 and for the year then ended.
The Evergreen amounts represent 21% of the consolidated total assets at
December 31, 1994 and 38% of consolidated net income for the year then ended.
The financial statements were audited by other auditors, whose report has been
furnished to us, and our opinion, with respect to the consolidated financial
statements as of and for the year ended December 31, 1994, insofar as it
relates to data included for Evergreen, is based solely on the report of the
other auditors.
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 and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of GranCare, Inc. at
December 31, 1996 and 1995, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1996 in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Ernst & Young LLP
Atlanta, Georgia
February 25, 1997, except for Note 13 as to which
the date is March 6, 1997
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Evergreen Healthcare, Inc.
We have audited the consolidated statements of operations, stockholders'
equity and cash flows of Evergreen Healthcare, Inc. and subsidiaries (Company)
for the year ended December 31, 1994 (not presented separately herein). These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated and combined financial statements referred to
above present fairly, in all material respects, the results of operations and
cash flows of Evergreen Healthcare, Inc. and subsidiaries for the year ended
December 31, 1994, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick, LLP
Indianapolis, Indiana
August 17, 1995
F-3
<PAGE>
GRANCARE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- ----------
DOLLARS IN THOUSANDS
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 14,512 $ 17,738
Accounts receivable, less allowance for doubtful ac-
counts (1996--$11,209 and 1995--$10,856)............ 233,335 173,068
Inventories.......................................... 17,312 13,527
Notes receivable (Notes 4 and 13).................... 24,520 4,100
Prepaid expenses and other current assets............ 18,786 12,398
Deferred income taxes (Note 8)....................... 9,239 10,933
---------- ----------
Total current assets................................... 317,704 231,764
Property and equipment:
Land and improvements................................ 10,382 10,238
Buildings and improvements........................... 176,846 192,875
Equipment............................................ 84,308 66,929
---------- ----------
271,536 270,042
Less accumulated depreciation........................ (64,387) (55,689)
---------- ----------
207,149 214,353
Other assets:
Investments, at fair value (Notes 5 and 12).......... 38,933 30,305
Goodwill (accumulated amortization: 1996--$10,332;
1995--$5,535)....................................... 133,152 120,946
Other intangibles (accumulated amortization: 1996--
$9,700; 1995--$8,051)............................... 11,613 9,793
Other (Note 2)....................................... 39,488 38,000
---------- ----------
Total assets........................................... $748,039 $ 645,161
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses................ $ 79,824 $ 72,935
Accrued wages and related liabilities................ 21,541 24,069
Interest payable..................................... 8,235 6,793
Notes payable and current maturities of long-term
debt (Notes 4, 5 and 12)............................ 7,535 4,937
---------- ----------
Total current liabilities.............................. 117,135 108,734
Long-term debt (Notes 4, 5 and 12)..................... 382,242 334,668
Deferred income taxes (Note 8)......................... 23,084 16,735
Other.................................................. 11,278 12,425
Commitments and contingencies (Notes 6 and 7)
Shareholders' equity (Note 9):
Common stock; no par value; 50,000,000 shares autho-
rized (shares issued: 1996--23,677,825 and 1995--
23,948,728)......................................... 123,378 134,699
Treasury stock, at cost (1995--915,000 shares)....... -- (18,700)
Equity component of minimum pension liability........ (542) (465)
Unrealized gain on investments (net of income taxes:
1996--$4,573; 1995--$3,453)......................... 6,885 5,206
Retained earnings.................................... 84,579 51,859
---------- ----------
214,300 172,599
---------- ----------
Total liabilities and shareholders' equity............. $748,039 $ 645,161
========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
GRANCARE, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
----------- ---------- ----------
DOLLARS AND SHARES IN THOUSANDS,
EXCEPT PER SHARE DATA
<S> <C> <C> <C>
REVENUES
Net patient revenues........................ $ 977,787 $ 811,402 $ 701,783
Investment and other income (Note 2)........ 25,336 5,060 15,688
----------- ---------- ----------
Total revenues.............................. 1,003,123 816,462 717,471
EXPENSES
Operating expenses:
Salary and related........................ 417,046 360,530 322,471
Rent and property......................... 56,895 51,206 44,291
Other operating........................... 396,400 308,982 266,774
----------- ---------- ----------
870,341 720,718 633,536
Depreciation and amortization............... 25,949 21,611 16,440
Interest expense and financing charges...... 35,659 27,054 21,481
Nonrecurring costs--exit, merger and other
costs (Notes 4 and 13)..................... 18,400 11,750 --
Restructuring costs (Note 13)............... -- -- 8,200
----------- ---------- ----------
Total expenses.............................. 950,349 781,133 679,657
----------- ---------- ----------
Income before income taxes.................. 52,774 35,329 37,814
Income taxes................................ 20,054 14,765 13,524
----------- ---------- ----------
Net income.................................. $ 32,720 $ 20,564 $ 24,290
=========== ========== ==========
NET INCOME PER COMMON AND COMMON EQUIVALENT
SHARE:
Primary................................... $ 1.36 $ 0.86 $ 1.07
=========== ========== ==========
Fully diluted............................. $ 1.33 $ 0.86 $ 1.07
=========== ========== ==========
Weighted average number of common and common
equivalent shares outstanding:
Primary................................... 24,084 23,794 22,631
=========== ========== ==========
Fully diluted............................. 26,527 23,919 24,966
=========== ========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE>
GRANCARE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
EQUITY
COMPONENT
OF
MINIMUM UNREALIZED
COMMON TREASURY PENSION GAIN ON RETAINED
STOCK STOCK LIABILITY INVESTMENTS EARNINGS TOTAL
-------- -------- --------- ----------- -------- --------
DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1,
1994................... $ 80,960 $(5,030) $(164) $4,200 $ 7,005 $ 86,971
Issuance of 221,655
shares of common stock
on exercise of war-
rants and options
(Note 9).............. 1,603 -- -- -- -- 1,603
Issuance of 1,000,000
shares of common stock
in connection with LTC
acquisition (Note 4).. 20,000 -- -- -- -- 20,000
Issuance of 5,048
shares of common stock
on conversion of debt
issued in connection
with a 1993 acquisi-
tion.................. 100 -- -- -- -- 100
Issuance of 2,421,875
shares of common stock
in public offering.... 28,478 -- -- -- -- 28,478
Issuance of 77,500
shares of common stock
in connection with HS
Healthcare acquisition
(Note 4).............. 1,000 -- -- -- -- 1,000
Unrealized loss on in-
vestments, net of in-
come taxes of $550.... -- -- -- (825) -- (825)
Net income............. -- -- -- -- 24,290 24,290
Minimum pension liabil-
ity adjustment........ -- -- (200) -- -- (200)
-------- ------- ----- ------ ------- --------
Balances at December 31,
1994................... 132,141 (5,030) (364) 3,375 31,295 161,417
Issuance of 769,799
shares of common stock
on exercise warrants
and options (Note 9).. 2,476 -- -- -- -- 2,476
Issuance of 5,500
shares of common
stock................. 82 -- -- -- -- 82
Repurchase of 715,000
shares of common
stock................. -- (13,670) -- -- -- (13,670)
Unrealized gain on in-
vestments, net of in-
come taxes of $1,203.. -- -- -- 1,831 -- 1,831
Net income............. -- -- -- -- 20,564 20,564
Minimum pension liabil-
ity adjustment........ -- -- (101) -- -- (101)
-------- ------- ----- ------ ------- --------
Balances at December 31,
1995................... 134,699 (18,700) (465) 5,206 51,859 172,599
Issuance of 448,573
shares of common stock
on exercise warrants
and options (Note 9).. 3,897 -- -- -- -- 3,897
Issuance of 95,524
shares of common stock
under stock incentive
plans................. 1,619 -- -- -- -- 1,619
Issuance of 100,000
shares of common stock
in connection with In-
novative acquisition.. 1,863 -- -- -- -- 1,863
Cancellation of 915,000
shares of common stock
held in treasury...... (18,700) 18,700 -- -- -- --
Unrealized gain on in-
vestments, net of in-
come taxes of $1,120.. -- -- -- 1,679 -- 1,679
Net income............. -- -- -- -- 32,720 32,720
Minimum pension liabil-
ity adjustment........ -- -- (77) -- -- (77)
-------- ------- ----- ------ ------- --------
Balances at December 31,
1996................... $123,378 $ -- $(542) $6,885 $84,579 $214,300
======== ======= ===== ====== ======= ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
GRANCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
DOLLARS IN THOUSANDS
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................. $ 32,720 $ 20,564 $ 24,290
Adjustments to reconcile net income to net
cash (used in) provided by operating
activities:
Provision for doubtful accounts........... 7,318 6,281 7,918
Depreciation.............................. 18,266 15,258 13,843
Amortization.............................. 7,683 6,353 2,597
Gain on sale of investments and other as-
sets..................................... (19,135) (829) (12,518)
Deferred income taxes..................... (754) 1,171 (333)
Amortization of deferred financing costs.. 947 531 522
Restructuring costs....................... -- -- 8,200
Non-cash one-time charges................. 17,100 -- --
Changes in operating assets and liabilities net of
effects of acquisitions
(Note 4):
Accounts receivable..................... (74,745) (49,018) (33,491)
Prepaid expenses and other current as-
sets................................... (696) (6,414) 1,109
Accounts payable, accrued wages and
other accrued expenses................. (2,067) 15,388 2,145
Interest payable........................ 1,442 3,110 769
Other................................... (10,271) (3,400) (1,320)
-------- -------- --------
Net cash (used in) provided by operating ac-
tivities................................... (22,192) 8,995 13,731
INVESTING ACTIVITIES
Acquisition of businesses (net of cash ac-
quired of $2,469 in 1994).................. (16,451) (68,467) (49,414)
Purchases of property and equipment......... (32,420) (23,495) (14,938)
Proceeds from disposition of property and
equipment.................................. 994 4,155 13,726
Purchases of investments.................... (4,416) (6,944) (6,978)
Proceeds from sale of unconsolidated affili-
ate........................................ 24,600 -- --
Other....................................... (1,275) (1,029) (3,822)
-------- -------- --------
Net cash used in investing activities....... (28,968) (95,780) (61,426)
FINANCING ACTIVITIES
Issuance of stock........................... -- 82 29,063
Payment of stock issuance costs............. -- -- (585)
Proceeds from exercise of warrants and op-
tions...................................... 3,897 2,776 1,603
Purchase of treasury stock.................. -- (13,670) --
Long-term debt payments..................... (29,690) (177,870) (23,207)
Proceeds from long-term debt borrowings..... 74,400 270,018 44,787
Repayments of short-term notes payable...... -- -- (600)
Payment of debt issuance costs.............. (673) (5,424) (1,136)
-------- -------- --------
Net cash provided by financing activities... 47,934 75,912 49,925
-------- -------- --------
Net (decrease) increase in cash and cash
equivalents................................ (3,226) (10,873) 2,230
Cash and cash equivalents at beginning of
year....................................... 17,738 28,611 26,381
-------- -------- --------
Cash and cash equivalents at end of year.... $ 14,512 $ 17,738 $ 28,611
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFOR-
MATION
Interest paid............................. $ 32,432 $ 22,566 $ 20,712
======== ======== ========
Income taxes paid......................... $ 24,917 $ 17,964 $ 14,406
======== ======== ========
</TABLE>
See accompanying notes.
F-7
<PAGE>
GRANCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
SUPPLEMENTAL CASH FLOW INFORMATION
ACQUISITIONS
The 1996, 1995 and 1994 acquisitions (see Note 4) had the following effects
on cash:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
DOLLARS IN THOUSANDS
<S> <C> <C> <C>
Fair values of assets acquired (net of cash re-
ceived)......................................... $(21,954) $(75,317) $(90,713)
Fair values of liabilities assumed............... 3,640 6,850 20,299
-------- -------- --------
(18,314) (68,467) (70,414)
Issuance of stock................................ 1,863 -- 21,000
-------- -------- --------
Net effect on cash............................... $(16,451) $(68,467) $(49,414)
======== ======== ========
</TABLE>
NONCASH TRANSACTIONS
During 1996, the Company issued 95,524 shares of common stock to employees
under various stock incentive and award plans.
In conjunction with the sale of the four long-term health care facilities
located in Michigan in the first quarter of 1996, the Company provided
purchase money financing in the amount of $17,550,000 evidenced by an interest
bearing promissory note due and payable in 1997.
Plant and equipment acquired under financing notes and capital lease
arrangements aggregated approximately $2,364,000, $1,021,000, and $3,222,000
in 1996, 1995, and 1994 respectively.
See accompanying notes.
F-8
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
GranCare, Inc. (GranCare or the Company) merged with Evergreen Healthcare,
Inc. (Evergreen) on July 20, 1995 (the Merger). On that date, GranCare issued
approximately 9,673,000 shares of its common stock in exchange for the
approximately 12,500,000 shares of Evergreen common stock then outstanding
based on an exchange ratio of its shares of GranCare common stock for each
share of Evergreen common stock.
The consolidated financial statements give retroactive effect to the Merger,
which has been accounted for using the pooling-of-interests method and, as a
result, the financial position, results of operations and cash flows are
presented as if the combining companies had been consolidated for all periods
presented. The consolidated statements of shareholders' equity also reflect
retroactive combination of the accounts of GranCare and Evergreen for all
periods presented, with adjustments to outstanding shares based on the
exchange ratio.
Evergreen amounts for the 1994 consolidated financial statements have been
conformed to the Company's December 31 year-end.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Consolidation The Company operates approximately 140 leased and
owned long-term health care facilities that provide skilled nursing and
residential care services in 15 states. In addition, the Company also owns and
operates or serves 33 institutional pharmacies operating under the name
"TeamCare", a specialty hospital geriatric services company, which manages
approximately 145 geriatric care units in acute hospitals in 20 states, and
home health operations in four states.
The facilities and pharmacy divisions represented approximately 67% and 24%,
respectively, of the total net patient revenues of the Company. Substantially
all of the facilities and pharmacies receive benefits under the Medicare and
Medicaid programs. These programs are highly regulated and subject to periodic
change.
The consolidated financial statements include the accounts of GranCare and
all of its subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Investments in affiliates in which the
Company has less than a 50% interest are accounted for by the equity method.
Use of Estimates The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash Equivalents The Company considers all highly liquid instruments
purchased with original maturity dates of three months or less to be cash
equivalents.
Inventories Inventories are stated at the lower of cost, using the first-in,
first-out method, or market value. Inventories consist primarily of purchased
pharmaceuticals and various medical equipment of the pharmacies and supplies
used in the care of residents in long-term health care facilities.
Property and Equipment Property and equipment are recorded at cost.
Depreciation is computed by the straight-line method over the estimated useful
lives of the assets as stated below. Leases and leasehold improvements that
have been capitalized are amortized over the lives of the leases. Amortization
of these assets is included in depreciation expense.
<TABLE>
<S> <C>
Buildings and improvements.................... 8-35 years
Equipment..................................... 5-7 years
</TABLE>
F-9
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Goodwill and Other Intangibles In connection with the Company's
acquisitions, costs in excess of the amounts assigned to identifiable assets
acquired, less liabilities assumed, are recorded as goodwill. Goodwill is
amortized on a straight-line basis principally over a period of 35 years.
Goodwill recorded in the Cornerstone acquisition (unamortized balance of
$46,721,000 at December 31, 1996) is being amortized over 25 years. The
carrying value of goodwill is reviewed if the facts and circumstances suggest
that it may be impaired. If this review indicates that goodwill will not be
recoverable, as determined based on undiscounted cash flows of the acquired
entity over the remaining amortization period, the Company's carrying value of
the goodwill is reduced by the estimated shortfall of cash flows.
Other intangibles, which primarily were obtained in connection with the
Company's acquisitions, mainly represent covenants not to compete and lease
contract rights that are amortized over the terms of the noncompetition
agreements and leases, respectively.
Other Assets The Company defers financing costs incurred to obtain long-term
debt and amortizes such costs using the straight-line method over the term of
the related obligation. An investment in an unconsolidated affiliate at
December 31, 1995 consisted of a 28% owned interest in Alternative Living
Services, Inc. (ALS), which was recorded using the equity method. In 1994, the
Company's 53% interest in ALS was consolidated with the Company. The remaining
other assets are individually not significant in their impact to the Company.
On August 5, 1996, the Company sold its entire interest in ALS, resulting in
net proceeds to the Company of approximately $24.6 million and an approximate
$18.0 million gain on the sale. The gain is reported in investment and other
income in the accompanying Consolidated Statements of Income.
Reserve for Worker's Compensation Losses and Loss Adjustment Expenses The
reserve for worker's compensation losses and loss adjustment expenses
represents the estimated ultimate net cost of all reported and unreported
losses incurred through the date of the balance sheet. Such estimates are
based on case-basis estimates of losses reported prior to the date of the
balance sheet, estimates (based on actuarial projections of historical loss
development) of losses incurred but not reported, and estimates of expenses
for investigation and adjustment of all incurred and unadjusted losses (and
estimates of expected salvage and subrogation receipts from such losses).
Given the inherent degree of variability in any such estimates, management
believes that the reported reserves are a reasonable estimate of the Company's
ultimate losses and loss adjustment expenses to be incurred to discharge the
Company's obligations. Reserves are continually reviewed and adjusted as
necessary as experience develops or new information becomes known; such
adjustments are included in current operations (see Note 7).
Net Patient Revenues Patient revenues are reported in the period in which
services are provided. Net patient revenues reflect contractual discounts and
the results of other arrangements for providing services at less than
established rates. Contractual adjustments include differences between
established billing rates and amounts estimated by management as reimbursable
under various cost reimbursement formulas or service contracts.
The administrative procedures related to the Medicare and Medicaid cost
reimbursement programs in effect, generally preclude final determination of
amounts due the Company until cost reimbursement reports, filed by the
Company, are audited or otherwise reviewed and settled with the applicable
administrative agencies. The Company is contesting certain issues raised in
audits of prior year cost reports (see Note 7). Normal estimation differences
between final settlements and amounts accrued in previous years are reported
in current net patient revenues. Actual results could differ from these
estimates. Included in accounts receivable are settlement amounts due from
Medicare and Medicaid programs totalling $49,725,000 and $45,764,000 at
December 31, 1996 and 1995, respectively. In the opinion of management,
adequate provision has been made for adjustments, if any, that might result
from subsequent review. The Medicare and Medicaid cost reimbursement programs
approximated 77%, 75% and 77% of net patient revenues for the years ended
December 31, 1996, 1995 and
F-10
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1994, respectively. Laws and regulations governing the Medicare and Medicaid
programs are complex and subject to interpretation. The Company believes that
it is in compliance with all applicable laws and regulations and is not aware
of any pending or threatened investigations involving allegations of potential
wrongdoing. While no such regulatory inquiries have been made, compliance with
such laws and regulations can be subject to future government review and
interpretation as well as significant regulatory action including fines,
penalties, and exclusion from the Medicare and Medicaid programs.
Earnings Per Share Earnings per share are computed based on the weighted
average common and (if dilutive) common equivalent shares outstanding, which
include options and warrants, and in the case of fully diluted earnings per
share, convertible subordinated debentures. The earnings per share amounts are
based on the combined historical weighted average common and dilutive common
equivalent shares of GranCare and Evergreen pre-merger adjusted for the .775
exchange ratio. Additionally, interest costs related to such debentures were
added, net of tax, to net income for the purpose of calculating fully diluted
income per share. Such amount for the year ended December 31, 1996 was
$2,559,000. Fully diluted net income per share for the years ended December
31, 1995 and 1994 was the same as primary because the effect of the assumed
conversion of the debentures was not dilutive.
Change in Accounting Principle During the first quarter of 1996, the Company
adopted as required FASB Statement No. 121 (Statement No. 121), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of." In accordance with Statement No. 121, the Company records
impairment losses on long-lived assets used in operations when events and
circumstances indicate the assets might be impaired and the undiscounted cash
flows estimated to be generated by those assets may be less than the carrying
amounts of those assets. This new standard had no effect on the financial
statements.
Reclassifications Certain reclassifications have been made in the 1995
financial statements to conform with the 1996 presentation.
NOTE 3. TEAMCARE MERGER
GranCare has entered into an Agreement and Plan of Merger between Vitalink
Pharmacy Services, Inc. (Vitalink) and GranCare dated as of September 3, 1996.
The form of the transactions are: (1) GranCare's skilled nursing facilities,
along with its contract management and home health businesses are to be
reorganized into New GranCare, Inc. (New GranCare) and all of the shares of
New GranCare distributed to the GranCare shareholders in a tax-free spin-off;
(2) GranCare (then consisting solely of the institutional pharmacy and related
business known as TeamCare) would merge into and be acquired by Vitalink
through a tax-free exchange of shares of common stock of Vitalink for shares
of common stock of GranCare; and (3) New GranCare would become a public
company upon the effectiveness of its initial registration statement.
Notwithstanding the legal structure of the transactions, for
accounting/financial reporting purposes such transactions will be treated as
the spin-off of TeamCare in the form of a dividend of the Vitalink Common
Stock to be received and reorganization/recapitalization of GranCare into New
GranCare as New GranCare will continue the majority of the GranCare
businesses. No gain will be recognized as a result of the distribution for the
difference between the market value of the Vitalink Common Stock received and
the carrying value of the net assets of TeamCare. New GranCare will continue
to reflect the historical cost basis of assets and liabilities of the Company.
These transactions were approved by the GranCare shareholders on February 11,
1997 and the transactions closed on February 12, 1997; the spin-off of
TeamCare will be reflected in the first quarter of 1997.
In addition, as a consequence of the merger, the Company redeemed its 6 1/2%
Convertible Subordinated Debentures (the Debentures) due January 15, 2003
effective as of the closing date. GranCare has deposited the
F-11
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
redemption price and accrued interest on each outstanding Debenture with the
trustee for the Debentures and interest ceased to accrue as of February 12,
1997. GranCare also completed a tender offer for its 9 3/8% Senior
Subordinated Notes (Senior Notes) due 2005. GranCare accepted $98 million
aggregate principal amount of Senior Notes (representing 98% of the
outstanding Senior Notes) for purchase pursuant to GranCare's cash tender
offer at a purchase price of $1,090 per $1,000 principal amount plus accrued
and unpaid interest up to, but not including, the payment date.
In February 1997, the Company recognized a merger charge in connection with
the aforementioned transactions. The components of the merger charge to be
recognized in New GranCare's operations in the first quarter of 1997 consist
of the following:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
--------------------
<S> <C>
Shared transaction costs:
Redemption premium--$100 million Senior
Subordinated Notes.............................. $ 9,000
Redemption premium--$60 million Convertible
Subordinated Debentures......................... 2,430
Investment banker fees........................... 4,200
Consent fee paid to HRPT......................... 5,500
Other professional fees and merger related costs. 5,470
-------
Total shared merger costs.......................... 26,600
Less costs to be paid by Vitalink.................. (13,300)
-------
GranCare portion of shared transaction costs....... 13,300
Other transaction related costs:
Consent fee paid to HRPT......................... 4,500
Write-off of deferred financing fees............. 5,441
Amounts payable under GranCare Shareholder Value
Program......................................... 4,500
Amounts payable under Restricted Stock Plan...... 2,200
Other employee severance and other related costs. 6,059
-------
36,000
Less: Income taxes................................. (6,000)
-------
Total merger costs, net of income taxes............ $30,000
=======
</TABLE>
F-12
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table shows the unaudited pro forma effect of this transation
on the historical consolidated balance sheet of the Company at December 31,
1996 as if such transaction had occurred on that date:
<TABLE>
<CAPTION>
HISTORICAL BALANCE PROFORMA
SHEET AT HISTORICAL OTHER PRO FORMA BALANCE SHEET AT
DECEMBER 31, 1996 TEAMCARE ADJUSTMENTS DECEMBER 31, 1996
------------------ ---------- --------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equiva-
lents.................. $ 14,512 $ -- $ 16,337 $ 30,849
Other current assets.... 303,192 (69,238) 6,000 239,954
Property and equipment.. 207,149 (14,337) -- 192,812
Other assets............ 223,186 (83,236) -- 139,950
-------- --------- -------- --------
$748,039 $(166,811) $ 22,337 $603,565
======== ========= ======== ========
Current liabilities..... $117,135 $ (28,904) $ 36,000 $124,231
Long-term debt.......... 382,242 (3,944) (71,467) 306,831
Due to/from parent...... -- (38,823) 38,823 --
Other long-term liabili-
ties................... 34,362 (5,680) -- 28,682
Shareholders' equity:
Common stock; no par
value................ 123,378 (46,379) (76,999) --
Common stock; $0.001
par value............ -- -- 24 24
Paid in capital....... -- -- 123,354 123,354
Equity component on
minimum pension
liability............ (542) -- -- (542)
Unrealized gain on in-
vestments, net of in-
come taxes........... 6,885 -- -- 6,885
Retained earnings..... 84,579 (43,081) (27,398) 14,100
-------- --------- -------- --------
Total shareholders' eq-
uity................... 214,300 ( 89,460) 18,981 143,821
-------- --------- -------- --------
$748,039 $(166,811) $ 22,337 $603,565
======== ========= ======== ========
</TABLE>
Excluding TeamCare, GranCare's total net revenues and pre-tax income for
1996, 1995 and 1994, respectively, would have been : $774,000,000 and
$24,000,000; $640,000,000 and $18,000,000; and $559,000,000 and $19,000,000.
The above transactions resulted in certain commitments of New GranCare.
These are described in Note 7.
NOTE 4. ACQUISITIONS, DISPOSITIONS AND MERGER
1994 Acquisitions and Dispositions On March 1, 1994, GranCare acquired the
operations of PPCP, Inc., which provides institutional pharmacy services, for
$3,800,000 in cash and adjustable subordinated promissory notes in the
aggregate sum of $1,449,000. In connection with this transaction, $4,518,000
was recorded as goodwill.
On April 1, 1994, GranCare acquired the operations of Merit Pharmacy, Inc.,
which provides institutional pharmacy services, for $600,000 in cash and a
subordinated promissory note for $1,184,000. In connection with this
transaction, GranCare recorded $1,817,000 in goodwill.
On June 7, 1994, Evergreen acquired substantially all of the assets of two
Illinois limited partnerships, Health Care Fund Limited Partnership and Health
Care Fund II Limited Partnership, as well as two related companies, H.S.
Healthcare, Inc. and H.S. Systems, Inc. (collectively referred to as HS
Healthcare). Evergreen
F-13
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
paid approximately $22,571,000 cash in exchange for the assets acquired and
liabilities assumed. The Company also paid $3,000,000 in cash and issued
77,500 shares (restated) of common stock valued at $1,000,000 to the general
partners of the partnerships and sole shareholders of the related companies in
consideration for their agreement not to compete with the Company for a period
of ten years.
Effective July 1, 1994, GranCare acquired substantially all of the assets
and assumed certain liabilities of Long Term Care Pharmaceutical Services
Corporation I and Long Term Care Pharmaceutical Services Corporation III
(collectively, LTC), an institutional pharmacy business based in Indiana, for
$16,000,000 cash and 1,000,000 shares of GranCare common stock valued at $20
per share, or $20,000,000. In the event the market price of the common stock
was not at least equal to $20 per share at a specified date in 1995, the
Company was obligated to issue additional consideration to bring the value of
the common stock to $20,000,000. In connection with this transaction, GranCare
recorded $27,402,000 goodwill. The purchase agreement also contains a
contingent earnout provision for the two year period ended June 30, 1996. An
additional $5,500,000 could be paid provided certain operating results were
obtained for this period. Subsequent to December 31, 1996, GranCare agreed to
pay $2.9 million and Vitalink agreed to pay $2.5 million to the sellers in
settlement of the earnout.
Also effective July 1, 1994, GranCare acquired the operations of Ricketts
Drug, Inc., an institutional pharmacy based in Virginia, for $4,111,000 in
cash. In connection with this transaction, GranCare recorded $2,355,000 in
goodwill.
Effective July 25, 1994, GranCare acquired leasehold interests in two long-
term health care facilities in South Carolina for $38,000.
Effective September 30, 1994, GranCare acquired leasehold interests in five
additional long-term health care facilities in South Carolina for $150,000.
The above-described 1994 acquisitions were all accounted for as purchases
and, accordingly, the financial statements of the Company include the
operations of such acquired entities since the respective dates of their
acquisition.
During 1994, GranCare also divested three facilities (exclusive of the
restructuring described in Note 13) and Pacific Therapies, acquired in 1993.
The sale of Pacific Therapies to an unrelated entity for approximately
$11,700,000 in cash and assumption of approximately $1,100,000 in debt and
certain other liabilities resulted in a gain of approximately $8,800,000. The
gain is reported in investment and other income in the accompanying
Consolidated Statements of Income.
1995 Acquisitions and Dispositions In January 1995, GranCare acquired a
leasehold interest in a long-term health care facility in Arizona for
$150,000.
In April 1995, GranCare acquired Cornerstone Health Management Company
(Cornerstone), a management company specializing in the implementation and
management of geriatric specialty programs for acute care hospitals, for
$53,213,000.
In November 1995, GranCare acquired Innovative Pharmacy Services, Inc.
(Innovative), an institutional pharmacy based in Wisconsin, for $10,000,000 in
cash and stock. GranCare common stock was distributed in January 1996. In
connection with this transaction, the Company recorded $9,555,000 in goodwill.
In December 1995, GranCare acquired the operations of both Pharmcare, Inc.
and American Pharmaceutical Inc., two institutional pharmacies based in
Northern California, for $4,700,000 and $1,200,000, respectively. In
connection with these transactions, the Company recorded $5,408,000 in
goodwill.
F-14
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The above-described 1995 acquisitions were all accounted for as purchases
and, accordingly, the financial statements of the Company include the
operations of such acquired entities since the respective dates of their
acquisition.
During 1995, GranCare also divested one facility (exclusive of the
restructuring described in Note 13).
In July 1995, in accordance with a contractual obligation to the former
owners of LTC, the Company repurchased 715,000 shares of its common stock.
During the second quarter of 1996, the Company cancelled these shares held in
treasury.
1996 Acquisitions and Dispositions
In January 1996, the Company completed the acquisition of RN Health Care
Services, Inc. (RN Services), a home health care business located in Detroit,
Michigan, for $2,350,000 in cash. In conjunction with the acquisition, the
Company advanced $2,500,000 to the former owners in the form of a short-term
note secured by RN Services' accounts receivable.
In April 1996, the Company completed the acquisition of Jennings Visiting
Nurse Association, Inc., a home health care business based in North Vernon,
Indiana, for $937,000 in cash and a promissory note for $250,000.
In July 1996, the Company completed the acquisition of Emery Pharmacy, Inc.,
an institutional pharmacy located in Utica, New York, for $3,672,000 in cash
and a promissory note in the amount of $1,488,000. In connection with this
transaction, GranCare recorded $5,747,000 in goodwill.
In September 1996, the Company completed the acquisition of RX Corporation,
an institutional pharmacy located in southern California, for $1,800,000 in
cash and a promissory note for $925,000. In connection with this transaction,
the Company recorded $2,908,000 in goodwill.
During 1996, the Company acquired leasehold interests in two long-term
health care facilities in South Carolina and one long-term health care
facility in California for an aggregate $3,210,000.
The above-described 1996 acquisitions were all accounted for as purchases
and, accordingly, the financial statements of the Company include the
operations of such acquired entities since the respective dates of their
acquisition.
Under the terms of an Assignment and Assumption Agreement (the Agreement)
between TeamCare and HPI Health Care Services, Inc. (HPI) dated February 1,
1996, TeamCare agreed to provide pharmacy services to the State of New Jersey
as a subcontractor under a contract (the New Jersey Contract) that was awarded
to HPI. Under the terms of the Agreement, TeamCare assumed all the contractual
provisions of the HPI contract for the period February 1, 1996 through January
31, 1998. TeamCare has also been awarded an additional two year contract
beginning February 1, 1998 with the State of New Jersey. In connection with
this Agreement, GranCare paid $4 million in cash for certain inventory and
property and equipment. Under the terms of the Agreement, TeamCare may be
obligated to make deferred conditional purchase price adjustments, not to
exceed $400,000. GranCare received $4.7 million from HPI in consideration of
TeamCare's assumption of the New Jersey Contract as GranCare will incur
certain transition costs and costs to be incurred in managing operations and
personnel during the remainder of the subcontract period. GranCare recognized
$4.5 million of the $4.7 million as net revenues and a reduction in operating
expenses for the year ended December 31, 1996.
In conjunction with the sale of four long-term health care facilities
located in Michigan in the first quarter of 1996, the Company provided
purchase money financing in the amount of $17,550,000 evidenced by an
interest-bearing promissory note, due and payable in 1997. This note is
included in notes receivable in the accompanying Consolidated Balance Sheets.
F-15
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Summarized below are the unaudited pro forma consolidated results of
operations for GranCare had the 1995 Cornerstone acquisition and the 1994 LTC
and HS Healthcare acquisitions occurred as of January 1, 1994:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
---------------------
DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA
<S> <C>
Total revenues......... $786,846
Net income............. $ 26,738
Net income per share:
Primary.............. $ 1.15
Fully diluted........ $ 1.15
</TABLE>
The above results are based upon certain assumptions and estimates which the
Company believes are reasonable, and do not reflect any benefit which might be
achieved from combined operations. The unaudited pro forma results do not
necessarily represent results which would have occurred if the acquisitions
had taken place on the basis assumed above, nor are they indicative of the
results of future combined operations.
Pro forma information for 1996 and other 1995 and 1994 acquisitions and
divestitures is not presented because their operating results, either
individually or in the aggregate, do not have a material effect on the pro
forma operating results presented above.
MERGER
On July 20, 1995, GranCare acquired, through merger, substantially all of
the outstanding common stock of Evergreen in exchange for approximately
9,673,000 shares of GranCare common stock based on a .775 exchange ratio. The
Evergreen merger is accounted for as a pooling-of-interests business
combination and, accordingly, the consolidated financial statements of all
periods prior to the merger have been restated to include the historical
balances of GranCare and Evergreen as if the two companies had always been
combined.
The Company incurred certain costs relating to completion of the Merger and
other one-time costs and recognized an $11.8 million charge in the third
quarter of 1995. The following is a summary of the Merger and other one-time
costs:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
--------------------
DOLLARS IN THOUSANDS
<S> <C>
Merger costs:
Investment banking fees............................ $ 4,100
Legal and other fees............................... 1,469
Executive severance................................ 1,100
Planned divestitures of certain facilities......... 1,500
Other one-time costs:
Relocation......................................... 1,626
Integration........................................ 850
Other deferred acquisition costs................... 1,105
-------
Total................................................ $11,750
=======
</TABLE>
As of December 31, 1996, all amounts provided under this charge had been
paid.
F-16
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of consolidated total revenues and net income to amounts
applicable to the separate pooled companies prior to the date of combination is
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
----------------------------
DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA
<S> <C>
TOTAL REVENUES
GranCare.................................. $549,220
Evergreen................................. 168,251
--------
$717,471
========
NET INCOME
GranCare.................................. $ 15,179
Evergreen................................. 9,111
--------
$ 24,290
========
NET INCOME PER SHARE (FULLY-DILUTED BASIS)
GranCare.................................. $ 1.08
Evergreen................................. .82
--------
$ 1.07
========
</TABLE>
NOTE 5. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
----------- -----------
DOLLARS IN THOUSANDS
<S> <C> <C>
SENIOR DEBT
Mortgage notes payable:
Omega................................................ $ 58,800 $ 58,800
Other (principally HRPT and FINOVA) in installments
which include interest ranging from 8% to 11.5%..... 31,782 32,376
Revolving loan under bank credit facility bearing in-
terest based on LIBOR or prime rate.................. 90,850 37,700
Evergreen revenue bonds............................... 13,038 13,445
Notes payable in installments which include interest
ranging from 6.0% to 13.75%; final maturities in 1996
through 2010......................................... 27,244 28,991
Capitalized lease obligations (less imputed interest
of $540 in 1996 and $570 in 1995).................... 4,520 4,622
Other................................................. 2,400 2,400
----------- -----------
Total senior debt.................................. 228,634 178,334
SUBORDINATED DEBT
Senior subordinated notes; interest due semi-annually
at 9 3/8%, principal due September 15, 2005.......... 100,000 100,000
Convertible subordinated debentures; interest due
semi-annually at 6.5%, principal due January 15,
2003................................................. 60,000 60,000
Other notes payable................................... 1,143 1,271
----------- -----------
Total subordinated debt............................ 161,143 161,271
----------- -----------
Total debt............................................. 389,777 339,605
Less short-term notes payable and current maturities of
long-term debt........................................ 7,535 4,937
----------- -----------
$ 382,242 $ 334,668
=========== ===========
</TABLE>
F-17
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On August 14, 1992, Professional Health Care Management, Inc. (PHCM,
acquired by GranCare in 1992) entered into a $58,800,000 loan agreement with
Omega Healthcare Investors, Inc. (Omega). The loan is secured by mortgages on
certain health care facilities, and by the personal property used in
connection with the operation of those facilities, as well as certain other
intangibles, including the licenses for these facilities, to the extent
permitted by Michigan law, and accounts receivable in excess of $1,000,000.
The minimum interest rate on the loan is 13% per year, of which 12% is payable
monthly in cash and 1% is deferred. The cash interest rate will increase in
each subsequent year based upon a specified formula tied to either; (i) the
percentage change in the Consumer Price Index published by the United States
Department of Labor, or; (ii) the change in Gross Revenues (as defined in the
loan agreement); however, the increase cannot be more than the interest for
the prior fiscal year multiplied by 1.05. The 1% of deferred interest will
accrue on an annual basis and will be cumulative on an annual basis as long as
the loan remains outstanding. Quarterly principal payments of $1,470,000 are
required beginning October 1, 2002, with the remaining balance plus the
deferred interest due in August 2007. The loan agreement also contains certain
restrictive covenants, including, but not limited to, restrictions on PHCM
incurring additional debt, prepayment and minimum net worth requirements. As
of December 31, 1996, the interest rate was 14.5%, including the 1% deferred
interest.
In conjunction with a 1990 acquisition, GranCare borrowed $15,000,000 under
a promissory note agreement with HRPT. The note is secured by mortgages on two
facilities and 1,000,000 shares of HRPT common stock owned by GranCare. The
HRPT note had a balance of $8,750,000, with an interest rate of 13.75% at
December 31, 1994.
During 1995, GranCare renegotiated the note with HRPT, whereby the principal
balance of the promissory note was increased to $11,500,000, resulting in
additional proceeds to GranCare. Minimum interest on the note is 11.5% per
year payable monthly in arrears. Additional interest is payable commencing on
January 1, 1996, in an amount equal to 75% of the percentage increase in the
Consumer Price Index, with certain defined limitations. Principal payments
will begin two years after the date of the note on a 30-year direct reduction
basis, with the remaining balance due December 31, 2010.
On January 29, 1993, GranCare completed a public offering of $60,000,000
aggregate principal amount of its 6.5% Convertible Subordinated Debentures due
2003. The Debentures are convertible into common stock of GranCare at any time
prior to redemption or final maturity, at a conversion price of $27.145 per
share, subject to adjustment upon the occurrence of certain events. Interest
on the Debentures is payable semi-annually on January and July 15th.
Approximately $15,600,000 of the net proceeds of $57,700,000 was used to repay
certain indebtedness, and the remaining $42,100,000 was used for general
corporate purposes, including the further expansion of specialty medical
services and acquisitions. The Debentures were redeemed in February 1997 in
connection with the TeamCare merger described in Note 3.
In conjunction with the 1993 acquisition of four skilled nursing facilities
in Wisconsin, GranCare entered into an $11,000,000 mortgage loan agreement
with FINOVA. Interest accrues on the mortgage note at an adjustable rate of 2%
over prime, with installments of principal and interest due monthly through
April 2001, with final payment due May 2001. The mortgage note cannot be
prepaid until 90 days prior to the end of the term without a prepayment
penalty.
At the end of 1993, a subsidiary of GranCare, GranCare Health Services, Inc.
entered into a $50,000,000 revolving credit agreement with a syndicate of
banks. In 1994, the agreement was amended to increase the line of credit to
$80,000,000. This credit agreement terminated on March 29, 1995.
On March 29, 1995, the Company entered into an agreement with First Union
National Bank of North Carolina (First Union) pursuant to which First Union
provided the Company with a $175 million revolving line of credit (the Credit
Facility). The Company has used the proceeds from the Credit Facility to pay
off its previous
F-18
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
line of credit, fund the acquisition of Cornerstone and for general working
capital purposes. In September 1995, concurrent with the High Yield Debt
offering the Credit Facility was reduced to $150 million. Amounts outstanding
under the Credit Facility bear interest based on LIBOR or prime rates (7.23%
and 8.35%, respectively, at December 31, 1996). Amounts outstanding as of June
30, 1998 may convert to a term loan with equal quarterly installments due
through the final maturity date of June 30, 2002. No principal payments are
required under the Credit Facility prior to the June 30, 1998 conversion date.
This Credit Facility was repaid in February 1997 in connection with the
TeamCare merger described in Note 3.
Evergreen maintained a revolving credit facility and a working capital
facility (the Evergreen Credit Facility) in the aggregate maximum amount of
$55,000,000 from a syndicate of banks, $45,000,000 of which was to be used for
acquisitions and $10,000,000 of which was to be used for working capital
purposes. The Evergreen Credit Facility was terminated at the merger. Six
long-term health care facilities were refinanced via mortgage debt in March
1995 for $16,500,000, including the facilities held as collateral under the
revolving credit facility. The Evergreen Credit Facility described above was
entered into on June 7, 1994, as a refinancing of an existing $6,000,000
revolving credit facility with the same bank.
On September 29, 1995, the Company closed the sale of $100 million aggregate
principal amount of its 9 3/8% Senior Subordinated Notes due 2005 in an
underwritten public offering. After paying underwriter fees and commissions,
the approximately $96 million realized by the Company from the sale of the
Senior Notes was used to pay outstanding indebtedness under its Credit
Facility. The Notes were redeemed in February 1997 in connection with the
TeamCare merger described in Note 3.
The Evergreen revenue bonds include a $9,100,000 Series 1993A taxable
adjustable demand issue that requires semiannual interest payments at a
variable rate (5.45% at December 31, 1996) and annual principal payments
through August 15, 2013. The remaining revenue bonds bear interest at fixed
rates ranging from 7.75% to 9.5% through 2001--2002, and which are subject to
change after such dates. These bonds mature in 2015; however, they may be
redeemed by the bondholders on various dates in the years 2001, 2002, 2011 and
2012.
Certain of these notes payable and related agreements contain covenant
restrictions on additional debt, intercompany loans, dividends and the
maintenance of certain financial ratios. The Company has pledged certain
accounts receivable, leasehold interests and substantially all property and
equipment as collateral under the various debt agreements.
Maturities of debt and obligations under capital leases at December 31,
1996, are summarized as follows:
<TABLE>
<CAPTION>
DEBT CAPITAL LEASES TOTAL
-------- -------------- --------
DOLLARS IN THOUSANDS
<S> <C> <C> <C>
Year ending December 31,
1997..................................... $ 5,881 $ 1,942 $ 7,823
1998..................................... 4,879 1,787 6,666
1999..................................... 2,552 1,044 3,596
2000..................................... 7,481 203 7,684
2001..................................... 1,860 84 1,944
Thereafter................................. 362,604 -- 362,604
-------- ------- --------
Total minimum payments..................... 385,257 5,060 390,317
Less amounts representing interest......... -- 540 540
-------- ------- --------
Total obligations.......................... $385,257 $ 4,520 $389,777
======== ======= ========
</TABLE>
F-19
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In connection with the TeamCare merger described in Note 3, subsequent to
year end the Company replaced its Credit Facility with a new credit facility
in the aggregate amount of $300,000,000 (the New Credit Facility). The New
Credit Facility will consist of two components: a $200,000,000 5-year
revolving credit facility (which includes a $40,000,000 sub-limit for the
issuance of standby letters of credit) and a $100,000,000 5-year term loan.
Borrowings for working capital and general corporate purposes may not exceed
$75,000,000. The first $25,000,000 of exposure for letters of credit issued
under the letter of credit sub-facility will correspondingly reduce
availability under the working capital sub-facility. The revolving credit
portion of the New Credit Facility will mature in five years. The term loan
portion of the New Credit Facility will be amortized in ten quarterly
installments of $7,000,000 each commencing February 12, 1999, thereafter
increasing to $10,000,000 per quarter. All remaining principal and accrued,
unpaid interest shall be due and payable in full on the fifth anniversary of
the closing date of the New Credit Facility. Interest on outstanding
borrowings shall accrue, at the option of the Company, at the base rate or at
the Eurodollar rate plus, in each case, an applicable margin.
NOTE 6. OPERATING LEASES
The Company has operating leases for 24 facilities, including land,
buildings, and equipment from HRPT under two Master Lease Documents. In 1995,
the existing Master Lease Documents were amended. Under the amended lease
arrangements, minimum rent for the aggregate facilities is the annual sum of
$11,550,000, payable in equal monthly installments. In addition, beginning
January 1, 1996, the amended lease agreement provides for additional rent to
be paid monthly, in advance, based on 75% of the increase in the Consumer
Price Index multiplied by the minimum rent due, provided, however, that the
maximum rent (minimum rent plus additional rent) each January shall be limited
to a 2% increase over the total monthly rent paid in the prior December. The
operating leases for 17 facilities expire on December 28, 2010, and there are
two 10 year renewal options. The leases for six facilities expire in June 2006
and there are two 10 1/2-year renewal options. The Company has subleased six
of the 24 facilities to unrelated parties.
The Company leases additional health care facilities, certain other
facilities, office space, and equipment from other unrelated parties.
Substantially all the leases are operating leases which expire at various
dates and generally contain options to renew for various terms. Certain leases
also contain purchase options. Rents generally are subject to increase based
on the Consumer Price Index, occupancy rates, Medicaid reimbursement rates or
at stated amounts specified in the lease agreements. The Company is required
to obtain the consent of HRPT with respect to certain transactions.
A summary of GranCare's minimum commitments under operating leases at
December 31, 1996, follows:
<TABLE>
<CAPTION>
YEAR ENDING DOLLARS IN
DECEMBER 31, THOUSANDS
------------ ----------
<S> <C>
1997........................................................ $ 47,089
1998........................................................ 46,049
1999........................................................ 41,019
2000........................................................ 29,581
2001........................................................ 26,585
Thereafter.................................................... 161,100
--------
Total minimum lease payments.................................. $351,423
========
</TABLE>
F-20
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6. OPERATING LEASES
Aggregate future minimum lease payments to be received under noncancelable
subleases are $4,955,000 for the year ended December 31, 1997 and $46,717,000
thereafter.
Total rent expense for all operating leases, net of sublease income,
aggregated $46,163,000, $41,058,000 and $35,632,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
Subsequent to year end, the Company entered into an agreement with the
owners of 17 of its long-term health care facilities located in Indiana and
one in West Virginia to terminate the Company's lease obligations related to
such facilities effective April 1, 1997 (see Note 13). Future minimum
commitments under operating leases in the amount of $20,269,000 related to
these facilities are included in the above table.
NOTE 7. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is involved in legal proceedings arising in the normal course of
business. Management believes, based in part upon discussions with legal
counsel, the ultimate resolution of these matters will not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
THIRD PARTY SETTLEMENT APPEAL
During the fourth quarter of 1996, the Company received final settlement on
its 1994 cost reports for its California long-term health care facilities. The
final settlements made by the intermediary for seven facilities included
disallowances of a portion of speech and occupational therapy costs based on
their interpretation of Medicare prudent buyer concept. In addition, the
intermediary has reopened the 1993 cost reports for two facilities for the
same issue. The Company has furnished therapy services to patients under
arrangements with outside therapy contractors. The contracts with the outside
contractors contain indemnification clauses regarding denial of payment for
services provided. The intermediary asserts that the Company did not act as a
prudent buyer of therapy services as the Company should have hired therapists
instead of contracting for their services. In the absence of prudent buyer
documentation to the contrary, the intermediary determined reasonable costs
for therapy services based on internally developed survey data and other
factors. The Company, in conjunction with a therapy company and another long-
term care company, has filed an expedited group appeal to the Provider
Reimbursement Review Board regarding these 1994 audit adjustments. A hearing
is scheduled to take place during the Company's second quarter. Management
(based on the advise of outside counsel) believes that it has a strong
position in this matter and will ultimately prevail. If the hearing results in
an unfavorable outcome to the Company and if the Company does not ultimately
prevail on this matter, these adjustments could have a material adverse impact
to net income of a particular future quarter or year.
WORKER'S COMPENSATION
The Company, through its wholly-owned subsidiary, GCI Indemnity, Inc.,
maintains a captive insurance company for the purpose of paying worker's
compensation claims. The Company maintains reinsurance contracts to minimize
its insurance exposure. The Company accepts the first $350,000 of loss and
loss adjustment expense liability per occurrence for worker's compensation
risks. The Company's estimated liability for worker's compensation claims is
reported in the accompanying Consolidated Balance Sheets as other long term
liabilities. Investments held by the captive insurance company are reported in
other assets section of the accompanying Consolidated Balance Sheets. These
investments serve as collateral for worker's compensation loss and loss
adjustment expense reserves.
F-21
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
PHARMACEUTICAL SUPPLY AGREEMENTS
In connection with the transactions described in Note 3, New GranCare has
agreed to purchase for use at substantially all of its long-term health care
facilities all its pharmaceutical supplies and related goods from TeamCare.
The terms of the pharmaceutical supply agreements are for five years. Such
agreements are terminable only upon material breach by TeamCare and a failure
to cure such breach within 30 days of receipt of notice. However, New GranCare
has agreed that for so long as Vitalink's limited guaranty of certain
obligations of New GranCare to HRPT is in effect, New GranCare will not
terminate any of the pharmaceutical supply agreements. Accordingly, the
pharmaceutical supply agreements may extend through December 31, 2010, the
date when all present New GranCare obligations to HRPT will be satisfied.
LETTERS OF CREDIT
To support Vitalink's guaranty of New GranCare's obligations, effective
February 12, 1997 New GranCare provided an irrevocable letter of credit
payable in the amount of $15,000,000 to Vitalink in the event Vitalink makes
any payments under the limited guaranty.
In connection with the sale of four long-term health care facilities located
in Michigan (see Note 4), the Company obtained a letter of credit in the
amount of $9,000,000 for the benefit of Omega. This letter of credit is due to
expire on March 22, 1998. At December 31, 1996, no amounts are outstanding
under this letter of credit.
NOTE 8. INCOME TAXES
The provision for income taxes consists of the following for the years ended
December 31:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995 1994
------- ------- -------
DOLLARS IN THOUSANDS
<S> <C> <C> <C>
CURRENT
Federal....................................... $17,586 $11,880 $11,025
State......................................... 3,222 1,714 2,832
------- ------- -------
20,808 13,594 13,857
DEFERRED
Federal....................................... (544) 1,133 (317)
State......................................... (210) 38 (16)
------- ------- -------
(754) 1,171 (333)
------- ------- -------
$20,054 $14,765 $13,524
======= ======= =======
</TABLE>
At December 31, 1996, the Company and its subsidiaries have approximately
$6,600,000 of federal net operating loss carryforwards and various state
income tax net operating loss carryforwards expiring at various dates through
2008. The use of the acquired federal net operating loss carryforwards is
subject to both annual dollar limitations and the general requirements that
such carryforwards be offset only against the taxable income of the acquired
operations.
The portion of the net operating loss carryforwards not relating to acquired
operations is also subject to various limitations because of previous
ownership changes. The valuation allowance at December 31, 1995, pertained to
nonacquired net operating loss carryforwards.
F-22
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of the
cumulative temporary differences are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
----------- -----------
DOLLARS IN THOUSANDS
<S> <C> <C>
DEFERRED INCOME TAX LIA-
BILITIES
Fixed asset basis dif-
ferences............... $ 15,932 $ 17,318
Deferred rent........... 558 --
Investments............. 4,791 3,276
Intangible asset basis
differences............ 4,035 1,648
Deferred gain on sale of
assets................. 668 1,263
Other................... 216 266
----------- -----------
Total deferred income tax
liabilities.............. 26,200 23,771
DEFERRED INCOME TAX ASSETS
Vacation and compensa-
tion accruals.......... 3,898 4,103
Accounts receivable..... 1,119 5,981
Deferred rent........... -- 426
Voluntary employees'
benefit association.... 588 507
Net operating loss and
credit carryforwards... 4,284 7,367
Accrued one-time costs.. 1,374 --
Accrued merger costs.... -- 886
Workers' compensation
and other insurance.... 328 2,088
Prepaid expenses and
other current assets... 764 --
----------- -----------
Total deferred income tax
assets................... 12,355 21,358
Valuation allowance for
deferred income tax as-
sets..................... -- (3,389)
----------- -----------
Net deferred income tax
assets................... 12,355 17,969
----------- -----------
Net deferred income tax
liabilities.............. $ 13,845 $ 5,802
=========== ===========
</TABLE>
The valuation allowance decreased as shown below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995 1994
-------- ---------------
DOLLARS IN THOUSANDS
<S> <C> <C> <C>
Recognition of NOL carryforwards as a reduction in
income tax expense................................ $ 514 $ 325 $ 325
NOL which will not be recognized due to expiration. 2,875 -- --
Initial recognition of deductible temporary differ-
ences as a reduction in income tax expense........ -- -- 665
Recognition of acquired NOLs and deductible tempo-
rary differences as a reduction to goodwill....... -- -- 2,548
-------- ------ --------
$ 3,389 $325 $ 3,538
======== ====== ========
</TABLE>
F-23
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Differences between GranCare's income tax expense and the amount calculated
utilizing the federal statutory rate are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1996 AMOUNT PERCENT 1995 AMOUNT PERCENT 1994 AMOUNT PERCENT
----------- ------- ----------- ------- ----------- -------
DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
Income tax at statutory
rate................... $18,471 35.0% $12,365 35.0% $13,236 35.0%
State tax, net of fed-
eral benefit........... 1,958 3.7 1,135 3.2 1,958 5.2
Merger costs............ -- -- 1,435 4.1 -- --
Federal NOL current..... (277) (.5) (277) (.8) (277) (.7)
Reduction in valuation
allowance, net of
write-off of expired
NOL.................... (237) (.5) -- -- (665) (1.8)
State NOL, net of fed-
eral benefit........... -- -- (48) (.1) (48) (.1)
Federal tax credits..... -- -- (88) (.3) (458) (1.2)
Other................... 139 .3 243 .7 (222) (.6)
------- ---- ------- ---- ------- ----
$20,054 38.0% $14,765 41.8% $13,524 35.8%
======= ==== ======= ==== ======= ====
</TABLE>
NOTE 9. SHAREHOLDERS' EQUITY, STOCK OPTIONS AND WARRANTS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
GranCare has a Stock Incentive Plan, adopted in 1991 and amended in 1992
(the 1991 Plan), which provides for the direct sale of shares, the granting of
stock options and the granting of limited stock appreciation rights to
selected employees, officers, directors and consultants of GranCare. The total
number of common shares that may be issued under the 1991 Plan is 2,500,000.
The direct sale of common shares under the 1991 Plan shall be at a price not
less than 85% of the fair market value of the common stock on the date the
right to purchase shares is granted.
Under the 1991 Plan, options are granted at an exercise price of not less
than 100% of fair market value at the date of grant, except for nonstatutory
options which are granted at an exercise price of not less than 85% of the
fair market value on the date of the grant.
Certain options are exercisable immediately, while others are subject to
vesting provisions whereby the options will be fully vested three to four
years after the date of grant. All options are non-transferable and expire
five to 10 years from the date of the grant. The Board of Directors, or a
committee appointed by the Board of Directors, may grant limited stock
appreciation rights in tandem with any stock options granted under the 1991
Plan. Limited stock appreciation rights are only exercisable with the consent
of the Board of Directors on and for the 60-day period following certain
events as defined in the 1991 Plan, and are payable in cash. No limited stock
appreciation rights have been issued under the 1991 Plan.
F-24
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On May 3, 1994, GranCare adopted a Stock Option/Stock Issuance Plan (the
1994 Plan) which provides for the granting of incentive stock options, the
granting of limited stock appreciation rights, a salary reduction grant
program, and a stock issuance program for selected employees of GranCare. The
1994 Plan has an automatic grant program for the granting of options to non-
employee directors. The total number of common shares issuable under the 1994
Plan is 1,363,960 shares. The 1994 Plan contains a provision that provides
that each year, commencing with the 1995 calendar year, the common stock
available for grant under the 1994 Plan will automatically increase by an
amount equal to 1% of the shares of common stock outstanding on December 31 of
the immediately preceding calendar year.
The exercise price per share for incentive stock options cannot be less than
100% of the fair market value per share of GranCare's common stock on the
grant date. For nonstatutory options, the exercise price per share may not be
less than 85% of such fair market value. No option shall have a maximum term
in excess of ten years from the grant date. The Plan Administrator, as
designated by the Board of Directors, will have complete discretion to grant
incentive stock options and limited stock appreciation rights, and to choose
individuals to participate in the salary reduction grant program. The Plan
Administrator may, at its discretion, sell shares of GranCare's common stock
at a price per share not less than 85% of fair market value in accordance with
the stock issuance program. Shares may also be issued solely as a bonus for
past services.
The Plan Administrator may, at its discretion, grant an employee with
incentive stock options the right to surrender all or part of an unexercised
option in exchange for a distribution from GranCare, or limited stock
appreciation rights. The distribution will be an amount equal to the excess of
the fair market value of the number of shares on the surrender date, over the
aggregate price payable for such vested shares. No limited stock appreciation
rights have been issued under the 1994 Plan.
On January 1, 1996, GranCare adopted an Outside Directors Stock Incentive
Plan (the 1996 Plan) which provides the granting of stock options and common
stock for non-employee directors. The 1996 Plan provides for the automatic
annual grant of shares of common stock to each non-employee director. The
total number of common shares issuable under the 1996 Plan is 250,000 shares.
Under the Plan, each non-employee director will also receive stock option
awards granted at various intervals. The exercise price of all of such options
will be the fair market value of common stock on the date of grant and such
options will vest in equal annual increments over a three year period.
Proforma information regarding net income and earnings per share is required
by Statement No. 123, which also requires that the information be determined
as if the Company has accounted for its employee stock options granted
subsequent to December 31, 1994 under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1996 and 1995, respectively: risk-free interest rates of 5.77
% and 6.91%; volatility factors of the expected market price of the Company's
common stock of .424 and .451; and a weighted-average expected life of the
option of 8 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimated, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
F-25
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
----------- -----------
DOLLARS IN THOUSANDS
EXCEPT
EARNINGS PER SHARE DATA
<S> <C> <C>
Pro forma net income................................ $ 31,753 $ 19,968
Pro forma net income per share:
Primary........................................... $ 1.32 $ 0.84
Fully diluted..................................... $ 1.29 $ 0.83
</TABLE>
Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until
future years.
In connection with the Evergreen merger, 9,672,806 shares of GranCare common
stock were issued in the exchange. Additionally, Evergreen stock options that
remained outstanding were exchanged for options to purchase GranCare stock
with the same terms, except as adjusted for the common stock exchange ratio.
The GranCare options issued in connection with the Evergreen exchange totaled
approximately 214,000 and are included in the option table presented below,
based on their original issuance date by Evergreen.
A summary of the Company's warrants activity for the three years ended
December 31, 1996 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1996 1995 1994
----------------------- ----------------------- -----------------------
(WARRANTS IN THOUSANDS)
WEIGHTED - WEIGHTED - WEIGHTED -
AVERAGE AVERAGE AVERAGE
WARRANTS EXERCISE PRICE WARRANTS EXERCISE PRICE WARRANTS EXERCISE PRICE
-------- -------------- -------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 352 $ 5 765 $ 3 890 $ 4
Exercised............... (352) 5 (413) 2 (125) 5
---- ---- ----
Outstanding at end of
year................... -- -- 352 5 765 3
==== ==== ====
Exercisable at end of
year................... -- -- 352 5 765 3
==== ==== ====
</TABLE>
A summary of the Company's stock option activity (including the exchanged
Evergreen options mentioned above) for the three years ended December 31,
1996, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1996 1995 1994
---------------------- ---------------------- ----------------------
(OPTIONS IN THOUSANDS)
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 2,142 $12 2,268 $11 1,809 $ 9
Granted................. 410 15 387 16 584 15
Cancelled............... (101) 16 (156) 16 (28) 8
Exercised............... (96) 14 (357) 5 (97) 4
----- ----- -----
Outstanding at end of
year................... 2,355 13 2,142 12 2,268 11
===== ===== =====
Exercisable at end of
year................... 1,436 11 1,186 10 1,117 7
===== ===== =====
Weighted-average fair
value of options
granted during the
year................... $ 9 $10
</TABLE>
F-26
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1996, an aggregate of 611,000 shares was available for
future grant under GranCare's stock incentive plans. Together with the
2,355,000 stock options outstanding on that date, approximately 2,966,000
shares of common stock were reserved for future issuance. In connection with
the TeamCare merger described in Note 3, New GranCare has adopted a
replacement plan whereby 2,355,000 options were issued and fully vested and
are exercisable on substantially the same terms as the GranCare options
discussed above.
Exercise prices for options outstanding as of December 31, 1996 ranged from
$0.77 to $21.00. The weighted-average contractual life of those options is 7
years.
NOTE 10. EMPLOYEE BENEFIT PLANS
The Company currently has two separate benefit plans covering employees of
GranCare. The defined benefit plan, which was amended as of December 31, 1986
to freeze benefits for all but certain unionized employees, covers certain
employees after reaching age 21 and completion of one year of service. During
1990, the accrual of benefits was suspended for the employees who continued to
accrue benefits after December 31, 1986. In September 1996, the Board of
Directors approved termination of this plan effective December 31, 1996.
At December 31, 1996 and 1995, the projected benefit obligations were
$675,000 and $588,000 respectively. Adjustments to recognize minimum pension
liability have been reflected in the accompanying Consolidated Statements of
Shareholders' Equity.
Other employees of the Company are covered by various defined contribution
plans. Company contributions are based on a certain percentage of wages, a
matching percentage of the participants' voluntary contributions, or at the
Company's discretion. During 1996, 1995 and 1994, the Company recognized
$2,000,000, $1,645,000 and $1,145,000 respectively, of expense related to
these plans.
On May 14, 1996 GranCare adopted the Senior Executive Shareholder Value
Program for the Company's senior level executive officers and the Shareholder
Value Program for all other executive officers and employees (collectively the
Shareholder Value Program). The Shareholder Value Program provides for the
payment of cash incentives based on the performance of the Company over a
three year performance period vis-a-vis a peer group. The Shareholder Value
Program vests upon a "Change in Control", which the TeamCare merger described
in Note 3 constitutes. The Board of Directors of the Company has determined
that upon consummation of the merger, the senior executives and all other plan
participants would receive $2.3 million and $2.2 million, respectively (see
Note 3).
NOTE 11. RELATED-PARTY TRANSACTIONS
In connection with various acquisitions, GranCare has incurred debt payable
to former owners who are now employees of GranCare. Such debt totaled
$6,189,000 and $3,779,000 at December 31, 1996 and 1995, respectively.
On October 1, 1996, the Company repurchased for $3,110,000 in cash one of
the two long-term health care facilities it sold in December 1993 to an
individual previously engaged by GranCare as a consultant on various
acquisitions and divestitures. Subsequent to this date, the individual
satisfied to the Company all obligations remaining in connection with the 1993
sale.
In 1994, GranCare sold three of its long-term health care facilities to a
former employee of GranCare at an aggregate sales price of $3,000,000.
GranCare provided financing of $2,550,000 on these sales and recognized a
total gain of $2,373,000.
F-27
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Included in notes receivable in the accompanying Consolidated Balance Sheets
at December 31, 1996 and 1995, is a $5,720,000 and $2,850,000 note receivable,
respectively, resulting from working capital advances made to the owner of
certain facilities currently managed by the Company. The loan bears interest
payable monthly at 1% above the prime rate and is secured by the accounts
receivable, inventory and equipment of the managed facilities. The 1996 amount
reflects a $3,000,000 write-off which was a component of the $18,400,000 exit
and other one-time costs charge recorded in the third quarter of 1996 (see
Note 13).
NOTE 12. FAIR VALUES OF FINANCIAL INSTRUMENTS AND INVESTMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments.
Cash and Cash Equivalents The carrying amount reported in the balance sheet
for cash and cash equivalents approximates fair value.
Investments The carrying amount reported in the balance sheet for
investments approximates fair value. The investments in municipal bonds are
held by GranCare's captive insurance subsidiary and are restricted to use by
only that subsidiary, and are not available for general corporate purposes.
All investments are classified as "available for sale" for accounting purposes
and, therefore, are carried at fair value with unrealized gains and losses
recorded directly in equity. Fair market values are based on quoted market
prices.
There were no significant realized gains or losses on sales of investments
during 1996, 1995 and 1994. The investments in municipal bonds generally
mature within six years (e.g., 2001 to 2002).
Notes Payable and Long-Term Debt The carrying amounts of GranCare's
borrowing under the revolving loan and various mortgages and notes payable
approximate fair value. The fair value of GranCare's convertible subordinated
debentures and senior subordinated notes is based on their quoted market
price.
The cost basis and estimated fair values of GranCare's financial instruments
at December 31 are as follows:
<TABLE>
<CAPTION>
FINANCIAL INSTRUMENT 1996 COST BASIS ESTIMATED FAIR VALUE 1995 COST BASIS ESTIMATED FAIR VALUE
- -------------------- --------------- -------------------- --------------- --------------------
DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C>
Cash and cash equiva-
lents.................. $ 14,512 $ 14,512 $ 17,738 $ 17,738
Investments:
Marketable equity se-
curities............. 10,233 21,532 9,506 17,695
Municipal bonds....... 17,240 17,401 12,166 12,610
-------- -------- -------- --------
27,473 38,933 21,672 30,305
Notes payable and long-
term debt:
Revolving loan and
other debt........... 229,777 229,777 179,605 179,605
Convertible subordi-
nated debentures..... 60,000 61,500 60,000 52,200
Senior Subordinated
Notes................ 100,000 106,750 100,000 103,000
</TABLE>
Note: The cost basis is the carrying amount for all financial instruments
except for investments, as noted above.
NOTE 13. EXIT, RESTRUCTURING AND OTHER ONE-TIME CHARGES
EXIT AND OTHER ONE-TIME CHARGES
During the third quarter of 1996, management decided to close five
facilities which are operated under long term operating leases, as these
facilities did not fit the Company's operating strategies. The plan to exit
these
F-28
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
activities, including providing appropriate notice as required by regulations
to residents, employees and authorities has commenced. The facilities will be
closed and operating activities will cease. The remaining net book value of
leasehold improvements at the dates of closure have been charged to
operations. On March 6, 1997, the Company modified its plan to close five
Indiana facilities to terminate its lease obligations and operations of a
total of 18 facilities. This modification did not significantly impact the
exit costs previously accrued in the third quarter of 1996. Management expects
to complete the lease terminations in the first quarter of 1997. The revenues
and income before taxes of these facilities and related regional offices
during 1996 were $57,140,000 and $677,000, respectively. In addition, in the
third quarter of 1996, the Company recorded other charges as set forth in the
following table, including a charge for additional bad debt expense related to
TeamCare. The charge for bad debt expense is attributable to the increased
risk of collection resulting from the deterioration in the financial condition
of certain customers. The notes receivable written off are for loans made by
the Company to a sublease lessee to fund working capital. Accounts receivable
from the facility under lease serve as collateral for the working capital
loans. During the third quarter of 1996, the loans to the lessee began to
significantly exceed the collateral, indicating that the loan would not be
recoverable. Accordingly, the Company decided to terminate the sublease
arrangement and to write off the loans which it concluded would not be
recoverable. The write-off of leasehold improvements, notes receivable and bad
debt expense are reflected in the accompanying Consolidated Balance Sheets as
a direct reduction of the related asset. Costs related to the termination of
the frozen pension plan and other items have been reflected in accrued
expenses in the accompanying Consolidated Balance Sheets. The following is a
summary of the exit and other one-time charges:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
--------------------
<S> <C>
EXIT COSTS:
Write-off of leasehold improvements in connection
with the terminated leases.......................... $10,600
OTHER:
TeamCare bad debt expense............................ 2,900
Write-off of notes receivable........................ 3,000
Termination of frozen pension plan and other items... 1,900
-------
$18,400
=======
</TABLE>
RESTRUCTURING
In August 1994, GranCare adopted and publicly announced a formal plan of
restructuring which includes the reorganization of GranCare's operations and
the sale of certain under-performing and non-strategic long-term health care
facilities. In connection with its commitment to this formal plan, GranCare
recognized an $8,200,000 restructuring charge in the third quarter of 1994,
consisting of the following components:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
--------------------
<S> <C>
Actual and projected net operating losses of the facil-
ities to be sold, from the commitment date to their
anticipated disposal dates............................ $2,620
Less: Estimated gains from the sale of the facilities.. 2,250
------
370
Personnel costs--termination and severance............. 3,700
Professional fees--legal, accounting and appraisals--
and other exit costs.................................. 1,100
Write-off of unamortized financing fees resulting from
restructuring......................................... 2,400
Other.................................................. 630
------
Total restructuring costs.............................. $8,200
======
</TABLE>
F-29
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The termination and severance benefits cover approximately 50 employees who
work or worked in the facilities to be divested or GranCare's corporate or
regional offices. Charges against the restructuring reserve in 1996, 1995 and
1994 included the write-off of unamortized financing fees and operating gains
and losses of the facilities sold. At December 31, 1996, all amounts provided
under this charge had been paid.
NOTE 14. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
The following table presents the Company's quarterly financial results of
operations for the years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
NET INCOME
(LOSS) PER
REVENUES NET INCOME SHARE
------------------- ------------------ --------------
1996 1995 1996 1995 1996 1995
--------- --------- ------- ------- --------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
First Quarter........... $ 230,011 $ 191,681 $ 6,590 $ 6,079 $ 0.28 $ 0.25
Second Quarter.......... 247,271 204,426 8,180 7,713 0.34 0.32
Third Quarter........... 268,371 208,462 9,392(2) (518)(1) 0.39 (0.02)
Fourth Quarter.......... 257,470 211,893 8,558 7,290 0.35 0.31
</TABLE>
- --------
(1) Includes merger and other one-time costs of $11.8 million (see Note 4).
(2) Includes the effects before income taxes of (a) $18.0 million gain on the
sale of the Company's interest in ALS (see Note 2) and (b) exit and other
one-time costs of $18.4 million (see Note 13).
F-30
<PAGE>
GRANCARE, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
- ----------- ---------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1994:
Allowance for doubtful ac-
counts................... 7,059 8,290 1,182(2) 6,639(1) 9,892
Restructuring reserve for
estimated losses on
reorganization and
divestiture of
facilities............... -- 8,200 -- 3,658(3) 4,542
Year ended December 31
1995:
Allowance for doubtful ac-
counts................... 9,892 6,281 572(2) 5,889(1) 10,856
Restructuring reserve for
estimated losses on
reorganization and
divestiture of
facilities............... 4,542 -- -- 4,042(3) 500
Year ended December 31,
1996:
Allowance for doubtful ac-
counts................... 10,856 7,318 -- 6,965(1) 11,209
Restructuring reserve for
estimated losses on
reorganization and
divestiture of
facilities............... 500 -- -- 500(3) --
</TABLE>
- --------
(1) Uncollectible accounts written off, net of recoveries.
(2) Allowances recorded at date of acquisition.
(3) Writeoff of deferred loan and other related costs, operating results of the
facilities to be divested and gain or loss on the sale of those facilities.
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation (Note 13)
3.2 Bylaws (Note 13)
4.1 Specimen of Common Stock Certificate (Note 13)
10.1 Acquisition Agreement, Agreement to Lease and Mortgage Loan Agreement,
dated December 28, 1990 by and among Health and Rehabilitation
Properties Trust ("HRPT") and HostMaster, Inc., AMS Holding Co.,
American Medical Services, Inc. and AMS Properties, Inc. ("AMS"), as
amended through December 29, 1993 (Note 1)
10.2 Master Lease Document, dated December 28, 1990, between HRPT and AMS
(Note 1)
10.3 Form of Guaranty, dated December 28, 1990, by American Medical
Services, Inc. and each of its subsidiaries in favor of HRPT (Note 1)
10.4 Deed of Trust and Security Agreement, dated as of January 28, 1993,
from GCI Colter Village, Inc. in favor of Bell Atlantic TriCon Leasing
Corporation ("Bell Atlantic"), with respect to the Colter Village
complex (Note 5)
10.5 Deed of Trust and Security Agreement, dated April 7, 1993 from GCI
Bella Vita, Inc. in favor of Bell Atlantic with respect to the Bella
Vita skilled nursing facility (Note 5)
10.6 Mortgage and Security Agreement and Fixture Financing Statement, dated
as of May 7, 1993 from GCI-Wisconsin Properties, Inc. in favor of Bell
Atlantic (Note 5)
10.7 Mortgage and Security Agreement and Fixture Financing Statement, dated
as of May 7, 1993 from GCI-Wisconsin Properties, Inc. in favor of Bell
Atlantic (Note 5)
10.8 Amendment to Acquisition Agreement, Agreement to Lease and Mortgage
Loan Agreement among HRPT, GranCare, Inc., AMS and GCI Health Care
Centers, Inc., dated as of December 29, 1993 (Note 7)
10.9 Amendment to Master Lease between HRPT and AMS, dated as of December
29, 1993 (Note 7)
10.10 First Amendment to Lease and Security Agreement dated October 28,
1994, by and among Nationwide Health Properties, Inc., as Landlord and
GCI Palm Court, Inc. and GranCare, Inc. as Tenant (Note 7)
10.11 Agreement and Plan of Merger among GranCare, Inc., GW Acquisition
Corp. and Evergreen Healthcare, Inc., dated as of May 2, 1995 (Note 8)
10.12 Plan and Agreement of Merger by and among GranCare, Inc., Healthtrust,
Inc.--The Hospital Company and Coralstone Management, Inc. with
respect to Cornerstone Health Management Company, Inc. (Note 9)
10.13 Credit Agreement between the Company and First Union National Bank of
North Carolina, as Administrative Agent and LC Bank and The Chase
Manhattan Bank as Syndication Agent, dated as of February 12, 1997
(the Registrant hereby undertakes to provide exhibits omitted from the
Credit Agreement upon request)
10.14 First Amendment to Credit Agreement, dated as of April 18, 1997
*10.15 GranCare, Inc. 1996 Annual Incentive Plan, Long Term Incentive Plan
and Stockholder Value Program (Note 14)
*10.16 GranCare, Inc. Outside Directors Stock Incentive Plan (Note 14)
*10.17 GranCare, Inc. 1996 Replacement Stock Option Plan (Note 14)
*10.18 Executive Split Dollar Life Insurance Plan (Note 14)
*10.19 Executive Deferred Compensation Plan (Note 14)
*10.20 401(k) Savings Plan and Trust (Note 12)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.21 Assignment, Assumption and Amendment of the GranCare, Inc. 401(k)
Savings Plan (Note 14)
*10.22 GranCare, Inc. 1996 Stock Incentive Plan (Note 14)
10.23 Amendment to Master Lease Document and Facility Lease between GHI
Health Care Center, Inc. And HRPT, dated as of October 1, 1994 (Note
12)
10.24 Amendment to Master Lease Document and Facility Lease between AMS and
HRPT, dated as of October 1, 1994 (Note 12)
10.25 Promissory Note from AMS to HRPT in the principal amount of $11.5
million, dated October 1, 1994 (Note 12)
10.26 Mortgage and Security Agreement from AMS to HRPT for the Northwest and
River Hills West Health Care Centers, dated as of March 31, 1995 (Note
12)
10.27 Master Settlement Agreement between GranCare, Inc. and the Service
Employees International Union ("SEIU"), dated as of November 6, 1995
(Note 12)
10.28 Settlement Agreement between GranCare and the SEIU with respect to
four of GranCare's facilities located in the State of Michigan, dated
as of January 29, 1996 (Note 12)
10.29 Settlement Agreement between GranCare, Inc. and the SEIU with respect
to seven of GranCare's facilities located in the State of Wisconsin
(Note 12)
10.30 Settlement Agreement between GranCare, Inc. and the SEIU with respect
to seven of GranCare's facilities located in the State of California
(Note 12)
10.31 Form of Mortgage and Security Agreement with respect to five of
GranCare's facilities located in the State of Illinois to secure a
loan in the aggregate principal amount of $16.5 million from Health
Care Capital Finance, Inc. (the "Health Care Capital Loan"), each
agreement dated as of March 23, 1995 (Note 12)
10.32 Deed to Secure Debt and Security Agreement with respect to GranCare,
Inc.'s facility located in Georgia to secure the Health Care Capital
Loan, dated as of March 23, 1995 (Note 12)
10.33 Bond Trust Indenture between Health Care Fund II, Ltd., and LaSalle
National Trust, N.A., as bond Trustee, dated as of June 1, 1993 (Note
12)
10.34 Form of Direct Note Obligation, Series 1993 (Health Care Fund II,
Ltd.), dated June 23, 1993 (Note 12)
10.35 Form of Direct Note Obligation, Series 1993A (Health Care Fund II,
Ltd.), dated June 23, 1993 (Note 12)
10.36 Bond Trust Indenture between Health Care Fund II, Ltd., and LaSalle
National Trust, N.A., as Bond Trustee, dated as of August 1, 1993
(Note 12)
10.37 Direct Note Obligation, Series 1993B-1 (Health Care Fund II, Ltd.)
dated June 23, 1993 (Note 12)
10.38 Direct Note Obligation, Series 1993B-2 (Health Care Fund II, Ltd.)
dated June 23, 1993 (Note 12)
10.39 Tax Allocation and Indemnification Agreement by and among the Company,
Vitalink and certain subsidiaries of the Company dated as of February
12, 1997
10.40 Non-Competition Agreement between Vitalink and the Company dated as of
February 12, 1997
*10.41 Form of employment Agreement between the Company and M. Scott Athans
(Note 13)
*10.42 Form of Employment Agreement for Executive Vice Presidents (Note 13)
10.43 Consent and Amendment to Transaction Documents dated as of December
31, 1996 (the "Consent and Amendment") among GCI Health Care Centers,
Inc., the Company, Vitalink, HRPT and AMS Properties, Inc. (the
Company hereby undertakes to provide all exhibits omitted from the
Consent and Amendment to the Commission upon request) (Note 14)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.44 Limited Guaranty between Vitalink and HRPT dated as of February 12,
1997
10.45 Assumption Agreement (the "Assumption Agreement") by the Company in
favor of HRPT (the Registrant hereby undertakes to provide all
exhibits omitted from the Assumption Agreement to the Commission upon
request) (Note 14)
10.46 Release and Settlement Agreement dated as of April 1, 1997 with
respect to leases for 17 facilities located in the State of Indiana
10.47 Amended and Restated Agreement and Plan of Distribution dated as of
September 3, 1996 (the "Distribution Agreement") between the
Predecessor and the Successor (the Registrant hereby undertakes to
provide all schedules omitted from the Distribution Agreement to the
Commission upon request) (Note 14)
11.1 Computation of Earnings Per Share
12.1 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP, independent auditors
23.2 Consent of KPMG Peat Marwick LLP, independent auditors
</TABLE>
- --------
* Management contracts or compensatory plans or arrangements required to be
filed as exhibits to this Form 10-K by Item 601(b)(10)(iii) of Regulation S-K,
previously filed where indicated and incorporated herein by reference.
