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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 33-44726
LIVING CENTERS OF AMERICA, INC.
(Exact name of registrant as specified in its Charter)
DELAWARE 74-2012902
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
15415 KATY FREEWAY, SUITE 800 77094
HOUSTON, TEXAS (Zip Code)
(Address of principal executive office)
(281) 578-4600
(Registrant's Telephone Number, Including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT
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Name of each exchange on
Title of each class which registered
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Common Stock, $.01 Par Value New York Stock Exchange
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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 X No
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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 the Form 10-K. [X]
The aggregate market value of the outstanding Common Stock of the
registrant held by non-affiliates of the registrant as of November 25, 1996,
based on the closing sale price of the Common Stock on the New York Stock
Exchange on said date, was $369,851,000. For purpose of the foregoing sentence
only, all directors and officers of the registrant are assumed to be
affiliates.
There were 19,500,867 shares of Common Stock of the registrant
outstanding as of November 25, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
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INCORPORATED DOCUMENT PART OF FORM 10-K
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Proxy Statement for the 1997 Part III
Annual Meeting of Stockholders
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TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 13
ITEM 3. LEGAL PROCEEDINGS 15
ITEM 4. SUBMISSION OF MATTERS
TO A VOTE OF SECURITY HOLDERS 15
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS 18
ITEM 6. SELECTED FINANCIAL DATA 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 20
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 50
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT 51
ITEM 11. EXECUTIVE COMPENSATION 51
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 51
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS 51
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K 52
SIGNATURES 57
SCHEDULES 59
EXHIBITS 60
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PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF THE BUSINESS
Living Centers of America, Inc. ("Living Centers", or the "Company")
is a Delaware corporation that primarily provides through its operating
subsidiaries, a diverse range of health care services to senior citizens.
(All references to "Living Centers" or the "Company" is intended to include the
operating subsidiaries through which the services described herein are directly
provided.) One of the largest providers of long-term care in the United States,
Living Centers' operations are geographically concentrated and specifically
focused in key regional markets. The Company's comprehensive continuum of
health care services includes skilled nursing care, rehabilitation services,
pharmaceutical services, assisted living services, subacute care, care for
individuals with Alzheimer's disease, hospice care, home health care, and
geriatric physician management services. American Rehabilitation Services,
Inc. ("ARS"), Living Centers' rehabilitation subsidiary, through its
subsidiaries, provides contract rehabilitation services to long- term care
facilities, operates outpatient clinics, operates hospital rehabilitation
departments on a contract basis, and offers therapy program management to
long-term care providers. American Pharmaceutical Services, Inc. ("APS"), the
Company's pharmaceutical services subsidiary, provides medical supplies,
pharmaceuticals, and support services to subacute and long-term care providers.
By operating this integrated network of services, Living Centers provides cost-
effective services across the senior health care services continuum.
The Company's subsidiaries are organized into three operational
business units -- the long-term care services group, the rehabilitation
services group, and the institutional pharmaceutical services group. While each
group has its own distinct corporate structure and management team, each
reports to the Company's Chief Operating Officer and is supported by the
corporate group located in Houston, Texas.
LONG-TERM CARE SERVICES GROUP
LONG TERM NURSING SERVICES. Living Centers is one of the largest
operators of long-term health care facilities in the United States and is the
first or second largest provider of long-term care services in its key markets
of Texas, North Carolina and Colorado. The long term care group is organized
into three regionally concentrated operating units: The Southeast Area
(Alabama, Florida, Georgia, Louisiana, Mississippi, North Carolina, South
Carolina, and Virginia); the Texas Area; and the Rocky Mountain Area (Arizona,
Colorado, Nebraska, and Wyoming).
Since becoming a public company in February 1992, the Company has made
two acquisitions which significantly increased its facility base. First, in
October 1993, the Company consummated a merger transaction in which it acquired
the outstanding stock of Vari-Care, Inc. ("Vari-Care") which added a total of
22 centers and approximately 2,500 beds in Alabama, Arizona, Florida and Texas.
Second, in July 1995, the Company completed a transaction in which it acquired
the outstanding stock of The Brian Center Corporation and 16 related S
corporations (collectively the "BCC Entities", or "BCC"); the BCC acquisition
added a total of 51 centers and approximately 6,000 beds in Florida, Georgia,
North Carolina, South Carolina and Virginia. As of September 30, 1996, the
Company operated 206 centers with in excess of 23,500 licensed beds.
Living Centers' facilities provide a continuum of care designed to
accommodate patients' and residents' needs as their acuity levels change.
Services provided include skilled nursing care, assisted living services, care
for individuals with Alzheimer's disease, subacute care, and hospice services,
although not all services are provided in all facilities. All facilities must
meet comprehensive state licensing requirements, and those participating in
Medicare or Medicaid programs must also meet federal and state certification
standards (see "Government Regulation"). The Company's facilities are generally
equally distributed between urban and non-urban areas and typically compete
only with other facilities in their respective local markets.
SPECIALTY CARE SERVICES. The Company is increasingly emphasizing
expansion and development of specialty care programs to better meet the
long-term care needs of the communities it serves. These programs and services,
none of which individually are material to the Company, are generally described
as follows:
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Assisted Living Centers. The Company provides assisted living services
in 35 of its long-term care centers and in four freestanding facilities with a
total of 1,350 beds to residents who need assistance with the basic activities
of daily living, but whose care needs have not yet reached a level that
requires 24-hour nursing care. The Company has developed a freestanding
assisted living center model in connection with the implementation of its
assisted living program. During fiscal year 1996, Living Centers completed
construction of one 38 bed assisted living facility in the Lincoln, Nebraska
market. Additionally, the company began construction on two facilities which
are expected to be completed in early fiscal year 1997 and further identified
nine sites for construction of new assisted living facilities. The Company's
assisted living development program is focused on markets where Living Centers
has a skilled nursing facility presence so that as these residents' needs
change and require higher acuity services, they can be accommodated in one of
the Company's nursing facilities. These newly constructed assisted living
facilities are intended to be exclusively private pay.
Subacute Care Services. Since 1993, the Company has developed its
Progressive Care Centers program in which distinct units of certain designated
long-term care facilities are dedicated to subacute nursing care and
rehabilitation services for patients with higher acuity levels. At Progressive
Care Centers, specially trained staff offers care to patients with higher
acuity levels in a technologically advanced physical plant as an alternative to
more expensive patient treatment in the acute care hospital setting. Services
offered by the Company in Progressive Care Centers include physical therapy,
occupational therapy, speech therapy, enteral therapy, IV therapy, respiratory
therapy, specialized wound management, ventilator care, and tracheostomy care,
although not all services are provided at all Progressive Care Center units.
The Company operates a total of approximately 250 beds in 14 facilities under
its Progressive Care Centers program.
Alzheimer's Care Services. The Company believes that it is a leading
provider of long-term care to residents with Alzheimer's disease. Within
specially designated and designed portions of certain of its long-term care
centers, the Company operates over 60 units with approximately 1,700 beds
dedicated to addressing the problems of disorientation and perceptual confusion
typically experienced by residents with Alzheimer's disease. The Alzheimer's
care units also provide education and support to the residents' families. The
Company provides specially trained activity directors and nursing staffs to
these units and employs a Director of Alzheimer's Programming to supervise
program development and staff training. The Company intends to continue its
commitment to Alzheimer's care through implementation of Alzheimer's programs
in more of its long-term care facilities as well as in association with its
planned free-standing assisted living centers.
Hospice Care. Hospice care is increasingly recognized as a preferred
method of care for those patients diagnosed with a terminal illness and
certified with a life expectancy of less than six months. Hospice services are
designed to provide comfort for the physical and emotional needs of terminally
ill patients. Hospice services focus on maximizing the quality of life of
terminally ill patients as opposed to curing an illness; as a result, this
modality of care is typically a more cost-effective alternative to more
aggressive medical treatment. An estimated four to eight percent of nursing
facility residents potentially require hospice services. During fiscal year
1996 the Company expanded its hospice initiative by purchasing a 50 percent
interest in Heart of America Hospice ("Heart of America") of Kansas City,
Missouri. Living Centers' existing hospice operation was combined with Heart
of America, which will become Living Centers' hospice provider. Subsequent to
September 30, 1996, Living Centers increased its ownership interest in Heart of
America to approximately 83 percent.
Home Health Care. Currently the Company provides home health care
through agencies in Tennessee (acquired as part of the 1995 Rehability
acquisition) and Corpus Christi, Texas. The Company plans to expand its home
health care business through the acquisition and development of agencies in its
key markets. The expansion of home health complements the Company's initiative
to provide a complete continuum of senior health care in its targeted markets.
Additionally, these home care businesses will be potential customers for Living
Centers' rehabilitation therapy and pharmacy operations. At September 30, 1996,
the Company was negotiating a letter of intent to acquire Colorado HomeCare
which was executed subsequent to year end. The locations of this home health
care provider's operations complement the Company's long-term care operations
in Colorado.
Geriatric Physician Management Services. Effective September 30, 1996
the Company purchased a 75 percent interest in American Geriatric Management
Services, Inc. ("AGMS"). AGMS is a management services organization created to
provide support services, record keeping, administrative management, budget
development, and managed care contracting services to geriatric and long-term
care physician group practices. Geriatric and long-term care physicians whose
professional practices to be managed by AGMS make their professional medical
services available on-site at skilled nursing, nursing, subacute, hospice and
assisted living facilities. The Company expects that its association with AGMS
will assist in expanding the complex care capabilities of its facilities.
Living Centers intends to participate in the development of
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several regionally concentrated management service organizations which will
provide services to long-term care physicians in the Company's key geographic
markets. The Company believes that its association with AGMS will enable it to
expand physician coverage at its long-term care facilities, thereby increasing
the level and quality of services provided. This association should therefore
make the Company more attractive to managed care providers.
Living Centers - DevCon Divestiture. In September 1996, Living Centers
divested its Living Centers - DevCon, Inc. subsidiary ("DevCon") which provided
training and habilitation services to individuals with mental retardation and
developmental disabilities (see Note 2 to the Consolidated Financial
Statements). DevCon operated over 80 centers and group homes with
approximately 400 beds in Florida and 1,750 beds in Texas and relied primarily
on Medicaid for reimbursement. In recent years the revenues for this operation
had grown at a slower rate than those associated with the Company's skilled
nursing business. This divestiture is consistent with the Company's strategy
of focusing on its senior health care services business.
LONG-TERM CARE -- BUSINESS STRATEGY. The Company's strategy is to
utilize its long-term care facilities as a platform to deliver a comprehensive
array of senior health care services. As a consequence, the Company seeks to
control the significant components of its care continuum, while diversifying
its sources of revenue and positioning itself to be responsive to a variety of
payors. Through the provision of cost-effective quality care, the Company
believes that it can enhance profitability. Several current focuses of the
long-term care group are as follows:
Occupancy Level Increase. During fiscal year 1996, the Company
significantly invested in the development of a Marketing and Managed Care
Department, led by a Corporate Vice President of Marketing, to assist the
facility-based staff to increase the occupancy of Living Centers' long-term
facilities. Several new systems, including a comprehensive facility level
training program and a demographic mapping system, are in the process of
implementation which will enhance census development and retention. Due to the
significant fixed cost component within the Company's long-term care business,
marginal increases in a facility's occupancy are typically disproportionately
more profitable.
Assisted Living Expansion. Currently the Company has eleven assisted
living facilities in various phases of development. This development is
targeted for markets where Living Centers already has a presence with skilled
nursing facilities. The residents of these assisted living centers will have
the option to choose Living Centers' skilled nursing facilities when their
needs for care increase. Additionally, these assisted living centers provide
an additional customer base for the Company's institutional pharmacy and
rehabilitation services businesses as well as for certain emerging service
lines such as home health and geriatric physician management services.
Hospice Care Expansion. A major initiative for the Company over the
next several years is to expand the coverage of its hospice care capabilities
within its key markets. Currently, hospice services are provided at
approximately 140 of the Company's facilities by more than 100 different
hospice providers. The Company's strategy is to offer Heart of America Hospice
services in Living Centers' targeted markets as an alternative provider to
these current third party providers. The Company's objective is to capture a
meaningful portion of the hospice services provided within its long-term care
facilities by offering the availability of consistent, quality hospice services
to its residents.
Complex Care Capability Enhancement. Typically, higher acuity, more
complex services command higher fees and often times are more profitable.
Furthermore, the provision of these services in a skilled nursing facility can
be more cost-effective than in a hospital based acute care environment. The
Company continually reviews its ancillary service offerings in an effort to
serve the complex care needs of the patient population within its service
areas. Closely aligned with this objective is Living Centers' recent
acquisition of a controlling interest in American Geriatric Management
Services, which will enhance complex care capabilities.
Managed Care Positioning. Managed care payors require services for
their members that encompass Living Centers' service and business lines. The
Company's Corporate Director of Managed Care is responsible for all aspects of
relationship management with this emerging payor including responsibility for
moving the managed care patient seamlessly along Living Centers' continuum of
care. The Company has increased its managed care contracting capabilities and
has created a system which allows the centralized case management of these
patients within targeted markets. The Company is in the process of enhancing
its management information systems to better accommodate additional needs of
this payor; these enhancements will include the development and implementation
of patient outcome systems.
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Facility Portfolio Optimization. The Company continuously reviews its
existing long-term franchise area for facility expansion opportunities
including the construction of new facilities. Additionally, acquisition
opportunities within Living Centers existing geographic markets are analyzed.
Furthermore, Living Centers continuously reviews its portfolio of long-term
care centers for facilities which no longer meet the Company's operating,
financial, or strategic objectives. During fiscal year 1996, the Company
divested or closed six long-term care facilities, not including the divestiture
of Living Centers - DevCon. The Company prefers to own rather than lease its
long-term care facilities. During fiscal year 1996, the Company converted five
leases to owned facilities.
REHABILITATION THERAPY SERVICES GROUP
In June 1995, the Company acquired Rehability Corporation
("Rehability") which became the foundation for the rehabilitation services
group of the Company. In July 1995, the Company acquired MedTherapy
Rehabilitation Services, Inc., as part of its merger with The Brian Center
Corporation. In August 1995, the Company acquired Therapy Management
Innovations, Inc. These three entities were subsequently combined to form the
Company's rehabilitation services group which operates through its subsidiaries
as American Rehabilitation Services, Inc. (including its subsidiaries "ARS").
During fiscal year 1996, Living Centers re-organized ARS into four distinct
operating divisions aligned along service lines as opposed to the previous
organization which was largely along geographic lines. The ARS service
continuum includes nursing facility based rehabilitation, outpatient clinics,
hospital rehabilitation management, and therapy management consulting. The
following describes these four operating divisions:
American Therapy Services. American Therapy Services ("ATS") employs
licensed therapists to provide physical, occupational, and speech therapy to
nursing facility residents through contracts with over 600 skilled nursing
facilities throughout the United States (approximately 500 of which are
unaffiliated with the Company). The ultimate payor for these services is
typically Medicare; in some instances ATS invoices the skilled nursing facility
which in turn bills Medicare, in other instances ATS invoices Medicare
directly.
Rehability Centers. Rehability Centers operates approximately 134
outpatient rehabilitation clinics in 19 states and provides home health
services through its agencies located in Tennessee and Texas. The primary
focus of the clinics is rehabilitation services related to occupational and
sports injuries. The primary payor for these services is typically private
employers (or their insurance carriers) for benefits associated with
occupational injuries or worker's compensation claims.
Rehability Hospital Services. Rehability Hospital Services manages
approximately 50 hospital rehabilitation departments on a contract basis.
Therapy Management Innovations. Therapy Management Innovations
("TMI") provides a variety of rehabilitation management consulting services to
subacute and long-term care facilities. These consulting services focus on
enhancing the quality of rehabilitation therapy and include supervision of
clinical procedures, documentation and billing protocols, as well as monitoring
of patient outcomes. Prior to the TMI acquisition, TMI managed substantially
all of the Company's rehabilitation therapy programs in its long-term care
services group.
REHABILITATION THERAPY SERVICES -- BUSINESS STRATEGY. Concurrent with the
reorganization of ARS during 1996, ARS' financial and management information
systems were modified to support this service line configuration. Several
current focuses of this business group are as follows:
Clinic and Contract Therapy Performance Monitoring. The enhanced
financial systems now in place provide management the capability to monitor the
financial and operating performance of individual clinics and contract therapy
contracts. Based upon this information, the Company can better manage its
portfolio of both outpatient clinics and therapy contracts. During fiscal year
1996 ARS closed approximately 30 clinics that no longer met the Company's
financial or operating objectives. Additionally, during the fiscal year, ARS
terminated over 100 nursing home contracts which did not meet the Company's
performance objectives. This portfolio management process is ongoing.
Overhead Reduction. During the year, as part of the service line
re-alignment process, ARS streamlined its operations. This process resulted
in the elimination of approximately 325 full time equivalent employees,
representing 9% of ARS's work force. Most of these eliminated positions were
non-revenue producing. ARS is in the process of centralizing
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its collection and billing functions; previously these functions were field
based at approximately 100 locations nationwide. This process was completed
for the ATS division during the fourth quarter of fiscal year 1996 and is
expected to be completed for the balance of the ARS divisions during fiscal
year 1997. The Company believes that this initiative will reduce overhead
costs and improve the receivable collection process.
Therapist Productivity Improvement. This tactical initiative has two
objectives. First, ARS has open positions for therapists, many of which
relate to additional available contracts with Living Centers' facilities, where
rehabilitation services are provided by third party contractors. To address
therapist recruiting, ARS has significantly enhanced its capabilities and
intensified its recruiting activities. Second, until late in fiscal year 1996
when new management information systems were introduced, the Company was unable
to monitor therapist productivity. Currently, approximately 60% of Living
Centers' contract therapy needs are being serviced by ATS. The Company's
objective for fiscal year 1997 is to further increase this internal
penetration.
Third Party Sales Improvement. With the realignment of ARS'
operations complete, the four business lines can refocus on marketing these
programs to nonaffiliated entities. ARS continues to review and evaluate its
continuum of rehabilitation services for service and product line development
opportunities. The Company believes that there exists cross-selling
opportunities for its ancillary service lines. The same types of customers
procure services from the ATS and TMI divisions, and American Pharmaceutical
Services; however these customers are largely unrelated.