<PAGE>
NOTE
REFERENCE DOCUMENT
(1) Incorporated by reference to the Predecessor's registration statement on
Form S-1 (Registration No. 33-42595), as amended, which was filed with
the Commission on September 11, 1991.
(2) Incorporated by reference to the Predecessor's Annual Report on Form 10-K
for the year ended December 31, 1991.
(3) Incorporated by reference to the Predecessor's Quarterly Report on Form
10-Q for the period ended December 31, 1993.
(4) Incorporated by reference to the Predecessor's Current Report on Form 8-K
which was filed with the Commission on July 15, 1994.
(5) Incorporated by reference to the Predecessor's Current Report on Form 8-K
for which was filed with the Commission on July 15, 1994.
(6) Incorporated by reference to the Predecessor's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1994.
(7) Incorporated by reference to the Predecessor's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1994.
(8) Incorporated by reference to the Predecessor's Annual Report on Form 10-K
for the quarterly period ended December 31, 1994.
(9) Incorporated by reference to the Predecessor's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1994.
(10) Incorporated by reference to the Predecessor's Current Report on Form 8-K
which was filed with the Commission on April 19, 1995.
(11) Incorporated by reference to the Predecessor's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1995.
(12) Incorporated by reference to the Predecessor's Annual Report on Form 10-K
for the year ended December 31, 1995.
(13) Incorporated by reference to the Successor's Registration Statement on
Form S-1 (Registration No. 333-19097) which was filed with the Commission
on December 31, 1996.
(14) Incorporated by reference to the Successor's Amendment No. 1 to
Registration Statement on Form S-1 (Registration No. 333-19097) which was
filed with the Commission on January 8, 1997.
<PAGE>
EXHIBIT 10.13
$300,000,000
CREDIT AGREEMENT
Dated as of February 12, 1997
Among
NEW GRANCARE, INC.,
a Delaware corporation,
as Borrower;
-- --------
FIRST UNION NATIONAL BANK OF NORTH CAROLINA,
as Administrative Agent;
-- -------------- -----
THE CHASE MANHATTAN BANK,
as Syndication Agent;
-- ----------- -----
FIRST UNION NATIONAL BANK OF NORTH CAROLINA,
as LC Bank;
-- -------
and
THE LENDERS NAMED HEREIN,
as Lenders.
-- -------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.1 Certain Defined Terms........................................ 1
SECTION 1.2 Accounting Terms............................................. 30
SECTION 1.3 Types of Borrowings and Classes of Loans..................... 31
ARTICLE II
AMOUNTS AND TERMS OF FACILITIES
SECTION 2.1 Revolving Credit Facilities.................................. 32
(a) Working Capital Loans............................................. 32
(b) Acquisition Loans................................................. 32
(c) Other Working Capital and Acquisition Loan Provisions............. 33
(d) Swing Line Loans.................................................. 33
SECTION 2.2 Term Loan Facility........................................... 35
(a) Term Loans........................................................ 35
(b) Other Term Loan Provisions........................................ 35
SECTION 2.3 Making Loans................................................. 36
(a) Notice of Borrowing............................................... 36
(b) Notice of Borrowing Irrevocable................................... 36
(c) Assumption of Funding............................................. 37
(d) Failure of Lender to Fund......................................... 37
SECTION 2.4 Letter of Credit Subfacility................................. 38
(a) Issuance of the Letters of Credit................................. 38
(b) Request for LC Issuance........................................... 38
(c) Reimbursement..................................................... 38
(d) Reimbursement Obligation Absolute................................. 39
(e) Lender Participation.............................................. 39
(f) Commercial Practices.............................................. 40
SECTION 2.5 Notes........................................................ 41
(a) Revolving Notes................................................... 41
(b) Term Notes........................................................ 41
(c) Swing Line Note................................................... 42
(d) Recording of Amounts.............................................. 42
SECTION 2.6 Mandatory Principal Payments................................. 42
(a) Scheduled Amortization............................................ 42
(b) Mandatory Prepayments upon Certain Events......................... 43
(c) Accompaniment of Interest; Eurodollar Costs....................... 47
(d) Application of LC Cash Collateral................................. 47
(e) Overadvance....................................................... 48
SECTION 2.7 Interest..................................................... 48
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
(a) Base Rate Loans................................................. 48
(b) Eurodollar Loans................................................ 48
(c) Default Interest................................................ 49
(d) Swing Line Loans................................................ 49
SECTION 2.8 Voluntary Prepayments...................................... 49
SECTION 2.9 Termination and Reduction of the Commitments............... 50
(a) Mandatory Termination and Reductions............................ 50
(b) Voluntary Termination and Reductions............................ 50
(c) Application of Reductions....................................... 51
SECTION 2.10 Voluntary Conversion of Loans............................. 51
(a) Notice.......................................................... 51
(b) Requirements.................................................... 52
SECTION 2.11 Fees...................................................... 52
(a) Commitment Fees................................................. 52
(b) Letter of Credit Fees........................................... 52
(c) Facing Fees..................................................... 52
(d) Letter of Credit Administration................................. 52
(e) Agent Fees...................................................... 53
SECTION 2.12 Payments and Computations................................. 53
(a) Payments........................................................ 53
(b) Charging of Accounts............................................ 53
(c) Computations.................................................... 53
(d) Payment on Business Day......................................... 54
(e) Presumption of Payment.......................................... 54
SECTION 2.13 Sharing of Payments, Etc.................................. 54
SECTION 2.14 Taxes..................................................... 55
(a) Net Payments.................................................... 55
(b) Payment of Other Taxes.......................................... 55
(c) Indemnification................................................. 55
(d) Evidence of Payments............................................ 55
(e) Withholding Tax Exemption....................................... 56
(f) Withholding Taxes............................................... 56
(g) Indemnification................................................. 56
(h) Participants.................................................... 57
SECTION 2.15 Illegality................................................ 57
SECTION 2.16 Increased Costs........................................... 57
(a) Increase in Expenses............................................ 57
(b) Increase in Capital Requirements................................ 57
SECTION 2.17 Interest Rate Determination and Protection................ 58
(a) Notice of Eurodollar Rate....................................... 58
(b) Inability to Provide Information................................ 58
(c) Suspension of Eurodollar Loans.................................. 58
(d) Failure to Select Duration...................................... 59
SECTION 2.18 Funding Losses............................................ 59
SECTION 2.19 Domestic and Eurodollar Lending Offices................... 59
</TABLE>
ii
<PAGE>
<TABLE> <C>
<S>
SECTION 2.20 Replacement Lenders....................................... 60
ARTICLE III
CONDITIONS OF LENDING
SECTION 3.1 Condition Precedent to the Closing Date.................... 60
(a) Payment of Fees and Expenses.................................... 61
(b) Loan Documents.................................................. 61
(c) Security Interests.............................................. 62
(d) Outstanding Letters of Credit................................... 63
(e) Corporate Documents............................................. 64
(f) Legal Opinions.................................................. 64
(g) Insurance Coverage.............................................. 65
(h) Other Deliveries................................................ 65
(i) Market Conditions............................................... 66
(j) The Transactions................................................ 66
SECTION 3.2 Conditions Precedent to Each Credit Event.................. 68
(a) Notice of Borrowing or Request of LC Issuance................... 68
(b) Certification................................................... 68
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION 4.1 Representations and Warranties of Borrower................. 69
(a) Organization.................................................... 69
(b) Power and Authority............................................. 69
(c) Due Authorization............................................... 69
(d) Binding and Enforceable......................................... 69
(e) Subsidiaries.................................................... 70
(f) Indebtedness.................................................... 70
(g) Liens........................................................... 70
(h) No Default...................................................... 70
(i) Governmental and Other Approvals................................ 70
(j) Litigation...................................................... 70
(k) Financial Information........................................... 71
(l) Material Adverse Change......................................... 72
(m) Compliance...................................................... 72
(n) Payment of Taxes................................................ 72
(o) Security Interests.............................................. 72
(p) Title to Property............................................... 72
(q) Real Property................................................... 73
(r) Conduct of Business............................................. 73
(s) Investment Company.............................................. 73
(t) Margin Stock.................................................... 73
(u) Registration of Notes........................................... 73
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
(v) Health Care Permits................................................73
(w) Environmental Matters..............................................74
(x) ERISA Compliance...................................................75
(y) Solvency...........................................................76
(z) Restrictions on Dividends..........................................77
(aa) Full Disclosure....................................................77
(ab) Transaction Documents..............................................78
ARTICLE V
COVENANTS OF BORROWER
SECTION 5.1 Financial Covenants...........................................78
(a) Maximum Leverage Ratio.............................................78
(b) Minimum Interest Coverage Ratio....................................78
(c) Maximum Debt Coverage Ratio........................................79
(d) Maximum Rental Expense.............................................79
SECTION 5.2 Reporting Covenants...........................................79
(a) Quarterly Financial Statements.....................................79
(b) Annual Financial Statements........................................80
(c) Compliance Certificate.............................................80
(d) Annual Operating and Cash Budget...................................81
(e) Management Letter..................................................81
(f) Notice of Default..................................................81
(g) Notice of Litigation...............................................81
(h) Security Holder Materials and SEC Filings..........................81
(i) Environmental Claims...............................................81
(j) ERISA Notices......................................................82
(k) Health Care Permit Violation.......................................82
(l) Notice of Material Event or Circumstance...........................82
(m) Notice of HRPT Negotiations........................................82
(n) Notice of Lease Default............................................82
(o) Tax Allocation Agreement Matters...................................83
(p) Other Information..................................................83
SECTION 5.3 Affirmative Covenants of Borrower and Its Subsidiaries........83
(a) Preservation of Corporate Existence, Etc...........................83
(b) Maintenance of Property and Assets.................................83
(c) Insurance..........................................................84
(d) Compliance With Laws...............................................84
(e) Payment of Obligations.............................................84
(f) Use of Proceeds....................................................84
(g) Inspection of Property and Books and Records.......................85
(h) New Subsidiaries...................................................85
(i) Real Property Acquisition..........................................86
(j) Real Property Liens................................................86
(k) Further Assurances.................................................88
</TABLE>
iv
<PAGE>
<TABLE>
<S> <C>
(l) Disclosure Updates.............................................. 88
(m) Environmental Laws.............................................. 89
(n) Health Care Permits and Approvals............................... 89
(o) Permitted Acquisitions.......................................... 89
SECTION 5.4 Negative Covenants of Borrower and Its Subsidiaries........ 90
(a) Liens........................................................... 90
(b) Limitation on Indebtedness...................................... 92
(c) Limitation on Contingent Obligations............................ 95
(d) Restricted Payments............................................. 95
(e) Consolidation, Merger, Sale of Assets........................... 97
(f) Capital Expenditures............................................ 98
(g) Loans and Investments........................................... 98
(h) Conduct of Business............................................. 100
(i) Transactions With Affiliates.................................... 100
(j) Compliance With ERISA........................................... 100
(k) Amendments to Corporate Documents............................... 101
(l) Compliance With Environmental Laws.............................. 101
(m) Health Care Permits and Approvals............................... 101
(n) Lease Agreement................................................. 101
(o) Accounting Changes.............................................. 102
(p) Transfer of Collateral to HRPT.................................. 102
(q) Tax Matters..................................................... 102
ARTICLE VI
EVENTS OF DEFAULT
SECTION 6.1 Events of Default..........................................102
(a) Non-Payment of Principal........................................102
(b) Non-Payment of Other Amounts....................................103
(c) Representations and Warranties..................................103
(d) Financial and Negative Covenants................................103
(e) Reporting and Affirmative Covenants.............................103
(f) Other Covenants.................................................103
(g) Bankruptcy......................................................103
(h) Judgments.......................................................103
(i) Loan Documents..................................................104
(j) Collateral Documents............................................104
(k) ERISA...........................................................104
(l) Environmental...................................................104
(m) Indebtedness....................................................104
(n) Tax Matters.....................................................105
(o) Material Leases.................................................105
ARTICLE VII
AGENTS
</TABLE>
v
<PAGE>
<TABLE>
<S> <C>
SECTION 7.1 Appointment..................................................106
SECTION 7.2 Nature of Duties.............................................106
SECTION 7.3 Exculpatory Provisions.......................................106
SECTION 7.4 Reliance by Agents...........................................107
SECTION 7.5 Non-Reliance on Agents and Other Lenders.....................107
SECTION 7.6 Notice of Default............................................108
SECTION 7.7 Indemnification..............................................108
SECTION 7.8 The Agents in their Individual Capacity......................109
SECTION 7.9 Successor Agents.............................................109
SECTION 7.10 Collateral Matters..........................................109
(a) Perfection of Security Interest...................................109
(b) Authority to Release Collateral...................................110
(c) Release on Sale...................................................110
(d) Release on Repayment..............................................110
(e) Collateral Documents..............................................111
(f) Actions under Third Party Consents................................111
ARTICLE VIII
MISCELLANEOUS
SECTION 8.1 Amendments...................................................111
SECTION 8.2 Notices......................................................112
SECTION 8.3 No Waiver; Remedies..........................................114
SECTION 8.4 Costs, Expenses and Taxes....................................114
SECTION 8.5 Right of Set-off.............................................114
SECTION 8.6 Indemnity....................................................115
(a) General Indemnity.................................................115
(b) Environmental Indemnity...........................................115
(c) Limitation........................................................115
SECTION 8.7 Assignments and Participations...............................116
(a) Permitted Assignment..............................................116
(b) Effect of Assignment..............................................116
(c) Maintenance of Agreements.........................................117
(d) Procedure.........................................................117
(e) Participations....................................................118
(f) Assignment to Federal Reserve Bank................................119
(g) Additional Information............................................119
SECTION 8.8 LC Bank......................................................119
SECTION 8.9 Binding Effect...............................................119
SECTION 8.10 GOVERNING LAW...............................................120
SECTION 8.11 Dispute Resolution..........................................120
(a) Arbitration.......................................................120
(b) Preservation and Limitation of Remedies...........................121
SECTION 8.12 Confidentiality.............................................121
SECTION 8.13 Limitation of Liability.....................................122
</TABLE>
vi
<PAGE>
<TABLE>
<S> <C>
SECTION 8.14 Entire Agreement............................................122
SECTION 8.15 Execution in Counterparts...................................122
SECTION 8.16 Survival....................................................122
SECTION 8.17 Severability................................................123
SECTION 8.18 Construction................................................123
</TABLE>
vii
<PAGE>
LIST OF EXHIBITS
Exhibit A-1 Form of Revolving Note
Exhibit A-2 Form of Term Note
Exhibit A-3 Form of Swing Line Note
Exhibit B-1 Form of Notice of Borrowing
Exhibit B-2 Form of Request for LC Issuance
Exhibit B-3 Form of Notice of Continuance/Conversion
Exhibit C-1 Form of Subsidiary Guaranty
Exhibit C-2 Form of Borrower Pledge and Security Agreement
Exhibit C-3 Form of Subsidiary Pledge and Security Agreement
Exhibit C-4 Form of Subsidiary Joinder
Exhibit C-5 Form of Intercompany Note
Exhibit C-6 Form of Agency Account Agreement
Exhibit C-7 Form of Mortgage
Exhibit C-8 Form of Perfection Certificate
Exhibit C-9 Form of Financial Condition Certificate
Exhibit D-1 Form of Opinion of Counsel for Borrower
Exhibit D-2 Form of Opinion of Local Counsel
Exhibit E-1 Form of Compliance Certificate
Exhibit E-2 Form of Assignment and Acceptance
LIST OF SCHEDULES
Schedule I Lenders, Commitments and Lending Offices
Schedule 2.4(g) Outstanding Letters of Credit
Schedule 4.1(e)(i) Subsidiaries of Borrower
Schedule 4.1(e)(ii) Encumbered Subsidiaries
Schedule 4.1(i) Approvals and Consents
Schedule 4.1(j) Litigation
Schedule 4.1(q) Real Property
Schedule 4.1(v) Health Care Permits
Schedule 4.1(w) Environmental Matters
Schedule 4.1(x) ERISA Compliance
Schedule 4.1(z) List of Material Agreements With Dividend Restrictions
Schedule 5.4(a) Existing Liens
Schedule 5.4(b) Existing Indebtedness
Schedule 5.4(c) Existing Contingent Obligations
Schedule 5.4(g) Existing Loans and Investments
vii
<PAGE>
CREDIT AGREEMENT
This CREDIT AGREEMENT, dated as of February 12, 1997, is made by and
among NEW GRANCARE, INC., a Delaware corporation, as Borrower, the financial
institutions signatory hereto, FIRST UNION NATIONAL BANK OF NORTH CAROLINA, as
Administrative Agent and LC Bank, and THE CHASE MANHATTAN BANK, as Syndication
Agent.
Borrower (such term, and all other capitalized terms herein, being
used as hereinafter defined) has requested the Lenders to extend credit to
Borrower in the aggregate principal amount of up to $300,000,000, as more
completely described herein. The Lenders are willing to extend such credit to
Borrower upon the terms and subject to the conditions set forth herein.
Accordingly, Borrower, the Lenders, Administrative Agent, Syndication Agent and
LC Bank agree as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.1 Certain Defined Terms. As used in this Agreement, the
---------------------
following terms shall have the following meanings:
"Acquired Indebtedness" has the meaning provided in Section
---------------------
5.4(b)(vi).
"Acquisition" means any acquisition, whether in a single transaction
-----------
or series of related transactions, by Borrower or any one or more of its
Subsidiaries of (a) all or a substantial part of the assets, or a going
business, unit or division, of any Person, whether through purchase of assets or
securities, by merger or otherwise; (b) control of at least a majority of
securities of a corporation ordinarily (and apart from rights accruing under
special circumstances) having the right to vote in the election of directors; or
(c) control of a greater than 50% ownership interest in a partnership, joint
venture or other Person.
"Acquisition Loan" and "Acquisition Loans" have the meanings provided
---------------- -----------------
in Section 2.1(b).
"Acquisition Loan Subfacility" means a revolving loan subfacility
----------------------------
pursuant to which the Lenders shall make Acquisition Loans as provided in
Section 2.1(b).
"Administrative Agent" means First Union, in its capacity as
--------------------
administrative agent for the Lenders hereunder, and any successor administrative
agent.
"Affiliate" of a specified Person means any other Person that
---------
directly, or indirectly through one or more intermediaries, controls, is
controlled by or is under common control with the Person specified. For
purposes of the foregoing, "control," "controlled by" and "under common control
with" with respect to any Person means (i) the possession, directly or
indirectly,
<PAGE>
of the power to direct or cause the direction of the management and policies of
such Person, whether through the ownership of voting securities or by contract
or otherwise, or (ii) the ownership of more than 15% of the voting securities
of, or other equity interests in, such Person.
"Agency Account Agreement" has the meaning provided in Section
------------------------
3.1(b)(ix).
"Agent Fees" has the meaning provided in Section 2.11(e).
----------
"Agents" means Administrative Agent and Syndication Agent.
------
"Aggregate Stated Amount" means, at any time, the aggregate Stated
-----------------------
Amount of all Letters of Credit issued and outstanding under this Agreement at
such time.
"Agreement" means this Credit Agreement, as such agreement may be
---------
amended, modified or supplemented from time to time.
"Ancillary Agreements" has the meaning given to such term in the
--------------------
Distribution Agreement.
"Applicable Lending Office" means, with respect to each Lender, such
-------------------------
Lender's Domestic Lending Office in the case of a Base Rate Loan and such
Lender's Eurodollar Lending Office in the case of a Eurodollar Loan.
"Approved Hedging Agreement" means any Hedging Agreement which (i) is
--------------------------
entered into by Borrower with any Lender or group of Lenders; (ii) relates to
(x) interest rate exposure of Borrower or any of its Subsidiaries with respect
to Indebtedness permitted pursuant to this Agreement and/or (y) foreign exchange
exposure of Borrower or any of its Subsidiaries with respect to the operations
of Borrower or any of its Subsidiaries; and (iii) is in form and substance
satisfactory to and approved in writing by Administrative Agent.
"Asset Sale" means any sale, lease, transfer, assignment or other
----------
disposition of assets, business units, individual business assets or property of
Borrower or any of its Subsidiaries, whether tangible or intangible, including
the sale, transfer or disposition of any capital stock or real property;
provided, however, that any Permitted Asset Disposition shall not be deemed to
- -------- -------
be an Asset Sale; provided, further, that the foregoing definition shall not be
-------- -------
deemed to imply that any such Asset Sale is permitted under this Agreement.
"Asset Sale Account" has the meaning provided in Section 2.6(b)(i).
------------------
"Assignment and Acceptance" means an assignment and acceptance, in
-------------------------
substantially the form of Exhibit E-2 hereto, entered into by a Lender and an
-----------
Eligible Assignee and accepted by Administrative Agent.
2
<PAGE>
"Authorized Officer" means the chief executive officer, president, any
------------------
executive vice president, the principal financial officer, the chief accounting
officer, the secretary, the controller or the treasurer of Borrower.
"Available Acquisition Commitment" means, at any time, the Total
--------------------------------
Revolving Credit Commitments at such time minus the Outstanding Working Capital
Credit at such time.
"Base Rate" means, for any day, a fluctuating interest rate per annum
---------
equal to the higher of: (i) the then effective rate of interest announced
publicly by First Union, from time to time, as its prime rate; and (ii) the then
Federal Funds Rate plus 0.50%.
"Base Rate Loan" means a Loan which bears interest at the Base Rate
--------------
plus the Base Rate Margin as provided in Section 2.7(a).
"Base Rate Margin" means (i) 0.50% per annum, for interest accrued
----------------
from the Closing Date to the first Rate Adjustment Date to occur after the
Closing Date; and (ii) from each Rate Adjustment Date after the Closing Date to
the subsequent Rate Adjustment Date, the Base Rate Margin in the following table
set forth opposite the Senior Debt Ratio as of the last day of the fiscal
quarter immediately preceding such Rate Adjustment Date:
<TABLE>
<CAPTION>
Senior Debt Ratio Base Rate Margin Pricing Level
- -------------------------- ----------------- -------------
<S> <C> <C>
Less than 2.50 0.00% Tier I
Greater than or equal to 0.00% Tier II
2.50 and less than 3.00
Greater than or equal to 0.00% Tier III
3.00 and less than 3.50
Greater than or equal to 0.25% Tier IV
3.50 and less than 4.00
Greater than or equal to 0.50% Tier V
4.00
</TABLE>
Notwithstanding the foregoing, (x) in order for Borrower to qualify for the Tier
I pricing level, the Debt Coverage Ratio must be less than 3.00 as of the last
day of the fiscal quarter immediately preceding such Rate Adjustment Date; (y)
if on any Rate Adjustment Date, Borrower has failed to deliver the financial
statements required to be delivered pursuant to Sections 5.2(a) and 5.2(b), as
applicable, and the Compliance Certificate required to be delivered pursuant to
Section 5.2(c) for the fiscal quarter immediately preceding such Rate Adjustment
Date, then (i) the Base Rate Margin shall be adjusted to the Tier V pricing
level on such Rate Adjustment Date, and (ii) the date of delivery of such
financial statements and Compliance Certificate shall be treated as a Rate
Adjustment Date if no Default or Event of Default has occurred and is continuing
on the date of
3
<PAGE>
such delivery; and (z) if a Default or Event of Default has occurred and is
continuing on any Rate Adjustment Date, then no decrease in the Base Rate Margin
shall occur on such Rate Adjustment Date. Any calculation pursuant to clause
(y)(i) in the preceding sentence shall not excuse or limit the remedies
available for any Default or Event of Default as a result of the failure to
deliver such financial statements or Compliance Certificate.
"Borrower" means New GranCare, Inc., a Delaware corporation, which
--------
immediately following the effectiveness of the Merger shall change its corporate
name to GranCare, Inc., and its successors.
"Borrower Pledge and Security Agreement" has the meaning provided in
--------------------------------------
Section 3.1(b)(vii).
"Borrower Prospectus" means the Prospectus, dated January 8, 1997,
-------------------
relating to the common stock of Borrower, filed by GranCare with the SEC and
distributed to the Shareholders in connection with the Distribution.
"Borrowing" means the incurrence by Borrower on a single date of a
---------
group of Loans of a single Class and Type (or, in the case of Swing Line Loans,
a Swing Line Loan made by Swing Line Lender) and, in the case of Eurodollar
Loans, as to which a single Interest Period is in effect.
"Borrowing Date" has the meaning provided in Section 2.3(a).
--------------
"Breakage Costs" has the meaning provided in Section 2.18.
--------------
"Business Day" means any day except a Saturday or Sunday or a day when
------------
commercial banks are authorized or required by law to be closed in Charlotte,
North Carolina, and Atlanta, Georgia, and, if the applicable Business Day
relates to any Eurodollar Loan, also means any day except any day on which
commercial banks are not open for international business (including dealings in
dollar deposits) in London.
"Capital Expenditures" means, for any period, the amount of all
--------------------
expenditures (whether paid in cash or accrued as liabilities) during such period
by Borrower or any of its Subsidiaries that, in conformity with GAAP, are or are
required to be included as capital expenditures in the consolidated cash flow
statements of Borrower and its Subsidiaries.
"Capital Lease" means, with respect to any Person, any lease of any
-------------
property by that Person as lessee which, in accordance with GAAP, is required to
be accounted for as a capital lease on the balance sheet of that Person.
"Capital Lease Obligations" means, with respect to any Person, any and
-------------------------
all lease obligations of such Person and its Subsidiaries on a consolidated
basis that, in accordance with GAAP, have been or are required to be capitalized
on the books of such Person and its Subsidiaries.
4
<PAGE>
"Cash Equivalents" means:
----------------
(i) securities issued or fully guaranteed or insured by the
United States government or any agency thereof and backed by the full faith
and credit of the United States having a maturity of not more than one year
from the date of acquisition;
(ii) marketable direct obligations issued by any state of the
United States of America or any political subdivision of any such state or
any public instrumentality thereof maturing within one year from the date
of acquisition thereof and, at the time of acquisition, rated A by S&P or A
by Moody's;
(iii) certificates of deposit, time deposits, Eurodollar time
deposits, or bankers' acceptances having in each case a tenor of not more
than one year, issued by any Lender, or by an United States commercial bank
having combined capital and surplus of not less than $100,000,000 whose
short-term securities are rated at least A-1 by S&P or P-1 by Moody's;
(iv) certificates of deposit in an amount less than or equal to
$100,000 in the aggregate issued by any other bank insured by the Federal
Deposit Insurance Corporation;
(v) commercial paper or bankers acceptances of an issuer rated
at least A-1 by S&P or P-1 by Moody's and, in either case, having a tenor
of not more than one year; and
(vi) money market funds invested in one or more of the foregoing.
"Casualty Event" means, with respect to any property (including any
--------------
interest in property) of Borrower or any of its Subsidiaries, any loss of,
damage to, or condemnation or other taking of, such property for which Borrower
or such Subsidiary receives insurance proceeds, proceeds of a condemnation award
or other compensation (other than business interruption insurance proceeds).
"Change of Control" means the occurrence of any of the following: (a)
-----------------
if the Distribution shall not have occurred, (i) GranCare shall fail to own 100%
of the outstanding capital stock of Borrower; (ii) at any time, any Person or
group of Persons (within the meaning of Section 13(d) of the Exchange Act) owns
beneficially (within the meaning of Rule 13d-3 promulgated by the SEC under the
Exchange Act, or any successor or replacement regulation), 30% or more of the
issued and outstanding shares of capital stock of GranCare having ordinary
voting power for the election of directors of GranCare (or, if lower, the
percentage of such issued and outstanding shares that would, upon the lapse of
time or the occurrence of certain events, permit Borrower's stockholders (other
than the acquiring Person or group) to exercise stock purchase rights pursuant
to any stockholder rights plan then in effect); (iii) at any time, a majority of
the members of the board of directors of GranCare shall not be Continuing
Directors; or (iv) a majority of the directors who are Continuing Directors as
of any date shall resign within a four-month period after such date; and (b) if
the Distribution shall have occurred, (i) at any time, any Person or group of
Persons (within the meaning of Section 13(d) of the Exchange Act and the
5
<PAGE>
regulations promulgated thereunder) owns beneficially (within the meaning of
Rule 13d-3 promulgated by the SEC under the Exchange Act, or any successor or
replacement regulation), 30% or more of the issued and outstanding shares of
capital stock of Borrower having ordinary voting power for the election of
directors of Borrower (or, if lower, the percentage of such issued and
outstanding shares that would, upon the lapse of time or the occurrence of
certain events, permit Borrower's stockholders (other than the acquiring Person
or group) to exercise stock purchase rights pursuant to any stockholder rights
plan then in effect); (ii) at any time, a majority of the members of the board
of directors of Borrower shall not be Continuing Directors; or (iii) a majority
of the directors who are Continuing Directors as of any date shall resign within
a four-month period after such date.
"Class" has the meaning provided in Section 1.3.
-----
"Closing Date" means the date, not later than February 28, 1997, on
------------
which all of the conditions precedent set forth in Sections 3.1 and 3.2 are
satisfied or waived in writing by the Required Lenders or the Agents, as
applicable.
"Code" means the Internal Revenue Code of 1986, as amended, and any
----
regulation promulgated thereunder.
"Collateral" means all property which is subject or becomes subject to
----------
the security interests or Lien granted by any of the Collateral Documents.
"Collateral Documents" means, collectively, the Borrower Pledge and
--------------------
Security Agreement, the Subsidiary Pledge and Security Agreement, all Subsidiary
Joinders, the Mortgages, if any, and all other security agreements, collateral
assignments and other instruments, documents and agreements at any time
delivered to Administrative Agent to create or evidence Liens to secure the
Obligations or any guaranty thereof, and any amendments, supplements,
modifications, renewals, replacements, consolidations, substitutions and
extensions of any of the foregoing.
"Commitment" means, with respect to any Lender, such Lender's
----------
Revolving Credit Commitment and Term Loan Commitment, as applicable.
"Commitment Fee" and "Commitment Fees" have the meanings provided in
-------------- ---------------
Section 2.11(a).
"Commitment Fee Margin" means (i) 0.375% per annum, for the Commitment
---------------------
Fee accrued from the Closing Date to the first Rate Adjustment Date to occur
after the Closing Date; and (ii) from each Rate Adjustment Date after the
Closing Date to the subsequent Rate Adjustment Date, the Commitment Fee Margin
in the following table set forth opposite the Senior Debt Ratio as of the last
day of the fiscal quarter immediately preceding such Rate Adjustment Date:
Senior Debt Ratio Commitment Fee Margin Pricing Level
- ----------------- --------------------- -------------
6
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Less than 2.50 0.250% Tier I
Greater than or equal to 0.250% Tier II
2.50 and less than 3.00
Greater than or equal to 0.300% Tier III
3.00 and less than 3.50
Greater than or equal to 0.375% Tier IV
3.50 and less than 4.00
Greater than or equal to 0.375% Tier V
4.00
</TABLE>
Notwithstanding the foregoing, (x) in order for Borrower to qualify for the Tier
I pricing level, the Debt Coverage Ratio must be less than 3.00 as of the last
day of the fiscal quarter immediately preceding such Rate Adjustment Date; (y)
if on any Rate Adjustment Date, Borrower has failed to deliver the financial
statements required to be delivered pursuant to Sections 5.2(a) and 5.2(b), as
applicable, or the Compliance Certificate required to be delivered pursuant to
Section 5.2(c) for the fiscal quarter immediately preceding such Rate Adjustment
Date, then (i) the Commitment Fee Margin shall be adjusted to the Tier V pricing
level on such Rate Adjustment Date, and (ii) the date of delivery of such
financial statements and Compliance Certificate shall be treated as a Rate
Adjustment Date if no Default or Event of Default has occurred and is continuing
on the date of such delivery; and (z) if a Default or Event of Default has
occurred and is continuing on any Rate Adjustment Date, then no decrease in the
Commitment Fee Margin shall occur on such Rate Adjustment Date. Any calculation
pursuant to clause (y)(i) in the preceding sentence shall not excuse or limit
the remedies available for any Default or Event of Default as a result of the
failure to deliver such financial statements or Compliance Certificate.
"Compliance Certificate" has the meaning provided in Section 5.2(c).
----------------------
"Compliance Date" means (i) the date on which any Notice of Borrowing,
---------------
Request for LC Issuance, Notice of Continuance/Conversion or Compliance
Certificate is delivered to Administrative Agent; and (ii) any Borrowing Date or
LC Issuance Date.
"Consent Solicitation" means a consent solicitation, conducted by
--------------------
GranCare and mailed to holders of the outstanding 9 3/8% Senior Notes together
with the Tender Offer, to obtain the approval of such holders of the
transactions contemplated by the Distribution Agreement and the Merger Agreement
and of certain amendments to the 9 3/8% Senior Note Indenture.
"Contingent Obligation" means, as applied to any Person, any direct or
---------------------
indirect liability of that Person with respect to any Indebtedness, lease,
dividend, letter of credit or other obligation (the "primary obligation") of
another Person (the "primary obligor"), including any
7
<PAGE>
obligation of that Person, whether or not contingent, (i) to purchase,
repurchase or otherwise acquire any such primary obligation or any property
constituting direct or indirect security therefor; or (ii) to advance or provide
funds (A) for the payment or discharge of any such primary obligation, or (B) to
maintain working capital or equity capital of the primary obligor or otherwise
to maintain the net worth or solvency or any balance sheet item, level of income
or financial condition of the primary obligor; or (iii) to purchase property,
securities or services primarily for the purpose of assuring the owner of any
such primary obligation of the ability of the primary obligor to make payment of
such primary obligation; or (iv) otherwise to assure or hold harmless the holder
of any such primary obligation against loss in respect thereof. The amount of
any Contingent Obligation of any Person shall be deemed to be an amount equal to
the maximum amount of such Person's liability with respect to the stated or
determinable amount of the primary obligation for which such Contingent
Obligation is incurred or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof (assuming such Person is required to
perform thereunder).
"Continuing Director" means a director who (i) was a member of the
-------------------
board of directors of Borrower on the Closing Date, or of GranCare at any time
prior to the Closing Date, as applicable, or (ii) was nominated to be a member
of the board of directors by a majority of the Continuing Directors then in
office to fill a vacancy left by death, retirement or voluntary resignation of a
director.
"Convert," "Conversion" and "Converted" each refer to a conversion of
------- ---------- ---------
Loans of one Type into Loans of another Type pursuant to Section 2.10.
"Convertible Subordinated Debt" means the Indebtedness, in the
-----------------------------
original principal amount of $60,000,000, issued by Borrower under the
Convertible Subordinated Debt Indenture.
"Convertible Subordinated Debt Indenture" means that certain
---------------------------------------
Indenture, dated as of January 29, 1993, by and between GranCare, as issuer, and
First Fidelity Trust Company, New York, as trustee, as amended.
"Debt" means, as applied to any Person and in each case determined on
----
a consolidated basis in conformity with GAAP (without duplication): (i) all
obligations for borrowed money (whether by loan or the issuance of debt
securities or otherwise); (ii) all obligations evidenced by bonds, debentures,
notes, or other similar instruments; (iii) all Capital Lease Obligations; (iv)
all obligations or liabilities of others secured by a Lien on any property or
asset of such Person, irrespective of whether such obligation or liability is
assumed; (v) all obligations owed for all or any part of the deferred purchase
price of property, assets, or services that are due more than 12 months after
the date of the incurrence of the obligation in respect thereto; and (vi) all
Unfunded Pension Liabilities of such Person or any of its Subsidiaries, to the
extent the aggregate amount of all such Unfunded Pension Liabilities exceeds
$1,000,000.
"Debt Coverage Ratio" means, as of any date of determination, the
-------------------
ratio obtained by dividing (i) the amount of Indebtedness required under GAAP to
be recorded on the balance sheet of Borrower and its Subsidiaries, plus all
other Indebtedness of Borrower and its
8
<PAGE>
Subsidiaries other than Indebtedness of the type described in clause (vii) of
the definition of Indebtedness, all on a consolidated basis as of such date of
determination, by (ii) EBITDA for the Reference Period with respect to such date
of determination.
"Debt Issuance" means any issuance, incurrence or sale by Borrower or
-------------
any of its Subsidiaries of any Subordinated Debt, whether in a public offering
or otherwise.
"Default" means any event or condition which with notice, the passage
-------
of time or both would constitute an Event of Default.
"Distribution" means the distribution by GranCare to the Shareholders
------------
of all the capital stock of Borrower on the Closing Date pursuant to the terms
set forth in the GranCare Proxy Statement.
"Distribution Agreement" means the Amended and Restated Agreement and
----------------------
Plan of Distribution, dated as of September 3, 1996, by and between GranCare and
Borrower, as such agreement may be amended, modified or supplemented from time
to time in accordance with the terms hereof.
"Dollars" and "$" means United States dollars or such coin or currency
------- -
of the United States of America as at the time of payment shall be legal tender
for the payment of public and private debts in the United States of America.
"Domestic Lending Office" means, with respect to any Lender, the
-----------------------
office of such Lender specified as its "Domestic Lending Office" beneath its
name on Schedule I hereto or in any Assignment and Acceptance pursuant to which
----------
it became a Lender, or such other office of such Lender as such Lender may from
time to time specify to Borrower and Administrative Agent as its Domestic
Lending Office pursuant to Section 2.19.
"Drawing Payment" means any payment by LC Bank honoring a drawing
---------------
under any Letter of Credit.
"EBITDA" means, for any period, the sum of (i) Net Income for such
------
period, (ii) depreciation and amortization included in calculating such Net
Income, (iii) Interest Expense for such period and (iv) Tax Expense for such
period.
"EBITDAR" means, for any period, the sum of (i) Net Income for such
-------
period, (ii) depreciation and amortization included in calculating such Net
Income, (iii) Interest Expense for such period, (iv) Tax Expense for such period
and (v) Rental Expense for such period.
"Eligible Assignee" means (i) a commercial bank organized under the
-----------------
laws of the United States, any state thereof or the District of Columbia and
having total assets in excess of $1,000,000,000; (ii) a commercial bank
organized under the laws of any other country which is a member of the OECD,
or a political subdivision of any such country, and having total assets in
excess of $1,000,000,000; provided that such bank is acting through a branch or
--------
agency located
9
<PAGE>
in the United States; (iii) a finance company, insurance or other financial
institution or fund that is engaged in making, purchasing or otherwise investing
in commercial loans in the ordinary course of its business and having total
assets in excess of $200,000,000; (iv) any Affiliate of an existing Lender; and
(v) any other Person approved by Administrative Agent and Borrower.
"Encumbered Subsidiary" means any Subsidiary of Borrower (other than
---------------------
GCI Indemnity) with respect to which Administrative Agent, LC Bank and the
Lenders do not have a first priority perfected Lien on a majority of the assets
of such Subsidiary.
"Environmental Claims" means any and all administrative, regulatory or
--------------------
judicial actions or causes of action, suits, obligations, liabilities, losses,
proceedings, executory decrees, judgments, penalties, fees, demands, demand
letters, orders, directives, claims (including any claims involving liability in
tort, strict, absolute or otherwise), liens, notices of noncompliance or
violation, or legal fees or costs of investigations or proceedings (hereinafter
"Claims"), relating in any way to any Environmental Law or any Environmental
------
Permit, or arising from the presence, discharge, emission or release (or alleged
presence, discharge, emission or release) on, in or under any property, whether
or not owned by Borrower or any Subsidiary, or into the environment of any
Hazardous Materials, including any and all Claims by any Governmental Authority
or by any third party for enforcement, cleanup, removal, response, remedial or
other actions or damages, contribution, indemnification, cost recovery,
compensation or injunctive relief pursuant to any Environmental Law or any
alleged injury or threat of injury to property, health, safety, natural
resources or the environment.
"Environmental Laws" means all federal, state and local laws, common
------------------
laws, statutes, rules, regulations, ordinances and codes, and any judicial or
administrative interpretation thereof or requirement thereunder, including any
judicial or administrative order, by any Governmental Authority, relating to the
environment, health, safety and land use, the regulation or protection of human
health, safety, the environment and natural resources, including without
limitation, the Comprehensive Environmental Response, Compensation, and
Liability Act, the Clean Air Act, the Federal Water Pollution Control Act of
1972, the Solid Waste Disposal Act, the Federal Resource Conservation and
Recovery Act, the Toxic Substances Control Act, the Emergency Planning and
Community Right-to-Know Act ("EPCRA"), as such laws have been and may be amended
-----
from time to time, and any analogous state laws, common laws, statutes, rules,
regulations, ordinances and codes.
"Environmental Permit" means any license, permit, authorization,
--------------------
registration or approval issued or required under any Environmental Law.
"Equity Issuance" means (i) any issuance of any equity interest by
---------------
Borrower and/or any Subsidiary of Borrower to any party other than (A) a
Subsidiary of Borrower or (B) an officer, employee or director of Borrower or
any Subsidiary of Borrower and (ii) any contribution of capital to Borrower or
any Subsidiary of Borrower by any party that is not Borrower or a Subsidiary of
Borrower; provided, however, that the term Equity Issuance shall not include (x)
-------- -------
any issuance of equity in respect of warrants or options issued and outstanding
as of the
10
<PAGE>
Closing Date or (y) any issuance of equity as a part of the Purchase Price for a
Permitted Acquisition.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended, and any regulation promulgated thereunder.
"ERISA Affiliate" means any trade or business (whether or not
---------------
incorporated) under common control with Borrower or any Subsidiary of Borrower
within the meaning of Sections 414(b), 414(c) or 414(m) of the Code.
"ERISA Event" means (i) a Reportable Event with respect to a Qualified
-----------
Plan or a Multiemployer Plan; (ii) a withdrawal by Borrower or any ERISA
Affiliate from a Qualified Plan subject to Section 4063 of ERISA during a plan
year in which it was a substantial employer (as defined in Section 4001(a)(2) of
ERISA) giving rise to any liability that would be reasonably likely to have a
Material Adverse Effect; (iii) a complete or partial withdrawal by Borrower or
any ERISA Affiliate from a Multiemployer Plan giving rise to any liability that
would be reasonably likely to have a Material Adverse Effect; (iv) the filing of
a notice of intent to terminate, in a distress termination, or the commencement
of proceedings by the PBGC to terminate a Qualified Plan or Multiemployer Plan
subject to Title IV of ERISA; (v) a failure to make required contributions to a
Qualified Plan or Multiemployer Plan that would be reasonably likely to have a
Material Adverse Effect; (vi) the imposition of any liability under Title VI of
ERISA, other than PBGC premiums due but not delinquent under Section 4007 of
ERISA, upon Borrower or any ERISA Affiliate that would be reasonably likely to
have a Material Adverse Effect; (vii) an application for a funding waiver or an
extension of any amortization period pursuant to Section 412 of the Code with
respect to any Qualified Plan; (viii) Borrower or any ERISA Affiliate engages in
a nonexempt prohibited transaction or otherwise become liable with respect to a
nonexempt prohibited transaction, the consequences of which, in the aggregate,
would be reasonably likely to have a Material Adverse Effect; or (ix) a
violation of the applicable requirements of Section 404 or 405 of ERISA or the
exclusive benefit rule under Section 401(a) of the Code by Borrower or any ERISA
Affiliate with respect to any Qualified Plan for which Borrower or any of its
Subsidiaries may be liable, the consequences of which, in the aggregate, would
be reasonably likely to have a Material Adverse Effect.
"Eurocurrency Liabilities" has the meaning assigned to that term in
------------------------
Regulation D of the Board of Governors of the Federal Reserve System, as in
effect from time to time.
"Eurodollar Lending Office" means, with respect to any Lender, the
-------------------------
office of such Lender specified as its "Eurodollar Lending Office" beneath its
name on Schedule I hereto or in any Assignment and Acceptance pursuant to which
----------
it became a Lender (or, if no such office is specified, its Domestic Lending
Office), or such other office of such Lender as such Lender may from time to
time specify to Borrower and Administrative Agent as its Eurodollar Lending
Office pursuant to Section 2.19.
"Eurodollar Loan" means a Loan which bears interest at the Eurodollar
---------------
Rate plus the Eurodollar Rate Margin as provided in Section 2.7(b).
11
<PAGE>
"Eurodollar Rate" means, for any Interest Period for each Eurodollar
---------------
Loan comprising part of the same Borrowing, an interest rate per annum obtained
by dividing (i) (y) the rate of interest appearing on Telerate Page 3750 (or any
successor page) or (z) if no such rate is available, the rate of interest
determined by Administrative Agent to be the rate or the arithmetic mean of
rates (rounded upward, if necessary, to the nearest 1/16 of one percentage
point) at which Dollar deposits in immediately available funds are offered by
Administrative Agent to first-tier banks in the London interbank Eurodollar
market, in each case under (y) and (z) above at approximately 11:00 a.m., London
time, two (2) Business Days prior to the first day of such Interest Period for a
period substantially equal to such Interest Period and in an amount
substantially equal to the amount of Administrative Agent's Eurodollar Loan
comprising part of such Borrowing, by (ii) the amount equal to 1.00 minus the
Eurodollar Rate Reserve Percentage (expressed as a decimal) for such Interest
Period. The Eurodollar Rate for the Interest Period for each Eurodollar Loan
comprising part of the same Borrowing shall be determined by Administrative
Agent two Business Days before the first day of such Interest Period (subject,
however, to the provisions of Section 2.17).
"Eurodollar Rate Margin" means (i) 1.75% per annum, for interest
----------------------
accrued from the Closing Date to the first Rate Adjustment Date to occur after
the Closing Date; and (ii) from each Rate Adjustment Date after the Closing Date
to the subsequent Rate Adjustment Date, the Eurodollar Rate Margin in the
following table set forth opposite the Senior Debt Ratio as of the last day of
the fiscal quarter immediately preceding such Rate Adjustment Date:
<TABLE>
<CAPTION>
Senior Debt Ratio Eurodollar Rate Margin Pricing Level
----------------- ---------------------- -------------
<S> <C> <C>
Less than 2.50 0.75% Tier I
Greater than or equal to 1.00% Tier II
2.50 and less than 3.00
Greater than or equal to 1.25% Tier III
3.00 and less than 3.50
Greater than or equal to 1.50% Tier IV
3.50 and less than 4.00
Greater than or equal to 1.75% Tier V
4.00
</TABLE>
Notwithstanding the foregoing, (x) in order for Borrower to qualify for the Tier
I pricing level, the Debt Coverage Ratio must be less than 3.00 as of the last
day of the fiscal quarter immediately preceding such Rate Adjustment Date; (y)
if on any Rate Adjustment Date, Borrower has failed to deliver the financial
statements required to be delivered pursuant to Sections 5.2(a) and 5.2(b), as
applicable, or the Compliance Certificate required to be delivered pursuant to
Section 5.2(c) for the fiscal quarter immediately preceding such Rate Adjustment
Date, then (i) the Eurodollar Rate Margin shall be adjusted to the Tier V
pricing level on such Rate Adjustment Date, and (ii) the
12
<PAGE>
date of delivery of such financial statements and Compliance Certificate shall
be treated as a Rate Adjustment Date if no Default or Event of Default has
occurred and is continuing on the date of such delivery; and (z) if a Default or
Event of Default has occurred and is continuing on any Rate Adjustment Date,
then no decrease in the Eurodollar Rate Margin shall occur on such Rate
Adjustment Date. Any calculation pursuant to clause (y)(i) in the preceding
sentence shall not excuse or limit the remedies available for any Default or
Event of Default as a result of the failure to deliver such financial statements
or Compliance Certificate.
"Eurodollar Rate Reserve Percentage" means, for any Interest Period,
----------------------------------
the reserve percentage applicable during such Interest Period (or if more than
one such percentage shall be so applicable, the daily average of such
percentages for those days in such Interest Period during which any such
percentage shall be so applicable) under regulations issued from time to time by
the Board of Governors of the Federal Reserve System (or any successor) for
determining the maximum reserve requirement (including, any emergency,
supplemental or other marginal reserve requirement) for First Union with respect
to liabilities or assets consisting of or including Eurocurrency Liabilities
having a term equal to such Interest Period.
"Event of Default" and "Events of Default" have the meanings provided
---------------- -----------------
in Section 6.1.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
------------
and the regulations promulgated thereunder.
"Expiration Date" means, for any Letter of Credit, 5:00 p.m.,
---------------
Charlotte time, on the earlier of (i) the Maturity Date and (ii) one year after
the date of issuance of such Letter of Credit, subject to annual extension
thereafter at the discretion of LC Bank, unless such Letter of Credit expires by
its terms on an earlier date (or, if the Presentation Office is closed on such
date for any reason, including any of the reasons set forth in Article 17 of the
UCP, such date shall be extended to the next succeeding Business Day thereafter
on which the Presentation Office is open).
"Facilities" means the Revolving Credit Facilities and the Term Loan
----------
Facility.
"Facing Fee" has the meaning provided in Section 2.11(c).
----------
"Federal Funds Rate" means, for any period, a fluctuating interest
------------------
rate per annum equal for each day during such period to the weighted average of
the rates on overnight federal funds transactions with members of the Federal
Reserve System arranged by federal funds brokers, as published for such day (or,
if such day is not a Business Day, for the next preceding Business Day) by the
Federal Reserve Bank of New York, or, if such rate is not so published for any
day which is a Business Day, the average of the quotations for such day on such
transactions received by First Union from three federal funds brokers of
recognized standing selected by it.
"Fee Estate" means any fee estate in real property owned by Borrower
----------
or any Subsidiary of Borrower.
13
<PAGE>
"Fee Letter" means the agreement set forth in that certain letter,
----------
dated September 3, 1996, by and between the Agents and GranCare, as amended by
letter dated December 31, 1996, and as further amended, modified or supplemented
from time to time.
"Fees" means, collectively, the Commitment Fees, the Letter of Credit
----
Fees, the Facing Fees and the Agent Fees.
"Financial Condition Certificate" has the meaning provided in Section
-------------------------------
3.1(h)(ii).
"FINOVA Subsidiaries" means GCI-Colter Village, Inc., an Arizona
-------------------
corporation, GCI-Bella Vita, Inc., a Colorado corporation, and GCI-Wisconsin
Properties, Inc., a Wisconsin corporation.
"First Union" means First Union National Bank of North Carolina, and
-----------
its successors.
"GAAP" means generally accepted accounting principles set forth in the
----
opinions and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accounts and statements and pronouncements of the
Financial Accounting Standards Board (or agencies with similar functions of
comparable stature and authority within the accounting profession), or in such
other statements by such entity as may be in general use by significant segments
of the United States accounting profession, which are applicable to the
circumstances on the date of determination.
"GCI Dividend" means the dividend made on the Closing Date by Borrower
------------
to GranCare in consideration for the Transferred Subsidiaries.
"GCI Indemnity" means GCI Indemnity, Inc., an Hawaii corporation.
-------------
"GCI Intercompany Indebtedness" means any intercompany indebtedness
-----------------------------
existing on the Closing Date of Borrower owed to GranCare, TeamCare or any
Subsidiary of TeamCare.
"GCI Properties" means GCI Properties, Inc., a California corporation.
--------------
"GCI Properties Merger" means the merger on or prior to the Closing
---------------------
Date of GCI Properties into Borrower, with Borrower as the surviving
corporation.
"Governmental Authority" means any nation or government, any state or
----------------------
other political subdivision thereof and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government.
"GranCare" means GranCare, Inc., a California corporation, and its
--------
successors.
14
<PAGE>
"GranCare Proxy Statement" means the Proxy Statement/Prospectus, dated
------------------------
January 8, 1997, filed by GranCare with the SEC in connection with the Merger
and the Distribution.
"Hazardous Materials" means, collectively, (i) flammable explosives,
-------------------
radioactive materials, friable asbestos, urea formaldehyde foam insulation,
transformers or other equipment that contain dielectric fluid containing levels
of polychlorinated biphenyls, radon gas and petroleum products; and (ii)
chemicals, materials, substances or wastes which are now or hereafter become
defined as or included in the definition listing or identification of "hazardous
substances," "special industrial wastes," "hazardous wastes," "hazardous
materials," "extremely hazardous wastes," "restricted hazardous wastes," "toxic
substances," "toxic pollutants," "medical waste," "infectious waste,"
"biomedical waste," "biohazardous waste," or words of similar import, under any
applicable Environmental Law.
"Health Care Facility" means a facility which provides any level of
--------------------
geriatric care, home health care, medical care (including sub-acute care),
assisted living service or rehabilitative services, whether licensed as a
skilled nursing facility, intermediate care facility, personal care facility or
hospital or any products or services reasonably related thereto.
"Health Care Permit" means every accreditation, authorization,
------------------
certificate of need, license or permit that is required by any applicable
Governmental Authority to own, lease, operate or manage a Health Care Facility
of Borrower or any of its Subsidiaries.
"Hedging Agreement" means (i) any foreign exchange contract, currency
------------------
swap agreement, futures contract, option contract, synthetic cap or other
similar agreement or arrangement designed to protect against fluctuations in
currency values; or (ii) any interest rate swap agreement, interest rate cap
agreement, interest rate collar agreement or other similar agreement or
arrangement which is designed to protect against fluctuations in interest rates.
"HRPT" means Health and Retirement Properties Trust, a real estate
----
investment trust formed under the laws of Maryland, and any successor thereto.
"HRPT Intercreditor Agreement" means that certain Intercreditor
----------------------------
Agreement, to be entered into on or prior to the Closing Date between HRPT and
Administrative Agent, as such agreement may be amended, modified or supplemented
from time to time.
"HRPT Subsidiaries" means AMS Properties, Inc., a Delaware
-----------------
corporation, and GCI Health Care Centers, Inc., a Delaware corporation.
"Inactive Subsidiary" means a Subsidiary of Borrower that carries on
-------------------
no business operations or other activities and has aggregate assets of $100,000
or less.
"Indebtedness" means, as applied to any Person and in each case
------------
determined on a consolidated basis in conformity with GAAP (without
duplication): (i) all Debt; (ii) all reimbursement obligations with respect to
surety bonds, letters of credit, bankers acceptances and
15
<PAGE>
similar instruments (in each case, whether or not matured); (iii) all
obligations (contingent or otherwise) to purchase, retire or redeem any capital
stock or any other equity interest of such Person; (iv) all monetary obligations
measured by, or determined on the basis of, the value of any capital stock of
such Person; (v) all obligations, whether or not such obligations constitute
Indebtedness as defined in clauses (i) through (iv) above, secured by (or for
which the holder of the obligation has an existing right, contingent or
otherwise, to be secured by) any Lien upon or in property (including accounts
and contract rights) owned by such Person or any Subsidiary of such Person,
except such obligations that are secured by involuntary Liens; (vi) Contingent
Obligations; and (vii) all monetary claims against Borrower or any Subsidiary of
Borrower under Hedging Agreements; provided that the foregoing shall not include
accounts payable of such Person incurred and paid in the ordinary course of
business.
"Indemnified Liabilities" has the meaning provided in Section 8.6(a).
-----------------------
"Indemnified Person" has the meaning provided in Section 8.6(a).
------------------
"Intercompany Notes" has the meaning provided in Section 3.1(b)(v).
------------------
"Interest Coverage Ratio" means, as of any date of determination, the
-----------------------
ratio obtained by dividing (i) EBITDAR for the Reference Period with respect to
such date of determination by (ii) the sum of (A) Interest Expense for such
Reference Period and (B) Rental Expense for such Reference Period.
"Interest Expense" means, for any period, the interest expense (net of
----------------
interest income) for such period of Borrower and its Subsidiaries on a
consolidated basis, determined in conformity with GAAP.
"Interest Period" means, for each Eurodollar Loan comprising part of
---------------
the same Borrowing, the period commencing on the date such Loan is initially
made or the date of the Conversion of any Base Rate Loan into, or continuation
of, a Eurodollar Loan and ending on the last day of the period selected by
Borrower pursuant to the provisions below and, thereafter, each subsequent
period commencing on the last day of the immediately preceding Interest Period
and ending on the last day of the period selected by Borrower pursuant to the
provisions below. The duration of each such Interest Period shall be one, two,
three or six months, as Borrower may, upon notice received by Administrative
Agent not later than 2:00 p.m., Charlotte time, three Business Days prior to the
first day of such Interest Period, select; provided, however, that:
-------- -------
(i) Borrower may not select any Interest Period which ends after the
Maturity Date;
(ii) Borrower may not select any Interest Period with respect to Term
Loans which ends after the date of any payment required under Section
2.6(a)(i) (each such date, a "Payment Date") unless, after giving effect to
------------
such selection, the aggregate unpaid principal amount of Term Loans that
are Base Rate Loans or that are Eurodollar Loans having Interest Periods
which end on or prior to such Payment Date shall be at least equal
16
<PAGE>
to the principal amount of Term Loans due and payable on and prior to such
Payment Date;
(iii) Interest Periods commencing on the same date for Eurodollar
Loans comprising part of the same Borrowing shall be of the same duration;
(iv) whenever the last day of any Interest Period would otherwise
occur on a day other than a Business Day, the last day of such Interest
Period shall be extended to occur on the next succeeding Business Day;
provided that, if such extension would cause the last day of such Interest
--------
Period to occur in the next following calendar month, the last day of such
Interest Period shall occur on the next preceding Business Day; and
(v) Borrower may not have more than (a) three Interest Periods in
effect at any one time with respect to the Term Loans or (b) six Interest
Periods in effect at any one time with respect to the Revolving Loans.
"LC Bank" means First Union, in its capacity as LC Bank hereunder, and
-------
any successor thereto hereunder.
"LC Cash Collateral" has the meaning provided in Section 2.6(b)(v).
------------------
"LC Cash Collateral Account" has the meaning provided in Section
--------------------------
2.6(b)(v).
"LC Issuance Date" has the meaning provided in Section 2.4(b).
----------------
"Leasehold Estate" means any interest in real property which is not a
----------------
Fee Estate and is enjoyed by Borrower or any Subsidiary of Borrower; provided
--------
that the term of such interest is greater than 12 months.
"Lender" means any financial institution signatory to this Agreement,
------
including Swing Line Lender, and any other financial institution that pursuant
to Section 8.7 becomes a party to this Agreement.
"Letter of Credit" and "Letters of Credit" have the meanings provided
---------------- -----------------
in Section 2.4(a).
"Letter of Credit Exposure" means, at any time, (i) the sum of (a) the
-------------------------
Aggregate Stated Amount at such time and (b) the aggregate Reimbursement
Obligations not yet reimbursed by Borrower at such time as provided in Section
2.4(c), minus (ii) the amount of LC Cash Collateral, if any, held in the LC Cash
Collateral Account. The Letter of Credit Exposure of any Revolving Credit
Lender at any time shall mean its Pro Rata Portion of the aggregate Letter of
Credit Exposure at such time.
"Letter of Credit Fee" and "Letter of Credit Fees" have the meanings
-------------------- ---------------------
provided in Section 2.11(b).
17
<PAGE>
"Letter of Credit Subfacility" means a letter of credit subfacility
----------------------------
pursuant to which LC Bank shall issue Letters of Credit for the account of
Borrower as provided in Section 2.4.
"Leverage Ratio" means, as of any date of determination, the ratio
--------------
obtained by dividing (i) the amount of Indebtedness required under GAAP to be
recorded on the balance sheet of Borrower and its Subsidiaries, plus all other
Indebtedness of Borrower and its Subsidiaries other than Indebtedness of the
type described in clause (vii) of the definition of Indebtedness, all on a
consolidated basis as of such date of determination, by (ii) the sum of (A) such
amount of Indebtedness and (B) the book value of stockholder's equity, plus
(without duplication) the book value of preferred stock to the extent not
included in stockholder's equity (each calculated on such date of determination
for Borrower and its Subsidiaries on a consolidated basis), determined in
conformity with GAAP.
"Lien" means any mortgage, deed of trust, lien, pledge, charge,
----
security interest, hypothecation, assignment or encumbrance of any kind in
respect of any asset, whether or not filed, recorded or otherwise perfected or
effective under applicable law, as well as the interest of a vendor or lessor
under any conditional sale agreement, capital or finance lease or other title
retention agreement relating to such asset and any agreement to grant any of the
foregoing.
"Loan" means a loan by a Lender to Borrower pursuant to Article II,
----
and refers to a Working Capital Loan, an Acquisition Loan, a Swing Line Loan or
a Term Loan.
"Loan Documents" means this Agreement, the Notes, the Letters of
--------------
Credit, the Subsidiary Guaranty, the Fee Letter, all Intercompany Notes, all
Subsidiary Joinders, the Collateral Documents, the Approved Hedging Agreements,
the Third Party Consents and all other guaranties and other agreements,
instruments and written indicia of the Obligations delivered to Administrative
Agent, Syndication Agent, LC Bank or any Lender by or on behalf of Borrower or
any other Loan Party pursuant to or in connection with the transactions
contemplated hereby.
"Loan Parties" means Borrower and the Subsidiary Guarantors.
------------
"Major Line of Business" means each of (i) home health care, (ii)
----------------------
contract management, (iii) facilities and (iv) corporate and others. For
purposes of this definition, if the business of a Subsidiary of Borrower is not
within one of the lines of business set forth in clause (i) through (iii), then
such Subsidiary shall be included within clause (iv).
"Margin Stock" has the meaning given to such term in Regulation U of
------------
the Board of Governors of the Federal Reserve System.
"Material Adverse Change" means (i) with reference to any time or
-----------------------
period prior to the Closing Date, a material adverse change in the business,
properties, assets, liabilities, operations, prospects or condition (financial
or otherwise) of GranCare and its Subsidiaries, taken as a whole, as compared
with the business, properties, assets, operations, prospects or condition
(financial or otherwise) of GranCare and its Subsidiaries, taken as a whole, as
of December 31, 1995, and (ii) with reference to any time or period from and
after the Closing Date, a material
18
<PAGE>
adverse change in the business, properties, assets, liabilities, operations,
prospects or condition (financial or otherwise) of Borrower and those entities
that are Subsidiaries of Borrower at the time of determination (the "Then
Current Subsidiaries"), taken as a whole, as compared with the business,
properties, assets, operations, prospects or condition (financial or otherwise)
of Borrower and the Then Current Subsidiaries, taken as a whole, as of December
31, 1995 (irrespective of whether any such Then Current Subsidiary was a
Subsidiary of Borrower as of December 31, 1995).
"Material Adverse Effect" means (i) with reference to any time or
-----------------------
period prior to the Closing Date, a material adverse effect on the business,
properties, assets, liabilities, operations, prospects or condition (financial
or otherwise) of GranCare and its Subsidiaries, taken as a whole, and (ii) with
reference to any time or period from and after the Closing Date, (a) a material
adverse effect on the business, assets, liabilities, financial condition,
prospects or results of operations of Borrower and its Then Current
Subsidiaries, taken as a whole, (b) a material impairment of the ability of the
Loan Parties, taken as a whole, to perform their obligations under the Loan
Documents or (c) a material impairment of the rights of or benefits available to
the Agents and the Lenders under the Loan Documents. In determining whether an
individual event would result in a Material Adverse Effect, notwithstanding that
such event does not itself have such effect, a Material Adverse Effect shall be
deemed to have occurred if the cumulative effect of such event and all other
then existing events would result in a Material Adverse Effect.
"Material Environmental Claim" means one or more Environmental Claims
----------------------------
which, regardless of merit, may cause Borrower or any Subsidiary of Borrower to
expend in the aggregate an amount in excess of $1,000,000 to defend against,
settle and/or satisfy.
"Material Lease" means any lease agreement with respect to a Health
--------------
Care Facility or Health Care Facilities for which either (i) total revenues from
such Health Care Facility or Health Care Facilities for the most recent
Reference Period represent 3.25% or more of the consolidated revenues of
Borrower and its Subsidiaries during such Reference Period; or (ii) pre-tax net
income from the operation of such Health Care Facility or Health Care Facilities
for the most recent Reference Period represents 3.25% or more of the pre-tax net
income of Borrower and its Subsidiaries during such Reference Period.
"Maturity Date" means the last day of the calendar month during which
-------------
the fifth anniversary of the Closing Date occurs.
"Maximum LC Amount" means, at any time, $40,000,000, as such amount
-----------------
may be reduced from time to time pursuant to this Agreement.
"Merger" means the merger of GranCare into Vitalink pursuant to the
------
terms of the Merger Agreement, with Vitalink as the surviving corporation.
"Merger Agreement" means the Agreement and Plan of Merger, dated as of
----------------
September 3, 1996, by and between GranCare and Vitalink, as such agreement may
be amended, modified or supplemented from time to time in accordance with the
terms hereof.
19
<PAGE>
"Moody's" means Moody's Investors Service, Inc. or any successor
-------
thereto.
"Mortgage" means any deed of trust, mortgage, deed to secure debt or
--------
other document in form and substance satisfactory to the Required Lenders
creating a Lien in favor of Administrative Agent on behalf of the Lenders on any
Real Property.
"Mortgaged Property" means any parcel of property covered by or
------------------
subject to a Mortgage.
"Multiemployer Plan" means a "multiemployer plan" (within the meaning
------------------
of Section 4001(a)(3) of ERISA) and to which Borrower or any ERISA Affiliate
makes, is making, or is obligated to make contributions or has made, or been
obligated to make, contributions.
"Net Cash Proceeds" means (i) in the case of any Asset Sale, Debt
-----------------
Issuance or Equity Issuance, (A) all cash received by Borrower or any Subsidiary
of Borrower as proceeds thereof or in connection therewith, net of (1) any
expenses incurred and paid in connection with such transaction (other than
expenses paid to an Affiliate of Borrower), and (2) in the case of an Asset
Sale, any proceeds thereof applied at the time of sale to repay any Indebtedness
that was secured by the asset sold or, if the asset sold was stock, that was
owed by the issuer of such stock or any of its Subsidiaries, and (B) as and when
received in cash, any cash payment or cash distribution or other cash proceeds
received by Borrower or any Subsidiary of Borrower upon or in respect of any
promissory note or other property received as proceeds thereof or in connection
therewith; and (ii) in the case of any Casualty Event, all cash proceeds of
insurance, condemnation awards and other compensation received by Borrower or
any Subsidiary in respect of such Casualty Event, net of any expenses incurred
and paid in connection therewith (other than expenses paid to an Affiliate of
Borrower).
"Net Income" means, for any period, the net income or net loss
----------
(exclusive of minority interests and extraordinary items) for such period of
Borrower and its Subsidiaries on a consolidated basis, determined in conformity
with GAAP.
"9 3/8% Senior Notes" means the 9 3/8% Senior Subordinated Notes due
-------------------
2005, in the original principal amount of $100,000,000, issued by GranCare under
the 9 3/8% Senior Note Indenture.
"9 3/8% Senior Note Indenture" means that certain Indenture, dated as
----------------------------
of September 15, 1995, by and between GranCare, as Issuer, and Marine Midland
Bank, as trustee, as amended.
"1995 Credit Agreement" means the Credit Agreement, dated as of March
---------------------
31, 1995, among GranCare, First Union, as Swing Line Lender, LC Bank and Agent,
and various lenders party thereto, as amended.
"Notes" means the Revolving Notes, the Term Notes and the Swing Line
-----
Note.
20
<PAGE>
"Notice of Borrowing" has the meaning provided in Section 2.3(a).
-------------------
"Notice of Continuance/Conversion" has the meaning provided in Section
--------------------------------
2.10(a).
"Obligations" means all present and future debts, obligations and
-----------
liabilities of Borrower of every type and description arising under or in
connection with this Agreement or any other Loan Document, due or to become due
to either of the Agents, LC Bank, Swing Line Lender, any Lender or any other
Person required to be indemnified under any Loan Document, or any of their
respective successors, transferees or assigns and shall include (without
limitation) (i) all liability for principal of and interest on any Loans; (ii)
all liability for principal of and interest on any Reimbursement Obligations;
(iii) all liability of Borrower under any Approved Hedging Agreements; and (iv)
all liability under the Loan Documents for any fees, taxes, additional
compensation, expense reimbursements and indemnification.
"OECD" means the Organization for Economic Cooperation and
----
Development.
"Other Taxes" has the meaning provided in Section 2.14(b).
-----------
"Outstanding Letters of Credit" means those letters of credit issued
-----------------------------
under the 1995 Credit Agreement as "Letters of Credit" and assumed by Borrower
and the Lenders under this Agreement pursuant to Section 2.4(g).
"Outstanding Revolving Credit" means, at any time, the sum of (i) the
----------------------------
Letter of Credit Exposure (up to, including and in excess of $25,000,000) at
such time and (ii) the aggregate principal amount of all Revolving Loans
outstanding at such time.
"Outstanding Working Capital Credit" means, at any time, the sum of
----------------------------------
(i) the Letter of Credit Exposure at such time, (ii) the aggregate principal
amount of all Working Capital Loans outstanding at such time and (iii) the
aggregate principal amount of all Swing Line Loans outstanding at such time;
provided, however, that not more than $25,000,000 in Letter of Credit Exposure
- -------- -------
(regardless of the actual Letter Credit Exposure) shall be included in the
calculation of the Outstanding Working Capital Credit at any time.
"PBGC" means and refers to the Pension Benefit Guaranty Corporation as
----
defined in Title IV of ERISA, or any successor thereto.
"Permitted Acquisitions" has the meaning provided in Section
----------------------
5.4(g)(vii).
"Permitted Asset Dispositions" means collectively:
----------------------------
(i) the sale or other disposition by Borrower or any of its
Subsidiaries of inventory or equipment in the ordinary course of business;
21
<PAGE>
(ii) the sale of equipment to the extent that such equipment is
exchanged for credit against the purchase price of similar replacement
equipment or the proceeds of such sale are reasonably promptly applied to
the purchase price of such replacement equipment;
(iii) (A) an assignment of accounts that is for the purpose of
collection only, (B) a transfer of a right to payment under a contract to
an assignee that is also to do the performance under the contract, or (C) a
transfer of a single account to an assignee in whole or partial
satisfaction of a pre-existing indebtedness;
(iv) the sale, lease, transfer, assignment or other disposition of
assets of any Subsidiary of Borrower to Borrower or to any Wholly Owned
Subsidiary of Borrower which has granted to Administrative Agent a first
priority Lien in all, or substantially all, of its assets under the
applicable Collateral Documents;
(v) the liquidation for the account of Borrower or any of its
Subsidiaries of Cash Equivalents; and
(vi) the sale or other disposition by Borrower or any of its
Subsidiaries of any damaged, worn out or obsolete tangible assets, so long
as the fair market value of all property disposed of pursuant to this
clause (vi) does not exceed $500,000 in the aggregate in any fiscal year.
"Person" means an individual, partnership, corporation (including a
------
business trust), limited liability company, joint stock company, trust,
unincorporated association, joint venture or other entity, or a government or
any political subdivision or agency thereof.
"Plan" means any "employee benefit plan" as defined in Section 3(3) of
----
ERISA which (i) Borrower or any ERISA Affiliate maintains, administers,
contributes to or is required to contribute to, or, within the five years prior
to the Closing Date, maintained, administered, contributed to or was required to
contribute to, or under which Borrower or any ERISA Affiliate may incur any
liability and (ii) covers any employee or former employee of Borrower or any
ERISA Affiliate (with respect to their relationship with such entities).
"Pledged Shares" means the shares of stock of or equity interests in
--------------
(i) the direct Subsidiaries of Borrower to be pledged as security pursuant to
the Borrower Pledge and Security Agreement; and (ii) the direct Subsidiaries of
any Subsidiary of Borrower to be pledged as security pursuant to the Subsidiary
Pledge and Security Agreement (excluding, however, in any event, shares of GCI
Indemnity).
"Prepayment Account" has the meaning provided in Section 2.6(b)(v).
------------------
"Presentation Office" means, for each Letter of Credit, the office of
-------------------
LC Bank designated in such Letter of Credit as the Presentation Office, or such
other office as LC Bank may by written notice to Borrower designate.
22
<PAGE>
"Pro Rata Portion" means (a) with respect to any Revolving Credit
----------------
Lender at any time, a percentage equal to (i) the Revolving Credit Commitment of
such Revolving Credit Lender at such time divided by (ii) the Total Revolving
Credit Commitments at such time or, if no Revolving Credit Commitments are
outstanding at such time, a percentage equal to (1) the sum of (A) the aggregate
principal amount of the Revolving Loans then outstanding to such Revolving
Credit Lender and (B) such Revolving Credit Lender's ratable share (based on the
proportion of its Revolving Credit Commitment to the Total Revolving Credit
Commitments at the time of termination of the Revolving Credit Commitments) of
all Letter of Credit Exposure at such time divided by (2) the Outstanding
Revolving Credit then in effect, and (b) with respect to any Term Loan Lender at
any time, a percentage equal to the Term Loan Commitment of such Term Loan
Lender at such time divided by the Total Term Loan Commitments at such time or,
if no Term Loan Commitments are outstanding at such time, a percentage equal to
the aggregate principal amount of the Term Loans then outstanding to such Term
Loan Lender divided by the aggregate principal amount of all Term Loans then
outstanding.
"Professional Health Care" means Professional Health Care Management,
------------------------
Inc., a Michigan corporation.
"Purchase Money Indebtedness" has the meaning provided in Section
---------------------------
5.4(b)(ix).
"Purchase Price" means, with respect to any Acquisition, the sum
--------------
(without duplication) of (i) the amount of cash paid by Borrower and its
Subsidiaries in connection with such Acquisition, (ii) the value (as determined
for purposes of such Acquisition in accordance with the applicable acquisition
agreement) of all capital stock of Borrower issued or given in connection with
such Acquisition, (iii) the amount (determined by using the face amount or the
amount payable at maturity, whichever is greater) of all Indebtedness incurred,
assumed or acquired by Borrower and its Subsidiaries in connection with such
Acquisition, (iv) all additional purchase price amounts in connection with such
Acquisition in the form of earnouts, deferred purchase price and other
contingent obligations that should be recorded as a liability on the balance
sheet of Borrower and its Subsidiaries or expensed, in either case in accordance
with GAAP, Regulation S-X under the Securities Act of 1933, as amended, or any
other rule or regulation of the SEC, (v) all amounts paid by Borrower and its
Subsidiaries in respect of covenants not to compete, consulting agreements and
other affiliated contracts in connection with such Acquisition, and (vi) the
aggregate fair market value of all other consideration given by Borrower and its
Subsidiaries in connection with such Acquisition; provided that the foregoing
--------
definition shall not be deemed to imply that any of the foregoing is permitted
under this Agreement.
"Qualified Plan" means a pension plan (as defined in Section 3(2) of
--------------
ERISA) subject to Title IV of ERISA and intended to be tax-qualified under
Section 401(a) of the Code and which Borrower or any ERISA Affiliate sponsors,
maintains, or to which it makes or is obligated to make contributions, or in the
case of a multiple employer plan (as described in Section 4064(a) of ERISA) has
made contributions at any time during the immediately preceding period covering
at least five plan years, but excluding any Multiemployer Plan.
23
<PAGE>
"Rate Adjustment Date" means the date five calendar days after the
--------------------
earlier to occur of (i) the receipt by Administrative Agent and (ii) the due
date for the delivery to Administrative Agent, of the financial statements and
the pricing matrix calculation required to be delivered by Borrower pursuant to
Sections 5.2(a) or 5.2(b), as applicable, and Section 5.2(c)(iii), respectively.
"Real Property" means any Fee Estate or any Leasehold Estate.
-------------
"Redemption" means the redemption by GranCare of all of the
----------
Convertible Subordinated Debt in accordance with the terms of the Convertible
Subordinated Debt Indenture.
"Reference Period" with respect to any date means the period of four
----------------
consecutive fiscal quarters of Borrower immediately preceding such date or, if
such date is the last day of a fiscal quarter, ending on such date.
"Refunded Swing Line Loans" has the meaning provided in Section
-------------------------
2.1(d)(ii).
"Register" has the meaning provided in Section 8.7(c).
--------
"Reimbursement Obligation" means Borrower's obligation to repay any
------------------------
and all Drawing Payments under the Letters of Credit.
"Reimbursement Payment" has the meaning provided in Section 2.4(c).
---------------------
"Rental Expense" means, for any period, the excess of (i) the sum of
--------------
fixed and contingent rentals payable for such period with respect to leases of
real and personal property (determined without duplication of any items included
in Interest Expense for such period) over (ii) the sum of fixed and contingent
rentals receivables for such period with respect to leases of real or personal
property (determined without duplication of any items included in interest
income for such period), in each case determined for Borrower and its
Subsidiaries on a consolidated basis and in conformity with GAAP.
"Reorganization" means those transactions referred to in Section 2.1
--------------
of the Distribution Agreement as in effect on the date hereof.
"Reportable Event" means (i) any "reportable event" within the meaning
----------------
of Section 4043(c) of ERISA for which the 30-day notice under Section 4043(a) of
ERISA has not been waived by the PBGC (including any failure to meet the minimum
funding standard of, or timely make any required installment under, Section 412
of the Code or Section 302 of ERISA, regardless of the issuance of any waivers
in accordance with Section 412(d) of the Code), (ii) any such "reportable event"
subject to advance notice to the PBGC under Section 4043(b)(3) of ERISA, (iii)
any application for a funding waiver or an extension of any amortization period
pursuant to Section 412 of the Code, and (iv) a cessation of operations
described in Section 4062(e) of ERISA.
"Request for LC Issuance" has the meaning provided in Section 2.4(b).
-----------------------
24
<PAGE>
"Required Lenders" means, at any time, Lenders holding Loans and
----------------
participations in Letters of Credit, and having Commitments, representing in the
aggregate greater than 50% of the sum at such time of (a) the aggregate
principal amount of the Loans outstanding, (b) the Letter of Credit Exposure and
(c) the aggregate amount of the Unutilized Revolving Credit Commitments and (if
not yet terminated) Term Loan Commitments.
"Revolving Credit Commitment" means, for any Lender, the amount set
---------------------------
forth opposite such Lender's name under the heading "Revolving Credit
Commitment" on Schedule I hereof, or if such Lender has entered into one or more
----------
Assignments and Acceptances, the amount set forth for such Lender in the
Register maintained by Administrative Agent pursuant to Section 8.7(c), in
either case, as such amount may be reduced pursuant to this Agreement.
"Revolving Credit Facilities" means the Working Capital Loans, the
---------------------------
Acquisition Loans, the Swing Line Loans and the Letters of Credit provided or
participated in by the Revolving Credit Lenders to Borrower pursuant to this
Agreement and the other Loan Documents.
"Revolving Credit Lender" means a Lender having a Revolving Credit
-----------------------
Commitment or holding outstanding Acquisition Loans or Working Capital Loans.
"Revolving Loans" means, collectively, the Acquisition Loans, the
---------------
Working Capital Loans and the Swing Line Loans.
"Revolving Note" and "Revolving Notes" have the meanings provided in
-------------- ---------------
Section 2.5(a).
"S&P" means Standard & Poor's Ratings Services, a division of McGraw-
---
Hill, Inc., or any successor thereto.
"SEC" means the Securities and Exchange Commission and any successor
---
agency.
"Secured Obligations" means the Obligations and all other debts,
-------------------
liabilities and obligations (including, without limitation, obligations of
Subsidiaries of Borrower under the Subsidiary Guaranty) secured by the
Collateral pursuant to the Collateral Documents.
"Seller Subordinated Indebtedness" has the meaning provided in Section
--------------------------------
5.4(b)(viii).
"Senior Debt" means, as of any date of determination, an amount equal
-----------
to the excess of (i) the amount of Indebtedness required under GAAP to be
recorded on the balance sheet of Borrower and its Subsidiaries, plus all other
Indebtedness of Borrower and its Subsidiaries other than Indebtedness of the
type described in clause (vii) of the definition of Indebtedness, all on a
consolidated basis as of such date of determination, over (ii) the aggregate
balance sheet amount of Subordinated Debt and Seller Subordinated Indebtedness
as of such date of determination.
25
<PAGE>
"Senior Debt Ratio" means, as of any date of determination, the ratio
-----------------
obtained by dividing (i) Senior Debt as of such date of determination by (ii)
EBITDA for the Reference Period with respect to such date of determination.
"Shareholders" means the shareholders of GranCare as of the record
------------
date set by the board of directors of GranCare for the determination of
shareholders entitled to receive capital stock of Borrower pursuant to the
Distribution.
"Stated Amount" means, on any day with respect to any Letter of
-------------
Credit, the maximum amount which LC Bank may be required to pay, but has not yet
paid, on such day or at any future time under such Letter of Credit.
"Subordinated Debt" has the meaning provided in Section 5.4(b)(vii).
-----------------
"Subsidiary" means, with respect to any Person, any corporation,
----------
association, partnership, joint venture or other business entity of which 50% or
more of the voting stock or other equity interests is owned or controlled
directly or indirectly by such Person, or one or more Subsidiaries of such
Person or a combination thereof.
"Subsidiary Group" means each of the following groups of Subsidiaries
----------------
of Borrower: (i) the HRPT Subsidiaries, and all direct and indirect
Subsidiaries of any HRPT Subsidiary; (ii) Professional Health Care, and all
direct and indirect Subsidiaries thereof; (iii) the FINOVA Subsidiaries, and all
direct and indirect Subsidiaries of any FINOVA Subsidiary; and (iv) all direct
and indirect Subsidiaries of Borrower which are not included in a Subsidiary
Group listed in clauses (i) through (iii).
"Subsidiary Guarantor" means each present and future direct and
--------------------
indirect Subsidiary of Borrower that has executed the Subsidiary Guaranty or a
Subsidiary Joinder.
"Subsidiary Guaranty" has the meaning provided in Section 3.1(b)(vi).
-------------------
"Subsidiary Joinder" has the meaning provided in Section 4.1(e).
------------------
"Subsidiary Pledge and Security Agreement" has the meaning provided in
----------------------------------------
Section 3.1(b)(viii).
"Supermajority Lenders" means, at any time, Lenders holding Loans and
---------------------
participations in Letters of Credit, and having Commitments, representing in the
aggregate at least 85% of the sum at such time of (a) the aggregate principal
amount of the Loans outstanding, (b) the Letter of Credit Exposure and (c) the
aggregate amount of the Unutilized Revolving Credit Commitments and (if not yet
terminated) Term Loan Commitments.
"Swing Line Commitment" means $5,000,000, as such amount may be
---------------------
reduced from time to time pursuant to this Agreement.
26
<PAGE>
"Swing Line Lender" means First Union, in its capacity as the maker of
-----------------
Swing Line Loans, and its successors in such capacity.
"Swing Line Loan" and "Swing Line Loans" have the meanings provided in
--------------- ----------------
Section 2.1(d)(i).
"Swing Line Note" has the meaning provided in Section 2.5(c).
---------------
"Swing Line Subfacility" means a revolving loan subfacility pursuant
----------------------
to which Swing Line Lender shall make swing line loans as provided in Section
2.1(d).
"Syndication Agent" means The Chase Manhattan Bank, in its capacity as
-----------------
syndication agent hereunder, and any successor syndication agent.
"Tax Allocation Agreement" has the meaning given to such term in the
------------------------
Distribution Agreement.
"Taxes" has the meaning provided in Section 2.14(a).
-----
"Tax Expense" means, for any period, charges for taxes accrued during
-----------
such period by Borrower and its Subsidiaries on a consolidated basis, determined
in conformity with GAAP.
"TeamCare" means TeamCare, Inc., a Delaware corporation and successor
--------
by merger to GranCare Health Services, Inc., a California corporation, by virtue
of the Reorganization.
"Tender Offer" means the tender offer made by GranCare for all of the
------------
outstanding 9 3/8% Senior Notes, mailed to the holders thereof on December 18,
1996 together with the Consent Solicitation, as such tender offer may be
extended or modified from time to time prior to the Closing Date.
"Term Loan" and "Term Loans" have the meanings provided in Section
--------- ----------
2.2(a).
"Term Loan Commitment" means, for any Lender, the amount set forth
--------------------
opposite such Lender's name under the heading "Term Loan Commitment" on Schedule
--------
I hereof, or if such Lender has entered into one or more Assignments and
- -
Acceptances, the amount set forth for such Lender in the Register maintained by
Administrative Agent pursuant to Section 8.7(c), in either case, as such amount
may be reduced pursuant to this Agreement.
"Term Loan Facility" means the Term Loans provided by the Term Loan
------------------
Lenders to Borrower pursuant to this Agreement.
"Term Loan Lender" means a Lender having a Term Loan Commitment or
----------------
holding outstanding Term Loans.
27
<PAGE>
"Term Note" and "Term Notes" have the meanings provided in Section
--------- ----------
2.5(b).
"Termination Date" means the Maturity Date or such earlier date of
----------------
termination of the Commitments pursuant to Section 2.9 or Section 6.1.
"Then Current Subsidiaries" has the meaning given to such term in the
-------------------------
definition of "Material Adverse Change" set forth in this Section 1.1.
"Third Party Consents" means collectively any consent waiver,
--------------------
estoppel, subordination or similar agreement executed by Borrower or any
Subsidiary of Borrower, Administrative Agent or any other Person or Persons in
connection with the execution and delivery of the Loan Documents or the approval
of or consent to the execution and delivery of the Loan Documents by Borrower or
any Subsidiary of Borrower, including the HRPT Intercreditor Agreement.
"Total Revolving Credit Commitments" means, at any time, the sum of
----------------------------------
the Revolving Credit Commitments of the Revolving Credit Lenders at such time.
"Total Term Loan Commitments" means, at any time, the sum of the Term
---------------------------
Loan Commitments of the Term Loan Lenders at such time.
"Transaction Documents" means this Agreement and the other Loan
---------------------
Documents, the Merger Agreement, the Distribution Agreement, and all other
agreements, instruments, documents and certificates (including all filings by
GranCare, Borrower and Vitalink with the SEC) delivered in connection with this
Agreement and the other Loan Documents, the Merger Agreement the Distribution
Agreement and otherwise in connection with the Transactions.
"Transactions" means the transactions contemplated by this Agreement,
------------
the Merger, the Distribution, the Redemption and the other transactions set
forth and described in the Grancare Proxy Statement.
"Transferred Subsidiaries" means AMS Green Tree, Inc., a Wisconsin
------------------------
corporation, American-Cal Medical Services, Inc., a California corporation, HMI
Convalescent Care, Inc., a California corporation, GranCare South Carolina,
Inc., a South Carolina corporation, GCI Palm Court, Inc., a California
corporation, GCI East Valley Medical & Rehabilitation Center, Inc., an Arizona
corporation, GCI Realty, Inc., a Delaware corporation, GCI Jolley Acres, Inc., a
South Carolina corporation, GCI Prince George, Inc., a South Carolina
corporation, GCI Springdale Village, Inc., a South Carolina corporation, GCI
Village Green, Inc., a South Carolina corporation, GCI Faith Nursing Home, Inc.,
a South Carolina corporation, GCI Rehab, Inc., a California corporation, GCI-Cal
Health Care Centers, Inc., a California corporation, GranCare GPO Services,
Inc., a Georgia corporation, GranCare Trading, Inc., a Georgia corporation,
GranCare of Northern California, Inc., a California corporation, GranCare Home
Health Services, Inc., a California corporation, Renaissance Mental Health
Center, Inc., a Wisconsin corporation, AMS Properties, Inc., a California
corporation, Evergreen Healthcare, Inc., a Georgia corporation, GCI Health Care
Centers, Inc., a Delaware corporation, GC Services, Inc., a
28
<PAGE>
California corporation, GCI Valley Manor Health Care Center, Inc., a Colorado
corporation, GCI Camellia Care Center, Inc., a Colorado corporation, Cornerstone
Health Management Company, a Delaware corporation, HostMasters, Inc., a
California corporation, GCI Colter Village, Inc., an Arizona corporation, GCI
Indemnity, Inc., a Hawaii corporation, GCI Bella Vita, Inc., a Colorado
corporation, GCI Wisconsin Properties, Inc., a Wisconsin corporation, and
Professional Health Care Management, Inc., a Michigan corporation.
"Type" has the meaning provided in Section 1.3.
----
"UCP" means the Uniform Customs and Practice for Documentary Credits
---
International Chamber of Commerce Publication 500, or any successor publication
in effect from time to time.
"Unfunded Pension Liabilities" means, with respect to any Plan, the
----------------------------
excess of such Plan's accrued benefits, as defined in Section 3(23) of ERISA,
over the current value of such Plan's assets, as defined in Section 3(26) of
ERISA (as determined in accordance with assumptions required by the PBGC upon
the termination of a plan subject to Title IV of ERISA).
"Unmatured Surviving Obligation" means, as of any date, an Obligation
------------------------------
which is contingent and unliquidated and not due and owing on such date and
which pursuant to the provisions of this Agreement survives termination of this
Agreement and the repayment of the Loans and Reimbursement Obligations, such as,
for example, a contingent and unliquidated indemnification obligation under
Section 8.6.
"Unutilized Revolving Credit Commitment" means (i) with respect to any
--------------------------------------
Revolving Credit Lender (other than Swing Line Lender in its capacity as a
Revolving Credit Lender) at any time, the amount of such Revolving Credit
Lender's Revolving Credit Commitment at such time minus the amount of such
Lender's Pro Rata Portion of the Outstanding Revolving Credit at such time
(exclusive of the aggregate principal amount of Swing Line Loans outstanding at
such time), and (ii) with respect to Swing Line Lender (in its capacity as a
Revolving Credit Lender) at any time, the amount of such Revolving Credit
Lender's Revolving Credit Commitment at such time minus the amount of such
Lender's Pro Rata Portion of the Outstanding Revolving Credit at such time
(including the aggregate principal amount of Swing Line Loans outstanding at
such time).
"Unutilized Swing Line Commitment" means, with respect to Swing Line
--------------------------------
Lender at any time, the Swing Line Commitment at such time minus the aggregate
principal amount of all Swing Line Loans outstanding at such time.
"Vitalink" means Vitalink Pharmacy Services, Inc., a Delaware
--------
corporation, and its successors.
"Wholly Owned Subsidiary" means, at any time with respect to any
-----------------------
Person, any Subsidiary of such Person all of the capital stock or other equity
interests of which is at such time directly or indirectly owned by such Person.
29
<PAGE>
"Working Capital Commitment" means $75,000,000, as such amount may be
--------------------------
reduced from time to time pursuant to this Agreement.
"Working Capital Loan" and "Working Capital Loans" have the meanings
-------------------- ---------------------
provided in Section 2.1(a).
"Working Capital Subfacility" means a revolving loan subfacility
---------------------------
pursuant to which the Lenders shall make working capital loans as provided in
Section 2.1(a).
SECTION 1.2 Accounting Terms. Except where context otherwise
----------------
requires, all accounting terms not expressly defined herein shall be construed
and all financial computations required under this Agreement shall be made in
accordance with GAAP as then in effect. Notwithstanding the first sentence of
this section, if one or more changes in GAAP after the date hereof are required
to be applied to the then existing transactions, and such change has a material
effect on the financial computations required under this Agreement, the parties
agree to negotiate in good faith to attempt to draft an amendment of this
Agreement which shall approximate, to the extent possible, the economic effect
of the original provisions hereof after taking into account such change or
changes in GAAP; provided that until the parties are able to negotiate such
----
amendment, then as used in this Agreement, "GAAP" means generally accepted
accounting principles as in effect prior to such change or changes.
SECTION 1.3 Types of Borrowings and Classes of Loans. The term
----------------------------------------
"Borrowing" refers to the portion of the aggregate principal amount of Loans of
a specific Type outstanding hereunder for a specific Interest Period pursuant to
a Notice of Borrowing. Each Lender's Pro Rata Portion of each Borrowing is
referred to herein as a separate "Loan." Borrowings and Loans hereunder are
distinguished by "Class" and by "Type." The "Class" of a Loan or of a
Commitment to make such a Loan refers to whether such Loan is a Term Loan,
Working Capital Loan, Acquisition Loan or Swing Line Loan, each of which
constitutes a Class. The "Type" of a Loan refers to whether such Loan is a
Base Rate Loan or a Eurodollar Loan. Borrowings and Loans may (but not need) be
identified both by Class and Type (e.g., a "Eurodollar Term Loan" is a Loan
----
which is both a Term Loan and a Eurodollar Loan).
SECTION 1.4 Other Definitional Provisions.
-----------------------------
(a) Unless otherwise specified herein or therein, all terms defined in
this Agreement have the defined meanings when used in any other Loan
Document or in any certificate or other document made or delivered pursuant
hereto.
(b) The words "hereof," "herein," "hereunder," and words of similar
import when used in this Agreement shall refer to this Agreement as a whole
and not to any particular provision of this Agreement, and section,
schedule and exhibit references are to this Agreement unless otherwise
specified.
(c) The meaning of defined terms shall be equally applicable to the
singular and plural forms of the defined terms unless specifically provided
otherwise.
30
<PAGE>
(d) The term "including" is not limiting and means "including without
limitation."
(e) In the computation of periods of time from a specified date to a
later specified date, the word "from" means "from and including"; the words
"to" and "until" each mean "to but excluding"; and the word "through" means
"to and including."
(f) References to sections shall be sections of this Agreement unless
specifically provided otherwise.
(g) References to agreements and other documents shall be deemed to
include all subsequent amendments and other modifications thereto that are
permitted under this Agreement.
(h) References to statutes or regulations are to be construed as
including all statutory and regulatory provisions consolidating, amending
or replacing the statute or regulation.
(i) The captions and headings of this Agreement are for convenience of
reference only and shall not affect the construction of this Agreement.
ARTICLE II
AMOUNTS AND TERMS OF FACILITIES
SECTION 2.1 Revolving Credit Facilities.
---------------------------
(a) Working Capital Loans. Each Revolving Credit Lender severally
---------------------
agrees, subject to the terms and conditions set forth in this Agreement, to
make revolving loans under the Working Capital Subfacility (each such loan,
a "Working Capital Loan," and all such loans, the "Working Capital Loans")
-------------------- ---------------------
to Borrower from time to time on any Business Day during the period from
the Closing Date until the Termination Date; provided that (i) such
--------
Revolving Credit Lender's Pro Rata Portion of the Outstanding Working
Capital Credit at any time shall not exceed such Revolving Credit Lender's
Pro Rata Portion of the Working Capital Commitment; (ii) no Working Capital
Loan shall be made if, after giving effect to the making of such Working
Capital Loan, the Outstanding Working Capital Credit would exceed the then
Working Capital Commitment; and (iii) no Working Capital Loan shall be made
if, after giving effect to the making of such Working Capital Loan, the
Outstanding Revolving Credit would exceed the then Total Revolving Credit
Commitments.
(b) Acquisition Loans. Each Revolving Credit Lender severally agrees,
-----------------
subject to the terms and conditions set forth in this Agreement, to make
revolving loans under the Acquisition Loan Subfacility (each such loan, an
"Acquisition Loan," and all such loans, the "Acquisition Loans") to
---------------- -----------------
Borrower from time to time on any Business Day during the
31
<PAGE>
period from the Closing Date until the Termination Date; provided that (i)
the aggregate principal amount of such Revolving Credit Lender's
Acquisition Loans outstanding at any time shall not exceed such Revolving
Credit Lender's Pro Rata Portion of the then Available Acquisition
Commitment; (ii) no Acquisition Loan shall be made if, after giving effect
to the making of such Acquisition Loan, the aggregate principal amount of
all outstanding Acquisition Loans would exceed the then Available
Acquisition Commitment; and (iii) no Acquisition Loan shall be made if,
after giving effect to the making of such Acquisition Loan, the Outstanding
Revolving Credit would exceed the then Total Revolving Credit Commitments.
(c) Other Working Capital and Acquisition Loan Provisions. Subject to
-----------------------------------------------------
the provisions of Section 2.1(d), each Borrowing of Working Capital Loans
or Acquisition Loans (i) shall be (A) in the case of Base Rate Loans, in an
aggregate principal amount not less than $1,000,000 or an integral multiple
of $500,000 in excess thereof, and (B) in the case of Eurodollar Loans, in
an aggregate principal amount of not less than $3,000,000 or an integral
multiple of $1,000,000 in excess thereof; and (ii) except as provided in
Section 2.15, shall consist of Loans of the same Type made on the same day
by the Revolving Credit Lenders ratably according to their Pro Rata Portion
of the Total Revolving Credit Commitments. Within the limits of each
Revolving Credit Lender's Revolving Credit Commitment, and subject to and
on the other terms and conditions of this Agreement, Borrower may borrow,
prepay pursuant to Section 2.8 and reborrow Working Capital Loans and
Acquisition Loans under this Section 2.1.
(d) Swing Line Loans.
----------------
(i) Swing Line Lender agrees, subject to the terms and
conditions set forth in this Agreement, to make revolving loans under
the Swing Line Subfacility (each such loan, a "Swing Line Loan," and
---------------
all such loans, the "Swing Line Loans") to Borrower from time to time
----------------
on any Business Day during the period from the Closing Date until the
Termination Date; provided that (x) the aggregate principal amount of
--------
the Swing Line Loans outstanding at any time shall not exceed the then
Swing Line Commitment; (y) no Swing Line Loan shall be made if, after
giving effect to the making of such Swing Line Loan, the Outstanding
Working Capital Credit would exceed the then Working Capital
Commitment; and (z) no Swing Line Loan shall be made if, after giving
effect to the making of such Swing Line Loan, the Outstanding
Revolving Credit would exceed the then Total Revolving Credit
Commitments.
(ii) If any Swing Line Loan has not been repaid by Borrower,
Swing Line Lender may, at any time in its sole and absolute
discretion, require Administrative Agent to deliver to each Revolving
Credit Lender (with a copy to Borrower), no later than 2:00 p.m.,
Charlotte time, on the first Business Day prior to the requested
funding, a notice (which shall, for all purposes of this Agreement, be
deemed to be a Notice of Borrowing given by Borrower) requesting such
Revolving Credit Lender to make a Working Capital Loan that is a Base
Rate
32
<PAGE>
Loan in an amount equal to such Revolving Credit Lender's Pro
Rata Portion of such Swing Line Loans (the "Refunded Swing Line
-------------------
Loans") outstanding and requested to be prepaid with Working Capital
-----
Loans on the date such notice is given which Administrative Agent
requests or is required to request the Revolving Credit Lenders to
prepay. Anything contained in this Agreement to the contrary
notwithstanding, (A) the proceeds of such Working Capital Loans made
by the Revolving Credit Lenders shall be immediately delivered to
Administrative Agent (and not to Borrower) and applied to repay a
corresponding portion of the Refunded Swing Line Loans and (B) on the
day such Working Capital Loans are made, the Refunded Swing Line Loans
shall be deemed to be paid with the proceeds of such Working Capital
Loan and such portion of the Swing Line Loans deemed to be so paid
shall no longer be outstanding as Swing Line Loans and shall no longer
be due under the Swing Line Note of Swing Line Lender. Borrower hereby
authorizes Swing Line Lender to charge Borrower's accounts with Swing
Line Lender (up to the amount available in each such account) in order
to immediately pay Swing Line Lender the amount of the Refunded Swing
Line Loans to the extent the proceeds of such Working Capital Loans
made by the Revolving Credit Lenders are not sufficient to repay in
full the Refunded Swing Line Loans.
(iii) If, as a result of any bankruptcy, insolvency or
similar proceeding with respect to Borrower, Working Capital Loans are
not made pursuant to Section 2.1(d)(ii) in an amount sufficient to
repay any amounts owed to Swing Line Lender in respect of any
outstanding Swing Line Loans, or if Swing Line Lender is otherwise
precluded for any reason from requiring a Borrowing of Working Capital
Loans to repay Refunded Swing Line Loans as provided for hereinabove,
Swing Line Lender shall be deemed to have sold without recourse,
representation or warranty, and each Revolving Credit Lender shall be
deemed to have purchased and hereby agrees to purchase, a
participation in such outstanding Swing Line Loans in an amount equal
to its Pro Rata Portion of the unpaid amount thereof together with
accrued interest thereon. In such event, Swing Line Lender may
require Administrative Agent to deliver notice thereof to each
Revolving Credit Lender; and upon its receipt of such notice given not
later than 2:00 p.m., Charlotte time, on the first Business Day prior
to the requested funding, each Revolving Credit Lender will make
available to Administrative Agent at its address referred to in
Section 8.2, an amount, in same day funds, equal to its respective
participation. To the extent the Revolving Credit Lenders have made
such amounts available to Administrative Agent as provided
hereinabove, Administrative Agent will make the aggregate of such
amounts available to Swing Line Lender in like funds as received by
Administrative Agent. In the event any such Revolving Credit Lender
fails to make available to Administrative Agent the amount of such
Lender's participation as provided in this Section 2.1(d)(iii), Swing
Line Lender shall be entitled to recover such amount on demand from
such Lender, together with interest thereon for each day from the date
such amount is required to be made available for the account of Swing
Line Lender until the date such
33
<PAGE>
amount is made available to Swing Line Lender, at the Federal Funds
Rate for the first three (3) Business Days after demand by Swing Line
Lender to such Lender for such repayment and thereafter at the
interest rate applicable to Base Rate Loans pursuant to Section
2.7(a). Promptly following its receipt of any payment by or on behalf
of Borrower in respect of a Swing Line Loan, Swing Line Lender will
pay to each Revolving Credit Lender that has acquired a participation
therein such Lender's ratable share of such payment.
(iv) Anything contained herein to the contrary
notwithstanding, each Revolving Credit Lender's obligation to make
Working Capital Loans for the purpose of repaying any Refunded Swing
Line Loans pursuant to Section 2.1(d)(ii) and each Revolving Credit
Lender's obligation to purchase a participation in any unpaid Swing
Line Loans pursuant to Section 2.1(d)(iii) shall be absolute and
unconditional and shall not be affected by any circumstance, including
without limitation (w) any set-off, counterclaim, recoupment, defense
or other right which such Revolving Credit Lender may have against
Swing Line Lender, Borrower or any other Person for any reason
whatsoever; (x) the occurrence or continuation of a Default or Event
of Default; (y) any breach of this Agreement or any other Loan
Document by any party thereto; or (z) any other circumstance,
happening or event whatsoever, whether or not similar to any of the
foregoing; provided that such obligations of each Revolving Credit
--------
Lender are subject to the satisfaction of one of the following: (A)
Swing Line Lender believed in good faith that all conditions under
Section 3.2 to the making of the applicable Swing Line Loans to be
refunded, were satisfied at the time such Swing Line Loans were made,
(B) such Revolving Credit Lender had actual knowledge, by receipt of
any notices required to be delivered to the Revolving Credit Lenders
pursuant to this Agreement, that any such condition had not been
satisfied and such Revolving Credit Lender did not notify Swing Line
Lender in writing that it had no obligation to make Working Capital
Loans until such condition was satisfied (any such notice to be
effective as of the time and date of receipt thereof by Swing Line
Lender), or (C) the satisfaction of any such condition not satisfied
had been waived in accordance with the provisions of this Agreement.
(v) Each Borrowing of Swing Line Loans shall be in an
aggregate principal amount not less than $500,000 or an integral
multiple of $100,000 in excess thereof. Each Borrowing of Swing Line
Loans shall be comprised solely of Base Rate Loans. Within the limits
of the Swing Line Commitment, and subject to and on the other terms
and conditions of this Agreement, Borrower may borrow, prepay pursuant
to Section 2.8 and reborrow Swing Line Loans under this Section 2.1.
34
<PAGE>
SECTION 2.2 Term Loan Facility.
------------------
(a) Term Loans. Each Term Loan Lender severally agrees, subject to
----------
the terms and conditions set forth in this Agreement, to make a term loan
under the Term Loan Facility (each such loan, a "Term Loan," and all such
---------
loans, the "Term Loans") to Borrower on the Closing Date in a principal
----------
amount equal to the amount of its Term Loan Commitment.
(b) Other Term Loan Provisions. The aggregate principal amount of the
--------------------------
Borrowing of the Term Loans on the Closing Date shall be in the amount of
the Total Term Loan Commitments. The Borrowing of Term Loans shall, on the
Closing Date (and each Conversion or continuation thereof pursuant to
Section 2.10 shall, except as provided in Section 2.15), consist of Term
Loans of the same Type, made by the Term Loan Lenders ratably according to
their Pro Rata Portion of the Total Term Loan Commitments. No Term Loans
may be made at any time after the Closing Date. Amounts paid or prepaid in
respect of Term Loans may not be reborrowed.
SECTION 2.3 Making Loans.
------------
(a) Notice of Borrowing. Each Borrowing shall be made on notice given
-------------------
not later than (x) 2:00 p.m., Charlotte time, three Business Days prior to
the requested borrowing date, in the case of Eurodollar Loans; (y) 2:00
p.m., Charlotte time, one Business Day prior to the requested borrowing
date, in the case of Base Rate Loans (other than Swing Line Loans); and (z)
11:00 a.m., Charlotte time, on the requested borrowing date, in the case of
Swing Line Loans; in each case under (x), (y) and (z) above, by Borrower to
Administrative Agent (and Administrative Agent shall promptly deliver a
copy of any such notice that relates to (1) Working Capital Loans or
Acquisition Loans, to each Revolving Credit Lender, and (2) Swing Line
Loans, to Swing Line Lender) by telecopier, telex or cable; provided that
--------
Borrower hereby requests a Borrowing of Term Loans on the Closing Date in
an amount equal to the Total Term Loan Commitments; and provided further
-------- -------
that with respect to Swing Line Loans, Swing Line Lender may consent in
writing to a shorter notice period and may agree to a Notice of Borrowing
in a form acceptable to Swing Line Lender and Borrower. Each such notice
of Borrowing (a "Notice of Borrowing") shall be by telecopier, telex or
-------------------
cable, confirmed immediately in writing, in substantially the form of
Exhibit B-1 hereto, specifying therein (i) the requested borrowing date of
-----------
such Borrowing (such date for each Borrowing, the "Borrowing Date"); (ii)
--------------
the Class of Loans comprising such Borrowing; (iii) the Type of Loans
comprising such Borrowing; (iv) the aggregate principal amount of such
Borrowing; and (v) in the case of a Borrowing comprised of Eurodollar
Loans, the initial Interest Period for such Eurodollar Loans. Upon
fulfillment of the applicable conditions set forth in Section 3.2 (and, in
the case of the initial Loans, Section 3.1), each applicable Lender shall,
before 2:00 p.m., Charlotte time, on the Borrowing Date for such Borrowing
make available for the account of its Applicable Lending Office to
Administrative Agent at its address referred to in Section 8.2, in same day
funds, such Lender's Pro Rata Portion of the aggregate principal amount of
such Borrowing. After Administrative Agent's receipt
35
<PAGE>
of such funds with respect to Working Capital Loans, Acquisition Loans or
Term Loans, as the case may be, Administrative Agent will, not later than
3:00 p.m., Charlotte time, on the Borrowing Date for such Borrowing, make
such funds available to Borrower at Administrative Agent's aforesaid
address. With respect to Swing Line Loans, Swing Line Lender will, not
later than 3:00 p.m., Charlotte time, on the Borrowing Date for such
Borrowing, make available to Borrower at Swing Line Lender's address
referred to in Section 8.2 the aggregate principal amount of such
Borrowing.
(b) Notice of Borrowing Irrevocable. Each Notice of Borrowing shall
-------------------------------
be irrevocable and binding on Borrower.
(c) Assumption of Funding. Unless Administrative Agent shall have
---------------------
received notice from a Lender prior to the Borrowing Date for any Borrowing
of Acquisition Loans, Working Capital Loans or Term Loans that such Lender
will not make available to Administrative Agent such Lender's Pro Rata
Portion of the aggregate principal amount of such Borrowing, Administrative
Agent may assume that such Lender has made such portion available to
Administrative Agent on the Borrowing Date for such Borrowing in accordance
with subsection (a) of this Section 2.3 and Administrative Agent may, in
reliance upon such assumption, make available to Borrower on such date a
corresponding amount. If and to the extent that such Lender shall not have
so made such Pro Rata Portion available to Administrative Agent, such
Lender and Borrower severally agree to repay to Administrative Agent
forthwith on demand such corresponding amount together with interest
thereon, for each day from the date such amount is made available to
Borrower until the date such amount is repaid to Administrative Agent, at
(i) in the case of Borrower, the interest rate applicable at the time to
Base Rate Loans; and (ii) in the case of such Lender, the Federal Funds
Rate for the first three days after demand by Administrative Agent to such
Lender for such repayment and thereafter at the interest rate applicable to
Base Rate Loans pursuant to Section 2.7(a). If such Lender shall repay to
Administrative Agent such corresponding amount, such amount so repaid shall
constitute such Lender's Loan as part of such Borrowing for purposes of
this Agreement and Borrower shall be relieved, ab initio, from its
-- ------
obligation pursuant to the preceding sentence.
(d) Failure of Lender to Fund. All obligations of the Lenders
-------------------------
hereunder shall be several, but not joint. The failure of any Lender to
make the Loan to be made by it as part of any Borrowing shall neither
increase any other Lender's Pro Rata Portion of the Total Revolving Credit
Commitments and/or Total Term Loan Commitments, as the case may be, nor
relieve any other Lender of its obligation, if any, hereunder to make its
Loan on the Borrowing Date for such Borrowing, but no Lender shall be
responsible for the failure of any other Lender to make the Loan to be made
by such other Lender on the Borrowing Date for any Borrowing. In the event
that, at any time when no Event of Default then exists, a Lender for any
reason (other than the failure of Borrower to satisfy the conditions to a
Borrowing set forth herein or Administrative Agent's failure to give notice
of such Borrowing as required hereunder) fails or refuses to fund its
portion of a Borrowing, then, until such time as such Lender has funded its
portion of such Borrowing,
36
<PAGE>
or all other Lenders have received payment in full (whether by repayment or
prepayment) of the principal and interest due in respect of such Borrowing,
such non-funding Lender (i) shall have no right to vote regarding any issue
on which voting is required or advisable under this Agreement or any other
Loan Document, notwithstanding anything to the contrary contained in
Section 8.1, and (ii) shall not be entitled to receive any payments of
principal, interest or fees from Borrower in respect of the Borrowing of
which such Lender failed to fund its ratable portion.
SECTION 2.4 Letter of Credit Subfacility.
----------------------------
(a) Issuance of the Letters of Credit. Subject to the terms and
---------------------------------
conditions set forth in this Agreement, LC Bank agrees, at the request and
for the account of Borrower from time to time on any Business Day from the
Closing Date until the Termination Date, to issue a standby letter or
standby letters of credit, and on the Closing Date LC Bank shall be deemed
to have issued the Outstanding Letters of Credit) under the Letter of
Credit Subfacility (individually a "Letter of Credit," and collectively,
----------------
the "Letters of Credit"), so long as such issuance would not cause (i) the
-----------------
Outstanding Working Capital Credit to exceed the then Working Capital
Commitment; (ii) the Letter of Credit Exposure to exceed the Maximum LC
Amount; or (iii) the Outstanding Revolving Credit to exceed the then Total
Revolving Credit Commitments. Upon such issuance (other than with respect
to the Outstanding Letters of Credit), LC Bank shall deliver such Letter of
Credit to the requested beneficiary designated by Borrower. Each Letter of
Credit shall expire on the Expiration Date corresponding to such Letter of
Credit. Each Letter of Credit shall provide for payments of drawings in
Dollars.
(b) Request for LC Issuance. Borrower shall request the issuance of
-----------------------
any Letter of Credit (other than the Outstanding Letters of Credit) by
delivering to LC Bank and Administrative Agent (and Administrative Agent
shall promptly deliver a copy of such request to each Revolving Credit
Lender) not later than three Business Days prior to the date such Letter of
Credit is to be issued (such date for each Letter of Credit, the "LC
--
Issuance Date"), an irrevocable written request in the form of Exhibit B-2,
------------- -----------
appropriately completed (a "Request for LC Issuance"), which specifies,
-----------------------
among other things: (i) the LC Issuance Date for such Letter of Credit;
(ii) the Stated Amount of such Letter of Credit; (iii) the beneficiary for
such Letter of Credit; and (iv) the Expiration Date for such Letter of
Credit. No Letter of Credit shall be issued if the Expiration Date for
such Letter of Credit is later than the Maturity Date.
(c) Reimbursement. Immediately after the payment by LC Bank of any
-------------
Drawing Payment under any Letter of Credit, LC Bank shall notify Borrower
of such Drawing Payment and not later than 2:00 p.m., Charlotte time, on
the date of such Drawing Payment, Borrower shall make or cause to be made
to Administrative Agent for the benefit of LC Bank a payment (each such
payment, a "Reimbursement Payment") in an amount equal to the sum of (i)
---------------------
the full amount of such Drawing Payment; and (ii) interest thereon (A) from
the date of the Drawing Payment through the date one Business Day after the
date of the Drawing Payment at a rate per annum equal to the Base Rate plus
the
37
<PAGE>
Base Rate Margin then in effect and (B) from the date one Business Day
after the date of the Drawing Payment through the date the Reimbursement
Payment is made at a rate per annum equal to the Base Rate plus the Base
Rate Margin then in effect plus 2% per annum; provided, however, that such
-------- -------
Reimbursement Payment shall be made for the benefit of the Revolving Credit
Lenders if, prior to the time such Reimbursement Payment is made, LC Bank
has requested the Revolving Credit Lenders pursuant to Section 2.4(e) to
pay to LC Bank their Pro Rata Portion of the Drawing Payment made by LC
Bank. If a Reimbursement Payment is made in the full amount of such Drawing
Payment at or prior to 2:00 p.m., Charlotte time, on the date such Drawing
Payment is made, no interest shall be payable on such Drawing Payment.
(d) Reimbursement Obligation Absolute. The Reimbursement Obligations
---------------------------------
of Borrower for each Drawing Payment shall be absolute, unconditional and
irrevocable, and shall be performed strictly in accordance with the terms
of this Agreement under and without regard to any circumstances, including
(i) any lack of validity or enforceability of any of the Loan Documents;
(ii) any amendment or waiver of or any consent to departure from all or any
terms of any of the Loan Documents; (iii) the existence of any claim, set-
off, defense or other right which Borrower or any other Loan Party may have
at any time against any beneficiary or any transferee of any Letter of
Credit (or any Persons for whom any such beneficiary or transferee may be
acting), LC Bank, either of the Agents, any Lender or any other Person,
whether in connection with this Agreement, the transactions contemplated
herein or in the other Loan Documents, or in any unrelated transaction;
(iv) any breach of contract or dispute among or between Borrower, either of
the Agents, LC Bank, any Lender, or any other Person; (v) any demand,
statement, certificate, draft or other document presented under any Letter
of Credit proving to be forged, fraudulent, invalid or insufficient in any
non-material respect or any statement therein being untrue or inaccurate in
any respect; (vi) payment by LC Bank under any Letter of Credit to the
beneficiary or transferee of such Letter of Credit against presentation of
any demand, statement, certificate, draft or other document which does not
strictly comply with the terms of any Letter of Credit; (vii) any non-
application or misapplication by any beneficiary or transferee of the
proceeds of any Drawing Payment under any Letter of Credit or any other act
or omission of such beneficiary or such transferee in connection with any
Letter of Credit; or (viii) any failure to preserve or protect any
Collateral, any failure to perfect or preserve the perfection of any Lien
thereon, or the release of any of the Collateral securing the performance
or observance of the terms of this Agreement or any of the other Loan
Documents.
(e) Lender Participation. Each Revolving Credit Lender severally
--------------------
agrees to participate with LC Bank in the extension of credit arising from
the issuance of the Letters of Credit in an amount not to exceed such
Revolving Credit Lender's Pro Rata Portion of the Maximum LC Amount and the
issuance of each Letter of Credit shall be deemed a confirmation by such
Revolving Credit Lender of such participation. If Borrower does not
reimburse any Drawing Payment on the day such Drawing Payment is made, LC
Bank may request each of the Revolving Credit Lenders to pay to
Administrative Agent, for the account of LC Bank, its Pro Rata Portion of
all or any portion of such Drawing Payment
38
<PAGE>
by delivering to Administrative Agent a written request for such payment
which specifies the amount of such Drawing Payment. Administrative Agent
shall promptly deliver a copy of such request to each Revolving Credit
Lender and notify the Revolving Credit Lenders in writing of each Revolving
Credit Lender's Pro Rata Portion of such Drawing Payment, and the date on
which such Drawing Payment is to be made or was made. If Administrative
Agent gives such notice prior to 11:00 a.m., Charlotte time, on any
Business Day, each Revolving Credit Lender will make available to
Administrative Agent, for the account of LC Bank, its Pro Rata Portion of
the applicable portion of such Drawing Payment on such Business Day in
immediately available funds. If Administrative Agent gives such notice
after 11:00 a.m., Charlotte time, on any Business Day, each Revolving
Credit Lender shall make such Pro Rata Portion available to Administrative
Agent on the next succeeding Business Day. Each such payment to
Administrative Agent, to the extent not made when due hereunder, shall be
made together with interest thereon at a per annum rate equal to the
Federal Funds Rate for the first three days after such amount is due to
Administrative Agent and thereafter at the rate applicable to Base Rate
Loans pursuant to Section 2.7(a) until the date on which such Revolving
Credit Lender makes such payment. Each payment made by any Revolving Credit
Lender pursuant to this Section 2.4(e) shall be a Working Capital Loan and
shall for all purposes hereunder be treated as a Working Capital Loan. Each
Revolving Credit Lender's obligation to make each such payment to
Administrative Agent for the account of LC Bank shall be absolute,
unconditional and irrevocable and shall not be affected by any circumstance
whatsoever, including the occurrence or continuance of any Default or Event
of Default, or the failure of any other Revolving Credit Lender to make any
payment under this Section 2.4(e), and each Revolving Credit Lender further
agrees that each such payment shall be made without any offset, abatement,
withholding or reduction whatsoever. If any Reimbursement Payment is made
to Administrative Agent, Administrative Agent shall pay, to each Revolving
Credit Lender which has paid its Pro Rata Portion of the Drawing Payment,
such Revolving Credit Lender's Pro Rata Portion of the Reimbursement
Payment and shall pay to LC Bank the balance of such Reimbursement Payment.
(f) Commercial Practices. Borrower assumes all risks of the acts or
--------------------
omissions of any beneficiary or transferee of any Letter of Credit with
respect to the use of any Letter of Credit. Borrower agrees that none of
LC Bank, either of the Agents or any Lender (or any of their respective
directors, officers or employees) shall be liable or responsible for: (i)
the use which may be made by any beneficiary or transferee of any Letter of
Credit or for any acts or omissions of any beneficiary or transferee in
connection therewith; (ii) any reference which may be made by any
beneficiary or transferee to this Agreement or to any Letter of Credit in
any agreements, instruments or other documents; (iii) the validity,
sufficiency or genuineness of documents submitted by such beneficiary or
transferee other than any Letter of Credit, or of any endorsement(s)
thereon, even if such documents should in fact prove to be in any or all
respects invalid, fraudulent or forged or any statement therein prove to be
untrue or inaccurate in any respect whatsoever; (iv) payment by LC Bank
against presentation of documents which do not strictly comply with the
terms of any Letter of Credit, so long as such documents reasonably
identify such Letter of Credit; or (v) any other circumstances whatsoever
in making or failing to make
39
<PAGE>
payment under any Letter of Credit, except only that LC Bank shall be
liable to Borrower for acts or events described in clauses (i) through (v)
above, to the extent, but only to the extent, of any direct, as opposed to
indirect, special or consequential, damages suffered by Borrower which
Borrower proves were caused by (A) LC Bank's willful misconduct or gross
negligence in determining whether a drawing made under any Letter of Credit
strictly complies with the terms and conditions therefor stated in such
Letter of Credit or (B) LC Bank's willful failure to pay under any Letter
of Credit after a drawing by the beneficiary or transferee strictly
complying with the terms and conditions of any Letter of Credit. Without
limiting the foregoing, LC Bank may accept any document submitted by any
beneficiary or transferee that appears on its face to be in order, without
responsibility for further investigation. The determination of whether a
drawing has been made under any Letter of Credit prior to its expiration or
whether a drawing made under any Letter of Credit is in proper and
sufficient form shall be made by LC Bank in its sole discretion, which
determination shall be conclusive and binding upon Borrower to the extent
permitted by law. Borrower hereby waives any right to object to any payment
made under any Letter of Credit with regard to a drawing that is in the
form provided in any Letter of Credit but which varies with respect to
punctuation, capitalization, spelling or similar matters of form.
(g) Outstanding Letters of Credit. The Outstanding Letters of Credit
-----------------------------
are set forth on Schedule 2.4(g). The parties hereto agree that each
Outstanding Letter of Credit will be treated as if it had been originally
issued under this Agreement, and as of the Closing Date each Outstanding
Letter of Credit shall be deemed to be a Letter of Credit for all purposes
hereunder and under the other Loan Documents. Specifically, and without
limitation of the foregoing or the other provisions of this Section 2.4,
(i) the Stated Amount of each Outstanding Letter of Credit, for so long as
the same shall be outstanding, shall be included in calculating (A) the
limit set forth in the Maximum LC Amount and (B) the Letter of Credit
Exposure, (ii) each Revolving Credit Lender hereby absolutely and
unconditionally agrees to pay to LC Bank, in accordance with Section
2.4(e), such Lender's Pro Rata Portion of each Drawing Payment made by LC
Bank under the Outstanding Letters of Credit, together with interest in
accordance with Section 2.4(e), and (iii) with respect to each Outstanding
Letter of Credit, LC Bank shall have the benefit of all agreements,
covenants and indemnities of LC Bank set forth under this Agreement and
shall comply with all agreements and obligations set forth herein which
bind LC Bank, insofar as the same apply to Letters of Credit generally.
SECTION 2.5 Notes. The Loans made by each Lender shall be evidenced
-----
by Notes as follows:
(a) Revolving Notes. The Revolving Loans made by each Revolving
---------------
Credit Lender shall be evidenced by a Revolving Note (each such note, a
"Revolving Note," and all such notes, the "Revolving Notes"), substantially
--------------- ---------------
in the form of Exhibit A-1, to be delivered on and dated the Closing Date,
-----------
in an original principal amount equal to such Revolving Credit Lender's
Revolving Credit Commitment.
40
<PAGE>
(b) Term Notes. The Term Loans made by each Term Loan Lender shall be
----------
evidenced by a Term Note (each such note, a "Term Note," and all such
---------
notes, the "Term Notes"), substantially in the form of Exhibit A-2, to be
---------- -----------
delivered on and dated the Closing Date, in an original principal amount
equal to such Lender's Term Loan Commitment (or, in the case of a Term Note
issued after the Closing Date, in an amount equal to the unpaid principal
amount of such Term Loan Lender's Term Loans).
(c) Swing Line Note. The Swing Line Loans made by Swing Line Lender
---------------
shall be evidenced by a Swing Line Note (such note, the "Swing Line Note"),
---------------
substantially in the form of Exhibit A-3, to be delivered on and dated the
-----------
Closing Date, in an original principal amount equal to the Swing Line
Commitment.
(d) Recording of Amounts. Each Lender is hereby authorized (but not
--------------------
obligated, and no failure by any Lender to do so shall relieve Borrower of
its obligation hereunder to repay Loans received by it and interest
thereon), at its option, to either (i) endorse the date and amount of each
Loan made by such Lender and each payment of principal of Loans made with
respect to the respective Notes on a schedule annexed to and constituting a
part of such Note, or (ii) record such Loans and payments in its books and
records, such schedule or such books and records, as the case may be,
constituting prima facie evidence of the accuracy of the information
----- -----
contained therein.
SECTION 2.6 Mandatory Principal Payments. Borrower agrees to repay
----------------------------
the Loans as follows:
(a) Scheduled Amortization.
----------------------
(i) To the extent not previously paid or declared due and
payable pursuant to the provisions of this Agreement, Borrower shall
repay the principal amount of the Term Loans in 13 quarterly
installments, with the first such installment to be made on the last
day of the calendar month during which the second anniversary of the
Closing Date occurs, and each subsequent installment to be made on the
last day of the third calendar month after the prior installment.
Subject to adjustment as provided in Section 2.6(b)(v), each of the
first 10 quarterly installments shall be in an amount equal to
$7,000,000 and each of the last three quarterly installments shall be
in an amount equal to $10,000,000; provided, however, that the last
-------- -------
installment shall be in an amount necessary to repay in full the
aggregate unpaid principal amount of Term Loans then outstanding.
(ii) To the extent not previously paid or declared due and
payable pursuant to the provisions of this Agreement, all Revolving
Loans and Term Loans shall be due and payable on the Maturity Date.
41
<PAGE>
(b) Mandatory Prepayments upon Certain Events.
-----------------------------------------
(i) Asset Sales. Borrower shall give Administrative Agent and
-----------
the Lenders at least three Business Days' prior written or telecopy
notice of each and every Asset Sale, the amount of Net Cash Proceeds
expected to be received therefrom and the expected schedule for
receiving such Net Cash Proceeds. On the Business Day after receipt
by Borrower and/or any of its Subsidiaries of any Net Cash Proceeds
with respect to any Asset Sale, Borrower shall deliver to
Administrative Agent an amount equal to the amount of such Net Cash
Proceeds, for deposit into an account (each, an "Asset Sale Account")
------------------
established by Borrower with Administrative Agent and over which
Administrative Agent shall have exclusive dominion and control,
including the right of withdrawal for application in accordance with
this Section 2.6(b) (but subject to Borrower's right of withdrawal as
set forth hereinbelow). Subject to the provisions of this Section
2.6(b)(i), Borrower shall be permitted, at any time and from time to
time during the period ending on the 180th day after deposit of such
Net Cash Proceeds into an Asset Sale Account, to withdraw all or any
portion of such Net Cash Proceeds for the purpose of making Capital
Expenditures otherwise permitted under this Agreement; provided,
--------
however, that no such withdrawals shall be permitted at any time after
-------
the occurrence and during the continuance of an Event of Default. In
order to make any such withdrawal, Borrower shall give Administrative
Agent at least three Business Days' prior written or telecopy notice
of each intended withdrawal, specifying the requested amount of such
withdrawal and the purpose for which the withdrawn funds are to be
used, and shall provide such other supporting documentation as
Administrative Agent may reasonably request. Any amounts remaining in
any Asset Sale Account on the 180th day after deposit therein as
provided in this Section 2.6(b)(i) shall thereupon be applied, for the
benefit of the applicable Lenders pursuant to Section 2.6(b)(v), as a
prepayment of the Loans in accordance with the provisions of Section
2.6(b)(v). Administrative Agent will, at the request of Borrower,
invest amounts on deposit in the Asset Sale Accounts in Cash
Equivalents that mature prior to the 180th day after deposit of such
amounts into the relevant Asset Sale Account; provided, however, that
-------- -------
(i) Administrative Agent shall not be required to make any investment
that, in its sole judgment, would require or cause Administrative
Agent to be in, or would result in any, violation of any law, statute,
rule or regulation and (ii) if an Event of Default shall have occurred
and be continuing, the selection of such investments shall be in the
sole discretion of Administrative Agent (provided that,
--------
notwithstanding the provisions of this clause (ii), such investments
made during the continuance of an Event of Default shall be in Cash
Equivalents having a maturity not exceeding 30 days). Borrower shall
indemnify Administrative Agent for any losses relating to the
investments so that the amount available to prepay the Loans on the
180th day after any deposit into any Asset Sale Account is not less
than the amount that would have been available had no investments been
made pursuant thereto. Other than any interest earned on such
investments, the Asset Sale Accounts shall not bear interest. Interest
or profits, if any, on such
42
<PAGE>
investments shall be deposited in the applicable Asset Sale Account
and reinvested and disbursed as specified above. If the maturity of
the Loans has been accelerated pursuant to Article VI, Administrative
Agent may, in its sole discretion, apply all amounts on deposit in the
Asset Sale Accounts to satisfy any of the Obligations (provided that
--------
such amounts shall be applied first to prepay all outstanding Base
Rate Loans). Borrower hereby pledges and assigns to Administrative
Agent, for its benefit and the benefit of the Lenders, each Asset Sale
Account established hereunder to secure the Obligations.
Notwithstanding the foregoing, (x) up to $5,000,000 of such Net Cash
Proceeds with respect to such Asset Sales received in any fiscal year
of Borrower shall be excluded from the deposit and payment
requirements set forth in this clause (b)(i) (provided that such Net
--------
Cash Proceeds shall be so excluded only if, at the time such Net Cash
Proceeds would otherwise be required to be delivered to Administrative
Agent pursuant to the second sentence of this Section 2.6(b)(i) (and
after giving effect to any concurrent prepayment), the aggregate
outstanding principal balance of the Term Loans is equal to or less
than $35,000,000) and (y) during the life of this Agreement, the
maximum aggregate amount excluded under clause (x) above shall not
exceed $15,000,000.
(ii) Debt Issuance. Borrower shall give Administrative Agent
-------------
and the Lenders at least three Business Days' prior written or
telecopy notice of each and every Debt Issuance, the amount of Net
Cash Proceeds expected to be received therefrom and the expected
schedule for receiving such Net Cash Proceeds. On the Business Day
after receipt by Borrower and/or any of its Subsidiaries of any Net
Cash Proceeds with respect to any Debt Issuance, Borrower shall make a
payment to Administrative Agent on behalf of the applicable Lenders
pursuant to Section 2.6(b)(v) in an amount equal to the amount of such
Net Cash Proceeds actually received. Notwithstanding the foregoing,
up to $35,000,000 of such Net Cash Proceeds with respect to any one or
more such Debt Issuances shall be excluded from the payments required
under this clause (b)(ii); provided that (v) such Net Cash Proceeds
--------
shall be so excluded only if, at the time such Net Cash Proceeds would
otherwise be required to be paid to Administrative Agent pursuant to
the immediately preceding sentence (and after giving effect to any
concurrent prepayment), the aggregate outstanding principal balance of
the Term Loans is equal to or less than $35,000,000, (w) such excluded
Net Cash Proceeds shall be retained by Borrower and used solely to
repurchase, redeem or otherwise acquire its capital stock within 90
days after Borrower's receipt thereof (but subject to the overall
limitation on such repurchases, redemptions and other acquisitions set
forth in Section 5.4(d)(iv)), (x) any Net Cash Proceeds not so
retained and applied within such 90-day period shall be promptly paid
over to Administrative Agent for application to the Loans pursuant to
Section 2.6(b)(v), (y) not more than $35,000,000 in the aggregate of
Net Cash Proceeds from Debt Issuances from and after the Closing Date
shall be excluded pursuant to this clause (b)(ii), and (z) to the
extent Net Cash Proceeds from Debt Issuances are received after the
$35,000,000 exclusion provided for herein has been fully utilized,
such Net Cash
43
<PAGE>
Proceeds shall be paid over to Administrative Agent for application to
the Loans pursuant to the preceding sentence of this clause (b)(ii)
and Section 2.6(b)(v).
(iii) Equity Issuance. Borrower shall give Administrative
---------------
Agent and the Lenders at least three Business Days' prior written or
telecopy notice of each and every Equity Issuance, the amount of Net
Cash Proceeds expected to be received therefrom and the expected
schedule for receiving such Net Cash Proceeds. On the Business Day
after receipt by Borrower and/or any of its Subsidiaries of any Net
Cash Proceeds with respect to any Equity Issuance, Borrower shall make
a payment to Administrative Agent on behalf of the applicable Lenders
pursuant to Section 2.6(b)(v) in an amount equal to 100% of the amount
of such Net Cash Proceeds. Notwithstanding the foregoing, if, at the
time such Net Cash Proceeds would otherwise be required to be paid to
Administrative Agent pursuant to the immediately preceding sentence
(and after giving effect to any concurrent prepayment), the aggregate
outstanding principal balance of the Term Loans is equal to or less
than $35,000,000), the prepayment required under this clause (b)(iii)
shall be an amount equal to 50% of such Net Cash Proceeds.
(iv) Casualty Event. On the 180th day after receipt by
--------------
Borrower and/or any of its Subsidiaries of any Net Cash Proceeds with
respect to any Casualty Event, Borrower shall make a payment to
Administrative Agent on behalf of the applicable Lenders pursuant to
this Section 2.6(b)(iv) in an amount equal to 100% of the amount of
such Net Cash Proceeds (less any amounts theretofore applied or
committed to be applied within a reasonable period to the repair or
replacement of property subject to such Casualty Event).
(v) Application of Mandatory Prepayments. If a payment
------------------------------------
under Section 2.6(b)(i), (ii), (iii) or (iv) occurs, such repayment
shall be applied to prepay Term Loans; provided that if, on the date
--------
that a prepayment is required under this Section 2.6(b), the amount of
such required prepayment exceeds the total principal amount of all
outstanding Term Loans on such date before giving effect to such
prepayment, such excess amount shall be applied (I) to prepay the
principal amount of the Acquisition Loans; (II) after payment in full
of all Acquisition Loans, to prepay the principal amount of the
Working Capital Loans; and (III) after payment in full of all
Acquisition Loans and all Working Capital Loans, to prepay the
principal amount of the Swing Line Loans; provided further that if, on
--------
the date that a payment is required under this Section 2.6(b), (x) the
amount of such required prepayment exceeds the total principal amount
of all outstanding Loans on such date before giving effect to such
prepayment and (y) one or more Letters of Credit are issued and
outstanding on such date, then Borrower shall deposit into a separate
account
(an "LC Cash Collateral Account") an amount (the "LC Cash Collateral")
-------------------------- ------------------
equal to the lesser of the Aggregate Stated Amount and the excess of
the amount of the required prepayment over the amount of outstanding
Loans on such date. Any prepayment under Section 2.6(b)(i), (ii),
(iii) or (iv) that is applied to Term Loans shall reduce pro rata each
of the installments required
44
<PAGE>
under Section 2.6(a)(i) to be made after the date of such prepayment.
All mandatory prepayments hereunder shall be applied, as to Loans of
the same Class, first to any outstanding Base Rate Loans. Any amounts
remaining after each such application shall, at the option of
Borrower, be applied to prepay Eurodollar Loans of such Class
immediately and/or shall be deposited in a separate Prepayment Account
(as defined below) for the Loans of such Class. Administrative Agent
shall apply any cash deposited in the Prepayment Account for any Class
of Loans to prepay Eurodollar Loans of such Class on the last day of
their respective Interest Periods (or, at the direction of Borrower,
on any earlier date), in ascending order of length of the remaining
portion of their then current Interest Periods, until all outstanding
Loans of such Class have been prepaid or until all the allocable cash
on deposit in the Prepayment Account for such Class has been
exhausted. For purposes of this Agreement, the term "Prepayment
----------
Account" for any Class of Loans shall mean an account established
-------
by Borrower with Administrative Agent and over which Administrative
Agent shall have exclusive dominion and control, including the
exclusive right of withdrawal for application in accordance with this
Section 2.6(b)(v). Administrative Agent will, at the request of
Borrower, invest amounts on deposit in the Prepayment Account for any
Class of Loans in Cash Equivalents that mature prior to the last day
of the applicable Interest Periods of the Eurodollar Loans of such
Class to be prepaid; provided, however, that (i) Administrative Agent
-------- -------
shall not be required to make any investment that, in its sole
judgment, would require or cause Administrative Agent to be in, or
would result in any, violation of any law, statute, rule or regulation
and (ii) if an Event of Default shall have occurred and be continuing,
the selection of such investments shall be in the sole discretion of
Administrative Agent (provided that, notwithstanding the provisions
--------
of this clause (ii), such investments made during the continuance of
an Event of Default shall be in Cash Equivalents having a maturity not
exceeding 30 days). Borrower shall indemnify Administrative Agent for
any losses relating to the investments so that the amount available to
prepay Eurodollar Loans on the last day of the applicable Interest
Periods is not less than the amount that would have been available had
no investments been made pursuant thereto. Other than any interest
earned on such investments, the Prepayment Accounts shall not bear
interest. Interest or profits, if any, on such investments shall be
deposited in the applicable Prepayment Account and reinvested and
disbursed as specified above. If the maturity of the Loans has been
accelerated pursuant to Article VI, Administrative Agent may, in its
sole discretion, apply all amounts on deposit in the Prepayment
Account for any Class of Loans to satisfy any of the Obligations
related to such Class of Loans (provided that such amounts shall be
--------
applied first to prepay all outstanding Base Rate Loans). Borrower
hereby pledges and assigns to Administrative Agent, for its benefit
and the benefit of the Lenders, each Prepayment Account established
hereunder to secure the Obligations related to such Class of Loans.
(c) Accompaniment of Interest; Eurodollar Costs. Each payment of
-------------------------------------------
Borrowings pursuant to this Section 2.6 shall not be required to be
accompanied by
45
<PAGE>
accrued interest on the principal amount paid, except as expressly required
otherwise under Section 2.7. The repayments and prepayments of the Loans
required by the respective subsections of this Section 2.6 and the optional
prepayments permitted by Section 2.8 are separate and cumulative, so that
any one such repayment or prepayment shall reduce any other repayment or
prepayment only as and to the extent specified in Sections 2.6 and 2.8. All
payments under this Section 2.6 shall be subject to Section 2.18, but
otherwise shall be without premium or penalty.
(d) Application of LC Cash Collateral. Any amount of LC Cash
---------------------------------
Collateral held in the LC Cash Collateral Account shall be applied in the
following order of priority:
(i) First, if on the date of any Drawing Payment there is
LC Cash Collateral on deposit in the LC Cash Collateral Account, then
LC Cash Collateral in an amount equal to the lesser of (A) the amount
of LC Cash Collateral then in the LC Cash Collateral Account and (B)
the amount of such Drawing Payment shall be applied as a Reimbursement
Payment under Section 2.4(c);
(ii) Second, if on the date of the termination of a Letter
or Letters of Credit without a Drawing Payment there is LC Cash
Collateral on deposit in the LC Cash Collateral Account and no Default
or Event of Default has occurred and is continuing, then LC Cash
Collateral in an amount equal to the excess, if any, of (A) the amount
of LC Cash Collateral held in the LC Cash Collateral Account on such
date over (B) the Letter of Credit Exposure on such date, shall be
withdrawn from the LC Cash Collateral Account, paid to Borrower, and
available for use by Borrower in accordance with the provisions of
this Agreement;
(iii) Third, on the date of termination of all Letters of
Credit outstanding under this Agreement, termination of the
Commitments and payment of all Obligations owing to either of the
Agents, LC Bank, any Lender or any other Person under this Agreement
or any other Loan Document, the amount of LC Cash Collateral held in
the LC Cash Collateral Account shall be returned to Borrower; and
(iv) Fourth, so long as no Default or Event of Default has
occurred and is continuing, then at any time Borrower may withdraw LC
Cash Collateral in an amount equal to the excess, if any, of (A) the
amount of LC Cash Collateral held in the LC Cash Collateral Account on
such date over (B) the Letter of Credit Exposure on such date, for use
by Borrower in accordance with the provisions of this Agreement.
(e) Overadvance. In the event and on each occasion that the
-----------
Outstanding Revolving Credit exceeds the then Total Revolving Credit
Commitments, Borrower shall immediately, without notice or demand, repay,
to the extent of such excess, (A) the principal amount of the Acquisition
Loans; (B) after payment in full of all Acquisition Loans, the principal
amount of the Working Capital Loans; and (C) after payment in full of
46
<PAGE>
all Acquisition Loans and all Working Capital Loans, the principal amount
of the Swing Line Loans; provided further that if, on the date that a
--------
payment is required under this Section 2.6(e), (x) the amount of such
required prepayment exceeds the total principal amount of all outstanding
Loans on such date before giving effect to such repayment and (y) one or
more Letters of Credit are issued and outstanding on such date, then
Borrower shall deposit into an LC Cash Collateral Account LC Cash
Collateral equal to the lesser of the Aggregate Stated Amount and the
excess of the amount of the required prepayment over the amount of
outstanding Loans on such date.
SECTION 2.7 Interest. Borrower agrees to pay interest on the unpaid
--------
principal amount of each Loan made by each Lender from the Borrowing Date for
such Loan until the principal amount of such Loan shall be paid in full, at the
following rates per annum:
(a) Base Rate Loans. During such periods as such Loan (other than a
---------------
Swing Line Loan) is a Base Rate Loan, a rate per annum equal at all times
to the sum of the Base Rate in effect from time to time plus the Base Rate
Margin in effect from time to time, payable quarterly in arrears on the
last day of each calendar quarter (including in respect of any Base Rate
Loan or portion thereof paid or prepaid pursuant to the provisions of
Section 2.6 or 2.8; provided, however, that in the event the Loans are paid
-------- -------
or prepaid in full and the Commitments have been terminated, then accrued
interest in respect of all Base Rate Loans shall be payable together with
such payment or prepayment on the date thereof).
(b) Eurodollar Loans. During such periods as such Loan is a
----------------
Eurodollar Loan, a rate per annum equal at all times during each Interest
Period for such Loan to the sum of the Eurodollar Rate for such Interest
Period for such Loan plus the Eurodollar Rate Margin in effect from time to
time, payable on the last day of such Interest Period and, if such Interest
Period has a duration of more than three months, on each day which occurs
during such Interest Period every three months from the first day of such
Interest Period (including in respect of any Eurodollar Loan or portion
thereof paid or prepaid pursuant to the provisions of Section 2.6 or 2.8;
provided, however, that in the event all Eurodollar Loans made pursuant to
-------- -------
a single Borrowing are paid or prepaid in full, then accrued interest in
respect of such Eurodollar Loans shall be payable together with such
payment or prepayment on the date thereof).
(c) Default Interest. For any period of time during which an Event of
----------------
Default has occurred and is continuing, the principal amount of all Loans
then outstanding, all accrued and unpaid interest thereon (to the extent
permitted by law) and all fees and other amounts due hereunder and under
the other Loan Documents shall bear interest payable upon demand at a rate
per annum equal to the sum of (i) 2% plus (ii) the rate otherwise payable
pursuant to subsection (a) or (b) above (or, in the case of fees and other
amounts, at a rate per annum equal to the sum of (x) the Base Rate in
effect from time to time, plus (y) the Base Rate Margin in effect from time
to time, plus (z) 2%), but not to exceed the maximum rate permitted by
applicable law.
47
<PAGE>
(d) Swing Line Loans. During such periods as such Loan is a Swing
----------------
Line Loan, a rate per annum equal at all times to the aggregate of (i) the
Base Rate in effect from time to time, plus (ii) the Base Rate Margin in
effect from time to time, payable quarterly in arrears on the last day of
each calendar quarter.
SECTION 2.8 Voluntary Prepayments.
---------------------
(a) Prepayments. At any time and from time to time, Borrower shall
-----------
have the right to prepay the Loans, in whole or in part, without premium or
penalty (except as provided in clause (iii) below), upon written notice
given to Administrative Agent not later than 11:00 a.m., Charlotte time,
three Business Days prior to each intended prepayment of Eurodollar Loans
and one Business Day prior to each intended prepayment of Base Rate Loans,
provided that (i) each partial prepayment of Base Rate Loans shall be in an
--------
aggregate principal amount of not less than $1,000,000 or, if greater, an
integral multiple of $500,000 in excess thereof, and each partial
prepayment of Eurodollar Loans shall be in an aggregate principal amount of
not less than $3,000,000 or, if greater, an integral multiple of $1,000,000
in excess thereof, (ii) no partial prepayment of Eurodollar Loans made
pursuant to any single Borrowing shall reduce the aggregate outstanding
principal amount of the remaining Eurodollar Loans under such Borrowing to
less than $3,000,000 or to any greater amount not an integral multiple of
$1,000,000 in excess thereof, and (iii) unless made together with all
Breakage Costs required to be paid as a consequence of such prepayment, a
prepayment of a Eurodollar Loan may be made only on the last day of the
Interest Period applicable thereto. Each such notice shall specify the
proposed date of such prepayment and the aggregate principal amount, Class
and Type of Loans to be prepaid, and shall be irrevocable. Notwithstanding
the foregoing provisions of this Section 2.8(a), Borrower may prepay the
Swing Line Loans at any time and from time to time after the date hereof,
in whole or in part, without premium or penalty and without any requirement
as to the minimum amount of such prepayment, upon written notice delivered
to Administrative Agent no later than 11:00 a.m., Charlotte time, on the
date of such prepayment. Revolving Loans (but not Term Loans) prepaid
pursuant to this Section 2.8(a) may be reborrowed, subject to the terms and
conditions of this Agreement.
(b) Application. Voluntary repayments of Revolving Loans made under
-----------
Section 2.8(a) will be applied, at the option of Borrower, to amounts
outstanding under the Swing Line Subfacility, under the Working Capital
Subfacility or under the Acquisition Subfacility. Voluntary prepayments of
the Term Loans made under Section 2.8(a) shall be applied ratably to each
of the installments required pursuant to Section 2.6(a)(i).
SECTION 2.9 Termination and Reduction of the Commitments.
--------------------------------------------
(a) Mandatory Termination and Reductions.
------------------------------------
(i) The Total Term Loan Commitments shall be automatically
terminated at 5:00 p.m., Charlotte time, on the earlier of (A) the
Closing Date and (B) February 28, 1997. The Total Revolving Credit
Commitments and the Swing
48
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Line Commitment shall be automatically terminated at 5:00 p.m.,
Charlotte time, on (A) February 28, 1997, if the first Borrowing
hereunder in accordance with Article IV has not occurred by such date,
and (B) otherwise, the Maturity Date (unless sooner terminated
pursuant to Sections 2.9(a)(i) or 2.9(b) or Section 6.1).
(ii) With respect to any mandatory prepayment of Revolving
Loans and reduction of the Aggregate Stated Amount required as a
result of an Asset Sale or a Casualty Event pursuant to Sections
2.6(b)(i), 2.6(b)(iv) and 2.6(b)(v), the Total Revolving Credit
Commitments shall be permanently reduced by 100% of the amount of such
mandatory prepayment (and, in the event that the amount referred to in
Section 2.6(b)(v) which is allocable to the Revolving Loans and the
Aggregate Stated Amount exceeds the amount of all outstanding
Revolving Loans and the Aggregate Stated Amount, the Total Revolving
Credit Commitments shall be further reduced by 100% of such excess).
Any such reduction shall be effective at the time such mandatory
prepayment is (or would be) required to be made.
(b) Voluntary Termination and Reductions. Borrower shall have the
------------------------------------
right, upon at least one Business Day's written notice to Administrative
Agent (and, in the case of a termination or reduction of the Unutilized
Swing Line Commitment, Swing Line Lender), to terminate in whole or reduce
ratably in part the aggregate Unutilized Revolving Credit Commitments or
the Unutilized Swing Line Commitment, provided that (i) each partial
--------
reduction shall be in the aggregate amount of $3,000,000 or an integral
multiple thereof and (ii) no such reduction or termination shall be
permitted if, after giving effect thereto, either (A) the Outstanding
Working Capital Credit would exceed the Working Capital Commitment, (B) the
Outstanding Revolving Credit would exceed the then Total Revolving Credit
Commitments or (C) the outstanding principal amount of Swing Line Loans
would exceed the then Swing Line Commitment. The amount of any termination
or reduction made under this Section 2.9(b) may not thereafter be
reinstated.
(c) Application of Reductions. Each reduction in the Commitments
-------------------------
under Sections 2.9(a) or 2.9(b) (other than a reduction in the Swing Line
Commitment) shall reduce the applicable Commitment of each applicable
Lender by such Lender's Pro Rata Portion of such reduction.
Notwithstanding any provision of this Agreement to the contrary, any
reduction of the Revolving Credit Commitments pursuant to this Section 2.9
that has the effect of reducing the Working Capital Commitment to an amount
less than the amount of the Swing Line Commitment at such time shall result
in an automatic corresponding reduction of the Swing Line Commitment to the
amount of the Working Capital Commitment (as so reduced), without any
further action on the part of Borrower or Swing Line Lender.
SECTION 2.10 Voluntary Conversion of Loans.
-----------------------------
(a) Notice. Borrower may on any Business Day, upon delivery of a
------
notice in substantially the form of Exhibit B-3 (such notice, the "Notice
----------- ------
of Continuance/Conversion"), given to Administrative Agent not later than
-------------------------
2:00 p.m., Charlotte time, on
49
<PAGE>
the third Business Day prior to the date of the proposed Conversion or
continuance and subject to the provisions of Sections 2.7 and 2.15: (i)
Convert Base Rate Loans comprising the same Borrowing into Eurodollar
Loans, (ii) Convert Eurodollar Loans comprising the same Borrowing into
Base Rate Loans, or (iii) continue Eurodollar Loans as Eurodollar Loans;
provided, however, that (x) any Conversion of any Eurodollar Rate Loan into
-------- -------
a Base Rate Loan shall be made on, and only on, the last day of an Interest
Period for such Eurodollar Loan and any continuance of any Eurodollar Loan
as a Eurodollar Loan shall be effective as of the last day of the Interest
Period for such Eurodollar Loan; (y) any Conversion of Eurodollar Loans
into Base Rate Loans shall involve an aggregate principal amount of not
less than $500,000 or, if greater, an integral multiple of $100,000 in
excess thereof; any Conversion of Base Rate Loans into, or continuation of,
Eurodollar Loans shall involve an aggregate principal amount of not less
than $3,000,000 or, if greater, an integral multiple of $1,000,000 in
excess thereof; and no partial conversion of Eurodollar Loans made pursuant
to a single Borrowing shall reduce the outstanding principal amount of such
Eurodollar Loans to less than $3,000,000 or to any greater amount not an
integral multiple of $1,000,000 in excess thereof; and (z) no Loan may be
Converted into or continued as a Eurodollar Loan if there is a Default or
Event of Default that has occurred and is continuing. In lieu of delivering
a Notice of Continuance/Conversion, Borrower may give Administrative Agent
telephonic notice of any proposed Conversion or continuance by the time
required under this Section 2.10(a); provided that if telephonically
--------
requested, such request shall be confirmed in writing by delivery to
Administrative Agent promptly (but in no event later than the date of the
requested Conversion or continuance) of a Notice of Continuance/Conversion.
In the event that the telephonic request shall differ in any respect from
the written Notice of Continuance/Conversion subsequently furnished, the
telephonic request shall govern as to the terms of such notice.
Administrative Agent's determination of the contents of any telephonic
request shall be conclusive and binding on all parties hereto.
(b) Requirements. Each such Notice of Continuance/Conversion shall
------------
specify (i) the date of such continuance or Conversion; (ii) the amount,
Class and Type of the Loans to be Converted or continued; and (iii) if such
Conversion is into, or such continuance is with respect to, Eurodollar
Loans, the duration of the Interest Period for each such Loan.
SECTION 2.11 Fees.
----
(a) Commitment Fees. On the last day of each calendar quarter ending
---------------
on or after the Closing Date, and on the Termination Date, Borrower shall
pay to Administrative Agent, for the account of each Revolving Credit
Lender, a commitment fee (the "Commitment Fee," and together with the
--------------
Commitment Fee for all Revolving Credit Lenders, the "Commitment Fees") for
---------------
such quarter (or portion thereof) then ending equal to the product of (i)
the Commitment Fee Margin, times (ii) the average daily Unutilized
Revolving Credit Commitment of such Revolving Credit Lender for such
quarter (or portion thereof), times (iii) a fraction, the numerator of
which is the number of days in such quarter (or portion thereof) and the
denominator of which is 365 or 366, whichever
50
<PAGE>
is the actual number of days in the calendar year during which such quarter
ends. The Commitment Fees shall accrue commencing on the Closing Date.
(b) Letter of Credit Fees. On the last day of each calendar quarter
---------------------
ending on or after the Closing Date, and on the Expiration Date for the
final Letter of Credit outstanding, Borrower shall pay to Administrative
Agent, for the account of each Revolving Credit Lender, a letter of credit
fee (the "Letter of Credit Fee," and together with the Letter of Credit Fee
--------------------
for all Revolving Credit Lenders, the "Letter of Credit Fees") for such
---------------------
quarter (or portion thereof) then ending equal to the product of (i) the
then applicable Eurodollar Rate Margin, times (ii) such Revolving Credit
Lender's Pro Rata Portion of the average daily Aggregate Stated Amount for
such quarter (or portion thereof), times (iii) a fraction, the numerator of
which is the number of days in such quarter (or portion thereof) and the
denominator of which is 360.
(c) Facing Fees. Borrower shall also pay to LC Bank, solely for its
-----------
account, on the last day of each calendar quarter ending on or after the
Closing Date, and on the Expiration Date for the final Letter of Credit
outstanding, a facing fee for the Letters of Credit (the "Facing Fee") in
----------
an amount equal to the product of (i) 0.125%, times (ii) the daily average
Aggregate Stated Amount for such quarter (or portion thereof), times (iii)
a fraction, the numerator of which is the number of days in such quarter
(or portion thereof) and the denominator of which is 360.
(d) Letter of Credit Administration. Borrower shall also pay LC
-------------------------------
Bank's usual and customary charges, including charges for the opening of
any Letter of Credit, for the amendment of any Letter of Credit, for the
negotiation of any drafts paid pursuant to any Letter of Credit and for any
wire transfers made to effect Drawing Payments.
(e) Agent Fees. Borrower shall also pay to each Agent, solely for its
----------
account, the fees (such fees, the "Agent Fees") provided for in the Fee
----------
Letter, with such fees being payable as provided in the Fee Letter.
SECTION 2.12 Payments and Computations.
-------------------------
(a) Payments. Borrower shall make each payment hereunder and under
--------
the Notes not later than 2:00 p.m., Charlotte time, on the day when due in
Dollars to Administrative Agent at its address referred to in Section 8.2
in same day funds. Administrative Agent will promptly thereafter cause to
be distributed like funds relating to the payment of principal, interest or
Commitment Fees ratably (other than amounts payable pursuant to Sections
2.11(c), 2.11(d), 2.11(e), 2.14, 2.16, 2.17, 2.18 or 8.6 or payments of
principal of or interest on Swing Line Loans) to the appropriate Lenders
for the account of their respective Applicable Lending Offices, and like
funds relating to the payment of any other amount payable to any Lender to
such Lender for the account of its Applicable Lending Office, in each case
to be applied in accordance with the terms of this Agreement. Any payment
required under this Agreement to be paid to any Lender shall be paid to
Administrative Agent for the benefit of such Lender and shall be paid in
51
<PAGE>
accordance with this Section 2.12(a). If Administrative Agent shall not
have made a required distribution to the applicable Lenders as required
hereinabove after receiving a payment for the account of such Lenders,
Administrative Agent will pay to each such Lender, on demand, its ratable
share of such payment with interest thereon at the Federal Funds Rate for
each day from the date such amount was required to be disbursed by
Administrative Agent until the date repaid to such Lender.