PHARMACEUTICAL SERVICES GROUP
American Pharmaceutical Services ("APS"), the institutional
pharmaceutical services group of the Company, specializes in meeting the needs
of health care providers in subacute and long-term care settings by providing
pharmaceutical supplies and programs. APS and its subsidiaries provide
services and products to approximately 1,000 long-term care centers (800 of
which are unaffiliated with Living Centers) with more than 100,000 long-term
care beds through 31 full-service institutional pharmacies. APS provides
pharmacy dispensing, infusion therapy and specialty patient care products such
as urologicals, wound care products and other ancillary supplies. APS also
offers a comprehensive array of services and supplies to meet the needs of
patients with higher acuity levels, such as intravenous (IV) and enteral
therapy. In 1996, APS expanded its product line to include respiratory therapy
and orthotic supplies and services. In addition, APS provides pharmacy
consulting services, specializing in long-term care drug regimen reviews,
medication procedures and regulatory monitoring. APS provides full clinical
support for its products through long-term care facility staff education and
quality assurance programs.
PHARMACEUTICAL SERVICES -- BUSINESS STRATEGY. APS is the fastest
growing of Living Centers' three business groups. Revenue increases have been
derived from both internally generated sales as well as through acquisitions.
Internally generated sales include adding new customer accounts as well as
selling additional products and services to existing customers. Approximately
25% of APS's revenue base is derived from Living Centers' facility base with
the balance associated with non-affiliated third party customers.
Correspondingly, APS has effectively penetrated Living Center's long-term care
facility franchise, fulfilling approximately 90% of its pharmaceutical service
requirements. While APS' franchise area covers 21 states, its operations are
concentrated largely in the same states where Living Centers operates
facilities. The Company believes that APS is the largest long-term care
institutional pharmacy provider in the states of Arizona, Colorado, Florida,
Texas and North Carolina. Several current focuses of this business unit are as
follows:
Acquisition Integration. Since September 1994, when APS became a
wholly-owned subsidiary of the Company, APS has acquired 12 institutional
pharmacy-related businesses with 22 branch operations, six of which were added
through the acquisition of Allied Pharmacy Management in September 1996.
During fiscal year 1997, APS will continue to integrate the operations added in
fiscal 1996 in order to realize operating efficiencies.
Internal Growth Continuation. APS will continue to focus on internal
growth by expanding product lines and adding new accounts.
Purchasing Power and Overhead Leverage. APS purchases significant
volumes of pharmaceutical products and has initiated a centralized purchasing
program designed to lower its product procurement costs. APS has also
developed and is implementing a preferred drug list (formulary) primarily
directed at the geriatric population it serves. This program
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is expected to assist APS reduce its product procurement cost. Furthermore,
as APS continues to grow its revenues, there exists opportunities to more
efficiently leverage overhead costs.
Targeted Acquisitions. The Company expects to continue to grow
externally through acquisition and continuously reviews institutional pharmacy
and pharmacy-related acquisition candidates. These potential opportunities
could be within markets where APS already has a presence, or within new markets
not currently served by the Company. APS' strategy is to be a significant
provider in the markets in which it operates as an institutional pharmacy
provider.
SOURCES OF REVENUE
The Company derives its net revenues from Medicaid, Medicare and
private pay sources. As of September 30, 1996, distinct part units in 191 of
the Company's 206 long-term care centers were certified to participate in the
Medicare program.
The Company classifies as private pay revenue all of the payments and
receivables from individuals who pay directly for services without governmental
assistance and revenues from managed care companies, commercial insurers,
health maintenance organizations and other charge-based contracted payment
sources. Veterans Administration payments are also included in private pay
revenue and are received pursuant to renewable contracts negotiated
periodically.
For a summary of the approximate percentages of total resident
revenues derived from the various sources of payment, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
GOVERNMENT REGULATION
Various aspects of the Company's business are regulated by the federal
government and by the states where the Company has operations. Regulatory
activities affect the Company's business activities by controlling its growth,
requiring licensure and certification for its facilities and health care
services, and controlling reimbursement for services provided. The Company
believes it is in substantial compliance with these regulatory requirements,
but there can be no assurance that the Company will be able to maintain such
compliance, or will not be required to expend significant amounts to do so.
MEDICARE AND MEDICAID. The Medicare program was enacted in 1965 to
provide a nationwide, federally funded health insurance program for the
elderly. The program is divided into Part A and Part B, each of which has
separate rules and requirements and separate funding sources. Medicare Part A,
the Hospital Insurance Program (42 U.S.C. Section 1395c et seq.) Is financed
primarily through mandatory taxes on workers' wages. Part A pays for hospital,
skilled nursing, home health agency, hospice, and dialysis services determined
to be medically necessary for the individual patient. Medicare Part B, the
Supplementary Medical Insurance program (42 U.S.C. Section 1395j et seq.), is a
voluntary medical benefits plan in which eligible individuals can enroll to
receive benefits in addition to those available under Part A. Under Part B,
each beneficiary must pay a monthly premium, meet a deductible towards the cost
of covered items and services determined to be medically necessary, and pay 20
percent of the Medicare allowable charge as coinsurance on most covered items.
Non-institutional services, including physician services, outpatient hospital
services, durable medical equipment, and laboratory services, among others, are
paid under Medicare Part B.
The Medicare program is administered by the Health Care Financing
Administration (HCFA) of the U.S. Department of Health and Human Services
(HHS). HCFA adopts regulations, and issues interpretive memoranda and
program manuals providing detailed explanation of the Medicare program. The
payment operations of the Medicare program are handled by intermediaries (under
Part A) and carriers (under Part B) who are insurance companies and Blue
Cross/Blue Shield plans which contract with the Secretary of HHS to make
Medicare payments to providers in a particular geographic region. Individual
intermediaries and carriers issue transmittals, bulletins, notices, and general
instructions to providers and suppliers in their respective areas to facilitate
the administration of the Medicare program, but are required to follow the
Medicare statute, HCFA regulations, HCFA transmittals, and the program manuals.
Within these requirements, intermediaries and carriers are granted
broad discretion to establish particular guidelines and procedures for making
Medicare coverage determinations and payments, including prior approval,
utilization limits, and specific documentation.
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The Medicaid program is a joint federal-state cooperative arrangement
established for the purpose of enabling states to furnish medical assistance on
behalf of aged, blind, or disabled individuals, or members of families with
dependent children, whose income and resources are insufficient to meet the
costs of necessary medical services. The federal and state governments share
the costs of such aid pursuant to statutory formulae. The Secretary of HHS has
primary federal responsibility for administering the Medicaid program. The
responsibility has been delegated to HCFA, whose Medicaid Bureau carries out
this delegation. States are not required to participate in the Medicaid
program. States which choose to participate, however, must administer their
Medicaid programs in accordance with federal law, the implementing regulations
and policies of the Secretary and their approved state plans. A state
becomes eligible to receive federal funds by submitting to the Secretary a
state plan for medical assistance. The federal Medicaid statute establishes
minimum standards for state plans in such areas as administration, eligibility,
coverage of services, quality and provision of services, and payment for
services. States have significant latitude, within these standards, to
determine the mix of services and structure of their state Medicaid programs.
The state plan must be amended by appropriate submission to the Secretary
whenever necessary to reflect changes in federal statutes, regulations,
policies, court decisions, or material changes in any phase of state law,
policy, or operations.
All of the Company's nursing facilities, assisted living facilities,
home health and hospice agencies, pharmacies, and rehabilitation clinics, and
rehabilitation clinics are licensed under applicable state law and are
certified or approved (other than its assisted living facilities) as providers
or suppliers under one or more of the Medicare or Medicaid programs, as
applicable. Licensure and certification standards may vary from jurisdiction
to jurisdiction, but generally focus upon physical environment and plant
safety, administration, staffing and personnel, professional and support
services, patient rights, and quality. Once a facility or service provider
becomes licensed and certified, it must continue to comply with federal, state
and local license requirements in addition to local building and life-safety
codes.
Long term care facilities must comply with certain requirements to
participate either as a skilled nursing facility under Medicare or a nursing
facility under Medicaid. Regulations effective October 1, 1990, pursuant to
the Omnibus Budget Reconciliation Act of 1987, obligate facilities to
demonstrate compliance with requirements relating to resident rights, resident
assessment, quality of care, quality of life, physician services, nursing
services, pharmacy services, dietary services, rehabilitation services,
infection control, physical environment, and administration. Survey,
certification, and enforcement procedures to be used by state and federal
survey agencies to determine facilities' level of compliance with the
participation requirements for Medicare and Medicaid were adopted by HCFA
regulations effective July 1, 1995. The requirements include (I) that surveys
focus on residents' outcomes of care and (ii) that all deviations from
participation requirements will be considered deficiencies, but that all
deficiencies will not constitute noncompliance. The regulations identify
alternative remedies against facilities and specify the categories of
deficiencies for which they will be applied. These remedies include: temporary
management; denial of payment for new admissions; denial of payment for all
residents; civil money penalties of $50 to $10,000 per day of violation;
facility closure and/or transfer of residents in emergencies; directed plans of
correction; and directed in- service training.
The facilities and service providers operated by the Company's
subsidiaries in the normal course of business are subject to annual inspections
and complaint investigations. The Company has developed a management system
to test compliance with the various standards and requirements, including
training on regulatory requirements, and initiating and maintaining on-going
quality assessment and improvement programs. The Company believes that its
facilities and service providers are in substantial compliance with applicable
regulatory requirements. From time to time, however, the Company receives
notice of noncompliance with various requirements for Medicare/Medicaid
participation or state licensure. The Company reviews such notices for factual
correctness, and based on such review, either takes appropriate corrective
action or challenges the stated basis for the allegation of noncompliance. In
most cases, the Company and the reviewing agency will agree upon the measure to
be taken to bring the facility or provider service into compliance. Under
certain circumstances, however, such as repeat violations or perceived severity
of the violations, the federal and/or state agencies have the authority to take
adverse actions against a facility or provider, including the imposition of
monetary fines, or the threatened decertification of a facility or provider
from participation in the Medicare and/or Medicaid programs, or licensure
revocation. While in certain instances facilities or providers have been
fined, decertified, or had licensure sanctions imposed, the Company has been
able to reinstate the certifications and satisfactorily resolve the fines and
licensure sanctions. No such enforcement action against a facility or provider
has had a material adverse impact on the Company. In all cases during fiscal
year 1996, cited deficiencies were remedied before any facilities or providers
were decertified or threatened licensure sanctions became effective.
- 9 -
<PAGE> 10
Medicare and Medicaid reimbursements are generally determined from
annual cost reports filed by the Company which are subject to audit by the
respective agency administering the programs. The Company believes that
adequate provisions for loss have been recorded to reflect any adjustments
which could result from audits to these cost reports. Adjustments to the
Company's cost reports have not had a material adverse effect on the Company's
operating results.
The Medicare and Medicaid anti-kickback statute, 42 U.S.C. Section
1320a-7(b), prohibits the knowing and willful solicitation or receipt of any
remuneration "in return for" referring an individual, or for recommending or
arranging for the purchase, lease, or ordering of any item or service for which
payment may be made under Medicare or a state health care program. In
addition, the statute prohibits the offer or payment of remuneration "to
induce" a person to refer an individual, or to recommend or arrange for the
purchase, lease, or ordering of any item or service for which payment may be
made under the Medicare or state health care programs. The statute contains
exceptions for certain discounts, group purchasing organizations, employment
relationships, waivers of coinsurance by community health centers, health
plans, and practices defined in regulatory safe harbors. Pursuant to the
"Health Insurance Portability and Accountability Act of 1996", effective
January 1997, Congress has expanded the sanctions applicable to health care
fraud.
False claims are prohibited pursuant to criminal and civil statutes.
Criminal provisions at 42 U.S.C. Section 1320a-7b prohibit filing false claims
or making false statements to receive payment or certification under Medicare
or Medicaid, or failing to refund overpayments or improper payments; offenses
for violation are felonies punishable by up to five years imprisonment, and/or
$25,000 fines. Civil provisions at 31 U.S.C. Section 3729 prohibit the
knowing filing of a false claim or the knowing use of false statements to
obtain payment; penalties for violations are fines of not less than $5,000 nor
more than $10,000, plus treble damages, for each claim filed.
The Ethics in Patient Referrals Act, ("Stark I"), effective January 1,
1992, generally prohibited physicians from referring Medicare patients to
clinical laboratories for testing, if the referring physician (or a member of
the physician's immediate family) had a "financial relationship", through
ownership or compensation, with the laboratory. The Omnibus Budget
Reconciliation Act of 1993 contains provisions ("Stark II") expanding Stark I
by prohibiting physicians from referring Medicare and Medicaid patients to an
entity for the furnishing of a list of "designated health services" including
physical therapy, occupational therapy, home health services, and others. If
such a financial relationship exists, the entity is generally prohibited from
claiming payment for such services under the Medicare or Medicaid programs.
Compensation arrangements are generally exempted from the Stark provisions if,
among other things, the compensation to be paid is set in advance, does not
exceed fair market value and is not determined in a manner that takes into
account the volume or value of any referrals or other business generated
between the parties.
Other provisions in the Social Security Act authorize other penalties,
including exclusion from participation in Medicare and Medicaid, for various
billing-related offenses. HHS can also initiate permissive exclusion actions
for such improper billing practices as submitting claims "substantially in
excess" of the provider's usual costs or charges, failure to disclose ownership
and officers, or failure to disclose subcontractors and suppliers. Executive
Order 12549 prohibits any corporation or facility from participating in federal
contracts if it or its principals have been disbarred, suspended or are
ineligible, or have been voluntarily excluded, from participating in federal
contracts. A principal has been defined as an officer, director, owner,
partner, key employee or other person with primary management or supervisory
responsibilities.
The Company expects that business practices of providers and financial
relationships between providers will be subject to increased scrutiny as health
care reform efforts continue at federal and state levels. Although the Company
has contractual arrangements with some health care providers, the Company
believes that its practices are not in violation of these federal and state
prohibitions. The Company cannot reasonably predict whether enforcement
activities will increase at the federal or state level or the effect of any
such increase on its business.
In the summer of 1995, a major anti-fraud demonstration project,
"Operation Restore Trust", was announced by the OIG. A primary purpose for the
project is to scrutinize the activities of health care providers who are
reimbursed under the Medicare and Medicaid programs. Initial investigative
efforts have focused on skilled nursing facilities, home health and hospice
agencies, and durable medical equipment suppliers in Texas, Florida, New York,
Illinois, California, and Louisiana. With the exception of Louisiana, the
states were targeted because they collectively compromise 40% of Medicare and
Medicaid beneficiaries. The OIG has issued, and will continue to issue,
special Fraud Alert bulletins identifying "suspect" characteristics of
potentially illegal practices by providers, and illegal arrangements between
providers. The bulletins contain Hot Line numbers and encourage Medicare
beneficiaries, health care company employees, competitors,
- 10 -
<PAGE> 11
and others to call to report suspected violations. The OIG has indicated it is
specifically looking for evidence of excessive services to residents in nursing
home, "drop shipments" of supplies for a resident that has not been properly
assessed, billing for services not rendered, billing for equipment or supplies
which were not used, the use of untrained staff, falsified plans of care,
forged physician signatures, and kickbacks. Identified problems will result in
increased audit scrutiny, letter inquiries or subpoenas for data and records,
and onsite investigations. Enforcement actions could include criminal
prosecutions, or suit for civil penalties, and/or Medicare program exclusion.
While the Company does not believe that it is in violation of any such laws or
is the target of any such investigation, there can be no assurance that
substantial amounts will not be expended to cooperate with any such
investigation or to defend allegations arising therefrom. If it were found
that any of the Company's practices failed to comply with the anti- fraud
provisions, the Company could be materially adversely affected. The Company is
unable to predict the effect of future administrative or judicial
interpretations of these laws, or whether other legislation or regulations on
the federal or state level in any of these areas will be adopted, what form
such legislation or regulations may take, or their impact on the Company.
There can be no assurance that such laws will ultimately be interpreted in a
manner consistent with the Company's practices.
CERTIFICATE OF NEED. Certificate of Need ("CON") statutes and
regulations control the development and expansion of health care services and
facilities in certain states. The CON process is intended to promote quality
health care at the lowest possible cost and to avoid the unnecessary
duplication of services, equipment and facilities. CON or similar laws
generally require that approval must be obtained from the designated state
health planning agency for certain acquisitions and capital expenditures, and
determine that a need exists prior to the expansion of existing facilities,
construction of new facilities, addition of beds, acquisition of major items of
equipment or introduction of new services. State approvals are generally
issued for a specified maximum expenditure and require implementation of the
proposal within a specified period of time. Failure to obtain the necessary
state approval can result in the inability to provide the service, to operate
the facility, to complete the acquisition, addition or other change, and can
also result in the imposition of sanctions or adverse action on the facility's
license and adverse reimbursement action. Most states in which the Company
operates have adopted CON or similar laws that regulate the locations operated
by the Company's subsidiaries, and/or the services provided. Some states,
however, including, but not limited to Colorado, Texas, and Wyoming, do have
other state laws which control the addition of nursing facility beds in a
service area. CONs or other approvals may be required in connection with the
Company's future acquisitions and/or expansions. There can be no assurance
that the Company will be able to obtain the CONs or other approvals necessary
for any or all such projects.
ENVIRONMENTAL LAWS. Certain federal and state laws govern the handling
and disposal of medical, infectious and hazardous waste. Failure to comply with
those laws or the regulations promulgated thereunder could subject an entity
covered by these laws to fines, criminal penalties and other enforcement
actions. The Company has developed policies with respect to the handling and
disposal of medical, infectious and hazardous waste to assure compliance by
each of its centers with those laws and regulations. The Company believes that
it is in material compliance with applicable laws and regulations governing
medical, infectious and hazardous waste.
OSHA. Federal regulations promulgated by the Occupational Safety and
Health Administration impose additional requirements on the Company with regard
to protecting employees from hazards in the workplace, including exposure to
blood-borne pathogens. The Company cannot predict the frequency of compliance
monitoring or enforcement actions that it may be subject to by governing
agencies and there can be no assurance that the regulations will not adversely
affect the operations of the Company and other long-term care providers.
WORK OPPORTUNITY CREDIT. The targeted jobs credit expired on December
31, 1994. The 1996 Small Business Act (P.L. 104-188), Section 1201, replaced
the targeted jobs credit under Section 51 with the work opportunity credit.
The credit is available on an elective basis for employers hiring individuals
from one or more of eight targeted groups, and generally, is equal to 35% of
qualified first-year wages. However, no credit is allowed for wages paid
unless the individual is employed by the employer for at least 180 days or 400
hours. In addition, the individual is not treated as a member of a targeted
group unless certification requirements are met. The credit is available for
wages paid or incurred to a qualified individual who begins work for an
employer after September 30, 1996, and before October 1, 1997.
COMPETITION
The long-term health care industry is segmented into a variety of
competitive areas which market similar services. These competitors include
nursing homes, hospitals, extended care centers, retirement centers and
communities, and home
- 11 -
<PAGE> 12
health and hospice agencies. The Company's centers historically have competed
on a local basis with other long-term care providers, and the Company's
competitive position has varied from center to center within the various
communities it serves. During fiscal year 1996, however, the Company invested
in the development of a Marketing and Managed Care Department, led by a Company
Vice President of Marketing to assist facilities-based staffs increase the
occupancies of the Company's long-term care centers. Several new systems are
in the process of implementation which are designed to enhance census
development and retention. Significant competitive factors include the quality
of care provided, reputation, location and physical appearance of the long-term
care centers and, in the case of private pay residents, charges for services.
Since there is little price competition with respect to Medicaid and Medicare
residents, the range of services provided by the Company's centers that is
covered by Medicaid and Medicare and the location of the centers significantly
affect a center's competitive position in its market. Competition in the
institutional pharmaceutical and the rehabilitation services markets ranges
from small local operators to companies which are national in scope and
distribution capability. The Company cannot assure that its marketing
initiative and the implementation of marketing systems will result in
significant increases in census at its long-term care centers.
CAUTIONARY STATEMENTS
Information provided herein by the Company contains, and from time to
time the Company may disseminate materials and make statements which may
contain "forward-looking" information, as that term is defined by the Private
Securities Litigation Reform Act of 1995 (the "Act"). These cautionary
statements are being made pursuant to the provisions of the Act and with the
intention of obtaining the benefits of the "safe harbor" provisions of the Act.
The Company cautions investors that any forward-looking statements
made by the Company are not guarantees of future performance and that actual
results may differ materially from those in the forward-looking statements as a
result of various factors, including, but not limited to, the following:
(i) In recent years, an increasing number of legislative proposals
have been introduced or proposed by Congress and in some state legislatures
which would effect major changes in the healthcare system. However, the
Company cannot predict the form of healthcare reform legislation which may be
proposed or adopted by Congress or by state legislatures. Accordingly, the
Company is unable to assess the effect of any such legislation on its business.
There can be no assurance that any such legislation will not have a material
adverse impact on the future growth, revenues and net income of the Company.
(ii) The Company derives substantial portions of its revenues from
third-party payors, including government reimbursement programs such as
Medicare and Medicaid, and some portions of its revenues from nongovernmental
sources, such as commercial insurance companies, health maintenance
organizations and other charge-based contracted payment sources. Both
government and non government payors have undertaken cost-containment measures
designed to limit payments to healthcare providers. There can be no assurance
that payments under governmental and nongovernmental payor programs will be
sufficient to cover the costs allocable to patients eligible for reimbursement.
The Company cannot predict whether or what proposals or cost-containment
measures will be adopted or, if adopted and implemented, what effect, if any,
such proposals might have on the operations of the Company.
(iii) The Company is subject to extensive federal, state and local
regulations governing licensure, conduct of operations at existing facilities,
construction of new facilities, purchase or lease of existing facilities,
addition of new services, certain capital expenditures, cost-containment and
reimbursement for services rendered. The failure to obtain or renew required
regulatory approvals or licenses, the delicensing of facilities owned, leased
or operated by the Company or the disqualification of the Company from
participation in certain federal and state reimbursement programs could have a
material adverse effect upon the operations of the Company.
(iv) There can be no assurance that the Company will be able to
continue its substantial growth or be able to fully implement its strategy to
develop and its business strategies for its long-term care, pharmaceutical, or
rehabilitation therapy services groups.
- 12 -
<PAGE> 13
EMPLOYEES
The Company employs approximately 29,000 individuals, including
approximately 5,000 registered and licensed practical nurses, 10,000 nursing
assistants, over 2,000 therapists, 200 pharmacists and 1,500 employees who work
at the corporate and field offices.
ITEM 2. PROPERTIES
As of September 30, 1996, Living Centers operated 206 long-term care
and assisted living centers with 23,746 licensed beds in 13 states. The
Company's lease arrangements for its long-term care centers are generally
"triple net" leases, as is typical in the industry, whereby the Company rather
than the landlord is responsible for all property taxes, insurance coverages
and maintenance on the property. The average remaining life of the leases,
including renewal options exercisable solely by the Company, is 11.8 years. The
Company considers its properties to be in good operating condition and suitable
for the purposes for which they are being used. The centers are generally
refurbished or remodeled on a five to seven-year cycle.
The following table lists, at September 30, 1996 by state, the total
number of licensed beds and the number of centers owned, leased and managed by
the Company. Licensed beds represent the number of beds for which a license has
been issued and may vary from the actual beds available for use.
<TABLE>
<CAPTION>
OWNED LEASED MANAGED TOTAL
-------------- -------------- -------------- --------------
STATE CENTERS BEDS CENTERS BEDS CENTERS BEDS CENTERS BEDS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Texas 51 5,854 42 4,656 1 120 94 10,630
North Carolina 29 3,429 3 458 1 91 33 3,978
Colorado 18 1,902 8 819 -- -- 26 2,721
Louisiana -- -- 6 1,260 -- -- 6 1,260
Georgia 2 270 6 706 -- -- 8 976
Alabama 7 820 -- -- -- -- 7 820
Arizona 2 215 5 545 -- -- 7 760
Nebraska 7 612 -- -- -- -- 7 612
Florida 2 295 1 266 1 51 4 612
Wyoming 3 385 2 140 -- -- 5 525
South Carolina 2 265 -- -- 1 120 3 385
Virginia -- -- 5 343 -- -- 5 343
Mississippi 1 124 -- -- -- -- 1 124
---- ------ -- ----- --- --- --- ------
Total 124 14,171 78 9,193 4 382 206 23,746
=== ====== == ===== === === === ======
</TABLE>
Certain of the above properties serve as collateral for various mortgage debt
instruments or capitalized lease obligations. See Note 5 to the Consolidated
Financial Statements. The Company regularly reviews its portfolio of
properties and intends to divest those centers which it believes do not meet
patient care or financial performance standards.
- 13 -
<PAGE> 14
In addition to long-term care centers, at September 30, 1996 the Company
operated 134 outpatient rehabilitation clinics in 19 states and 31
institutional pharmacies in 11 states, as follows:
<TABLE>
<CAPTION>
OUTPATIENT INSTITUTIONAL
STATE CLINICS PHARMACIES
<S> <C> <C>
Alabama . . . . . . . . . . . . . . . . . -- 1
Arizona . . . . . . . . . . . . . . . . . 1 2
California . . . . . . . . . . . . . . . . 5 --
Colorado . . . . . . . . . . . . . . . . . -- 2
Connecticut . . . . . . . . . . . . . . . 3 --
Florida . . . . . . . . . . . . . . . . . 15 9
Georgia . . . . . . . . . . . . . . . . . 1 1
Illinois . . . . . . . . . . . . . . . . . -- 1
Indiana . . . . . . . . . . . . . . . . . -- 1
Iowa . . . . . . . . . . . . . . . . . . . 1 --
Kansas . . . . . . . . . . . . . . . . . . 11 --
Kentucky . . . . . . . . . . . . . . . . . 1 --
Louisiana . . . . . . . . . . . . . . . . 6 2
Maryland . . . . . . . . . . . . . . . . . 3 --
Mississippi . . . . . . . . . . . . . . . 8 --
Nevada . . . . . . . . . . . . . . . . . . 1 --
New Jersey . . . . . . . . . . . . . . . . -- 1
North Carolina . . . . . . . . . . . . . . 21 2
South Carolina . . . . . . . . . . . . . . 10 --
Tennessee . . . . . . . . . . . . . . . . 10 --
Texas . . . . . . . . . . . . . . . . . . 28 9
Virginia . . . . . . . . . . . . . . . . . 7 --
Washington . . . . . . . . . . . . . . . . 1 --
Wyoming . . . . . . . . . . . . . . . . . 1 --
-- --
Total . . . . . . . . . . . . . . . . 134 31
=== ==
</TABLE>
Substantially all of the Company's outpatient rehabilitation clinics
and institutional pharmacy facilities are leased under "triple net" leases. The
Company considers its properties to be in good operating condition and suitable
for the purposes for which they are being used. In connection with the
Rehability acquisition, the Company adopted a restructuring plan in which it
expects to close a total of 30 outpatient rehabilitation centers prior to March
31, 1997. See Note 9 to the Consolidated Financial Statements.
Certain of the above properties serve as collateral for various
mortgage debt instruments or capitalized lease obligations. See Note 5 to the
Consolidated Financial Statements. The Company regularly reviews its portfolio
of properties and intends to divest those clinics and/or pharmacies which it
believes do not meet quality or financial performance standards.
- 14 -
<PAGE> 15
ITEM 3. LEGAL PROCEEDINGS
As is typical in the health care industry, the Company is subject to
claims that its services have resulted in resident injury or other adverse
effects, the risks of which are greater for higher acuity residents receiving
services from the Company than for other long-term care residents. The Company
has, from time to time, been subject to such negligence claims and other
litigation. In addition, resident, visitor, and employee injuries also subject
the Company to risk of litigation. While the Company believes that the
ultimate resolution of pending legal proceedings will not have a material
adverse effect on the Company's business or financial condition, there can be
no assurance that any current or future claims will not have a material adverse
effect on the Company's business or financial condition. Although the Company
maintains insurance with coverages it deems appropriate in respect of such
potential liabilities, there can be no assurance that such insurance will
continue to be available at acceptable rates or that claims in excess of the
current insurance coverages or claims not covered by insurance will not be
asserted against the Company. Moreover, insurance coverage in certain states
is not available to cover punitive damages, and proceedings involving claims of
punitive damages are pending in certain of those states. See "Liquidity and
Capital Resources" included in Management's Discussion and Analysis of
Financial Condition and Results of Operations.
An attorney in the Civil Division of the United States Department of
Justice has advised Living Centers that a complaint under the Civil False
Claims Act has been filed, under seal, against BCC and one of its subsidiaries,
MedTherapy Rehabilitation Services, Inc. ("MedTherapy"), in the federal
district court for the Western District of North Carolina. The Department of
Justice has reviewed the sealed complaint and advised counsel for BCC and
MedTherapy that the plaintiff alleges, in general, that BCC and MedTherapy
caused certain therapists to make improper therapy record entries with respect
to therapy screening services and that any claims filed with Medicare for
payments which are based upon such improper record entries should be viewed as
false claims under the Civil False Claims Act. Under the Civil False Claims
Act, any person who knowingly files false claims is liable for treble damages
and penalties ranging from $5,000 to $10,000 for each false claim. Because the
complaint is under seal, Living Centers does not know the number of claims
alleged or the specific factual allegations set forth in the complaint. The
Department of Justice has the right to intervene and pursue the claim on behalf
of the plaintiff, but has not made a decision on intervention as of the date
hereof. If the Department of Justice does not intervene, the plaintiff may
continue to pursue the claim individually. BCC and MedTherapy have advised the
Department of Justice that, based upon the information disclosed thus far by
the Department of Justice, they dispute, and will vigorously contest, the
claims of the plaintiff. Although the Company believes, based on discussions
with counsel, that the plaintiff's claims are merit less, no assurances can be
given that, if the plaintiff were to prevail in his claim, the resulting
judgment would not have a material adverse effect upon the Company. Moreover,
in connection with the Company's acquisition of BCC, the primary stockholder
(Donald C. Beaver) agreed to indemnify and hold harmless Living Centers from
and against any and all loss, expense, damage, penalty and liability which
could result from this claim, subject to further adjustment. Mr. Beaver's
indemnity requires any payment to the Company to be in the form of shares of
Common Stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
- 15 -
<PAGE> 16
ITEM 4A. EXECUTIVE MANAGEMENT OF THE REGISTRANT
The following table sets forth certain information concerning
executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE OFFICE HELD
<S> <C> <C>
Edward L. Kuntz . . . . . . . . . . . . . . . . . . . . 51 Chairman, Chief Executive Officer, President and
Director
Leroy D. Williams . . . . . . . . . . . . . . . . . . . 55 Executive Vice President, Chief Operating Officer
and Director
Charles B. Carden . . . . . . . . . . . . . . . . . . . 51 Executive Vice President and Chief Financial
Officer
Donald C. Beaver . . . . . . . . . . . . . . . . . . . 56 Vice Chairman
Pauline Bonner . . . . . . . . . . . . . . . . . . . . 47 Area President, Long Term Care Group
Sydney K. Boone, Jr. . . . . . . . . . . . . . . . . . 51 Vice President, Acquisitions and Development
David W. Budke . . . . . . . . . . . . . . . . . . . . 33 Vice President, Program Development
James P. Dorn . . . . . . . . . . . . . . . . . . . . . 49 Vice President, Human Resources
Boyd P. Gentry . . . . . . . . . . . . . . . . . . . . 37 Vice President, Investor Relations and Treasurer
Kelly R. Gill . . . . . . . . . . . . . . . . . . . . . 41 President, Therapy Services Group
Laura Kislowski . . . . . . . . . . . . . . . . . . . . 42 Vice President, Marketing
William R. Korslin . . . . . . . . . . . . . . . . . . 47 President, Pharmaceutical Services Group
Keith Krein, M.D. . . . . . . . . . . . . . . . . . . . 44 Medical Director and Vice President, Professional
Services
John D. Lee, III . . . . . . . . . . . . . . . . . . . 50 Area President, Long Term Care Group
James L. Martin, Jr. . . . . . . . . . . . . . . . . . 38 Vice President, Purchasing
Kenneth Morgan . . . . . . . . . . . . . . . . . . . . 53 Area President, Long Term Care Group
Karuppanna Muthuswamy . . . . . . . . . . . . . . . . . 51 Vice President, Information Services
Susan Thomas Whittle . . . . . . . . . . . . . . . . . 48 Vice President, General Counsel and Secretary
</TABLE>
There are no family relationships existing among any of the above listed
officers. Officers are elected annually and serve at the discretion of the
Board of Directors. Each of the executive officers has employment agreements
that provide for annual salaries ranging from $113,000 to $500,000 for periods
of employment up to 36 months and severance payments of up to 36 months of
salary plus certain benefits. The severance arrangements also provide for an
additional 12 months of compensation and benefits in the event of a change in
control of the Company.
Mr. Kuntz became Chief Executive Officer and a Director in December 1991,
Chairman in January 1992 and President in November 1993. He served as
President until February 1996. He joined Living Centers as Executive Vice
President in February 1985. Prior to joining the Company, Mr. Kuntz was
employed by ARA since 1978 and was general counsel to ARA Living Centers (the
predecessor of Living Centers).
Mr. Williams became Executive Vice President in December 1991 and a
Director in January 1992. He was appointed Chief Operating Officer in August
1995, and President in February 1996. He joined Living Centers in 1978 as
Regional Controller of Living Centers--Eastern Region. From May 1983 to
February 1985, Mr. Williams was Financial Vice President for Living
Centers--Texas. In March 1985, he was appointed Vice President--Finance and
became Senior Vice President--Finance in January 1991.
Mr. Carden was appointed Executive Vice President and Chief Financial
Officer effective October 1996. Previously, he was Chief Financial Officer of
Leaseway Transportation Corp. where he was employed for fourteen years. He
also has had various supervisory and analytical positions in corporate finance
with Ford Motor Company.
Mr. Beaver was appointed Vice Chairman concurrent with the acquisition by
the Company of the outstanding stock of The Brian Center Corporation in July
1995. Previously, Mr. Beaver had been the sole shareholder of The Brian Center
Corporation.
- 16 -
<PAGE> 17
Ms. Bonner became Area President, for the Rocky Mountain Area, in February
1996. She has held various operational positions since joining the Company in
1980, including District Director of Operations and Area Vice President for the
Rocky Mountain Area.
Mr. Boone became Vice President, Acquisitions and Development and Associate
General Counsel in November 1993. He had served as Assistant General Counsel
since joining the Company in May 1989. Previously, he was in private law
practice.
Mr. Budke became Vice President, Program Development in November 1993. He
previously held various marketing and public relation positions at the Company
since joining the Company in September 1987.
Mr. Dorn became Vice President, Human Resources in March 1996. Previously,
he was Vice-President - Human Resources for Curtin Matheson Scientific, and has
held human resources management positions for over twenty years.
Mr. Gentry became Vice President, Investor Relations and Treasurer in
August 1995. Previously, Mr. Gentry was a Senior Vice President of NationsBank.
Mr. Gentry served NationsBank and its predecessors in a variety of corporate
finance and corporate banking positions for over 12 years prior to joining the
Company.
Ms. Kislowski became Vice President, Marketing in August 1995. Previously,
Ms. Kislowski had significant experience in long-term care sales and marketing
positions, most recently with Regency Health Services.
Mr. Korslin has served as President of APS since May 1994. Mr. Korslin
joined APS in July 1987 as General Manager, Enteral Services. From 1989 through
1992, he served as Eastern Area Vice President of APS and, from 1992 to 1994,
Mr. Korslin was Senior Vice President in charge of all field operations of
APS. He was appointed as a Vice President of Living Centers in September 1995.
Mr. Lee became Area President, for the Southeast Area in February 1996. He
previously held the position of Area Vice President for the Southeast Area
since joining the Company in May 1994. Previously, Mr. Lee had held Senior
Management positions with long-term care companies located in the Eastern and
Southeastern United States.
Mr. Martin became Vice President, Purchasing in May 1996. Mr. Martin
joined the Company through the acquisition of The Brian Center Corporation in
July 1995, where he had been Controller.
Mr. Morgan became Area President, for the Texas Area in February 1996. He
previously held the position of Area Vice President for the Texas Area since
joining the Company in January 1995. Previously, Mr. Morgan had owned and
operated long-term care facilities, and held Senior Management positions with
long-term care companies located in Texas and the Midwestern United States.
Dr. Krein became Medical Director and Vice President, Professional Services
in November 1989. Previously, he was regional medical director for Spectrum
Emergency Care, Inc. (a subsidiary of ARA) from September 1984 until he joined
the Company in November 1989.
Mr. Muthuswamy became Vice President, Information Services in January 1991.
Previously, he was Director of Operation Services Development for ARASERVE (an
ARA business sector) from March 1978 until he joined the Company in May 1989.
Ms. Whittle became Vice President, General Counsel and Secretary in
September 1993. Previously, she was a partner with the law firms of Clark,
Thomas & Winters of Austin, Texas and Wood, Lucksinger & Epstein, a national
health care law firm.
- 17 -
<PAGE> 18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
PRINCIPAL MARKETS AND SALES PRICES OF COMMON EQUITY SECURITIES
The Company's common stock is traded on the New York Stock Exchange
under the symbol "LCA." The high and low sales prices for each quarter for the
last two fiscal years is presented in the table below:
<TABLE>
<CAPTION>
Fiscal Year 1996 Fiscal Year 1995
----------------------- --------------------------
High Low High Low
Quarter Ended
-------------
<S> <C> <C> <C> <C>
December 31 35 25 1/2 34 1/4 29 1/4
March 31 41 31 1/2 38 1/4 32 3/4
June 30 39 1/4 32 5/8 37 1/2 25 1/4
September 30 28 1/8 20 3/4 34 7/8 267/16
</TABLE>
NUMBER OF STOCKHOLDERS
As of November 25, 1996 there were approximately 512 owners of record
of the Company's common stock.