(b) Charging of Accounts. Borrower hereby authorizes each Lender, if
--------------------
and to the extent any payment owed to such Lender is not made within three
Business Days after the date when due hereunder or under the Notes held by
such Lender, to charge from time to time against any or all of the accounts
of Borrower with such Lender any amount so due. Each Lender that so
charges any account of Borrower shall give prompt written or telecopy
notice thereof (including a description of the amount, date and reason for
such charge) to Borrower and Administrative Agent; provided, however, that
-------- -------
failure to give such notice shall neither affect any rights of such Lender
hereunder (including its rights set forth in this Section 2.12(b)) nor
relieve Borrower of any of its obligations hereunder or under any other
Loan Document.
(c) Computations. All computations of interest based on the
------------
Eurodollar Rate and of Letter of Credit Fees and Facing Fees shall be made
by Administrative Agent, on the basis of a year of 360 days, in each case
for the actual number of days (including the first day but excluding the
last day) occurring in the period for which such interest or Fees are
payable. All computations of interest based on the Base Rate or the
Federal Funds Rate and of Commitment Fees shall be made by Administrative
Agent on the basis of a year of 365 or 366 days, as the case may be, in
each case for the actual number of days (including the first day but
excluding the last day) occurring in the period for which such interest or
Fees are payable. Each determination by Administrative Agent or a Lender of
an interest rate hereunder shall be conclusive and binding for all
purposes, absent manifest error.
(d) Payment on Business Day. Whenever any payment hereunder or under
-----------------------
the Notes shall be stated to be due on a day other than a Business Day,
such payment shall be made on the next succeeding Business Day, and such
extension of time shall in such case be included in the computation of
payment of interest or Fees, as the case may be; provided, however, if such
-------- -------
extension would cause payment of interest on or principal of Eurodollar
Loans to be made in the next following calendar month, such payment shall
be made on the next preceding Business Day.
(e) Presumption of Payment. Unless Administrative Agent shall have
----------------------
received notice from Borrower prior to the date on which any payment is due
to Administrative Agent for the benefit of the applicable Lenders hereunder
that Borrower will not make such payment in full, Administrative Agent may
assume that Borrower has made such payment in full to Administrative Agent
on such date and Administrative Agent may, in reliance upon such
assumption, cause to be distributed to each such Lender on such due date an
amount equal to the amount then due such Lender. If and to the extent
Borrower
52
<PAGE>
shall not have so made such payment in full to Administrative Agent, each
such Lender shall repay to Administrative Agent forthwith on demand such
amount distributed to such Lender together with interest thereon, for each
day from the date such amount is distributed to such Lender until the date
such Lender repays such amount to Administrative Agent, at the Federal
Funds Rate for the first three days after such demand and thereafter at the
interest rate applicable to Base Rate Loans pursuant to Section 2.7(a).
SECTION 2.13 Sharing of Payments, Etc. If any Lender shall obtain
-------------------------
any payment (whether voluntary, involuntary, through the exercise of any right
of set-off, or otherwise) on account of Loans of any Class made by it (other
than pursuant to Sections 2.11(c), 2.11(d), 2.11(e), 2.14, 2.16, 2.17, 2.18 or
8.6) in excess of its Pro Rata Portion of payments on account of Loans obtained
by all the Lenders holding Loans of such Class, such Lender shall forthwith
purchase from such other Lenders such participations in such Loans made by them
as shall be necessary to cause such purchasing Lender to share the excess
payment ratably with each of them; provided, however, that if all or any portion
-------- -------
of such excess payment is thereafter recovered from such purchasing Lender, such
purchase from each Lender shall be rescinded and such Lender shall repay to the
purchasing Lender the purchase price to the extent of such recovery together
with an amount equal to such Lender's ratable portion (according to the
proportion of (i) the amount of such Lender's required repayment to (ii) the
total amount so recovered from the purchasing Lender) of any interest or other
amount paid or payable by the purchasing Lender in respect of the total amount
so recovered. Borrower agrees that any Lender so purchasing a participation
from another Lender pursuant to this Section 2.13 may, to the fullest extent
permitted by law, exercise all its rights of payment (including the right of
set-off) with respect to such participation as fully as if such Lender were the
direct creditor of Borrower in the amount of such participation.
SECTION 2.14 Taxes.
-----
(a) Net Payments. Any and all payments by Borrower hereunder or under
------------
the Notes shall be made, in accordance with Section 2.12, free and clear of
and without deduction for any and all present or future taxes, levies,
imposts, deductions, charges or withholdings, and all liabilities with
respect thereto, excluding, in the case of each Lender, LC Bank and each
---------
Agent, taxes imposed on its net income, and franchise taxes imposed on it,
by the jurisdiction under the laws of which such Lender, LC Bank or such
Agent (as the case may be) is organized or any municipal subdivision
thereof and, in the case of each Lender, taxes imposed on its net income,
and franchise taxes imposed on it, by the jurisdiction of such Lender's
Applicable Lending Office or any political subdivision thereof (all such
non-excluded taxes, levies, imposts, deductions, charges, withholdings and
liabilities being hereinafter referred to as "Taxes"). If Borrower shall
-----
be required by law to deduct any Taxes from or in respect of any sum
payable hereunder or under any Note to any Lender or either of the Agents,
(i) the sum payable shall be increased as may be necessary so that after
making all required deductions (including deductions applicable to
additional sums payable under this Section 2.14) such Lender, LC Bank or
such Agent (as the case may be) receives an amount equal to the sum it
would have received had no such deductions been made; (ii) Borrower shall
make such deductions; and (iii) Borrower shall
53
<PAGE>
pay the full amount deducted to the relevant taxation authority or other
authority in accordance with applicable law; provided, however, that if
-------- -------
such Lender subsequently recoups all or any part of such deducted amount
from the relevant taxation authority or other authority and such Lender is
reasonably able to identify such recoupment as relating to amounts paid
under this Agreement, such Lender shall remit the amount of the recoupment
to Borrower within five Business Days after it receives the recoupment.
(b) Payment of Other Taxes. In addition, Borrower agrees to pay any
----------------------
present or future stamp or documentary taxes or any other excise or
property taxes, charges or similar levies which arise from any payment made
hereunder or under the Notes or from the execution, delivery or
registration of, or otherwise with respect to, this Agreement, the Notes or
the other Loan Documents (hereinafter referred to as "Other Taxes").
-----------
(c) Indemnification. Borrower will indemnify each Lender, LC Bank and
---------------
each Agent for the full amount of Taxes or Other Taxes (including any Taxes
or Other Taxes imposed by any jurisdiction on amounts payable under this
Section 2.14) paid by such Lender, LC Bank or such Agent (as the case may
be) and any liability (including penalties, interest and expenses) arising
therefrom or with respect thereto, whether or not such Taxes or Other Taxes
were correctly or legally asserted. This indemnification shall be made
within 30 days from the date such Lender, LC Bank or such Agent (as the
case may be) makes written demand therefor.
(d) Evidence of Payments. Within 30 days after the date of any
--------------------
payment of Taxes, Borrower will furnish to Administrative Agent, at its
address referred to in Section 8.2, the original or a certified copy of a
receipt evidencing payment thereof. If no Taxes are payable in respect of
any payment hereunder or under the Notes, Borrower will furnish to
Administrative Agent, at such address, a certificate from each appropriate
taxing authority, or an opinion of counsel acceptable to Administrative
Agent, in either case stating that such payment is exempt from or not
subject to Taxes.
(e) Withholding Tax Exemption. If any Lender is a "foreign
-------------------------
corporation" within the meaning of the Code, such Lender shall deliver to
Administrative Agent either: (i) if such Lender qualifies for an exemption
from, or a reduction of, United States withholding tax under a tax treaty,
a properly completed and executed Internal Revenue Service form 1001 before
the payment of any interest in the first fiscal year and in each third
succeeding fiscal year during which interest may be paid under this
Agreement; or (ii) if such Lender qualifies for an exemption for interest
paid under this Agreement from United States withholding tax because it is
effectively connected with a United States trade or business of such
Lender, two properly completed and executed copies of Internal Revenue
Service form 4224 before the payment of any interest is due in the first
taxable year of such Lender, and in each succeeding taxable year of such
Lender, during which interest may be paid under this Agreement; and (iii)
such other form or forms as may be required or reasonably requested by
Administrative Agent to establish or substantiate exemption from, or
reduction of, United States withholding tax under the Code or other laws of
the United States. Each such Lender agrees to notify Administrative Agent
of any
54
<PAGE>
change in circumstances which would modify or render invalid any claimed
exemption or reduction.
(f) Withholding Taxes. Where any Lender is entitled to a reduction in
-----------------
the applicable withholding tax, Administrative Agent may withhold from any
interest payment to Lender an amount equivalent to the applicable
withholding tax after taking into account such reduction. If the forms or
other documentation required by Section 2.14(e) are not delivered to
Administrative Agent, then Administrative Agent may withhold from any
interest payment to any Lender not providing such forms or other
documentation, an amount equivalent to the applicable withholding tax.
(g) Indemnification. If the Internal Revenue Service or any authority
---------------
of the United States or other jurisdiction asserts a claim that
Administrative Agent did not properly withhold tax from amounts paid to or
for the account of any Lender (because the appropriate form was not
delivered, was not properly executed, or because such Lender failed to
notify Administrative Agent of a change in circumstances which rendered the
exemption from, or reduction of, withholding tax ineffective, or for any
other reason), such Lender shall indemnify Administrative Agent fully for
all amounts paid, directly or indirectly, by Administrative Agent as tax or
otherwise, including penalties and interest, together with all expenses
incurred, including legal expenses, allocated staff costs, and any out-of-
pocket expenses.
(h) Participants. If any Lender sells a participation in its rights
------------
under this Agreement, the participant shall comply with and be bound by the
terms of Sections 2.14(e), 2.14(f) and 2.14(g) as though it were such
Lender.
SECTION 2.15 Illegality. Notwithstanding any other provision of this
----------
Agreement, if any Lender shall notify Borrower and Administrative Agent in
writing that the introduction of or any change in or in the interpretation of
any law or regulation makes it unlawful, or any central bank or other
Governmental Authority asserts that it is unlawful, for such Lender or its
Eurodollar Lending Office to perform its obligations hereunder to make
Eurodollar Loans or to fund or maintain Eurodollar Loans hereunder: (i) the
obligation of such Lender to make, or to Convert Loans into, Eurodollar Loans
shall be suspended until such Lender shall notify Borrower and Administrative
Agent that the circumstances causing such suspension no longer exist; (ii) if
requested by such Lender, Borrower shall forthwith Convert all Eurodollar Loans
of such Lender then outstanding into Base Rate Loans in accordance with Section
2.10; and (iii) such Lender shall be obligated to make Base Rate Loans in a
principal amount equal to the Eurodollar Loans that such Lender would have been
obligated to make and fund absent such illegality until such Lender shall notify
Borrower and Administrative Agent that such illegality no longer exists
whereupon such Lender shall be obligated to make, or Convert Loans into,
Eurodollar Loans once again and, if requested by Borrower, shall Convert any or
all Base Rate Loans made by it pursuant to this clause (iii) during such period
of illegality into Eurodollar Loans.
55
<PAGE>
SECTION 2.16 Increased Costs.
---------------
(a) Increase in Expenses. If, due to either (i) the introduction of
--------------------
or any change (other than any change by way of imposition or increase of
reserve requirements, in the case of Eurodollar Loans, included in the
Eurodollar Rate Reserve Percentage) in or in the interpretation of any law
or regulation or (ii) the compliance with any guideline or request from any
central bank or other Governmental Authority (whether or not having the
force of law), there shall be any increase in the cost to any Lender (and
for any Lender which has entered into a participation pursuant to Section
8.7(e), increases in cost for its participants if and to the extent the
Lender would have had an increase in cost if it had not entered into such
participation) of agreeing to make or making, funding or maintaining
Eurodollar Loans, then Borrower shall from time to time, upon demand by
such Lender (with a copy of such demand to Administrative Agent), pay to
Administrative Agent for the account of such Lender additional amounts
sufficient to compensate such Lender for such increased cost, to the extent
such Lender reasonably determines such increased cost to be allocable to
the existence of such Lender's commitment to lend or otherwise extend
credit to Borrower hereunder. A certificate as to the amount of such
increased cost, submitted to Borrower and Administrative Agent by such
Lender shall be conclusive and binding for all purposes, absent manifest
error.
(b) Increase in Capital Requirements. If any Lender determines that
--------------------------------
compliance with any law or regulation or any guideline or request from any
central bank or other Governmental Authority (whether or not having the
force of law) affects or would affect the amount of capital required or
expected to be maintained by such Lender or any corporation controlling
such Lender and that the amount of such capital is increased by or based
upon the existence of such Lender's commitment to lend hereunder and other
commitments of this type, then, upon demand by such Lender (with a copy of
such demand to Administrative Agent), Borrower shall immediately pay to
such Lender, from time to time as specified by such Lender, additional
amounts sufficient to compensate such Lender or such corporation in the
light of such circumstances, to the extent that such Lender reasonably
determines such increase in capital to be allocable to the existence of
such Lender's commitment to lend or otherwise extend credit to Borrower
hereunder. A certificate as to such amounts submitted to Borrower and
Administrative Agent by such Lender shall be conclusive and binding for all
purposes, absent manifest error.
SECTION 2.17 Interest Rate Determination and Protection.
------------------------------------------
(a) Notice of Eurodollar Rate. Administrative Agent shall determine
-------------------------
the Eurodollar Rate and shall give prompt notice thereof to Borrower and
the Lenders. Such determination shall be binding and conclusive on all
parties.
(b) Inability to Provide Information. If Administrative Agent shall
--------------------------------
be unable to obtain timely information for determining the Eurodollar Rate
for any Eurodollar Loans: (i) Administrative Agent shall forthwith notify
Borrower and the Lenders that the interest rate cannot be determined for
such Eurodollar Loans; (ii) each such Loan will
56
<PAGE>
automatically, on the last day of the then existing Interest Period
therefor, Convert into a Base Rate Loan (or if such Loan is then a Base
Rate Loan, will continue as a Base Rate Loan); and (iii) the obligation of
the Lenders to make, or to Convert Loans into, Eurodollar Loans shall be
suspended until Administrative Agent shall notify Borrower and the Lenders
that the circumstances causing such suspension no longer exist.
(c) Suspension of Eurodollar Loans. If, with respect to any
------------------------------
Eurodollar Loans, the Required Lenders shall notify Administrative Agent
that funding is not available to such Lenders in the London interbank
market in Dollars, then Administrative Agent shall forthwith so notify
Borrower and the Lenders, whereupon (i) each Eurodollar Loan will
automatically, on the last day of the then existing Interest Period
therefor, Convert into a Base Rate Loan, and (ii) the obligation of the
Lenders to make, or to Convert Loans into, Eurodollar Loans shall be
suspended until Administrative Agent shall notify Borrower and the Lenders
that the circumstances causing such suspension no longer exist. If, with
respect to any Eurodollar Loans, the Required Lenders shall notify
Administrative Agent and Borrower that the Eurodollar Rate for any Interest
Period for such Loans is at least two basis points less than the cost to
such Lenders of obtaining funds in Dollars in the London interbank market
in amounts substantially equal to such Lenders' Eurodollar Loans and for a
period equal to such Interest Period, Borrower shall either (x) pay each
such Lender the difference between (A) the cost to such Lender of obtaining
funds in Dollars in the London interbank market in the amounts
substantially equal to such Lender's Eurodollar Loans and for a period
equal to such Interest Period and (B) the Eurodollar Rate for such Interest
Period or (y) elect to have such Eurodollar Loans made as or converted into
Base Rate Loans.
(d) Failure to Select Duration. If, in connection with the initial
--------------------------
Borrowing of any Eurodollar Loans, Borrower shall have failed to select the
duration of the Interest Period to be applicable to such Eurodollar Loans,
then Borrower shall be deemed to have selected an Interest Period with a
duration of one month. If, upon the expiration of any Interest Period
applicable to a Borrowing of Eurodollar Loans, Borrower shall have failed
to deliver a Notice of Continuance/Conversion in respect of such Eurodollar
Loans, then Borrower shall be deemed to have elected to convert such
Eurodollar Loans into Base Rate Loans as of the expiration of the then
current Interest Period applicable thereto.
SECTION 2.18 Funding Losses. If Borrower shall (i) repay or prepay
--------------
any Eurodollar Loan on any day other than the last day of an Interest Period for
such Loan (whether an optional prepayment, a mandatory prepayment, a payment
upon acceleration or otherwise); (ii) fail to borrow any Eurodollar Loan in
accordance with a Notice of Borrowing or a telephonic request delivered to
Administrative Agent (whether as a result of the failure to satisfy any
applicable conditions or otherwise); (iii) fail to Convert any Base Rate Loan
into a Eurodollar Loan or continue any Eurodollar Loan in accordance with a
Notice of Continuance/Conversion delivered to Administrative Agent (whether as a
result of the failure to satisfy any applicable conditions or otherwise); or
(iv) fail to make any prepayment in accordance with any notice of prepayment
delivered to Administrative Agent, Borrower shall, upon demand by any Lender,
reimburse such Lender for all costs and losses incurred by such Lender as a
result of such
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repayment, prepayment or failure ("Breakage Costs"). Borrower understands that
--------------
such costs and losses may include losses incurred by a Lender as a result of
funding and other contracts entered into by such Lender to fund Eurodollar
Loans. Each Lender demanding payment under this Section 2.18 shall deliver to
Borrower (through Administrative Agent) a certificate including calculations in
reasonable detail as to the amount of costs and losses for which demand is made.
Such a certificate so delivered to Borrower shall, in the absence of manifest
error, be conclusive and binding as to the amount of such loss for all purposes.
Calculation of all amounts payable to a Lender under this Section 2.18 shall be
made as though such Lender had actually funded its relevant Eurodollar Loan
through the purchase of a Eurodollar deposit bearing interest at the Eurodollar
Rate in an amount equal to the amount of such Eurodollar Loan, having a maturity
comparable to the relevant Interest Period; provided, however, that each Lender
-------- -------
may fund its Eurodollar Loans in any manner sees fit and the foregoing
assumption shall be utilized only for the calculation of amounts payable under
this Section 2.18.
SECTION 2.19 Domestic and Eurodollar Lending Offices. The Loans made
---------------------------------------
by each Lender may be made from and maintained in such Domestic Lending Offices
and Eurodollar Lending Offices (as the case may be) of such Lender, or its
Affiliates, as such Lender may from time to time designate to Borrower and
Administrative Agent. A Lender shall not elect a Domestic Lending Office that,
at the time of the making of such election, increases the amounts that would
have been payable by Borrower to such Lender under this Agreement in the absence
of such election. With respect to Eurodollar Loans made from and maintained at
such Lender's foreign offices or Affiliates, the obligation of Borrower to repay
such Eurodollar Loans shall nevertheless be to such Lender and shall, for all
purposes of this Agreement (including for purposes of the definition of the term
"Required Lenders"), be deemed made, or maintained by it, for the account of
----------------
such office or Affiliate.
SECTION 2.20 Replacement Lenders. If, and on each occasion that, (i)
-------------------
a Lender makes a demand for compensation pursuant to Section 2.16; (ii) a Lender
is unable to fund Eurodollar Loans; (iii) a Lender has requested additional
costs pursuant to Section 2.17(c); or (iv) a Lender has failed to perform its
obligation to make a Loan required by such Lender hereunder, Borrower may, upon
at least five Business Days' prior irrevocable written or telex notice to each
of such Lender and Administrative Agent, in whole permanently replace the
Commitments of such Lender; provided that such notice must be given not later
--------
than the 60th day following the date of a demand for compensation made by such
Lender, the time of such unavailability, or the date of any such refusal; and
provided that Borrower shall replace such Commitments with the commitment of an
- --------
Eligible Assignee. Any such replacement Lender shall, upon the effective date
of replacement, enter into an Assignment and Acceptance with the replaced Lender
and, pursuant thereto, purchase the Obligations owed to such replaced Lender for
the aggregate amount thereof and shall thereupon for all purposes become a
"Lender" hereunder. The notice from Borrower replacing a Lender shall specify
an effective date for the replacement of the Commitments of such Lender, which
date shall not be later than the tenth day after the day such notice is given.
On the effective date of any replacement of the Commitments of such Lender
pursuant to this Section 2.20, Borrower shall pay to Administrative Agent for
the account of such Lender (x) any fees due to such Lender to the date of such
replacement; (y) accrued interest on the principal amount of outstanding Loans
made by such Lender to the
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date of such replacement; and (z) the amount or amounts requested by such Lender
pursuant to Sections 2.16 and 2.17(c). Borrower will remain liable to such
replaced Lender for any Breakage Costs that such Lender may sustain or incur as
a consequence of repayment of the Loans of such Lender. Upon the effective date
of repayment of any such Lender's Commitments pursuant to this Section 2.20, and
the execution by the replacement Lender of an Assignment and Acceptance, such
Lender shall cease to be a Lender hereunder. No such termination of the
Commitments of any such Lender and the purchase of the Loans of any such Lender
pursuant to this Section 2.20 shall affect (A) any liability or obligation of
Borrower or any other Lender to such terminated Lender which accrued on or prior
to the date of such termination (other than the Obligations in respect of which
the assignment purchase price is being paid) or (B) the rights of such
terminated Lender hereunder in respect of any such liability or obligation.
ARTICLE III
CONDITIONS OF LENDING
SECTION 3.1 Condition Precedent to the Closing Date. The obligation
---------------------------------------
of each Lender to make its initial Loans or LC Bank to issue the initial
Letter(s) of Credit is subject to the satisfaction of each of the following
conditions:
(a) Payment of Fees and Expenses. All fees of each of the Agents and
----------------------------
the Lenders due and payable on or prior to the Closing Date under this
Agreement and the Fee Letter shall have been paid (including reasonable
fees and disbursements of counsel to the Agents).
(b) Loan Documents. Borrower shall have delivered to Administrative
--------------
Agent (and, other than item (iv) below, with sufficient copies for each
Lender) each of the following:
(i) this Agreement duly executed by Borrower, each of the
Agents, LC Bank and each of the Lenders;
(ii) a Revolving Note for each Revolving Credit Lender, dated
the Closing Date and duly executed by Borrower, payable to the order
of such Revolving Credit Lender, in an original principal amount equal
to such Revolving Credit Lender's Revolving Credit Commitment;
(iii) a Term Note for each Term Loan Lender, dated the Closing
Date and duly executed by Borrower, payable to the order of such Term
Loan Lender, in an original principal amount equal to such Term Loan
Lender's Term Loan Commitment;
(iv) a Swing Line Note for Swing Line Lender, dated the Closing
Date and duly executed by Borrower, payable to the order of Swing Line
Lender, in an original principal amount equal to the Swing Line
Commitment;
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(v) Intercompany Notes, substantially in the form of Exhibit
-------
C-5 hereto ("Intercompany Notes"), dated the Closing Date and duly
--- ------------------
executed by each of the Subsidiary Guarantors, accompanied by
assignments executed in blank;
(vi) a guaranty, in substantially the form of Exhibit C-1 (as
-----------
such agreement may be amended, modified or supplemented, by way of a
Subsidiary Joinder or otherwise, from time to time, the "Subsidiary
----------
Guaranty"), dated as of the Closing Date and duly executed by each of
--------
the Subsidiaries of Borrower (other than Inactive Subsidiaries, GCI
Indemnity and (subject to the approval of the Agents) any Encumbered
Subsidiary subject to restrictions in any agreement to which it is a
party or by which it is bound which prohibits such a guaranty and
which prohibition shall not have been waived or guaranty consented to
by the beneficiary of such prohibition);
(vii) a pledge and security agreement, in substantially the
form of Exhibit C-2 (as such agreement may be amended, modified or
-----------
supplemented from time to time, the "Borrower Pledge and Security
----------------------------
Agreement"), dated as of the Closing Date and duly executed by
---------
Borrower and Administrative Agent, together with certificates
representing the Pledged Shares identified in Part A of Schedule I to
----------
the Borrower Pledge and Security Agreement, accompanied by undated
stock powers executed in blank, and together with all other documents
and instruments required to be delivered under the terms of the
Borrower Pledge and Security Agreement;
(viii) a pledge and security agreement, in substantially the form
of Exhibit C-3 (as such agreement may be amended, modified or
-----------
supplemented, by way of a Subsidiary Joinder or otherwise, from time
to time, the "Subsidiary Pledge and Security Agreement"), dated as of
----------------------------------------
the Closing Date and duly executed by each Subsidiary Guarantor (other
than (subject to the approval of the Agents) any Encumbered Subsidiary
subject to restrictions in any agreement to which it is a party or by
which it is bound which probibits or limits the right of such
Subsidiary to grant to Administrative Agent a Lien on the Collateral,
to the extent such prohibition shall not have been waived or Lien
consented to by the beneficiary of such prohibition) and
Administrative Agent, together with certificates representing the
Pledged Shares identified in Part A of Schedule I to such Subsidiary
----------
Pledge and Security Agreement, accompanied by undated stock powers
executed in blank, and together with all other documents and
instruments required to be delivered under the terms of the Subsidiary
Pledge and Security Agreement;
(ix) agency account agreements, in substantially the form of
Exhibit C-6 (each, as the same may be amended, modified or
-----------
supplemented from time to time, an "Agency Account Agreement"), dated
------------------------
as of the Closing Date and duly executed by the parties thereto;
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(x) a Mortgage, in substantially the form of Exhibit C-7 (with
-----------
such modifications as may be necessary or appropriate under applicable
local laws), with respect to each Fee Estate of Borrower or any of its
Subsidiaries that, as of the Closing Date, is not subject to a
mortgage, deed of trust or similar Lien in favor of a third-party
lender, dated as of the Closing Date and duly executed by Borrower or
such Subsidiary (other than Excell Healthcare Center, Heritage
Healthcare Center and the Shores Healthcare Center, which Borrower has
agreed to mortgage to Omega Healthcare Investors, Inc. as substitute
collateral for Health Care Facilities previously mortgaged to said
lender but which have been sold), as applicable, and (if applicable)
the trustee thereunder, together in each case with the title insurance
policy, environmental site assessment, opinions and other documents,
reports and items of the types specified in Section 5.3(j); and
(xi) the HRPT Intercreditor Agreement, duly executed by the
parties thereto.
(c) Security Interests. Administrative Agent shall have a perfected
------------------
security interest in the Collateral (subject only to Permitted Liens) and
Administrative Agent shall have received:
(i) an acknowledgement copy, or other evidence satisfactory to
the Agents, of the proper filing, registration or recordation of each
document (including each Uniform Commercial Code financing statement)
required by law or reasonably requested by either of the Agents or any
Lender to be filed, registered or recorded, in each jurisdiction in
which such filing, registration or recordation is so required or
requested, in order to create in favor of Administrative Agent a
valid, legal and perfected security interest in or Lien on the
Collateral that is the subject of the Collateral Documents;
(ii) certified copies of Requests for Information or Copies (form
UCC-11), or equivalent reports from Paranet Corporation Services,
Inc., Prentice-Hall Financial Services, CT Corp. or another
independent search service satisfactory to the Agents, listing (A) any
judgment naming Borrower or any of its Subsidiaries as judgment debtor
in any of the jurisdictions where a Uniform Commercial Code financing
statement would be required by law to be filed in order to create a
perfected security interest or Lien on any of the personal or real
property of Borrower and its Subsidiaries, (B) any tax lien that names
Borrower or any of its Subsidiary as a delinquent taxpayer in any of
the jurisdictions referred to in the preceding clause (A), and (C) any
Uniform Commercial Code financing statement that names Borrower or any
of its Subsidiaries as debtor or seller filed in any of the
jurisdictions referred to in the preceding clause (A);
(iii) a perfection certificate, in substantially the form of
Exhibit C-8, duly completed and executed by Borrower;
-----------
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(iv) short-form trademark assignments for filing in the U.S.
Patent and Trademark Office with regard to all federally registered
trademarks, service marks and applications therefor of Borrower and
its Subsidiaries, duly executed by Borrower and each applicable
Subsidiary;
(v) appropriate duly executed termination statements (Form UCC-
3) signed by all persons disclosed on current financing statements as
secured parties in the jurisdictions referred to in clause (i) above
in form for filing under the Uniform Commercial Code of such
jurisdictions (except with respect to Liens permitted under Section
5.4(a)); and
(vi) an escrow letter or agreement in form and substance
satisfactory to the Agents with respect to the 1995 Credit Agreement
providing for the release on the Closing Date of the termination
statements referred to in clause (iii) above and such other matters as
either Agent may reasonably require.
(d) Outstanding Letters of Credit. Borrower shall have delivered to
-----------------------------
Agent a consent to the assignment of each Outstanding Letter of Credit from
the account of GranCare to the account of Borrower, duly executed by the
beneficiary thereunder and in form and substance satisfactory to the
Agents.
(e) Corporate Documents. Borrower shall have delivered to
-------------------
Administrative Agent (with sufficient copies for each Lender) each of the
following:
(i) the certificate of incorporation, including all amendments
thereto, of Borrower as in effect on the Closing Date (and after
giving effect to the GCI Properties Merger), certified as of the
Closing Date by the Secretary of State of the State of Delaware and
certified by a Secretary or an Assistant Secretary of Borrower as of
the Closing Date;
(ii) the articles or certificate of incorporation or
certificates of limited partnership, including all amendments thereto,
of each Loan Party (other than Borrower) as in effect on the Closing
Date, certified as of a recent date by the Secretary of State (or
comparable authority) of the jurisdiction of its organization and
certified by a Secretary or an Assistant Secretary of such Loan Party
as of the Closing Date;
(iii) the bylaws, partnership agreement or comparable governing
instruments, as appropriate, of each Loan Party as in effect on the
Closing Date, certified by a Secretary or an Assistant Secretary of
such Loan Party as of the Closing Date;
(iv) copies of the resolutions of the board of directors (or, in
the case of any partnership, of the general partner of such party) of
each Loan Party approving each Loan Document and each Transaction
Document to which it is a party and all
62
<PAGE>
actions to be taken pursuant thereto, and of all documents evidencing
other necessary corporate or organizational action and governmental
approvals, if any, with respect to each such Loan Document and
Transaction Document, certified by a Secretary or an Assistant
Secretary of such Loan Party as of the Closing Date;
(v) a certificate of the Secretary or an Assistant Secretary of
each Loan Party certifying the names and true signatures of the
officers of such Loan Party authorized to sign each Loan Document to
which it is or will be a party and the other documents to be delivered
hereunder; and
(vi) a good standing certificate dated as of a recent date for
each Loan Party from the Secretary of State of (x) the state of
incorporation or organization of such Loan Party and (y) each other
state where such Loan Party is qualified to do business.
(f) Legal Opinions. Borrower shall have delivered to Administrative
--------------
Agent (with sufficient copies for each Lender) the following, each dated
the Closing Date and addressed to the Agents and the Lenders:
(i) an opinion of counsel for Borrower and the other Loan
Parties, substantially in the form of Exhibit D-1 hereto and as to
-----------
such other matters as any Lender through the Agents may reasonably
request (provided that opinions with respect to matters of
--------
Delaware corporate law shall be given by Delaware counsel);
(ii) an opinion of special local counsel for each of the Loan
Parties in such jurisdictions as either of the Agents may request,
substantially in the form of Exhibit D-2 hereto and as to such other
-----------
matters as any Lender through the Agents may reasonably request; and
(iii) copies of each opinion (including, without limitation, tax
opinions) required to be delivered by counsel to GranCare pursuant to
the Merger Agreement and/or the Distribution Agreement, which opinions
shall be in form and substance reasonably satisfactory to the Agents
and shall be accompanied in each case by a letter, unless such opinion
is addressed to the Agents and the Lenders or expressly includes a
reliance provision, from the counsel rendering such opinion, stating
that the Agents and the Lenders are entitled to rely on such opinion
as if it were addressed to them.
(g) Insurance Coverage. Borrower shall have delivered to
------------------
Administrative Agent certificates of insurance, a report from Borrower's
independent insurance consultant or other evidence satisfactory to
Administrative Agent indicating that Borrower and each other Loan Party has
in place the insurance coverage required by this Agreement and that
Administrative Agent, as Administrative Agent under this Agreement, has
been named an additional insured or loss payee, as applicable, on all
insurance policies of Borrower or any of its Subsidiaries.
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(h) Other Deliveries. Borrower shall have delivered to Administrative
----------------
Agent (with sufficient copies for each Lender) each of the following:
(i) copies of the unaudited pro forma consolidated balance
sheet of Borrower and its Subsidiaries as of September 30, 1996
(giving effect to the Merger and the Distribution and the other
transactions contemplated thereby as if such transactions had occurred
on such date) and the unaudited pro forma consolidated statements of
income of Borrower and its Subsidiaries for the year ended December
31, 1995 and the nine-month period ended September 30, 1996 (giving
effect to the Merger and the Distribution and the other transactions
contemplated thereby as if such transactions had occurred on January
1, 1995);
(ii) a certificate, in substantially the form of Exhibit C-9
-----------
(the "Financial Condition Certificate"), as to certain matters
-------------------------------
pertaining to the solvency of Borrower and its Subsidiaries, dated the
Closing Date and duly executed by the chief financial officer of
Borrower, and attaching copies of the following financial statements,
prepared in accordance with GAAP and satisfactory in all respects to
the Agents: (A) projected financial statements for Borrower and its
Subsidiaries for the period after the Closing Date through December
31, 2001, prepared on an annual basis; and (B) the pro forma balance
sheet referred to in clause (i) above;
(iii) a certificate dated as of the Closing Date and signed by
the chairman, chief executive officer or chief financial officer of
Borrower, certifying that, as of the Closing Date, (A) the
representations and warranties contained in Article IV of this
Agreement are true and correct on and as of the Closing Date, as
though made on and as of such date; and (B) each of the other
conditions precedent to the Closing Date has been satisfied;
(iv) a certificate dated as of the Closing Date and signed by
the chairman, chief executive officer or chief financial officer of
Grancare, certifying that, as of the Closing Date, the representations
and warranties contained in Article IV of this Agreement are true and
correct on and as of the Closing Date, as though made on and as of
such date; and
(v) all documents evidencing other necessary corporate action
and governmental approvals, if any, with respect to this Agreement,
the other Loan Documents and the Transaction Documents, including
final copies of the GranCare Proxy Statement, the Borrower Prospectus,
the Tender Offer and the Consent Solicitation.
(i) Market Conditions. There shall not have occurred and be
-----------------
continuing: (i) any general suspension of trading in, or limitation on
prices for, securities on any national securities exchange or in the over-
the-counter market in the United States, (ii) a banking moratorium or any
suspension of payments in respect of banks in the United States, (iii) any
material limitation (whether or not mandatory) imposed by any United
64
<PAGE>
States Governmental Authority on, or any other action that has had a
material adverse impact on, the nature or extension of credit or further
extension of credit by banks or other lending institutions generally or
(iv) any material disruption or material adverse change (except as may be
attributable to changes in prevailing interest rate levels) of the United
States debt markets (including the market for bank syndications).
(j) The Transactions. All aspects of the structure and documentation
----------------
of the Transactions, all legal matters incident to the Merger, the
Distribution, the other Transactions and the Facilities, and all corporate,
tax and other proceedings taken or to be taken in connection therewith
shall be reasonably satisfactory to the Agents, including the following:
(i) Neither the Merger Agreement nor the Distribution
Agreement shall have been amended or modified, nor any material
provision thereof waived by Borrower or any of its Subsidiaries,
except such as shall be acceptable to the Agents, and all conditions
precedent to the obligations of Borrower or any of its Subsidiaries
set forth therein shall have been satisfied (without giving effect to
any waiver thereof, except such as shall be acceptable to the Agents);
each of the Ancillary Agreements shall have been executed and
delivered by the parties thereto in the form attached as an exhibit to
the Distribution Agreement (except for such amendments and
modifications as shall have been approved by the Agents); the Agents
shall be reasonably satisfied with the terms of all contractual
arrangements between Borrower, on the one hand, and Vitalink and
TeamCare, on the other, including the terms of pharmaceutical supply
agreements; and Administrative Agent shall have received copies of the
executed Transaction Documents in such number as it shall have
reasonably requested;
(ii) All governmental, regulatory, shareholder and other Third
Party Consents, approvals, filings, registrations and other actions
required in order to consummate the Merger, the Distribution, the
Facilities and the other Transactions (including, without limitation,
approvals or filings required in connection with Health Care Permits,
consents and approvals from third-party creditors, and consents and
approvals under leases and contracts to which Borrower or any of its
Subsidiaries is a party) shall have been obtained or made, as
applicable, and shall remain in full force and effect, in each case
without the imposition of any condition or restriction which is, in
the judgment of the Agents, materially adverse to Borrower or any of
its Subsidiaries, and Administrative Agent shall have received
satisfactory evidence thereof;
(iii) There shall not be any pending proceeding requesting an
injunction or restraining order with respect to the Merger, the
Distribution, the Facilities or the other Transactions or challenging
the validity or enforceability of any of the Transactions;
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(iv) The Tender Offer shall have been consummated, and the
Consent Solicitation shall have occurred and GranCare shall have
obtained the approval sought pursuant thereto;
(v) The GCI Properties Merger shall have occurred on terms
satisfactory to the Agents;
(vi) The Reorganization shall have occurred on terms
satisfactory to the Agents;
(vii) Immediately after giving effect to the Transactions,
(A) Borrower and its Subsidiaries shall have no Indebtedness, except
in respect of (x) the Facilities and (y) other Indebtedness described
in Schedule 5.4(b) and Schedule 5.4(c), and (B) the Shareholders shall
--------------- ---------------
own 100% of the aggregate ordinary voting power of all of the
outstanding capital stock of Borrower;
(viii) All transaction fees and expenses payable by or on
behalf of Borrower in connection with the Transactions shall be in an
aggregate amount reasonably acceptable to the Agents, and
Administrative Agent shall have received such evidence thereof in form
and substance satisfactory to it (including itemizations thereof) as
it shall have reasonably requested; and
(ix) Substantially simultaneously with the initial funding
under the Facilities, there shall occur the consummation of all
components of the Transactions not previously consummated in a manner
and on terms satisfactory to the Agents, such that, without
limitation, (A) payment of all GCI Intercompany Indebtedness shall be
made in full, (B) the GCI Dividend shall be made in an amount not
exceeding $181,000,000, (C) (I) all obligations of GranCare and its
Subsidiaries (as such Subsidiaries exist on the Business Day
immediately prior to the Closing Date) under the 1995 Credit Agreement
shall have been paid in full and (II) all Liens securing obligations
under the 1995 Credit Agreement shall be released and the commitments
to extend credit under the 1995 Credit Agreement shall be terminated,
(D) the Redemption shall occur, (E) the Distribution shall occur and
(F) the Merger shall occur.
SECTION 3.2 Conditions Precedent to Each Credit Event. The
-----------------------------------------
obligation of each Lender to make a Loan on the occasion of each Borrowing
(including the initial Borrowing) and the obligation of LC Bank to issue any
Letter of Credit (including the initial issuance of a Letter of Credit) shall be
subject to the conditions precedent that on the date of the Borrowing Date for
such Borrowing or the LC Issuance Date for such issuance of a Letter of Credit,
as the case may be:
(a) Notice of Borrowing or Request of LC Issuance. Borrower shall
---------------------------------------------
have delivered to Administrative Agent a fully completed Notice of
Borrowing or a fully completed Request for LC Issuance, as the case may be.
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(b) Certification. Each of the following statements shall be true and
-------------
correct, and Administrative Agent shall have received a certificate signed
by an Authorized Officer certifying that (and each of the giving of a
Notice of Borrowing (or a Request for LC Issuance), and the acceptance by
Borrower of the proceeds of such Borrowing (or the issuance of such Letter
of Credit), shall constitute a representation and warranty by Borrower that
on the Borrowing Date (or LC Issuance Date) such statements are true):
(i) the representations and warranties contained in this
Agreement and each of the other Loan Documents are true and correct on
and as of the Borrowing Date or LC Issuance Date, as the case may be
(except to the extent such representations and warranties expressly
relate solely to an earlier date), before and after giving effect to
the Borrowing (or Letter of Credit issuance) and to the application of
the proceeds therefrom, as though made on and as of such date;
(ii) no event has occurred and is continuing, or would result
from such Borrowing (or Letter of Credit issuance) or from the
application of the proceeds therefrom, which constitutes a Default or
Event of Default; and
(iii) there has been no Material Adverse Change.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION 4.1 Representations and Warranties of Borrower. As of each
------------------------------------------
Compliance Date, Borrower represents and warrants, both before and after giving
effect to the Transactions, as follows:
(a) Organization. Borrower is a corporation duly organized, validly
------------
existing and in good standing under the laws of the State of Delaware and
is duly qualified to do business in each other jurisdiction where the
absence of such qualification would have a Material Adverse Effect. Each
of the other Loan Parties is duly organized and in good standing under the
laws of the jurisdiction where such Loan Party is organized and is duly
qualified to do business in each jurisdiction where the absence of such
qualification would have a Material Adverse Effect.
(b) Power and Authority. Each of the Loan Parties has the corporate
-------------------
or partnership power: (i) to carry on its business as now being conducted
and as proposed to be conducted by it; (ii) to execute, deliver and perform
each Loan Document and Transaction Document to which it is a party; and
(iii) to take all action as may be necessary to consummate the Transactions
and the other transactions contemplated under the Loan Documents and the
Transaction Documents to which it is a party.
(c) Due Authorization. The execution, delivery and performance by
-----------------
each Loan Party of each Loan Document and Transaction Document to which it
is a party and the
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consummation of the Transactions have been duly authorized by all necessary
corporate or partnership action and do not (A) contravene such Loan Party's
charter, certificate of partnership, bylaws, partnership agreement or other
organizational documents, any law, statute, rule or regulation applicable
to it, or any order, writ, judgment, injunction, decree or determination of
any Governmental Authority applicable to it, (B) conflict with, result in a
breach of or constitute (with notice, lapse of time or both) a default
under any material indenture, agreement or other instrument to which it is
a party, by which it or any of its properties is bound or to which it is
subject, or (C) result in or require the creation of any Lien (other than
pursuant to the Collateral Documents) upon or with respect to any of its
respective properties.
(d) Binding and Enforceable. This Agreement and each of the other
-----------------------
Loan Documents has been, and each Transaction Document when delivered will
have been, duly executed and delivered by each Loan Party that is a party
hereto or thereto. This Agreement and each other Loan Document is, and each
Transaction Document when delivered will be, the legally valid and binding
obligation of each Loan Party that is a party hereto or thereto,
enforceable against such Loan Party in accordance with its respective
terms, except as the enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to or
limiting creditors' rights generally and subject to the availability of
equitable remedies.
(e) Subsidiaries. After giving effect to the Transactions, (i) except
------------
as set forth in Schedule 4.1(e)(i), as from time to time amended by
------------------
Borrower in accordance with the provisions of Section 5.3(h), there are no
direct or indirect Subsidiaries of Borrower, and (ii) except as set forth
in Schedule 4.1(e)(ii), there are no Encumbered Subsidiaries. Schedule
------------------- --------
4.1(e)(i) indicates each Subsidiary that is an Inactive Subsidiary as of
---------
the Closing Date. Each Subsidiary of Borrower (except any Subsidiary that
is, and at all times while a Subsidiary was, an Inactive Subsidiary),
except as otherwise permitted under this Agreement, has duly executed and
delivered the Subsidiary Guaranty and the Subsidiary Pledge and Security
Agreement or, if such Subsidiary was formed or acquired after the Closing
Date, a joinder to the Subsidiary Guaranty and the Subsidiary Pledge and
Security Agreement, substantially in the form of Exhibit C-4 hereto (a
-----------
"Subsidiary Joinder").
-------------------
(f) Indebtedness. As of the Closing Date and after giving effect to
------------
the Transactions, neither Borrower nor any Subsidiary of Borrower is
subject to any Indebtedness other than Indebtedness permitted pursuant to
Sections 5.4(b)(i), (ii), (iii), (iv) and (v).
(g) Liens. As of the Closing Date and after giving effect to the
-----
Transactions, there are no Liens on assets of Borrower or any Subsidiary of
Borrower, other than Liens permitted pursuant to Sections 5.4(a)(i), (ii),
(iii), (iv), (v) and (vi).
(h) No Default. No Default or Event of Default has occurred and is
----------
continuing.
68
<PAGE>
(i) Governmental and Other Approvals. No authorization, approval,
--------------------------------
Third Party Consent or other action by, and no notice to or filing with,
any Governmental Authority or other Person is required for the due
execution, delivery and performance by each of the Loan Parties of any Loan
Document or Transaction Document to which it is or will be a party or for
the consummation of the Merger, the Distribution and the other Transactions
(including, without limitation, consents and approvals under material
contracts to which Borrower or any of its Subsidiaries is a party, and
approvals or filings required in connection with any Health Care Permits),
except for those listed on Schedule 4.1(i), each of which has been duly
---------------
obtained or made and is in full force and effect except as set forth on
such schedule.
(j) Litigation. Except as identified on Schedule 4.1(j), there is no
---------- ---------------
pending or overtly threatened action or proceeding affecting Borrower, any
of its Subsidiaries or any of their respective properties before any court,
governmental agency or arbitrator, which could reasonably be expected to
have a Material Adverse Effect or which purports to affect any aspect of
the Transactions or the legality, validity or enforceability of this
Agreement or any other Loan Document to which any Loan Party is a party.
(k) Financial Information.
---------------------
(i) The audited consolidated balance sheet of GranCare and its
Subsidiaries as of December 31, 1995, and the related consolidated
statements of income, stockholders equity and cash flows for the year
then ended, certified by Ernst & Young L.L.P., copies of which have
been delivered to the Agents, were prepared in accordance with GAAP
applied on a consistent basis and fairly present the consolidated
financial position of GranCare as of such date and the consolidated
results of operations and cash flows of GranCare for the year then
ended.
(ii) The unaudited consolidated balance sheet of GranCare and
its Subsidiaries as of September 30, 1996, and the related
consolidated statements of income, stockholders equity and cash flows
for the nine-month period then ended, copies of which have been
delivered to the Agents, were prepared in accordance with GAAP applied
on a consistent basis and fairly present the consolidated financial
position of GranCare as of such date and the consolidated results of
operations and cash flows of GranCare for the nine-month period then
ended, in each case subject to normal year-end audit adjustments and
to the absence of footnotes.
(iii) The unaudited pro forma consolidated balance sheet of
Borrower and its Subsidiaries as of September 30, 1996, as set forth
in the Borrower Prospectus, gives pro forma effect to the consummation
of the Merger and the Distribution and the consummation of all other
Transactions, all as if such events had occurred on September 30,
1996. The unaudited pro forma consolidated statements of income of
Borrower and its Subsidiaries for the year ended
69
<PAGE>
December 31, 1995 and for the nine-month period ended September 30,
1996, all as set forth in the Borrower Prospectus, give pro forma
effect to the consummation of the Merger and the Distribution and the
consummation of all other Transactions, all as if such events had
occurred on January 1, 1995. Such pro forma financial statements have
been prepared in accordance with GAAP (subject to normal year-end
adjustments and to the absence of footnotes) and present fairly the
consolidated financial condition and results of operations of Borrower
and its Subsidiaries on an unaudited pro forma basis as of the dates
and for the periods set forth therein after giving effect to the
consummation of the Transactions as described above.
(iv) Any report, financial statement, exhibit, schedule or
other information (including the projections referred to in Section
3.1(h)(ii)(A)) furnished by or on behalf of Borrower or any of its
Subsidiaries to either of the Agents or Lender in connection with the
negotiation of any Loan Document or included therein or delivered
pursuant thereto which constitutes a financial forecast or projection
was prepared in good faith, was based on assumptions that Borrower
believes to be reasonable and was based on the best information known
to Borrower at the time such report, financial statement, exhibit,
schedule or other information was so furnished. Borrower has no reason
to believe that any such forecasts or projections are misleading in
any material respect in light of the circumstances existing at the
time of preparation thereof.
(l) Material Adverse Change. There has been no Material Adverse
-----------------------
Change (it being understood that the Merger, the Distribution and the other
Transactions to be consummated on or prior to the Closing Date do not, as
such, constitute a Material Adverse Change).
(m) Compliance. Each Loan Party is in compliance in all material
----------
respects with all material applicable laws, rules, regulations and orders
except to the extent that the failure to be in such compliance would not
have a Material Adverse Effect or is contested in accordance with the
provisions of Section 5.3(d).
(n) Payment of Taxes. Borrower and each of its Subsidiaries (and, as
----------------
to all periods prior to the Closing Date, GranCare and each of its
Subsidiaries) has filed all federal income tax returns and all other tax
returns required to be filed by it and has paid all taxes and assessments
payable by it which have become due except to the extent being contested in
accordance with the provisions of Section 5.3(e).
(o) Security Interests. The provisions of each of the Collateral
------------------
Documents are effective to create in favor of Administrative Agent, for
itself, Syndication Agent, the Lenders and LC Bank, legal, valid, and
enforceable security interests in all right, title and interest of Borrower
and the other Loan Parties in the Collateral described therein, and upon
(i) the initial extension of credit hereunder, (ii) the filing of
appropriately completed Uniform Commercial Code financing statements and
continuations thereof in the
70
<PAGE>
jurisdictions specified therein, (iii) the filing of appropriately
completed short-form assignments in the U.S. Patent and Trademark Office
and the U.S. Copyright Office, and (iv) the possession by Administrative
Agent of any certificates evidencing the securities pledged thereby, such
security interests shall constitute (1) fully perfected and first priority
security interests in such right, title and interest of each such Loan
Party not constituting an Encumbered Subsidiary in and to such Collateral,
and (2) fully perfected security interests in such right, title and
interest of each such Loan Party constituting an Encumbered Subsidiary in
and to such Collateral, in each case to the extent that such security
interest can be perfected by such filings, actions and possession, subject
only to Liens permitted pursuant to Section 5.4(a).
(p) Title to Property. Borrower and each other Loan Party (i) has
-----------------
good and indefeasible title to (or holds interests as lessee under valid
leases in full force and effect with respect to) all properties reflected
in its books and records as being owned or leased by it, and (ii) possesses
or has rights to use licenses and all other assets sufficient to enable it
to conduct its business as presently conducted (or at any time prior to the
Closing Date, as then conducted by GranCare and its Subsidiaries) and as
presently proposed to be conducted, in each instance free and clear of all
Liens other than Liens permitted pursuant to Section 5.4(a).
(q) Real Property. After giving effect to the Transactions, (i)
-------------
except as set forth in Part A of Schedule 4.1(q), as amended pursuant to
---------------
Section 5.3(i), neither Borrower nor any Subsidiary of Borrower owns any
Fee Estate, and (ii) except as set forth in Part B of Schedule 4.1(q), as
---------------
amended pursuant to Section 5.3(i), neither Borrower nor any Subsidiary of
Borrower owns any Leasehold Estate.
(r) Conduct of Business. At all times prior to the Closing Date
-------------------
GranCare and its Subsidiaries are, and from and after the Closing Date
Borrower and its Subsidiaries will be, principally engaged in the business
of owning, operating, managing and/or financing Health Care Facilities and
providing other services or amenities customarily provided by, or other
activities customarily undertaken by, Persons owning, operating, managing
and/or financing Health Care Facilities.
(s) Investment Company. Neither Borrower nor any other Loan Party is
------------------
an "investment company" or a company "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940, as
amended.
(t) Margin Stock. Borrower is not engaged in the business of
------------
extending credit for the purpose of purchasing or carrying Margin Stock,
and no proceeds of any Loan will be used to purchase or carry any Margin
Stock (except as provided in Section 5.3(f)), to extend credit to others
for the purpose of purchasing or carrying any Margin Stock, or for any
other purpose that would violate Regulations G, U or X of the Board of
Governors of the Federal Reserve System or any provision of the Exchange
Act.
71
<PAGE>
(u) Registration of Notes. It is not necessary to register the Notes
---------------------
under the Securities Act of 1933, as amended, or to qualify this Agreement
as an indenture under the Trust Indenture Act of 1939, as amended.
(v) Health Care Permits. Except as disclosed in Schedule 4.1(v):
------------------- ---------------
(i) Each Loan Party now has (after giving effect to the
Transactions), and has no reason to believe it will not be able to
maintain in effect, all Health Care Permits necessary for the lawful
conduct of its business or operations wherever now conducted and as
planned to be conducted (other than those Health Care Permits the lack
of which would not have a Material Adverse Effect), including the
ownership and operation of its Health Care Facilities, pursuant to all
applicable laws, of all Governmental Authorities having jurisdiction
over any such Loan Party or over any part of its operations. All such
Health Care Permits are in full force and effect and have not been
amended or otherwise modified, rescinded, revoked or assigned. No Loan
Party is in default in any material respect under, or in violation in
any material respect of, any such Health Care Permit, and to the best
knowledge of Borrower, no event has occurred, and no condition exists,
which, with the giving of notice, the passage of time, or both, would
constitute a default thereunder or a violation thereof, which default
or violation would (with the passage of time, notice or both) result
in the loss of any Health Care Permit which is necessary to operate
any Health Care Facility of any Loan Party (other than those Health
Care Permits the loss of which would not have a Material Adverse
Effect). Neither Borrower nor, to the best knowledge of Borrower, any
Loan Party, has received any notice of any violation of applicable
laws which would (with the passage of time, notice or both) cause any
of such Health Care Permits to be modified, rescinded or revoked
(except for modifications, rescissions or revocations which would not
have a Material Adverse Effect). To the best knowledge of Borrower, no
condition exists or event has occurred which in itself or with the
giving of notice or the lapse of time, or both, would result in the
suspension, revocation, impairment, forfeiture or non-renewal of any
such Health Care Permit, and there is no claim filed with any
Governmental Authority of which Borrower or any Subsidiary has been
notified challenging the validity of any such Health Care Permit. The
continuation, validity and effectiveness of all such Health Care
Permits will not be adversely affected by the Transactions or any
other actions or transactions contemplated by this Agreement or any of
the other Loan Documents.
(ii) All Health Care Facilities owned, leased, managed or
operated by any Loan Party are entitled to participate in, and receive
payment under, the appropriate Medicare, Medicaid and related
reimbursement programs, and any similar state or local government-
sponsored program, to the extent that such Loan Party has decided to
participate in any such program, and to receive reimbursement from
private and commercial payers and health maintenance organizations to
the extent applicable thereto, except any failure or failures to be so
entitled relating to
72
<PAGE>
payments and reimbursements that, in the aggregate, are less than 10%
of the consolidated net revenues of Borrower and its Subsidiaries.
(w) Environmental Matters.
---------------------
(i) The operations of Borrower and each of its Subsidiaries
comply in all material respects with all applicable Environmental
Laws, Borrower and each of its Subsidiaries have obtained all material
applicable Environmental Permits necessary for its operations, and all
such Environmental Permits are in good standing, and Borrower and each
of its Subsidiaries are in compliance with such Environmental Permits
in all material respects, except (in each case) where any failure to
do so could not reasonably be expected to result in a Material
Environmental Claim or a Material Adverse Effect.
(ii) Except as specifically identified in Schedule 4.1(w), (A)
---------------
to the best knowledge of Borrower after due inquiry, there are no
conditions or circumstances which could give rise to any Material
Environmental Claim arising from the ownership or lease of property by
Borrower or its Subsidiaries and, subject to and without limiting the
generality of the foregoing, neither Borrower nor any of its
Subsidiaries has or has control of any underground storage tanks (x)
that are not properly registered or permitted under applicable
Environmental Laws, (y) that are leaking or disposing of Hazardous
Materials or (z) that have leaked or disposed of Hazardous Materials;
and (B) Borrower and its Subsidiaries have notified all of their
employees of the existence, if any, of any health hazard arising from
the conditions of their employment and have met all notification
requirements under EPCRA or any other Environmental Law.
(iii) Borrower has no knowledge of any pending Material
Environmental Claims against Borrower or any of its Subsidiaries or
any of their past or present property or operations.
(x) ERISA Compliance.
----------------
(i) Schedule 4.1(x) lists, after giving effect to the
---------------
Transactions, all material Plans maintained or sponsored by Borrower
or to which Borrower or any ERISA Affiliate is obligated to
contribute, and separately identifies Plans intended to be Qualified
Plans and Multiemployer Plans. All written descriptions thereof
provided to Administrative Agent are true and complete in all material
respects.
(ii) Each Plan is in compliance in all material respects with
the applicable provisions of ERISA, the Code and other applicable
Federal or state law the failure to comply with which would have a
Material Adverse Effect, including all requirements under the Code or
ERISA for filing reports (which are true and correct in all material
respects as of the date filed), and benefits have been paid in
accordance with the provisions of the Plan.
73
<PAGE>
(iii) Each Qualified Plan has been determined by the IRS to
qualify under Section 401 of the Code, and the trusts created
thereunder have been determined to be exempt from tax under the
provisions of Section 501 of the Code, and to the best knowledge of
Borrower nothing has occurred which would cause the loss of such
qualification or tax-exempt status.
(iv) Except as set forth in Schedule 4.1(x), there is no
---------------
outstanding material liability under Title IV of ERISA with respect to
any Qualified Plan maintained or sponsored by Borrower or ERISA
Affiliate (as to which Borrower or any Loan Party is or may be
liable), nor with respect to any Plan to which Borrower or any ERISA
Affiliate (wherein Borrower or any Loan Party is or may be liable)
contributes or is obligated to contribute.
(v) Except as set forth on Schedule 4.1(x), none of the
---------------
Qualified Plans subject to Title IV of ERISA has any Unfunded Pension
Liability as to which Borrower is or may be liable.
(vi) Except as set forth in Schedule 4.1(x), no Plan
---------------
maintained or sponsored by Borrower or any ERISA Affiliate provides
medical or other welfare benefits or extends coverage relating to such
benefits beyond the date of a participant's termination of employment
with Borrower or such ERISA Affiliate, except to the extent required
by Section 4980B of the Code and at the sole expense of the
participant or the beneficiary of the participant to the fullest
extent permissible under such section of the Code. Borrower and each
ERISA Affiliate have complied in all material respects with the notice
and continuation coverage requirements of Section 4980B of the Code.
(vii) Except as set forth in Schedule 4.1(x), no ERISA Event
---------------
has occurred or is reasonably expected to occur with respect to any
Qualified Plan maintained or sponsored by Borrower or to which
Borrower or any ERISA Affiliate is obligated to contribute.
(viii) There are no pending or, to the best knowledge of
Borrower, threatened claims, actions or lawsuits, other than routine
claims for benefits in the usual and ordinary course, asserted or
instituted against (A) any Plan maintained or sponsored by Borrower or
any ERISA Affiliate; (B) Borrower or any ERISA Affiliate with respect
to any Qualified Plan; or (C) any other fiduciary with respect to any
Plan for which Borrower may be directly or indirectly liable, through
indemnification obligations or otherwise.
(ix) Except as set forth in Schedule 4.1(x), Borrower has not
---------------
incurred nor reasonably expects to incur (A) any liability (and, to
the best knowledge of Borrower, no event has occurred which, with the
giving of notice under Section 4219 of ERISA, would result in such
liability) under Sections 4201 or 4243 of ERISA with respect to a
Multiemployer Plan; or (B) any liability under Title IV of
74
<PAGE>
ERISA (other than premiums due and not delinquent under Section 4007
of ERISA) with respect to any Plan.
(x) Except as set forth in Schedule 4.1(x), neither Borrower
---------------
nor any ERISA Affiliate has transferred any Unfunded Pension Liability
to an entity other than an ERISA Affiliate or otherwise engaged in a
transaction that could be subject to Sections 4069 or 4212(c) of
ERISA.
(xi) Borrower may amend Schedule 4.1(x) from time to time, as
---------------
acceptable to the Required Lenders, to reflect any changes in the
matters set forth in this Section 4.1(x) resulting from any Permitted
Acquisition.
(y) Solvency. After giving effect to the Transactions, the making of
--------
the initial Loans on the Closing Date and the uses of proceeds therefrom,
each of Borrower and Subsidiaries will be solvent on the Closing Date.
"Solvent" means, with respect to any Person, that (A) the assets of such
Person, at a fair valuation, will exceed the debts and liabilities,
subordinated, contingent or otherwise, of such Person; (B) the present fair
saleable value of the assets of such Person will be greater than the amount
that will be required to pay the liabilities of such Person on its debts
and other liabilities, subordinated, contingent or otherwise, as such debts
and other liabilities become absolute and matured; (C) such Person has not
incurred, and does not intend to incur, debts and liabilities,
subordinated, contingent or otherwise, beyond its ability to pay such debts
and liabilities as they become absolute and matured, taking into account
the timing of and amounts of cash to be received by such Person and the
timing of and amounts of cash to be payable on or in respect of obligations
of such Person; and (D) such Person will not have an unreasonably small
amount of capital with which to conduct the businesses in which it is
engaged as such businesses are now conducted and are proposed to be
conducted. With respect to any contingent liabilities, such liabilities
shall be computed at the amount which, in light of all the facts and
circumstances existing at the time, represents the amount which can
reasonably be expected to become an actual or matured liability.
(z) Restrictions on Dividends. Except as set forth on Schedule
------------------------- --------
4.1(z), no Subsidiary of Borrower is subject to any material agreement
------
which restricts the ability of such Subsidiary of Borrower to declare or
make any dividend payment or other distribution of assets, properties,
cash, rights, obligations or securities to its stockholders or to make any
loan or advance to Borrower or any other Subsidiary of Borrower.
(aa) Full Disclosure. All factual information (including, without
---------------
limitation, factual information set forth in the GranCare Proxy Statement
or the Borrower Prospectus) furnished to either of the Agents or any Lender
in writing by or on behalf of GranCare or any Loan Party for purposes of or
in connection with this Agreement, the transactions contemplated hereby and
the other Transactions is, and all other such factual information hereafter
furnished to either Agent or any Lender in writing by or on behalf of
GranCare or any Loan Party will be, true and accurate in all material
respects on the date as of which such information is dated or certified
(or, if such information has been
75
<PAGE>
amended or supplemented, on the date as of which any such amendment or
supplement is dated or certified) and not made incomplete by omitting to
state a material fact necessary to make the statements contained therein,
in light of the circumstances under which such information was provided,
not misleading. No fact is known, no condition exists nor has any event
occurred which has not been disclosed herein or in any other document,
certificate or statement furnished to either Agent or the Lenders for use
in the transactions contemplated hereby which, singly or in the aggregate,
could reasonably be expected to have a Material Adverse Effect. The
GranCare Proxy Statement complied with, in all material respects, as of the
date distributed to the stockholders of GranCare, as of the date of the
special meeting of the stockholders of GranCare to consider and vote on the
Merger and the Distribution, and as of the date of the Merger and the
Distribution, and all filings of and solicitations under the GranCare Proxy
Statement by GranCare have been made, in all material respects, in
accordance with, the applicable provisions of the Exchange Act and the
proxy solicitation rules and other applicable rules and regulations
thereunder.
(bb) Transaction Documents. Borrower has furnished to each Agent a
---------------------
true and complete copy of each of the Merger Agreement and the Distribution
Agreement, and on or prior to the Closing Date will have furnished to each
Agent a true and complete copy of each of the other Transaction Documents
executed and delivered on or prior to the Closing Date, in each case
together with all schedules and exhibits referred to therein or delivered
pursuant thereto and all amendments, modifications and waivers relating
thereto. As of the Closing Date, none of the Transaction Documents has
been amended, modified or supplemented, nor have any of the provisions
thereof been waived, in any material respect other than as approved in
writing by the Agents. All representations and warranties of GranCare or
any Loan Party contained in any of the Transaction Documents were true and
correct in all material respects on and as of the date made and will be
true and correct in all material respects on and as of the Closing Date
with the same effect as though made on and as of the Closing Date, except
as expressly contemplated by the terms of the Transaction Documents.
ARTICLE V
COVENANTS OF BORROWER
SECTION 5.1 Financial Covenants. So long as any Obligation (other
-------------------
than an Unmatured Surviving Obligation) shall remain unpaid, any Letter of
Credit shall remain outstanding or any Lender shall have any Commitment
hereunder, unless the Required Lenders shall otherwise consent in writing,
Borrower will:
(a) Maximum Leverage Ratio. Maintain a Leverage Ratio, determined as
----------------------
of the last day of each fiscal quarter, at an amount not greater than the
amount set forth in the following table for the applicable period:
76
<PAGE>
<TABLE>
<CAPTION>
Maximum
Quarter Ended During Period Leverage Ratio
--------------------------- --------------
<S> <C>
Closing Date through December 31, 1997 70.0%
January 1, 1998 through December 31, 1998 68.0%
January 1, 1999 through December 31, 1999 66.0%
January 1, 2000 through December 31, 2000 62.0%
Thereafter 50.0%
</TABLE>
(b) Minimum Interest Coverage Ratio. Maintain an Interest Coverage Ratio,
-------------------------------
determined as of the last day of each fiscal quarter, at an amount not less
than the amount set forth in the following table for the applicable period:
<TABLE>
<CAPTION>
Minimum Interest
Quarter Ended During Period Coverage Ratio
--------------------------- ----------------
<S> <C>
Closing Date through December 31, 1997 1.40
January 1, 1998 through December 31, 1998 1.45
January 1, 1999 through December 31, 1999 1.50
January 1, 2000 through December 31, 2000 1.60
Thereafter 1.70
</TABLE>
(c) Maximum Debt Coverage Ratio. Maintain a Debt Coverage Ratio,
---------------------------
determined as of the last day of each fiscal quarter, at an amount not
greater than the amount set forth in the following table for the applicable
period:
<TABLE>
<CAPTION>
Maximum Debt
Quarter Ended During Period Coverage Ratio
--------------------------- --------------
<S> <C>
Closing Date through December 31, 1997 4.50
January 1, 1998 through December 31, 1998 4.25
January 1, 1999 through December 31, 1999 3.75
January 1, 2000 through December 31, 2000 3.25
Thereafter 3.00
</TABLE>
(d) Maximum Rental Expense. Not permit Rental Expense during any
----------------------
fiscal year to exceed the amount set forth in the following table opposite
such fiscal year:
77
<PAGE>
<TABLE>
<CAPTION>
Maximum
Fiscal Year Rental Expense
----------- --------------
<S> <C>
1996 $56,000,000
1997 $57,500,000
1998 $59,500,000
1999 $61,000,000
2000 $62,500,000
2001 $64,500,000
</TABLE>
SECTION 5.2 Reporting Covenants. So long as any Obligation (other
-------------------
than an Unmatured Surviving Obligation) shall remain unpaid, any Letter of
Credit shall remain outstanding or any Lender shall have any Commitment
hereunder and, unless the Required Lenders shall otherwise consent in writing
Borrower will, and will cause its Subsidiaries to:
(a) Quarterly Financial Statements. Deliver to Administrative Agent
------------------------------
and each Lender, as soon as available, and in any event within 45 days (90
days for the final fiscal quarter in each fiscal year) after the end of
each fiscal quarter of Borrower, (i) the consolidated and, at the request
of Administrative Agent, consolidating (with such consolidation to be by
Subsidiary Group) financial statements of Borrower and its Subsidiaries
(including a balance sheet for Borrower and its Subsidiaries dated as of
the end of such fiscal quarter, a statement of income and retained earnings
for Borrower and its Subsidiaries for such quarter and for the period
commencing at the end of the previous calendar year and ending with the end
of such quarter and a cash flow statement for Borrower and its Subsidiaries
for such quarter and for the period commencing at the end of the previous
calendar year and ending with the end of such quarter), and in each case,
setting forth comparable figures for the related periods in the prior
fiscal year and comparable budgeted figures for such period, all of which
shall be certified by the chief financial officer of Borrower, subject to
normal year-end adjustments; and (ii) a statement of income for each Major
Line of Business for such quarter and for the period commencing at the end
of the previous calendar year and ending with the end of such quarter
setting forth comparable figures for the related periods in the prior
fiscal year and comparable budgeted figures for such period, all of which
shall be certified by the chief financial officer of Borrower.
(b) Annual Financial Statements. Deliver to Administrative Agent and
---------------------------
each Lender, as soon as available, and in any event within 90 days after
the end of each fiscal year of Borrower, (i) the consolidated and
consolidating (with such consolidation to be by Subsidiary Group) financial
statements of Borrower and its Subsidiaries (including a consolidated and
consolidating balance sheet for Borrower and its Subsidiaries dated as of
the end of such fiscal year, a consolidated and consolidating statement of
income, retained earnings for Borrower and its Subsidiaries for such fiscal
year and a consolidated and consolidating cash flow statement for Borrower
and its Subsidiaries for such fiscal year), and in each case, setting forth
comparable figures for the prior fiscal year and comparable budgeted
figures for such period, all of which shall be certified by (A) in the case
of
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consolidating statements, the chief financial officer of Borrower, and (B)
in the case of consolidated statements of Borrower and its Subsidiaries, by
Ernst & Young L.L.P. or other independent public accountants of nationally
recognized standing reasonably acceptable to Administrative Agent together
with an unqualified opinion of such accounting firm; and (ii) a statement
of income for each Major Line of Business for such fiscal year setting
forth comparable figures for the prior fiscal year and comparable budgeted
figures for such fiscal year, all of which shall be certified by the chief
financial officer of Borrower.
(c) Compliance Certificate. Deliver to Administrative Agent and each
----------------------
Lender, together with the financial statements delivered pursuant to
Sections 5.2(a) or 5.2(b), (i) a Compliance Certificate of the chief
financial officer of Borrower in substantially the form of Exhibit E-1 (the
-----------
"Compliance Certificate"), (A) stating that during such period, each Loan
----------------------
Party has observed and performed all of its covenants and other agreements,
and satisfied every condition contained in this Agreement and all other
Loan Documents to be observed, performed or satisfied by them, and that
such officer has obtained no knowledge of any Default or Event of Default
except as set forth in a notice delivered pursuant to Section 5.2(f), and
(B) showing in detail the calculations supporting such statement in respect
of Sections 5.1, 5.4(b), 5.4(c), 5.4(e)(ii), 5.4(f), 5.4(g)(iv) and
5.4(g)(vii); (ii) an accounts receivable aging schedule (including, without
limitation, categorization by payor class, region and business line, and
information relating to bad debt allowances and chargeoffs), dated as of
the end of the fiscal period to which the Compliance Certificate relates;
and (iii) a pricing matrix calculation setting forth the calculation of the
Senior Debt Ratio.
(d) Annual Operating and Cash Budget. Deliver to Administrative
--------------------------------
Agent and each Lender, as soon as available and in any event within 45 days
after the beginning of each fiscal year of Borrower, an operating and
capital budget for Borrower and its Subsidiaries for such fiscal year;
including a budgeted balance sheet, statement of income and retained
earnings and a cash flow statement for such fiscal year.
(e) Management Letter. Deliver to Administrative Agent and each
-----------------
Lender, as soon as available and in any event within 30 days of receipt
thereof, a copy of the annual management letters issued by the engaged
certified public accounting firm to Borrower.
(f) Notice of Default. Deliver to Administrative Agent and each
-----------------
Lender, as soon as possible and in any event within 10 Business Days after
obtaining knowledge of each Default or Event of Default continuing on the
date of such statement, a statement of an Authorized Officer of Borrower
setting forth details of such Default or Event of Default and the action
which Borrower has taken and proposes to take with respect thereto.
(g) Notice of Litigation. Deliver to Administrative Agent and each
--------------------
Lender, as soon as possible and in any event within 10 days of obtaining
knowledge thereof, notice of the commencement of any action or proceeding
affecting Borrower or any of its
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Subsidiaries before any Governmental Authority which, if decided adversely,
could reasonably be expected to have a Material Adverse Effect, or which
purports to affect the legality, validity or enforceability of this
Agreement or any other Loan Document or any Transaction Document to which
any Loan Party is a party.
(h) Security Holder Materials and SEC Filings. Deliver to
-----------------------------------------
Administrative Agent and each Lender, promptly after the sending or filing
thereof, and in any event within 10 Business Days after such sending or
filing, copies of all reports which Borrower sends to any of its security
holders, and copies of all reports and registration statements which
Borrower or any Subsidiary of Borrower files with the SEC or any national
securities exchange.
(i) Environmental Claims. Deliver to Administrative Agent and each
--------------------
Lender, upon, but in no event later than 10 days after, obtaining knowledge
of such event, notice of (i) any and all enforcement, cleanup, response,
removal, remedial or compliance notifications, orders or actions instituted
by a Governmental Authority against Borrower or any Subsidiary of Borrower
or any of their properties pursuant to any applicable Environmental Laws,
if a Material Environmental Claim; (ii) all other Material Environmental
Claims or requests from any Governmental Authority regarding any potential
Material Environmental Claim; and (iii) the presence of any Hazardous
Material in, on or under the property of Borrower or any of its
Subsidiaries that is likely to prohibit or restrict materially the
occupancy, transferability or use of such property under any Environmental
Laws.
(j) ERISA Notices. Deliver to Administrative Agent and each Lender,
-------------
upon, but in no event later than 10 days after obtaining knowledge thereof,
notice of the occurrence of any ERISA Event affecting Borrower or any ERISA
Affiliate, together with (i) a copy of any notice with respect to such
ERISA Event that may be required to be filed with the PBGC, and (ii) any
notice delivered by the PBGC to Borrower or any ERISA Affiliate with
respect to such ERISA Event.
(k) Health Care Permit Violation. Deliver to Administrative Agent
----------------------------
and each Lender as soon as possible, and in any event within 5 Business
Days (i) after obtaining knowledge thereof, notice of the occurrence of any
event that would (with the passage of time, notice or both) be a default
under or a violation of any Health Care Permit necessary for the lawful
conduct of the business or operations of any Loan Party (other than those
Health Care Permits the default under or violation of which would not have
a Material Adverse Effect), including the ownership and operation of its
Health Care Facilities; and (ii) after receipt thereof, any notice of any
violation of applicable laws which would (with the passage of time, notice
or both) cause any of the Health Care Permits referred to in clause (i) to
be modified, rescinded or revoked.
(l) Notice of Material Event or Circumstance. Deliver to
----------------------------------------
Administrative Agent and each Lender as soon as possible and in any event
within 10 days of obtaining
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knowledge of such event or circumstance, notice of any event or
circumstance that would (with the passage of time, notice or both) have a
Material Adverse Effect.
(m) Notice of HRPT Negotiations. Deliver to Administrative Agent and
---------------------------
each Lender as soon as possible and in any event within 5 days of
commencement thereof, notice of the commencement of any discussions or
negotiations with HRPT by Borrower and/or any Subsidiary of Borrower which
could result in the transfer of any Collateral (including Collateral
subject to a prior Lien in favor of HRPT or any Affiliate of HRPT) to HRPT
or any Affiliate, assignee or designee of HRPT.
(n) Notice of Lease Default. Deliver to Administrative Agent and
-----------------------
each Lender as soon as possible and in any event within 10 days of
obtaining knowledge of such default, notice of any default, event of
default or breach by Borrower or any Subsidiary under any lease agreement
with respect to a Health Care Facility or Health Care Facilities
(including, without limitation, any "master lease" agreement and any lease
or sublease thereunder) for which either (i) total revenues from such
Health Care Facility or Health Care Facilities for the most recent
Reference Period represent 1.0% or more of the consolidated revenues of
Borrower and its Subsidiaries during such Reference Period or (ii) pre-tax
net income from the operation of such Health Care Facility or Health Care
Facilities for the most recent Reference Period represents 1.0% or more of
the pre-tax net income of Borrower and its Subsidiaries during such
Reference Period.
(o) Tax Allocation Agreement Matters. Promptly deliver to
--------------------------------
Administrative Agent and each Lender (i) a copy of any and all written
notices (each, a "Tax Allocation Agreement Notice") received by Borrower
-------------------------------
from time to time from any Governmental Authority or from Vitalink, (A)
asserting, claiming or determining that the restructuring transactions
contemplated by the Distribution Agreement failed to qualify as a "tax-
free" reorganization and distribution within the meaning of Sections
368(a)(1)(D) and 355 of the Code or otherwise as "tax-free" under the Code,
or (B) as to any Tax Controversy (as defined in the Tax Allocation
Agreement); and (ii) following the receipt of any such Tax Allocation
Agreement Notice by Borrower, such other information regarding the status
of the claims or matters to which such Tax Allocation Agreement Notice
relates as Administrative Agent or any Lender may reasonably request from
time to time.
(p) Other Information. Deliver to Administrative Agent and each
-----------------
Lender, as soon as practicable after request therefor, such other
information respecting the condition or operations, financial or otherwise,
of Borrower or any Subsidiary of Borrower as any Lender through
Administrative Agent may from time to time reasonably request.
SECTION 5.3 Affirmative Covenants of Borrower and Its Subsidiaries.
------------------------------------------------------
So long as any Obligation (other than an Unmatured Surviving Obligation) shall
remain unpaid, any Letter of Credit shall remain outstanding or any Lender shall
have any Commitment hereunder, unless the Required Lenders shall otherwise
consent in writing Borrower will, and will cause each of its Subsidiaries (other
than Inactive Subsidiaries) to:
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(a) Preservation of Corporate Existence, Etc. Preserve and maintain
-----------------------------------------
in full force and effect (i) all rights, privileges, qualifications,
permits, licenses and franchises reasonably necessary or desirable in
reimbursement programs and in the normal conduct of its business; (ii) its
corporate or partnership existence and good standing under the laws of its
state or jurisdiction of incorporation or organization; and (iii) its good
standing under the laws of each jurisdiction where the character of its
properties or the nature of its activities makes it necessary for it to
qualify to do business, in each case except where the failure results from
a dissolution, merger or combination otherwise permitted under Section
5.4(e) of this Agreement.
(b) Maintenance of Property and Assets. Maintain and preserve all
----------------------------------
its property which is necessary for use in its business in good working
order and condition, ordinary wear and tear excepted, and to use the
standard of care typical in the industry in the operation of the Health
Care Facilities, in each case except where failure to do so would not have
a Material Adverse Effect.