DIVIDENDS
The Company has not paid any cash dividends on its common stock since
inception and it does not currently anticipate paying any such dividends on the
common stock. The Company's Bank Credit Facility and various other note
agreements contain covenants which effectively limited the payment of cash
dividends as of September 30, 1996 to $24.4 million. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" and Note 5 to the Consolidated Financial
Statements.
- 18 -
<PAGE> 19
ITEM 6. SELECTED FINANCIAL INFORMATION
The following selected financial data are derived from the Company's
Consolidated Financial Statements, which have been audited by Ernst & Young
LLP, independent auditors. The Consolidated Financial Statements give
retroactive effect to the acquisition of BCC as though the transaction occurred
on September 30, 1990; such transaction has been accounted for using the
pooling of interests method of accounting. The information set forth below is
qualified by reference to, and should be read in conjunction with, the
Consolidated Financial Statements and the Notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this filing. All dollar amounts are presented in
thousands, except per share amounts.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------------------------------------------------
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA: (1)
Net revenues.............................. $ 1,114,491 $ 893,869 $ 708,873 $ 576,140 $ 511,838
Income from operations.................... 89,556 57,005(2) 49,468 38,464 30,868
Interest expense, net.................. 12,461 10,817 10,894 8,998 11,001
Equity earnings/minority interests..... (156) (204) 1,603 1,582 1,210
Net Income............................. 43,180 24,234 26,616 20,899 14,249
Pro forma taxes(4)........................ -- 599 899 899 726
Pro forma net income(4)................... 43,180 23,635 25,717 20,000 13,523
Earnings per share........................ $ 2.13 $ 1.27(3) $ 1.56 $ 1.32 $ 0.92
Pro forma earnings per share(4)........... $ 2.13 $ 1.24(3) $ 1.51 $ 1.26 $ 0.87
Weighted average number of shares
outstanding (in thousands)............ 20,315 19,034 17,080 15,824 15,551
OPERATING STATISTICS:
Number of centers (end of period)......... 206 294 288 267 261
Average occupancy rate.................... 83.9% 85.1% 85.2% 84.3% 84.3%
Percentage of patient revenues from:
Private................................ 31.9% 25.5% 23.7% 24.0% 25.2%
Medicare............................... 25.5 23.9 17.5 13.6 9.9
Medicaid............................... 42.6 50.6 58.8 62.4 64.9
Percentage operating margin............... 8.0% 6.4%(2) 7.0% 6.7% 6.0%
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------------------------------------------------------
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................... $ 101,091 $ 34,631 $ 14,955 $ 15,960 $ 17,258
Total assets.............................. 821,734 730,708 525,639 376,248 354,974
Long term debt, including current portion 276,448 216,910 206,097 135,409 145,956
Stockholders' equity...................... 329,315 303,596 172,018 119,432 105,521
Total capitalization...................... 605,763 520,506 378,115 254,841 251,477
</TABLE>
- ---------------------------
(1) Years prior to 1994 have been restated to reflect the implementation
of SFAS 109.
(2) Includes $14.3 million of non-recurring merger and acquisition and
related costs associated with the BCC merger. Excluding these
non-recurring merger and acquisition and related costs, the percentage
operating margin would have been 8.0%.
(3) Excluding non-recurring merger and acquisition and related costs in
the amount of $14.3 million, earnings per share and proforma earnings
per share would have been $1.93 and $1.90, respectively.
(4) A pro forma income tax provision has been provided to reflect the
estimated federal and state income taxes as if all BCC S corporations
were taxable entities. See Note 1 to Consolidated Financial
Statements.
- 19 -
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company provides a diverse range of services in the health care
continuum including long-term health care, rehabilitation therapy, and
pharmaceutical services. Services provided at the Company's long-term care
facilities, which comprise approximately 70% of the Company's total revenue,
include long-term nursing services and specialty care services including
assisted living services, subacute care, and care for individuals with
Alzheimer's disease. The Company is currently expanding or developing
additional specialty care services such as hospice care, geriatric physician
management services and home health care. See Business - Long-Term Care
Services Group. The Company's rehabilitation therapy group provides services to
over 600 skilled nursing and other health care facilities, offers therapy
program management services to long-term health care companies, and operates
approximately 134 outpatient clinics. The pharmaceutical group operates 31
institutional pharmacies and provides services to more than 100,000 long-term
health care beds through its various product lines.
When the Company began its operations as a separate, publicly-traded
company in 1992, it provided primarily long-term nursing services. From fiscal
year 1992 through fiscal year 1995 it grew rapidly through acquisitions, adding
specialty care services, rehabilitation therapy, and pharmaceutical services,
as well as additional long-term care facilities. During this period the
Company's net revenue increased from $351 million to $894 million and its net
income, adjusted for non-recurring merger and acquisition costs in 1995,
increased from $10.5 million to $36.1 million. During the fiscal year ending
September 30, 1995 the Company completed several significant acquisitions
including The Brian Center Corporation ("BCC"), Rehability, and TMI.
Accordingly, the fiscal year ended September 30, 1996 was the first year that
fully reflected the financial results from all of the Company's major
acquisitions. The Company's net revenue for the fiscal year ended September 30,
1996 increased to $1.1 billion and net income, excluding non-recurring items,
increased to $45.0 million.
During the fiscal year ended September 30, 1996, the Company turned its
focus to integrating the BCC, Rehability, and TMI operations and divesting its
DevCon subsidiary, which provided training and habilitation services to
individuals with mental retardation and developmental disabilities. During
fiscal year 1996, the Company finalized a plan originating in June 1995 to
restructure the operations and exit certain activities of ARS, including
closing or downsizing unprofitable clinics and offsite contracts. See Note 9 to
the Consolidated Financial Statements. The divestiture of DevCon was completed
in September 1996 through the recapitalization and subsequent sale of the
majority of DevCon's stock for $47.5 million in cash. The Company's results for
the fiscal year ended September 30, 1996 and prior years reflect the inclusion
of the DevCon operations. DevCon's net revenue and income from operations for
fiscal year 1996 were $47.6 million and $5.7 million, respectively. The Company
expects its reported earnings to reflect the effects of this divestiture until
the proceeds from the divestiture are reinvested.
The Company's strategy is to utilize its core long-term care facilities as
a platform to deliver a comprehensive array of senior health care services. As
a consequence, the Company seeks to control the significant components of its
care continuum, while diversifying its sources of revenue and positioning
itself to be responsive to a variety of payors. Through the provision of
cost-effective quality care, the Company believes that it can enhance
profitability. However, future operating performance will continue to be
affected by the issues facing the senior health care industry including quality
of care, occupancy levels, availability of nursing, therapy and other
personnel, adequacy of funding of federal and state reimbursement programs in
addition to the Company's continued expansion of its non-nursing home
operations and its ability to control costs.
- 20 -
<PAGE> 21
RESULTS OF OPERATIONS
The following table sets forth data from the statement of income expressed
as a percentage of net revenues:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------
1996 1995 1994
<S> <C> <C> <C>
Net Revenues:
Nursing home 69.7% 82.6% 94.3%
Non-nursing home:
Pharmacy 11.4 10.4 4.0
Therapy 18.5 6.6 1.1
Other .4 .4 .5
------ ------ ------
100.0 100.0 100.0
------ ------ ------
Costs and Expenses:
Salaries and wages 40.9 40.3 42.0
Employee benefits 8.7 9.1 11.7
Nursing, dietary, and other supplies 5.4 6.3 6.6
Ancillary services 16.9 16.6 11.2
General and administrative 15.1 15.1 17.5
Depreciation and amortization 3.5 3.5 3.7
Provision for bad debts 1.5 1.3 .4
Life insurance proceeds (.2) -- --
Gain on sale (2.0) -- --
Impairment of long-lived assets 2.3 -- --
Other .3 -- --
Mergers and acquisition cost -- 1.4 --
------ ------ ------
Income from operations 7.6 6.4 7.0
Interest expense, net 1.1 1.2 1.5
------ ------ ------
Income before income taxes and equity earnings/
minority interest 6.5 5.2 5.5
Provision for income taxes 2.8 2.4 1.9
------ ------ ------
Income before equity earnings/minority interest 3.7 2.8 3.6
Equity earnings/minority interest -- .1 .2
------ ------ ------
Net income 3.7 2.8 3.8
Pro forma taxes (unaudited) -- .1 .1
------ ------ ------
Pro forma net income (unaudited) 3.7% 2.1% 3.7%
====== ====== ======
</TABLE>
-21-
<PAGE> 22
Nursing home revenues are derived from two basic sources: routine services
$(630.7 million or 81.2 % in fiscal year 1996) and ancillary services $(145.8
million or 18.8 % in fiscal year 1996) and are a function of occupancy rates in
the long-term care facilities and the payor mix. Occupancy rates, as identified
in the following table, decreased in fiscal year 1996 partially due to an
increase in hospital-operated skilled units in key markets. The Company has
invested in the marketing and managed care areas and has implemented an
aggressive marketing program to increase census and improve quality mix. Years
Ended September 30,
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------
1996 1995 1994
<S> <C> <C> <C>
Weighted licensed bed count 25,498 26,355 26,617
Total average residents 21,405 22,428 22,669
Average occupancy 83.9% 85.1% 85.2%
</TABLE>
Payor mix is the source of payment for the services provided and consists
of private pay, Medicare and Medicaid. Private pay includes revenue from
individuals who pay directly for services without governmental assistance,
managed care companies, commercial insurers, health maintenance organizations,
and Veteran's administration contractual payments. Managed care as a payor
source to health care providers is expected to increase over the next several
years. The Company has increased its managed care contracting capabilities and
has created a system which allows the centralized case management of these
patients within targeted markets. However, the impact to the Company of this
increasing payor source can not be determined at this time.
Reimbursement rates from government sponsored programs, such as Medicare
and Medicaid, are strictly regulated and subject to funding appropriations from
federal and state governments. To the extent unfavorable changes in economic
conditions impact payments under governmental or third-party payor programs,
the Company would be adversely affected. See Business - Government Regulation.
Revenues derived from the Company's pharmacy and therapy groups are also
influenced by payor mix. The table below presents the approximate percentage of
the Company's net patient revenues derived from the various sources of payment
for the periods indicated:
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------
1996 1995 1994
<S> <C> <C> <C>
Private pay 31.9% 25.5% 23.7%
Medicare 25.5% 23.9% 17.5%
Medicaid 42.6% 50.6% 58.8%
</TABLE>
The increasing trend in the percentage of revenues derived from private
pay and Medicare sources is attributable primarily to the growth in the
Company's pharmacy and therapy operations. The revenue from these operations,
which is generated primarily from private pay and Medicare sources, results in
a reduction of the percentage of net revenue derived from the Medicaid program.
In addition, average reimbursement rates for Medicare patients have increased
more rapidly than for Medicaid residents due primarily to the higher
reimbursement rates associated with the increase in acuity levels. Although
cost reimbursement for Medicare residents generates a higher level of revenue
per patient day, profitability is not proportionally increased due to the
additional costs associated with the required higher level of care and other
services for such residents.
The administrative procedures associated with the Medicare cost
reimbursement program generally preclude final determination of amounts due the
Company until cost reports are audited or otherwise reviewed and settled with
the applicable administrative agencies. The Company does not expect any
differences between revenue recorded and as finally determined to have a
significant effect on the Company's results of operations or financial
position. See Note 1 to the Consolidated Financial Statements.
- 22 -
<PAGE> 23
Costs and expenses, excluding depreciation and amortization, primarily
consist of salaries, wages, and employee benefits. Various federal, state, and
local regulations impose, depending on the services provided, a variety of
regulatory standards for the type, quality and level of personnel required to
provide care or services. These regulatory requirements have an impact on
staffing levels, as well as the mix of staff, and therefore impact total costs
and expenses. See Business-Government Regulation. The cost of ancillary
services, which includes pharmaceuticals, is also affected by the level of
service provided and patient acuity. General and administrative expenses
include the cost of the Company's various insurance programs, except worker's
compensation. See Note 12 to the Consolidated Financial Statements.
FISCAL 1996 COMPARED TO FISCAL 1995. Net revenues comprising nursing home
and non-nursing home operations totaled $1.1 billion for the year ended
September 30, 1996, an increase of $220.6 million or 24.7%, as compared to
fiscal 1995. Nursing home operations contributed $38.1 million of the increase
which included rate increases of $37.2 million and higher ancillary service
billings resulting from the improvement in patient mix, primarily Medicare, of
$22.6 million. Divesture of nursing home operations decreased revenue $19.6
million and lower census reduced revenue by $7.6 million. Non-nursing home
operations contributed $182.5 million of the increase, consisting of $34.6
million from pharmacy operations, $146.5 million from therapy services and $1.4
million from medical supplies. Acquisitions, primarily Rehability, provided
$177.0 million of the $182.5 million increase in non-nursing home revenue.
Costs and expenses, including non-recurring items totaled, $1.0 billion
for the year ended September 30, 1996, an increase of $188.1 million or 22.5%,
as compared to fiscal 1995. Acquisitions, primarily Rehability and TMI, were
$171.0 million of the increase and divestitures reduced total expenses by $24.3
million. Other increases include payroll and related $(15.8 million) and
ancillary services $(28.4 million). The increase in ancillary services
corresponds to the increase in ancillary revenue and the higher level of
patient acuity as well as an increase in the cost of pharmaceuticals related to
higher pharmacy services revenue.
Non-recurring items reduced total costs and expenses in fiscal year 1996
by $1.1 million compared to the $12.4 million of merger and acquisition costs
from the BCC purchase in fiscal 1995. Non-recurring items included a $2.0
million gain from the receipt of life insurance proceeds on the former
President of the Rehabilitation Services Group. In addition the Company
recognized a $22.5 million gain in September 1996 on the sale of its DevCon
operations, which provided training and habilitation services to individuals
with mental retardation and developmental disabilities, through the
recapitalization and subsequent sale of the majority of DevCon's stock for
$47.5 million. The Company also recorded non-recurring charges of $2.9 million
primarily related to the closure of its medical supplies business and the
write-off of unamortized loan acquisition costs related to the Second Amended
and Restated Credit Agreement.
Non-recurring items also included an impairment loss of $20.5 million
related to nursing facilities with current period operating losses and certain
other nursing facilities and goodwill where management believed an impairment
existed as a result of the regulatory or competitive environment. Management
estimated the undiscounted cash flows to be generated by each of these assets
and compared them to their carrying value. If the undiscounted future cash flow
estimates were less than the carrying value of the asset then the carrying
value was written down to estimated fair value. Fair value was estimated based
on either management's estimate of fair value, present value of future cash
flows, or market value less estimated cost to sell for certain facilities to be
disposed. See Note 8 to the Consolidated Financial Statements.
Net interest expense totaled $12.5 million for the year ended September
30, 1996, an increase of $1.6 million or 15.2%, as compared to the same period
for fiscal 1995. The increase reflects a full year of interest expense for
fiscal 1996 versus three months of interest expense for fiscal 1995 on the
additional debt incurred to acquire Rehability.
The provision for income taxes increased $12.0 million in fiscal year 1996
but resulted in a lower effective tax rate of 43.8% compared to 47.1% in fiscal
year 1995. The decrease in non-deductible merger and acquisition costs reduced
the effective tax rate by 7.2% while the elimination of the Targeted Jobs Tax
Credit, increased non-deductible goodwill amortization, and other items
resulted in an increase of 3.9%.
- 23 -
<PAGE> 24
FISCAL 1995 COMPARED TO FISCAL 1994. Net revenues totaled $893.9 million
for the year ended September 30, 1995, an increase of $185.0 million or 26.1%,
as compared to fiscal 1994. Nursing home operations contributed $69.7 million
of the increase, which includes $18.7 million of acquisitions and approximately
$32.4 million in rate increases and improvements in patient mix over the prior
period (primarily in the area of Medicaid and Medicare services). Ancillary
revenue in the nursing home operations increased approximately $29.7 million
due to higher acuity levels and an increase in Medicare patients. Nursing home
revenues were lower by $11.1 million due to divestitures. Non-nursing home
operations contributed $115.3 of the increase, which includes $68.0 million of
pharmacy acquisitions, primarily APS, and $51.2 million in therapy services,
primarily Rehability and TMI.
Costs and expenses totaled $836.9 million for the year ended September 30,
1995, an increase of $177.5 million or 26.9%, as compared to the same period
for fiscal 1994. Acquisitions contributed $125.3 million of the increase, which
includes acquisitions, primarily APS$(60.0 million), Rehability $(41.2
million), TMI $(5.3 million) and nursing homes $(18.8 million). Other major
expense increases included $22.5 million in payroll related expenses, $3.0
million in nursing dietary and other supplies, $19.1 million in ancillary
services (primarily from the higher resident acuity level and the increase in
the number of Medicare residents in the Company's nursing home operations),
$2.4 million in general and administrative expenses and $2.0 million in bad
debt expense. All fiscal 1995 expense categories expressed as a percentage of
revenues reflect a significant change from fiscal 1994. This percentage shift
in expense categories is attributable to the inclusion of APS's cost of
products sold in the expense category "operating and administrative" and, to a
lesser extent, the lower labor intensity of the APS operation. Non-recurring
merger and acquisition and related costs were $14.3 million due to the
acquisition of Rehability. Also, divestitures decreased total expenses by $11.1
million.
Net interest expense totaled $10.8 million for the year ended September
30, 1995, a decrease of $.01 million or .7%, as compared to the same period for
fiscal 1994. Interest income from the Company's insurance subsidiary increased
and the Company used the proceeds from the February 1995 public offering of
Common Stock to retire existing debt. However, the effects of the common stock
offering were partially offset by additional debt incurred to acquire
Rehability.
Equity earnings/minority interests incurred a loss of $.2 million for the
year ended September 30, 1996, a decrease of $1.8 million, as compared to the
same period for fiscal 1994. This decrease is the result of APS recorded as a
fully consolidated subsidiary for fiscal 1995 as opposed to an unconsolidated
equity investment (49% ownership) for fiscal 1994.
Net income totaled $24.2 million for the year ended September 30, 1995, a
decrease of $2.4 million, or 8.9%, as compared to the same period for fiscal
1994. The decrease reflects the impact of the nonrecurring merger and
acquisition and related costs of $14.3 million, most of which is non-deductible
for federal income tax purposes. Excluding non-recurring merger and acquisition
and related costs, net income would have increased $7.8 million or 27.0% from
fiscal 1994.
SEASONALITY
The Company's revenues and operating income generally fluctuate from
quarter to quarter. This seasonality is related to a combination of factors
which include the timing of Medicaid rate increases, the number of work days in
the period, and seasonal census cycles.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $21.4 million at September 30, 1996, a $3.5
million increase from September 30, 1995 and working capital was $101.0
million, an increase of $66.5 million during fiscal year 1996. Cash provided by
operations was $31.8 million or $34.6 million less than fiscal year 1995. Net
income of $43.1 million, non-cash items totaling $44.9 million and an increase
in accrued expenses of $17.5 million contributed to the cash provided by
operations. The increase in income taxes payable is primarily the taxes due on
the gain on the sale of DevCon stock which will be paid in the first quarter of
fiscal year 1997. These items were offset by the reduction in accounts payable
of $13.8 million due to the timing of payments and an increase in receivables
of $69.6 million. The increase in receivables was primarily attributable to
acquisitions $(15.6 million), timing of collections on Medicare cost reports
and other rate adjustments $(13.1 million), receivables due to LCA Insurance
Company, Ltd. (see Note 12 to the Consolidated Financial Statements) from
third-party insurance companies $(11.7 million), and an increase in average
days outstanding, net of allowance, $(13.0 million).
- 24 -
<PAGE> 25
Excluding the $47.5 million in proceeds from the disposition of DevCon,
cash used in investing activities was $114.2 million in fiscal 1996 compared to
$139.9 million in fiscal year 1995. Investing activities in fiscal year 1996
included six pharmacy related acquisitions $(60.3 million), conversion of five
previously leased long-term care facilities to an ownership position $(14.8
million), construction of five assisted living facilities and expansion of
existing facilities $(13.3 million), the acquisition of a 50% interest in a
hospice operation $(2.8 million), and routine capital expenditures. Capital
commitments on four assisted living facilities remaining under construction and
expansion of existing long-term care facilities totaled $9.6 million at
September 30, 1996. These commitments are expected to be funded by cash from
operations or the Bank Credit Facility.
Financing activities provided $38.4 million during fiscal 1996. During the
fourth quarter the Company entered into an amended bank credit facility (the
"Bank Credit Facility") with a group of banks pursuant to which the banks
agreed to provide $500 million to the Company. A complete description of the
Bank Credit Facility is included in Note 5 to the Consolidated Financial
Statements. Total debt increased $57.4 million as funds were used in investing
activities and the purchase of $20.0 million of the Company's common stock in
accordance with a share repurchase program. The shares are to be utilized over
the next several years to fulfill the Company's obligations under its various
employee benefit programs.
In October 1996 the Company entered into a leasing program, initially
totaling $70.0 million, which will be used as the primary funding mechanism for
future assisted living and skilled nursing facility construction, lease
conversions, and other facility acquisitions. The company's long-term strategy
in managing working capital is to maintain substantial available commitments
under bank credit agreements or other financial agreements to finance
short-term capital requirements in excess of internally generated cash.
IMPACT OF INFLATION
The health care industry is labor intensive. Wages and other labor-related
costs are especially sensitive to inflation. Increases in wages and other
labor-related costs as a result of inflation, or the increase in minimum wage
requirements effective October 1996, without a corresponding increase in
Medicaid and Medicare reimbursement rates would adversely impact the Company.
- 25 -
<PAGE> 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors of Living Centers of America, Inc.
We have audited the accompanying consolidated balance sheets of Living
Centers of America, Inc. and subsidiaries as of September 30, 1996 and 1995 and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended September 30, 1996. Our
audits also included the financial statement schedule listed in the index at
Item 14. These consolidated financial statements and schedule are the
responsibility of the management of Living Centers of America, Inc. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Living Centers of America, Inc. and subsidiaries at September 30, 1996 and
1995 and the consolidated results of their operations and their cash flows for
each of the three years in the period ended September 30, 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.
As discussed in Note 1 to the consolidated financial statements, in the
fourth quarter of 1996 the Company changed its method of accounting for
impairment of long-lived assets in accordance with the adoption of SFAS 121.
/s/ ERNST & YOUNG LLP
Houston, Texas
November 25, 1996
- 26 -
<PAGE> 27
LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
September 30,
------------------------
<S> <C> <C>
ASSETS 1996 1995
CURRENT ASSETS:
Cash and cash equivalents $ 21,394 $ 17,886
Receivables (less allowances of $22,783 and $16,500) 204,462 151,969
Notes receivable, net 3,756 3,403
Receivable from affiliates -- 2,698
Supplies 16,582 13,264
Prepaid expenses 6,450 10,503
Deferred income taxes 19,644 17,264
Other (including patient trust funds of $3,768 and $4,506) 9,273 9,865
---------- ----------
TOTAL CURRENT ASSETS 281,561 226,852
PROPERTY AND EQUIPMENT:
Land, buildings and improvements 359,137 356,725
Furniture, fixtures and equipment 104,363 92,996
Leased property under capital leases 12,551 13,465
---------- ----------
476,051 463,186
Less accumulated depreciation 186,333 169,815
---------- ----------
289,718 293,371
GOODWILL, NET 188,508 145,402
RESTRICTED INVESTMENTS 31,040 36,622
INVESTMENT IN UNCONSOLIDATED AFFILIATE 3,016 205
NOTES RECEIVABLE, NET 10,780 10,781
OTHER ASSETS 17,111 17,475
---------- ----------
$ 821,734 $ 730,708
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current maturities of long-term debt $ 13,746 $ 34,981
Accounts payable 60,210 73,076
Accrued payroll and related expenses 60,089 55,957
Accrued property taxes 4,995 5,131
Patient trust funds 3,768 4,506
Accrued income taxes payable 16,921 4,534
Other accrued expenses 20,741 14,036
---------- ----------
TOTAL CURRENT LIABILITIES 180,470 192,221
LONG-TERM DEBT, NET OF CURRENT MATURITIES 262,702 181,929
LONG-TERM INSURANCE RESERVES 26,093 22,986
MINORITY INTERESTS 289 604
DEFERRED INCOME TAXES AND OTHER NONCURRENT LIABILITIES 22,865 29,372
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $ .01; 4,650,000 shares authorized;
none issued -- --
Series A - Junior participating preferred stock, par
value $.01; 350,000 authorized and
reserved; none issued -- --
Common stock, par value $ .01; 75,000,000 and 35,000,000
shares authorized; 20,267,920 shares issued 203 203
Capital surplus 228,171 227,099
Retained earnings 120,733 77,553
Unrealized loss on securities available-for-sale (18) --
Treasury stock at cost - 767,053 and 77,109 shares (19,774) (1,259)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 329,315 303,596
---------- ----------
$ 821,734 $ 730,708
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 27 -
<PAGE> 28
LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended September 30,
--------------------------------------
1996 1995 1994
<S> <C> <C> <C>
NET REVENUES
Nursing home revenue:
Net patient services $ 767,747 $ 724,924 $ 656,493
Other 8,799 13,556 12,306
Non-nursing home revenue:
Pharmacy services 127,439 92,843 28,574
Therapy services 205,785 59,278 7,934
Medical supplies and other 4,721 3,268 3,566
---------- ---------- ----------
1,114,491 893,869 708,873
COSTS AND EXPENSES:
Salaries and wages 455,702 360,571 297,509
Employee benefits 96,716 82,007 83,231
Nursing, dietary and other supplies 60,427 55,991 46,505
Ancillary services 188,937 148,746 79,195
General and administrative 168,333 134,697 123,771
Depreciation and amortization 39,214 31,158 26,072
Provision for bad debts 16,666 11,220 3,122
Non-recurring items:
Life insurance proceeds (2,015) -- --
Gain on sale (22,451) -- --
Impairment of long-lived assets 20,489 -- --
Other 2,917 -- --
Merger and acquistion costs -- 12,474 --
---------- ---------- ----------
1,024,935 836,864 659,405
---------- ---------- ----------
INCOME FROM OPERATIONS 89,556 57,005 49,468
INTEREST EXPENSE, NET:
Interest expense 20,128 18,322 16,043
Interest income (7,667) (7,505) (5,149)
---------- ---------- ----------
12,461 10,817 10,894
---------- ---------- ----------
INCOME BEFORE INCOME TAXES
AND EQUITY EARNINGS/MINORITY
INTEREST 77,095 46,188 38,574
PROVISION FOR INCOME TAXES 33,759 21,750 13,561
---------- ---------- ----------
INCOME BEFORE EQUITY EARNINGS/
MINORITY INTEREST 43,336 24,438 25,013
EQUITY EARNINGS/MINORITY INTEREST (156) (204) 1,603
---------- ---------- ----------
NET INCOME $ 43,180 $ 24,234 $ 26,616
========== ========== ==========
PRO FORMA DATA (UNAUDITED):
INCOME BEFORE PRO FORMA TAXES $ 43,180 $ 24,234 $ 26,616
PRO FORMA TAXES -- 599 899
---------- ---------- ----------
PRO FORMA NET INCOME $ 43,180 $ 23,635 $ 25,717
========== ========== ==========
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING 20,315 19,034 17,080
========== ========== ==========
EARNINGS PER SHARE $ 2.13 $ 1.27 $ 1.56
========== ========== ==========
PRO FORMA EARNINGS PER SHARE $ 2.13 $ 1.24 $ 1.51
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 28 -
<PAGE> 29
LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars and shares in thousands)
<TABLE>
<CAPTION>
Common Stock Unrealized Treasury Stock
--------------- Capital Retained Loss on ----------------
Shares Amount Surplus Earnings Securities Shares Amount Total
------ ------ -------- --------- ---------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1993 15,941 $ 159 $ 93,058 $ 30,591 - 274 $(4,376) $ 119,432
Issuance of stock as partial consideration
of Vari-Care merger transaction 1,193 12 25,492 25,504
Transaction costs associated with Vari-Care
merger transaction (349) (349)
Net income 26,616 26,616
Transfer S corporation earnings, net of
distributions (9) 9 0
Stockholder distributions (2,414) (2,414)
Funding of employee benefit
plans 274 (55) 870 1,144
Funding of options exercised
under 1992 Employee Stock
Option Plan, net of tax 103 (44) 708 811
Issuance of warrants in APS purchase
transaction 1,274 1,274
------ ----- -------- --------- ---- --- ------- ---------
BALANCE, SEPTEMBER 30, 1994 17,134 171 119,843 54,802 - 175 (2,798) 172,018
Net income 24,234 24,234
Transfer S corporation earnings, net of
distributions (898) 898 0
Stockholder distributions (2,381) (2,381)
Proceeds from additional public offering 2,875 29 99,032 99,061
Issuance of stock as consideration for
TMI merger transaction 258 3 8,320 8,323
Funding of employee benefit
plans 656 (44) 678 1,334
Funding of options exercised
under 1992 Employee Stock
Option Plan, net of tax 146 (54) 861 1,007
------ ----- -------- --------- ---- --- ------- ---------
BALANCE, SEPTEMBER 30, 1995 20,267 203 227,099 77,553 - 77 (1,259) 303,596
Net income 43,180 43,180
Funding of employee benefit
plans 736 (46) 846 1,582
Funding of options exercised
under 1992 Employee Stock
Option Plan, net of tax 336 (40) 639 975
Purchase of treasury stock 776 (20,000) (20,000)
Unrealized loss on securities
available-for-sale (18) (18)
------ ----- -------- --------- ---- --- ------- ---------
BALANCE, SEPTEMBER 30, 1996 20,267 $ 203 $228,171 $ 120,733 $(18) 767 $(19,774) $ 329,315
====== ===== ======== ========= ==== === ======= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 29 -
<PAGE> 30
LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Years Ended September 30,
--------------------------------------
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 43,180 $ 24,234 $ 26,616
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 39,214 31,158 26,072
Income taxes deferred (9,141) (3,429) (9,409)
Equity earnings/minority interest 156 204 (1,603)
Provision for bad debts 16,666 11,220 3,122
Gain on sale (22,451) -- --
Impairment of long-lived assets 20,489 -- --
Additions to asset valuation reserve -- -- 4,998
Changes in noncash working capital:
Receivables (69,634) (35,387) (16,729)
Receivable from affiliates 2,698 (844) 1,925
Supplies (519) 258 (863)
Prepayments, including insurance 4,053 (4,106) 175
Other current assets (221) (2,073) (1,923)
Accounts payable (13,774) 34,194 4,706
Accrued expenses and other current liabilities 17,465 8,860 (1,241)
Changes in other noncurrent liabilities, primarily insurance 2,694 756 7,999
Other 933 1,389 1,588
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 31,808 66,434 45,433
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisitions and investments (68,710) (87,602) (91,216)
Purchases of property and equipment (53,366) (38,946) (23,473)
Proceeds from sale of DevCon 47,500 -- --
Disposals of property, equipment and
other assets 2,690 7,022 8,533
Restricted investments 5,564 (19,822) (16,200)
Additions to notes receivable (1,519) (3,488) (22,507)
Collections on notes receivable 981 3,173 21,905
Other 209 (198) (2,862)
---------- ---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (66,651) (139,861) (125,820)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 1,469 219,342 120,835
Net draws under credit line 194,615 1,955 10,000
Repayment of long-term debt (138,708) (247,461) (66,466)
Proceeds from additional public offering -- 99,061 --
Issuance of warrants for APS purchase -- -- 1,274
Issuance of common stock for Vari-Care merger -- -- 25,152
Purchase of treasury stock (20,000) -- --
Shareholder distributions -- (2,381) (2,414)
Funding of options under 1992 employee stock
purchase plan and employee benefit plans 975 1,007 1,152
---------- ---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 38,351 71,523 89,533
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,508 (1,904) 9,146
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 17,886 19,790 10,644
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 21,394 $ 17,886 $ 19,790
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 30 -
<PAGE> 31
LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Living Centers of America, Inc. (the "Company" or "Living Centers"),
engages in the operation of long-term care facilities, specialty health care
services, pharmacy and rehabilitation services through its operating
subsidiaries. The Company's operations are geographically concentrated and
specifically focused in key markets, including Texas, North Carolina, and
Colorado. The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries and exclude all significant
intercompany transactions.
In February 1995, the Company issued an additional 2,875,000 shares of its
common stock in an additional public offering. The net proceeds of the
transaction, approximately $99.1 million, were used to retire existing debt and
for working capital and general corporate purposes.
Effective July 31, 1995, the Company issued approximately 6,479,000
additional shares of its common stock in a merger transaction with The Brian
Center Corporation and 16 related S corporations (collectively the "BCC
Entities"). The merger was accounted for using the pooling of interests
methodology and the accompanying financial statements have been restated to
include the accounts of the BCC Entities as though the transaction occurred on
September 30, 1992. See Note 3.
CASH MANAGEMENT
The Company maintains a centralized cash management system in which cash
receipts are transferred daily from facility and ancillary company depository
accounts to a cash concentration account. Cash is then used to provide for
normal working capital requirements, including reduction of the outstanding
credit lines or placement of excess funds in commercial grade investments. To
the extent that cash transferred from the facility and ancillary company
depository accounts is not sufficient to provide for cash disbursement
requirements, a cash advance is obtained from the Bank Credit Facility. See
Note 5. Cash equivalents consist of temporary investments with original
maturities of three months or less.
NOTES RECEIVABLE, NET
Notes receivable, net, aggregating $14.5 million and $14.2 million at
September 30, 1996 and 1995, respectively, consist primarily of notes which
arose from divestitures of certain operating facilities. These notes, which are
generally collateralized by long-term care facilities, have interest rates
ranging generally from 5% to 12.25% and maturities through 2012, including
approximately $12.5 million due after 1999. Notes receivable, net at September
30, 1996 and 1995, include reserves for potential uncollectible amounts of $3.5
million. Management believes the collateral values are sufficient to recover
the net carrying amount of these notes in the event of default.
RECEIVABLE FROM AFFILIATES
Included in the merger with the BCC Entities (see Note 3) were receivables
from various related corporations (which were not part of the merger
transaction) and the major stockholder of the BCC Entities. Such receivables
originated from services or products provided by the BCC Entities to such
corporations or the major stockholder and were repaid during fiscal year 1996.
SUPPLIES
Supplies, consisting principally of pharmaceutical and medical supplies,
are valued at the lower of cost (first-in, first out) or market.
- 31 -
<PAGE> 32
LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and include interest on funds
borrowed to finance construction. Capitalized interest was $.2 million for 1996
and none in 1995 or 1994. Maintenance and repairs are charged to operations
currently and replacements and significant improvements are capitalized.
Depreciation and amortization are provided over the estimated useful lives of
the assets on a straight-line basis as follows:
<TABLE>
<S> <C>
Buildings .............................. 25-40 years
Building improvements .................. 10-15 years
Furniture, fixtures and equipment....... 3-15 years
</TABLE>
GOODWILL, NET
Goodwill represents primarily an allocation from the Company's previous
parent as a result of a management buyout transaction which is amortized on a
straight-line basis over 40 years and the excess of purchase price over fair
market value of assets acquired in various purchase transactions which is
amortized on a straight line basis over 30 years. Accumulated amortization at
September 30, 1996 and 1995 was $11.7 million and $5.5 million, respectively.
Amortization of goodwill charged to expense was $5.6 million, $2.8 million and
$1.2 million for the three years ended September 30, 1996, 1995 and 1994,
respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
In September 1996 the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" (SFAS 121). SFAS 121 requires impairment
losses to be recognized for long-lived assets when indicators of impairment are
present and the undiscounted cash flows are not sufficient to recover the
assets' carrying amount. Goodwill is also evaluated for recoverability by
estimating the projected undiscounted cash flows, excluding interest, of the
related business activities. The impairment loss of these assets, including
goodwill, is measured by comparing the carrying amount of the asset to its fair
value with any excess of carrying value over fair value written off. Fair value
is based on market prices where available, an estimate of market value, or
determined by various valuation techniques including discounted cash flow. See
Note 8.
Prior to adoption of SFAS 121 the Company performed its analyses of
impairment of long-lived assets by consideration of the projected undiscounted
cash flows on an entity-wide basis.
RESTRICTED INVESTMENTS
Restricted investments represent cash and other investments that have been
designated to pay insurance claims of the Company's wholly-owned insurance
subsidiary. The invested funds restricted to pay insurance claims have been
classified as available-for-sale securities in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" and are recorded at their estimated market value.
See Note 4.
INVESTMENT IN UNCONSOLIDATED AFFILIATE
Investment in unconsolidated affiliate at September 30, 1996 primarily
consists of a 50% owned interest in Heart of America Hospice, LLC, a
Kansas-based hospice. This investment is recorded under the equity method of
accounting.
- 32 -
<PAGE> 33
LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-----(CONTINUED)
Investment in unconsolidated affiliate at September 30, 1995 consists of a
50% owned interest in Charlotte/Advance, Inc. (a corporation which partially
owns and operates three long-term care facilities), which is recorded using the
equity method. This investment was sold during fiscal year 1996. At September
30, 1995, the Company also held minority interests in an institutional pharmacy
and a joint venture operation in American Rehabilitation Services, Inc.