(c) Insurance. Maintain adequate levels of either insurance with
---------
insurers that are rated A or better in "Best's Insurance Guide" at the time
of issuance (or reissuance) or self-insurance with respect to its
properties and business against loss or damage of the kinds customarily
insured against by other Persons engaged in the same or similar business,
of such types and in such amounts as are customarily carried under similar
circumstances by such other Persons, including workers' compensation
insurance, public liability and property and casualty insurance; and, upon
reasonable request of Administrative Agent or the Required Lenders, (i)
furnish Administrative Agent a certificate of an Authorized Officer (and,
if requested by Administrative Agent, any insurance broker of Borrower)
setting forth the nature and extent of all insurance maintained by Borrower
and its Subsidiaries (other than self-insurance) in accordance with this
Section 5.3(c) (and which, in the case of a certificate of a broker, was
placed through such broker); (ii) furnish Administrative Agent a certified
copy of each policy of insurance maintained in accordance with this Section
5.3(c); and (iii) cause Administrative Agent, as Administrative Agent under
this Agreement, to be named as an additional insured or loss payee, as
applicable, on all or any of such insurance.
(d) Compliance With Laws. Comply in all material respects with all
--------------------
applicable laws, rules, regulations and orders applicable to Borrower, such
Subsidiary or its respective property, the noncompliance with which would
have a Material Adverse Effect, except that the validity or application of
any such laws, rules, regulations or orders may be contested in good faith
and reasonable diligence by appropriate legal proceedings or actions.
(e) Payment of Obligations. Pay and discharge as the same shall
----------------------
become due and payable:
(i) all tax liabilities, assessments and governmental charges or
levies upon it or its properties or assets; and
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(ii) all lawful claims which, if unpaid, would, with the passage
of time, notice or both, by law become a Lien upon its property;
except that any such item may be contested in good faith and when so
contested may remain unpaid so long as (A) adequate reserves have been
established in an amount sufficient to pay any such claims, accrued
interest thereon and potential penalties or other costs relating thereto,
or other adequate provision for the payment thereof shall have been made,
(B) enforcement of the contested item is effectively stayed for the entire
duration of such contest, and (C) any amount determined to be due, together
with any interest or penalties thereon, is promptly paid after resolution
of such contest.
(f) Use of Proceeds. Use the proceeds of (x) the Term Loans, and up
---------------
to $81,000,000 of Acquisition Loans, made on the Closing Date solely to
repay the GCI Intercompany Indebtedness and to make the GCI Dividend; (y)
the Acquisition Loans made after the Closing Date solely (i) to finance
Acquisitions in accordance with the provisions of this Agreement and (ii)
subject to the provisions of Section 5.4(d)(iv), to finance the repurchase,
redemption or other acquisition of capital stock of Borrower (provided,
--------
however, that (1) the proceeds of Acquisition Loans shall not be used for
-------
the purposes described in this clause (ii) until such time as the aggregate
outstanding principal balance of the Term Loans is less than $35,000,000;
(2) the aggregate principal amount of Acquisition Loans borrowed for such
purposes shall not at any time exceed the amount by which the then
aggregate outstanding principal balance of the Term Loans is less than
$35,000,000; and (3) the aggregate amount of Acquisition Loans used for
such purposes shall not, when combined with all other amounts (including
the aggregate amount of Net Cash Proceeds from Debt Issuances retained by
Borrower in accordance with Section 2.6(b)(ii)) applied to the repurchase,
redemption or other acquisition of the capital stock of Borrower, exceed
$35,000,000); and (z) the Working Capital Loans made after the Closing Date
for working capital and lawful general corporate purposes permitted under
and in accordance with the terms of this Agreement. Notwithstanding the
foregoing or anything else contained in this Agreement, in the event that
any claim shall be made or asserted against Borrower or any of its
Subsidiaries by or on behalf of Vitalink or any Governmental Authority,
pursuant to the Tax Allocation Agreement or otherwise, for Restructuring
Taxes (as such term is defined in the Tax Allocation Agreement) in excess
of $1,000,000 or otherwise for tax liabilities in excess of $1,000,000
resulting from the failure of the restructuring transactions contemplated
by the Distribution Agreement to qualify as a "tax-free" reorganization and
distribution within the meaning of Sections 368(a)(1)(D) and 355 of the
Code or otherwise as "tax-free" under the Code, then the Revolving Credit
Lenders shall not be obligated to make any further Acquisition Loans until
such time as Borrower shall have demonstrated to the satisfaction of the
Required Lenders (which determination shall be made by the Required Lenders
in their good faith sole discretion) that the existence of such claim and
the prospective resolution thereof would not be likely to have a Material
Adverse Effect.
(g) Inspection of Property and Books and Records. Maintain proper
--------------------------------------------
books of record and account, in which full, true and correct entries in
conformity with GAAP
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consistently applied shall be made of all financial transactions and
matters involving the assets and business of Borrower and such
Subsidiaries, and permit representatives of Administrative Agent or any
Lender to visit and inspect any of their respective properties, to examine
their respective corporate, financial and operating records and make copies
thereof or abstracts therefrom, and to discuss their respective affairs,
finances and accounts with their respective officers, employees and
independent public accountants, all at the expense of Borrower and at such
reasonable times during normal business hours and as often as may be
reasonably requested, upon reasonable notice to Borrower.
(h) New Subsidiaries. Promptly, and in any event within 10 days,
----------------
after forming or acquiring any Subsidiary (other than an Inactive
Subsidiary) or after any Inactive Subsidiary ceases to be an Inactive
Subsidiary, (i) notify Administrative Agent thereof, (ii) cause such
Subsidiary to execute and deliver a Subsidiary Joinder and an Intercompany
Note, (iii) deliver to Administrative Agent (x) the certificates
representing all outstanding shares of stock of such Subsidiary and
certificates representing the Pledged Shares identified in Schedule I to
----------
the Subsidiary Pledge and Security Agreement added pursuant to such
Subsidiary Joinder, accompanied by undated stock powers executed in blank;
(y) one or more opinions of counsel for Borrower and such Subsidiary,
reasonably satisfactory to Administrative Agent, confirming as to such
Subsidiary substantially each of the matters confirmed, in the legal
opinions delivered pursuant to Section 3.1(f), as to Subsidiaries of
Borrower that were Loan Parties on the Closing Date; and (z) evidence that
the financing statements referred to in such opinion of counsel have been
filed in the offices identified in such Schedule, and (iv) take, and cause
such Subsidiary to take, all such other action (including the execution and
delivery of documents, instruments and certificates) as may be reasonably
requested in order to create in favor of Administrative Agent a first
priority perfected Lien upon and security interest in the Collateral being
pledged by such Subsidiary, subject only to Permitted Liens; provided that
--------
for any Permitted Acquisition, the deliveries required pursuant to this
Section 5.3(h) shall be made not later than (A) the closing of such
Permitted Acquisition if the proceeds of Acquisition Loans are used to
complete such Permitted Acquisition, and (B) within 30 days of the date
that the Permitted Acquisition closes if it is completed without the use of
proceeds of Acquisition Loans.
(i) Real Property Acquisition. Promptly, and in any event within 10
-------------------------
days, after acquisition by Borrower or any Subsidiary of Borrower of any
Real Property deliver to Administrative Agent a supplement to Schedule
--------
4.1(q) with respect to such Real Property.
------
(j) Real Property Liens. Promptly, and in any event within 60 days
-------------------
after the reasonable request by Administrative Agent or the Required
Lenders, deliver to Administrative Agent each of the following with respect
to any Real Property having a value (net of prior liens) of at least
$1,000,000:
(i) a Mortgage (substantially in the form of Exhibit C-7, with
-----------
such modifications as may be necessary or appropriate under applicable
local law) upon such interest, duly executed and duly recorded,
together with evidence reasonably
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satisfactory to Administrative Agent and the Required Lenders that all
actions necessary or, in the opinion of Administrative Agent or the
Required Lenders, desirable to perfect the Lien of such Mortgage have
been taken;
(ii) an A.L.T.A. form B (or other form acceptable to
Administrative Agent and the Required Lenders) mortgagee policy of
title insurance or a binder issued by a title insurance company
reasonably satisfactory to Administrative Agent and the Required
Lenders insuring or, in the case of a binder, undertaking to insure
that such Mortgage creates and constitutes a valid Lien against the
Real Property described therein, subject only to exceptions reasonably
acceptable to Administrative Agent and the Required Lenders and with
such endorsements and affirmative assurances as Administrative Agent
or the Required Lenders may reasonably request;
(iii) evidence satisfactory to Administrative Agent and the
Required Lenders that mortgagee's loss payable clauses have been
issued to Administrative Agent under all policies of casualty
insurance covering the Collateral under such Mortgage and that
Administrative Agent is named as additional insured under all policies
of liability insurance relating thereto;
(iv) flood insurance, on terms reasonably satisfactory to
Administrative Agent and Required Lenders, if the Collateral under
such Mortgage is located in a flood plain and if Administrative Agent
or any Lender, in the opinion of its counsel, is required by law to
obtain flood insurance;
(v) evidence that all title insurance premiums, documentary
stamp or intangible taxes, recording fees and mortgage taxes payable
in connection with such Mortgage (whether due on or before recordation
or, if permitted to be prepaid, at some later time and specifically
including any such amounts payable in respect of future advances) have
been paid;
(vi) an environmental site assessment (in form and content
reasonably satisfactory to Administrative Agent and the Required
Lenders) with respect to the Collateral under such Mortgage, dated as
of a recent date (and in any event no more than three months prior to
the date of such Mortgage), prepared by a qualified firm acceptable to
Administrative Agent and the Required Lenders, stating, among other
things, that such property or Real Property is not impaired by
Hazardous Materials and that operations conducted thereon are in
compliance with all Environmental Laws except to the extent that
presence of such Hazardous Material or non-compliance with such
Environmental Laws is not reasonably expected to result in liability
to Borrower or any Subsidiary of Borrower that in the aggregate
exceeds $1,000,000;
(vii) an opinion of counsel (which counsel shall be
reasonably satisfactory to Administrative Agent) in the state in which
each Mortgaged
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Property is located with respect to the enforceability of the
Mortgages recorded in such state and such other matters as
Administrative Agent may request, in form and substance reasonably
satisfactory to Administrative Agent;
(viii) in the case of a Leasehold Estate, such estoppel
letters, consents and waivers from the landlords on such Real Property
as reasonably may be required by Administrative Agent, which letters,
consents, waivers and agreements shall be in form and substance
reasonably satisfactory to Administrative Agent;
(ix) in the case of any such Real Property which is
encumbered by a Lien that secures Indebtedness permitted under either
Section 5.4(b)(ii) or 5.4(b)(vi), the consent or waiver of each holder
of such a Lien, and such estoppel letters from such holder as may be
reasonably required by Administrative Agent, which consents, waivers
and estoppel letters shall be in form and substance reasonably
satisfactory to Administrative Agent; and
(x) if required by applicable law in the opinion of counsel
to Administrative Agent or any Lender, an appraisal of the Collateral
under such Mortgage in form and substance reasonably satisfactory to
Administrative Agent and the Required Lenders.
Notwithstanding anything to the contrary in this Section 5.3(j), with
respect to any Leasehold Estate or any Real Property referred to in Section
5.3(j)(ix), (y) Borrower shall use its best efforts to obtain any and all
consents and/or waivers required pursuant to Section 5.3(j)(viii) or
5.3(j)(ix), as applicable, during the 60-day period referred to in the
lead-in of this Section 5.3(j); and (z) if during such 60-day period
Borrower is unable to obtain any such waiver or consent, Borrower shall be
relieved from its obligation to execute and record a Mortgage with respect
to such Leasehold Estate or Real Property (as the case may be) until such
waiver or consent is obtained or is no longer required.
(k) Further Assurances. Promptly upon reasonable request by
------------------
Administrative Agent or the Required Lenders, execute, acknowledge,
deliver, file, re-file, register and re-register, any and all such further
acts, security agreements, assignments, estoppel certificates, financing
statements and continuations thereof, termination statements, notices of
assignment, transfers, certificates, assurances and other instruments as
Administrative Agent or the Required Lenders may reasonably require from
time to time in order (i) to carry out more effectively the purposes of
this Agreement or any other Loan Document; (ii) to subject to the Liens
created by any of the Collateral Documents any of the properties, rights or
interests covered thereby; (iii) to perfect and maintain the validity,
effectiveness and priority of any of the Collateral Documents or any of the
Liens intended to be created thereby; and (iv) to better assure, convey,
grant, assign, transfer, preserve, protect and confirm to Administrative
Agent and the Lenders the rights granted or now or hereafter intended to be
granted to the Lenders under any Loan Document or under any other
instrument executed in connection therewith.
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(l) Disclosure Updates. Promptly and in no event later than five
------------------
Business Days after obtaining knowledge thereof, (i) notify Administrative
Agent and the Lenders if any written information, exhibits and reports
furnished to Administrative Agent or the Lenders contained any untrue
statement of a material fact or omitted to state any material fact or any
fact necessary to make the statements contained therein not misleading in
light of the circumstances in which made; and (ii) correct any defect or
error that may be discovered therein or in any Loan Document or in the
execution, acknowledgement, filing or recordation thereof.
(m) Environmental Laws. Conduct its operations and keep and
------------------
maintain its property in compliance with all Environmental Laws and
Environmental Permits, the noncompliance with which would have a Material
Adverse Effect, except that the validity or application of any
Environmental Law or the failure to be in compliance with any Environmental
Permit may be contested in good faith and reasonable diligence by
appropriate legal proceedings or actions, and upon reasonable written
request of Administrative Agent or the Required Lenders, submit to
Administrative Agent and the Lenders, at Borrower's sole cost and expense
at reasonable intervals, a report providing an update of the status of any
Material Environmental Claim.
(n) Health Care Permits and Approvals. Take all action reasonably
---------------------------------
necessary (i) to maintain in full force and effect all Health Care Permits
reasonably necessary for the lawful conduct of its business or operations
wherever now conducted and as planned to be conducted, including the
ownership and operation of its Health Care Facilities, pursuant to all
applicable laws, of all Governmental Authorities having jurisdiction over
any such Loan Party or over any part of its operations; and (ii) to ensure
that all Health Care Facilities owned, leased, managed or operated by any
Loan Party are entitled to participate in, and receive payment under, the
appropriate Medicare, Medicaid and related reimbursement programs, and any
similar state or local government-sponsored program, to the extent that
such Loan Party has decided to participate in any such program, and to
receive reimbursement from private and commercial payers and health
maintenance organizations to the extent applicable thereto, except (in each
case) where a failure to do so would not have a Material Adverse Effect.
(o) Permitted Acquisitions.
----------------------
(i) Deliver to the Lenders, not less than 10 Business Days
prior to the closing of any proposed Acquisition involving a Purchase
Price of $10,000,000 or more, each of the following: (A) a detailed
description of the property, assets and/or equity interest being
purchased; (B) a term sheet or other description setting forth the
essential terms and the basic structure of the proposed Acquisition
(including, Purchase Price and method and structure of payment; in
this regard, if the Purchase Price includes a note or other right to
payment Borrower shall detail the economic terms thereof and state in
writing the balance sheet amount that will be required to be recorded
in connection with such consideration; if the proposed Acquisition is
approved, the amount of such consideration for purposes of the
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restrictions set forth in Section 5.4(g)(vii) shall be such balance
sheet amount); (C) projected statements of income for the entity that
is being acquired or the entity that would own the assets after they
are acquired for at least a two-year period following such Acquisition
(including a summary of assumptions or pro forma adjustments for such
projections); (D) to the extent made available to Borrower, historical
financial statements for the entity that is being acquired or the
entity that would own the assets after they are acquired (including
balance sheets and statements of income, retained earnings and cash
flows for at least a two-year period prior to such Acquisition); and
(E) confirmation, supported by detailed calculations and approved in
writing by the Required Lenders (which approval shall not be
unreasonably withheld), that Borrower and its Subsidiaries (x) would
have been in compliance with all the covenants in Section 5.1 for each
of the two fiscal quarters ending immediately prior to the
consummation of such Permitted Acquisition, with such compliance
determined on a pro forma basis as if such Permitted Acquisition had
been consummated on the first day of the Reference Period ending on
the last day of the earlier of such two fiscal quarters, and (y) will
have been in compliance with all the covenants in Section 5.1 for the
Reference Period beginning on the first day of the fiscal quarter
during which the consummation of such Permitted Acquisition occurs,
with such compliance determined on a pro forma basis as if such
Permitted Acquisition had been consummated on the first day of such
Reference Period. Borrower agrees that in reviewing such compliance
and the historical financial statements of the Person or Persons being
acquired, Administrative Agent and/or the Required Lenders may require
a review, at the cost of Borrower, by an independent certified public
accountant.
(ii) Deliver to the Lenders, not later than 45 days after
the end of each fiscal quarter of Borrower, the information required
pursuant to clauses (A) and (B) of Section 5.3(o)(i) for each
Permitted Acquisition which was closed during such fiscal quarter and
involves a Purchase Price of at least $3,000,000 but less than
$10,000,000.
(iii) With respect to those Permitted Acquisitions referred
to in clause (ii) above, deliver to the Lenders, not later than 10
days after the closing of a Permitted Acquisition, notice of such
closing.
SECTION 5.4 Negative Covenants of Borrower and Its Subsidiaries. So
---------------------------------------------------
long as any Obligation (other than an Unmatured Surviving Obligation) shall
remain unpaid, any Letter of Credit shall remain outstanding or any Lender shall
have any Commitment hereunder, without the written consent of the Required
Lenders, Borrower will not, and will not cause or permit any Subsidiary of
Borrower (other than an Inactive Subsidiary) to:
(a) Liens. Directly or indirectly (x) make, create, incur, assume or
-----
suffer to exist any Lien upon or with respect to any part of its property
or assets, whether now owned or hereafter acquired, or agree to do so; or
(y) enter into any contract or
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agreement that in any way restricts the ability of Borrower or such
Subsidiary to make, create, incur, assume or suffer to exist any Lien upon
or with respect to any part of its property or assets, whether now owned or
hereafter acquired, other than the following:
(i) any Lien created under any Loan Document;
(ii) any Lien for taxes, fees, assessments or other
governmental charges which are not delinquent and remain payable
without penalty or which are being contested in accordance with the
provisions of Section 5.3(e);
(iii) any carriers', warehousemen's, mechanics', landlords',
materialmen's, repairmen's or other similar Lien arising in the
ordinary course of business, the underlying claim with respect to
which is not delinquent or remains payable without penalty or which is
being contested in accordance with the provisions of Section 5.3(e);
(iv) any Lien (other than a Lien imposed by Environmental
Laws or by ERISA) on the property of Borrower or any of its
Subsidiaries imposed by law, or pledges or deposits required by law
pursuant to worker's compensation, unemployment insurance and other
social security legislation;
(v) any easement, defect, right-of-way, restriction and
other similar encumbrances incurred in the ordinary course of business
that do not interfere in any material respect with the business of the
Loan Party whose asset is subject to such Lien;
(vi) any Lien existing on the property of Borrower or its
Subsidiaries on the Closing Date and set forth in Schedule 5.4(a)
---------------
securing Indebtedness permitted under Section 5.4(b)(ii) and
extensions, renewals, refinancings or replacements thereof; provided
that (A) after giving effect to any extensions, renewals, refinancings
and replacements thereof, (x) the principal amount of the Indebtedness
secured thereby is not increased and (y) the average weighted maturity
of the Indebtedness secured thereby is not decreased, and (B) the Lien
granted pursuant to any such extension, renewal, refinancing or
replacement is limited to the properties and/or assets originally
encumbered thereby;
(vii) any purchase money Lien on assets of Borrower or any
Subsidiary of Borrower securing Indebtedness permitted under Section
5.4(b)(ix) and extensions, renewals, refinancings or replacements
thereof; provided that (A) after giving effect to any extensions,
renewals, refinancings and replacements thereof, (x) the principal
amount of the Indebtedness secured thereby is not increased and (y)
the average weighted maturity of the Indebtedness secured thereby is
not decreased, and (B) the purchase money Lien granted pursuant to any
such extension, renewal, refinancing or replacement is limited to the
properties and/or assets originally encumbered thereby;
89
<PAGE>
(viii) any Lien on assets of any Subsidiary of Borrower
securing Capital Lease Obligations permitted under Section 5.4(b)(v);
(ix) any Lien upon assets of a Subsidiary securing
Indebtedness permitted under Section 5.4(b)(vi), if such Lien was
granted prior to (and not in anticipation of) such Subsidiary becoming
a Subsidiary of Borrower or such assets being sold to a Subsidiary of
Borrower;
(x) Liens on capital stock of Borrower held by Borrower or
any of its Subsidiaries that constitutes Margin Stock, to the extent
the fair market value thereof exceeds 25% of the fair market value of
the assets of Borrower and its Subsidiaries (including such Margin
Stock);
(xi) provisions in pharmaceutical supply agreements now or
hereafter entered into with TeamCare or any of its Affiliates by
Borrower or a Subsidiary of Borrower in the ordinary course of its
business that prohibit the transfer of ownership or control of the
Health Care Facility covered by such agreement to any party that has
not agreed to assume the obligations of Borrower or such Subsidiary,
as the case may be, under such agreement, unless provision has been
made for the payment by Borrower or such Subsidiary, as the case may
be, of damages to TeamCare as compensation for losses over the
remaining term of such agreement; and
(xii) any additional Liens securing obligations in an
aggregate amount outstanding at any time not in excess of $500,000.
(b) Limitation on Indebtedness. Directly or indirectly create,
--------------------------
incur, assume, guarantee, suffer to exist, or otherwise become or remain
directly or indirectly liable with respect to, any Indebtedness, except:
(i) Indebtedness incurred pursuant to the Loan Documents;
(ii) Indebtedness existing on the Closing Date and set forth
in Schedule 5.4(b), in the principal amounts not exceeding the amounts
---------------
set forth thereon, and any extensions, renewals, refinancings and
replacements thereof by the same obligor so long as the principal
amount of such Indebtedness is not increased and the average weighted
maturity of such Indebtedness is not decreased;
(iii) Contingent Obligations permitted pursuant to Section
5.4(c) below;
(iv) any intercompany loan or advance made by Borrower to
any Subsidiary Guarantor or made by any Subsidiary Guarantor to
Borrower or to any other Subsidiary Guarantor if, and only if (A) such
intercompany loan is repayable on demand; (B) with respect to any such
intercompany loan or advance made by Borrower or any Subsidiary
Guarantor to any other Subsidiary Guarantor, such
90
<PAGE>
loan or advance is evidenced by an Intercompany Note from the
Subsidiary Guarantor receiving the loan or advance to Borrower or the
Subsidiary Guarantor making the loan or advance, which is pledged to
and held by Administrative Agent pursuant to the Borrower Pledge and
Security Agreement or the Subsidiary Pledge and Security Agreement, as
applicable; (C) with respect to any such intercompany loan or advance
made by any Subsidiary Guarantor to Borrower and if any such loan or
advance is evidenced by a note or other instrument, such note or
instrument is pledged to and held by Administrative Agent pursuant to
the Subsidiary Pledge and Security Agreement; (D) if such loan or
advance to Borrower is not evidenced by a note or other instrument,
such loan or advance is Collateral under the Subsidiary Pledge and
Security Agreement; and (E) no such loan or advance shall be made to
any Subsidiary Guarantor that is the subject of a proceeding described
in clause (g) of Section 6.1; provided, however, that, in addition to
-------- -------
the foregoing provisions of this clause (iv), any intercompany loan or
advance made to any Subsidiary Guarantor that is an Encumbered
Subsidiary shall be subject to the limitations set forth in Section
5.4(g)(iv);
(v) Capital Lease Obligations of Borrower or any of its
Subsidiaries in an aggregate principal amount at any one time
outstanding not in excess of $7,500,000; provided that each agreement
evidencing such obligations satisfies the following conditions: (A)
it contains no cross-default provisions except to other leases by the
same lessor, (B) it contains no provision that permits acceleration or
modification of such obligation upon a change in the ownership of
Borrower or the Subsidiary responsible for such obligations, and (C)
such obligation is not guaranteed by any Loan Party other than
Borrower;
(vi) Indebtedness of a Subsidiary of Borrower (other than
Capital Lease Obligations permitted under Section 5.4(b)(v)), and any
extensions, renewals, refinancings and replacements thereof, if such
Subsidiary was acquired or formed after the Closing Date and if such
Indebtedness (A) is secured only by the assets of the Subsidiary which
incurred such Indebtedness or purchased property subject to, or by
merger became liable for, such Indebtedness, (B) was initially
incurred by such Subsidiary (or in the case of an asset purchase, such
Subsidiary's transferor) prior to (and not in anticipation of) such
entity becoming a Subsidiary of Borrower or such asset purchase, (C)
contains no cross-default provisions, (D) contains no provision that
permits acceleration or modification of such Indebtedness upon a
change in the ownership of Borrower or the Subsidiary incurring such
Indebtedness, and (E) does not exceed $7,500,000 in aggregate
principal amount at any one time outstanding ("Acquired
--------
Indebtedness");
------------
(vii) unsecured Indebtedness of Borrower ("Subordinated
------------
Debt") subordinated in right and time of payment to the prior payment
----
in full of all Obligations; provided that (A) such Indebtedness shall
--------
not mature, and shall not provide for any scheduled payment of
principal, prior to the first anniversary of the Maturity Date, (B)
the agreements and instruments evidencing or governing such
91
<PAGE>
Indebtedness shall have covenants and undertakings that, taken as a
whole, are materially less restrictive than those contained herein
(and, without limitation of the foregoing, such agreements
and instruments shall not have any financial, affirmative or negative
covenants or events of default that are more restrictive than those
contained in this Agreement), (C) such Indebtedness shall be
subordinated in right and time of payment to the Obligations on terms
and conditions satisfactory in all respects to the Required Lenders,
(D) such Indebtedness shall not bear interest (to the extent payable
only in cash) at a rate exceeding 15% per annum, (E) immediately prior
to and after giving effect to the incurrence of such Indebtedness, no
Default or Event of Default shall have occurred and be continuing, and
(F) Borrower shall have prepared and furnished to Administrative
Agent, prior to the incurrence of such Indebtedness, pro forma
financial statements demonstrating to the satisfaction of the Required
Lenders that Borrower will be in compliance with the financial
covenants in Section 5.1 on a pro forma basis as if such Indebtedness
had been incurred on the first day of the most recently ended
Reference Period for which Borrower shall have delivered financial
statements pursuant to Section 5.2(a) or 5.2(b), together with a
certificate of the chief financial officer of Borrower to such effect;
(viii) unsecured subordinated Indebtedness of Borrower or any
of its Subsidiaries (with each item of such Indebtedness to be on
terms and conditions satisfactory to and separately approved in
writing by Administrative Agent), issued to sellers in connection with
Permitted Acquisitions, in an aggregate amount outstanding at any one
time not in excess of $7,500,000 ("Seller Subordinated Indebtedness");
--------------------------------
(ix) purchase money debt incurred by Borrower or any
Subsidiary of Borrower after the Closing Date for the purpose of
financing Capital Expenditures of Borrower or the Subsidiary incurring
such Indebtedness (and any extensions, renewals, refinancings and
replacements thereof); provided that (A) each initial incurrence of
--------
such Indebtedness satisfies the following conditions: (w) it is
secured only by the assets acquired with the proceeds of such
Indebtedness and by the assets acquired with the proceeds of any other
Purchase Money Indebtedness owed to the same lender or vendor; (x) it
contains no cross-default provisions; (y) it contains no provision
that permits acceleration or modification of such Indebtedness upon a
change in the ownership of Borrower or the Subsidiary incurring such
Indebtedness; and (z) it is not guaranteed by any Loan Party other
than Borrower; and (B) the aggregate outstanding principal amount of
such Indebtedness outstanding at any one time shall not exceed
$2,500,000 ("Purchase Money Indebtedness");
---------------------------
(x) any Approved Hedging Agreement; and
(xi) additional Indebtedness of Borrower in an aggregate
outstanding principal amount outstanding at any one time not in excess
of $5,000,000 (which
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<PAGE>
additional Indebtedness may be incurred separately or in conjunction
with the incurrence, extension, renewal, refinancing or replacement of
any other Indebtedness permitted by this Section 5.4(b)).
(c) Limitation on Contingent Obligations. Directly or indirectly
------------------------------------
create, incur, assume, guarantee, suffer to exist, or otherwise become or remain
or indirectly liable with respect to, any Contingent Obligations, except:
(i) Contingent Obligations incurred pursuant to the Loan
Documents;
(ii) Contingent Obligations existing on the Closing Date and
---------------
set forth in Schedule 5.4(c) and any extensions, renewals,
refinancings and replacements thereof; provided that (x) if such
Contingent Obligation relates to Indebtedness, the extension, renewal,
refinancing or replacement of such Indebtedness is permitted pursuant
to Section 5.4(b); and (y) if such Contingent Obligation does not
relate to Indebtedness, the amount of such Contingent Obligations is
not increased;
(iii) endorsements of checks for collection or deposit in the
ordinary course of business;
(iv) Guaranties by Borrower of lease obligations of any
Subsidiary of Borrower (other than an Encumbered Subsidiary) to the
extent such Subsidiary is permitted to incur such lease obligation
pursuant to the terms of this Agreement;
(v) Guaranties by Borrower or any Subsidiary of Borrower of
any Indebtedness permitted pursuant to Section 5.4(b) other than (x)
Indebtedness of an Encumbered Subsidiary and (y) Indebtedness
permitted pursuant to Section 5.4(b)(ii);
(vi) any Contingent Obligation with respect to obligations
of an Encumbered Subsidiary to the extent, but only to the extent,
that the amount of such Contingent Obligation would be permitted as an
advance to such Encumbered Subsidiary under Section 5.4(g)(iv);
(vii) Contingent Obligations of Borrower under the Merger
Agreement, the Distribution Agreement and the Ancillary Agreements;
and
(viii) additional Contingent Obligations of Borrower or any
Subsidiary of Borrower in an aggregate amount outstanding at any one
time not in excess of $5,000,000.
(d) Restricted Payments. Directly or indirectly (v) declare or
-------------------
make any dividend payment or other distribution of assets, properties,
cash, rights, obligations or securities on account of any shares of any
class of its capital stock, or purchase, redeem or
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<PAGE>
otherwise acquire for value any shares of any class of capital stock or any
warrants, rights or options to acquire any such shares, now or hereafter
outstanding; (w) enter into any agreement restricting the ability of
Borrower or any Subsidiary of Borrower to declare or make any dividend
payment or other distribution of assets, properties, cash, rights,
obligations or securities to its stockholders or to make any loan or
advance to Borrower or another Subsidiary of Borrower; (x) amend or modify
any of the terms of any Subordinated Debt or any Seller Subordinated
Indebtedness in a manner adverse to Borrower, any other Loan Party, any
Agent or any Lender; (y) make, or give any notice in respect of, any
payment, prepayment, defeasance, redemption, purchase, acquisition or
exchange of any Subordinated Debt or any Seller Subordinated Indebtedness;
or (z) forgive any intercompany indebtedness permitted under Section
5.4(b)(iv), except that:
(i) Borrower may declare and make any dividend payments or
other distributions payable solely by Borrower in common stock of
Borrower or in warrants, rights or options to acquire such common
stock;
(ii) any Subsidiary of Borrower may declare and make any
dividend payment or other distribution payable solely to Borrower or
any other Wholly Owned Subsidiary of Borrower that is a Subsidiary
Guarantor;
(iii) Borrower may pay, when due, interest on any
Subordinated Debt or interest or principal on any Seller Subordinated
Indebtedness unless at the time such payment is prohibited or
restricted from being made pursuant to the terms of such Subordinated
Debt or Seller Subordinated Indebtedness, as the case may be;
(iv) Borrower may repurchase, redeem or otherwise acquire
its capital stock in an aggregate amount from and after the Closing
Date not to exceed $35,000,000, provided that (w) no such repurchase,
--------
redemption or other acquisition shall be made until such time as the
aggregate outstanding principal balance of the Term Loans is equal to
or less than $35,000,000, (x) the use of proceeds of any Acquisition
Loans for any such repurchase, redemption or other acquisition shall
be subject to the limitations set forth in Section 5.3(f), (y)
immediately prior to and after giving effect to any such repurchase,
redemption or other acquisition, no Default or Event of Default shall
have occurred and be continuing, and (z) Borrower shall have prepared
and furnished to Administrative Agent and each Lender, prior to such
repurchase, redemption or other acquisition, a written representation
to the effect that Borrower will be in compliance with the financial
covenants in Section 5.1 on a pro forma basis as if such repurchase,
redemption or other acquisition had occurred on the first day of the
most recently ended Reference Period (provided that supporting
--------
calculations need not be furnished together with such representation);
and
(v) Borrower may declare the GCI Dividend on or prior to the
Closing Date and may make the GCI Dividend on the Closing Date.
94
<PAGE>
(e) Consolidation, Merger, Sale of Assets. Wind up, liquidate or
-------------------------------------
dissolve its affairs, or enter into any transaction of merger or
consolidation or to directly or indirectly sell, assign, lease, convey,
transfer or otherwise dispose of (whether in one or a series of
transactions) all or any portion of its assets (including capital stock),
business or property (including accounts and notes receivable (with or
without recourse) and equipment sale-leaseback transactions) or enter into
any agreement to do any of the foregoing except:
(i) any Wholly Owned Subsidiary of Borrower may be merged
or consolidated with or into Borrower or any other Wholly Owned
Subsidiary of Borrower or be liquidated, wound up, or dissolved, or
all or any part of its business, property, or assets may be conveyed,
sold, assigned, leased, transferred, or otherwise disposed of, in one
transaction or a series of transactions, to Borrower or any other
Wholly Owned Subsidiary of Borrower; provided, however, that (x)
-------- -------
Borrower shall give notice to Administrative Agent thereof and cause
any such Subsidiary to comply with Section 5.3(k) to effect and
continue the transactions contemplated by this Agreement and the Loan
Documents; (y) the surviving or transferee entity shall be Borrower or
a Wholly Owned Subsidiary that is a party to the Subsidiary Guaranty
and the Subsidiary Pledge and Security Agreement (provided that, after
--------
giving effect to such transaction, Administrative Agent shall have a
first priority perfected Lien upon and security interest in the assets
of the surviving or transferee entity, unless each of the parties to
such transaction is already an Encumbered Subsidiary); and (z)
immediately after giving effect to any such transaction, there is no
Default or Event of Default that has occurred and is continuing;
(ii) any Asset Sale which is made for at least 75% cash and
for fair market value, if and so long as (A) Borrower makes any
deposit into an Asset Sale Account required pursuant to Section
2.6(b)(i) in connection with such Asset Sale, (B) at the time of and
after giving effect to such Asset Sale there shall not exist any
Default or Event of Default, and (C) the Liens created by the
Collateral Documents remain continuously perfected as to all non-cash
proceeds of such Asset Sale; provided that (x) the maximum aggregate
--------
amount of any such Asset Sales pursuant to this clause (ii) in any
fiscal year shall not exceed $5,000,000, and (y) the amount of
sublease payments made to Borrower and Subsidiaries of Borrower with
respect to subleases entered into in connection with the Asset Sales
under this Section 5.4(e)(ii) shall not exceed $5,000,000 in the
aggregate in any fiscal year;
(iii) any sale or other disposition by Borrower or any of its
Subsidiaries of capital stock of Borrower that constitutes Margin
Stock to the extent the fair market value thereof exceeds 25% of the
fair market value of the assets of Borrower and its Subsidiaries
(including such Margin Stock), provided that fair value is received in
--------
exchange therefor; and
(iv) Permitted Asset Dispositions.
95
<PAGE>
(f) Capital Expenditures. Incur Capital Expenditures during any
--------------------
fiscal year in an amount in excess of 5% of the net revenues of Borrower
and its Subsidiaries for the preceding fiscal year, determined on a
consolidated basis in accordance with GAAP.
(g) Loans and Investments. Directly or indirectly purchase, acquire,
---------------------
carry or maintain (or enter into any binding commitment to purchase,
acquire, carry or maintain) any capital stock, equity interest,
Indebtedness, obligations or other securities of or any interest in, any
Person or any business or assets or make any advance, loan, extension of
credit or capital contribution to or any other investment in any Person
including any Affiliates of Borrower, except for:
(i) investments in cash or Cash Equivalents;
(ii) extensions of credit in the nature of accounts
receivable or notes receivable arising from the sale or lease of goods
or services in the ordinary course of business;
(iii) investments in (x) the capital stock of, or other
equity interests in, Subsidiaries of Borrower identified in Schedule
--------
4.1(e)(i) (other than Encumbered Subsidiaries) on the Closing Date and
---------
(y) the stock of any newly-formed corporation which thereupon becomes
a Wholly Owned Subsidiary of Borrower and which is not an Encumbered
Subsidiary, but only if Borrower complies with the provisions of
Sections 5.3(h), 5.3(i), 5.3(j) and 5.3(k);
(iv) (x) investments on the Closing Date in Encumbered
Subsidiaries; (y) additional investments in Encumbered Subsidiaries
(including, without limitation, advances or contributions of proceeds
of the Loans to Encumbered Subsidiaries) for purposes other than
making Capital Expenditures, in an aggregate amount outstanding
pursuant to this clause (y) not to exceed at any time $20,000,000,
provided that the maximum additional net investments in any single
--------
Encumbered Subsidiary pursuant to this clause (y) shall not exceed
$7,500,000; and (z) additional investments in Encumbered Subsidiaries
(including, without limitation, advances or contributions of proceeds
of the Loans to Encumbered Subsidiaries) solely for the purpose of
making Capital Expenditures, provided that such investments shall be
--------
permitted pursuant to this clause (z) only to the extent that such
Capital Expenditures are permitted under Section 5.4(f); and provided
--------
further that, notwithstanding the foregoing, no investments described
-------
in this Section 5.4(g) may be made in Professional Health Care
Management, Inc. ("PHCM") or its Subsidiaries during the continuance
of any "Nonpayment Period" under, and as defined in, the Intercreditor
Agreement dated as of the date hereof among PHCM and its Subsidiaries,
Borrower, Administrative Agent and Omega Healthcare Investors, Inc.,
as the same may be amended, modified or supplemented from time to
time;
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<PAGE>
(v) investments consisting of intercompany loans permitted
pursuant to Section 5.4(b)(iv);
(vi) investments that are Capital Expenditures, to the
extent and only to the extent such investments are permitted under
Section 5.4(f);
(vii) any Acquisition (in a single transaction or series of
related transactions) of any Person or business, either through the
purchase of the assets (including the goodwill) of such Person or
business or the purchase of 100% of the capital stock of, or 100% of
the partnership or other ownership interests in, such Person or the
owner or operator of such business if each of the following conditions
is satisfied: (v) the business being acquired is within the permitted
business activities described in Section 5.4(h); (w) the requirements
of Section 5.3(o) have been satisfied with respect to such
Acquisition; (x) the Purchase Price paid by Borrower and its
Subsidiaries for any such Acquisition shall not exceed $35,000,000
during each fiscal year of 1997 and 1998, and the Purchase Price paid
by Borrower and its Subsidiaries for any such Acquisition thereafter
shall not exceed $10,000,000; (y) no Default or Event of Default has
occurred and is continuing, or would occur after giving effect to such
Acquisition; and (z) the aggregate Purchase Prices of all such
Acquisitions in any fiscal year shall not exceed the amount opposite
such fiscal year in the following table:
<TABLE>
<CAPTION>
Year Aggregate Amount
---- ----------------
<S> <C>
1997 $50,000,000
1998 $50,000,000
Thereafter $35,000,000
</TABLE>
(all such Acquisitions, the "Permitted Acquisitions"); provided that
---------------------- --------
(A) the permitted aggregate Purchase Prices of all Permitted
Acquisitions during each of fiscal years 1997 and 1998 shall be
increased to $75,000,000 for each such fiscal year upon prepayment of
the Term Loans in an amount such that the aggregate outstanding
principal balance thereof is equal to or less than $35,000,000; (B) in
the event that the Debt Coverage Ratio is less than or equal to 3.75
to 1.00 as of the last day of the fiscal year ending December 31,
1997, then the permitted aggregate Purchase Prices of all Permitted
Acquisitions during fiscal year 1998 shall be increased (in addition
to any increase pursuant to clause (A) above) by an amount equal to
the excess, if any, of the permitted aggregate Purchase Prices of all
Permitted Acquisitions for fiscal year 1997 over the actual aggregate
Purchase Prices of all Permitted Acquisitions actually consummated
during fiscal year 1997; and (C) in the event that the Debt Coverage
Ratio is less than or equal to 3.50 to 1.00 as of the last day of the
fiscal year ending December 31, 1998, then the permitted aggregate
Purchase Prices of all Permitted Acquisitions during fiscal year 1999
shall be increased by an amount equal to the excess, if any, of the
permitted aggregate Purchase Prices of all Permitted Acquisitions for
fiscal year
97
<PAGE>
1998 (calculated, for this purpose, without giving effect to any
carryover of unused amounts from fiscal year 1997 pursuant to clause
(B) above) over the actual aggregate Purchase Prices of all Permitted
Acquisitions actually consummated during fiscal year 1998;
(viii) investments in respect of accounts receivable that
have become delinquent, including securities of the account debtor
received by Borrower or its Subsidiaries in connection with a plan of
reorganization of the indebtedness of such account debtor;
(ix) making and owning loans or advances to any officers or
employees of Borrower or any of its Subsidiaries for reasonable travel
and business expenses in the ordinary course of business, in an
aggregate amount not to exceed at any time $2,000,000;
(x) non-cash proceeds received by Borrower or any
Subsidiary of Borrower in connection with the Asset Sales permitted
pursuant to Section 5.4(e)(ii), in an amount outstanding not to exceed
at any time $5,000,000;
(xi) investments by GCI Indemnity in the ordinary course of
business and consistent with its past practices;
(xii) loans and investments in existence on the Closing
Date and set forth in Schedule 5.4(g); and
---------------
(xiii) other investments by Borrower or any other Subsidiary
of Borrower (other than GCI Indemnity), in an aggregate amount not to
exceed at any time $5,000,000.
(h) Conduct of Business. Engage in any business other than the
-------------------
business described in Section 4.1(r), together with any business or
activities substantially similar thereto. Borrower will not cause or
permit GCI Indemnity to engage in any business other than risk management
business with respect to Borrower and its Subsidiaries.
(i) Transactions With Affiliates. Other than the Distribution
----------------------------
Agreement as in effect on the Closing Date, enter or agree to enter into
any transaction with any Affiliate of Borrower except in the ordinary
course of business and upon terms no less favorable to Borrower or such
Subsidiary than Borrower or such Subsidiary would obtain in a comparable
arm's-length transaction with a Person not an Affiliate.
(j) Compliance With ERISA. Permit directly or indirectly or permit
---------------------
any ERISA Affiliate directly or indirectly:
(i) to terminate any Plan subject to Title IV of ERISA so
as to result in liability to Borrower or any ERISA Affiliate;
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<PAGE>
(ii) to permit to exist any ERISA Event;
(iii) to make a complete or partial withdrawal (within the
meaning of ERISA Section 4201) from any Multiemployer Plan so as to
result in liability to Borrower or any ERISA Affiliate that would be
reasonably likely to have a Material Adverse Effect; and
(iv) permit any one or more Plans, individually or in the
aggregate, to have Unfunded Pension Liabilities (using the actuarial
assumptions utilized by the PBGC) in excess of $1,000,000 in the
aggregate for all such Plans.
(k) Amendments to Corporate Documents. Amend, modify or otherwise
---------------------------------
change in any material respect (i) the certificate or articles of
incorporation, bylaws or other organizational document of Borrower or any
other Loan Party, except to the extent such amendment, modification or
change could not reasonably be expected to affect the Lenders adversely, or
(ii) the Merger Agreement, the Distribution Agreement or any of the
Ancillary Agreements.
(l) Compliance With Environmental Laws. Fail to comply in all
----------------------------------
material respects with all applicable Environmental Laws and Environmental
Permits; fail to obtain all material applicable Environmental Permits
necessary for its operations; or permit to exist any conditions or
circumstances which could reasonably be expected to give rise to any
Material Environmental Claim arising from the operations of Borrower or its
Subsidiaries.
(m) Health Care Permits and Approvals. Engage in any activity that
---------------------------------
(i) constitutes or, with the passage of time, notice or both, would result
in a material default under or violation of, any such Health Care Permit
necessary for the lawful conduct of its business or operations; or (ii)
constitutes or, with the passage of time, notice or both, would result in
the loss by any Health Care Facility owned, leased, managed or operated by
any Loan Party of the right to participate in, and receive payment under,
the appropriate Medicare, Medicaid and related reimbursement programs, and
any similar state or local government-sponsored program, to the extent that
such Loan Party has decided to participate in any such program, and to
receive reimbursement from private and commercial payers and health
maintenance organizations to the extent applicable thereto; in each case
except where the loss of such Health Care Permit or rights to participate
in or receive payments under such programs would not have a Material
Adverse Effect.
(n) Lease Agreement. Enter into any lease (other than a Capital
---------------
Lease) that (i) contains any cross-default provisions except to other
leases by the same lessor; (ii) contains any provision that permits
acceleration or modification of such obligation upon a change in the
ownership of Borrower or the Subsidiary responsible for such obligations,
except any provision requiring a consent that may not unreasonably be
99
<PAGE>
withheld and that is deemed granted unless denied within a reasonable time
with a statement of reasons; or (iii) is guaranteed by any Loan Party other
than Borrower.
(o) Accounting Changes. Permit any change in the fiscal year of
------------------
Borrower or in any of the accounting procedures maintained by Borrower as
of the Closing Date (other than changes required as a result of a change in
GAAP).
(p) Transfer of Collateral to HRPT. Notwithstanding anything to the
------------------------------
contrary in the HRPT Intercreditor Agreement, directly or indirectly
transfer, or enter into any agreement to transfer, any Collateral
(including Collateral subject to a prior Lien in favor of HRPT or any
Affiliate of HRPT, but excluding the proceeds, if any, drawn by Vitalink
under any Letter of Credit issued pursuant to this Agreement) to HRPT or
any Affiliate, assignee or designee of HRPT without the prior written
consent of the Supermajority Lenders.
(q) Tax Matters. Notwithstanding any other provision of this
-----------
Agreement or any of the other Loan Documents:
(i) Take or omit to take any action that would constitute,
or would be deemed pursuant to the Tax Allocation Agreement to
constitute, a "GCI Properties Tainting Act" (as such term is defined
in the Tax Allocation Agreement); or
(ii) At any time during which a Default or Event of Default
shall have occurred and be continuing, directly or indirectly make any
payment or distribution in excess of $1,000,000 of or on account of
liability for "Restructuring Taxes" (as such term is defined in the
Tax Allocation Agreement) to or for the benefit of Vitalink pursuant
to the Tax Allocation Agreement or make any other payment or
distribution in excess of $1,000,000 to or for the benefit of Vitalink
arising from the failure of the restructuring transactions
contemplated by the Distribution Agreement to qualify as a "tax-free"
reorganization and distribution within the meaning of Sections
368(a)(1)(D) and 355 of the Code or otherwise as "tax-free" under the
Code.
ARTICLE VI
EVENTS OF DEFAULT
SECTION 6.1 Events of Default. If any of the following events (each
-----------------
such occurrence an "Event of Default," and collectively, the "Events of
---------------- ---------
Default") shall occur:
(a) Non-Payment of Principal. Borrower shall fail to pay any principal
------------------------
of any Loan or Reimbursement Obligation when the same becomes due and
payable;
(b) Non-Payment of Other Amounts. Borrower or any other Loan Party
----------------------------
shall fail to pay any interest on any Loan or Reimbursement Obligation or
any other amount
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payable under this Agreement or any other Loan Document (other than the
principal described in Section 6.1(a)) within three (3) Business Days after
such amount is due and payable;
(c) Representations and Warranties. Any representation or warranty
------------------------------
made by any Loan Party under or in connection with any Loan Document shall
prove to have been incorrect in any material respect when made;
(d) Financial and Negative Covenants. Borrower shall fail to perform
--------------------------------
or observe any term, covenant or agreement contained in Sections 5.1,
5.2(f) or 5.4 of this Agreement;
(e) Reporting and Affirmative Covenants. Borrower shall fail to
-----------------------------------
perform or observe any term, covenant or agreement contained in Sections
5.2 (other than 5.2(f)), 5.3(c), 5.3(h), 5.3(i), 5.3(j) or 5.3(l) if such
failure shall remain unremedied for five (5) days after such failure;
(f) Other Covenants. Borrower or any Loan Party shall fail to perform
---------------
or observe any term, covenant or agreement contained in the Agreement or
any other Loan Document (other than a default under subsection (a), (b),
(c), (d) or (e) of this Section 6.1) if such failure shall remain
unremedied for 30 days after the earlier of (i) the date Borrower or such
Loan Party obtains knowledge of such failure or (ii) the date Borrower
receives notice from Administrative Agent or any Lender of such failure;
(g) Bankruptcy. Borrower or any other Loan Party shall generally not
----------
pay its debts as such debts become due, or shall admit in writing its
inability to pay its debts generally, or shall make a general assignment
for the benefit of creditors; or any proceeding shall be instituted by or
against any Loan Party seeking to adjudicate it a bankrupt or insolvent, or
seeking liquidation, winding up, reorganization, arrangement, adjustment,
protection, relief, or composition of it or its debts under any law
relating to bankruptcy, insolvency or reorganization or relief of debtors,
or seeking the entry of an order for relief or the appointment of a
receiver, trustee, custodian or other similar official for it or for any
substantial part of its property and, in the case of any such proceeding
instituted against it (but not instituted by it), either (i) such
proceeding shall remain undismissed or unstayed for a period of 60 days; or
(ii) any of the actions sought in such proceeding (including the entry of
an order for relief against, or the appointment of a receiver, trustee,
custodian or other similar official for, it or for any substantial part of
its property) shall occur; or any Loan Party shall take any corporate
action to authorize any of the actions set forth above in this subsection
(g);
(h) Judgments. Any judgment or order for the payment of money in
---------
excess of $1,000,000 (net of amounts indefeasibly paid at the time of
judgment by persons
who are not Loan Parties) shall be rendered against any Loan Party and
either (i) enforcement proceedings shall have been commenced by any
creditor upon such judgment or order and not stayed for any period of 30
consecutive days; or (ii) there shall be any period of 30
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consecutive days during which a stay of enforcement of such judgment or
order, by reason of a pending appeal or otherwise, shall not be in effect;
(i) Loan Documents. Any Loan Document shall cease to be in full
--------------
force and effect after delivery thereof, or any Loan Party shall so state
in writing;
(j) Collateral Documents. Any of the Collateral Documents, after
--------------------
delivery thereof pursuant to Sections 3.1, 5.3(h) or 5.3(j) or any other
provision of any of the Loan Documents, shall for any reason (other than
pursuant to the terms thereof) cease to create a valid and enforceable
security interest in, or the Lien created thereby shall not be duly
perfected as to, any Collateral purported to be covered thereby having a
value, in the aggregate, of $1,000,000 or more;
(k) ERISA. (i) Borrower or any ERISA Affiliate shall fail to pay
-----
when due, after the expiration of any applicable grace period, any
installment payment with respect to its withdrawal liability under a
Multiemployer Plan; (ii) Borrower or any ERISA Affiliate shall fail to
satisfy its contribution requirements under Section 412(c)(11) of the Code,
whether or not it has sought a waiver under Section 412(d) of the Code;
(iii) the occurrence of an ERISA Event involving the withdrawal by Borrower
or any ERISA Affiliate from a Plan with respect to which it is a
"substantial employer" (as defined in Section 4001(a)(2) or Section 4062(e)
of ERISA); (iv) the occurrence of the complete or partial withdrawal from a
Multiemployer Plan by Borrower or any ERISA Affiliate; (v) there shall
exist any Unfunded Pension Liabilities; or (vi) a Plan that is intended to
be qualified under Section 401(a) of the Code shall lose its qualification;
in each case under clauses (i) through (vi) above, where such event,
occurrence or failure has a Material Adverse Effect;
(l) Environmental. Any Material Environmental Claim shall become
-------------
payable by Borrower or any of its Subsidiaries and shall not have been paid
within 30 days, unless enforcement thereof is effectively stayed and such
Material Environmental Claim does not have a Material Adverse Effect; or
Borrower or any of its Subsidiaries shall fail to maintain, or to comply
with the conditions of, any Environmental Permit necessary for the conduct
of its business, if such failure has or could reasonably be expected to
have a Material Adverse Effect;
(m) Indebtedness. Borrower or any of its Subsidiaries shall fail to
------------
pay when due any principal of or premium or interest on Indebtedness which
has an aggregate outstanding principal amount of $2,500,000 individually or
$5,000,000 in the aggregate; or any breach, default or event of default
shall occur and any applicable grace period shall have passed, or any event
shall occur or condition exist, under any Indebtedness which has an
aggregate outstanding principal amount of $2,500,000
individually or $5,000,000 in the aggregate if the effect thereof is to
accelerate or permit the holder or holders of such Indebtedness to
accelerate the maturity thereof;
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(n) Tax Matters. (i) Borrower or any of its Subsidiaries shall have
-----------
been determined, by order of any court of competent jurisdiction that
either is final and unappealable or is not stayed pending appeal (or
Borrower or any of its Subsidiaries shall have agreed in a written
settlement agreement or similar agreement), to be liable, pursuant to the
Tax Allocation Agreement or otherwise, for the payment of Restructuring
Taxes (as such term is defined in the Tax Allocation Agreement) in excess
of $1,000,000 or otherwise for tax liabilities in excess of $1,000,000
resulting from the failure of the restructuring transactions contemplated
by the Distribution Agreement to qualify as a "tax-free" reorganization and
distribution within the meaning of Sections 368(a)(1)(D) and 355 of the
Code or otherwise as "tax-free" under the Code; or (ii) Borrower shall make
any payment or series of payments in an amount in excess of $1,000,000 in
respect of Restructuring Taxes or any such other tax liabilities;
(o) Material Leases. (i) Any breach, default or event of default
---------------
shall occur, or any event shall occur or condition exist, under any
Material Lease of Borrower or any Subsidiary of Borrower if the effect
thereof is to terminate, or permit the other party to such Material Lease
to terminate, such Material Lease; (ii) any Material Lease of Borrower or
any Subsidiary of Borrower shall be terminated by the lessor thereof (other
than as a result of the expiration of the term of such Material Lease); or
(o) Change of Control. There shall occur a Change of Control,
-----------------
then, and in any such event, Administrative Agent (x) shall at the request, or
may with the consent, of the Required Lenders, by notice to Borrower, declare
the obligation of each Lender to make Loans, Swing Line Lender to make Swing
Line Loans and the obligation of LC Bank to issue Letters of Credit to be
terminated, whereupon the same shall forthwith terminate; and (y) shall at the
request, or may with the consent, of the Required Lenders, by notice to
Borrower, declare the Loans, all interest thereon and all other amounts payable
under any Loan Document to be forthwith due and payable, whereupon the Loans,
all such interest and all such amounts shall become and be forthwith due and
payable (without presentment, demand, protest or further notice of any kind, all
of which are hereby expressly waived by Borrower) and the Maximum LC Amount
shall be reduced to zero; provided, however, that in the event of an Event of
Default with respect to Borrower under Section 6.1(g), (A) the obligation of
each Lender to make Loans, Swing Line Lender to make Swing Line Loans and the LC
Bank to issue Letters of Credit shall automatically be terminated and (B) the
Loans, all such interest and all such amounts shall automatically become and be
due and payable (without presentment, demand, protest or any notice of any kind,
all of which are hereby expressly waived by Borrower) and the Maximum LC Amount
shall be reduced to zero.
ARTICLE VII
AGENTS
SECTION 7.1 Appointment. Each Lender hereby irrevocably appoints and
-----------
authorizes each Agent to take such actions as agent on its behalf hereunder and
under the other
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Loan Documents, and to exercise such powers and to perform such duties, as are
specifically delegated to it by the terms hereof or thereof, together with such
other powers and duties as are reasonably incidental thereto.
SECTION 7.2 Nature of Duties. Neither of the Agents shall have any
----------------
duties or responsibilities other than those expressly set forth in this
Agreement and the other Loan Documents. Neither of the Agents shall have, by
reason of this Agreement or any other Loan Document, a fiduciary relationship in
respect of any Lender; and nothing in this Agreement or any other Loan Document,
express or implied, is intended to or shall be so construed as to impose upon
either of the Agents any obligations or liabilities in respect of this Agreement
or any other Loan Document except as expressly set forth herein or therein.
Each Agent may execute any of its duties under this Agreement or any other Loan
Document by or through agents or attorneys-in-fact and shall not be responsible
for the negligence or misconduct of any agents or attorneys-in-fact that it
selects with reasonable care. Each Agent shall be entitled to consult with
legal counsel, independent public accountants and other experts selected by it
with respect to all matters pertaining to this Agreement and the other Loan
Documents and its duties hereunder and thereunder and shall not be liable for
any action taken or omitted to be taken in good faith by it in accordance with
the advice of such counsel, accountants or experts. The Lenders hereby
acknowledge that neither of the Agents shall be under any duty to take any
discretionary action permitted to be taken by it pursuant to the provisions of
this Agreement or any other Loan Document unless it shall be requested in
writing to do so by the Required Lenders (or, where a higher percentage of the
Lenders is expressly required hereunder, such Lenders).
SECTION 7.3 Exculpatory Provisions. Neither of the Agents nor any of
----------------------
their respective officers, directors, employees, agents, attorneys-in-fact or
Affiliates shall be (i) liable for any action taken or omitted to be taken by it
or such Person under or in connection with the Loan Documents, except for its or
such Person's own gross negligence or willful misconduct, (ii) responsible in
any manner to any Lender for any recitals, statements, information,
representations or warranties herein or in any other Loan Document or in any
document, instrument, certificate, report or other writing delivered in
connection herewith or therewith, for the execution, effectiveness, genuineness,
validity, enforceability or sufficiency of this Agreement or any other Loan
Document, or for the financial condition of Borrower, its Subsidiaries or any
other Person, or (iii) required to ascertain or make any inquiry concerning the
performance or observance of any of the terms, provisions or conditions of this
Agreement or any other Loan Document or the existence or possible existence of
any Default or Event of Default, or to inspect the properties, books or records
of Borrower or any of its Subsidiaries.
SECTION 7.4 Reliance by Agents. Each Agent shall be entitled to rely,
------------------
and shall be fully protected in relying, upon any notice, statement, consent or
other communication (including, without limitation, any thereof by telephone,
telecopy, telex, telegram or cable) believed by it in good faith to be genuine
and correct and to have been signed, sent or made by the proper Person or
Persons. Administrative Agent may deem and treat each Lender as the owner of
its interest hereunder for all purposes hereof unless and until a written notice
of the assignment, negotiation or transfer thereof shall have been given to
Administrative Agent in accordance with the provisions of this Agreement. Each
Agent shall be entitled to refrain from taking or omitting
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to take any action in connection with this Agreement or any other Loan Document
(i) if such action or omission would, in the reasonable opinion of such Agent,
violate any applicable law or any provision of this Agreement or any other Loan
Document or (ii) unless and until it shall have received such advice or
concurrence of the Required Lenders (or, where a higher percentage of the
Lenders is expressly required hereunder, such Lenders) as it deems appropriate
or it shall first have been indemnified to its satisfaction by the Lenders
against any and all liability and expense (other than liability and expense
arising from its own gross negligence or willful misconduct) that may be
incurred by it by reason of taking, continuing to take or omitting to take any
such action. Without limiting the foregoing, no Lender shall have any right of
action whatsoever against either of the Agents as a result of such Agent's
acting or refraining from acting hereunder or under any other Loan Document in
accordance with the instructions of the Required Lenders (or, where a higher
percentage of the Lenders is expressly required hereunder, such Lenders), and
such instructions and any action taken or failure to act pursuant thereto shall
be binding upon all of the Lenders (including all subsequent Lenders).
SECTION 7.5 Non-Reliance on Agents and Other Lenders. Each Lender
----------------------------------------
expressly acknowledges that neither of the Agents nor any of their respective
officers, directors, employees, agents, attorneys-in-fact or Affiliates has made
any representation or warranty to it and that no act by either of the Agents or
any such Person hereafter taken, including any review of the affairs of Borrower
and its Subsidiaries, shall be deemed to constitute any representation or
warranty by either of the Agents to any Lender. Each Lender represents to the
Agents that (i) it has, independently and without reliance upon either of the
Agents or any other Lender and based on such documents and information as it has
deemed appropriate, made its own appraisal of and investigation into the
business, prospects, operations, properties, financial and other condition and
creditworthiness of Borrower and its Subsidiaries and made its own decision to
enter into this Agreement and extend credit to Borrower hereunder, and (ii) it
will, independently and without reliance upon either of the Agents or any other
Lender and based on such documents and information as it shall deem appropriate
at the time, continue to make its own credit analysis, appraisals and decisions
in taking or not taking action hereunder and under the other Loan Documents and
to make such investigation as it deems necessary to inform itself as to the
business, prospects, operations, properties, financial and other condition and
creditworthiness of Borrower and its Subsidiaries. Except as expressly provided
in this Agreement and the other Loan Documents, neither of the Agents shall have
any duty or responsibility, either initially or on a continuing basis, to
provide any Lender with any credit or other information concerning the business,
prospects, operations, properties, financial or other condition or
creditworthiness of Borrower, its Subsidiaries or any other Person that may at
any time come into the possession of such Agent or any of its officers,
directors, employees, agents, attorneys-in-fact or Affiliates.
SECTION 7.6 Notice of Default. Administrative Agent shall not be
-----------------
deemed to have knowledge or notice of the occurrence of any Default or Event of
Default (except with respect to defaults in the payment of principal, interest
and fees required to be paid to Administrative Agent for the account of the
Lenders) unless Administrative Agent shall have received written notice from
Borrower or a Lender referring to this Agreement, describing such Default or
Event of Default and stating that such notice is a "notice of default." In the
event that Administrative Agent receives such a notice, Administrative Agent
will give notice thereof to the
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Lenders as soon as reasonably practicable; provided, however, that if any such
-------- -------
notice has also been furnished to the Lenders, Administrative Agent shall have
no obligation to notify the Lenders with respect thereto. Administrative Agent
shall (subject to Sections 7.4 and 8.1) take such action with respect to such
Default or Event of Default as shall reasonably be directed by the Required
Lenders; provided that, unless and until Administrative Agent shall have
--------
received such directions, Administrative Agent may (but shall not be obligated
to) take such action, or refrain from taking such action, with respect to such
Default or Event of Default as it shall deem advisable in the best interests of
the Lenders.
SECTION 7.7 Indemnification. To the extent the Agents are not
---------------
reimbursed by or on behalf of Borrower, and without limiting the obligation of
Borrower to do so, the Lenders agree (i) to indemnify each of the Agents and
their respective officers, directors, employees, agents, attorneys-in-fact and
Affiliates, ratably according to their respective Pro Rata Portions of the
Commitments, from and against any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses (including,
without limitation, attorneys' fees and expenses) or disbursements of any kind
or nature whatsoever that may at any time (including at any time following the
repayment in full of the Loans and the termination of the Commitments) be
imposed on, incurred by or asserted against such Agent or such other Person in
any way relating to or arising out of this Agreement or any other Loan Document
or any documents contemplated by or referred to herein or the transactions
contemplated hereby or thereby or any action taken or omitted by such Agent or
such other Person under or in connection with any of the foregoing, and (ii) to
reimburse the Agents upon demand, ratably according to their respective Pro Rata
Portions of the Commitments, for any expenses incurred by the Agents in
connection with the preparation, negotiation, execution, delivery,
administration, amendment, modification, waiver or enforcement (whether through
negotiations, legal proceedings or otherwise) of, or legal advice in respect of
rights or responsibilities under, this Agreement or any of the other Loan
Documents (including, without limitation, reasonable attorneys' fees and
expenses and compensation of agents and employees paid for services rendered on
behalf of the Lenders); provided, however, that no Lender shall be liable for
-------- -------
any portion of such liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements to the extent
resulting from the gross negligence or willful misconduct of the party to be
indemnified.
SECTION 7.8 The Agents in their Individual Capacity. With respect to
---------------------------------------
its Commitments, the Loans made by it, the Letters of Credit (if any) issued by
it and the Note or Notes issued to it, each Agent in its individual capacity and
not as an Agent shall have the same rights and powers under the Loan Documents
as any other Lender and may exercise the same as though it were not performing
the agency duties specified herein; and the terms "Lenders," "Required Lenders,"
"holders of Notes" and any similar terms shall, unless the context clearly
otherwise indicates, include each Agent in its individual capacity. Each Agent
and its Affiliates may accept deposits from, lend money to and generally engage
in any kind of banking, trust, financial advisory or other business with
Borrower, any of its Subsidiaries or any of their respective Affiliates as if
such Agent were not an Agent under this Agreement or performing the agency
duties specified herein, and may accept fees and other consideration from any of
them for services in connection with this Agreement and otherwise without having
to account for the same to the Lenders.
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SECTION 7.9 Successor Agents. Each Agent may resign at any time by
----------------
giving written notice to Borrower and the Lenders and may be removed at any time
with or without cause by the Required Lenders. Upon any such notice of
resignation or removal, the Required Lenders will appoint a successor Agent. If
no successor Agent shall have been so appointed by the Required Lenders and
shall have accepted such appointment within thirty (30) days after the retiring
Agent's giving of notice of resignation or the Required Lenders' removal of the
retiring Agent, then the retiring Agent may, on behalf of the Lenders, appoint a
successor Agent, which shall be a commercial bank organized or licensed under
the laws of the United States of America or any state thereof and having a
combined capital and surplus of at least $250,000,000. Upon the acceptance of
any appointment as Agent by a successor Agent, such successor Agent shall
thereupon succeed to and become vested with all the rights, powers, privileges
and duties of the retiring Agent, and the retiring Agent shall be discharged
from its duties and obligations hereunder and under the other Loan Documents.
After any retiring Agent's resignation as Agent, the provisions of this Article
shall inure to its benefit as to any actions taken or omitted to be taken by it
while it was Agent. If no successor to the retiring Agent has accepted
appointment as Agent by the thirtieth (30th) day following a retiring Agent's
notice of resignation or removal, the retiring Agent's resignation shall
nevertheless thereupon become effective, and the Lenders shall thereafter
perform all of the duties of such Agent hereunder and under the other Loan
Documents until such time, if any, as the Required Lenders appoint a successor
Agent as provided for hereinabove. Notwithstanding anything to the contrary
contained herein, so long as no Event of Default shall be then continuing, each
appointment of a successor Agent hereunder shall require the prior written
approval of Borrower, which approval shall not be unreasonably withheld or
delayed.
SECTION 7.10 Collateral Matters.
------------------
(a) Perfection of Security Interest. Administrative Agent is hereby
-------------------------------
irrevocably authorized (but shall not be obligated), without the necessity
of any notice to or further consent from the Lenders or any other Person,
from time to time to take any action with respect to any Collateral or
Collateral Documents which may be necessary or appropriate to perfect and
keep perfected the Liens created in favor of Administrative Agent pursuant
to the Collateral Documents.
(b) Authority to Release Collateral. Administrative Agent is hereby
-------------------------------
irrevocably authorized at its option and in its discretion (but, except as
provided in Sections 7.10(c) and 7.10(d), shall not be obligated) to
release any Lien created under the Collateral Documents and held by
Administrative Agent (i) when all obligations of the Lenders and LC Bank to
extend credit to Borrower have expired or been terminated, all Letters of
Credit have expired or been discharged, and all principal of and interest
on all Loans and Reimbursement Obligations and all other Secured
Obligations (except any Unmatured Surviving Obligation) then outstanding
have been paid in full and in cash; (ii) constituting property sold or to
be sold or disposed of as part of or in connection with any disposition
permitted hereunder; (iii) constituting property in which Borrower or any
Subsidiary of Borrower owned no interest at the time the Lien was granted
or at any time thereafter; (iv) constituting property leased to Borrower or
any Subsidiary of Borrower under a lease which has expired or been
terminated in a transaction permitted under this Agreement or is
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about to expire and which has not been, and is not intended by Borrower or
such Subsidiary to be, renewed or extended; (v) consisting of an instrument
evidencing Indebtedness or other debt instrument, if the Indebtedness
evidenced thereby has been paid in full; or (vi) as permitted pursuant to
any Collateral Document. Each Lender agrees that it will, if Administrative
Agent or Borrower so requests at any time, confirm in writing
Administrative Agent's authority to release the Collateral or any
particular types or items of Collateral pursuant to this Section 7.10(b).
(c) Release on Sale. If Borrower or any of its Subsidiaries sells or
---------------
disposes of any property or assets in a transaction permitted under this
Agreement, Administrative Agent is hereby authorized to, and upon written
request therefor by Borrower and a reasonable time for Administrative Agent
to act thereon Administrative Agent shall, release (without any recourse,
representation, warranty or liability whatsoever) any Lien created by the
Collateral Documents on such property or assets, but not the proceeds
thereof.
(d) Release on Repayment. Each Lender and LC Bank will, upon request
--------------------
by Administrative Agent or Borrower, confirm in writing (i) the amount
outstanding to such Lender (or, in the case of LC Bank, to LC Bank) for
Loans and Reimbursement Obligations and on all other Secured Obligations
(except any Unmatured Surviving Obligation) then outstanding to it; and
(ii) Administrative Agent's authority to release all Liens created by the
Collateral Documents and held by Administrative Agent when Administrative
Agent receives (A) such amount in cash for account of such Lender (or, in
the case of LC Bank, for account of LC Bank), (B) a written notice from
Borrower terminating all obligations of the Lenders and LC Bank to extend
credit to Borrower, and (C) evidence satisfactory to Administrative Agent
and LC Bank that all Letters of Credit have expired or been discharged. If
Administrative Agent receives such written confirmation from all the
Lenders and from LC Bank and receives cash for their account in the
aggregate amount so specified, together with such notice of termination and
evidence, then Administrative Agent is hereby authorized to, and upon
written request therefor by Borrower and a reasonable time for
Administrative Agent to act thereon Administrative Agent shall, release
(without any recourse, representation, warranty or liability whatsoever)
any and all Liens created by the Collateral Documents and held by
Administrative Agent.
(e) Collateral Documents. Each Lender and LC Bank agree, in respect of
--------------------
the Collateral and Collateral Documents and any and all Liens, rights,
powers, benefits and interests created or conferred thereby and all acts,
omissions, conditions or events related thereto, to the matters set forth
in Article VII of the Borrower Pledge and Security Agreement and all
parallel provisions of each other Collateral Document.
(f) Actions under Third Party Consents. Each Lender and LC Bank hereby
----------------------------------
authorize Administrative Agent to take any and all actions required to be
taken by Administrative Agent pursuant to the provisions of any Third Party
Consent.
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ARTICLE VIII
MISCELLANEOUS
SECTION 8.1 Amendments. No amendment, modification or waiver of any
----------
provision of this Agreement, the Notes or any other Loan Document, or consent to
any departure by Borrower therefrom, shall in any event be effective unless the
same shall be in writing and signed by the Required Lenders, and then the same
shall be effective only in the specific instance and for the specific purpose
for which given; provided, however, that no amendment, modification, waiver or
consent shall:
(a) unless in writing and signed by each Lender directly affected
thereby, (i) reduce the principal of, or interest on, any Loan, or any fees
or other amounts payable hereunder or under any other Loan Document (other
than interest payable pursuant to Section 2.7(c)), or (ii) postpone any
date fixed for any payment of principal of, or interest on, any Loan, or
any fees or other amounts payable hereunder or under any other Loan
Document (other than with respect to interest payable pursuant to Section
2.7(c)); and
(b) unless in writing and signed by all the Lenders, (i) increase the
Commitments of the Lenders or subject the Lenders to any additional
obligations, (ii) change the percentage of the Commitments, or of the
aggregate unpaid principal amount of the Loans, which shall be required for
the Lenders or any of them to take any action hereunder, (iii) amend the
definition of "Required Lenders" or "Supermajority Lenders," (iv) release
all or substantially all of the Collateral, (v) amend Section 2.13 or 2.16,
or (vi) amend this Section 8.1;
and provided, further, that (x) no amendment, modification, waiver or consent
shall, unless in writing and signed by such Agent in addition to the Lenders
required above to take such action, affect the rights or duties of either of the
Agents under this Agreement or any other Loan Document; and (y) no amendment,
modification, waiver or consent shall, unless in writing and signed by LC Bank
in addition to the Lenders required above to take such action, affect the rights
or duties of LC Bank under this Agreement or any other Loan Document. Copies of
each such amendment, modification, waiver or consent shall be delivered by
Borrower to each Lender.
SECTION 8.2 Notices. All notices and other communications provided
-------
for hereunder shall be in writing (including telecopier, telegraphic, telex or
cable communication) and mailed, telecopied, telegraphed, telexed, cabled or
delivered, to
(a) Borrower, at: GranCare, Inc.
One Ravinia Drive, Suite 1500
Atlanta, Georgia 30346
Telephone Number: (770) 393-0199
Telecopy Number: (770) 393-8054
Attention: Mr. Jerry A. Schneider
Executive Vice President
and Chief Financial Officer
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with a copy to: GranCare, Inc.
One Ravinia Drive, Suite 1500
Atlanta, Georgia 30346
Telephone Number: (770) 393-0199
Telecopy Number: (770) 393-8054
Attention: Evrett W. Benton, Esq.
Executive Vice President
and General Counsel
and a copy to: Robert C. Lewinson, Esq.
Powell, Goldstein, Frazer & Murphy
191 Peachtree Street, N.E., 16th Floor
Atlanta, Georgia 30303
Telephone Number: (404) 572-6623
Telecopy Number: (404) 572-6999
(b) any Lender, at: its Domestic Lending Office (or other
address) specified beneath its name on
Schedule I hereto
----------
(c) Syndication
Agent, at: The Chase Manhattan Bank
270 Park Avenue
New York, New York 10017
Telephone Number: (212) 270-2472
Telecopy Number: (212) 270-3279
Attention: Ms. Dawn Lee Lum
Vice President
(d) Administrative
Agent, Swing Line
Lender and LC
Bank at: First Union National Bank of North
Carolina
One First Union Center, 5th Floor
301 South College Street
Charlotte, North Carolina 28288-0735
Telephone Number: (704) 383-6237
Telecopy Number: (704) 383-9144
Attention: Ms. Valerie Cline
Director
Healthcare Finance Group
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with a copy to: First Union National Bank of North
Carolina
One First Union Center, TW-10
301 South College Street
Charlotte, North Carolina 28288-0608
Telephone Number: (704) 383-0281
Telecopy Number: (704) 383-0288
Attention: Syndication Agency Services
and a copy to: Stokely G. Caldwell, Jr., Esq.
Robinson, Bradshaw & Hinson, P.A.
101 North Tryon Street, Suite 1900
Charlotte, North Carolina 28246
Telephone Number: (704) 377-2536
Telecopy Number: (704) 378-4000
or, as to each party, at such other address as shall be designated by such party
in a written notice to the other parties. All such notices and communications
shall, when mailed, telecopied, telegraphed, telexed or cabled, be effective
when deposited in the mails, telecopied, delivered to the telegraph company,
confirmed by telex answerback or delivered to the cable company, respectively,
except that notices and communications to Administrative Agent pursuant to
Articles II or VII shall not be effective until received by Administrative
Agent. Notwithstanding the foregoing, copies of administrative notices (such as
notices of Borrowings, Conversions and continuations) given hereunder and copies
of financial statements and related reports need not be given to attorneys.
SECTION 8.3 No Waiver; Remedies. No failure on the part of any
-------------------
Lender, LC Bank or either of the Agents to exercise, and no delay in exercising,
any right under any Loan Document shall operate as a waiver thereof; nor shall
any single or partial exercise of any such right preclude any other or further
exercise thereof or the exercise of any other right. The rights and remedies
provided for in this Agreement and the other Loan Documents are cumulative and
are not exclusive of any other rights, powers or privileges or remedies provided
by law or in equity, or under any other instrument, document or agreement.
SECTION 8.4 Costs, Expenses and Taxes. Borrower agrees to pay on
-------------------------
demand all costs and expenses of each Agent in connection with the preparation,
execution, delivery, administration, modification and amendment of the Loan
Documents and the other documents to be delivered under the Loan Documents,
including the reasonable fees and out-of-pocket expenses of counsel for each
Agent actually incurred with respect thereto and with respect to advising such
Agent as to its rights and responsibilities under the Loan Documents. Borrower
further agrees to pay on demand all costs and expenses, if any (including
reasonable counsel fees and expenses), actually incurred in connection with the
enforcement by either of the Agents, LC Bank or any Lender (whether through
negotiations, legal proceedings or otherwise) of the Loan Documents and the
other documents to be delivered under the Loan Documents, including reasonable
counsel fees and expenses actually incurred in connection with the enforcement
of
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rights under this Section 8.4. In addition, Borrower shall pay any and all stamp
and other taxes payable or determined to be payable in connection with the
execution, delivery, filing and recording of the Loan Documents and the other
documents to be delivered under the Loan Documents, and agrees to save each
Agent, LC Bank and each Lender harmless from and against any and all liabilities
with respect to or resulting from any delay in paying or omission to pay such
taxes.
SECTION 8.5 Right of Set-off. Upon (a) the occurrence and during the
----------------
continuance of any Event of Default and (b) the making of the request or the
granting of the consent specified by Section 6.1 to authorize Administrative
Agent to declare all Obligations due and payable pursuant to the provisions of
Section 6.1, each Lender is hereby authorized at any time and from time to time,
to the fullest extent permitted by law, to set off and apply any and all
deposits (general or special, time or demand, provisional or final) at any time
held and other indebtedness at any time owing by such Lender or any of its
Affiliates to or for the credit or the account of Borrower against any and all
of the obligations of Borrower now or hereafter existing under any Loan
Document, whether or not such Lender shall have made any demand under this
Agreement or such Note and although such obligations may be unmatured. Each
Lender agrees promptly to notify Borrower after any such set-off and application
made by such Lender, provided that the failure to give such notice shall not
affect the validity of such set-off and application. The rights of each Lender
under this section are in addition to other rights and remedies (including other
rights of set-off) which such Lender may have.