("ARS"). Both were recorded using the equity method of accounting.
Prior to September 30, 1994, the Company owned a 49% interest in American
Pharmaceutical Services, Inc. ("APS"), which was recorded using the equity
method. APS provides nutritional and infusion therapy services, as well as
pharmacy services, at selected Company facilities. See Note 3. The Company's
equity earnings in APS's net income for fiscal year 1994 was $1.7 million and
is reflected as equity earnings in the Consolidated Statements of Income. On
September 30, 1994, the Company acquired the remaining 51% of the outstanding
stock of APS and the investment in unconsolidated affiliate was eliminated as
part of the purchase allocation.
INCOME TAXES
Noncurrent deferred income taxes arise primarily from timing differences
resulting from using accelerated depreciation for tax purposes and reserves for
uninsured losses not deductible in the current period. Current deferred income
taxes result from timing differences in the recognition of revenues and
expenses for tax and financial reporting purposes which are expected to reverse
within one year. See Note 10.
The Company filed a consolidated federal income tax return the year ended
September 30, 1995 which included pre-merger (non BCC) operations and will
continue to file on a consolidated basis for subsequent years. Federal and
state income tax payments made (including the BCC Entities) during fiscal 1996,
1995 and 1994 were $31.5 million, $21.2 million and $16.4 million,
respectively.
The various corporations (exclusive of the S corporations) included in the
BCC Entities filed consolidated tax returns through the date of the merger. For
state income tax purposes, each corporation within the federal consolidated
group filed a separate income tax return. The S corporations included in the
merger are not subject to income taxes as their attributes flow through to
their individual stockholders; accordingly, the accompanying consolidated
financial statements do not include a provision for income taxes with respect
to the earnings of these entities through July 31, 1995. A pro forma income tax
provision has been provided to reflect the estimated federal and state income
taxes as if all of the S corporations were taxable entities. This estimate is
based on the maximum effective federal and state income tax rates in effect
during the years presented. Effective August 1, 1995, all of these corporations
became taxable entities and the operations of these companies are included in
the consolidated tax return of Living Centers.
TREASURY STOCK
During fiscal year 1996, the Company acquired 775,740 shares of treasury
stock on the open market for a total cost of $20.0 million. The shares
repurchased are primarily intended to be used as part of a plan to fund the
employer's contribution to the Company's 401(k) Plan and Deferred Retirement
Incentive Plan and to fund employee purchases made under the Company's Employee
Stock Purchase Plan. See Note 16.
NET REVENUES
Revenues are recorded in the period in which services are provided at
established rates whether or not collection in full is anticipated. Contractual
adjustments and the results of other arrangements for providing services at
less than established rates are reported as deductions to arrive at net
revenues. Contractual adjustments include differences between established
billing rates and amounts estimated by management as reimbursable under various
cost reimbursement formulas or contracts in effect. An appropriate provision
for bad debt expense is included as an operating expense and a corresponding
reserve for doubtful accounts is reflected in net receivables to reduce gross
receivables to an amount actually expected to be collected.
- 33 -
<PAGE> 34
LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-----(CONTINUED)
The administrative procedures associated with the Medicare cost
reimbursement program generally preclude final determination of amounts due the
Company until cost reports are audited or otherwise reviewed and settled with
the applicable administrative agencies. Normal estimation differences between
final settlements and amounts recorded in previous years are generally reported
as current year contractual adjustments. The Company does not expect any
differences between revenue recorded and as finally determined to have a
significant effect on the Company's results of operations or financial
position. Medicare revenues represented 26%, 24% and 18% and Medicaid revenues
represented 43%, 51%, 59% of net revenue for fiscal years 1996, 1995 and 1994,
respectively.
STOCK-BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with APB
Opinion 25 "Accounting for Stock Issued to Employees" and, accordingly,
recognizes no compensation expense for the stock option grants.
In October 1995 the Financial Accounting Standards Board adopted Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 allows companies the option to retain the
current accounting approach for recognizing stock-based expense in the
financial statements or to adopt a new accounting method based on the estimated
fair value of the employee stock options. Companies that do not follow the new
fair value based method will be required to provide pro-forma disclosures of
net income and earnings per share as if the fair-value method of accounting had
been applied. The Company is required to adopt SFAS 123 for the year ending
September 30, 1997. As the Company expects to retain their current accounting
method, SFAS 123 will not have an impact on the Company's results of operation
or financial position.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Although these estimates are based on management's
knowledge of current events, they may ultimately differ from actual results.
OTHER
Certain prior year amounts have been reclassified to conform with the 1996
presentation.
NOTE 2. DIVESTITURES
In September 1996, the Company completed the divestiture of its DevCon
operations, which provided training and habilitation services to individuals
with mental retardation and developmental disabilities, through the
recapitalization and subsequent sale of the majority of DevCon's stock for
$47.5 million in cash. The Company will retain a small ownership interest in
the recapitalized company. Proceeds from the divestiture were utilized to
reduce debt related to various acquisitions.
- 34 -
<PAGE> 35
LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-----(CONTINUED)
NOTE 3. ACQUISITIONS
FISCAL YEAR 1996 ACQUISITIONS
In May 1996, the Company acquired a 50% interest in Heart of America
Hospice, a Kansas based hospice company, for $2.8 million in cash.
In June 1996, the Company acquired certain assets of Lahr Pharmacy, Inc.
and related companies for $13.4 million in cash. An additional $3.5 million may
be paid in connection with this acquisition if certain predetermined earnings
targets are achieved during the subsequent three years. If paid, this
additional consideration will be included in goodwill. The Company has not
completed the evaluations necessary to determine the final purchase price
allocation related to this acquisition.
Effective September 1, 1996, the Company acquired the stock of Allied
Pharmacy Management, Inc., which operates five institutional pharmacies and a
home health care business in Florida, for $29.6 million in cash. The Company
has not completed the evaluations necessary to determine the final purchase
price allocation related to the this acquisition.
The Company also acquired other previously leased long-term care
facilities, institutional pharmacies, and therapy operations as part of several
smaller transactions, primarily for cash. All such acquisitions were recorded
using the purchase method of accounting.
FISCAL YEAR 1995 ACQUISITIONS
On June 30, 1995, Living Centers completed a merger with Rehability
Corporation in which it acquired all of the outstanding stock of the company
through a cash tender offer of $11.50 per share. In the transaction, the
Company paid approximately $88.1 million in cash for the stock and various
transaction costs and assumed approximately $36 million in debt. The name of
the acquired company was subsequently changed to American Rehabilitation
Services, Inc. ("ARS" or "Rehability"). The transaction was recorded using the
purchase method of accounting. The allocation of purchase price includes
approximately $81.9 million of goodwill which will be amortized over a 30-year
period.
Effective August 1, 1995 the Company issued approximately 258,000 shares
of its common stock valued at $8.3 million in exchange for all of the capital
stock of Therapy Management Innovations, Inc. and related entities ("TMI"). The
transaction was recorded using the purchase method of accounting. The
allocation of purchase price includes approximately $7.9 million of goodwill
which will be amortized over a 30-year period.
The following information presents the results of operations on a pro
forma basis as though the APS, Rehability and TMI transactions all occurred on
October 1, 1993. Information is presented for informational purposes only and
may not be indicative of actual operating results that would have been
achieved. All amounts are in thousands, except per share amounts.
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------
1995 1994
<S> <C> <C>
Net revenues .......................... $1,041,228 $ 941,297
Net Income ............................ 26,893(a) 25,296
Earnings per share .................... $ 1.37(a) $ 1.46
</TABLE>
- -----------
(a) Excluding non-recurring merger and acquisition and other related costs of
$14.3 million, net income and earnings per share would have been $38.8
million and $2.02, respectively.
- 35 -
<PAGE> 36
LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-----(CONTINUED)
On July 31, 1995, the Company acquired all of the outstanding stock of The
Brian Center Corporation and 16 related S corporations (collectively the "BCC
Entities") in exchange for approximately 6,479,000 shares of its common stock
in a merger transaction which was accounted for as a pooling of interests. In
addition, the Company paid $3.7 million in cash to acquire various minority
interests associated with several of the BCC affiliates. The Company used a
portion of its bank credit facility to retire approximately $70.0 million of
existing debt of BCC. The retained earnings of the S corporations $(1.8 million
at July 31, 1995 and $2.6 million at September 30, 1994 and 1993) have been
reclassified to Capital Surplus. Financial statements for periods prior to the
merger have been restated to reflect the financial position and results of
operations of the combined companies as if they had merged on September 30,
1992.
Separate results of operations of the companies prior to the
acquisition are summarized below (in thousands):
<TABLE>
<CAPTION>
Ten Months Year
Ended July 31, Ended
1995 September 30,
(unaudited) 1994
<S> <C> <C>
Net Revenues:
Living Centers ............... $529,405 $498,633
The BCC Entities ............. 183,127 210,240
-------- --------
Combined ..................... $712,532 $708,873
======== ========
Income From Operations(a):
Living Centers ............... $ 37,310 $ 33,269
The BCC Entities ............. 10,004 16,199
-------- --------
Combined ..................... $ 47,314 $ 49,468
======== ========
Net Income:
Living Centers ............... $ 20,110 $ 18,718
The BCC Entities ............. 2,109 7,898
-------- --------
Combined ..................... $ 22,219 $ 26,616
======== ========
Pro Forma Net Income:
Living Centers ............... $ 20,110 $ 18,718
The BCC Entities ............. 1,510 6,999
-------- --------
Combined ..................... $ 21,620 $ 25,717
======== ========
</TABLE>
- -------------
(a) Includes merger and acquisition expenses of $4.5 million for Living
Centers and $1.3 million for BCC Entities.
In addition to the above, the Company has acquired other long-term care
facilities and five separate pharmaceutical operations as part of several
smaller transactions, primarily for cash. All such acquisitions were recorded
using the purchase method of accounting.
- 36 -
<PAGE> 37
LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-----(CONTINUED)
FISCAL YEAR 1994 ACQUISITIONS
On September 30, 1994, the Company completed a transaction in which it
acquired the remaining 51% of the common stock of Abbey Pharmaceutical
Services, Inc. The name of the acquired company was subsequently changed to
American Pharmaceutical Services, Inc. ("APS"). In the transaction, the Company
paid $20.5 million in cash and issued warrants to purchase 250,000 shares of
common stock of the Company at $35 per share. The Company valued the warrants,
which can be exercised anytime within seven years after the transaction closing
date, at $1.3 million. The purchase agreement also contemplates the Company's
preparing, upon request by Abbey Healthcare Group, Inc. (the previous 51% owner
of APS), one registration statement for its resale of such shares. Any such
registration statement is to become effective ten days after the filing by the
Company of its next annual or quarterly report required to be filed with the
Securities and Exchange Commission after such request, and is to remain
effective for 60 days. Financing for the transaction was provided through the
Company's Bank Credit Facility. The transaction was recorded using the purchase
method of accounting. The allocation of purchase price includes approximately
$24.8 million of goodwill which will be amortized over a 30-year period.
NOTE 4. RESTRICTED INVESTMENTS
Restricted investments at September 30, 1996 and 1995 included the
following:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
September 30, 1995 Cost Gains Losses Value
- ------------------ ------- ------- ------- -------
<S> <C> <C> <C> <C>
U. S. Treasury Notes $14,187 $ 122 $ (186) $14,123
Asset-backed securities 5,859 21 (32) 5,848
Corporate debt securities 2,691 25 (27) 2,689
Mortgage-backed securities 1,401 59 -- 1,460
Repurchase Pooling Arrangement 5,892 -- -- 5,892
Cash 1,028 -- -- 1,028
------- ------- ------- -------
Total $31,058 $ 227 $ (245) $31,040
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
September 30, 1995 Cost Gains Losses Value
- ------------------ ------- ------- ------- -------
<S> <C> <C> <C> <C>
U. S. Treasury Notes $15,135 $ 432 (605) $14,962
Asset-backed securities 6,400 59 (7) 6,452
Corporate debt securities 2,701 43 (16) 2,728
Mortgage-backed securities 1,382 94 -- 1,476
Repurchase Pooling Arrangement 5,600 -- -- 5,600
Cash 5,404 -- -- 5,404
------- ------- ------- -------
Total $36,622 $ 628 $ (628) $36,622
======= ======= ======= =======
</TABLE>
Proceeds from sales and maturities of investments were $14.5 million, $3.7
million and none in fiscal years 1996, 1995 and 1994, respectively. Gross gains
of $0.1 million, $0.1 million, and none were realized during fiscal years 1996,
1995 and 1994.
- 37 -
<PAGE> 38
LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-----(CONTINUED)
The amortized cost and estimated market value of debt securities at
September 30, 1996 by contractual maturity are shown below. Expected maturities
may differ from contractual maturities because borrowers may have the right to
call or repay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
------- -------
<S> <C> <C>
Due after one year through five years $ 9,664 $ 9,748
Due after five years through ten years 7,216 7,064
------- -------
16,880 16,812
Cash 1,028 1,028
Repurchase Pooling Arrangement 5,892 5,892
Mortgage-backed securities 1,401 1,460
Asset-backed securities 5,859 5,848
------- -------
Total $31,058 $31,040
======= =======
</TABLE>
The Repurchase Pooling Arrangement is subject to market risk associated
with changes in the value of the underlying financial instruments as well as
the risk of loss of appreciation if a counter party fails to perform.
NOTE 5. DEBT
Long-term debt at September 30, 1996 and 1995 is summarized in the
following table (in thousands):
<TABLE>
<CAPTION>
September 30,
----------------------------
1996 1995
<S> <C> <C>
Bank Credit Facility.................................... $225,315 $168,950
SouthTrust Bank of Alabama, NA.......................... 20,000 20,000
Variable Annuity Life Insurance Company................. 10,000 10,000
NationsBank of Texas, NA................................ 10,000 --
Mortgage notes (6% to 10.75% due
through 2014).................................. 1,444 1,795
Other notes payable (8% to 10% due
through 2008).................................. 5,688 11,202
-------- --------
272,447 211,947
Obligations under capital leases........................ 4,001 4,963
-------- --------
276,448 216,910
Less short-term notes payable and current portion ...... (13,746) (34,981)
-------- --------
Total long-term debt.................................... $262,702 $181,929
======== ========
</TABLE>
Interest paid on the above debt was $19.3 million, $17.7 million and $15.8
million during fiscal years 1996, 1995 and 1994, respectively.
In February 1992, the Company entered into an agreement (the "Bank Credit
Facility") with several banks in which the banks provided financing to the
Company. During the last several years, the Bank Credit Facility has been
amended and/or restated to provide financing for various purchase transactions.
In August, 1996, the Company entered into a Third Amended and Restated Credit
Agreement (the "1996 Bank Credit Facility"), pursuant to which the banks agreed
to provide $500 million to Living Centers, including a $350 million five-year
revolving credit and competitive advance facility (Tranche
- 38 -
<PAGE> 39
LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-----(CONTINUED)
A) and a $150 million 364-day revolving credit facility with a four-year term
out (Tranche B). The Company recorded a non-recurring charge of $0.9 million
for the write-off of unamortized deferred financing costs related to the Second
Amended and Restated Credit Agreement. See Note 8. The 1996 Bank Credit
Facility allows Living Centers to borrow at the base rate in effect at
NationsBank of Texas, N.A. or at LIBOR plus an applicable margin ranging from
0.25% to 0.65% and also provides for a facility fee of 0.15% to 0.225%. The
applicable margin and facility fee are subject to adjustment depending on
Living Centers' leverage ratio at the quarter end immediately preceding the
borrowing.
Living Centers may prepay borrowings made under Tranche A at any time, but
all amounts drawn must be repaid by August 19, 2001 with a provision for
earlier extension if the Company and banks agree. If not extended prior
thereto, the balance of Tranche B at August 18, 1997 will be converted to a
term note and repaid in equal quarterly installments beginning October 1, 1997.
The 1996 Bank Credit Facility is an unsecured credit facility and contains
various financial covenants similar to those in the original Bank Credit
Facility. Balances available under the 1996 Bank Credit Facility and
predecessor agreements at September 30, 1996 and 1995 (after giving
consideration to outstanding letters of credit of $4.7 million) were $270.0
million and $84.6 million, respectively. As of September 30, 1996 and 1995, the
announced base rate of NationsBank was 8.25% and 8.75%, respectively.
The Company has entered into interest rate swap agreements to reduce the
impact of changes in interest rates on its floating rate long-term debt. At
September 30, 1996, the Company had outstanding three interest rate swap
agreements with commercial banks having a total notional principal amount of
$60 million. These agreements effectively changed the Company's interest rate
exposure on $60 million under the 1996 Bank Credit Facility to approximately
6.8% through 2005. The Company receives floating rates on these swaps which are
based on LIBOR.
The Company's use of swap agreements and reverse swap agreements did not
have a material effect on the weighted-average borrowing rate of reported
interest expense during the years ended September 30, 1996, 1995, and 1994 and
the Company is not exposed to credit loss on these swaps. See Note 13 for fair
value disclosures. The difference between amounts paid and received on swap
agreements is recorded on an accrual basis as an adjustment to net interest
over the periods covered by the agreements. The related amount receivable from
or payable to counter parties is included in other receivables or payables,
respectively. The fair values of the swap agreements and changes thereto are
not recognized in the consolidated financial statements.
On October 1, 1993, the Company borrowed $20 million from SouthTrust Bank
of Alabama, NA which was used to repay debt that was assumed in the Vari-Care
merger transaction. The note is unsecured and bears interest at the rate of
6.95%, payable semi-annually. The principal is repayable in five annual
payments of $4 million beginning October 1, 1998. The Company also assumed
approximately $6.3 million of existing Vari-Care notes and capital lease
obligations under substantially the same terms that existed prior to the
merger.
In January 1994, the Company issued, in a private placement, a $10 million
note to American General Insurance Company that was later sold to The Variable
Annuity Life Insurance Company ("Variable Annuity Life") at a fixed rate of
interest of 7.79%. The note is unsecured and will mature in a single payment
due in ten years. The note agreement contains restrictions similar to other
unsecured debt of the Company.
In May 1994, the Company executed a promissory note (payable on demand or
by June 29, 1997) with NationsBank of Texas, N.A. in the principal amount of
$10 million. Subject to the Bank's prior approval of any request for an
advance, the Company may borrow, repay and reborrow principal amounts in
increments such that the unpaid principal balance at anytime shall not exceed
$10 million. The interest rate on each advance is quoted separately based on
market conditions that exist at that time. At September 30, 1996, there was
$10.0 million outstanding under the note agreement.
- 39 -
<PAGE> 40
LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-----(CONTINUED)
Long-term debt maturing in the next five fiscal years is presented below
(in thousands):
<TABLE>
<CAPTION>
September 30, 1996
------------------
<S> <C>
1997..................... $ 13,746
1998..................... 3,813
1999..................... 5,149
2000..................... 4,833
2001..................... 230,214
</TABLE>
The covenants governing the 1996 Bank Credit Facility and the notes with
SouthTrust Bank and Variable Annuity Life provide for the maintenance of
various financial ratios. The Company is in compliance with the terms of all
such covenants. These covenants also limit the Company's ability to pay
dividends. At September 30, 1996 and 1995, these restrictions effectively
limited dividend payments to no more than $24.4 million and $16.7 million,
respectively. Even though the covenants of the 1996 Bank Credit Facility permit
the payment of dividends as described above, the Company does not presently
intend to pay any such dividends.
NOTE 6. EMPLOYEE RETIREMENT PLANS
The Company's employees are eligible to participate in defined
contribution retirement plans sponsored by the Company. Company contributions
to these plans represents a matching percentage of certain employee
contributions which is subject to management's discretion based upon
consolidated financial performance. The employees of ARS are also covered by a
defined contribution plan which provides for Company contributions in cash of
up to 50% of certain employee contributions. Total combined expense recognized
by the Company under both of these plans was $2.2 million, $1.8 million and
$1.1 million in fiscal years 1996, 1995 and 1994, respectively.
The Company does not provide post-retirement health care or life insurance
benefits to employees. Accordingly, the Company is not subject to the
requirements of Statement of Financial Accounting Standards No. 106,
"Employers" Accounting for Post Retirement Benefits Other Than Pensions."
NOTE 7. LIFE INSURANCE PROCEEDS
The Company recorded a non-taxable gain of $2.0 million from the receipt
of insurance proceeds on Don W. Wortley, former President of TMI and the
Rehabilitation Services Group.
NOTE 8. IMPAIRMENT OF LONG-LIVED ASSETS AND OTHER NON-RECURRING ITEMS
The Company recorded an impairment loss of $20.5 million upon adoption of
SFAS 121 which is included in the Statement of Income as Impairment of
long-lived assets. This loss is related to nursing facilities with current
period operating losses, facilities where management believed an impairment
existed as a result of the regulatory or competitive environment, and goodwill,
primarily TMI. The impairment of TMI goodwill is primarily a result of the
death of its former President (see Note 7). Management estimated the
undiscounted cash flows to be generated by each of these assets and compared
them to their carrying value. If the undiscounted future cash flow estimates
were less than the carrying value of the asset then the carrying value was
written down to their estimate of fair value. Fair value was estimated based on
either management's estimate of fair value or present value of future cash
flows. In addition, this impairment loss included a reduction to fair value of
certain nursing facilities to be replaced or expected to be disposed of. Fair
value for facilities to be replaced or disposed of was calculated based on
either management's estimate of fair value or market value less estimated cost
to sell. Facilities to be disposed of had a carrying value of $4.8 million at
September 1996 and are expected to be divested in fiscal year 1997.
- 40 -
<PAGE> 41
LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-----(CONTINUED)
The Company also recorded non-recurring charges of $2.9 million primarily
related to the closure of its medical supplies business and the write-off of
unamortized loan acquisition costs related to the Second Amended and Restated
Credit Agreement.
NOTE 9. RESTRUCTURING PLAN
During fiscal year 1996, the Company finalized a plan originating in June
1995 to restructure the operations and exit certain activities of ARS. This
plan includes centralization of billing and collection, closing or downsizing
unprofitable clinics and offsite contracts, and staff reductions of
approximately 300 employees in both corporate overhead and field management.
This plan resulted in an increase to the original purchase price of the
acquisition by $10.1 million which included an accrual for estimated exit costs
of $8.6 million. The increase in purchase price includes the following:
<TABLE>
<S> <C>
Termination/severance for displaced employees $ 4,394
Future lease costs for abandoned real property 4,176
Write off of abandoned tangible and intangible
assets at closed locations 1,532
-------
Total $10,102
=======
</TABLE>
The Company has charged $1,038 against the accrual for
termination/severance for approximately 200 displaced employees and $309
against the accrual for future lease costs. At September 30, 1996, the Company
believes that the remaining accruals for the restructuring plan are adequate.
The restructuring is expected to be completed during the second quarter of
fiscal 1997.
NOTE 10. INCOME TAXES
The provision for income taxes is presented in the table below (in
thousands):
<TABLE>
<CAPTION>
Years Ended September 30,
--------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Current:
Federal ............ $ 38,326 $ 21,982 $ 14,476
State & Local ...... 5,141 4,237 2,978
-------- -------- --------
43,467 26,219 17,454
Deferred:
Federal ............ (8,276) (3,698) (3,373)
State & Local ...... (1,432) (771) (520)
-------- -------- --------
(9,708) (4,469) (3,893)
-------- -------- --------
Total .......... $ 33,759 $ 21,750 $ 13,561
======== ======== ========
</TABLE>
- 41 -
<PAGE> 42
LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-----(CONTINUED)
The provision for income taxes varies from the amount determined by
applying the Federal statutory rate to pre-tax income as a result of the
following:
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------
1996 1995 1994
<S> <C> <C> <C>
Federal statutory income tax rate ..................... 35.0% 35.0% 35.0%
Increase (decrease) in taxes resulting from:
State & local taxes, net of federal tax benefit ... 3.4 4.9 4.0
Permanent book/tax differences, primarily
resulting from goodwill ....................... 7.0 2.0 1.2
Targeted job tax credits .......................... -- (2.7) (4.0)
Non-deductible merger and acquisition cost ........ -- 7.2 --
Other, net ............................................ (1.6) 0.7 (1.0)
------ ------ ------
Effective tax rate .................................... 43.8% 47.1% 35.2%
====== ====== ======
</TABLE>
The components of deferred income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------
1996 1995 1994
<S> <C> <C> <C>
Reserves for potential claims ...... $ (2,134) $ (1,984) $ (1,840)
Purchase accounting ................ (1,749) (1,828) (1,435)
FAS 121 asset valuation ............ (4,030) -- --
Tax depreciation under book ........ (1,822) (1,023) (147)
Bad debts .......................... (1,295) (761) (342)
Texas Occupational Injury accrual .. 1,847 835 568
Net operating losses ............... (262) -- 1,116
Other, net ......................... (525) 292 (1,352)
Changes in valuation allowance ..... 262 -- (461)
-------- -------- --------
TOTAL ............ $ (9,708) $ (4,469) $ (3,893)
======== ======== ========
</TABLE>
- 42 -
<PAGE> 43
LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-----(CONTINUED)
The components of the net deferred tax liability are as follows (in
thousands):
<TABLE>
<CAPTION>
September 30,
---------------------
1996 1995
<S> <C> <C>
Deferred tax liabilities:
- -------------------------
Amounts relating to property and equipment ... $(34,773) $(36,905)
Abbey equity accounting ...................... -- (883)
Other ........................................ (1,596) (1,105)
-------- --------
Total deferred tax liabilities ............... (36,369) (38,893)
-------- --------
Deferred tax assets:
- --------------------
Financial reserves not yet deductible for
tax purposes:
Asset valuation ......................... 4,243 2,564
Insurance ............................... 8,524 7,562
Notes receivable allowance .............. 821 821
Payroll and benefits .................... 4,884 4,460
Bad debts ............................... 6,572 5,355
Restructuring reserve ................... 3,159 --
NOL carryforwards ....................... 1,785 1,293
Other miscellaneous ..................... 5,243 6,276
Timing differences in Medicare .......... 1,592 899
-------- --------
Total deferred tax assets .................... 36,823 29,230
Less valuation allowances .................... (1,785) (808)
-------- --------
Net deferred tax liability ................... $ (1,331) $(10,471)
======== ========
</TABLE>
The net change in the valuation allowance for deferred tax assets was an
increase of $977 at September 30, 1996 and a nominal increase at September 30,
1995.
NOTE 11. COMMITMENTS AND CONTINGENCIES
Certain of the Company's facilities are held under operating or capital
leases. All capital leases will expire by 2009. Certain of these leases also
contain provisions allowing the Company to purchase the leased assets during
the term or at the expiration of the lease, at fair market value. Facilities
operating under capital leases are summarized as follows (in thousands):
<TABLE>
<CAPTION>
September 30,
--------------------
1996 1995
<S> <C> <C>
Centers operating under capital leases ....... $ 12,551 $ 13,465
Less accumulated amortization ................ (5,084) (4,473)
-------- --------
$ 7,447 $ 8,992
======== ========
</TABLE>
Rental expense, net of sublease rent income, for all operating leases was
$44.2 million, $36.9 million and $31.8 for fiscal years 1996, 1995 and 1994,
respectively. Certain leases also contain increases based on the Consumer Price
Index, Medicaid reimbursement rates, or at amounts specified in the lease
agreement. Sublease rent income was $6.9 million, $6.1 million and $5.9 million
for fiscal years 1996, 1995 and 1994 respectively. Contingent rent based
primarily on revenues was $1.6 million, $1.4 million and $1.2 million for
fiscal years 1996, 1995 and 1994, respectively.
- 43 -
<PAGE> 44
LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-----(CONTINUED)
The table below presents a schedule of the future minimum rental
commitments and sublease income under all noncancellable leases as of September
30, 1996 (in thousands):
<TABLE>
<CAPTION>
September 30, 1996
---------------------------------------------
Sublease
Operating Income Capital
<S> <C> <C> <C>
1997........................................... $ 38,576 $ 6,545 $ 1,249
1998........................................... 33,478 6,429 969
1999........................................... 28,223 5,552 645
2000........................................... 21,127 2,342 634
2001........................................... 18,897 2,348 647
Subsequent years............................... 100,142 9,992 982
-------- ------- --------
Total minimum rental obligations............... $240,443 $33,208 5,126
======== =======
Less amount representing interest.............. (1,125)
--------
Present value of capital leases................ 4,001
Less current portion........................... (1,007)
--------
Long-term obligations under capital leases..... $ 2,994
========
</TABLE>
The Company is a party to various legal proceedings in the normal course
of business. The Company takes every legal claim seriously and investigates
and, where appropriate, defends such allegations vigorously. Such claims are
generally covered by insurance, or the Company has provided reserves which it
believes are adequate for any potential losses which may result from such
claims. The Company believes that the results of any such proceedings, if
determined unfavorably to the Company, will not have a material adverse effect
on its consolidated financial position or its results of operations.
An attorney in the Civil Division of the United States Department of
Justice has advised Living Centers that a complaint under the Civil False
Claims Act has been filed, under seal, against BCC and one of its subsidiaries,
MedTherapy Rehabilitation Services, Inc. ("MedTherapy"), in the federal
district court for the Western District of North Carolina. The Department of
Justice has reviewed the sealed complaint and advised counsel for BCC and
MedTherapy that the plaintiff alleges, in general, that BCC and MedTherapy
caused certain therapists to make improper therapy record entries with respect
to therapy screening services and that any claims filed with Medicare for
payments which are based upon such improper record entries should be viewed as
false claims under the Civil False Claims Act. Under the Civil False Claims
Act, any person who knowingly files false claims is liable for treble damages
and penalties ranging from $5,000 to $10,000 for each false claim. Because the
complaint is under seal, Living Centers does not know the number of claims
alleged or the specific factual allegations set forth in the complaint. The
Department of Justice has the right to intervene and pursue the claim on behalf
of the plaintiff, but has not made a decision on intervention as of the date
hereof. If the Department of Justice does not intervene, the plaintiff may
continue to pursue the claim individually. BCC and MedTherapy have advised the
Department of Justice that, based upon the information disclosed thus far by
the Department of Justice, they dispute, and will vigorously contest, the
claims of the plaintiff. Although the Company believes, based on discussions
with counsel, that the plaintiff's claims are merit less, no assurances can be
given that, if the plaintiff were to prevail in his claim, the resulting
judgment would not have a material adverse effect upon the Company. Moreover,
in connection with the Company's acquisition of BCC, the primary stockholder
(Donald C. Beaver) agreed to indemnify and hold harmless Living Centers from
and against any and all loss, expense, damage, penalty and liability which
could result from this claim, subject to further adjustment. Mr. Beaver's
indemnity requires any payment to the Company to be in the form of shares of
Common Stock.
- 44 -
<PAGE> 45
LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-----(CONTINUED)
NOTE 12. INSURANCE COVERAGES
The Company insures auto, general, and professional liability and workers'
compensation risks through insurance policies with third parties. Some of these
third-party policies subsequent to February 21, 1994 are subject to reinsurance
agreements between the insurer and LCA Insurance Company, Ltd., a wholly-owned
subsidiary of the Company that was formed during 1994. The liabilities for
incurred losses are estimated by independent actuaries on an undiscounted
basis. Cash reserves of LCA Insurance Company, Ltd. have been designated as
restricted investments to pay for future claims experience applicable to policy
periods subsequent to February 21, 1994. Restricted investments at September
30, 1996 and 1995 designated to pay such claims were $31.0 million and $36.6
million, respectively.
In 1992, the Company elected under Texas law to decline to participate in
the Texas workers' compensation insurance program. As part of the election, the
Company implemented an employee benefit plan providing for employer-paid
benefits comparable to those provided under the Texas workers' compensation
program and obtained insurance that limits the Company's exposure for any
individual injury. During 1994, the Company established a trust in which to
fund the amount applicable to actuarially determined claims to be incurred for
fiscal year 1994 and subsequent years.
The BCC Entities are insured for current and past workers' compensation
claims under various types of insurance and financial plans, certain of which
are loss-sensitive in nature and design, which subject the Companies to
additional future premiums for losses incurred in a prior year but paid in a
subsequent fiscal period, as losses develop. The BCC Entities have recorded
expenses under these plans based upon actual and estimated losses based on the
available incurred loss structure.
Additionally, certain of these loss-sensitive workers' compensation plans
in which the Companies have participated were organized as pools or funds, with
joint and several or pro rata liability ascribed to its members. Such plans may
lead to the potential of future loss assessments for the BCC Entities; however,
the amount of such additional potential assessments, if any, is not
determinable at this time. It is the opinion of management that any additional
assessments will not have a material adverse effect on the financial position
or results of operations of the Companies.
NOTE 13. DISCLOSURES REGARDING FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value because of the short maturity
of those instruments.
NOTES RECEIVABLE
Fair value for each significant note receivable was estimated based on the
net present value of cash flows that would be received on each note over the
remaining note term using current market interest rates rather than stated
interest rates. The discount factor was the estimated rate for long-term debt
in effect at September 30, 1996 and 1995. Further adjustments were made to the
value of the notes based on management's opinion of the credit risk of the note
obligee.
LONG-TERM DEBT
Since the Company recently renegotiated its Bank Credit Facility, the
Company believes that the fair value of the long-term debt is properly
reflected at current carrying amounts except for certain fixed rate debt
instruments. Fair values for each significant fixed rate debt instrument was
estimated based on the net present value of cash flows that would be paid on
each note over the remaining note term using the Company's current incremental
borrowing rate rather than the stated interest rates on the notes. See Note 5.
- 45 -
<PAGE> 46
LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-----(CONTINUED)
INTEREST RATE SWAP AGREEMENTS
Fair values for the Company's various interest rate swap agreements were
estimated based on quoted amounts from the issuers which would be required to
terminate the agreement. See Note 5.
The estimated values of the Company's financial instruments as of
September 30, 1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------------------------
1996 1995
------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
Cash and cash equivalents............... $ 21,394 $ 21,394 $ 17,886 $ 17,886
Notes receivable........................ 14,536 15,517 14,184 14,562
Restricted investments.................. 31,040 31,040 36,622 36,622
Long-term debt.......................... 276,448 277,413 216,910 216,985
Interest rate swap agreements........... -- 341 -- (1,575)
</TABLE>
NOTE 14. RELATED PARTY TRANSACTIONS
The Company purchases services and medical supplies from APS at current
market prices under certain service and supply agreements and all significant
intercompany purchases have been eliminated for the years ended September 30,
1996 and 1995. Prior to acquiring the remaining 51% of APS on September 30,
1994, the Company also purchased services and supplies from APS which amounted
to approximately $4.8 million which is included in the accompanying
Consolidated Statement of Income for fiscal year 1994. See Note 3. The Company
also purchases therapy services from ARS and TMI at current market prices under
certain service agreements. The total purchases from these companies prior to
their acquisition by the Company on June 30, 1995 and August 1, 1995,
respectively amounted to $1.5 million and $0.9 million in 1995 and 1994,
respectively for ARS and $1.9 million and $1.8 million 1995 and 1994,
respectively for TMI. All significant intercompany purchases from these two
subsidiaries since their acquisition have been eliminated.
NOTE 15. EARNINGS PER COMMON SHARE
The table below presents a reconciliation of the number of weighted
average common shares used in computing primary earnings per share (in
thousands):
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Common shares outstanding, end of period..................... 19,501 20,190 10,481
Issuance of shares in connection with the BCC
Entities merger.......................................... -- -- 6,479
Effect of using weighted average shares outstanding......... 623 (1,340) (37)
Effect of using treasury stock method on
stock options.............................................. 191 184 157
------ ------ ------
Shares used in computing earnings per share.................. 20,315 19,034 17,080
====== ====== ======
</TABLE>
In February 1995, the Company issued an additional 2,875,000 shares of its
common stock in an additional public offering. The net proceeds of the
transaction, approximately $99.1 million, were used primarily to retire
existing debt. Assuming the transaction had occurred on October 1, 1994, net
income and earnings per share for the year ended September 30, 1995 would have
been $25.5 million and $1.27, respectively.