SECTION 8.6 Indemnity.
---------
(a) General Indemnity. Borrower shall pay, indemnify, defend and hold
-----------------
each Lender, LC Bank, each Agent and each of their respective Affiliates,
officers, directors, employees, counsel, agents and attorneys-in-fact (each,
an "Indemnified Person") harmless (to the fullest extent permitted by law)
------------------
from and against any and all claims, demands, suits, actions,
investigations, proceedings and damages, and all reasonable attorney's fees
and disbursements (including allocated costs of internal counsel) and other
costs and expenses actually incurred in connection therewith (as and when
they are incurred and whether or not suit is brought), at any time asserted
against, imposed upon or incurred by any of them in connection with or as a
result of or related to the execution, delivery, enforcement, performance
and administration of this Agreement and any other Loan Documents or the
transactions contemplated herein, and with respect to any investigation,
litigation or proceeding related to this Agreement, any other Loan Document,
any of the Transactions or the Loans or the use of the proceeds thereof
(whether or not any Indemnified Person is a party thereto) and any act,
omission, event or circumstance in any manner related thereto (all the
foregoing, collectively, the "Indemnified Liabilities").
-----------------------
(b) Environmental Indemnity. Borrower shall pay, indemnify, defend and
-----------------------
hold harmless each Indemnified Person, from and against any and all claims,
demands, suits, actions, investigations, proceedings and damages, and all
reasonable attorney's fees and disbursements (including allocated costs of
internal counsel) and other costs and expenses actually incurred in
connection therewith (as and when they are incurred and whether or not
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suit is brought), at any time asserted against, imposed upon or incurred by
any of them in connection with or arising out of any pending or threatened
investigation, litigation or proceeding, or any action taken by any Person,
with respect to any Environmental Claim arising out of or related to any
property or operations of Borrower or any of its Subsidiaries. No action
taken by legal counsel chosen by either of the Agents or any Lender in
defending against any such Environmental Claim shall vitiate or in any way
impair Borrower's obligation and duty hereunder to indemnify and hold
harmless each Agent and each Lender. In no event shall any site visit,
observation, or testing by either of the Agents or any Lender be a
representation that Hazardous Materials are or are not present in, on, or
under the site, or that there has been or shall be compliance with any
Environmental Laws. Neither Borrower nor any other party is entitled to rely
on any site visit, observation, or testing by either of the Agents or any
Lender. Neither of the Agents nor any Lender owes any duty of care to
protect Borrower or any other Person against, or to inform Borrower or any
other Person of, any adverse condition affecting any site or property.
Neither of the Agents nor any Lender has any authority to direct the
response of Borrower or any other Person with regard to conditions that
might reasonably give rise to an Environmental Claim.
(c) Limitation. Borrower shall have no obligation to any Indemnified
----------
Person under this Section 8.6 with respect to any Indemnified Liability or
Environmental Claim that a court of competent jurisdiction finally
determines to have resulted from the gross negligence or willful misconduct
of such Indemnified Person.
SECTION 8.7 Assignments and Participations.
------------------------------
(a) Permitted Assignment. Each Lender may assign to one or more banks
--------------------
or other entities all or a portion of its rights and obligations under this
Agreement (including all or a portion of its Commitments, the Loans owing to
it and the Note or Notes held by it); provided, however, that (i) each such
assignment shall be of a constant, and not a varying, percentage of all of
the assigning Lender's rights and obligations under this Agreement; (ii) if
such assignment is to any party other than an existing Lender, the sum of
(A) the principal amount of the outstanding Loans subject to such assignment
and (B) the amount of the unused Commitments of the assigning Lender being
assigned pursuant to such assignment (in each case, determined as of the
date of the Assignment and Acceptance with respect to such assignment) shall
in no event be less than the lesser of (I) $5,000,000 or (II) the entire
remaining amount of such Lender's outstanding Loans and unused Commitments;
(iii) each such assignment shall be to an Eligible Assignee; (iv) if such
assignment is to any party other than an existing Lender or an Affiliate
thereof, such assignment shall have been consented to by Administrative
Agent and, if no Event of Default has occurred and is continuing, by
Borrower (which consent, in each case, shall not be unreasonably withheld);
and (v) the parties to each such assignment shall execute and deliver to
Administrative Agent, for its acceptance and recording in the Register, an
Assignment and Acceptance, together with any Note or Notes subject to such
assignment and a processing and recordation fee, payable to Administrative
Agent, of $3,000. Upon such execution, delivery, acceptance and recording,
from and after the effective date specified in each Assignment and
Acceptance, (x) the assignee thereunder shall be a party
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hereto and, to the extent that rights and obligations hereunder have been
assigned to it pursuant to such Assignment and Acceptance, have the rights
and obligations of a Lender hereunder; and (y) the Lender assignor
thereunder shall, to the extent that rights and obligations hereunder have
been assigned by it pursuant to such Assignment and Acceptance, relinquish
its rights and be released from its obligations under this Agreement (and,
in the case of an Assignment and Acceptance covering all or the remaining
portion of an assigning Lender's rights and obligations under this
Agreement, such Lender shall cease to be a party hereto).
(b) Effect of Assignment. By executing and delivering an Assignment
--------------------
and Acceptance, the Lender assignor thereunder and the assignee thereunder
confirm to and agree with each other and the other parties hereto as
follows: (i) other than as provided in such Assignment and Acceptance, such
assigning Lender makes no representation or warranty and assumes no
responsibility with respect to any statements, warranties or representations
made in or in connection with this Agreement or the execution, legality,
validity, enforceability, genuineness, sufficiency or value of this
Agreement or any other instrument or document furnished pursuant hereto;
(ii) such assigning Lender makes no representation or warranty and assumes
no responsibility with respect to the financial condition of Borrower or the
performance or observance by Borrower of any of its obligations under this
Agreement or any other instrument or document furnished pursuant hereto;
(iii) such assignee confirms that it has received a copy of this Agreement,
together with copies of the financial statements referred to in Sections
5.2(a) and 5.2(b), and such other documents and information as it has deemed
appropriate to make its own credit analysis and decision to enter into such
Assignment and Acceptance; (iv) such assignee will, independently and
without reliance upon either of the Agents, such assigning Lender or any
other Lender and based on such documents and information as it shall deem
appropriate at this time, continue to make its own credit decisions in
taking or not taking action under this Agreement; (v) such assignee confirms
that it is an Eligible Assignee; (vi) such assignee appoints and authorizes
each of the Agents to take such action as agent on its behalf and to
exercise such powers under this Agreement as are delegated to it by the
terms hereof, together with such powers as are reasonably incidental
thereto; (vii) such assignee agrees that it will perform in accordance with
their terms all of the obligations which by the terms of this Agreement are
required to be performed by it as a Lender; and (viii) Borrower shall not be
required as a result of such assignment to file a registration statement
with the SEC or qualify the Loans or the Notes under the blue sky laws of
any state.
(c) Maintenance of Agreements. Administrative Agent shall maintain at
-------------------------
its address referred to in Section 8.2 a copy of each Assignment and
Acceptance delivered to and accepted by it and a register for the
recordation of the names and addresses of the Lenders and the Commitments
of, and principal amount of the Loans owing to, each Lender from time to
time (the "Register"). The entries in the Register shall be conclusive and
--------
binding for all purposes, absent manifest error, and Borrower, LC Bank, each
Agent and the Lenders may treat each Person whose name is recorded in the
Register as a Lender hereunder for all purposes of this Agreement. The
Register shall be available for inspection
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by Borrower, LC Bank or any Lender at any reasonable time and from time to
time upon reasonable prior notice.
(d) Procedure. Upon its receipt of an Assignment and Acceptance
---------
executed by an assigning Lender and an assignee Lender representing that it
is an Eligible Assignee, together with any Note or Notes subject to such
assignment and the processing and recordation fee referred to in Section
8.7(a), Administrative Agent shall, if such Assignment and Acceptance has
been completed and is in substantially the form of Exhibit E-2 hereto, (i)
-----------
accept such Assignment and Acceptance; (ii) record the information contained
therein in the Register; and (iii) give prompt notice thereof to Borrower.
Within 5 Business Days after its receipt of such notice, Borrower, at its
own expense, shall execute and deliver to Administrative Agent in exchange
for the surrendered Note or Notes a new Note or Notes to the order of such
assignee (and, if the assigning Lender has retained Loans or a Commitment
hereunder, to the order of the assigning Lender) prepared in accordance with
the applicable provisions of Section 2.5 as necessary to reflect, after
giving effect to the assignment, the Commitments (or outstanding Term Loans,
as the case may be) of the assignee and (to the extent of any retained
interests) the assigning Lender. Such new Note or Notes shall be dated the
effective date of such Assignment and Acceptance and shall otherwise be in
substantially the form of Exhibit A-1 or Exhibit A-2 hereto, as applicable.
----------- -----------
(e) Participations.
--------------
(i) Each Lender may sell participations to one or more banks or
other entities (other than direct competitors of Borrower) in all or a
portion of its rights and obligations under this Agreement (including
all or a portion of its Commitments, the Loans owing to it and the Note
or Notes held by it); provided, however, that (A) such Lender's
obligations under this Agreement (including its Commitments to Borrower
hereunder) shall remain unchanged, (B) such Lender shall remain solely
responsible to the other parties hereto for the performance of such
obligations, (C) such Lender shall remain the holder of any such Note
for all purposes of this Agreement, (D) Borrower, LC Bank, each Agent
and the other Lenders shall continue to deal solely and directly with
such Lender in connection with such Lender's rights and obligations
under this Agreement, and (E) if such participation is to any party
other than an existing Lender, the sum of (A) the principal amount of
the outstanding Loans subject to such participation and (B) the unused
amount of the Commitments of the selling Lender being participated
pursuant to such participation (in each case, determined as of the date
of such participation) shall in no event be less than the lesser of (I)
$3,000,000 or (II) the entire remaining amount of such selling Lender's
outstanding Loans and unused Commitments.
(ii) Although any Lender may grant participations in its rights
hereunder, (A) such Lender shall remain a "Lender" for all purposes
hereunder and the participant shall not constitute a "Lender"
hereunder; (B) any such grant of a participation shall not require
Borrower to file a registration statement with the
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SEC or qualify the Loans or the Notes under the blue sky laws of any
state; and (C) no Lender shall grant any participation (other than to
an Affiliate of such Lender) under which the participant shall have
rights to approve any amendment to or modification or waiver of this
Agreement or of any other agreement, instrument, or document executed
in connection herewith, except to the extent such amendment to or
modification or waiver of this Agreement or of any other agreement,
instrument, or document executed in connection herewith would (I)
reduce the principal of, or interest on, any Loan, or any fees or other
amounts payable hereunder or under any other Loan Document, (II)
postpone any date fixed for any payment of principal of, or interest
on, any Loan, or any fees or other amounts payable hereunder or under
any other Loan Document, (III) increase the Commitments of the Lenders,
or (IV) release all or substantially all of the Collateral. In the case
of any participation, the participant shall not have any rights under
this Agreement, the other Loan Documents or any of the other documents
entered into in connection herewith or therewith (the participant's
rights against such Lender in respect of such participation to be those
set forth in the agreement executed by such Lender in favor of the
participant relating thereto) and all amounts payable to any Lender
hereunder shall be determined as if such Lender had not sold such
participation.
(f) Assignment to Federal Reserve Bank. Any Lender may assign any of
----------------------------------
its rights (including, without limitation, rights to payment of principal
and/or interest under the Notes) under this Agreement to any Federal Reserve
Bank without notice to or consent of Borrower or Administrative Agent.
(g) Additional Information. Any Lender may, in connection with any
----------------------
assignment or participation or proposed assignment or participation pursuant
to this Section 8.7, disclose to the assignee or participant or proposed
assignee or participant, any information relating to Borrower furnished to
such Lender by or on behalf of Borrower; provided that, prior to any such
disclosure, the assignee or participant or proposed assignee or participant
shall agree to preserve the confidentiality of any confidential information
relating to Borrower received by it from such Lender.
SECTION 8.8 LC Bank. LC Bank may resign at any time by giving written
-------
notice thereof to Administrative Agent, the Lenders and Borrower and, if no
Letters of Credit or Reimbursement Obligations are outstanding, may be removed
at any time with or without cause by the Required Lenders. Upon any such notice
of resignation or removal, the Required Lenders shall have the right to appoint
a successor LC Bank. If no successor LC Bank shall have been appointed by the
Required Lenders and shall have accepted such appointment within thirty (30)
days after the retiring LC Bank's giving notice of resignation or the Required
Lenders' removal of the retiring LC Bank, then the retiring LC Bank may, on
behalf of the Lenders, appoint a successor LC Bank, which shall be a commercial
bank organized or licensed under the laws of the United States of America or any
state thereof and having a combined capital and surplus of at least $250,000,000
and whose long-term unsecured senior debt rating and short-term unsecured senior
debt rating with any nationally recognized rating agency shall not be less than
the
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corresponding ratings of the retiring LC Bank. Upon, but not prior to, the
acceptance of any appointment as LC Bank hereunder by a successor LC Bank, such
successor LC Bank shall thereupon succeed to and become vested with all the
rights, powers, privileges and duties of the retiring LC Bank, and the retiring
LC Bank shall be discharged from its duties and obligations under this
Agreement; provided that the retiring LC Bank shall retain all rights, powers,
duties and obligations hereunder in respect of any and all Letters of Credit
issued by it and Reimbursement Obligations therefor. Notwithstanding anything
to the contrary contained herein, so long as no Event of Default shall be then
continuing, each appointment of a successor LC Bank hereunder shall require the
prior written approval of Borrower, which approval (assuming the above criteria
for such replacement LC Bank are met) shall not be unreasonably withheld or
delayed.
SECTION 8.9 Binding Effect. This Agreement shall become effective
--------------
when it shall have been executed by Borrower, LC Bank and each Agent and when
Administrative Agent shall have been notified by each Lender that such Lender
has executed it and thereafter shall be binding upon and inure to the benefit of
Borrower, LC Bank, each Agent and each Lender and their respective successors
and assigns, except that Borrower shall not have the right to assign its rights
hereunder or any interest herein without the prior written consent of each of
the Lenders, LC Bank and each Agent.
SECTION 8.10 GOVERNING LAW. THIS AGREEMENT AND THE OTHER LOAN
-------------
DOCUMENTS SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH,
THE INTERNAL LAWS OF THE STATE OF NORTH CAROLINA; PROVIDED THAT EACH LETTER OF
--------
CREDIT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE
LAWS OR RULES DESIGNATED IN SUCH LETTER OF CREDIT OR, IF NO SUCH LAWS OR RULES
ARE DESIGNATED, THE UCP, AND, AS TO MATTERS NOT GOVERNED BY THE UCP, THE
INTERNAL LAWS OF THE STATE OF NORTH CAROLINA. ANY LEGAL ACTION OR PROCEEDING
WITH RESPECT TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS MAY BE BROUGHT
IN THE COURTS OF THE STATE OF NEW YORK OR THE STATE OF NORTH CAROLINA OR OF THE
UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK, OR THE WESTERN DISTRICT OF
NORTH CAROLINA, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF
BORROWER, LC BANK, THE AGENTS AND THE LENDERS CONSENTS, FOR ITSELF AND IN
RESPECT OF ITS PROPERTY, TO THE NONEXCLUSIVE JURISDICTION OF THOSE COURTS. EACH
OF BORROWER, LC BANK, THE AGENTS AND THE LENDERS IRREVOCABLY WAIVES ANY
OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE
GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE
--------------------
BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS
AGREEMENT OR ANY DOCUMENT RELATED HERETO. SERVICE OF ANY SUMMONS, COMPLAINT OR
OTHER PROCESS MAY BE MADE BY ANY MEANS PERMITTED BY NEW YORK OR NORTH CAROLINA
LAW.
SECTION 8.11 Dispute Resolution.
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(a) Arbitration. Upon demand of any party hereto, whether made
-----------
before or after institution of any judicial proceeding (subject, however, to
the proviso at the end of this sentence), any dispute, claim or controversy
arising out of, connected with or relating to this Agreement or any other
Loan Document ("Disputes") between or among Borrower, LC Bank, the Agents
and the Lenders, or any of them, shall be resolved by binding arbitration as
provided herein; provided, however, that no party may demand arbitration in
-------- -------
any judicial proceeding to which it is a party more than 90 days from the
later of (i) its commencement of such proceeding or (ii) the date it is
served with a complaint, counterclaim or third-party claim in such
proceeding. Institution of a judicial proceeding by a party does not waive
the right of that party to demand arbitration hereunder. Disputes may
include, without limitation, tort claims, counterclaims, claims brought as
class actions, claims arising from documents executed in the future, or
claims arising out of or connected with the transactions contemplated by
this Agreement and the other Loan Documents. Arbitration shall be conducted
under and governed by the Commercial Financial Disputes Arbitration Rules
(the "Arbitration Rules") of the American Arbitration Association (the
"AAA"), as in effect from time to time, and Title 9 of the U.S. Code, as
amended. Notwithstanding anything to the contrary, the parties agree that
(i) all document requests in any arbitration proceeding initiated hereunder
shall be governed by Rule 34 of the Federal Rules of Civil Procedure; (ii)
each party to any Dispute submitted to arbitration hereunder shall have the
right to depose up to five witnesses who are not otherwise subject to
subpoena power in connection with such arbitration proceeding (or such
greater number of witnesses as shall be acceptable to the opposing party or
parties in such Dispute) and to use such depositions in such arbitration
proceeding; and (iii) all questions regarding the scope of arbitrability
with respect to any Dispute submitted to arbitration hereunder shall be
resolved by the arbitrator(s). All arbitration hearings shall be conducted
in the city in which the principal office of Administrative Agent is
located. The expedited procedures set forth in Rule 51 et seq. of the
-- ---
Arbitration Rules shall be applicable to claims of less than $100,000. All
applicable statutes of limitation shall apply to any Dispute. A judgment
upon the award may be entered in any court having jurisdiction. The panel
from which all arbitrators are selected shall be comprised of licensed
attorneys. The single arbitrator selected for expedited procedure shall be a
retired judge from the highest court of general jurisdiction, state or
federal, of the state where the hearing will be conducted. Notwithstanding
the foregoing, this arbitration provision does not apply to Disputes under
or related to Hedging Agreements.
(b) Preservation and Limitation of Remedies. Notwithstanding the
---------------------------------------
preceding binding arbitration provisions, the parties hereto agree to
preserve, without diminution, certain remedies that any party hereto may
employ or exercise freely, either alone, in conjunction with or during a
Dispute. Any party hereto shall have the right to proceed in any court of
proper jurisdiction or by self-help to exercise or prosecute the following
remedies, as applicable: (i) all rights to foreclose against any Collateral
by exercising a power of sale granted pursuant to any of the Loan Documents
or under applicable law or by judicial foreclosure and sale, including a
proceeding to confirm the sale; (ii) all rights of self-help, including
peaceful occupation of real property and collection of rents, set-off, and
peaceful possession of personal property; and (iii) obtaining provisional or
ancillary
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remedies, including injunctive relief, sequestration, garnishment,
attachment, appointment of a receiver and filing an involuntary bankruptcy
proceeding. Preservation of these remedies does not limit the power of an
arbitrator to grant similar remedies that may be requested by a party in a
Dispute. Nothing contained in this Section 8.11, however, shall operate or
be construed as a waiver or release by Borrower of any of its rights,
claims, counterclaims or defenses in connection with any Dispute now or
hereafter arising or any attempt by the Agents, LC Bank or the Lenders to
exercise their rights or remedies hereunder or under any other Loan
Document.
SECTION 8.12 Confidentiality. Each Lender agrees that material, non-
---------------
public information regarding Borrower, its Subsidiaries, operations, assets, and
existing and contemplated business plans shall be treated by such Lender in a
confidential manner, and shall not be disclosed by it to Persons who are not
parties to this Agreement, except: (i) to counsel for and other advisors,
accountants, and auditors to such Lender; (ii) as may be required by statute,
decision, or judicial or administrative order, rule, or regulation; (iii) as may
be agreed to in advance by Borrower; (iv) as to any such information that is
generally available to the public; (v) to its Affiliates; and (vi) in connection
with any assignment, prospective assignment, sale, prospective sale,
participation or prospective participation of a Lender's interests hereunder,
provided that any such assignee, prospective assignee, purchaser, prospective
purchaser, participant, or prospective participant shall have agreed in writing
in favor of Borrower to acquire any information regarding Borrower or the other
Loan Parties subject to the terms of this Section 8.12, or shall have entered
into a confidentiality agreement with Borrower or for the benefit of Borrower
substantially upon the terms of this Section 8.12.
SECTION 8.13 Limitation of Liability. No claim may be made by
-----------------------
Borrower, any Subsidiary of Borrower, any Lender, LC Bank, either of the Agents
or any other Person against either of the Agents, LC Bank or any other Lender or
the Affiliates, directors, officers, employees, attorneys or agents of any of
them for any special, indirect, consequential or punitive damages in respect of
any claim for breach of contract or any other theory of liability arising out of
or related to the transactions contemplated by this Agreement (including any
Dispute subject to the provisions of Section 8.11), or any act, omission or
event occurring in connection therewith, and Borrower, each Subsidiary of
Borrower, each Agent, LC Bank and each Lender hereby waives, releases and agrees
not to sue upon any claim for any such damages, whether or not now accrued and
whether or not known or suspected to exist in its favor.
SECTION 8.14 Entire Agreement. This Agreement, together with the
----------------
other Loan Documents, embodies the entire agreement and understanding among
Borrower, the Lenders, LC Bank and the Agents and supersedes all prior or
contemporaneous agreements and understandings of such persons, verbal or
written, relating to the subject matter hereof and thereof and any prior
arrangements (other than the Fee Letter, which shall survive the execution and
delivery of this Agreement) made with respect to the payment by Borrower of (or
any indemnification for) any fees, costs or expenses payable to or incurred (or
to be incurred) by or on behalf of the Agents or LC Bank.
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SECTION 8.15 Execution in Counterparts. This Agreement may be
-------------------------
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute one and the same
agreement.
SECTION 8.16 Survival. All representations, warranties and agreements
--------
made by or on behalf of Borrower or any of its Subsidiaries in this Agreement
and in the other Loan Documents shall survive the execution and delivery hereof
or thereof, the making and repayment of the Loans and the issuance and repayment
of the Letters of Credit. In addition, notwithstanding anything herein or under
applicable law to the contrary, the provisions of this Agreement and the other
Loan Documents relating to indemnification or payment of fees, costs and
expenses, including, without limitation, the provisions of Sections 2.14, 2.16,
2.18, 7.7, 8.4 and 8.6, shall survive the payment in full of all Loans and
Letters of Credit, the termination of the Commitments and all Letters of Credit,
and any termination of this Agreement or any of the other Loan Documents.
SECTION 8.17 Severability. To the extent any provision of this
------------
Agreement is prohibited by or invalid under the applicable law of any
jurisdiction, such provision shall be ineffective only to the extent of such
prohibition or invalidity and only in such jurisdiction, without prohibiting or
invalidating such provision in any other jurisdiction or the remaining
provisions of this Agreement in any jurisdiction.
SECTION 8.18 Construction. The headings of the various articles,
------------
sections and subsections of this Agreement have been inserted for convenience
only and shall not in any way affect the meaning or construction of any of the
provisions hereof. Except as otherwise expressly provided herein and in the
other Loan Documents, in the event of any inconsistency or conflict between any
provision of this Agreement and any provision of any of the other Loan
Documents, the provision of this Agreement shall control.
[The remainder of this page is intentionally left blank.]
120
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Credit
Agreement to be executed by their respective officers thereunto duly authorized,
as of the date first above written.
NEW GRANCARE, INC., a Delaware corporation, as
Borrower
By: ______________________________________
Name: ________________________________
Title: _______________________________
FIRST UNION NATIONAL BANK OF
NORTH CAROLINA, as Administrative Agent, as LC
Bank and as a Lender
By: ______________________________________
Name: ________________________________
Title: _______________________________
THE CHASE MANHATTAN BANK, as Syndication Agent and
as a Lender
By: ______________________________________
Name: ________________________________
Title: _______________________________
(signatures continued)
S-1
<PAGE>
ABN AMRO BANK, N.V., as a Lender
By: ______________________________________
Name: ________________________________
Title: _______________________________
By: ______________________________________
Name: ________________________________
Title: _______________________________
(signatures continued)
S-2
<PAGE>
AMSOUTH BANK OF ALABAMA, as a Lender
By: ______________________________________
Name: ________________________________
Title: _______________________________
(signatures continued)
S-3
<PAGE>
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as a Lender
By: ______________________________________
Name: ________________________________
Title: _______________________________
(signatures continued)
S-4
<PAGE>
BANQUE PARIBAS, as a Lender
By: _____________________________________
Name: _______________________________
Title: ______________________________
By: _____________________________________
Name: _______________________________
Title: ______________________________
(signatures continued)
S-5
<PAGE>
CORESTATES BANK, N.A., as a Lender
By: ______________________________________
Name: ________________________________
Title: _______________________________
(signatures continued)
S-6
<PAGE>
DRESDNER BANK AG, NEW YORK BRANCH AND GRAND CAYMAN
BRANCH, as a Lender
By: ______________________________________
Name: ________________________________
Title: _______________________________
By: ______________________________________
Name: ________________________________
Title: _______________________________
(signatures continued)
S-7
<PAGE>
FIRST AMERICAN NATIONAL BANK, as a Lender
By:_________________________________________
Name:___________________________________
Title:__________________________________
(signatures continued)
S-8
<PAGE>
THE FUJI BANK, LIMITED, ATLANTA AGENCY, as a
Lender
By:_________________________________________
Name:___________________________________
Title:__________________________________
(signatures continued)
S-9
<PAGE>
THE INDUSTRIAL BANK OF JAPAN, LIMITED, as a Lender
By:_________________________________________
Name:___________________________________
Title:__________________________________
(signatures continued)
S-10
<PAGE>
LTCB TRUST COMPANY, as a Lender
By:_________________________________________
Name:___________________________________
Title:__________________________________
(signatures continued)
S-11
<PAGE>
NATIONAL CITY BANK OF INDIANA, as a Lender
By:_________________________________________
Name:___________________________________
Title:__________________________________
(signatures continued)
S-12
<PAGE>
NATIONSBANK, N.A. (SOUTH), as a Lender
By:_________________________________________
Name:___________________________________
Title:__________________________________
(signatures continued)
S-13
<PAGE>
THE NIPPON CREDIT BANK, LTD., as a Lender
By:_________________________________________
Name:___________________________________
Title:__________________________________
(signatures continued)
S-14
<PAGE>
UNION BANK OF CALIFORNIA, N.A., as a Lender
By:_________________________________________
Name:___________________________________
Title:__________________________________
S-15
<PAGE>
SCHEDULE I
LENDERS, COMMITMENTS AND LENDING OFFICES
<TABLE>
<CAPTION>
Revolving Credit Term Loan
Lender Commitment Commitment
- ------ ---------- ----------
<S> <C> <C>
First Union National Bank
of North Carolina $18,333,333.33 $9,166,666.67
Domestic Lending Office:
One First Union Center, 5th Floor
301 South College Street
Charlotte, North Carolina 28288-0735
Attention: Valerie Cline
Telephone: 704/383-6237
Facsimile: 704/383-9144
Eurodollar Lending Office:
One First Union Center, 5th Floor
301 South College Street
Charlotte, North Carolina 28288-0735
Attention: Valerie Cline
Telephone: 704/383-6237
Facsimile: 704/383-9144
The Chase Manhattan Bank $18,333,333.33 $9,166,666.67
Domestic Lending Office:
270 Park Avenue
New York, New York 10017
Attention: Dawn Lee Lum
Telephone: 212/270-2472
Facsimile: 212/270-3279
Eurodollar Lending Office:
270 Park Avenue
New York, New York 10017
Attention: Dawn Lee Lum
Telephone: 212/270-2472
Facsimile: 212/270-3279
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Revolving Credit Term Loan
Lender Commitment Commitment
- ------ ---------- ----------
<S> <C> <C>
ABN Amro Bank, N.V. $10,000,000.00 $5,000,000.00
Domestic Lending Office:
1 Ravinia Drive, Suite 1200
Atlanta, Georgia 30346
Attention: Rodney Carson
Telephone: 770/399-7376
Facsimile: 770/399-7397
Eurodollar Lending Office:
1 Ravinia Drive, Suite 1200
Atlanta, Georgia 30346
Attention: Rodney Carson
Telephone: 770/399-7376
Facsimile: 770/399-7397
AmSouth Bank of Alabama $10,000,000.00 $5,000,000.00
Domestic Lending Office:
1900 5th Avenue, North
AmSouth - SONAT Tower
Birmingham, Alabama 35203
Attention: Mark Housel
Telephone: 205/581-7278
Facsimile: 205/326-4790
Eurodollar Lending Office:
1900 5th Avenue, North
AmSouth - SONAT Tower
Birmingham, Alabama 35203
Attention: Mark Housel
Telephone: 205/581-7278
Facsimile: 205/326-4790
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Revolving Credit Term Loan
Lender Commitment Commitment
- ------ ---------- ----------
<S> <C> <C>
Bank of America National Trust
and Savings Association $15,666,666.67 $7,833,333.33
Domestic Lending Office:
555 South Flower Street
Los Angeles, California 90071
Attention: Randy Strickley
Telephone: 213/228-2953
Facsimile: 213/228-2756
Eurodollar Lending Office:
555 South Flower Street
Los Angeles, California 90071
Attention: Randy Strickley
Telephone: 213/228-2953
Facsimile: 213/228-2756
Banque Paribas $15,666,666.67 $7,833,333.33
Domestic Lending Office:
2029 Century Park East
Los Angeles, California 90067
Attention: Shirley Williams
Telephone: 310/551-7360
Facsimile: 310/553-1504
Eurodollar Lending Office:
2029 Century Park East
Los Angeles, California 90067
Attention: Shirley Williams
Telephone: 310/551-7360
Facsimile: 310/553-1504
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Revolving Credit Term Loan
Lender Commitment Commitment
- ------ ---------- ----------
<S> <C> <C>
CoreStates Bank, N.A. $10,000,000.00 $5,000,000.00
Domestic Lending Office:
Widener Bldg., 1339 Chestnut Street
3rd Floor
Philadelphia, Pennsylvania 19101-7618
Attention: Elizabeth Morris
Telephone: 215/786-7275
Facsimile: 215/973-2738
Eurodollar Lending Office:
Widener Bldg., 1339 Chestnut Street
3rd Floor
Philadelphia, Pennsylvania 19101-7618
Attention: Elizabeth Morris
Telephone: 215/786-7275
Facsimile: 215/973-2738
Dresdner Bank AG, New York Branch
and Grand Cayman Branch $15,666,666.67 $7,833,333.33
Domestic Lending Office:
75 Wall Street
New York, New York 10005-2889
Attention: Andrew Nesi
Telephone: 212/429-2201
Facsimile: 212/429-2780
Eurodollar Lending Office:
75 Wall Street
New York, New York 10005-2889
Attention: Andrew Nesi
Telephone: 212/429-2201
Facsimile: 212/429-2780
</TABLE>
<PAGE>
<TABLE>
Revolving Credit Term Loan
Lender Commitment Commitment
- ------ ---------- ----------
<S> <C> <C>
First American National Bank $8,333,333.33 $4,166,666.67
Domestic Lending Office:
300 Union Street, 2nd Floor
Nashville, Tennessee 37237
Attention: Sandra Hamrick
Telephone: 615/748-2191
Facsimile: 615/748-2812
Eurodollar Lending Office:
300 Union Street, 2nd Floor
Nashville, Tennessee 37237
Attention: Sandra Hamrick
Telephone: 615/748-2191
Facsimile: 615/748-2812
The Fuji Bank, Limited, Atlanta Agency $10,000,000.00 $5,000,000.00
Domestic Lending Office:
Marquis One Tower, Suite 2100
Atlanta, Georgia 30303-1253
Attention: Scott Keller
Telephone: 404/215-3317
Facsimile: 404/652-2119
Eurodollar Lending Office:
Marquis One Tower, Suite 2100
Atlanta, Georgia 30303-1253
Attention: Scott Keller
Telephone: 404/215-3317
Facsimile: 404/652-2119
</TABLE>
<PAGE>
<TABLE>
Revolving Credit Term Loan
Lender Commitment Commitment
- ------ ---------- ----------
<S> <C> <C>
The Industrial Bank of Japan, Limited $10,000,000.00 $5,000,000.00
Domestic Lending Office:
1251 Avenue of the Americas
New York, New York 10020-1104
Attention: James Welch
Telephone: 212/282-3690
Facsimile: 212/282-4490
Eurodollar Lending Office:
1251 Avenue of the Americas
New York, New York 10020-1104
Attention: James Welch
Telephone: 212/282-3690
Facsimile: 212/282-4490
LTCB Trust Company $15,666,666.67 $7,833,333.33
Domestic Lending Office:
165 Broadway
New York, New York 10006
Attention: Edna Astuto
Telephone: 212/335-4565
Facsimile: 212/608-2371
Eurodollar Lending Office:
165 Broadway
New York, New York 10006
Attention: Edna Astuto
Telephone: 212/335-4565
Facsimile: 212/608-2371
Address for notices:
245 Peachtree Center Ave. N.E. Suite 2810
Atlanta, Georgia 30303
Attention: Rebecca Silbert
Telephone: 404/659-7210
Facsimile: 404/658-9751
</TABLE>
<PAGE>
<TABLE>
Revolving Credit Term Loan
Lender Commitment Commitment
- ------ ---------- ----------
<S> <C> <C>
National City Bank of Indiana $10,000,000.00 $5,000,000.00
Domestic Lending Office:
101 West Washington Street
Indianapolis, Indiana 46256
Attention: Michael Stewart
Telephone: 317/267-7494
Facsimile: 317/267-6249
Eurodollar Lending Office:
101 West Washington Street
Indianapolis, Indiana 46256
Attention: Michael Stewart
Telephone: 317/267-7494
Facsimile: 317/267-6249
NationsBank, N.A. (South) $15,666,666.67 $7,833,333.33
Domestic Lending Office:
101 North Tryon Street
Charlotte, North Carolina 28255
Attention: Jacquetta Banks
Telephone: 704/388-1111
Facsimile: 704/386-8694
Eurodollar Lending Office:
101 North Tryon Street
Charlotte, North Carolina 28255
Attention: Jacquetta Banks
Telephone: 704/388-1111
Facsimile: 704/386-8694
Address for notices:
100 North Tryon Street
Charlotte, North Carolina 28255
Attention: Michael A. Crabb, III
Telephone: 704/388-6000
Facsimile: 704/388-6002
</TABLE>
<PAGE>
<TABLE>
Revolving Credit Term Loan
Lender Commitment Commitment
- ------ ---------- ----------
<S> <C> <C>
The Nippon Credit Bank, Ltd. $10,000,000.00 $5,000,000.00
Domestic Lending Office:
245 Park Avenue, 30th Floor
New York, New York 10167
Attention: Yoshihide Watanabe
Telephone: 212/984-1224
Facsimile: 212/490-3895
Eurodollar Lending Office:
245 Park Avenue, 30th Floor
New York, New York 10167
Attention: Yoshihide Watanabe
Telephone: 212/984-1224
Facsimile: 212/490-3895
Union Bank of California, N.A. $6,666,666.66 $3,333,333.34
Domestic Lending Office:
550 South Hope Street, 3rd Floor
Los Angeles, California 90071
Attention: Al Kelley
Telephone: 213/243-3505
Facsimile: 213/243-3552
Eurodollar Lending Office:
550 South Hope Street, 3rd Floor
Los Angeles, California 90071
Attention: Al Kelley
Telephone: 213/243-3505
Facsimile: 213/243-3552
</TABLE>
<PAGE>
EXHIBIT 10.14
FIRST AMENDMENT TO CREDIT AGREEMENT
AND WAIVER
THIS FIRST AMENDMENT TO CREDIT AGREEMENT AND WAIVER, dated as of the 18th
day of April, 1997 (this "Amendment"), is made among GRANCARE, INC., a Delaware
corporation formerly known as New GranCare, Inc. ("Borrower"), the Lenders (as
hereinafter defined) that have executed this Amendment (the "Required Lenders"),
and FIRST UNION NATIONAL BANK OF NORTH CAROLINA, as administrative agent for the
Lenders (in such capacity, "Administrative Agent").
RECITALS
A. Borrower, certain banks and other financial institutions (the
"Lenders"), The Chase Manhattan Bank, as Syndication Agent, and First Union
National Bank of North Carolina, as Administrative Agent and LC Bank, are
parties to a Credit Agreement, dated as of February 12, 1997 (the "Credit
Agreement"), providing for the availability of certain credit facilities to
Borrower upon the terms and conditions set forth therein. Capitalized terms
used herein without definition shall have the meanings given to them in the
Credit Agreement.
B. Borrower is presently negotiating definitive agreements to acquire the
assets of Northport Health Services, Inc., an Alabama corporation ("Northport"),
and certain of its affiliates, as more particularly described in Section 3.1 of
this Amendment.
C. Borrower has requested that the Required Lenders make certain
amendments to the Credit Agreement and approve the Northport Acquisition (as
hereinafter defined), and the Required Lenders have agreed to do so upon the
terms and conditions set forth herein.
STATEMENT OF AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
AMENDMENTS TO CREDIT AGREEMENT
1.1. Definitions. (a) The definition of "Base Rate Margin" is hereby
------------
amended as follows:
<PAGE>
(i) The table set forth therein is hereby amended and restated in its
entirety as follows:
<TABLE>
<CAPTION>
Senior Debt Ratio Base Rate Margin Pricing Level
----------------- ---------------- -------------
<S> <C> <C>
Less than 2.50 0.00% Tier I
Greater than or equal to 0.00% Tier II
2.50 and less than 3.00
Greater than or equal to 0.00% Tier III
3.00 and less than 3.50
Greater than or equal to 0.25% Tier IV
3.50 and less than 4.00
Greater than or equal to 0.50% Tier V
4.00 and less than 4.50
Greater than or equal to 0.75% Tier VI"
4.50
</TABLE>
(ii) The reference to "Tier V" in subclause (i) of clause (y) of
such definition is hereby amended to read "Tier VI."
(b) The definition of "Commitment Fee Margin" is hereby amended as
follows:
(i) The table set forth therein is hereby amended and restated in
its entirety as follows:
<TABLE>
<CAPTION>
"Senior Debt Ratio Commitment Fee Margin Pricing Level
----------------- --------------------- -------------
<S> <C> <C>
Less than 2.50 0.250% Tier I
Greater than or equal to 0.250% Tier II
2.50 and less than 3.00
Greater than or equal to 0.300% Tier III
3.00 and less than 3.50
Greater than or equal to 0.375% Tier IV
3.50 and less than 4.00
</TABLE>
-2-
<PAGE>
<TABLE>
<S> <C> <C>
Greater than or equal to 0.375% Tier V
4.00 and less than 4.50
Greater than or equal to 0.500% Tier VI"
4.50
</TABLE>
(ii) The reference to "Tier V" in subclause (i) of clause (y) of
such definition is hereby amended to read "Tier VI."
(c) The definition of "Eurodollar Rate Margin" is hereby amended as
follows:
(i) The table set forth therein is hereby amended and restated in
its entirety as follows:
<TABLE>
<CAPTION>
"Senior Debt Ratio Eurodollar Rate Margin Pricing Level
----------------- ---------------------- -------------
<S> <C> <C>
Less than 2.50 0.75% Tier I
Greater than or equal to 1.00% Tier II
2.50 and less than 3.00
Greater than or equal to 1.25% Tier III
3.00 and less than 3.50
Greater than or equal to 1.50% Tier IV
3.50 and less than 4.00
Greater than or equal to 1.75% Tier V
4.00 and less than 4.50
Greater than or equal to 2.00% Tier VI"
4.50
</TABLE>
(ii) The reference to "Tier V" in subclause (i) of clause (y) of
such definition is hereby amended to read "Tier VI."
(d) The number "$40,000,000" contained in the definition of "Maximum LC
Amount" is hereby changed to "$90,000,000."
1.2. Prepayments from Debt Issuance. SECTION 2.6(B)(II) of the Credit
------------------------------
Agreement is hereby amended by deleting the third sentence thereof in its
entirety, including the proviso and clauses (v) through (z) therein.
-3-
<PAGE>
1.3. Leverage Ratio. SECTION 5.1(A) of the Credit Agreement is hereby
--------------
amended and restated in its entirety as follows:
"(a) Maximum Leverage Ratio. Maintain a Leverage Ratio, determined
----------------------
as of the last day of each fiscal quarter, at an amount not greater than
the amount set forth in the following table for the applicable period:
<TABLE>
<CAPTION>
Maximum
Quarter Ended During Period Leverage Ratio
--------------------------- --------------
<S> <C>
Closing Date through December 31, 1997 75.0%
January 1, 1998 through June 30, 1998 72.5%
July 1, 1998 through December 31, 1998 70.0%
January 1, 1999 through June 30, 1999 70.0%
July 1, 1999 through December 31, 1999 67.5%
January 1, 2000 through December 31, 2000 65.0%
Thereafter 60.0%"
</TABLE>
1.4. Debt Coverage Ratio. SECTION 5.1(C) of the Credit Agreement is hereby
-------------------
amended and restated in its entirety as follows:
"(c) Maximum Debt Coverage Ratio. Maintain a Debt Coverage Ratio,
---------------------------
determined as of the last day of each fiscal quarter, at an amount not
greater than the amount set forth in the following table for the applicable
period:
<TABLE>
<CAPTION>
Maximum Debt
Quarter Ended During Period Coverage Ratio
--------------------------- --------------
<S> <C>
Closing Date through December 31, 1997 5.25
January 1, 1998 through December 31, 1998 4.50
January 1, 1999 through December 31, 1999 4.25
January 1, 2000 through December 31, 2000 4.00
Thereafter 3.75"
</TABLE>
1.5. Senior Debt Coverage Ratio. SECTION 5.1 of the Credit Agreement is
--------------------------
hereby amended by adding the following as a new subsection (e) thereof:
"(e) Maximum Senior Debt Ratio. Maintain a Senior Debt Ratio,
-------------------------
determined as of the last day of each fiscal quarter, at an amount not
greater than the amount set forth in the following table for the applicable
period:
-4-
<PAGE>
<TABLE>
<CAPTION>
Maximum Senior
Quarter Ended During Period Debt Ratio
--------------------------- ----------
<S> <C>
September 30, 1997 through December 31, 1997 3.50
January 1, 1998 through December 31, 1998 3.25
January 1, 1999 through December 31, 1999 2.75
January 1, 2000 through December 31, 2000 2.50
Thereafter 2.50"
</TABLE>
1.6. Distributions. (a) Clause (y) of SECTION 5.3(F) of the Credit
-------------
Agreement is hereby amended and restated in its entirety as follows:
"(y) the Acquisition Loans made after the Closing Date solely to finance
Acquisitions in accordance with the provisions of this Agreement;"
(b) SECTION 5.4(D) of the Credit Agreement is hereby amended by (i) adding
the word "and" at the end of clause (iii) thereof, (ii) deleting clause (iv)
thereof in its entirety, and (iii) renumbering clause (v) thereof as clause
(iv).
1.7. Permitted Acquisitions. Clause (vii) of SECTION 5.4(G) of the Credit
----------------------
Agreement is hereby amended as follows:
(a) Clause (A) of the proviso after the parenthetical definition of
"Permitted Acquisitions" is hereby deleted in its entirety.
(b) The words "(in addition to any increase pursuant to clause (A) above)"
are hereby deleted from clause (B) of such proviso.
(c) The reference to "clause (B) above" in the parenthetical contained in
clause (C) of such proviso is hereby amended to read "clause (A) above."
(d) Clauses (B) and (C) of such proviso are hereby renumbered as clauses
(A) and (B), respectively.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Borrower hereby represents and warrants that:
2.1. Representations and Warranties. The representations and warranties
------------------------------
contained in this Amendment, the Credit Agreement and each of the other Loan
Documents are true and correct on and
-5-
<PAGE>
as of the date hereof (except to the extent such representations and warranties
expressly relate solely to an earlier date), as though made on and as of such
date.
2.2. No Default. No Default or Event of Default has occurred and is
----------
continuing.
2.3. No Material Adverse Change. There has been no Material Adverse
--------------------------
Change.
ARTICLE III
NORTHPORT ACQUISITION
3.1. Approval of Northport Acquisition; Waiver. Subject to and on the
-----------------------------------------
terms and conditions set forth in this Article III and in Section 4.2 hereof:
(a) The Required Lenders hereby consent to and approve the following
transactions (the transactions described in clauses (i) and (ii) below,
collectively, the "Northport Acquisition"):
(i) The execution and delivery by Borrower (and any one or more
Subsidiaries) of, and the consummation of the transactions contemplated by,
definitive agreements pursuant to which Borrower acquires all or
substantially all of the assets of Northport, South-Care Medical
Facilities, Inc., Estes-McAbee Investments, Diversified Medical
Specialties, Inc., Northgate Services, Inc., Millennium Health Services,
Inc. and Tallassee Health Care, Inc. and one-third of the partnership
interests in Restore Therapy, Ltd., and a definitive management agreement
with respect to certain health care facilities leased by Northport (and not
acquired pursuant to the foregoing) and pursuant to which Borrower acquires
an option to purchase the outstanding capital stock of Northport upon the
expiration of such management agreement; and
(ii) The assumption and/or issuance of Indebtedness (including
Seller Subordinated Indebtedness) as payment of the aggregate Purchase
Price for all components of the Northport Acquisition, in an aggregate
principal amount not to exceed $93,000,000; provided that the terms and
--------
provisions of each item of such Indebtedness (including without limitation
payment terms, maturity and, in the case of Seller Subordinated
Indebtedness, subordination terms) shall be satisfactory to the Required
Lenders;
provided, however, that the aggregate Purchase Price for all components of the
- -------- -------
Northport Acquisition shall not exceed $93,000,000; and
-6-
<PAGE>
(b) The Required Lenders hereby waive any Default or Event of Default that
would otherwise occur under the provisions of SECTION 5.4(G)(VII) of the Credit
Agreement as a consequence of the consummation of, or Borrower's or any
Subsidiary's agreement to consummate, the Northport Acquisition on the terms and
conditions described in subsection (a) above.
3.2. Nature and Scope of Approval and Waiver. The approval and waiver of
---------------------------------------
the Required Lenders contained in Section 3.1 above is limited as specified and
shall not constitute or be deemed to constitute (i) consent or approval with
regard to any term, condition or provision of any portion of the Northport
Acquisition or the documentation relating thereto, the existence, performance or
fulfillment of which would cause a Default or Event of Default under any
provision of the Credit Agreement (other than as expressly set forth in Section
3.1(b) above), or (ii) an amendment, modification or waiver of any provision of
the Credit Agreement except as expressly set forth in Section 3.1 above.
Specifically, but without limitation of the foregoing, no consent, approval or
waiver is granted hereunder with regard to:
(a) The creation, incurrence or assumption by Borrower or any Subsidiary
of any Indebtedness (including Capital Lease Obligations) pursuant to or in
connection with the Northport Acquisition, except as specifically set forth in
clause (ii) of Section 3.1(a) above but subject to the proviso therein:
(b) The creation, incurrence or assumption by Borrower or any Subsidiary
of any Liens pursuant to or in connection with the Northport Acquisition, except
for Liens expressly permitted under SECTION 5.4(A) of the Credit Agreement
(other than under clauses (ix) and (xii) thereof); or
(c) The entering into or assumption by Borrower or any Subsidiary of any
operating lease, except to the extent expressly permitted under SECTION 5.4(N)
of the Credit Agreement.
The parties agree that the Northport Acquisition will not be considered a
"Permitted Acquisition" for purposes of SECTIONS 5.4(B)(VIII) and 5.4(G)(VII) of
the Credit Agreement.
ARTICLE IV
EFFECTIVENESS OF AMENDMENTS, APPROVAL AND WAIVER;
CONDITIONS TO CONSUMMATION OF NORTHPORT ACQUISITION
4.1. Effectiveness of Amendments, Approval, Waiver. The effectiveness of
---------------------------------------------
the amendments to the Credit Agreement set forth in Article I of this Amendment,
and the effectiveness of the approval of the Northport Acquisition and the
related waiver by the Required Lenders as expressly set forth in Section 3.1 of
-7-
<PAGE>
this Amendment, is subject to the satisfaction of the following conditions:
(a) Representations and Warranties; Officer's Certificate. The
-----------------------------------------------------
following shall be true and Administrative Agent shall have received a
certificate, signed by an Authorized Officer of Borrower, in form and
substance satisfactory to Administrative Agent, dated the date of
effectiveness of the amendments set forth in Article I hereof and
certifying that (i) the representations and warranties contained in this
Amendment, the Credit Agreement and each of the other Loan Documents are
true and correct on and as of the date of such certificate, both
immediately before and after giving effect to the amendments effected
hereby (except to the extent such representations and warranties expressly
relate solely to an earlier date), as though made on and as of such date,
(ii) no Default or Event of Default has occurred and is continuing, both
immediately before and after giving effect to the amendments effected
hereby, and (iii) there has been no Material Adverse Change.
(b) Settlement of LTC Earnout. Borrower shall have delivered to the
-------------------------
Agents copies of the settlement agreement with Long Term Care
Pharmaceutical Services Corporation I and Long Term Care Pharmaceutical
Services Corporation II (collectively, "LTC") relating to the payment of a
contingent earnout in connection with Borrower's acquisition of LTC,
together with evidence of the agreement of Vitalink Pharmacy Services, Inc.
to pay, or reimburse Borrower for, a portion of such payment in an amount
equal to $2,500,000, all of which shall be in form and substance
satisfactory to the Agents.
(c) Consent Fee. Borrower shall have paid the fee provided for under
-----------
Section 5.1 of this Amendment to each Lender entitled thereto.
4.2. Conditions to Consummation of Northport Acquisition. The consummation
---------------------------------------------------
of the Northport Acquisition by Borrower is subject to the satisfaction of the
conditions set forth in Section 4.1 of this Amendment and, in addition, to the
following conditions:
(a) Acquisition Documentation. With respect to the Northport
-------------------------
Acquisition, Borrower shall have delivered to Administrative Agent and each
Lender all documents, certificates and other materials described in SECTION
5.3(O) of the Credit Agreement as if the Northport Acquisition were a
"Permitted Acquisition" within the meaning of the Credit Agreement,
including without limitation confirmation of covenant compliance as
described in clause (E) of SECTION 5.3(O) of the Credit Agreement.
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<PAGE>
(b) Due Diligence. The Agents shall have completed their due
-------------
diligence review of the business, operations and properties of Northport
and its Affiliates, and the results thereof shall be satisfactory to the
Agents in their sole discretion.
(c) Acquisition Documentation. The Required Lenders shall be
-------------------------
satisfied with the terms and provisions of all documentation relating to
the Northport Acquisition, including without limitation (i) the definitive
acquisition agreements and all matters set forth on the disclosure
schedules furnished by Northport and its Affiliates pursuant thereto, and
(ii) the documentation relating to the Medical Clinic Board Bonds issued
with respect to certain of Northport's facilities, including the terms of
the lease agreements between Northport and the respective Medical Clinic
Boards.
(d) Further Consent. The Required Lenders (or Administrative Agent
---------------
on their behalf) shall have delivered their written consent to the terms
and conditions of all Indebtedness assumed or issued by Borrower or any of
its Subsidiaries pursuant to or in connection with the Northport
Acquisition and to any other matter relating to the Northport Acquisition
for which such consent is required under the terms of the Credit Agreement
(including the assumption or incurrence of any Liens other than Liens
expressly permitted as set forth in Section 3.2(b) above).
(e) Other Documents. The Agents and the Lenders shall have received
---------------
such other documents, certificates, opinions and instruments as they shall
have reasonably requested.
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<PAGE>
ARTICLE V
MISCELLANEOUS
5.1. Consent Fee. As an inducement for the Lenders to promptly agree to
-----------
the amendments to the Credit Agreement set forth herein and to furnish the
consent and approval provided for under Section 3.1, Borrower agrees to pay, to
each Lender that evidences its agreement to the terms of this Amendment by
delivering its executed signature page hereto (including by facsimile) to
Administrative Agent prior to 5:00 p.m. (Charlotte time) on April 9, 1997
(whether or not such Lender's approval is actually required in order to obtain
the agreement of the Required Lenders), a fee equal to 0.05% (five basis points)
of the aggregate of such Lender's Revolving Credit Commitment and outstanding
Term Loans under the Credit Agreement.
5.2. Effect of Amendment. From and after the effective date of the
-------------------
amendments to the Credit Agreement set forth herein, all references to the
Credit Agreement set forth in any other Loan Document or other agreement or
instrument shall, unless otherwise specifically provided, be references to the
Credit Agreement as amended by this Amendment and as may be further amended,
modified, restated or supplemented from time to time. This Amendment is limited
as specified and shall not constitute or be deemed to constitute an amendment,
modification or waiver of any provision of the Credit Agreement or of any other
Loan Document except as expressly set forth herein. Except as expressly amended
hereby, the Credit Agreement shall remain in full force and effect in accordance
with its terms.
5.3. Governing Law. This Amendment shall be governed by and construed and
-------------
enforced in accordance with the laws of the State of North Carolina (without
regard to the conflicts of law provisions thereof).
5.4. Expenses. Borrower agrees to pay upon demand all reasonable out-of-
--------
pocket costs and expenses of the Agents (including, without limitation, the
reasonable fees and expenses of counsel to the Agents) in connection with the
preparation, negotiation, execution and delivery of this Amendment.
5.5. Severability. To the extent any provision of this Amendment is
------------
prohibited by or invalid under the applicable law of any jurisdiction, such
provision shall be ineffective only to the extent of such prohibition or
invalidity and only in any such jurisdiction, without prohibiting or
invalidating such provision in any other jurisdiction or the remaining
provisions of this Amendment in any jurisdiction.
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<PAGE>
5.6. Successors and Assigns. This Amendment shall be binding upon, inure
----------------------
to the benefit of and be enforceable by the respective successors and assigns of
the parties hereto.
5.7. Construction. The headings of the various sections and subsections of
------------
this Amendment have been inserted for convenience only and shall not in any way
affect the meaning or construction of any of the provisions hereof.
5.8. Counterparts; Effectiveness. This Amendment may be executed in any
---------------------------
number of counterparts and by different parties hereto on separate counterparts,
each of which when so executed and delivered shall be an original, but all of
which shall together constitute one and the same instrument. This Amendment
shall become effective upon the execution and delivery of a counterpart hereof
by Borrower, Administrative Agent and the Required Lenders (provided that (i)
--------
the amendments set forth in Article I hereof and the approval of the Northport
Acquisition and related waiver set forth in Section 3.1 hereof shall become
effective as provided in Section 4.1 hereof).
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their duly authorized officers as of the date first above written.
GRANCARE, INC.
By: _______________________________
Title: ____________________________
FIRST UNION NATIONAL BANK OF
NORTH CAROLINA, as Administrative
Agent and as a Lender
By: _______________________________
Title: ____________________________
(signatures continued)
S-1
<PAGE>
THE CHASE MANHATTAN BANK
By: _______________________________
Title: ____________________________
(signatures continued)
S-2
<PAGE>
ABN AMRO BANK, N.V.
By: _______________________________
Title: ____________________________
By: _______________________________
Title: ____________________________
(signatures continued)
S-3
<PAGE>
AMSOUTH BANK OF ALABAMA
By: _______________________________
Title: ____________________________
(signatures continued)
S-4
<PAGE>
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By: _______________________________
Title: ____________________________
(signatures continued)
S-5
<PAGE>
BANQUE PARIBAS
By: _______________________________
Title: ____________________________
By: _______________________________
Title: ____________________________
(signatures continued)
S-6
<PAGE>
CORESTATES BANK, N.A.
By: _______________________________
Title: ____________________________
(signatures continued)
S-7
<PAGE>
DRESDNER BANK, AG, NEW YORK BRANCH
AND GRAND CAYMAN BRANCH
By: _______________________________
Title: ____________________________
By: _______________________________
Title: ____________________________
(signatures continued)
S-8
<PAGE>
FIRST AMERICAN NATIONAL BANK
By: _______________________________
Title: ____________________________
(signatures continued)
S-9
<PAGE>
THE FUJI BANK, LIMITED, ATLANTA
AGENCY
By: _______________________________
Title: ____________________________
(signatures continued)
S-10
<PAGE>
THE INDUSTRIAL BANK OF JAPAN, LIMITED
By: _______________________________
Title: ____________________________
(signatures continued)
S-11
<PAGE>
LTCB TRUST COMPANY
By: _______________________________
Title: ____________________________
(signatures continued)
S-12
<PAGE>
NATIONAL CITY BANK OF INDIANA
By: _______________________________
Title: ____________________________
(signatures continued)
S-13
<PAGE>
NATIONSBANK, N.A. (SOUTH)
By: _______________________________
Title: ____________________________
(signatures continued)
S-14
<PAGE>
THE NIPPON CREDIT BANK, LTD.
By: _______________________________
Title: ____________________________
(signatures continued)
S-15
<PAGE>
UNION BANK OF CALIFORNIA, N.A.
By: _______________________________
Title: ____________________________
(signatures continued)
S-16
<PAGE>
EXHIBIT 10.39
TAX ALLOCATION AND INDEMNIFICATION AGREEMENT
This Tax Allocation and Indemnification Agreement dated as of February
12, 1997, is entered into by and among GranCare, Inc., a California corporation
("GCI"), New GranCare, Inc., a Delaware corporation, and the successor by merger
to GCI Properties, Inc., a California corporation, ("New GranCare"), and each of
the following corporations:
TeamCare, Inc., a Delaware corporation, and the successor by merger to each of
the following corporations: GranCare Health Services, Inc. a California
corporation; TCI, Inc., a Delaware corporation that formerly was known as
TeamCare, Inc. and, prior to that, CompuPharm, Inc.; TeamCare of New Jersey,
Inc., a New Jersey corporation that formerly was known as CompuPharm New
Jersey, Inc.; CompuPharm of Southern California, Inc., a California
corporation that formerly was known as GCI-Cal Pharmacies, Inc.; Drug Systems,
Inc., a California corporation; TeamCare of Wisconsin, Inc., a Wisconsin
corporation that formerly was known as TeamCare Pharmacy, Inc.; CapCare Health
Services, Inc., an Illinois corporation; Winyah Dispensary, LTC of North
Carolina, Inc., a North Carolina corporation; and TeamCare of South Carolina,
Inc., a South Carolina corporation that formerly was known as GCI-Winyah,
Inc.; ("TeamCare")
TeamCare Clinical Services, Inc., a New Jersey corporation that formerly was
known as CompuPharm Clinical Services, Inc. ("TCSI")
CompuPharm of Northern California, Inc., a California corporation that
formerly was known as CompuPharm Diagnostics, Inc., and the successor by
merger to Patient Therapy Systems, Inc., a California corporation,
("CompuPharm NC")
TeamCare of Indiana, Inc., an Indiana corporation that formerly was known as
CompuPharm LTC, Inc. ("TeamCare Indiana")
TeamCare of Virginia, Inc., a Virginia corporation that formerly was known as
CompuPharm of Virginia, Inc. ("TeamCare VA")
CompuPharm Ohio Pharmacy, Inc., an Ohio corporation ("CompuPharm Ohio")
GCI Innovative Pharmacy, Inc., a Wisconsin corporation ("GCI Innovative")
Span Purchasing, Inc., a Virginia corporation ("Span")
GCI-Cal Therapies, Inc., a California corporation ("GCI-Cal Therapies")
GCI Therapies, Inc., a California corporation ("GCI Therapies")
AMS Green Tree, Inc., a Wisconsin corporation ("AMS-GT")
American-Cal Medical Services, Inc., a California corporation ("Am-Cal")
HMI Convalescent Care, Inc., a California corporation ("HMI")
GranCare South Carolina, Inc., a South Carolina corporation ("GC-SC")
GCI Palm Court, Inc., a California corporation ("GCI-PC")
GCI East Valley Medical & Rehabilitation Center, Inc., an Arizona corporation
("GCI-EV")
<PAGE>
GCI Realty, Inc., a Delaware corporation ("GCI Realty")
GCI Jolley Acres, Inc., a South Carolina corporation ("GCI-JA")
GCI Prince George, Inc, a South Carolina corporation ("GCI-PG")
GCI Springdale Village, Inc., a South Carolina corporation ("GCI-SV")
GCI Village Green, Inc., a South Carolina corporation ("GCI-VG")
GCI Faith Nursing Home, Inc., a South Carolina corporation ("GCI-FN")
GCI Rehab, Inc., a California corporation ("GCI Rehab")
GCI-Cal Health Care Centers, Inc., a California corporation ("GCI-Cal HCC")
GranCare Home Health Services, Inc., a California corporation ("GCI-Cal HH")
Renaissance Mental Health Center, Inc., a Wisconsin corporation
("Renaissance")
Coordinated Home Health Services, Inc., a California corporation ("CHHS")
GranCare Nursing Services and Hospice, Inc., a Wisconsin corporation ("GCNSH")
AMS Properties, Inc., a California corporation ("AMS-Properties")
Evergreen Health Care, Inc., a Georgia corporation ("Evergreen")
National Heritage Realty, Inc., a Louisiana corporation ("NHRI")
Omega/Indiana Care Corporation, a Delaware corporation ("OICC")
EH Acquisition Corp., Inc., a Georgia corporation ("EHAC I")
EH Acquisition Corp. II, Inc., a Georgia corporation ("EHAC II")
EH Acquisition Corp. III, Inc., a Georgia corporation ("EHAC III")
Heritage of Louisiana, Inc., a Louisiana corporation ("HOLI")
Health Resources, Inc., a Nevada corporation ("HRI")
National Heritage Pharmacy, Inc., a Nevada corporation ("NHPI")
Heritage Sterling Financial Services, Inc., an inactive corporation ("HSFSI")
Sterling Health Care, Inc., an inactive corporation ("SHCI")
EH Resources, Inc., a Georgia corporation ("EHRI")
Evergreen Retirement Management Company, a Delaware corporation ("ERMC")
GCI Health Care Centers, Inc., a Delaware corporation ("GCI-HCC")
GC Services, Inc., a California corporation ("GC-Services")
GranCare Trading, Inc., a Georgia corporation ("Trading")
GCI Valley Manor Health Care Center, Inc., a Colorado corporation ("GCI-VM")
GCI Camelia Care Center, Inc., a Colorado corporation ("GCI-Camelia")
Cornerstone Health Management Company, a Delaware corporation ("Cornerstone")
StoneCreek Management Company, Inc. a Missouri corporation ("StoneCreek")
HostMasters, Inc., a California corporation ("HostMasters")
GCI Colter Village, Inc., an Arizona corporation ("GCI-Colter")
GCI Indemnity, Inc., a Hawaii corporation ("GCI-Indemnity")
GCI Bella Vita, Inc., a California corporation ("GCI Bella Vita")
GCI Wisconsin Properties, Inc., a Wisconsin corporation ("GCI-Wisconsin")
GCI Ashland Health Care Center, Inc., a Wisconsin corporation ("GCI-Ashland")
GCI North Shore Health Care Center, Inc., a Wisconsin corporation ("GCI-North
Shore")
GCI Hillside Health Care Center, Inc., a Wisconsin corporation ("GCI-
Hillside")
GCI Family Nursing Home and Rehabilitation Center, Inc., a Wisconsin
corporation ("GCI-Family")
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<PAGE>
GranCare GPO Services, Inc., a Georgia corporation ("GranCare GPO")
GCI Simi Valley Healthcare Center, Inc., a California corporation ("GCI-Simi")
Professional Health Care Management, Inc., a Michigan corporation ("PHCM")
Cambridge Bedford, Inc., a Michigan corporation ("CBI")
Cambridge East, Inc., a Michigan corporation ("CEI")
Cambridge North, Inc., a Michigan corporation ("CNI")
Cambridge South, Inc., a Michigan corporation ("CSI")
Clintonaire Nursing Home, Inc., a Michigan corporation ("CNHI")
Crestmont Health Center, Inc., a Michigan corporation ("CHCI")
Frenchtown Nursing Home, Inc., a Michigan corporation ("FNHI")
Heritage Nursing Home, Inc., a Michigan corporation ("HNHI")
Madonna Nursing Center, Inc., a Michigan corporation ("MNCI")
Middlebelt Nursing Home, Inc., a Michigan corporation ("MNHI")
Middlebelt-Hope Nursing Home, Inc., a Michigan corporation ("MHNHI")
Nightingale East Nursing Center, Inc., a Michigan corporation ("NENCI")
St. Anthony Nursing Home, Inc., a Michigan corporation ("SANHI")
International Health Care Management, Inc., a Michigan corporation ("IHCMI")
International X-Ray, Inc., a Michigan corporation ("IXRI")
(individually, sometimes referred to as a "Subsidiary" and, collectively, the
"Subsidiaries").
WITNESSETH:
WHEREAS GCI adopted a plan of distribution, as set forth in that certain
Agreement and Plan of Distribution dated September 3, 1996 (the "Distribution
Agreement"), whereby it contemplates a distribution to its shareholders of all
the outstanding common stock of New GranCare, a corporation which will hold
(directly or indirectly) its skilled nursing facilities business and certain
other non-pharmacy businesses (the "Distribution"), and GCI and New GranCare
have agreed to enter into certain agreements, including the Distribution
Agreement and this Tax Allocation and Indemnification Agreement, setting forth
their respective rights, duties, and obligations with respect to liabilities of
the Parties, including Tax liabilities, attributable to events that occurred in
periods prior to the Distribution;
WHEREAS, as a consequence of the Distribution, New GranCare and the
Subsidiaries that will become members of the New GranCare Group (as hereinafter
defined) will no longer be members of the GCI Group (as hereinafter defined) or
of any other group of which GCI and the subsidiaries who are members of the
Post-Distribution GCI Group (as hereinafter defined) become members;
WHEREAS, pursuant to Treas. Reg. Section 1.1502-6, GCI and each Subsidiary
will be severally liable for the consolidated federal income tax liability of
the GCI Group for any period during which GCI and such Subsidiary were members
of the GCI Group during any part of a consolidated return year; and
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<PAGE>
WHEREAS, GCI, New GranCare, and the Subsidiaries desire to set forth their
rights and obligations with respect to foreign, federal, state and local taxes
for periods both before and after the Distribution and with respect to certain
tax liabilities that may be asserted in connection with the Distribution.
NOW THEREFORE, GCI, New GranCare, and the Subsidiaries, in consideration of
the mutual covenants contained herein, agree as follows:
ARTICLE I.
DEFINITIONS
-----------
For purposes of this Agreement, the following definitions shall apply:
1.1 "Code" means the Internal Revenue Code of 1986, as amended from time
to time.
1.2 "Consolidated Return" means a consolidated United States federal
income tax return or any consolidated or combined state, county, or local income
tax return which includes any Party to this agreement.
1.3 "Date of Distribution" or "Distribution Date" means the date on which
the stock of New GranCare is distributed by GCI to its shareholders.
1.4 "Employee Benefits Matters Agreement" means that certain agreement of
even date herewith entitled Employee Benefit Matters Agreement which was entered
into by the Parties to this Agreement in connection with the Distribution
Agreement.
1.5 "Expenses" means out-of-pocket expenses paid to third parties and
shall not include any overhead or indirect costs.
1.6 "Final Determination" means the final resolution of liability for any
Tax for a taxable period (i) by IRS Form 870 or 870-AD (or any successor forms
thereto), on the date of acceptance by or on behalf of the IRS, or by a
comparable agreement or form under the laws of other jurisdictions, except that
a Form 870 or 870-AD or comparable form that reserves the right of the taxpayer
to file a claim for refund and/or the right of the taxing authority to assert a
further deficiency shall not constitute a Final Determination; (ii) by a
decision, judgment, decree, or other order by a court of competent jurisdiction
which has become final and unappealable; (iii) by a closing agreement or
compromise under Section 7121 or 7122 of the Code or any subsequently enacted
corresponding provisions of the Code, or comparable agreements under the laws of
other jurisdictions; (iv) by an allowance of a refund or credit in respect of an
overpayment of Tax, but only after the expiration of all periods during which
such
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<PAGE>
refund may be recovered (including by way of offset) by the Tax-imposing
jurisdiction; or (v) by any other final disposition by reason of the expiration
of the applicable statutes of limitations.
1.7 "GCI Group" means the affiliated group (within the meaning of Section
1504(a) of the Code) of which GCI is the common parent, including periods before
GCI became the common parent.
1.8 "GCI Tainting Act" means any breach by GCI or any member of the Post-
Distribution GCI Group of a representation or covenant relating to the
qualification of the Distribution as a distribution described in Section 355 of
the Code which is given by GCI and the members of the Post-Distribution GCI
Group in connection with the Tax Certificate dated February ___, 1997 , unless
either (a) New GranCare consents in writing to such action, or (b) New GranCare
is provided (at GCI's expense) an IRS ruling that such action will not cause the
Distribution to fail to qualify as a distribution described in Section 355 of
the Code.
1.9 "IRS" means the Internal Revenue Service.
1.10 "Merger" shall have the same meaning as given that term in the
Distribution Agreement.
1.11 "New GranCare Group" means New GranCare, any subsidiaries that become
members of the New GranCare consolidated group after the Distribution Date, and
the following Subsidiaries:
GCI-Cal Therapies AMS-GT EHAC II
GCI Therapies Am-Cal EHAC III
Cornerstone HMI HOLI
StoneCreek GC-SC HRI
HostMasters GCI-PC NHPI
GCI-Colter GCI-EV HSFSI
GCI-Indemnity GCI Realty SHCI
GCI Bella Vita GCI-JA EHRI
GCI-Wisconsin GCI-PG ERMC
GCI-Ashland GCI-SV GCI-HCC
GCI-North Shore GCI-VG GC-Services
GCI-Hillside GCI FN Trading
GCI-Family GCI Rehab GCI-VM
GranCare GPO GCI-Cal HCC GCI-Camelia
GCI-Simi GCI-Cal HH HNHI
PHCM Renaissance MNCI
CBI CHHS MNHI
CEI GCNSH MHNHI
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<PAGE>
CNI AMS-Properties NENCI
CSI Evergreen SANHI
CNHI NHRI IHCMI
CHCI OICC IXRI
FNHI EHAC I
1.12 "New GranCare Tainting Act" means any breach by New GranCare or any
member of the New GranCare Group of a representation or covenant relating to the
qualification of the Distribution as a distribution described in Section 355 of
the Code which is given by New GranCare and the members of the New GranCare
Group in connection with the Tax Certificate dated February __, 1997 , unless
either (a) GCI consents in writing to such action, or (b) GCI is provided (at
New GranCare's expense) an IRS ruling that such action will not cause the
Distribution to fail to qualify as a distribution described in Section 355 of
the Code.
1.13 "Party" or "Parties" means any of the parties to this Agreement.
1.14 "Post-Distribution GCI Group" means GCI and the following
Subsidiaries:
TeamCare TCSI
CompuPharm NC TeamCare Indiana
TeamCare VA CompuPharm Ohio
GCI Innovative Span
1.15 "Personal and Real Property Taxes" mean all Taxes which are assessed
upon the value of real or personal property owned, leased, rented or used by any
of the Parties to this Agreement, including, but not limited to, real and
personal property taxes, use taxes, value added taxes or other ad valorem taxes.
1.16 "Restructuring Taxes" means any Taxes resulting from the failure of
the restructuring transactions contemplated by the Distribution Agreement to
qualify as a "tax-free" reorganization and distribution within the meaning of
Sections 368(a)(1)(D) and 355 of the Code or otherwise as "tax-free" under the
Code.
1.17 "Tax Benefit" means any Tax Item which decreases Taxes paid or
payable.
1.18 "Tax" or "Taxes" means all forms of taxation, whenever created or
imposed, whether domestic or foreign, and whether imposed by a nation, locality,
municipality, government, state, federation, or other body (a "Taxing
Authority"), and without limiting the generality of the foregoing, shall include
net income, alternative or add-on minimum tax, gross income, sales, use,
franchise, gross receipts, value added, ad valorem, profits, license, payroll,
withholding, social security, unemployment insurance, employment, property,
transfer, recording, excise, severance, stamp, occupation, premium, windfall
profit, custom duty, or other
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<PAGE>
tax, governmental fee or other like assessment or charge of any kind whatsoever,
together with any related interest, penalties or other additions to tax, or
additional amounts imposed by any such Taxing Authority.
1.19 "Tax Controversy" means any audit, examination, dispute, suit, action,
litigation or other judicial or administrative proceeding by or against the IRS
or any other Taxing Authority.
1.20 "Tax Item" means any item of income, gain, loss, deduction, credit,
recapture of credit or any other item, including, but not limited to, an
adjustment under Code Section 481 resulting from a change in accounting method,
which increases or decreases Taxes paid or payable.
1.21 "Tax Returns" means all reports, estimates, declarations of estimated
tax, information statements, returns or other documents required to be filed by
a Party in connection with any Taxes, including but not limited to requests for
extensions of time, information statements and reports, claims for refund, and
amended returns.
ARTICLE II.
TAX RETURN PREPARATION
----------------------
2.1 Consolidated Returns. (a) New GranCare shall prepare and timely file
--------------------
any Consolidated Return which includes one or more, but only, members of the GCI
Group for any taxable period which ends on or prior to the Distribution Date.
The Consolidated Return shall be prepared by New GranCare in compliance with
applicable tax laws and on a basis that is consistent with any IRS ruling or
opinion of tax counsel obtained by GCI or New GranCare and with prior
Consolidated Returns (to the extent applicable). Not later than 60 days prior
to the due date for filing the Consolidated Return (including extensions), New
GranCare shall provide a copy of the Consolidated Return to GCI for its review
and consent prior to the filing of the Consolidated Return. GCI shall notify
New GranCare in writing of any objections it has to the treatment of any Tax
Item on the Consolidated Return within 30 days after the receipt of the
Consolidated Return; provided, however, that when such objections relate to
items which do not affect the Tax liability of the Post-Distribution GCI Group
or adversely affect the "tax-free" treatment of the Distribution or the
Restructuring Taxes, the objections shall be set forth in writing, specifically
stating that there does not exist a reasonable basis or substantial authority
for the tax treatment being accorded such item. Any failure to provide such
objection shall be considered acceptance by GCI of the Consolidated Return as
prepared by New GranCare. If a written objection is made by GCI, the tax
managers of GCI and New GranCare will meet and try in good faith to resolve all
disagreements with respect to the treatment of the Tax Item(s) in question
within 5 days of the receipt of the written objection. If the tax managers are
unable to resolve all disagreements with respect to the treatment of the Tax
Item(s) in question, then one of the "Big Six" certified public accounting firms
will be chosen by GCI and New GranCare
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<PAGE>
to advise as to the proper treatment of the Tax Item(s) in dispute; provided,
however, that when any disagreement which relates to an item which does not
affect the Tax liability of the Post-Distribution GCI Group or adversely affect
the "tax-free" treatment of the Distribution or the Restructuring Taxes, the
item shall be reported in accordance with the tax treatment determined by New
GranCare provided that GCI has received a letter from the chief financial
officer of New GranCare that, after consultation with its tax adviser,
substantial authority exists for the tax treatment being accorded the item by
New GranCare. New GranCare will provide GCI with a copy of the Consolidated
Return as filed, along with documentation establishing proof of timely filing.
(b) New GranCare shall prepare and timely file any Consolidated Return
which includes one or more, but only, members of the GCI Group for any taxable
period which ends after the Distribution Date, but includes the Distribution
Date. The Consolidated Returns shall be prepared by New GranCare in compliance
with applicable tax laws and on a basis that is consistent with any IRS ruling
or opinion of tax counsel obtained by GCI or New GranCare and with prior
Consolidated Returns (to the extent applicable). GCI shall provide New GranCare
with (i) separate, pro forma Tax Returns covering the period beginning with the
day after the Distribution Date and running through the close of the taxable
period reported on such Consolidated Return for each of the members of the Post-
Distribution GCI Group included in such Consolidated Return, and (ii) any
information in support of such separate, pro forma returns or which might
otherwise be necessary or helpful in the preparation of the Consolidated Return.
GCI shall provide such separate, pro forma returns and information not later
than 60 days prior to the due date of the Consolidated Return (including
extensions). Not later than 45 days prior to the due date for filing the
Consolidated Return (including extensions), New GranCare shall provide a copy of
the Consolidated Return to GCI for its review and consent prior to the filing of
the Consolidated Return. GCI shall notify New GranCare in writing of any
objections it has to the treatment of any Tax Item on the Consolidated Return
within 30 days after the receipt of the Consolidated Return; provided, however,
that when such objections relate to items which do not affect the Tax liability
of the Post-Distribution GCI Group or adversely affect the "tax-free" treatment
of the Distribution or the Restructuring Taxes, the objections shall be set
forth in writing, specifically stating that there does not exist a reasonable
basis or substantial authority for the tax treatment being accorded such item.
Any failure to provide such objection shall be considered acceptance by GCI of
the Consolidated Return as prepared by New GranCare. If a written objection is
made by GCI, the tax managers of GCI and New GranCare will meet and try in good
faith to resolve all disagreements with respect to the treatment of the Tax
Item(s) in question within 5 days of the receipt of the written objection. If
the tax managers are unable to resolve all disagreements with respect to the
treatment of the Tax Item(s) in question, then one of the "Big Six" certified
public accounting firms will be chosen by GCI and New GranCare to advise as to
the proper treatment of the Tax Item(s) in dispute; provided, however, that when
any disagreement which relates to an item which does not affect the Tax
liability of the Post-Distribution GCI Group or adversely affect the "tax-free"
treatment of the Distribution or the Restructuring Taxes, the item shall be
reported in accordance with the tax treatment determined by New GranCare
provided that GCI has received a letter from the chief
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financial officer of New GranCare that, after consultation with its tax adviser,
substantial authority exists for the tax treatment being accorded the item by
New GranCare.. New GranCare will provide GCI with a copy of the Consolidated
Return as filed, along with documentation establishing proof of timely filing.
(c) GCI shall be responsible for preparing and filing any Consolidated
Return which includes any member of the Post-Distribution GCI Group for any
taxable period which begins after the Distribution Date.
(d) New GranCare shall be responsible for preparing and filing any
Consolidated Return which includes only members of the New GranCare Group.
2.2 Separate Returns. (a) New GranCare shall prepare and file any Tax
----------------
Return required to be filed for any member of the Post-Distribution GCI Group
not listed on Schedule 2.2 hereto for all taxable periods which end on or before
the Distribution Date or which end after the Distribution Date, but include the
Distribution Date. If the Tax Return includes any period ending after the
Distribution Date, then GCI shall provide New GranCare with (i) a separate, pro
forma Tax Return covering the period beginning with the day after the
Distribution Date and running through the close of the taxable period reported
on such Tax Return, and (ii) any information in support of such separate, pro
forma Tax Return or which might otherwise be necessary or helpful in the
preparation of the Tax Return. GCI shall provide such separate, pro forma Tax
Return and information not later than 60 days prior to the due date of the Tax
Return (including extensions). Not later than 45 days prior to the due date for
filing the Tax Return, New GranCare shall provide a copy of the Tax Return to
GCI for its review and consent prior to the filing of the Tax Return (including
extensions). GCI shall notify New GranCare in writing of any objections it has
to the treatment of any Tax Item on the Tax Return within 30 days after the
receipt of the Tax Return; provided, however, that when such objections relate
to items which do not affect the Tax liability of the Post-Distribution GCI
Group or adversely affect the "tax-free" treatment of the Distribution or the
Restructuring Taxes, the objections shall be set forth in writing, specifically
stating that there does not exist a reasonable basis or substantial authority
for the tax treatment being accorded such item. Any failure to provide such
objection shall be considered acceptance by GCI of the Tax Return as prepared by
New GranCare. If a written objection is made by GCI, the tax managers of GCI
and New GranCare will meet and try in good faith to resolve all disagreements
with respect to the treatment of the Tax Item(s) in question within 5 days of
the receipt of the written objection. If the tax managers are unable to resolve
all disagreements with respect to the treatment of the Tax Items in question,
then one of the "Big Six" certified public accounting firms will be chosen by
GCI and New GranCare to advise as to the proper treatment of the Tax Item in
dispute; provided, however, that when any disagreement which relates to an item
which does not affect the Tax liability of the Post-Distribution GCI Group or
adversely affect the "tax-free" treatment of the Distribution or the
Restructuring Taxes, the item shall be reported in accordance with the tax
treatment determined by New GranCare provided that GCI has received a letter
from the chief financial officer of New GranCare that, after consultation with
its tax adviser, substantial
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authority exists for the tax treatment being accorded the item by New GranCare.
New GranCare will provide GCI with a copy of the Tax Return as filed, along with
documentation establishing proof of timely filing.
(b) GCI shall be responsible for causing the preparation and filing of any
Tax Return for any member of the Post-Distribution GCI Group listed on Schedule
2.2 hereto for any taxable period which ends on or includes the Distribution
Date.
(c) GCI shall be responsible for causing the preparation and filing of any
Tax Return for any member of the Post-Distribution GCI Group for any taxable
period which begins after the Distribution Date.
(d) New GranCare shall be responsible for preparing and filing all Tax
Returns for any member of the New GranCare Group.
2.3 Cooperation and Exchange of Information. Each Party shall be
---------------------------------------
responsible for the timely submission to each other Party of information of
which it has knowledge regarding any Tax Item which may properly be included in
any Tax Return to be filed by the other Party, and shall provide any and all
other information and documentation (including, but not by way of limitation,
working papers and schedules) reasonably requested by any Party for use in
connection with the preparation and filing of any Tax Returns or the handling of
any Tax Controversy. GCI, New GranCare, and each Subsidiary shall execute such
consents, elections, attachments, and other documents, as well as the
Consolidated Return or Tax Return itself, that may be required or appropriate
for the proper filing of such Consolidated Return or Tax Return.
ARTICLE III.
CONSOLIDATED RETURN TAX LIABILITIES
-----------------------------------
3.1 Allocation Method. In order to determine that portion of the Tax
-----------------
liability (other than Restructuring Taxes) due with respect to any Consolidated
Return which is the subject of this Agreement that is allocable to a Party, the
Parties agree to determine and allocate such Tax liability among themselves in
the following manner:
(a) All Consolidated Return Tax liabilities of any member or members
of the GCI Group for any taxable period (or portion thereof) ending on
or before the Distribution Date shall be allocated to New GranCare and
the other members of the New GranCare Group.
(b) All Consolidated Return Tax liabilities for taxable periods that
include but do not end on the Distribution Date ("Straddle Periods")
shall be allocated between that portion of the period that ends on the
Distribution Date and the subsequent portion of the period based upon
a closing of the books and
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computations of separate hypothetical Tax liabilities for such
portions. The Consolidated Return Tax liability for the relevant
Straddle Period shall be allocated to the portions of the Straddle
Period in the ratio of the portion's hypothetical Tax liability to the
sum of the portions' hypothetical Tax liabilities, and then the
portions allocated to each of such periods shall be further allocated
among the Parties in accordance with the method described in Section
1552(a)(2) of the Code, except that all Consolidated Return Tax
liabilities allocable under this Section 3.1(b) to any member or
members of the GCI Group for any taxable period (or portion thereof)
ending on the Distribution Date shall be allocated to New GranCare and
the other members of the New GranCare Group.
(c) If the Tax liability with respect to a Consolidated Return is
adjusted for any taxable period, whether by means of an amended
return, claim for refund, or assessment by a taxing authority, the
liability of each Party shall be recomputed under this Section 3.1 of
the Agreement to give effect to such adjustment.
(d) New GranCare shall provide each Party with a computation (and such
other workpapers and documentation supporting such computation) of the
allocation to each Party of the Tax liability with respect to a
Consolidated Return no later than 10 days prior to the filing of the
Consolidated Return. GCI may object to such computation or allocation
by presenting New GranCare with a written explanation of such
objection(s) (which contains specific explanation of the reasons and
support for their objections) within 30 days after receiving the
computation and allocation from New GranCare. Any failure to provide
such objection shall be considered acceptance by GCI of the allocation
as prepared by New GranCare. If a written objection is made by GCI,
the tax managers of GCI and New GranCare will meet and try in good
faith to resolve all disagreements with respect to the allocation of
Tax Liability. If the tax managers are unable to resolve all
disagreements with respect to the allocation, then one of the "Big
Six" certified public accounting firms will be chosen by GCI and New
GranCare to advise as to the proper treatment of the Tax Item in
dispute.
(e) Notwithstanding any provision in this Section 3.1 to the contrary:
(1) In the event that the Merger results in any "excess parachute
payments" within the meaning of Section 280G of the Code to any
persons other than Gene E. Burleson or Arlen Reynolds that would
be deductible after the Closing Date by GCI, any of its
Subsidiaries, or their successors but for the provisions of
Section 280G, New GranCare shall pay to GCI or its successor an
amount in cash equal to the amount of such "excess parachute
payments" multiplied by the sum of (i) the highest federal income
tax rate under Code Section 11 (or any successor provision
thereto)
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applicable to a corporation that is in effect for the year of the
"excess parachute payment" and (ii) five percent (5%). Such
payment shall be made by New GranCare to GCI or its successor
within ten (10) days after GCI or its successor provides to New
GranCare a written statement that such "excess parachute
payments" have been made together with a calculation of the
amount of such "excess parachute payments."
(2) In the event that the Merger results in any "excess parachute
payments" within the meaning of Section 280G of the Code to Gene
E. Burleson or Arlen Reynolds that would be deductible on or
before the Closing Date by GCI or any of its Subsidiaries but for
the provisions of Section 280G, GCI or its successor shall pay to
New GranCare an amount in cash equal to the amount of such
"excess parachute payments" multiplied by the sum of (i) the
highest federal income tax rate under Code Section 11 (or any
successor provision thereto) applicable to a corporation that is
in effect for the year of the "excess parachute payment" and (ii)
five percent (5%). Such payment shall be made by GCI or its
successor to New GranCare within ten (10) days after New GranCare
provides to GCI or its successor a written statement that such
"excess parachute payments" have been made together with a
calculation of the amount of such "excess parachute payments."
(3) If the Party obligated to make payment under subsection (1)
or (2) above makes a written objection prior to the payment's due
date, the tax managers of GCI or its successor and New GranCare
will meet and try in good faith to resolve all disagreements with
respect to the characterization and amount of such payment as an
"excess parachute payment" within five (5) days of the receipt of
the written objection. If the tax managers are unable to resolve
all disagreements, then one of the "Big Six" certified public
accounting firms will be chosen by GCI or its successor and New
GranCare to determine the proper characterization and amount of
such payment as an "excess parachute payment" which determination
shall be final and payment shall be made within ten (10) days of
such determination.
3.2 Tax Payments or Benefits. New GranCare shall be responsible for
------------------------
paying or for making arrangements with GCI for the payment of any Tax liability,
including estimated tax liability and any liability which may be subsequently
assessed, with respect to a Consolidated Return allocated to New GranCare or any
member of the New GranCare Group in accordance with Section 3.1 of this
Agreement. Payments under this Section 3.2 are to be made no later than the
date on which payments must be made to the Taxing Authority. New GranCare shall
be entitled to receive and retain any refund or overpayment (including any
interest received thereon), and GCI and/or any member of the GCI Group shall pay
over to New GranCare such
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refund or overpayment received by GCI or such other member, whether claimed on
the originally filed return or an amended return, with respect to a Consolidated
Return to the extent that New GranCare has been allocated the Tax liability in
accordance with Section 3.1 of this Agreement.
3.3 Carrybacks and Carry Forwards. If part or all of an unused
-----------------------------
consolidated net operating loss or tax credit is allocated to a Party pursuant
to Treasury Regulations Section 1.1502-79 (or comparable provision under
foreign, state, or local law) and is carried back or forward to a year in which
such Party was not a member of the Consolidated Return from which such tax
attribute arose, any refund or reduction in Tax liability arising from the
carryback or carryover shall be retained by such Party (if such refund or
reduction goes to a Party other than the Party entitled to the refund under this
Section 3.3, then such other Party shall pay over such amount to the Party
entitled to the refund under this Section 3.3).
If a member of the New GranCare Group incurs a net operating loss or has
excess tax credits for a taxable year subsequent to the period in which such
member was a member of the GCI Group, and such net operating loss or tax credits
must be carried back to a Consolidated Return of the GCI Group, then such member
shall be permitted to carryback such tax attribute to such GCI Group
Consolidated Return; provided, however, that in the event that any member of the
New GranCare Group incurs a capital loss which may, but need not, be carried
back to a period in which it was a member of the GCI Group, then such member
shall be permitted to carryback such capital loss to such GCI Group Consolidated
Return. GCI shall cooperate in the filing of a claim for refund relating to
such net operating loss or tax credit carryback. The member of the New GranCare
Group possessing the tax attributes giving rise to the refund shall be entitled
to retain the full amount of such refund (and such amount shall be paid over by
GCI to such member), less an amount to cover any Expenses incurred by GCI in
connection with the filing of such claim for refund. Notwithstanding the
foregoing, in the event where any member of the New GranCare Group incurs a
capital loss which is carried back to a period in which it was a member of the
GCI Group, the amount of the refund to which New GranCare shall be entitled to
receive (and which shall be paid to New GranCare) shall be the lesser of: (a)
the actual Tax refund with respect to such loss carryback; or (b) the amount of
Taxes that would have been refunded if the amount of capital loss carried back
equalled only the capital gain generated by the members of the New GranCare
Group for the years to which the capital loss is carried back (calculated on a
yearly basis); less an amount to cover a proportionate share (based upon a ratio
of the portion of the refund to be paid to New GranCare to the total refund
received as a result of filing the claim) of any Expenses incurred by GCI in
connection with the filing of the claim for refund. In the event that any
member of the Post-Distribution GCI Group incurs a capital loss which is carried
back to a period in which it was a member of the GCI Group, the amount of the
refund to which New GranCare shall be entitled to receive (and which shall be
paid to New GranCare) shall be the actual Tax refund with respect to such loss
carryback minus the amount of Taxes that would have been refunded if the amount
of capital loss carried back equalled only the capital gain generated by the
members of the Post-Distribution GCI Group for the years to which the capital
loss is carried back (calculated on a
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<PAGE>
yearly basis), but not less then zero, less an amount to cover a proportionate
share (based upon a ratio of the portion of the refund to be paid to New
GranCare to the total refund received as a result of filing the claim) of any
Expenses incurred by GCI in connection with the filing of the claim for refund.
GCI shall be entitled to retain any portion of a refund which is not required to
be paid to a member of the New GranCare Group under this Section 3.3.
ARTICLE IV.
RESTRUCTURING TAXES AND OTHER LIABILITIES
-----------------------------------------
4.1 Restructuring Taxes. Notwithstanding any other provision of this
-------------------
Agreement to the contrary, any liability with respect to Restructuring Taxes
shall be allocated as follows:
(a) Liability Resulting from a New GranCare Tainting Act. In the event that
----------------------------------------------------
GCI is liable for Restructuring Taxes because the Distribution failed to meet
the requirements of Sections 368(a)(1)(D) and 355 of the Code for nonrecognition
of gain or loss due solely to a New GranCare Tainting Act, then New GranCare
shall be allocated all liability for: (1) the Restructuring Taxes; (2) any claim
against GCI or any member of the Post-Distribution GCI Group for liability to
shareholders of GCI arising out of the determination that the Distribution
failed to meet the requirements of Section 355 of the Code for nonrecognition of
gain or loss; and (3) any and all other liability that arises as a direct
consequence of, or would not have otherwise arisen but for, the determination
that GCI is liable for the Restructuring Taxes as a result of the New GranCare
Tainting Act. For purposes of this Section 4.1, any failure of the Distribution
to meet the requirements of Code Sections 368(a)(1)(D) and 355 shall be treated
as due solely to a New GranCare Tainting Act if any of the following items shall
have occurred; provided, however, that none of the items set forth in 4.1(c)(i)-
(v) shall have occurred first:
(i) A merger or liquidation of New GranCare, or an acquisition of the
outstanding stock of New GranCare which acquisition the New GranCare Board
of Directors consents or otherwise agrees to, or a contract or option for
such a merger, liquidation, or acquisition, within two years of the
Distribution Date;
(ii) A failure by New GranCare and its subsidiaries to continue the
active conduct of their businesses for at least two years after the
Distribution Date;
(iii) A failure by New GranCare to satisfy the active business
requirement of Code Section 355(b);
(iv) A failure by GCI to satisfy the active business requirement of
Code Section 355(b), but only if such failure is not the result of GCI's
failure to satisfy the conditions set forth in Section 4.1(c)(ii)-(iv);
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(v) The sale, exchange, or other disposition (in one or more
transactions) of more than fifty percent of New GranCare' assets (taking
into account the stock of its subsidiaries) within two years of the
Distribution Date; and
(vi) A repurchase by New GranCare of any of its outstanding stock
within two years of the Distribution Date other than stock repurchases
meeting the requirements of Section 4.05(1)(b) of Rev. Proc. 96-30.
(b) Multiple Tainting Acts or an Absence of Tainting Acts. In the event of
-----------------------------------------------------
a determination that the Distribution failed to meet the requirements of
Sections 368(a)(1)(D) and 355 of the Code for nonrecognition of gain or loss due
to (1) any combination of a New GranCare Tainting Act and a GCI Tainting Act, or
(2) a complete absence of New GranCare Tainting Acts and GCI Tainting Acts, then
all liability for: (i) the Restructuring Taxes; (ii) any claim against GCI or
any member of the Post-Distribution GCI Group for liability to shareholders of
GCI arising out of the determination that the Distribution failed to meet the
requirements of Section 355 of the Code for nonrecognition of gain or loss; and
(iii) any and all other liability that arises as a direct consequence of, or
would not have otherwise arisen, but for the determination that GCI or any
member of the GCI Group is liable for the Restructuring Taxes, shall be borne
one-half (1/2) by GCI and one-half (1/2) by New GranCare; provided, however,
that the maximum liability that shall be borne by GCI under this Section 4.1(b)
shall be $10 million. Notwithstanding the foregoing, if there is a complete
absence of New GranCare Tainting Acts and GCI Tainting Acts, and the liability
under this Section 4.1(b) arises as the result of a retroactive change in the
tax laws, then all liability under this Section 4.1(b) shall be borne one-half
(1/2) by GCI and one-half (1/2) by New GranCare.
(c) Liability Resulting from a GCI Tainting Act. In the event that GCI is
-------------------------------------------
liable for Restructuring Taxes because the Distribution failed to meet the
requirements of Sections 368(a)(1)(D) and 355 of the Code for nonrecognition of
gain or loss due solely to a GCI Tainting Act, then GCI shall be allocated all
liability for: (1) the Restructuring Taxes; (2) any claim against GCI or any
member of the Post-Distribution GCI Group for liability to shareholders of GCI
arising out of the determination that the Distribution failed to meet the
requirements of Section 355 of the Code for nonrecognition of gain or loss; and
(3) any and all other liability that arises as a direct consequence of, or would
not have otherwise arisen but for, the determination that GCI is liable for the
Restructuring Taxes as a result of the GCI Tainting Act. For purposes of this
Section 4.1, any failure of the Distribution to meet the requirements of Code
Sections 368(a)(1)(D) and 355 shall be treated as due solely to a GCI Tainting
Act if any of the following items shall have occurred; provided, however, that
none of the items set forth in 4.1(a)(i)-(vi) shall have occurred first:
(i) A taxable merger or a liquidation of any successor to GCI, or a
taxable acquisition of the outstanding stock of any successor to GCI which
acquisition the Board
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of Directors to GCI's successor consents or otherwise agrees to, or a
contract or option for such a merger, liquidation, or acquisition, within
two years of the Distribution Date;
(ii) A failure by TeamCare to continue the active conduct of its
trade or business for at least two years after the Distribution Date;
(iii) A sale, exchange, or other disposition of the stock of TeamCare
within two years of the Distribution Date;
(iv) The sale, exchange, or other disposition (in one or more
transactions) of more than fifty percent of TeamCare' assets (taking into
account the stock of its subsidiaries) within two years of the Distribution
Date; and
(v) A repurchase by any successor of GCI of any of its outstanding
stock within two years of the Distribution Date other than stock
repurchases meeting the requirements of Section 4.05(1)(b) of Rev. Proc.
96-30.
ARTICLE V.
ALL OTHER TAX LIABILITIES
-------------------------
5.1 Real and Personal Property Taxes. Liability for Real and Personal
--------------------------------
Property Taxes incurred with respect to the business or assets of GCI or any
member of the Post-Distribution GCI Group which relate to any period which
includes the Distribution Date shall be allocated between the period which ends
on the Distribution Date and the period which begins on the day after the
Distribution Date based upon a ratio of the number of days in each such period.
5.2 Other GCI Taxes. Any sales, use, transfer, recordation, excise, and
---------------
similar Taxes with respect to the business or assets of GCI, New GranCare, or
any member of the GCI Group shall be allocable to the period (i.e., pre- or
post- Distribution Date) in which the sale, transfer, assignment, or exchange or
other event giving rise to the liability for such Tax occurred.
ARTICLE VI.
TAX CONTROVERSIES
-----------------
6.1 Tax Controversies. (a) Except as otherwise provided in this Article
-----------------
VI, GCI shall have primary responsibility and discretion in handling, settling,
or contesting any Tax Controversy involving a Tax Return for which it has filing
responsibility under this Agreement, and New GranCare shall have primary
responsibility and discretion in handling, settling, or contesting any Tax
Controversy involving a Tax Return for which it has filing responsibility
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under this Agreement. Any expense incurred in handling, settling or contesting
any Tax Controversy shall be borne by the Party having primary responsibility
and discretion therefor.
(b) The Party primarily responsible for any Tax Controversy shall use all
reasonable efforts to resist any deficiency assertions by any Taxing Authority
regardless of which Party is ultimately responsible for any such Tax under this
Agreement, and shall not enter into any settlement that may reasonably be
expected to have an adverse effect on another Party without the consent of that
Party.
(c) Each Party shall give prompt notice to any other affected Party of any
communication (including, but not limited to, requests for information that
might affect the treatment of any Tax Item and notices of proposed adjustments
affecting the treatment of any Tax Item) with the IRS or other Taxing Authority
which may affect any Tax Item of the other Party. Such other Party shall have
the right to provide the Party having primary responsibility for the audit with
information and input as to the response to such communication as may be
appropriate under the circumstances. The Party having primary responsibility
for the Tax Controversy shall notify all affected Parties promptly if any Taxing
Authority proposes an assessment of Taxes for which any other Party to this
Agreement could be obligated to indemnify or a Party with direct responsibility
for payment of the Tax liability to the Taxing Authority is other than the Party
with responsibility for the handling of Tax Controversy.
6.2 Cooperation. (a) The Parties agree that they shall afford full
-----------
cooperation to each other in handling, settling, or contesting any Tax
Controversy including, without limitation:
i) the timely filing of appropriate claims for any refund which may
be available on account of an item of loss, deduction or credit
of any member of the GCI Group;
ii) preparing and submitting responses to information requests by any
Taxing Authority;
iii) making available books, records and other documentation
(including, but not by way of limitation, working papers and
schedules) relevant to such proceeding, and systems support for
documentation furnished in electronic form;
iv) making directors, officers or employees available to appear in
person for interview or for testimony;
v) making employees available on a mutually convenient basis to
provide additional information and explanation of materials
provided hereunder;
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<PAGE>
vi) executing powers of attorney, tax information authorizations and
any other necessary or appropriate authorizations; and
vii) executing agreements with the Taxing Authority reasonably
necessary or appropriate for the settlement or pursuit of the
contest of such issue.
viii) executing and filing any petitions, memoranda, and/or such
other documentation with the Taxing Authority or any court as may
reasonably necessary or appropriate in pursuit of the contest of
such issue.
(b) The Party(ies) that may be affected by a Tax Controversy for which
another Party has responsibility and discretion in handling, settling, or
contesting shall have the right to have its representatives, at its expense,
participate in (1) all conferences, meetings, or proceedings with any Taxing
Authority, and (2) all appearances before any court, the subject matter of which
includes an issue that may affect such Party.
(c) The right to participate referred to in Section 6.2(b) hereof shall
include right to review the submission and content of documentation, memoranda
of fact and law and briefs, to be present and submit input to the Party with
primary Tax Controversy responsibility, or its representatives, with respect to
the conduct of oral arguments or presentations, the selection of witnesses, and
the negotiation of stipulations of fact with respect to the issue.
6.3 Waiver of Indemnification. A Party with a right to indemnification
-------------------------
under this Agreement with respect to any Tax liability that does not have the
primary responsibility to handle, settle, or contest any Tax Controversy under
the provisions of this Section VI may waive the right to such indemnification
and assume the primary responsibility (at its expense) to handle, settle, or
contest that portion of the Tax Controversy for which such Party has primary
liability for the Tax liability.
6.4 Record Retention. The Parties agree to retain all books, records,
----------------
returns, schedules, documents and all material papers or relevant items of
information for periods (or portions thereof) prior to the Date of Distribution
until the later of (i) seven (7) years after the Date of Distribution or (ii)
the expiration of the full periods of the applicable statutes of limitations,
including any extensions thereof.
ARTICLE VII.
INDEMNIFICATION
---------------
7.1 Indemnification for Taxes. (a) New GranCare and the other members of
-------------------------
the New GranCare Group agree to pay, and to indemnify and to hold GCI and each
member of the Post-Distribution GCI Group harmless from and against, any and all
Tax liability (other than a
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liability for Restructuring Taxes) of each member of the GCI Group to the extent
that such Tax liability relates to a period (or portion thereof) which ends on
or before the Distribution Date.
(b) New GranCare and the other members of the New GranCare Group agree to
pay, and to indemnify and to hold GCI and each member of the Post-Distribution
GCI Group harmless from and against, any and all Restructuring Taxes allocable
to New GranCare or any member of the New GranCare Group in accordance with
Article IV of this Agreement.
(c) New GranCare and the other members of the New GranCare Group agree to
pay, and to indemnify and to hold GCI and each member of the Post-Distribution
GCI Group harmless from and against, any and all Tax liability (in accordance
with Article III or V hereof) to New GranCare or any member of the New GranCare
Group.
(d) GCI agrees to pay, and to indemnify and to hold New GranCare and each
member of the New GranCare Group harmless from and against, any and all Tax
liability (other than a liability for Restructuring Taxes) allocable (in
accordance with Article III or V of this Agreement) to GCI or a member of the
Post-Distribution GCI Group to the extent that such Tax liability relates to a
period (or portion thereof) which begins after the Distribution Date.
(e) GCI agrees to pay, and to indemnify and to hold New GranCare and each
member of the New GranCare Group harmless from and against, any and all
Restructuring Taxes allocable to GCI or the Post-Distribution GCI Group in
accordance with Article IV of this Agreement.
ARTICLE VIII.
ALLOCATION OF TAX BENEFITS RELATED TO STOCK OPTION EXPENSE
----------------------------------------------------------
8.1 Payroll Tax Reporting and Withholding. Upon the exercise of any
-------------------------------------
nonqualified stock option, or the disqualifying disposition of stock acquired
upon exercise of any incentive stock option, covered by the Employee Benefits
Matters Agreement, the employer of the employee exercising such option or making
such disqualifying disposition of stock shall be responsible for collecting from
the employee and timely remitting to the applicable Taxing Authority any
required income, employment, payroll, or other tax withholding with respect to
the income to be recognized by such employee as a result of such exercise or
disqualifying disposition, and shall include on such employee's annual wage
statement or other payroll tax reporting form for the calendar year in which the
option is exercised or the disqualifying disposition occurs the amount of such
income and withholdings. In addition, upon the exercise of any nonqualified
stock option, or the disqualifying disposition of stock acquired upon exercise
of any incentive stock option, covered by the Employee Benefits Matters
Agreement, the employer of the employee exercising such option or making such
disqualifying disposition of stock shall be responsible for paying to any
applicable Taxing Authority any Taxes imposed on an employer in connection with
such exercise or disqualifying disposition. If an employee
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exercises an option with respect to, or makes a disqualifying disposition of,
other than his or her employer's stock, then the issuer of that stock shall be
required to provide the employer with information sufficient to allow the
employer to satisfy its withholding and reporting obligations, including,
without limitation, the number of option shares exercised or shares disposed of
in a disqualifying disposition, the fair market value of the issuer's stock on
the date of exercise and, if applicable, the date of disposition, and the option
price paid for the stock. The issuer of such stock shall retain the stock to be
issued upon the exercise of an option by a person who is not an employee of such
issuer until such time as both the exercise price for the stock has been paid
and any required withholding with respect to the income to be recognized by such
person has been remitted to his or her employer. The employer, if the employer
is not the issuer of the stock, shall promptly notify the issuer when such
required withholding has been remitted.
8.2 Tax Deduction and Allocation of Tax Benefit. The employer of an
-------------------------------------------
employee exercising a stock option, or making a disqualifying disposition of
stock acquired upon exercise of any incentive stock option, covered by the
Employee Benefits Matters Agreement shall be entitled to claim any and all
deductions, to the extent permitted, on any Tax Return for the income recognized
by such employee as a result of such exercise or disqualifying disposition. Not
later than ninety (90) days after the end of each calendar year during which a
stock option is exercised, or a disqualifying disposition of stock acquired upon
exercise of any incentive stock option occurs, which is covered by the Employee
Benefits Matters Agreement, the Post-Distribution GCI Group and the New GranCare
Group shall each compute, and shall provide a schedule to the other Party
showing such computation, the total amount of income included in its employees'
annual wage statements or other payroll tax reporting forms for the calendar
year with respect to stock options, or disqualifying dispositions of stock
acquired upon the exercise of any incentive stock option, covered by the
Employee Benefits Matters Agreement which have been exercised or for which there
has been a disqualifying disposition during that calendar year for which no
member of the respective group (or another corporation which has become the
common parent that includes such group) is the issuer of such stock. If, for
such calendar year, the total amount of income included in the annual wage
statements or other payroll tax reporting forms of the employees of the Post-
Distribution GCI Group as a result of the exercise of stock options, or
disqualifying dispositions of stock acquired upon the exercise of any incentive
stock option, covered by the Employee Benefits Matters Agreement for which no
member of the Post-Distribution GCI Group (or another corporation which has
become the common parent that includes the Post-Distribution GCI Group) is the
issuer of such stock exceeds the total amount of income included in the annual
wage statements or other payroll tax reporting forms of the employees of the New
GranCare Group as a result of the exercise of stock options or disqualifying
dispositions of stock acquired upon the exercise of any incentive stock option
covered by the Employee Benefits Matters Agreement for which no member of the
New GranCare Group (or another corporation which has become the common parent
that includes the New GranCare Group) is the issuer of such stock, then GCI
shall pay to New GranCare, not later than ten (10) days after the exchange of
such computations, an amount equal to such excess times the sum of the highest
federal income tax rate under Code Section 11 (or any successor provision
thereto) applicable to a corporation that is in effect for the calendar year
-20-
<PAGE>
for which such computation is being made plus five percent (5%). If, for such
calendar year, the total amount of income included in annual wage statements or
other payroll tax reporting forms of the employees of the New GranCare Group as
a result of the exercise of stock options, or disqualifying dispositions of
stock acquired upon the exercise of any incentive stock option, covered by the
Employee Benefits Matters Agreement for which no member of the New GranCare
Group (or another corporation which has become the common parent that includes
the New GranCare Group) is the issuer of such stock exceeds the total amount of
income included in annual wage statements or other payroll tax reporting forms
of the employees of the Post-Distribution GCI Group as a result of the exercise
of stock options, or disqualifying dispositions of stock acquired upon the
exercise of any incentive stock option, covered by the Employee Benefits Matters
Agreement for which no member of the Post-Distribution GCI Group (or another
corporation which has become the common parent that includes the Post-
Distribution GCI Group) is the issuer of such stock, then New GranCare shall pay
to GCI, not later than ten (10) days after the exchange of such computations, an
amount equal to such excess times the sum of the highest federal income tax rate
under Code Section 11 (or any successor provision thereto) applicable to a
corporation that is in effect for the calendar year for which such computation
is being made plus five percent (5%). In addition, each Party shall reimburse
the other Party for the payroll Taxes imposed on such other Party under Code
Section 3111(a) and (b) in respect of any income recognized by its employees to
the extent that such income was taken into account in determining the payment to
be made under either of the two previous sentences. In determining the amount
of such reimbursement payable to the other Party, it shall be assumed that such
income was the last item of income earned by the employee during the applicable
year. In the event that it is determined as a result of a challenge by a Taxing
Authority that a member of one of the groups claiming a deduction as a result of
an exercise of an option or a disqualifying disposition of stock covered by this
Article VIII is not entitled to such deduction, and a member of the other group
is entitled to claim such deduction and receives a refund of or reduction in
Taxes as a result of claiming such deduction, then no payment with respect to
such deduction shall be due under this Section 8.2 (including any payment for
reimbursement of payroll Taxes paid as an employer) or, if a payment has already
been made with respect to such deduction, then such payment (net of any
reimbursement for payroll Taxes) shall be returned to the Party who originally
made such payment. For purposes of this Article VIII, a person whose employment
has terminated prior to the time an option covered by the Employee Benefits
Matters Agreement is exercised shall be treated as an employee of the group by
which he or she was last employed.
ARTICLE IX.
PAYMENTS
--------
9.1 Payments in General. Except as otherwise provided in this Agreement,
-------------------
any amount required to be paid by one Party pursuant to this Agreement shall be
paid in immediately available funds within thirty (30) days after written demand
therefor from the other Party.
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<PAGE>
9.2 Interest on Late Payments. Any amount payable under this Agreement by
-------------------------
one Party to another Party shall, if not paid by the due date specified in this
Agreement, bear interest from such due date until the date paid at the
underpayment rates applicable under Section 6621 of the Code on and after the
due date.
9.3 Character and Effect of Payments. The Parties agree that for income
--------------------------------
and other Tax purposes all amounts paid pursuant to this Agreement by one Party
to the other Party (other than interest payments pursuant to Section 9.2) shall
be treated by the Parties as made directly to the third parties to which such
payment is due. If, notwithstanding such treatment by the Parties, any payment
by either Party is determined to be taxable to the other Party by any Taxing
Authority, the payor shall also indemnify the other Party for the amount of any
Taxes and related Expenses payable by the other Party by reason of the receipt
of such payment. In addition, the amount of any indemnity payment due under this
Agreement shall be computed by properly taking into account any Tax Benefit
actually realized by the recipient from the payment of the item at issue (net of
the Taxes and related Expenses described in the preceding sentence).
9.4 Notice. The Parties shall give each other prompt notice of any payment
------
that may be due under this Agreement.
ARTICLE X.
ADMINISTRATIVE PROVISIONS
-------------------------
10.1 Interest. Except as expressly provided herein, no obligation to pay or
--------
right to collect interest or other amounts shall arise by virtue of this
Agreement.
10.2 Expenses. Except as expressly provided herein, each Party to this
--------
Agreement hereby agrees to be responsible for all of the expenses which it may
incur in carrying out its duties hereunder.
ARTICLE XI.
MISCELLANEOUS
-------------
11.1 Prior Agreement. This Agreement supersedes and terminates the Tax
---------------
Sharing Agreement dated December 29, 1993, between GCI and TeamCare.
11.2 Modification of Agreement. No modification, amendment or waiver or any
-------------------------
provision of this Agreement shall be effective unless the same shall be in
writing, and signed by each of the Parties hereto and then such modification,
amendment or waiver shall be effective only in the specific instance and for the
purpose for which given.
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<PAGE>
11.3 Successors and Assigns. Except as hereinafter provided, neither this
----------------------
Agreement nor any rights hereunder shall be assignable or transferable by any
Party hereto, without the prior written consent of the other Parties hereto,
except by operation of law. Each Party hereby guarantees the performance of all
actions, agreements, and obligations provided for under this Agreement by each
of its Subsidiaries it has at the time such performance is required. Each Party
shall, upon the written request of any other Party, cause any of its
Subsidiaries formally to execute this Agreement. This Agreement shall be binding
upon, and shall inure to the benefit of, the successors and assigns of the
corporations bound hereby.
11.4 Term. This Agreement shall commence on the date of execution indicated
----
above and shall continue in effect until otherwise agreed to in writing by the
Parties or their successors. Notwithstanding any other provision in this
Agreement, this Agreement shall remain in effect and its provisions shall
survive for the full period of all applicable statutes of limitation (giving
effect to any extension, waiver, or mitigation thereof).
11.5 Rights Confined to Parties. Nothing expressed or implied herein is
--------------------------
intended or shall be constructed to confer upon or to give to any person firm or
corporation (other than the Parties hereto, and their successors and assigns)
any right, remedy or claim under or by reason of this Agreement or of any term,
covenant or condition hereof. All terms, covenants, conditions, promises and
agreements contained herein shall be for the sole and exclusive benefit of the
Parties hereto, and their successors and assigns.
11.6 Notices. All demands, notices, and communications under this Agreement
-------
shall be in writing and shall be deemed to have been duly given on the date on
which such demand, notice, or communication is personally delivered or sent by
certified or registered United States Mail, postage prepaid, to:
a) in the case of GCI and/or a member of the Post-Distribution GCI Group:
GranCare, Inc.
c/o Vitalink Pharmacy Services, Inc.
1250 E. Diehl Road
Naperville, Illinois 60563
b) in the case of New GranCare and/or a member of the New GranCare Group:
New GranCare, Inc.
One Ravinia Drive
Suite 1500
Atlanta, GA 30346
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<PAGE>
11.7 Effect of Headings. The paragraph headings herein are for convenience
------------------
only and shall not affect the construction hereof.
11.8 Governing Law. The governing law provision of this Agreement shall be
-------------
identical to the governing law provision of the Distribution Agreement.
11.9 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall, when so executed, be considered an original
and all of which, taken together, shall be considered one document.
IN WITNESS WHEREOF, the Parties hereto have caused their names to be
subscribed and executed by their respective authorized officers on the dates
indicated, effective as of the day first written above.
GRANCARE, INC.
By:___________________________ Date:___________________________
NEW GRANCARE, INC.
By:___________________________ Date:___________________________
TEAMCARE, INC.
By:___________________________ Date:___________________________
TEAMCARE CLINICAL SERVICES, INC.
By:___________________________ Date:___________________________
COMPUPHARM OF NORTHERN CALIFORNIA, INC.
By:___________________________ Date:___________________________
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<PAGE>
TEAMCARE OF INDIANA, INC.
By:___________________________ Date:___________________________
TEAMCARE OF VIRGINIA, INC.
By:___________________________ Date:___________________________
COMPUPHARM OHIO PHARMACY, INC.
By:___________________________ Date:___________________________
GCI INNOVATIVE PHARMACY, INC.
By:___________________________ Date:___________________________
SPAN PURCHASING, INC.
By:___________________________ Date:___________________________
GCI-CAL THERAPIES, INC.
By:___________________________ Date:___________________________
GCI THERAPIES, INC.
By:___________________________ Date:___________________________
AMS GREEN TREE, INC.
By:___________________________ Date:___________________________
AMERICAN-CAL MEDICAL SERVICES, INC.,
By:___________________________ Date:___________________________
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<PAGE>
HMI CONVALESCENT CARE, INC.
By:___________________________ Date:___________________________
GRANCARE SOUTH CAROLINA, INC.
By:___________________________ Date:___________________________
GCI PALM COURT, INC.
By:___________________________ Date:___________________________
GCI EAST VALLEY MEDICAL & REHABILITATION CENTER, INC.
By:___________________________ Date:___________________________
GCI REALTY, INC.
By:___________________________ Date:___________________________
GCI JOLLEY ACRES, INC.
By:___________________________ Date:___________________________
GCI PRINCE GEORGE, INC.
By:___________________________ Date:___________________________
GCI SPRINGDALE VILLAGE, INC.
By:___________________________ Date:___________________________
GCI VILLAGE GREEN, INC.
By:___________________________ Date:___________________________
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<PAGE>
GCI FAITH NURSING HOME, INC.
By:___________________________ Date:___________________________
GCI REHAB, INC.
By:___________________________ Date:___________________________
GCI-CAL HEALTH CARE CENTERS, INC.
By:___________________________ Date:___________________________
GRANCARE HOME HEALTH SERVICES, INC.
By:___________________________ Date:___________________________
RENAISSANCE MENTAL HEALTH CENTER, INC.
By:___________________________ Date:___________________________
COORDINATED HOME HEALTH SERVICES, INC.
By:___________________________ Date:___________________________
GRANCARE NURSING SERVICES AND HOSPICE, INC.
By:___________________________ Date:___________________________
AMS PROPERTIES, INC.
By:___________________________ Date:___________________________
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<PAGE>
EVERGREEN HEALTH CARE, INC.
By:___________________________ Date:___________________________
NATIONAL HERITAGE REALTY, INC.
By:___________________________ Date:___________________________
OMEGA/INDIANA CARE CORPORATION
By:___________________________ Date:___________________________
EH ACQUISITION CORP., INC.
By:___________________________ Date:___________________________
EH ACQUISITION CORP. II, INC.
By:___________________________ Date:___________________________
EH ACQUISITION CORP. III, INC.
By:___________________________ Date:___________________________
HERITAGE OF LOUISIANA, INC.
By:___________________________ Date:___________________________
HEALTH RESOURCES, INC.
By:___________________________ Date:___________________________
NATIONAL HERITAGE PHARMACY, INC.
By:___________________________ Date:___________________________
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<PAGE>
HERITAGE STERLING FINANCIAL SERVICES, INC.
By:___________________________ Date:___________________________
STERLING HEALTH CARE, INC.
By:___________________________ Date:___________________________
EH RESOURCES, INC.
By:___________________________ Date:___________________________
EVERGREEN RETIREMENT MANAGEMENT COMPANY
By:___________________________ Date:___________________________
GCI HEALTH CARE CENTERS, INC.
By:___________________________ Date:___________________________
GC SERVICES, INC.
By:___________________________ Date:___________________________
GRANCARE TRADING, INC.
By:___________________________ Date:___________________________
GCI VALLEY MANOR HEALTH CARE CENTER, INC.
By:___________________________ Date:___________________________
GCI CAMELIA CARE CENTER, INC.
By:___________________________ Date:___________________________
-29-
<PAGE>
CORNERSTONE HEALTH MANAGEMENT COMPANY
By:___________________________ Date:___________________________
STONECREEK MANAGEMENT COMPANY, INC.
By:___________________________ Date:___________________________
HOSTMASTERS, INC.
By:___________________________ Date:___________________________
GCI COLTER VILLAGE, INC.
By:___________________________ Date:___________________________
GCI INDEMNITY, INC.
By:___________________________ Date:___________________________
GCI BELLA VITA, INC.
By:___________________________ Date:___________________________
GCI WISCONSIN PROPERTIES, INC.
By:___________________________ Date:___________________________
GCI ASHLAND HEALTH CARE CENTER, INC.
By:___________________________ Date:___________________________
GCI NORTH SHORE HEALTH CARE CENTER, INC.
By:___________________________ Date:___________________________
-30-
<PAGE>
GCI HILLSIDE HEALTH CARE CENTER, INC.
By:___________________________ Date:___________________________
GCI FAMILY NURSING HOME AND REHABILITATION CENTER, INC.
By:___________________________ Date:___________________________
GRANCARE GPO SERVICES, INC.
By:___________________________ Date:___________________________
GRANCARE SIMI VALLEY HEALTHCARE CENTER, INC.
By:___________________________ Date:___________________________
PROFESSIONAL HEALTH CARE MANAGEMENT, INC.
By:___________________________ Date:___________________________
CAMBRIDGE BEDFORD, INC.
By:___________________________ Date:___________________________
CAMBRIDGE EAST, INC.
By:___________________________ Date:___________________________
CAMBRIDGE NORTH, INC.
By:___________________________ Date:___________________________
CAMBRIDGE SOUTH, INC.
By:___________________________ Date:___________________________
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<PAGE>
CLINTONAIRE NURSING HOME, INC.
By:___________________________ Date:___________________________
CRESTMONT HEALTH CENTER, INC.
By:___________________________ Date:___________________________
FRENCHTOWN NURSING HOME, INC.
By:___________________________ Date:___________________________
HERITAGE NURSING HOME, INC.
By:___________________________ Date:___________________________
MADONNA NURSING CENTER, INC.
By:___________________________ Date:___________________________
MIDDLEBELT NURSING HOME, INC.
By:___________________________ Date:___________________________
MIDDLEBELT-HOPE NURSING HOME, INC.
By:___________________________ Date:___________________________
NIGHTINGALE EAST NURSING CENTER, INC.
By:___________________________ Date:___________________________
ST. ANTHONY NURSING HOME, INC.
By:___________________________ Date:___________________________
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<PAGE>
INTERNATIONAL HEALTH CARE MANAGEMENT, INC.
By:___________________________ Date:___________________________
INTERNATIONAL X-RAY, INC.
By:___________________________ Date:___________________________
-33-
<PAGE>
Schedule 2.2
------------
Corporation(s): Returns:
- --------------- --------
Compupharm LTC, Inc. All property tax returns
All members of the Post-Distribution GCI Group All Forms 1099
All members of the Post-Distribution GCI Group All payroll tax forms,
including Forms W-2
All members of the Post-Distribution GCI Group Quarterly and annual payroll
tax withholding
All members of the Post-Distribution GCI Group Quarterly and annual social
security tax withholding
All members of the Post-Distribution GCI Group Quarterly and annual
unemployment tax returns
-34-
<PAGE>
EXHIBIT 10.40
NON-COMPETITION AGREEMENT
-------------------------
AGREEMENT, dated as of February 12, 1997 (the "Agreement"), by and among
Vitalink Pharmacy Services, Inc. Vitalink Pharmacy Services, Inc., a Delaware
corporation ("Vitalink"), Manor Care, Inc., a Delaware corporation ("Manor
Care") and New GranCare, Inc., a California corporation ("New GranCare").
RECITALS
WHEREAS, in accordance with the terms of an Amended and Restated Agreement
and Plan of Distribution dated September 3, 1996 (the "Distribution Agreement")
between GranCare, Inc. and New GranCare,Inc., the Skilled Nursing Businesses
currently conducted by GranCare, Inc., a California corporation ("GranCare"),
will be restructured such that all such businesses will be held by GranCare
(capitalized terms used herein and not defined shall have the meaning set forth
in the Distribution Agreement); and
WHEREAS, pursuant to an Amended and Restated Agreement and Plan of Merger
(the "Merger Agreement") dated September 3, 1996 between Vitalink and GranCare,
Vitalink and GranCare will combine their respective pharmacy businesses and
GranCare will be merged with and into Vitalink (the "Merger") with Vitalink the
surviving corporation; and
WHEREAS, pursuant to the Distribution Agreement, immediately prior to the
Merger the stockholders of GranCare will receive as a dividend one share of
common stock of New GranCare for each share of GranCare common stock currently
held by them as of the Distribution Record Date; and
WHEREAS, to induce GranCare to enter into the Merger Agreement and the
Distribution Agreement, Manor Care, New GranCare and Vitalink have agreed to
enter into this Agreement for the purpose of regulating, for a period of three
years from the Effective Time, certain aspects of their business relationships;
NOW, THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants, agreements and conditions contained
herein, the parties hereto agree as follows:
ARTICLE I
NON-COMPETITION -- PHARMACY BUSINESS
Section 1.1 Non-competition. Manor Care, and New GranCare acknowledge
---------------
that: the principal business of Vitalink is, and will be following the Merger,
the institutional pharmacy business (the "Institutional Pharmacy Business"), the
Institutional Pharmacy Business of Vitalink is national in scope and Vitalink
will suffer substantial and irreparable harm in the event Manor Care or New
GranCare should engage in the Institutional Pharmacy Business in
<PAGE>
competition with Vitalink. Accordingly, for a period of three years from the
Effective Time neither Manor Care nor New GranCare will, directly or indirectly,
own, manage, operate, join, control or participate in the ownership, management,
operation or control of any person (other than Vitalink) that is engaged in the
Institutional Pharmacy Business in the United States, other than temporarily as
provided in Section 1.3 hereof.
Section 1.2 Severability. Manor Care and New GranCare acknowledge that
------------
the restricted period of time and geographical area under Section 1.1 hereof are
reasonable, in view of the nature of the Institutional Pharmacy Business, the
knowledge of Manor Care and New GranCare of the Institutional Pharmacy Business
and transactions contemplated by the Distribution Agreement and the Merger
Agreement. Notwithstanding the foregoing, if any provision, or any part thereof,
of this Article I is held to be unenforceable because of the duration thereof or
the area covered thereby, the parties agree that the court making the
determination shall have the power to reduce the duration or the area of such
provision or to delete specific words or phrases, and in its reduced or amended
form such provision shall then be enforceable and enforced.
Section 1.3 Option to Purchase.
------------------
(a) Vitalink recognizes that Manor Care and New GranCare each (as it has in
the past) may in the future acquire healthcare businesses (an "Acquisition")
which also include an Institutional Pharmacy Business or an interest therein,
the ownership or possession of which would violate the terms of Section 1.1
hereof. Vitalink agrees that Manor Care or New GranCare may make such an
Acquisition so long as it complies with the terms of this Section 1.3. The
proposed acquiror (Manor Care or New GranCare, as the case may be, the
"Acquiror") shall, not less than 30 days prior to the proposed closing date of
the Acquisition, give written notice (the "Purchase Notice") to Vitalink of the
terms of such Acquisition including, the identity of the seller (the "Seller")
and the proposed purchase price for the Acquisition and audited historical
financial statements of the Acquisition and of the Institutional Pharmacy
Business portion of the Acquisition for a period of three fiscal years prior to
the Acquisition to the extent available and otherwise unaudited financial
statements. The purchase price for the Institutional Pharmacy Business to be
paid by Vitalink shall be the price specified by the Acquiror ("Purchase Price")
in the Purchase Notice, which price shall not exceed an amount equal to 120
percent of the product of (i) the earnings before interest, taxes, depreciation
and amortization for the most recent fiscal year determined in accordance with
generally accepted accounting principles consistently applied ("EBITDA") as
reflected in the most recent annual financial statement of the Institutional
2
<PAGE>
Pharmacy Business portion of the Acquisition and (ii) a fraction, the numerator
of which is the aggregate purchase price for the Acquisition and the denominator
of which is the EBITDA for the most recent fiscal year as reflected in most
recent annual financial statement of the Acquisition. Vitalink shall have the
right to purchase the Institutional Pharmacy Business portion of the Acquisition
by giving written notice to the Acquiror within 15 business days following
receipt of the Purchase Notice. Vitalink and the Acquiror shall negotiate in
good faith regarding the other terms of the purchase of such Institutional
Pharmacy Business by Vitalink with reference to the manner and under the terms
and conditions as the Acquisition and shall execute such documents reasonably
required to document such purchase.
(b) In the event Vitalink elects not to purchase such Institutional
Pharmacy Business at the Purchase Price, the Acquiror nonetheless may complete
the Acquisition but use its commercially reasonable efforts to divest itself of
such Institutional Pharmacy Business within one year of the closing of the
Acquisition. In such event, the Acquiror may divest such Institutional Pharmacy
Business without further obligation to Vitalink at a price payable in cash that
equals or exceeds the Purchase Price provided that the Institutional Pharmacy
Business is otherwise being sold on the same terms as it had been proposed to be
sold to Vitalink.
(c) In the event that Acquiror determines to sell such Institutional
Pharmacy Business for a price less than the Purchase Price, the Acquiror shall
give prompt written notice to Vitalink (the "Sale Notice"), which Sale Notice
shall contain (i) the proposed minimum sale price and (ii) all other material
terms and conditions of the proposed sale. Each Sale Notice shall be deemed and
irrevocable offer to sell, on the terms set forth in such Sale Notice and
herein, such Institutional Pharmacy Business and Vitalink will have the
irrevocable and exclusive option, as hereinafter provided, to buy on the terms
set forth in such Sale Notice and herein, such Institutional Pharmacy Business.
Within 10 business days following receipt by Vitalink of the Sale Notice,
Vitalink shall give written notice to the Acquiror if Vitalink elects to
purchase such Institutional Pharmacy Business (the "Acceptance Notice"). If the
Acquiror does not receive the Acceptance Notice from Vitalink within such ten
business-day period, Vitalink shall be deemed to have declined to purchase such
Institutional Pharmacy Business and the Acquiror shall be free to sell such
Institutional Pharmacy Business at a price equal to or exceeding the price and
on the terms specified in the Sale Notice. If Vitalink elects to purchase such
Institutional Pharmacy Business, the Acceptance Notice shall be deemed to be an
irrevocable commitment to purchase such Institutional Pharmacy Business on the
terms set
3
<PAGE>
forth in such Sale Notice and herein. Upon exercise of Vitalink's right of
first offer pursuant to this Section 1.3(c), the Acquiror and Vitalink shall be
legally obligated to consummate the purchase and sale contemplated thereby. The
Acquiror and Vitalink shall negotiate in good faith regarding the other terms of
the purchase and shall use all commercially reasonable efforts to secure any
approvals required in connection therewith and to close such purchase and sale
as soon as reasonably practicable.
(d) The parties hereto agree that the acquisition after the Time of
Distribution by GranCare of the businesses code-named "Project Balloon" shall be
exempt from this Article I.
ARTICLE II
NON-COMPETITION-SKILLED NURSING BUSINESSES
Section 2.1 Non-competition. Vitalink acknowledges that: one of the
---------------
principal businesses of each of Manor Care and New GranCare is the construction
and management of skilled nursing facilities (the "Skilled Nursing Business");
that the Skilled Nursing Business of Manor Care and New GranCare is national in
scope and that Manor Care and New GranCare will suffer substantial and
irreparable harm in the event Vitalink should enter into competition with Manor
Care and New GranCare. Accordingly, for a period of three years from the
Effective Time Vitalink will not, directly or indirectly, own, manage, operate,
join, control or participate in the ownership, management, operation or control
of any business that is engaged in the Skilled Nursing Business in the United
States, other than temporarily as provided in Section 2.3 hereof.
Section 2.2 Severability. Vitalink acknowledges that the restricted
------------
period of time and geographical area under Section 2.1 hereof are reasonable, in
view of the nature of the Skilled Nursing Business, the knowledge of Vitalink of
the Skilled Nursing Business and transactions contemplated by the Distribution
Agreement and the Merger Agreement. Notwithstanding the foregoing, if any
provision, or any part thereof, of this Article II is held to be unenforceable
because of the duration thereof or the area covered thereby, the parties agree
that the court making the determination shall have the power to reduce the
duration or the area of such provision or to delete specific words or phrases,
and in its reduced or amended form such provision shall then be enforceable and
enforced.
Section 2.3 Notification. Vitalink hereby agrees that, in the event it
------------
acquires assets associated with the Skilled Nursing Business, or a company
engaged in the Skilled Nursing Business,
4
<PAGE>
as a result of the acquisition of one or more businesses not in the Skilled
Nursing Business, it will notify Manor Care and New GranCare upon its
acquisition thereof of the nature of such assets or company. Vitalink also
agrees that it will divest itself of such assets or company within one year of
the acquisition thereof.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Section 3.1 Representations and Warranties of Manor Care. Manor Care is
----------------------------------------
duly organized, validly existing in good standing under the laws of the State of
Delaware and has the requisite corporate power and authority to carry on its
business as now being conducted. Manor Care has the requisite corporate power
and other authority to enter into this Agreement and consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by Manor Care
and the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Manor Care. This
Agreement has been duly executed and delivered by Manor Care and constitutes a
valid and binding obligation of Manor Care enforceable against it in accordance
with its terms.
Section 3.2 Representations and Warranties of Vitalink. Vitalink is duly
------------------------------------------
organized, validly existing and in good standing under the laws of the State of
Delaware and has the requisite corporate power and authority to carry on its
business as now being conducted. Vitalink has the requisite corporate power and
other authority to enter into this Agreement and consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by Vitalink
and the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Vitalink. This
Agreement has been duly executed and delivered by Vitalink and constitutes a
valid and binding obligation of Vitalink, enforceable against it in accordance
with its terms.
Section 3.3 Representations and Warranties of New GranCare. New GranCare
----------------------------------------------
is duly organized, validly existing and in good standing under the laws of the
State of Delaware and has the requisite corporate power and authority to carry
on its business as now being conducted. New GranCare has the requisite corporate
power and other authority to enter into this Agreement and consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
by New GranCare and the consummation of the transactions contemplated hereby
have been duly authorized by all necessary corporate action on the part of New
GranCare. This Agreement has been duly executed and delivered by New GranCare
and constitutes a valid and
5
<PAGE>
binding obligation of New GranCare, enforceable against it in accordance with
its terms.
ARTICLE IV
MISCELLANEOUS
Section 4.1 Governing Law. This Agreement shall be governed by the laws
-------------
of the State of Delaware (regardless of the law that might otherwise govern
under applicable Delaware principles of conflicts of law) as to all matters,
including but not limited to matters of validity, construction, effect,
performance and remedies.
Section 4.2 Binding Effect. This Agreement shall be binding on and inure
--------------
to the benefit of the parties hereto and their respective legal representatives,
successor and assigns. Nothing in this Agreement, expressed or implied is
intended to confer on any persons other than the parties hereto or their
respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
Section 4.3 Notices, Etc. All notices and other communications hereunder
------------
shall be in writing and shall be delivered in the manner and at the address
(unless subsequently notified to the contrary in the manner provided therein) as
provided in the Merger Agreement (in the case of Manor Care and Vitalink) and in
the Distribution Agreement (in the case of New GranCare).
Section 4.4 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.
Section 4.5 Amendment. This Agreement may be amended, modified or
---------
supplemented only with the written agreement of Vitalink, New GranCare and Manor
Care.
IN WITNESS WHEREOF, the parties hereto have executed this agreement as of
the date above written.
MANOR CARE, INC.
By: /s/ James H. Rempe
----------------------------------
Name: James H. Rempe
Title: Senior Vice President
6
<PAGE>
VITALINK PHARMACY SERVICES, INC.
By: /s/ Scott T. Macomber
-----------------------------------
Name: Scott T. Macomber
Title: Vice President, Finance
NEW GRANCARE, INC.
By: /s/ Jerry A. Schneider
-----------------------------------
Name:
Title:
7
<PAGE>
EXHIBIT 10.44
LIMITED GUARANTY
----------------
LIMITED GUARANTY (this "Guaranty") dated as of February 12, 1997, made by
--------
VITALINK PHARMACY SERVICES, INC., a Delaware corporation (the "Guarantor"), in
---------
favor of HEALTH AND RETIREMENT PROPERTIES TRUST, a real estate investment trust
formed under the laws of the State of Maryland (together with its successors and
assigns, "HRP").
---
WITNESSETH
----------
WHEREAS, HRP, HostMasters, Inc., a California corporation ("HMI"),
---
GranCare, Inc. (f/k/a AMS Holding Co.), a California corporation ("GranCare") ,
--------
American Medical Services, Inc., a Wisconsin corporation ("AMSI") and AMS
----
Properties, Inc., a Delaware corporation ("AMS") have entered into an
---
Acquisition Agreement, Agreement to Lease and Mortgage Loan Agreement dated as
of December 28, 1990, as amended (as so amended, the "Acquisition Agreement"),
---------------------
under which, inter alia, (A) HRP has leased 18 nursing properties located in
----- ----
Wisconsin, California, Colorado and Illinois to AMS pursuant to the several
Facility Leases (as amended, the "AMS Facility Leases"), each incorporating a
-------------------
Master Lease Document General Terms and Conditions dated as of December 28, 1990
(as amended, the "AMS Master Lease") between HRP, as landlord, and AMS, as
----------------
tenant, and (B) HRP has made a mortgage loan to AMS in the original principal
amount of $11,500,000, the payment of which is currently evidenced by a
Promissory Note dated as of October 1, 1994 by AMS to HRP (the "AMS Note") and
--------
is secured, inter alia by Mortgage and Security Agreements dated as of March 31,
----------
1995 (collectively, the "AMS Mortgages") by AMS in favor of HRP encumbering the
-------------
two nursing facilities in Wisconsin;
WHEREAS, the terms defined in the Acquisition Agreement are used herein as
therein defined, unless otherwise defined herein;
WHEREAS, (a) in May 1991, the AMSHC Exchange (as defined in the Acquisition
Agreement) took place, whereby GranCare, which previously had been a wholly-
owned subsidiary of HMI, became the sole stockholder of HMI and AMSI; and (b) in
December 1993, AMSI, which previously had owned all the outstanding common stock
of AMS, and AMS Rehab, Inc., a Delaware corporation and a wholly-owned
subsidiary of GranCare, each merged into AMS, with AMS as the surviving
corporation;
WHEREAS, HRP has leased 7 nursing and/or residential living properties
located in Arizona, California and South Dakota to GCI Health Care Centers,
Inc., a Delaware corporation ("GCI") pursuant to the several Facility Leases (as
---
amended, the "GCI Facility Leases"), each incorporating a Master Lease Document
-------------------
General Terms and Conditions dated as of June 30, 1992 (as amended, the "GCI
---
Master Lease") between HRP, as landlord, and GCI, as tenant;
- ------------
WHEREAS, GranCare, which holds beneficially and of record all of the
outstanding capital stock of AMS and GCI, proposes to transfer all of its
skilled nursing, home health care, assisted living and contract management
business (including, without limitation, such capital stock), and related
<PAGE>
assets, to New GranCare, Inc., a Delaware corporation and a wholly-owned
subsidiary of GranCare ("New GranCare"), with GranCare thereafter distributing
------------
New GranCare common stock to GranCare shareholders (collectively, the
"Distribution");
- -------------
WHEREAS, immediately following the Distribution, GranCare shall merge with
and into the Guarantor, with the Guarantor as the surviving corporation (the
"Merger");
- -------
WHEREAS, GranCare has requested that HRP agree to (a) waive the provisions
of Section 9.15A of the Acquisition Agreement to permit the Distribution and
Merger and (b) release the Guarantor and its subsidiaries (including any
remaining Subsidiary of GranCare that becomes a subsidiary of the Guarantor as a
result of the Merger) and their respective successors and assigns from and
against any and all claims, liabilities and obligations, as successor by merger
to GranCare, under (A) the Acquisition Agreement, (B) the Representation Letter
and Indemnification Agreement dated June 30, 1992 by GCI, AMS and GranCare to
HRP (the "GCI Indemnity Agreement"), (C) the Guaranty, dated as of December 28,
-----------------------
1990, as amended, by GranCare in favor of HRP in respect of the obligations of
AMS (the "AMS Guaranty"), (D) the Guaranty dated as of June 30, 1992, as
------------
amended, by GranCare in favor of HRP in respect of the obligations of GCI (the
"GCI Guaranty"), (E) the Pledge Agreement, dated as of December 28, 1990, as
- -------------
amended, by GranCare in favor of HRP (the "AMS Pledge Agreement"), (F) the
Pledge Agreement, dated as of June 30, 1992 as amended, by GranCare in favor of
HRP (the "GCI Pledge Agreement"), (G) the Subordination Agreement, dated as of
--------------------
December 28, 1990, as amended, among GranCare, as subordinate creditor, AMS, as
debtor and HRP, as senior creditor (the "AMS Subordination Agreement"), (H) the
---------------------------
Subordination Agreement, dated as of June 30, 1992, as amended, among GranCare,
as subordinate creditor, GCI, as debtor and HRP, as senior creditor (the "GCI
---
Subordination Agreement"), and (I) any other agreements, instruments or
- -----------------------
understandings, written or oral, of GranCare with HRP or any of its affiliates
relating to or arising out of the transactions contemplated by the agreements
described in clauses (A) through (H) above; and HRP is, subject to the terms and
provisions of the Consent and Amendment to Transaction Documents dated as of
December 31, 1996 among GranCare, New GranCare, AMS, GCI and HRP (the
"Amendment"), willing to so agree, subject to, inter alia, the execution and
--------- ----- ----
delivery of this Guaranty by the Guarantor;
NOW, THEREFORE, in consideration of the premises contained herein and to
induce HRP to consent to the Distribution and Merger, and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the Guarantor hereby agrees with HRP as follows:
1. Defined Terms. Unless otherwise defined herein, terms which are defined
-------------
in the AMS Master Lease and used herein are so used as so defined. In addition,
the following terms shall have the meanings set forth below:
"Applicable Law" shall mean shall mean any law of any governmental
--------------
authority, whether domestic or foreign, including without limitation all
federal and state laws, to which the Person in question is subject or by
which it or any of its property is bound, and including without limitation
any: (a) administrative, executive, judicial, legislative or other action,
code, consent decree, constitution, decree, directive, enactment, finding,
guideline, injunction, interpretation, judgment, law, order, ordinance,
-2-
<PAGE>
policy statement, proclamation, promulgation, regulation, requirement,
rule, rule of law, rule of public policy, settlement agreement, statute, or
writ, of any governmental authority, domestic or foreign, whether or not
having the force of law; (b) common law or other legal or quasi-legal
precedent; or (c) arbitrator's, mediator's or referee's award, decision,
finding or recommendation, or, in any case, any particular section, part or
provision thereof.
"Assumption Agreement" shall mean the Assumption Agreement dated as of
--------------------
even date herewith by New GranCare in favor of HRP, as the same may be
amended, amended and restated, supplemented or modified from time to time,
pursuant to which New GranCare has agreed to assume the obligations of
GranCare under, inter alia, the Acquisition Agreement, the GCI Indemnity
----- ----
Agreement, the AMS Guaranty, the GCI Guaranty, the AMS Pledge Agreement.
the GCI Pledge Agreement, the AMS Subordination Agreement and the GCI
Subordination Agreement.
"Bankruptcy Code" means Title 11 of the United States Code.
---------------
"Consolidated Net Worth" of any Person shall mean, at any date as of
----------------------
which the amount thereof shall be determined, the consolidated total assets
of such Person and its Subsidiaries, minus all obligations that should, in
accordance with GAAP, be classified as liabilities on the consolidated
balance sheet of such Person and its Subsidiaries, including in any event
all Indebtedness.
"Contingent Obligation" shall mean, as applied to any Person, any
---------------------
direct or indirect liability, contingent or otherwise, of that Person (i)
with respect to any Indebtedness, lease, dividend or other obligation of
another if the primary purpose or intent thereof by the Person incurring
the Contingent Obligation is to provide assurance to the obligee of such
obligation of another that such obligation of another will be paid or
discharged, or that any agreements relating thereto will be complied with,
or that the holders of such obligation will be protected (in whole or in
part) against loss in respect thereof, or (ii) with respect to any letter
of credit issued for the account of that Person or as to which that Person
is otherwise liable for reimbursement of drawings. Contingent Obligations
shall include, without limitation (a) the direct or indirect guaranty,
endorsement (otherwise than for collection or deposit in the ordinary
course of business), co-making, discounting with recourse or sale with
recourse by such Person of the obligation of another, (b) the obligation to
make take-or-pay or similar payments if required regardless of non-
performance by any other party or parties to an agreement and (c) any
liability of such Person for the obligation of another through any
agreement (contingent or otherwise) (X) to purchase, repurchase or
otherwise acquire such obligation or any security therefor, or to provide
funds for the payment or discharge of such obligation (whether in the form
of loans, advances, stock purchases, capital contributions or otherwise) or
(Y) to maintain the solvency or any balance sheet item, level of income or
financial condition of another if, in the case of any agreement described
under subclauses (X) or (Y) of this sentence, the primary purpose or intent
thereof is as described in the preceding sentence. The amount of any
Contingent Obligation shall be equal to the amount of the obligation so
guaranteed or otherwise supported or, if less, the amount to which such
Contingent Obligation is specifically limited.
-3-
<PAGE>
"Default Amount" shall mean $15,000,000 or such lesser amount to which
--------------
the Guarantor's maximum liability hereunder has been reduced pursuant to
the second paragraph of Section 2 hereof.
---------
"Default Rate" shall mean 18% per annum.
------------
"GAAP" shall mean generally accepted accounting principles, consistently
----
applied.
"GranCare Companies" shall mean, collectively, New GranCare, AMS, GCI
------------------
and all Subsidiaries of any thereof (after giving effect to the Merger and
the Distribution), whether now existing or hereafter created, and any
successors of any thereof (individually, a "GranCare Company").
----------------
"GranCare Default" shall mean any GranCare Event of Default and any
----------------
event or condition which with the passage of time or giving of notice, or
both, would become a GranCare Event of Default.
"GranCare Documents" shall mean, collectively,
------------------
(i) the Acquisition Agreement, the GCI Indemnity Agreement, the AMS
Leases, the AMS Master Lease, the AMS Note, the GCI Leases, the GCI
Master Lease, all Security Documents (as such term is defined in
the Acquisition Agreement, and including, without limitation, the
AMS Guaranty, the GCI Guaranty, the AMS Pledge Agreement and the
GCI Pledge Agreement, in each case as modified by the Assumption
Agreement) and the Assumption Agreement, in each case as from time
to time in effect; and
(ii) any other present or future undertaking, agreement or instrument of
any kind whatsoever from time to time entered into by one or more
GranCare Companies with HRP (and any applicable third parties), or
to or for the benefit of HRP (and any applicable third parties),
each as from time to time in effect (and, in each case, whether or
not related to any transaction contemplated by any documents,
instruments or agreements listed in subparagraph (i) above).
"GranCare Event of Default" shall mean an "Event of Default" under and
-------------------------
as defined in any GranCare Document.
"Guarantor Default" shall mean any Guarantor Event of Default and any
-----------------
event or condition which with the passage of time or giving of notice, or
both, would become a Guarantor Event of Default.
"Guarantor Event of Default" shall mean an Event of Default under and as
--------------------------
defined in Section 15 hereof.
----------
-4-
<PAGE>
"Indebtedness" of any Person at any date shall mean, (a) all
------------
indebtedness of such Person for borrowed money or for the deferred purchase
price of property or services (excluding current trade liabilities incurred
in the ordinary course of business and payable in accordance with customary
practices, but including any class of capital stock of such Person with
fixed payment obligations or with redemption at the option of the holder),
or which is evidenced by a note, bond, debenture or similar instrument, (b)
all obligations of such Person under leases that should be treated as
capitalized leases in accordance with GAAP, (c) all obligations of such
Person in respect of acceptances issued or created for the account of such
Person, and all reimbursement obligations (contingent or otherwise) of such
Person in respect of any letters of credit issued for the account of such
Person, and (d) all liabilities secured by any Lien on any property owned
by such Person even though such Person has not assumed or otherwise become
liable for the payment thereof.
"Lien" means any lien, mortgage, pledge, assignment, security interest,
----
charge or encumbrance of any kind (including any conditional sale or other
title retention agreement, any lease in the nature thereof, and any
agreement to give any security interest) and any option, trust or other
preferential arrangement having the practical effect of any of the
foregoing.
"Material Adverse Effect" means a material adverse effect on (a) the
-----------------------
business, operations, property, condition (financial or otherwise) or
prospects of the Guarantor, or of the Guarantor and its Subsidiaries taken
as a whole, (b) the ability of the Guarantor to perform its obligations
under this Guaranty, or (c) the validity or enforceability of this
Guaranty, or the rights of HRP hereunder.
"Obligations" shall mean the payment and performance of each and every
-----------
obligation and liability of any GranCare Company to HRP under any GranCare
Document, whether now existing or hereafter arising or created, joint or
several, direct or indirect, absolute or contingent, due or to become due,
matured or unmatured, liquidated or unliquidated, arising by contract,
operation of law or otherwise, and including, without limitation, payment
of the principal, premium or prepayment fee and interest (including,
without limitation, Minimum Interest and Additional Interest, as such terms
are defined in the AMS Note) under any promissory note payable to HRP, and
the payment of rent under any lease with HRP as landlord (including,
without limitation, any Minimum Rent, Additional Rent and Additional
Charges, as such terms are defined in the AMS Leases or the GCI Leases).
"Person" shall mean any individual, corporation, firm, unincorporated
------
organization, association, partnership, trust, business trust, joint stock
company, joint venture or other organization, entity or business, or any
governmental organization or authority.
"Subsidiary" shall mean any Person of which any specified Person shall
----------
at the time, directly or indirectly through one or more of its
Subsidiaries, (a) own at least 50% of the outstanding capital stock (or
other shares of beneficial interest) entitled to vote generally, (b) hold
-5-
<PAGE>
at least 50% of the partnership, joint venture or similar interests or (c)
be a general partner or joint venturer.
2. Guaranty. The Guarantor hereby unconditionally and irrevocably
--------
guarantees to HRP the prompt and complete payment and performance by the
GranCare Companies (and each of them), when due (whether at stated maturity, by
acceleration or otherwise), of the Obligations. The Guarantor further agrees to
pay any and all expenses (including, without limitation, all reasonable fees and
disbursements of counsel to HRP) which may be paid or incurred by HRP in
enforcing, or obtaining advice of counsel in respect of, any of its rights under
this Guaranty. This Guaranty is a guaranty of payment and not of collectibility
and is absolute and in no way conditional or contingent. The Guarantor's
liability hereunder is direct and unconditional and may be enforced after
nonpayment or nonperformance by any GranCare Company of any Obligation without
requiring HRP to resort to any other Person (including without limitation such
GranCare Company) or any other right, remedy or collateral. This Guaranty shall
remain in full force and effect until the Obligations are paid in full.
Notwithstanding the aggregate amount of the Obligations at any time or from
time to time payable or to be payable by the GranCare Companies to HRP, the
liability of the Guarantor to HRP under this Section 2 shall not exceed the
---------
principal sum of Fifteen Million Dollars ($15,000,000) in the aggregate less
amounts paid by the Guarantor hereunder in respect of such principal sum;
provided that whenever, at any time, or from time to time, Guarantor shall make
any payment to HRP on account of its liability hereunder, it will notify HRP in
writing that such payment is made under this Guaranty for such purpose. The
Guarantor agrees that the Obligations may at any time and from time to time
exceed the amount of the liability of the Guarantor hereunder without impairing
this Guaranty or affecting the rights and remedies of HRP hereunder. No payment
or payments made by any GranCare Company or any other Person or received or
collected by HRP from any GranCare Company or any other Person by virtue of any
action or proceeding or any set-off or appropriation or application, at any time
or from time to time, in reduction of or in payment of the Obligations shall be
deemed to modify, reduce, release or otherwise affect the liability of the
Guarantor hereunder which shall, notwithstanding any such payment or payments,
remain liable for the amount of the Obligations until the Obligations are paid
in full (but subject as provided in this paragraph).
3. Costs and Expenses of Collection. The Guarantor agrees, as principal
--------------------------------
obligor and not as a guarantor only, to pay to HRP forthwith upon demand, in
immediately available funds, all costs and expenses (including, without
limitation, all court costs and all fees and disbursements of counsel to HRP)
incurred or expended by HRP in connection with the enforcement of this Guaranty,
together with interest on amounts recoverable under this Guaranty from the time
such amounts become due until payment at the Default Rate. The Guarantor's
covenants and agreements set forth in this Section 3 shall survive the
---------
termination of this Guaranty.
4. Right of Setoff. Regardless of the adequacy of any collateral or other
---------------
means of obtaining repayment of the Obligations, HRP is hereby authorized,
without notice to the Guarantor or compliance with any other condition precedent
now or hereafter imposed by Applicable Law (all of which are hereby expressly
waived to the extent permitted by Applicable Law) and to the fullest extent
permitted by Applicable Law, to set off and apply the Deposit Balance (as
hereinafter defined), interest thereon, and any other monies, securities,
-6-
<PAGE>
deposits or other property now or hereafter delivered to HRP as collateral
pursuant hereto, and all proceeds of any thereof, against the obligations of the
Guarantor under this Guaranty, whether or not HRP shall have made any demand
under this Guaranty, at any time and from time to time after the occurrence of a
Guarantor Event of Default, in such manner as HRP in its sole discretion may
determine, and the Guarantor hereby grants HRP a continuing security interest in
such Deposit Balance, interest, monies, securities, deposits and property as
collateral for the payment and performance of such obligations.
5. Subrogation and Contribution. Until the Obligations shall have been
----------------------------
paid and performed in full, the Guarantor irrevocably and unconditionally waives
any and all rights to which it may be entitled, by operation of law or
otherwise, to be subrogated, with respect to any payment made by the Guarantor
hereunder, to the rights of HRP against any GranCare Company, or otherwise to be
reimbursed, indemnified or exonerated by any GranCare Company in respect thereof
or to receive any payment, in the nature of contribution or for any other
reason, from any other guarantor of the Obligations with respect to any payment
made by the Guarantor hereunder (provided that the foregoing shall not prevent
the Guarantor from drawing (and retaining any amounts so drawn) under any letter
of credit issued by a bank for the account of any Person). Until the Obligations
shall have been paid and performed in full, the Guarantor waives any defense it
may have based upon any election of remedies by HRP which impairs the
Guarantor's subrogation rights or the Guarantor's rights to proceed against any
GranCare Company for reimbursement (including without limitation any loss of
rights the Guarantor may suffer by reason of any rights, powers or remedies of
such GranCare Company in connection with any anti-deficiency laws or any other
laws limiting, qualifying or discharging any indebtedness to HRP). Until the
Obligations shall have been paid, performed and satisfied in full, the Guarantor
further waives any right to enforce any remedy which HRP now has or may in the
future have against any GranCare Company, any other guarantor or any other
Person and any benefit of, or any right to participate in, any security
whatsoever now or in the future held by HRP.
6. Effect of Bankruptcy Stay. If acceleration of the time for payment or
-------------------------
performance of any of the Obligations is stayed upon the insolvency, bankruptcy
or reorganization of any GranCare Company or any other Person or otherwise, all
such amounts otherwise subject to acceleration shall nonetheless be payable by
the Guarantor under this Guaranty forthwith upon demand.
7. Receipt of GranCare Documents, etc. The Guarantor confirms, represents
----------------------------------
and warrants to HRP that (i) it has received true and complete copies of all
existing GranCare Documents from the GranCare Companies, has read the contents
thereof and reviewed the same with legal counsel of its choice; (ii) no
representations or agreements of any kind have been made to the Guarantor which
would limit or qualify in any way the terms of this Guaranty; (iii) HRP has made
no representation to the Guarantor as to the creditworthiness of any GranCare
Company; and (iv) the Guarantor has established adequate means of obtaining from
each GranCare Company on a continuing basis information regarding such GranCare
Company's financial condition. The Guarantor agrees to keep adequately informed
from such means of any facts, events, or circumstances which might in any way
affect the Guarantor's risks under this Guaranty, and the Guarantor further
-7-
<PAGE>
agrees that HRP shall have no obligation to disclose to the Guarantor any
information or documents acquired by HRP in the course of its relationship with
the GranCare Companies.