- 46 -
<PAGE> 47
LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-----(CONTINUED)
NOTE 16. EMPLOYEE STOCK OPTION AND STOCK PURCHASE PLANS
The Company established an Employee Stock Option Plan in 1992 which
authorizes the granting of incentive stock options, nonqualified options, or
any combination of the foregoing to purchase up to 1,400,000 shares of the
Company's common stock. The exercise price per share of common stock with
respect to each incentive stock option is the fair market value of a share of
common stock (defined as the closing price per share of the common stock on the
New York Stock Exchange) on the date such option is granted while the exercise
price per share of common stock with respect to a nonqualified option is the
fair market value of a share of common stock on the date such option is granted
or on a subsequent date or as otherwise provided in any agreement with the
recipient, but in no event will the exercise price with respect to a
nonqualified option be less than 50% of the fair market value of a share of
common stock on the date of the grant. The options have a term as fixed by the
Stock Option Committee, but, in no event, longer than ten years after the date
of grant. Options are exercisable only by the optionee and only while the
optionee is an employee or nonemployee director of the Company or, unless such
optionee's employment is terminated for cause, within three months after the
optionee ceases to be an employee or director of the Company. Options are
exercisable for 12 months after the death or permanent disability of an
optionee. The option exercise price must be paid in cash or, at the discretion
of the Stock Option Committee, may be paid in whole or in part in shares of
common stock valued at fair market value on the date of exercise. As of
September 30, 1996 and 1995, there were 1,259,548 and 779,625, respectively,
options granted and outstanding. The following is a summary of the stock option
activity under the plan:
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Options outstanding a beginning of period........... 779,625 597,775 542,300
Options granted..................................... 691,540 334,250 189,975
Options exercised................................... (39,434) (54,010) (44,770)
Options forfeited................................... (172,183) (98,390) (89,730)
--------- ------- -------
Options outstanding at end of period................ 1,259,548 779,625 597,775
========= ======= =======
Options exercisable at end of period................ 317,011 207,280 146,780
========= ======= =======
Option price range.................................. $13.25-$38.75 $13.25-$35.50 $13.25-$28.75
============= ============= =============
</TABLE>
The Company established an Employee Stock Purchase Plan in 1993. The plan
authorizes the purchase of up to 120,000 shares of the Company's common stock
by eligible employees. The provisions of the plan include eligibility for all
full time employees who have completed one year of service, employee
contributions equal to the lesser of 10% of base salary or $10,000, the
purchase price being equal to the lesser of the fair market value of the stock
on the first or the last day of the plan year, and an option to purchase shares
of stock or withdraw all payroll deductions plus interest at the end of the
plan year. As of September 30, 1995 and 1996, a total of 32,006 shares and
43,160 shares, respectively, had been issued under the plan.
- 47 -
<PAGE> 48
LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-----(CONTINUED)
NOTE 17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The table below sets forth summarized quarterly financial data for the
years ended September 30, 1996 and 1995 (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Fourth Third Second First
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
1996
Net revenues ................................ $ 284,838 $ 281,217 $ 278,056 $ 270,380
Income from operations ...................... 21,172(a) 22,951(a) 24,110 21,323
Income before income taxes and equity
earnings/minority interests .......... 17,700 20,038 21,154 18,203
Equity earnings/minority interests .......... (87) 122 (189) (2)
Net income .................................. $ 7,053 $ 12,816 $ 12,412 $ 10,899
========= ========= ========= =========
Earnings per share .......................... $ 0.35 $ 0.63 $ 0.61 $ 0.54
========= ========= ========= =========
Weighted average common and common
equivalent shares outstanding ........ 19,913 20,501 20,503 20,360
========= ========= ========= =========
</TABLE>
(a) Includes $2.0 million income and $0.9 million expense of non-recurring
items in the third and fourth quarters, respectively (or $.10 per
share income and $0.19 per share expense after tax, respectively)
<TABLE>
<S> <C> <C> <C> <C>
1995
Net revenues ................................ $ 267,793 $ 215,851 $ 208,081 $ 202,144
Income from operations ...................... 15,170(b) 12,835(b) 14,793(b) 14,207
Income before income taxes and equity
earnings/minority interests .......... 11,807 11,111 12,339 10,931
Equity earnings/minority interests .......... (112) (43) (30) (19)
Net income .................................. 4,474 5,208 7,692 6,860
Pro forma tax expense ....................... 50 166 165 218
Pro forma net income ........................ $ 4,424 $ 5,042 $ 7,527 $ 6,642
========= ========= ========= =========
Earnings per share:
Primary .............................. $ 0.22 $ 0.26 $ 0.41 $ 0.40
========= ========= ========= =========
Pro forma ............................ $ 0.22 $ 0.25 $ 0.40 $ 0.39
========= ========= ========= =========
Weighted average common and common
equivalent shares outstanding ........ 20,265 20,089 18,718 17,179
========= ========= ========= =========
</TABLE>
- --------------
(b) Includes $0.6 million, $4.7 million and $7.1 million of mergers and
acquisitions cost in second, third and fourth quarters, respectively
(or $.03, $0.23 and $0.29 per share, respectively)
- 48 -
<PAGE> 49
LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-----(CONTINUED)
NOTE 18. STOCKHOLDER RIGHTS PLAN
Since November 17, 1994, when the Company's Board of Directors declared a
dividend of one right for each outstanding share of the Company's common stock,
each share of the Company's outstanding common stock carries with it such
right. Each right entitles the holder to purchase from the Company one
one-hundredth of a share of Series A Junior Participating Preferred Stock, par
value $.01 per share, for an exercise price of $160, subject to adjustment. The
rights expire on November 17, 2004. Such rights will not be exercisable nor
transferable apart from the Common Stock until such time as a person or group
acquires 15% of the Company's Common Stock or initiates a tender offer or
exchange offer that will result in ownership of 15% of the Company's Common
Stock. In the event that the Company is merged, and its Common Stock is
exchanged or converted, the rights will entitle the holders to buy shares of
the acquiror's common stock at a 50% discount. Under certain other
circumstances, the rights can become rights to purchase the Company's Common
Stock at a 50% discount. The rights may be redeemed by the Company for one cent
per right at any time until 10 days following the first public announcement of
a 15% acquisition of beneficial ownership of the Company's Common Stock.
- 49 -
<PAGE> 50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In November 1994, the Company engaged Ernst & Young LLP as independent
certified public accountants to audit the Company's financial statements for
the fiscal year ending September 30, 1995. At that time, the Company chose not
to renew the engagement of Arthur Andersen LLP, who previously served as the
Company's independent certified public accountants. The decision to change
accountants was approved by the Company's Board of Directors. The Company also
engaged Ernst & Young LLP to audit the Company's financial statements for the
fiscal year ended September 30, 1994 which is presented under the pooling of
interests method of accounting for the BCC acquisition.
In connection with the audit of the Company's financial statements for the
two fiscal years ended September 30, 1994 and during the interim period
following September 30, 1994 through the date of dismissal of Arthur Andersen
LLP, there were no disagreements with Arthur Andersen LLP on any matters of
accounting principles or practice, financial statement disclosure or auditing
scope or procedure which, if not resolved to its satisfaction, would have
caused Arthur Andersen LLP to make reference thereto in connection with its
report. Arthur Andersen LLP's report on the Company's financial statements for
the fiscal year ended September 30, 1994 contained no adverse opinion or
disclaimer of opinion and was not qualified or modified as to uncertainty,
audit scope or accounting principles.
- 50 -
<PAGE> 51
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information on directors of the registrant appears in the Company's Proxy
Statement for the 1997 annual meeting of stockholders expected to be held
February 6, 1997, which is to be filed with the Securities and Exchange
Commission, and is incorporated herein by reference. Information required by
this item for the Company's executive officers is contained in Part I of this
report.
ITEM 11. EXECUTIVE COMPENSATION
Information on executive compensation appears in the Company's Proxy
Statement for the 1997 annual meeting of stockholders expected to be held
February 6, 1997, which is to be filed with the Securities and Exchange
Commission, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information on security ownership of certain beneficial owners appears in
the Company's Proxy Statement for the 1997 annual meeting of stockholders
expected to be held February 6, 1997, which is to be filed with the Securities
and Exchange Commission, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information on certain relationships and related transactions appears in
the Company's Proxy Statement for the 1997 annual meeting of stockholders
expected to be held February 6, 1997, which is to be filed with the Securities
and Exchange Commission, and is incorporated herein by reference.
- 51 -
<PAGE> 52
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
The following reports, financial statements and schedule are filed
herewith on the pages indicated:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors 26
Consolidated Balance Sheets at September 30, 1995 and 1996 27
Consolidated Statements of Income for Fiscal
Years 1994, 1995 and 1996 28
Consolidated Statements of Stockholders' Equity
for Fiscal Years 1994, 1995 and 1996 29
Consolidated Statements of Cash Flows for Fiscal
Years 1994, 1995 and 1996 30
Notes to Consolidated Financial Statements 31
FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts and Reserves 59
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and, therefore,
have been omitted.
- 52 -
<PAGE> 53
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Document
----------- --------
<S> <C>
*2.1 Stock Purchase Agreement by and between Abbey Healthcare
Group, Incorporated and Living Centers of America, Inc. with
respect to the sale of Abbey Pharmaceutical Services, Inc.
(filed as Exhibit 99.2 to Registrant's 8-K dated October 14,
1994 and incorporated herein by reference).
*2.2 Schedule 14D-1 Tender Offer Statement for Rehability
Corporation filed on May 23, 1995.
*2.3 Amended and Restated Agreement and Plan of Merger dated March
27, 1995 among Living Centers of American, Inc., and Living
Centers/Brian Care Company and The Brian Center Corporation,
The Beaver Property Entities and Donald C. Beaver, as amended
(filed as Exhibit 2.1 of the Fourth Amendment to Registrant's
Registration Statement on Form S-4, Registration No. 33-90676
and incorporated herein by reference).
*2.4 Agreement of Purchase and Exchange among Living Centers of
America, Inc. and Living Centers Specialty Care Services,
Inc. and Cason, Inc., Don W. Wortley, Don W. Wortley Trust,
Mary Ann Wortley Trust, and 726 Cottonwood, Ltd. dated as of
August 1, 1995 (filed as Exhibit 10.1 in Registrant's
Registration Statement on Form S-3, Registration No.
33-97616, and incorporated herein by reference).
*2.5 Form of Registration Rights Agreement between Donald C.
Beaver and Living Centers of America, Inc., (filed as Exhibit
2.2 to Registrants' Registration Statement on Form S-4,
Registration Number 33-90676 and incorporated herein by
reference).
*2.6 Form of Registration Covenant between Donald C. Beaver and
Living Centers of America, Inc. (filed as Exhibit 2.3 to
Registrant's Registration Statement on Form S-4, Registration
Number 33-90676 and incorporated herein by reference).
2.7 Recapitalization Agreement, as amended, by and among Living
Centers of America, Inc., DevCon Holding Company, Living
Centers-DevCon, Inc., and Golder, Thoma, Cressey, Rauner
Fund IV, L.P.
*3.1 Restated Certificate of Incorporation of Living Centers of
America, Inc. (filed as Exhibit 4.1 to the Registrant's Form
S-8 on August 7, 1996, Registration No. 333-09707, and
incorporated herein by reference).
*3.2 By-laws of Living Centers of America, Inc. (filed as Exhibit
3.2 to the Registrant's Registration Statement on Form S-1,
Registration No. 33-44726, and incorporated herein by
reference).
*4.1 Restated Certificate of Incorporation of Living Centers of
America, Inc. (filed as Exhibit 3.1 hereto).
*4.2 By-laws of Living Centers of America, Inc. (filed as Exhibit
3.2 hereto).
*4.3 Certificate of Designations of Series A Junior Participating
Preferred Stock of Living Centers of American, Inc. (filed as
Exhibit 4.1 to Registrant's Form 10-Q for the quarter ended
December 31, 1994, Commission File Number 33-44726 and
incorporated herein by reference).
*4.4 Rights Agreement dated as of November 17, 1994 between the
Registrant and Chemical Bank, as Rights Agent, specifying the
terms of the rights to purchase the Company's Series A Junior
Participating Preferred Stock, and the exhibits thereto
(filed as Exhibit 1 to the Company's Registration Statement
on Form 8-A dated November 17, 1994), as amended by Loan
Agreement dated October 1, 1993 between Living Centers of
America, Inc. and SouthTrust Bank of Alabama, N.A. (filed as
Exhibit 4(d) to Registrant's Form 8-K dated October 15, 1993
and incorporated herein by reference).
</TABLE>
- 53 -
<PAGE> 54
<TABLE>
<CAPTION>
Exhibit No. Document
----------- --------
<S> <C>
*4.5 Amendment to Loan Agreement dated October 1, 1993 between
Living Centers of America, Inc. and SouthTrust Bank of
Alabama, N.A. (filed as Exhibit 99.7 to Registrant's Form 8-K
dated October 14, 1994 and incorporated herein by reference).
*4.6 Senior Note Purchase Agreement among Living Centers of
America, Inc. and the purchasers listed in the Schedule of
Purchasers attached thereto as ANNEX I, dated January 21,
1994 (filed as Exhibit 4 to Registrant's Form 10-Q for the
quarter ended December 31, 1993, Commission File Number
33-44726, and incorporated herein by reference), as amended
by Amendment Number 1 to Senior Note Purchase Agreement dated
January 21, 1994 among Living Centers of America, Inc. and
Purchaser (filed as Exhibit 4.1 to Registrant's Form 10-Q for
the quarter ended March 31, 1994, Commission File Number 33-
44726, and incorporated herein by reference) by Second
Amendment and Consent to Senior Note Purchase Agreement
between Living Centers of America, Inc. and the Variable
Annuity Life Insurance Company (filed as Exhibit 4.2 to
Registrant's Form 10-Q for the quarter ended June 30, 1994,
Commission File Number 33-44726 and incorporated herein by
reference), and by Third amendment to Senior Note Purchase
Agreement between Living Centers of America, Inc. and the
Variable Annuity Life Insurance Company (filed as Exhibit
99.8 to Registrant's 8-K dated October 14, 1994 and
incorporated herein by reference).
4.7 Third Amended and Restated Credit Agreement, dated as of
August 19, 1996 among Living Centers of America, Inc., the
banks named therein, Chase Securities Inc., Toronto Dominion
(Texas), Inc. and NationsBank of Texas, N.A.
+*10.1 Employment Agreement between Living Centers of America, Inc.
and Edward L. Kuntz (filed as Exhibit 10.1 to Registrant's
Registration Statement on Form S-4, Registration No.
33-66588, and incorporated herein by reference.)
+10.2 Extension and Ratification of Employment Agreement
between Living Centers of America, Inc. and Edward L. Kuntz.
+*10.3 Employment Agreement between Living Centers of America, Inc.
and Leroy D. Williams (filed as Exhibit 10.3 to Registrant's
Registration Statement on Form S-4, Registration No.
33-66588, and incorporated herein by reference.)
+ 10.4 Extension and Ratification of Employment Agreement
between Living Centers of America, Inc. and Leroy D.
Williams.
+ 10.5 Employment Agreement between Living Centers of America,
Inc. and Charles B. Carden.
+*10.6 Employment Agreement between Living Centers of America, Inc.
and Donald C. Beaver (filed as Exhibit 2.2 to Registrant's
Registration Statement on Form S-4, Registration Number
33-90676 and incorporated herein by reference).
+ 10.7 Employment Agreement between Living Centers of America,
Inc. and Pauline Bonner.
+*10.8 Employment agreement between Living Centers of America, Inc.
and Sydney K. Boone, Jr. (filed as Exhibit 10.4 to the
Registrant's Form 10-K for the fiscal year ended September
30, 1993, Commission File Number 33-44726 and incorporated
herein by reference).
+*10.9 Employment Agreement between Living Centers of America, Inc.
and David W. Budke (filed as Exhibit 10.5 to the Registrant's
Form 10-K for the fiscal year ended September 30, 1993,
Commission File Number 33-44726, and incorporated herein by
reference).
</TABLE>
- 54 -
<PAGE> 55
<TABLE>
<CAPTION>
Exhibit No. Document
----------- --------
<S> <C>
+*10.10 Employment Agreement between Living Centers of America, Inc.
and Boyd P. Gentry (filed as Exhibit 10.7 to the Registrant's
Form 10-K for the fiscal year ended September 30, 1995,
Commission File Number 33-44726, and incorporated herein by
reference).
+*10.11 Employment Agreement between Living Centers of America, Inc.
and Kelly R. Gill (filed as Exhibit 10 to the Registrant's
Form 10-Q for the quarter ended December 31, 1995, Commission
File Number 33- 44726, and incorporated herein by reference).
+*10.12 Employment Agreement between Living Centers of America, Inc.
and Laura Kislowski (filed as Exhibit 10.8 to the
Registrant's Form 10-K for the fiscal year ended March 31,
1996, Commission File Number 33-44726, and incorporated
herein by reference).
+*10.13 Employment Agreement between Living Centers of America, Inc.
and William R. Korslin (filed as Exhibit 10 to the
Registrant's Form 10-Q for the quarter ended December 31,
1995, Commission File Number 33-44726, and incorporated
herein by reference).
+*10.14 Employment Agreement between Living Centers of America, Inc.
and Keith Krein, M.D. (filed as Exhibit to Registrant's
Registration Statement on Form S-4, Registration No.
33-66588, and incorporated herein by reference.)
+ 10.15 Employment Agreement between Living Centers of America,
Inc. and John D. Lee, III.
+*10.16 Employment Agreement between Living Centers of America, Inc.
and James L. Martin, Jr. (filed as Exhibit 10.1 to the
Registrant's Form 10-Q for the quarter ended June 30, 1996,
Commission File Number 33-44726, and incorporated herein by
reference).
+ 10.17 Employment Agreement between Living Centers of America,
Inc. and Kenneth Morgan.
+*10.18 Employment Agreement between Living Centers of America, Inc.
and Karuppanna Muthuswamy (filed as Exhibit 10.10 to
Registrant's Registration Statement on Form S-4, Registration
No. 33-66588, and incorporated herein by reference.)
+*10.19 Employment Agreement between Living Centers of America, Inc.
and Susan Thomas Whittle (filed as Exhibit 10.10 to the
Registrant's Form 10-K for the fiscal year ended September
30, 1993, Commission File Number 33-44726, and incorporated
herein by reference).
+*10.20 1992 Stock Option Plan of Living Centers of America, Inc.,
as amended (filed as Exhibit 10.1 to Registrant's Form S-8 on
August 7, 1996, Registration No. 333-09707, and incorporated
herein by reference).
+*10.21 Deferred Retirement Incentive Plan of Living Centers of
America, Inc. (filed as Exhibit 10.4 to Registrant's Annual
Report on Form 10-K for the fiscal year ended September 30,
1992, File No. 33-44726, and incorporated herein by
reference).
*10.22 Indemnification Agreement dated as of February 21, 1992
between Living Centers of America, Inc. and The ARA Group,
Inc. (filed as Exhibit 10.4 to the Registrant's Registration
Statement on Form S-1, Registration No. 33-44726, and
incorporated herein by reference).
*10.23 Assignment Agreement dated as of February 21, 1992 between
Living Centers of America, Inc. and The ARA Group, Inc.
(filed as Exhibit 10.6 to the Registrant's Registration
Statement on Form S-1, Registration No. 33-44726, and
incorporated herein by reference).
</TABLE>
- 55 -
<PAGE> 56
<TABLE>
<CAPTION>
Exhibit No. Document
----------- --------
<S> <C>
+*10.24 Management Incentive Bonus Plan of Living Centers of America,
Inc. (filed as Exhibit 10.8 to Registrant's Annual Report on
Form 10-K for the fiscal year ended September 30, 1992, File
No. 33- 44726, and incorporated herein by reference).
+*10.25 Employee