8. Amendments, etc. with Respect to the Obligations. The obligations of
------------------------------------------------
the Guarantor under this Guaranty shall remain in full force and effect without
regard to, and shall not be released, altered, exhausted, discharged or in any
way affected by any circumstance or condition (whether or not any GranCare
Company shall have any knowledge or notice thereof), including without
limitation (a) any amendment or modification of or supplement to any GranCare
Document, or any obligation, duty or agreement of the GranCare Companies or any
other Person thereunder or in respect thereof; (b) any assignment or transfer in
whole or in part of any of the Obligations; any furnishing, acceptance, release,
nonperfection or invalidity of any direct or indirect security or guaranty for
any of the Obligations; (c) any waiver, consent, extension, renewal, indulgence,
settlement, compromise or other action or inaction under or in respect of any
GranCare Document, or any exercise or nonexercise of any right, remedy, power or
privilege under or in respect of any such instrument (whether by operation of
law or otherwise); (d) any bankruptcy, insolvency, reorganization, arrangement,
readjustment, composition, liquidation or similar proceeding with respect to any
GranCare Company or any other Person or any of their respective properties or
creditors or any resulting release or discharge of any Obligation (including
without limitation any rejection of any lease pursuant to Section 365 of the
Federal Bankruptcy Code); (e) any new or additional financing arrangements
entered into by any GranCare Company or by any other Person on behalf of or for
the benefit of any GranCare Company; (f) the merger or consolidation of any
GranCare Company with or into any other Person or of any other Person with or
into any GranCare Company; (g) the voluntary or involuntary sale or other
disposition of all or substantially all the assets of any GranCare Company or
any other Person; (h) the voluntary or involuntary liquidation, dissolution or
termination of any GranCare Company or any other Person; (i) any invalidity or
unenforceability, in whole or in part, of any term hereof or of any GranCare
Document, or any obligation, duty or agreement of any GranCare Company or any
other Person thereunder or in respect thereof; (j) any provision of any
applicable law or regulation purporting to prohibit the payment or performance
by any GranCare Company or any other Person of any Obligation; (k) any failure
on the part of any GranCare Company or any other Person for any reason to
perform or comply with any term of any GranCare Document or any other agreement;
or (l) any other act, omission or occurrence whatsoever, whether similar or
dissimilar to the foregoing. The Guarantor authorizes each GranCare Company,
each other guarantor in respect of the Obligations and HRP at any time in its
discretion, as the case may be, to alter any of the terms of any of the
Obligations.
9. Guarantor as Principal. If for any reason the GranCare Companies, or
----------------------
any of them, or any other Person is under no legal obligation to discharge any
Obligation, or if any other moneys included in the Obligations have become
unrecoverable from the GranCare Companies, or any of them, or any other Person
by operation of law or for any other reason, including, without limitation, the
invalidity or irregularity in whole or in part of any Obligation or of any
GranCare Document, the legal disability of any GranCare Company or any other
obligor in respect of Obligations, any discharge of or limitation on the
liability of any GranCare Company or any other Person or any limitation on the
method or terms of payment under any Obligation, or of any GranCare Document,
which may now or hereafter be caused or imposed in any manner whatsoever
(whether consensual or arising by operation of law or otherwise), this Guaranty
-8-
<PAGE>
shall nevertheless remain in full force and effect and shall be binding upon the
Guarantor to the same extent as if the Guarantor at all times had been the
principal obligor on all Obligations (subject as provided in Section 2 hereof).
---------
10. Waiver of Demand, Notice, Etc. The Guarantor hereby waives, to the
------------------------------
extent not prohibited by applicable law, all presentments, demands for
performance, notice of nonperformance, protests, notices of protests and notices
of dishonor in connection with the Obligations or any GranCare Document,
including but not limited to (a) notice of the existence, creation or incurring
of any new or additional obligation or of any action or failure to act on the
part of any GranCare Company, HRP, any endorser or creditor of any GranCare
Company or any other Person; (b) any notice of any indulgence, extensions or
renewals granted to any obligor with respect to the Obligations; (c) any
requirement of diligence or promptness in the enforcement of rights under any
GranCare Document, or any other agreement or instrument directly or indirectly
relating thereto or to the Obligations; (d) any enforcement of any present or
future agreement or instrument relating directly or indirectly thereto or to the
Obligations; (e) notice of any of the matters referred to in Section 9 above;
---------
(f) any defense of any kind which the Guarantor may now have with respect to his
liability under this Guaranty; (g) any right to require HRP, as a condition of
enforcement of this Guaranty, to proceed against any GranCare Company or any
other Person or to proceed against or exhaust any security held by HRP at any
time or to pursue any other right or remedy in HRP's power before proceeding
against the Guarantor; (h) any defense that may arise by reason of the
incapacity, lack of authority, death or disability of any other Person or
Persons or the failure of HRP to file or enforce a claim against the estate (in
administration, bankruptcy, or any other proceeding) of any other Person or
Persons; (i) any defense based upon an election of remedies by HRP; (j) any
defense arising by reason of any "one action" or "anti-deficiency" law or any
other law which may prevent HRP from bringing any action, including a claim for
deficiency, against the Guarantor, before or after HRP's commencement of
completion of any foreclosure action, either judicially or by exercise of a
power of sale; (k) any defense based upon any lack of diligence by HRP in the
collection of any Obligation; (l) any duty on the part of HRP to disclose to the
Guarantor any facts HRP may now or hereafter know about any GranCare Company or
any other obligor in respect of Obligations; (m) any defense arising because of
an election made by HRP under Section 1111(b)(2) of the Federal Bankruptcy Code;
(n) any defense based on any borrowing or grant of a security interest under
Section 364 of the Federal Bankruptcy Code; (o) and any defense based upon or
arising out of any defense which any GranCare Company or any other Person may
have to the payment or performance of the Obligations (including but not limited
to failure of consideration, breach of warranty, fraud, payment, accord and
satisfaction, strict foreclosure, statute of frauds, bankruptcy, infancy,
statute of limitations, lender liability and usury). Guarantor acknowledges and
agrees that each of the waivers set forth herein on the part of the Guarantor is
made with Guarantor's full knowledge of the significance and consequences
thereof and that, under the circumstances, the waivers are reasonable. If any
such waiver is determined to be contrary to Applicable Law such waiver shall be
effective only to the extent not prohibited by such Applicable Law.
11. Reinstatement. This Guaranty shall continue to be effective, or be
-------------
reinstated, as the case may be, if at any time payment, or any part thereof, of
any of the Obligations or the payment of the Deposit Amount (as hereinafter
defined) is rescinded or must otherwise be restored or returned by HRP upon the
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insolvency, bankruptcy, dissolution, liquidation or reorganization of any
GranCare Company or upon or as a result of the appointment of a receiver,
intervenor or conservator of, or trustee or similar officer for, any GranCare
Company or any substantial part of its property, or otherwise, all as though
such payments had not been made.
12. Payments. The Guarantor hereby agrees that the Obligations, and all
--------
amounts payable hereunder, will be paid to HRP without set-off or counterclaim
in U.S. Dollars at the office of HRP located at 400 Centre Street, Newton,
Massachusetts 02158, or to such other location as HRP shall notify the
Guarantor.
13. Representations and Warranties. The Guarantor represents and warrants
------------------------------
that:
(A) Corporate Existence. The Guarantor is a corporation duly
-------------------
incorporated and validly existing under the laws of the jurisdiction of its
incorporation, and is duly licensed or qualified as a foreign corporation in
all states wherein the nature of its property owned or business transacted
by it makes such licensing or qualification necessary, except where the
failure to be licensed or to so qualify could not have a Material Adverse
Effect.
(B) No Violation. The execution, delivery and performance of this
------------
Guaranty will not contravene any provision of law, statute, rule or
regulation to which the Guarantor or any of its Subsidiaries is subject or
any judgment, decree, franchise, order or permit applicable to the Guarantor
or any of its Subsidiaries, or conflict or be inconsistent with or result in
any breach of, any of the terms, covenants, conditions or provisions of, or
constitute a default under, or result in the creation or imposition of (or
the obligation to create or impose) any Lien upon any of the property or
assets of the Guarantor or any of its Subsidiaries pursuant to the terms of
any agreement or instrument to which the Guarantor or any of its
Subsidiaries is party, or violate any provision of the respective corporate
charters or bylaws of the Guarantor or any of its Subsidiaries.
(C) Corporate Authority and Power. The execution, delivery and
-----------------------------
performance of this Guaranty is within the corporate powers of the Guarantor
and has been duly authorized by all necessary corporate action.
(D) Enforceability. This Guaranty has been duly executed and
--------------
delivered by the Guarantor, and this Guaranty constitutes the valid and
binding obligation of the Guarantor enforceable against the Guarantor in
accordance with its terms, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar
laws affecting the enforcement of creditors' rights generally and except as
enforceability may be subject to general principles of equity, whether such
principles are applied in a court of equity or at law.
(E) Governmental Approvals. No order, permission, consent, approval,
----------------------
license, authorization, registration or validation of, or filing with, or
exemption by, any governmental authority is required to authorize, or is
required in connection with, the execution, delivery and performance of this
Guaranty, or the taking of any action contemplated hereby or thereby.
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<PAGE>
(F) Financial Statements. The financial statements of the Guarantor
--------------------
contained in the Guarantor's Registration Statement on Form S-4 filed in
connection with the Merger, fairly present the consolidated financial
condition of the Guarantor and its Subsidiaries as of their date of
presentation, and the consolidated results of their operations and their
consolidated cash flows for the respective fiscal period then ended. The
Financial Statements (including in each case the related schedules and
notes) (i) have been prepared in accordance with GAAP applied consistently
throughout the periods involved (except as disclosed therein), (ii) are
true, complete and correct, and (iii) do not omit any material fact
necessary to make them not misleading.
(G) No Adverse Change. Other than as set forth in or contemplated by
-----------------
the Guarantor's Registration Statement on Form S-4 filed in connection with
the Merger, since May 31, 1996, there has been no change in the business
operations, management or properties, or in the condition, financial or
other, of the Guarantor and its Subsidiaries taken as a whole that has had
or could have a Material Adverse Effect.
(H) Litigation. The Guarantor has no notice or knowledge of any action,
----------
suit or proceeding pending or threatened against or affecting it at law or
in equity or before or by any governmental department, court, commission,
board, bureau, agency or instrumentality, domestic or foreign, or before any
arbitrator of any kind that would, to the best of its knowledge, information
or belief, materially and adversely affect its ability to perform its
obligations under this Guaranty.
(I) No Restrictions. Neither the Guarantor nor any of its Subsidiaries
---------------
has entered into any agreement or arrangement, written or oral, direct or
indirect, with any GranCare Company that either now or in the future would
have the effect of restricting the ability of any GranCare Company, or would
conflict with the right of any GranCare Company, to (a) enter into any new
or additional mortgage or lease financing, or any other transaction, with
HRP (including, without limitation, any transaction contemplated by Section
9.27 of the Acquisition Agreement), (b) extend or renew the term of any
mortgage or lease financing with HRP, (c) exercise any option to purchase
property from HRP or (d) take any other action permitted or required to be
taken by any GranCare Company pursuant to the terms of any GranCare
Document.
14. Covenants. The Guarantor hereby covenants and agrees with HRP that,
---------
from and after the date of this Guaranty until the Obligations are paid in full
or until the Release Date (as defined in Section 16 hereof):
----------
(a) the Guarantor shall not enter into any transaction of merger or
consolidation, or liquidate, wind-up or dissolve itself (or suffer any
liquidation or dissolution), or convey, sell, lease, sub-lease, transfer or
otherwise dispose of in one transaction or a series of transactions, all or
substantially all of its business, property or fixed assets, whether now owned
or hereafter acquired, except that the Guarantor may merge or consolidate with
any Person, or convey, transfer or lease substantially all of its assets so long
as
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<PAGE>
(A) no condition or event shall exist, either before or immediately
after giving effect to such merger or consolidation, or such conveyance,
transfer or lease, that constitutes a Guarantor Default;
(B) the successor formed by such consolidation or the survivor of such
merger or the Person that acquires by conveyance, transfer or lease
substantially all of the assets of the Guarantor, as the case may be, shall
be a corporation organized and existing under the laws of the United States
or any State thereof (including the District of Columbia), and, if the
Guarantor is not such corporation, (i) such corporation shall have executed
and delivered to HRP its assumption of the due and punctual performance and
observance of each covenant and condition of this Guaranty to the same
extent and with the same effect as though such corporation was a party
hereto and was named and defined as the "Guarantor" herein and (ii) shall
have caused to be delivered to HRP an opinion of nationally recognized
independent counsel, or other independent counsel reasonably satisfactory to
HRP, to the effect that all agreements or instruments effecting such
assumption are enforceable in accordance with their terms and comply with
the terms hereof; and
(i) if the survivor of any such merger is the Guarantor, the
Consolidated Net Worth of the Guarantor giving effect to such
merger shall not be less than $100,000,000; or
(ii) if the successor formed by such consolidation or the survivor of
such merger, if other than the Guarantor, or the Person that
acquires by conveyance, transfer or lease substantially all of the
assets of the Guarantor as an entirety, as the case may be, giving
effect to such consolidation or merger, or such conveyance,
transfer or lease, has either (x) a Consolidated Net Worth of not
less than $100,000,000 or (y) (A) paid HRP an amount in immediately
available funds equal to the Default Amount, free and clear of
claims of third parties, to be held by HRP as cash collateral for
the payment of the Guarantor's obligations hereunder (such amounts
to be applied by HRP to the payment and performance of the
obligations of the Guarantor (and its successors) hereunder as and
when the same become due and payable in accordance with the
provisions of this Guaranty) and (B) executed and delivered a cash
collateral pledge agreement in favor of HRP in respect of such cash
collateral (together with UCC-1 financing statements or similar
instruments if requested by HRP, and in form satisfactory to HRP),
which cash collateral pledge agreement shall be in form and
substance satisfactory to HRP in its sole discretion.
(b) The Guarantor shall not, and shall not permit any of its Subsidiaries
to, enter into any agreement or arrangement, written or oral, direct or
indirect, with any GranCare Company that would have the effect of restricting
the ability of any GranCare Company, or would conflict with the right of any
GranCare Company, to (a) enter into any new or additional mortgage or lease
financing, or any other transaction, with HRP (including, without limitation,
any transaction contemplated by Section 9.27 of the Acquisition Agreement), (b)
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<PAGE>
extend or renew the term of any mortgage or lease financing with HRP, (c)
exercise any option to purchase property from HRP or (d) take any other action
permitted or required to be taken by any GranCare Company pursuant to the terms
of any GranCare Document.
15. Guarantor Events of Default. If one or more of the following events (a
---------------------------
"Guarantor Event of Default") shall have occurred:
--------------------------
(A) the Guarantor shall fail to make punctual payment of any amount
payable hereunder as the same shall become due and payable; or
(B) any representation or warranty of the Guarantor contained in this
Guaranty, or any statement or certificate furnished pursuant to any
provision of this Guaranty or the Amendment, shall have been false,
incorrect or misleading in any material respect when made or so certified
to; or
(C) the Guarantor shall breach any of the provisions of, or fail duly to
observe or perform any covenant, agreement or provision contained in, this
Guaranty; or
(D) any obligation of the Guarantor in respect of any Indebtedness or
any Contingent Obligation with an aggregate amount of principal outstanding
(whether or not due) exceeding $10,000,000 (but excluding, in any event, the
obligations of the Guarantor hereunder) shall be declared to be or shall
become due and payable prior to the stated maturity thereof, or such
Indebtedness or Contingent Obligation shall not be paid as and when the same
becomes due and payable, or there shall occur and be continuing any default
under any instrument, agreement or evidence of indebtedness relating to any
such Indebtedness the effect of which is to permit the holder or holders of
such instrument, agreement or evidence of indebtedness, or a trustee, agent
or other representative on behalf of such holder or holders, to cause such
Indebtedness to become due prior to its stated maturity; or
(E) the Guarantor shall apply for or consent to the appointment of, or
the taking of possession by, a receiver, custodian, trustee or liquidator of
itself or of all or a substantial part of its property, make a general
assignment for the benefit of its creditors, commence a voluntary case under
the Bankruptcy Code, file a petition seeking to take advantage of any other
law relating to bankruptcy, insolvency, reorganization, winding-up, or
composition or readjustment of debts, fail to controvert in a timely and
appropriate manner, or acquiesce in writing to, any petition filed against
it in an involuntary case under the Bankruptcy Code, or take any corporate
action for the purpose of effecting any of the foregoing; or
(F) a proceeding or case shall be commenced, without the application or
consent of the Guarantor thereof in any court of competent jurisdiction,
seeking its liquidation, reorganization, dissolution or winding-up, or the
composition or readjustment of its debts, the appointment of a trustee,
receiver, custodian, liquidator or the like of the Guarantor or of all or
any substantial part of its assets, or similar relief in respect of the
Guarantor under any law relating to bankruptcy, insolvency, reorganization,
winding-up, or composition or adjustment of debts, and such proceeding or
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<PAGE>
case shall continue undismissed, or an order, judgment or decree approving
or ordering any of the foregoing shall be entered and continue unstayed and
in effect, for a period of 60 days; or an order for relief against the
Guarantor shall be entered in an involuntary case under the Bankruptcy Code;
or
(G) A judgment or judgments for the payment of money in excess of
$[10,000,000] (net of insurance proceeds) in the aggregate shall be rendered
against the Guarantor and any such judgment or judgments shall not have been
vacated, discharged, stayed or bonded pending appeal within thirty (30) days
from the entry thereof;
THEN, notwithstanding that no GranCare Event of Default may then have occurred
- ----
and be continuing, (a) in the event of a Guarantor Event of Default described in
paragraph (E) or (F) above, there shall become due and payable to HRP, and the
- ------------- ---
Guarantor shall immediately pay HRP, without notice or demand of any kind
whatsoever, an amount in immediately available funds equal to the Default
Amount, and (b) in the event of any other Guarantor Event of Default, upon
notice from HRP specifying such Guarantor Event of Default, there shall become
due and payable to HRP, and the Guarantor shall immediately pay HRP, an amount
in immediately available funds equal to Default Amount. The amounts so paid to
HRP shall be held as collateral for the payment of the Guarantor's obligations
hereunder. Such amounts shall be applied by HRP to the payment and performance
of the obligations of the Guarantor hereunder as and when the same become due
and payable in accordance with the provisions of this Guaranty.
16. Payment of Default Amount. Notwithstanding anything herein to the
-------------------------
contrary, upon the Guarantor's (i) payment to HRP of an amount in immediately
available funds equal to the Default Amount, free and clear of claims of third
parties, to be held by HRP as cash collateral for the payment of the Guarantor's
obligations hereunder (such amounts to be applied by HRP to the payment and
performance of the obligations of the Guarantor (and its successors) hereunder
as and when the same become due and payable in accordance with the provisions of
this Guaranty) and (ii) execution and delivery of a cash collateral pledge
agreement in favor of HRP in respect of such cash collateral (together with
executed UCC-1 financing statements or similar instruments if requested by HRP,
and in form satisfactory to HRP), which cash collateral pledge agreement shall
be in form and substance satisfactory to HRP in its sole discretion (the date
upon which the conditions in clauses (i) and (ii) have been satisfied, the
"Release Date"), Sections 14 and 15 hereof shall have no further force and
- ------------- ----------- --
effect, and (subject to Section 11 hereof) HRP shall look solely to such cash
----------
collateral for payment of the Guarantor's obligations hereunder (so long as such
cash collateral shall not thereafter become subject to any Lien or other claim
of any Person, other than the rights of the Guarantor hereunder). Without
limiting the foregoing, such cash collateral pledge agreement shall provide that
(A) the amount paid to HRP pursuant to this Section 16 , less amounts applied by
----------
HRP from time to time to the payment of the Obligations (the "Deposit Balance"),
---------------
shall bear interest at a per annum rate equal to the lesser of eight percent
(8%) per annum or the T-Bill Rate (as hereinafter defined), which interest shall
be payable to the Guarantor or to its order on each anniversary of the date of
the payment of such amount to HRP (the "Deposit Payment Date") so long as no
--------------------
GranCare Event of Default shall have occurred and be continuing on such interest
payment date, (B) the Deposit Balance, together with accrued but unpaid interest
thereon, shall be released to the Guarantor or to its order upon the payment in
full of the Obligations, and (C) the Deposit Balance and accrued interest
thereon may be commingled with the general assets of HRP. The term "T-Bill
Rate" means, with respect to the Deposit Balance, the yield to maturity implied
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<PAGE>
by (i) the yields reported as of 10:00 A.M. (New York City time) on the Deposit
Payment Date on the display designated as "Page 678" on the Telerate Access
Service (or such other display as may replace Page 678 on Telerate Access
Service) for 30-year U.S. Treasury securities, or (ii) if such yields are not
reported as of such time or the yields reported as of such time are not
ascertainable, the Treasury Constant Maturity Series Yields reported, for the
latest day for which such yields have been so reported as of the Deposit Payment
Date in Federal Reserve Statistical Release H.15 (519) (or any comparable
successor publication) for 30-year U.S. Treasury securities. Such implied yield
will be determined, if necessary, by converting U.S. Treasury bill quotations to
per annum bond-equivalent yields in accordance with accepted financial practice.
17. Supply Contracts. The Guarantor agrees that all agreements or
----------------
arrangements between the Guarantor and its Subsidiaries or representative or
agents on the one hand, and AMS or GCI on the other, providing for
pharmaceuticals or other supplies or services to be furnished to any facility
operated by AMS or GCI, shall provide that each such agreement or arrangement
shall be terminated and of no further force and effect, and all obligations and
liabilities thereunder released and terminated (other than obligations to pay
for services or supplies previously rendered or furnished), at any time upon
notice to the Guarantor by HRP after either (i) HRP terminates such lease with
AMS or GCI, accelerates the maturity of any promissory note of AMS or GCI, or
forecloses upon or exercises remedies of like effect in respect of the stock of
GCI or AMS pledged to HRP or (ii) the occurrence of an Event of Default
hereunder or under any other GranCare Document involving the bankruptcy or
insolvency of New GranCare, AMS, GCI or the Guarantor.
18. Severability. Any provision of this Guaranty which is prohibited or
------------
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
19. Additional Guaranties. This Guaranty shall be in addition to any other
---------------------
guaranty or other security for the Obligations, and it shall not be prejudiced
or rendered unenforceable by the invalidity of any such other guaranty or
security.
20. Paragraph Headings. The paragraph headings used in this Guaranty are
------------------
for convenience of reference only and are not to affect the construction hereof
or be taken into consideration in the interpretation hereof.
21. No Waiver, Cumulative Remedies. HRP shall not by any act (except by a
------------------------------
written instrument pursuant to Paragraph 22 hereof), delay, indulgence, omission
------------
or otherwise, be deemed to have waived any right or remedy hereunder or to have
acquiesced in any Default or in any breach of any of the terms and conditions
hereof. No failure to exercise, nor any delay in exercising, on the part of
HRP, any right, power or privilege hereunder shall operate as a waiver thereof.
No single or partial exercise of any right, power or privilege hereunder shall
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. A waiver by HRP of any right or remedy hereunder on
any one occasion shall not be construed as a bar to any right or remedy which
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<PAGE>
HRP would otherwise have on any future occasion. The rights and remedies herein
provided are cumulative, may be exercised singly or concurrently and are not
exclusive of any rights or remedies provided by law.
22. Waivers and Amendments; Successors and Assigns. None of the terms or
-----------------------------------------------
provisions of this Guaranty may be waived, amended, supplemented or otherwise
modified except by a written instrument executed by the Guarantor and HRP,
provided that any provision of this Guaranty may be waived by HRP in a letter or
agreement executed by HRP or by telecopy from HRP. This Guaranty shall be
binding upon the successors and assigns of the Guarantor and shall inure to the
benefit of HRP and its successors and assigns.
23. WAIVER OF JURY TRIAL; CONSENT TO JURISDICTION; GOVERNING LAW. THE
------------------------------------------------------------
GUARANTOR HEREBY EXPRESSLY WAIVES ANY RIGHT IT MAY NOW OR HEREAFTER HAVE TO A
JURY TRIAL IN ANY SUIT, ACTION OR PROCEEDING WHICH ARISES OUT OF OR BY REASON OF
THIS GUARANTY, ANY GRANCARE DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY AND
THEREBY.
BY ITS EXECUTION AND DELIVERY OF THIS GUARANTY, THE GUARANTOR (1) ACCEPTS
FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY,
THE NONEXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT
JURISDICTION IN THE COMMONWEALTH OF MASSACHUSETTS IN ANY ACTION, SUIT OR
PROCEEDING OF ANY KIND AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS
GUARANTY, ANY GRANCARE DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR
THEREBY, IN ADDITION TO ANY OTHER COURT IN WHICH SUCH ACTION, SUIT OR PROCEEDING
MAY BE BROUGHT; (2) IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED BY
ANY SUCH COURT IN ANY SUCH ACTION, SUIT OR PROCEEDING IN WHICH IT SHALL HAVE
BEEN SERVED WITH PROCESS IN THE MANNER HEREINAFTER PROVIDED; (3) TO THE EXTENT
THAT IT MAY LAWFULLY DO SO, WAIVES AND AGREES NOT TO ASSERT, BY WAY OF MOTION,
AS A DEFENSE OR OTHERWISE, IN SUCH ACTION, SUIT OR PROCEEDING ANY CLAIM THAT IT
IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT, THAT ITS PROPERTY
IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT THE ACTION, SUIT OR
PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE THEREOF IS
IMPROPER; AND (4) AGREES THAT PROCESS MAY BE SERVED UPON IT IN ANY SUCH ACTION,
SUIT OR PROCEEDING IN THE MANNER PROVIDED BY CHAPTER 223A OF THE GENERAL LAWS OF
MASSACHUSETTS, RULE 4 OF THE MASSACHUSETTS RULES OF CIVIL PROCEDURE OR RULE 4 OF
THE FEDERAL RULES OF CIVIL PROCEDURE.
THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE COMMONWEALTH OF MASSACHUSETTS.
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<PAGE>
24. Notices. All notices under this Guaranty shall be in writing, and shall
-------
be delivered by hand, by a nationally recognized commercial overnight delivery
service, by first class mail or by telecopy, delivered, addressed or
transmitted, if to HRP, at 400 Centre Street, Newton, Massachusetts 02158,
Attention: President (telecopy no. 617-332-2261), with a copy to Sullivan &
Worcester LLP, One Post Office Square, Boston, Massachusetts 02109, Attention:
Alexander A. Notopoulos, Esq. (telecopy no. 617-338-2880), and if to the
Guarantor, at its address or telecopy number set out below its signature in this
Guaranty. Such notices shall be effective: in the case of hand deliveries,
when received; in the case of an overnight delivery service, on the next
business day after being placed in the possession of such delivery service, with
delivery charges prepaid; in the case of mail, three days after deposit in the
postal system, first class postage prepaid; and in the case of telecopy notices,
when electronic indication of receipt is received. Either party may change its
address and telecopy number by written notice to the other delivered in
accordance with the provisions of this Section.
IN WITNESS WHEREOF, the undersigned has caused this Guaranty to be duly
executed and delivered as of the date first above written.
VITALINK PHARMACY SERVICES, INC.
By:
-------------------------------------
Title:
Address for Notices:
Vitalink Pharmacy Services, Inc.
1250 East Diehl Road
Naperville, Illinois 60563
Attention: President
Telecopy: (630) 245-4800
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<PAGE>
EXHIBIT 10.46
RELEASE AND SETTLEMENT AGREEMENT
This Release and Settlement Agreement ("AGREEMENT") is entered into as of
the 1st day of April, 1997 between and among the following parties:
Basic American Convalescent Centers, L.P., a Delaware limited partnership,
f/k/a Omega/Turtle Creek, L.P. ("BACC"), Jackson Leasing Co., L.L.P., an
Indiana limited liability partnership, f/k/a Jackson Leasing Co.
("JACKSON"), Turtle Creek Convalescent Centre, L.L.P., an Indiana limited
liability partnership, f/k/a Turtle Creek Convalescent Centre, an Indiana
general partnership ("TURTLE CREEK"), Children's Convalescent Centers,
Inc., an Indiana corporation, successor in interest to Turtle Creek
Investment Co. ("CHILDREN'S"), Jackson Realty and Builders Co., Inc., an
Indiana corporation ("REALTY"), and Medical Engineering, Inc., an Indiana
corporation ("ENGINEERING") (BACC, Jackson, Turtle Creek, Children's,
Realty and Engineering are hereinafter collectively referred to as the
"LESSOR GROUP"); and
GranCare, Inc., a California corporation ("OLD GRANCARE"), GranCare, Inc.,
a Delaware corporation ("NEW GRANCARE"), Evergreen Healthcare Ltd., L.P.,
an Indiana limited partnership, f/k/a Omega Health Care Ltd. ("EVERGREEN"),
Evergreen Healthcare, Inc., a Georgia corporation ("EVERCO"), a wholly-
owned subsidiary of New GranCare and sole limited partner of Evergreen,
Omega/Indiana Care Corp., Inc., an Indiana corporation ("OMEGA"), a wholly-
owned subsidiary of EverCo and general partner of Evergreen, and Connorwood
Healthcare, Inc., an Indiana corporation ("CONNORWOOD") (Old GranCare, New
GranCare, Evergreen, EverCo, Omega, and Connorwood are hereinafter
collectively referred to as the "LESSEE GROUP").
WHEREAS, Lessor Group and Lessee Group are currently parties to the
following agreements with respect to the eighteen (18) nursing facilities listed
in SCHEDULE A attached hereto (collectively, the "FACILITIES"):
Eleven (11) separate Lease Agreements each executed March 1, 1988 by and
between BACC and Evergreen, four (4) separate Lease Agreements each
executed March 1, 1988 by and between Jackson and Evergreen, one (1) Lease
Agreement executed October 1, 1989 by and between Jackson and Evergreen,
one (1) Lease Agreement executed March 1, 1988 by and between Turtle Creek
and Evergreen, and one (1) Lease Agreement executed March 1, 1988 by and
between Children's and Evergreen (hereinafter collectively referred to as
the "LEASES"); a Master Agreement In Respect To Leases Of Health Care
Facilities executed March 10, 1988 by and between BACC, Jackson, Turtle
Creek, Children's and Evergreen ("MASTER AGREEMENT"); an Amendment to 1988
Leases executed August 4, 1988 by and between BACC, Jackson, Turtle Creek,
Children's and Evergreen ("LEASE AMENDMENT"); an Amendment to 1988 Leases
(Consolidated) executed August 4, 1988 by and between BACC, Jackson, Turtle
Creek,
<PAGE>
Children's and Evergreen ("CONSOLIDATED LEASE AMENDMENT"); a
Maintenance Agreement executed August 4, 1988 by and between Realty and
Evergreen ("MAINTENANCE AGREEMENT"); and an Agreement for Purchase of
Computer Hardware and for License of Computer Software executed June 28,
1982 by and between Engineering and Evergreen ("SOFTWARE AGREEMENT") (the
Leases, Master Agreement, Lease Amendment, Consolidated Lease Amendment,
Maintenance Agreement, Software Agreement, and all other agreements, if
any, whether written or oral, in existence as of the date hereof between
Lessee Group and Lessor Group are hereinafter collectively referred to as
the "EXISTING AGREEMENTS"); and
WHEREAS, the parties have developed certain disagreements as to their
respective obligations under the Existing Agreements; and
WHEREAS, the following lawsuits related to the Existing Agreements are
currently pending:
BACC, Jackson, Turtle Creek and Children's, Plaintiffs v. GranCare,
Defendant, which is pending in the United States District Court for the
Southern District of Indiana, Indianapolis Division, under Case Number
IP97-0031-C-B/S ("INDIANA FEDERAL COURT LITIGATION"); BACC, Jackson, Turtle
Creek and Children's, Plaintiffs, v. GranCare, Evergreen, EverCo, and
Connorwood, Defendants, which is pending in the Hamilton County, Indiana,
Superior Court No. 2, under Cause No. 29D02-9701-CP-022 ("INDIANA STATE
COURT LITIGATION"); and Jackson, Plaintiff, v. Evergreen, EverCo, and
GranCare, Defendants, which is pending in the Circuit Court of Wood County,
West Virginia, under Civil Action No. 97-C-31 ("WEST VIRGINIA STATE COURT
LITIGATION") (the Indiana Federal Court Litigation, the Indiana State Court
Litigation, and the West Virginia State Court Litigation are hereinafter
collectively referred to as the "PENDING LITIGATION"); and
WHEREAS, Lessor Group and Lessee Group have agreed to settle their various
disputes and the Pending Litigation, subject to the following terms and
conditions set out in this Agreement; and
WHEREAS, the intent of the parties hereto is to transfer all of Lessee
Group's interest in the Facilities to Lessor Group's new tenant, EagleCare,
Inc., an Indiana corporation ("EAGLECARE"), in exchange for dismissal of the
Pending Litigation and a mutual release of any and all further claims or
obligations with respect to the Facilities under the Existing Agreements, or
otherwise, except for the obligations expressly set forth herein.
NOW, THEREFORE, in consideration of the premises, the mutual terms and
conditions hereof, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
2
<PAGE>
1. Assignment of Leases. Lessee Group agrees to execute and deliver to Lessor
---------------------
Group on or before 12:00 a.m., April 1, 1997 ("Effective Date") the following
instruments in the form attached hereto as EXHIBITS A1-A21 which (i) convey to
EagleCare all of Lessee Group's right, title and interest in the Leases, the
Master Agreement, the Lease Amendment and the Consolidated Lease Amendment, (ii)
release Lessee Group of any further obligations under such agreements, and
(iii) terminate any interest of Connorwood with respect to the Facilities:
a. An Assignment and Assumption of Lease for each of the eleven (11) BACC
Facilities listed on SCHEDULE A hereto executed by and between BACC,
Evergreen and EagleCare (attached hereto as EXHIBITS A1-A11).
b. An Assignment and Assumption of Lease for each of the five (5) Jackson
Facilities listed on SCHEDULE A hereto executed by and between
Jackson, Evergreen and EagleCare (attached hereto as EXHIBITS A12-
A16).
c. An Assignment and Assumption of Lease for the one (1) Turtle Creek
Facility listed on SCHEDULE A hereto executed by and between Turtle
Creek, Evergreen and EagleCare (attached hereto as EXHIBIT A17).
d. An Assignment and Assumption of Lease for the one (1) Children's
Facility listed on SCHEDULE A hereto executed by and between
Children's, Evergreen and EagleCare (attached hereto as EXHIBIT A18).
e. An Assignment and Assumption of Master Lease by and between BACC,
Jackson, Turtle Creek, Children's, Evergreen and EagleCare (attached
hereto as EXHIBIT A19).
f. A Sublease Termination Agreement for the four (4) Connorwood Subleased
Facilities listed on SCHEDULE A hereto executed by and between
Evergreen and Connorwood (attached hereto as EXHIBIT A20).
g. A Termination of Management Agreement by and between Evergreen and
Connorwood (attached hereto as EXHIBIT A21).
2. Termination of Maintenance Agreement and Software Agreement. Lessee Group
-----------------------------------------------------------
agrees to execute and deliver to Lessor Group on or before the Effective Date
the instruments in the form attached hereto as EXHIBITS B1-B2 which (i)
terminate the Maintenance Agreement and the Software Agreement in their
entirety, and (ii) deem all of the respective responsibilities and obligations
of the parties thereto to be fully satisfied. Without limiting the generality of
the foregoing, the parties hereto expressly acknowledge that, upon execution of
the attached instruments, all rights, privileges and obligations contemplated by
either the Maintenance Agreement or the Software Agreement will be null, void
and of no further force or effect without any further action by any of the
parties hereto.
3
<PAGE>
3. Conveyance of Personal Property. Lessee Group agrees to execute and deliver
-------------------------------
to Lessor Group on or before the Effective Date the following instruments in the
form attached hereto as EXHIBITS C1-C4 which (i) convey to Lessor Group all of
Lessee Group's interest in all of Lessee Group's personal property located at
the Facilities, but excluding from such conveyance Lessee Group's cash, accounts
receivable and any property located in Lessee Group's Carmel, Indiana office
and (ii) to the extent a conveyance or assignment is permitted and subject to
the provisions of Section 5(j) of this Agreement, convey or assign to Lessor
Group all of Lessee Group's right, title and interest in the Achieve/Benchmark
computer software (collectively the items in (i) and (ii) constitute the
"Transferred Assets"). Lessee Group acknowledges that the Transferred Assets are
limited solely to those described in the foregoing documents and that neither
Lessor Group nor EagleCare is assuming any obligations or liabilities of Lessee
Group except for those expressly assumed under this Agreement.
a. A Bill of Sale and Assignment of Interest in Assets for each of the
eleven (11) BACC Facilities listed on SCHEDULE A hereto executed by
and between BACC and Evergreen (attached hereto as EXHIBITS C1).
b. A Bill of Sale and Assignment of Interest in Assets for each of the
five (5) Jackson Facilities listed on SCHEDULE A hereto executed by
and between Jackson and Evergreen (attached hereto as EXHIBITS C2).
c. A Bill of Sale and Assignment of Interest in Assets for the one (1)
Turtle Creek Facility listed on SCHEDULE A hereto executed by and
between Turtle Creek and Evergreen (attached hereto as EXHIBIT C3).
d. A Bill of Sale and Assignment of Interest in Assets for the one (1)
Children's Facility listed on SCHEDULE A hereto executed by and
between Children's and Evergreen (attached hereto as EXHIBIT C4).
In consideration of execution and delivery of the foregoing conveyances of
personal property, Lessor Group agrees to pay Lessee Group the sum of three
hundred thousand dollars ($300,000.00) payable in equal installments due on or
before June 30, 1997, September 30, 1997, and December 31, 1997, and other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged.
4. Assignment of Interest in Executory Agreements. Lessee Group agrees to
----------------------------------------------
execute and deliver to Lessor Group on or before the Effective Date instruments
in a form attached hereto as EXHIBIT D which assign to EagleCare all of Lessee
Group's interest in those certain executory contracts set forth on SCHEDULE B
attached hereto with respect to the Facilities subject to any consent to
assignment required under such contracts. EagleCare agrees to execute and
deliver to Lessee Group on or before the Effective Date instruments evidencing
its acceptance of the assignment and assumption of the executory contracts set
forth on Schedule B.
4
<PAGE>
5. Transition Efforts and Post-Termination Revenues. For the period commencing
-------------------------------------------------
on the execution of this Agreement and extending through December 31, 1997
("Transition Period"), Lessee Group agrees to cooperate with Lessor Group and
EagleCare as may be reasonably requested by EagleCare in order to provide
continuity of patient care, employee retention, and to prepare and file all
documents required by regulatory bodies. Lessee Group hereby designates the
individuals on the attached SCHEDULE C as representatives of Lessee Group who
have authority to assist in the transition in each of the following areas:
accounting, MIS/data processing, operations, licensure, insurance, and human
resources. The cooperation between the parties includes, but is not limited to,
the following terms and conditions:
a. Payments Designated for Services Rendered Before the Effective Date.
-------------------------------------------------------------------
Lessee Group shall be entitled to retain all revenues, fees, and other payments
received after the Effective Date which are designated by the payor as payments
for services provided to patients before the Effective Date.
b. Payments Designated for Services Rendered After the Effective Date.
------------------------------------------------------------------
Lessor Group, or its tenant, EagleCare, shall be entitled to retain all
revenues, fees, and other payments received after the Effective Date which are
designated by the payor as payments for services provided to patients after the
Effective Date.
c. Non-Designated Payments. Payments received by either Lessee Group or
-----------------------
Lessor Group or its tenant, EagleCare, after the Effective Date from payors with
balances due and owing for services rendered both prior to and after the
Effective Date and for which the payor fails to designate how the payments
should be applied shall be applied (i) first to any balance for services
rendered after the Effective Date and second to any balance for services
rendered prior to the Effective Date, or (ii) in accordance with prior approved
arrangements by and between Lessee Group and the payor which have been disclosed
to Lessor Group or EagleCare. Lessor Group or EagleCare will pre-bill at the
beginning of each month and such monthly billing shall be deemed a balance due
upon issuance of such pre-bill. Eagle Care or Lessor Group shall not influence
how payors direct or describe any payments under this subsection or under
subsections (a) or (b) above.
d. Mutual Access to Cash Receipt Records. Lessee Group and Lessor Group or
-------------------------------------
its tenant, EagleCare, shall each have access to the records of account balances
and payments received by the other party upon reasonable notice during
reasonable business hours at a location designated by the keeper of such records
through December 31, 1997 in order to assist each party in the collection of its
accounts receivable.
e. Access to Other Records Existing As of the Effective Date. All medical
---------------------------------------------------------
and other records, including but not limited to accounting records, personal and
real property tax records, payroll records, cost report records, survey records,
employee benefit records, vendor records, personnel records, and computer
records, existing at the Facilities as of the Effective Date shall remain at the
Facilities, or if located elsewhere, shall be provided to Lessor Group or
EagleCare following reasonable request therefor. However, Lessee Group shall
have access to such records
5
<PAGE>
upon reasonable notice during reasonable business hours at a location designated
by the keeper of such records in order to review any such records that may be
reasonably required by Lessee Group in order to respond to audits, citations,
requests for information, claims, and other third party requests. No originals
of any patient records, customer or vendor lists, personnel files or other
facility records may be removed from the Facilities by Lessee Group without the
permission of Lessor Group or Eagle Care or until after copies of such records
are provided to Lessor Group or EagleCare.
f. Accounts Payable. Utility accounts and other accounts payable for
----------------
which invoices are received after the Effective Date for periods beginning
before the Effective Date and ending after the Effective Date will be prorated
by the parties.
g. Patient Funds Accounts. All patient funds accounts at the Facilities
----------------------
will be reconciled by Lessee Group as of the Effective Date and delivered to
Lessor Group or EagleCare together with original records related thereto.
h. Unemployment Compensation Rating. To the extent permitted by
--------------------------------
applicable state law, Lessee Group will execute all documents necessary to
assign its unemployment compensation experience rating or ratings for the
Facilities to Lessor Group or EagleCare. Lessee Group agrees to provide Lessor
Group or EagleCare with a copy of the first quarter 1997 state unemployment tax
returns.
i. Access Pending the Effective Date. Between the date of execution of
---------------------------------
this Agreement and the Effective Date, Lessor Group and EagleCare will have
reasonable access to the Facilities to inspect and repair plant and equipment at
their sole cost and expense, to inspect linens and supplies without performing
an inventory of such items, and for all other reasonable purposes in order to
perform a general due diligence review thereof. Lessor Group and EagleCare shall
also have reasonable access to inspect records related to the Facilities and
which are located in Atlanta, Georgia. Lessee Group, Lessor Group, and
EagleCare agree to develop a procedure for granting access for such inspections
and to permit EagleCare to interview existing employees of Lessee Group without
disruption of Lessee Group's operation of the Facilities. Any such access and
arrangement shall be subject to the reasonable control and discretion of Lessee
Group. Lessor Group and EagleCare agree to indemnify and hold Lessee Group
harmless from all claims, liabilities, penalties, assessments, and costs
relating to or arising out of Lessor Group's or EagleCare's access to the
Facilities prior to the Effective Date, except as expressly provided to the
contrary herein.
j. Mutual Access to Licensed Software During Transition. Notwithstanding
----------------------------------------------------
Lessee Group's conveyance and assignment, if permitted, to Lessor Group of all
of Lessee Group's right, title and interest in the Achieve/Benchmark computer
software maintained at the Facilities or at Lessee Group's Carmel, Indiana
office, Lessee Group is hereby granted a limited license to reasonable access to
such software, in a manner to be mutually determined between Lessee Group and
Lessor Group, or its designee, until March 31, 1998, in order to process Lessee
Group's accounts payable and accounts receivable information related to the
Facilities.
6
<PAGE>
k. Nonsolicitation of Certain Employees. Lessor Group and its new tenant,
------------------------------------
EagleCare, agree not to solicit, hire, or induce any of the existing Evergreen
or GranCare employees at Lessee Group's Carmel, Indiana office listed on the
attached SCHEDULE D to terminate such employment or to become employed by the
Lessor Group or EagleCare until January 1, 1998, unless the employee terminates
his or her employment without inducement by Lessor Group or EagleCare prior to
that date. Lessor Group and EagleCare agree to indemnify and hold Lessee Group
harmless from all claims, liabilities, penalties, assessments, and costs
relating to or arising out of Lessor Group's or EagleCare's failure to perform
this covenant between the date of execution of this Agreement and the Effective
Date, except as expressly provided to the contrary herein.
l. Credits/Rebates/Deposits. Lessor Group or its new tenant, EagleCare,
------------------------
agree to promptly remit to Lessee Group any credits, rebates or refunds of
deposits received by Lessor Group or EagleCare if such amounts are related to
payments made or services provided by Lessee Group prior to the Effective Date.
m. Payroll. On the payroll date immediately following the Effective Date,
-------
Lessee Group shall pay all of its employees at the Facilities for time worked
from the beginning of the pay period until the Effective Date. On that same
payroll date, Lessor Group or EagleCare shall pay all employees it hires from
the Effective Date through the end of the pay period.
n. Medicare Reimbursement Matters. Lessor Group or its new tenant,
------------------------------
EagleCare, will apply for Medicare certification and assume the existing
Medicare provider agreements in effect for the Facilities. Lessor Group or
EagleCare will utilize the existing provider number assigned by Medicare to
submit claims submitted for services rendered after the Effective Date. Lessor
Group or EagleCare will forward to Lessee Group copies of all Explanation of
Medicare Benefit (EOMB) forms containing any information regarding claims for
services rendered prior to the Effective Date within five (5) business days of
receipt of such EOMBs. If the remittance accompanying such EOMB is entirely
related to services rendered prior to the Effective Date, such remittance will
be transmitted with the EOMB. If the remittance contains payments for services
prior to and after the Effective Date, Lessor Group or EagleCare will remit
Lessee Group's portion of Medicare payments received with respect to services
rendered prior to the Effective Date within fifteen (15) calendar days of the
receipt of such payments. Lessee Group will file the Medicare Cost Reports for
the period ending December 31, 1996 within five (5) months after the reporting
year end, or no later than May 31, 1997. Lessee Group will file a Medicare Cost
Report for the period ending March 31, 1997 within ninety (90) days after the
Effective Date. Each party will remain liable for any Medicare overpayments it
received or receives related to services rendered by it which Medicare
subsequently attempts to recoup from the other party and agrees to defend and
indemnify the other party against such recoupment attempts.
o. Medicaid Reimbursement Matters. Lessor Group or its new tenant,
------------------------------
EagleCare, will apply for Medicaid certification and a new Medicaid provider
agreement for each of the Facilities. Lessor Group or EagleCare will not
utilize Lessee Group's existing provider number
7
<PAGE>
assigned by Medicaid in any manner to submit claims for services rendered after
the Effective Date. Lessor Group and EagleCare anticipate that each of the
Facilities will be assigned a new Medicaid number consisting of the prior
Medicaid number with a "B" modifier added to the end of the number, that an "A"
modifier will be added to the number currently used by Lessee Group, and that
Medicaid payments related to services rendered prior to the Effective Date will
be sent to the address indicated by Lessee Group utilizing the "A" number while
payments related to services rendered subsequent to the Effective Date will be
sent to the address indicated by Lessor Group or EagleCare utilizing the "B"
number. However, the parties agree to forward all remittances intended for the
other party within fifteen (15) calendar days of receipt of all such
remittances. Lessee Group will file all Medicaid Cost Reports for each reporting
year end within ninety (90) calendar days after the reporting year end and will
not request an extension of such filing deadline. Lessor Group or EagleCare will
file the Medicaid Cost Report for each of the Facilities for the period ending
December 31, 1997 and will remain liable for any Medicaid overpayments it
receives related to services rendered subsequent to the Effective Date. Lessee
Group will remain liable for any Medicaid overpayments it received or receives
related to services rendered prior to the Effective Date which Medicaid
subsequently attempts to recoup from Lessor Group or EagleCare except if such
overpayment is due to a cost report filed by Lessor Group or Eagle Care. Each
party will defend and indemnify the other against attempts by Medicaid to recoup
overpayments from the party who did not receive the overpayment. Lessor Group or
EagleCare shall have access upon request to inspect and copy the original source
documentation necessary to file and sustain an audit of cost reports filed by
Lessee Group. Documentation necessary to file and sustain an audit of a Medicaid
Cost Report will include the items on the attached SCHEDULE E. Lessee Group
shall retain such documentation until an audit is conducted or until receipt of
written verification from the auditors that no such audit will occur. Lessee
Group shall indemnify Lessor Group and EagleCare from any recoupments or rate
reductions due to the failure of Lessee Group to produce documentation for
services provided by Lessee Group prior to the Effective Date requested by an
auditor for any reason.
p. Licensure and Certification Survey Matters. Lessee Group will remain
------------------------------------------
liable for any fines or civil money penalties related to services provided prior
to the Effective Date and Lessor Group or Eagle Care will remain liable for any
fines or civil money penalties related to services provided after the Effective
Date. In cases where a fine or civil money penalty is imposed prior to the
Effective Date and continues in effect as of the Effective Date, Lessor Group or
EagleCare will be responsible for such amounts from and after the twentieth
(20th) day following the Effective Date. In cases where a fine or civil money
penalty is proposed prior to the Effective Date but not imposed until after the
Effective Date, Lessor Group or EagleCare will be responsible for such amounts
from and after the twentieth (20th) day following the date on which the fine or
penalty is imposed. Each party will defend and indemnify the other against
attempts to collect fines or civil money penalties from either party in a manner
inconsistent with this provision. If the licensure or Medicare or Medicaid
certification of any Facility has been terminated as of the Effective Date
(except for Ritter Healthcare Center) the assignment of the lease of that
facility shall not be effective until the date when such licensure and
certification is reinstated and Lessee Group shall use all reasonable methods to
promptly regain such licensure and certification.
8
<PAGE>
q. Real Estate Taxes. Lessee Group will pay the May and November 1997
-----------------
installments of real estate taxes related to the 1996 tax assessment for the
Facilities. Lessee Group will pay one-half of the May 1998 installment of real
estate taxes related to Lessee Group's occupancy of the Facilities during the
1997 assessment period. Lessee Group shall indemnify Lessor Group and EagleCare
from any costs or expenses incurred by Lessor Group or EagleCare related to
Lessee Group's failure to pay real estate taxes when due in accordance with this
provision.
r. Accrued Vacation. Lessee Group will remain liable to pay all accrued
----------------
vacation and sick pay benefits on the final payroll date for its terminated
employees. However, Lessor Group and its new tenant, EagleCare, agree that for
each employee terminated by Lessee Group who is offered and accepts employment
with Lessor Group or its new tenant, EagleCare, and who executes a written
consent agreeing to the following procedure in lieu of immediate payment by
Lessee Group, Lessor Group or EagleCare will credit that employee with the same
number of accrued benefit days and will invoice Lessee Group for no more than
such credited amounts actually paid to that employee when the credited benefit
time is used by the employee prior to April 1, 1998. Amounts paid by Lessor
Group or EagleCare under this arrangement will be invoiced to Lessee Group
within thirty (30) business days following each payroll date and Lessee Group
will pay such amounts within fifteen (15) days of receipt of such invoice
allowing three (3) days for receipt of invoices sent by United States Mail.
Notwithstanding this arrangement, Lessor Group and its new tenant, EagleCare,
will not be obligated to hire any or all of the employees terminated by Lessee
Group. Consents honored under this procedure must expressly provide that Lessor
Group and EagleCare reserve the right to establish different benefit policies
and will not be obligated to continue any or all of Lessee Group's employee
benefit policies.
s. Proprietary Rights. Lessee Group is the owner of certain operating
------------------
procedures that are proprietary in nature and which represent trade secrets of
Lessee Group. EagleCare will be permitted to utilize all of Lessee Group's
operating policies and procedures, including but not limited to Lessee Group's
personnel policies, patient care policies, and departmental policies for a
period of sixty (60) days after the Effective Date provided that EagleCare and
Lessor Group will treat confidentially such information (collectively, the
"Material"). Lessor Group and EagleCare agree that the Material will not be used
other than in connection with the day-to-day operation of the Facilities and
that the Material will be kept confidential in all respects; provided, however,
that (1) any of the Material may be disclosed, on a need-to-know basis, to
directors, officers, employees, attorneys and accountants (collectively,
"authorized recipients") of EagleCare or Lessor Group in connection with the
day to day operation of the Facilities; (2) Lessor Group and EagleCare will use,
and cause its authorized recipients to use, the same care and discretion with
regard to the Material as it employs with regard to similar information of its
own which it does not desire to publish, disclose or disseminate; and (3) any
disclosure of such information may be made to which Lessee Group consents in
advance in writing. Lessor Group and EagleCare agree to inform their authorized
recipients of the confidential nature of the Material and to direct its
authorized recipients to treat the Material confidentially and to use it only in
connection with the day-to-day operation of the Facilities. In the event that
Lessor
9
<PAGE>
Group, EagleCare, or any of their directors, officers and employees are
requested by oral or written order, inquiry or request for information or
documents in legal proceedings, interrogatories, subpoenas or any other
similar process to disclose any of the Material, Lessor Group and EagleCare
agree that they will provide Lessee Group with prompt notice of any such
order, inquiry or request so that either or both of them may seek an
appropriate protective order, or by mutual written agreement waive
compliance with this provisions of this Agreement. The name "Material" does
not include information which (i) is or becomes generally available to the
public other than as a result of a disclosure by Lessor Group, EagleCare,
or their directors, officers and employees, (ii) was available to Lessor
Group, EagleCare, or their authorized recipients, on a non-confidential
basis prior to its disclosure, or (iii) becomes available to Lessor Group,
EagleCare, or their authorized recipients on a non-confidential basis from
a source other than Lessee Group, provided that such source is not known or
should not reasonably have been known to Lessor Group or EagleCare or their
authorized recipients to be bound by a confidentiality agreement with
Lessee Group, or that such source is otherwise prohibited from transmitting
the Material by a contractual, legal or fiduciary obligation. Lessor Group
and EagleCare will promptly deliver to Lessee Group all documents
constituting all or any portion of the Material, without retaining any copy
or summary thereof on or before the expiration of the period of use
authorized by this Agreement. Lessor Group and EagleCare agree to indemnify
and hold Lessee Group harmless from all claims, liabilities, penalties,
assessments, and costs relating to or arising out of Lessor Group's or
EagleCare's failure to perform this covenant between the date of execution
of this Agreement and the Effective Date, except as expressly provided to
the contrary herein.
6. Representations and Warranties of Lessee Group. In order to induce
----------------------------------------------
Lessor Group to enter into this Agreement and to consummate the
transactions contemplated hereunder, Lessee Group makes the following
representations and warranties:
a. Organization, Power and Authority of Lessee Group. Each
-------------------------------------------------
entity in Lessee Group is duly organized and validly existing under the
laws of the respective State under which it was organized and has full
power and authority (i) to own its respective right, title and interest in
any of the Transferred Assets, (ii) to conduct the business of Lessee Group
as it is now being conducted, (iii) to enter into this Agreement and to
sell, convey, transfer, assign and deliver the Transferred Assets to Lessor
Group as provided herein, and (iv) to carry out the other transactions and
agreements contemplated hereby.
b. Due Authorization; Binding Obligation. The execution,
--------------------------------------
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
action of each entity in Lessee Group and no further approvals of any other
parties or governmental authorities are required to consummate the
transactions. This Agreement has been duly executed and delivered by Lessee
Group and is a valid and binding obligation of Lessee Group, enforceable in
accordance with its terms except to the extent that enforcement thereof may
be limited by bankruptcy, insolvency, reorganization, moratorium and other
laws enacted for the relief of debtors generally, from time to time in
effect and by general principles of equity and public policy. Neither the
execution and delivery of this Agreement nor
10
<PAGE>
the consummation of the transactions contemplated hereby will: (i) conflict
with or violate any provision of any entity in Lessee Group's
organizational documents, or of any law, ordinance or regulation or any
decree or order of any court or administrative or, to the best of Lessee
Group's knowledge, other governmental body which is either applicable to,
binding upon or enforceable against Lessee Group or requires any filing or
authorization under any applicable law, ordinance or regulation or (ii)
other than those contracts where the consent of a third party is required
but not yet obtained, result in any breach of or default under any
mortgage, contract, agreement, indenture, will, trust or other instrument
which is either binding upon or enforceable against Lessee Group or the
Transferred Assets.
c. Litigation Involving Lessee Group. Lessee Group will retain
---------------------------------
all benefits and liabilities associated with any actions, suits, claims,
governmental investigations or arbitration proceedings relating to Lessee
Group or its business at the Facilities which may be asserted or is pending
or to the best of knowledge of Lessee Group threatened against Lessee Group
with respect to its operation of the Facilities or affecting any of the
Transferred Assets, including, without limitation, any liability of any
member of Lessee Group for attorney fees and costs with respect to the
Tioga Pines class action litigation currently pending before the Hancock
-----------
County, Indiana, Circuit Court under Cause No. 30C01-9002-CP-00125.
d. Liabilities of Lessee Group. Lessee Group will pay all of its
liabilities which, if unpaid, could become a lien upon the Transferred
Assets or a charge against Lessor Group or EagleCare (including but not
limited to state income, sales and use taxes) ("Liabilities") which are due
and payable on or before the Effective Date or which become due and payable
following the Effective Date but are related to Lessee Group's use of the
Facilities prior to the Effective Date. Lessee Group (expressly excluding
Old GranCare) agrees to indemnify and hold Lessor Group and EagleCare
harmless from and against any and all such Liabilities, except as expressly
provided to the contrary herein.
e. No Material Changes. Between the date of execution of this
-------------------
Agreement and the Effective Date, Lessee Group will make no material
changes in operation of the Facilities, including without limitation: no
wage rates will be increased, except for regular annual merit increases
consistent with past practices, or decreased; levels of inventory, food
supplies, medical supplies, and other supplies will be maintained at the
average levels on hand as of execution of this Agreement; and no operating
policies and procedures or personnel policies will be materially changed
without consultation with Lessor Group or EagleCare.
f. Benefit Plans. All obligations of Lessee Group, whether
-------------
arising by operation of law, by contract, or by past custom, for payments
by Lessee Group, with respect to severance and unemployment compensation
benefits, pension and retirement benefits, social security benefits, or
other benefits for Lessee Group's present or former employees in respect of
periods prior to the Effective Date have been paid or shall be paid on or
promptly after the Effective Date. There are no circumstances that might
result in the imposition of a lien on any of the Transferred Assets or the
Facilities pursuant to (S)(S) 302 or 4068 of ERISA or (S) 412 of the Code.
It is not a principal purpose of the transactions contemplated by this
Agreement to
11
<PAGE>
evade or avoid liability under Sections 4069 or 4212 of ERISA. Lessee Group
will defend and indemnify Lessor Group and EagleCare against any such
claims or liabilities and expressly retains such liabilities.
7. Representations and Warranties of Lessor Group. In order to induce
----------------------------------------------
Lessee Group to enter into this Agreement and to consummate the
transactions contemplated hereunder, Lessor Group makes the following
representations and warranties:
a. Organization, Power and Authority of Lessor Group. Each
-------------------------------------------------
entity in Lessor Group is duly organized, validly existing and in good
standing under the laws of the State of its organization with full power
and authority to enter into this Agreement, to purchase the Transferred
Assets and to perform its obligations hereunder.
b. Due Authorization; Binding Obligation. The execution,
--------------------------------------
delivery and performance of this Agreement and all other agreements
contemplated hereby and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary action of each entity in
Lessor Group. This Agreement has been duly executed and delivered by Lessor
Group and is a valid and binding obligation of Lessor Group, enforceable in
accordance with its terms except to the extent that enforcement thereof may
be limited by bankruptcy, insolvency, reorganization, moratorium and other
laws enacted for the relief of debtors, generally, from time to time, in
effect and by general principles of equity and public policy. Neither the
execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will: (i) conflict with or violate any
provision of the organization documents of Lessor Group, or of any law,
ordinance or regulation, or of any decree or order of any court of
administrative or other governmental body which is either applicable to,
binding upon or enforceable against Lessor Group or requires any filing or
authorization under any applicable law, ordinance or regulation; or (ii)
result in any breach of or default under any mortgage, contract, agreement,
indenture, will, trust or other instrument which is either binding upon or
enforceable against Lessor Group.
c. Litigation Involving Lessor Group or EagleCare. Lessor Group
----------------------------------------------
or EagleCare will retain all benefits and liabilities associated with any
actions, suits, claims, governmental investigations or arbitration
proceedings relating to Lessor Group or EagleCare or their business at the
Facilities which may be asserted or threatened with respect to their
operation of the Facilities or their use of the Transferred Assets.
d. Liabilities of Lessor Group or EagleCare. Lessor Group and
----------------------------------------
EagleCare will pay all of their liabilities which are related to Lessor
Group's or EagleCare's use of the Facilities after the Effective Date.
Lessor Group and EagleCare agree to indemnify and hold Lessee Group
harmless from and against any and all claims, liabilities, penalties,
assessments, and costs relating to or arising out of their interest in or
use of the Facilities after the Effective Date, except as expressly
provided to the contrary herein.
8. Execution of Further Documents. Upon reasonable request, the parties
-------------------------------
shall execute, acknowledge and deliver all such further deeds, bills of
sale, assignments, transfers, conveyances, and assurances as may be
required to convey and transfer to and vest in Lessor
12
<PAGE>
Group the right, title and interest in the Transferred Assets transferred
pursuant hereto, and as may be appropriate to otherwise to carry out the
transactions contemplated by this Agreement.
9. Notice and Default. If either party fails to perform a covenant of
------------------
this Agreement which requires the payment of money to the other party or to
a third party, the non-defaulting party may give written notice to the
defaulting party of such default and the defaulting party shall have ten
(10) days in which to cure such default. If either party commits a material
breach of any other term or covenant of this Agreement, the non-defaulting
party shall give written notice to the defaulting party of such default and
the defaulting party shall have thirty (30) days in which to cure such
default. In the event that Lessor Group gives notice to Lessee Group of a
non-monetary default by Lessee Group and such default is not cured within
the thirty (30) day cure period, the period of time to cure such default
shall be extended by Lessor Group as long as, in the reasonable judgment of
Lessor Group, Lessee Group has diligently tried to cure such default at all
times during the cure period and is continuing to diligently pursue a cure.
Failure to cure a default prior to expiration of the cure period shall
constitute an Event of Default under this Agreement.
10. Right of Offset. Lessor Group and its new tenant, EagleCare, shall be
---------------
entitled to deduct from any payments or any other amounts due to Lessee
Group under this Agreement any sums required to be paid by Lessee Group
under this Agreement but which are paid by either Lessor Group or EagleCare
following an Event of Default.
11. Mutual Release.
--------------
a. Release of Lessee Group. In consideration for this Agreement
-----------------------
and for delivery of the documents required to be executed by Lessee Group
under Sections 1 through 4 of this Agreement, Lessor Group, and each of its
entities employees, officers, directors, successors, assigns, affiliates,
subsidiaries, agents and representatives hereby release and forever
discharge Lessee Group and each of its employees, officers, directors,
successors, assigns, affiliates, subsidiaries, agents and representatives
from any and all claims, actions, suits, damages, expenses (including
attorney's fees and disbursements), injuries and demands of any kind or
nature which Lessor Group may have against Lessee Group, from the beginning
of time, now or in the future, arising out of or related to the Existing
Agreements, including but not limited to all claims which were or could
have been asserted in the Pending Litigation, except for the obligations
specifically set forth in this Agreement. This release does not release
Lessee Group of its obligation to pay March 1997 rent under the Leases and
monthly payments for March 1997 for services rendered prior to the
Effective Date under the Maintenance Agreement and the Software Agreement.
b. Release of Lessor Group. In consideration for this
-----------------------
Agreement, Lessee Group, and each of its entities employees, officers,
directors, successors, assigns, affiliates, subsidiaries, agents and
representatives hereby release and forever discharge Lessor Group and each
of its employees, officers, directors, successors, assigns, affiliates,
subsidiaries, agents and representatives from any and all claims, actions,
suits, damages, expenses (including attorney's
13
<PAGE>
fees and disbursements), injuries and demands of any kind or nature which
Lessee Group may have against Lessor Group, from the beginning of time, now
or in the future, arising out of or related to the Existing Agreements,
including but not limited to all claims which were or could have been
asserted in the Pending Litigation, except for the obligations specifically
set forth in this Agreement.
12. Dismissal of Pending Litigation. Lessor Group shall,
-------------------------------
contemporaneously with the receipt of the executed documents required to be
executed under Sections 1 through 4 of this Agreement, execute a notice of
dismissal or stipulation of dissmissal, with prejudice, with respect to all
of the Pending Litigation and promptly file such notice of dismissal or
stipulation of dismissal with the appropriate court.
13. Costs. Each party to this Agreement shall bear its own costs and
-----
attorneys' fees incurred in the Pending Litigation, the settlement of this
matter and in any way related to the execution of this Agreement and any
documents related thereto. Provided, however, that in the event of a
default under this Agreement, the defaulting party shall pay and be
responsible for all costs, including reasonable attorneys' fees, incurred
by the non-defaulting party to enforce this Agreement.
13. Modification of Terms of Leases. In consideration for this Agreement,
-------------------------------
Lessee Group and Lessor Group hereby agree that the terms of the Leases, as
amended by the Master Agreement the Lease Amendment, and the Consolidated
Lease Amendment, are hereby further amended as follows:
a. Section 1.2 is revised to read as follows: "The term of this
Lease shall commence on March 1, 1988 ("commencement date"), and shall
continue until 12:00 a.m. on April 1, 1997, provided however that, in the
event Lessee delivers the executed documents required to be executed under
Sections 1 through 4 of that certain Release and Settlement Agreement
executed on February 28, 1997, by and between Lessor and Lessee, the term
of this Lease shall continue until 11:59 p.m. Indianapolis time on August
31, 1999."
b. Section 1.3 as amended by the Consolidated Lease Amendment is
revised by replacing the next to the last paragraph with the following:
"For purposes of determining the Purchase Price, both parties agree that
the current net book value of the tangible assets shall be computed in
accordance with generally accepted accounting principles applied on a
consistent basis. Further, notwithstanding the foregoing, Lessee
acknowledges that the Lessor continues to own all equipment which was
located in the Leased Premises as of November 23, 1977 together with any
replacements or additions thereto (the 'Original Equipment'). Such Original
Equipment is included in the Leased Premises and, upon the termination or
earlier cancellation or expiration of this Lease, Lessor shall continue to
own, without obligation to make any payment therefor, all of the Original
Equipment at the Leased Premises."
c. In the event that Lessor Group or EagleCare has either committed an
Event of Default or has received a notice of material breach under Section 9 of
this Agreement, which after the passage of time would result in an
14
<PAGE>
Event of Default, that remains uncured as of the Effective Date, then Lessee
Group may seek equitable relief in order to enjoin the parties' obligations
under this Agreement and the effectiveness of the amendment to the Leases
described in this Section.
15. General Provisions.
------------------
a Indiana Law. This Agreement shall be governed, construed, applied
-----------
and enforced in accordance with the laws of the State of Indiana.
b Binding Effect. This Agreement shall extend to and be binding upon
--------------
the heirs, personal representatives, successors, predecessors and assigns of the
parties.
c. Integration. This Agreement and the document attached hereto
-----------
constitute the sole and entire agreement between the parties and no statement or
promise has been made with respect to the subject matter of these provisions
other than as expressed herein.
d. Severability. In the case that any one or more of the provisions
------------
contained in this Agreement shall be invalid, illegal or unenforceable in any
respect, the validity, legality or enforceability of the remaining provisions
contained herein shall not in any way be affected or impaired thereby.
e. Descriptive Headings. The headings of the several sections of this
--------------------
Agreement are inserted for convenience only and shall not in any way affect the
meaning or construction of any provision of this Agreement. This Agreement, and
the collection of entities under the terms "Lessee Group" and "Lessor Group" is
not intended, and shall not be construed, to mean that any entities within
either of these groupings is related to or responsible for any other entity or
its rights and obligations other than as may be imposed by law without regard
for this Agreement.
f. Amendment or Waiver. This Agreement may not be amended, changed,
-------------------
waived, discharged or terminated without the written consent of each member of
the Lessor Group and Lessee Group.
g. Execution in Counterparts. This Agreement may be executed in
-------------------------
multiple counterparts, all of which when combined constitute one original
document.
h. Jurisdiction. The parties agree that any suit to interpret or
------------
enforce this Release and Settlement Agreement should be filed only in the U.S.
District Court for the Southern District of Indiana, Indianapolis Division, and
the parties hereby consent to the venue and jurisdiction of such court for any
such suit.
i. Construction. The parties hereto agree that the normal rule of
------------
construction to the effect that any ambiguities are to be resolved against the
drafting party shall not be employed in the interpretation of this Agreement or
any amendments hereto. When applicable, use of the singular form of any word
shall mean or apply to the plural and use of the plural form of any word shall
mean or apply to the singular.
j. Time of the Essence. Time is of the essence with respect to the
-------------------
performance of every provision of this Agreement in which time of performance or
cooperation is a factor.
IN WITNESS WHEREOF, Lessor Group and Lessee Group have entered into,
executed and delivered this Agreement as of the day and year first above
written.
APPROVAL OF LENDER
The obligations of Lessee Group under this Agreement are subject to
the consent and approval of fifty-one percent (51%) of the Lenders as named in
that certain Credit Agreement dated February 12, 1997 by and among New GranCare,
Inc., as Borrower, and First Union National Bank of North Carolina, as
Adminstrative Agent, the Chase Manhanttan Bank, as Syndication Agent, and First
Union National Bank of North Carolina, as L.C. Bank; provided that Lessee Group
makes continuous and good faith efforts to obtain such approvals.
(Remainder of Page Intentionally Left Blank)
15 (continued)
15
<PAGE>
"LESSOR GROUP" BASIC AMERICAN CONVALESCENT CENTERS, L.P.
By: Turtle Creek Investment Co., L.L.P., its General
Partner
By: Justice Family Limited Partnership No. 3, its
Managing Partner
By: Justice Enterprises, Inc., its General Partner
By: ________________________________________________
Brady R. Justice, Jr., President
JACKSON LEASING CO., L.L.P.
By: Franklin L. Jackson Trust, its General Partner
By: ________________________________________________
Brady R. Justice, Jr., Trustee
TURTLE CREEK CONVALESCENT CENTRE, L.L.P.
By: Justice Family Limited Partnership No. 3, its
Managing Partner
By: Justice Enterprises, Inc., its General Partner
By: _______________________________________________
Brady R. Justice, Jr., President
CHILDREN'S CONVALESCENT CENTER, INC.
By: _______________________________________________
Blake A. Jackson, President
JACKSON REALTY AND BUILDERS CO., INC.
By: ______________________________________________
Mark A. Jackson, President
MEDICAL ENGINEERING, INC.
By: ______________________________________________
Brady R. Justice, Director
16
<PAGE>
"LESSEE GROUP" GRANCARE, INC., a California Corporation
By:________________________________________________
Printed:___________________________________________
Title:_____________________________________________
GRANCARE, INC., a Delaware corporation, on its own
behalf and as transferee of the "Skilled Nursing
Assets," "Skilled Nursing Business," and "Skilled
Nursing Liabilities" under that certain Amended and
Restated Agreement and Plan of Distribution by and
between GranCare, Inc., a California corporation, as
transferor, and GranCare, Inc., a Delaware corporation,
as transferee, dated as of September 3, 1996
By:________________________________________________
Printed:___________________________________________
Title:_____________________________________________
EVERGREEN HEALTHCARE LTD., L.P., f/k/a OMEGA
HEALTH CARE LTD.
By:________________________________________________
Printed:___________________________________________
Title:_____________________________________________
EVERGREEN HEALTHCARE, INC.
By:________________________________________________
Printed:___________________________________________
Title:_____________________________________________
OMEGA/INDIANA CARE CORP.
By:________________________________________________
Printed:___________________________________________
Title:_____________________________________________
CONNORWOOD HEALTHCARE, INC.
By:________________________________________________
Printed:___________________________________________
Title:_____________________________________________
17
<PAGE>
ACCEPTANCE BY EAGLECARE
EagleCare, Inc. hereby accepts the benefits conferred by and the
obligations imposed by this Release and Settlement Agreement in its own right
and in its capacity as replacement tenant of Lessor Group with respect to the
Facilities. EagleCare, Inc. agrees to abide by the terms and conditions imposed
upon it in this Release and Settlement Agreement and to assume the liabilities
and obligations being assigned and transferred to it under this Agreement and
its Exhibits.
EagleCare, Inc.
By:___________________________________
Philip Caldwell, President
18
<PAGE>
EXHIBIT 11
GRANCARE, INC.
COMPUTATION OF NET INCOME PER SHARE
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Primary
Average shares outstanding........................ 23,350 23,170 21,294
Net effect of conversion of stock options (1)..... 560 317 695
Net effect of conversion of warrants (1).......... 174 307 642
------- ------- -------
Total........................................... 24,084 23,794 22,631
======= ======= =======
Net Income........................................ $32,720 $20,564 $24,290
======= ======= =======
Net income per common share....................... $ 1.36 $ 0.86 $ 1.07
======= ======= =======
Fully diluted
Average shares outstanding........................ 23,351 23,170 21,294
Net effect of conversion of stock options (1)..... 666 380 695
Net effect of conversion of warrants (1).......... 180 369 642
Net effect of conversion of convertible securities
(2).............................................. 2,330 -- (3) 2,335
------- ------- -------
Total........................................... 26,527 23,919 24,966
======= ======= =======
Net Income.......................................... $32,720 $20,564 $24,290
Interest on convertible securities--net of tax...... 2,559 -- (3) 2,496
------- ------- -------
$35,279 $20,564 $26,786
======= ======= =======
Net income per common share....................... $ 1.33 $ 0.86 $ 1.07
======= ======= =======
</TABLE>
- --------
(1) Computed using the treasury stock method.
(2) Computed using the "if-converted" method.
(3) The effect of convertible securities for 1995 is anti-dilutive and,
therefore, is not included in the fully diluted earnings per share
calculation.
NOTE: All of the above calculations give retroactive effect to the merger with
Evergreen Healthcare, Inc. as described in Note 1 in the Consolidated
Financial Statements.
<PAGE>
EXHIBIT 21.1
Exhibit 21.1
Subsidiaries of Registrant
<TABLE>
<S> <C>
Renaissance Mental Health Center, Inc. AMS Green Tree, Inc.
GCI Springdale Village, Inc. GCI Faith Nursing Home, Inc.
American-Cal Medical Services, Inc. GCI Village Green, Inc.
GCI East Valley Medical & Rehabilitation GCI Prince George, Inc.
Center, Inc.
HMI Convalescent Care, Inc. GCI Palm Court, Inc.
GranCare Nursing Services and Hospice, Inc. GCI Jolley Acres, Inc.
GCI-Cal Health Care Centers, Inc. GCI Realty, Inc.
GranCare Home Health Services, Inc. GranCare South Carolina, Inc.
Coordinated Home Health Services, Inc. GCI Rehab, Inc.
GCI Family Nursing Home and Rehabilitation AMS Properties, Inc.
Center, Inc.
Cornerstone Health Management Company GCI Health Care Centers, Inc.
GCI Ashland Health Care Center, Inc. Cambridge Bedford, Inc.
Professional Health Care Management, Inc. GCI Bella Vita, Inc.
GCI Valley Manor Health Care Center, Inc. GCI Colter Village, Inc.
GCI Hillside Health Care Center, Inc. GCI Camelia Care Center, Inc.
GCI Wisconsin Properties, Inc. GC Services, Inc.
GCI North Shore Health Care Center, Inc. GCI Indemnity, Inc.
International Health Care Management, Inc. GCI-Cal Therapies, Inc.
Middlebelt-Hope Nursing Home, Inc. HostMasters, Inc.
Nightingale East Nursing Center, Inc. GCI Therapies, Inc.
St. Anthony Nursing Home, Inc. International X-Ray, Inc.
EH Acquisition Corp., Inc. Heritage of Louisiana, Inc.
EH Acquisition Corp. II, Inc. Madonna Nursing Center, Inc.
EH Acquisition Corp. III, Inc. Cambridge East, Inc.
Evergreen Health Care, Inc. Cambridge North, Inc.
National Heritage Realty, Inc. Cambridge South, Inc.
Omega/Indiana Care Corporation Crestmont Health Center, Inc.
Clintonaire Nursing Home, Inc. Heritage Nursing Home, Inc.
Frenchtown Nursing Home, Inc. GranCare Trading, Inc.
Middlebelt Nursing Home, Inc. GranCare GPO Services, Inc.
GCI Simi-Valley Health Care Center, Inc. Stone Creek Management Co., Inc.
Evergreen Health Care Ltd.
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
on Form S-8 (No. 333-21643, No. 333-21373, No. 333-21375, No. 333-21371, and
No. 333-21377) of GranCare, Inc., pertaining to various option, warrants, and
restricted shares agreements/plans, of our report dated February 25, 1997,
except for Note 13 as to which the date is March 6, 1997, with respect to the
consolidated financial statements and schedule of GranCare, Inc. included in
this Annual Report (Form 10-K) for the year ended December 31, 1996.
Ernst & Young LLP
Atlanta, Georgia
May 8, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS
The Board of Directors
Evergreen Healthcare, Inc.:
We consent to the inclusion of our report dated August 17, 1995, with respect to
the consolidated statements of operations, stockholders' equity and cash flows
for the year ended December 31, 1994, which report appears in the Form 10-K of
GranCare, Inc. dated as of May 8, 1997.
Indianapolis, Indiana
May 8, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 14,512 17,738
<SECURITIES> 38,933 30,305
<RECEIVABLES> 257,855 177,168
<ALLOWANCES> (11,209) (10,856)
<INVENTORY> 17,312 13,527
<CURRENT-ASSETS> 317,704 231,764
<PP&E> 217,536 270,042
<DEPRECIATION> (64,387) (55,689)
<TOTAL-ASSETS> 748,039 645,161
<CURRENT-LIABILITIES> 117,135 108,734
<BONDS> 382,242 334,668
0 0
0 0
<COMMON> 123,378 134,699
<OTHER-SE> 90,722 37,700
<TOTAL-LIABILITY-AND-EQUITY> 748,039 645,161
<SALES> 1,003,123 816,462
<TOTAL-REVENUES> 1,003,123 816,462
<CGS> 0 0
<TOTAL-COSTS> 870,341 720,718
<OTHER-EXPENSES> 44,349 33,361
<LOSS-PROVISION> 7,318 6,281
<INTEREST-EXPENSE> 35,659 27,054
<INCOME-PRETAX> 52,774 35,329
<INCOME-TAX> 20,054 14,765
<INCOME-CONTINUING> 32,720 20,564
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 32,720 20,564
<EPS-PRIMARY> 1.36 0.86
<EPS-DILUTED> 1.33 0.86
</TABLE>
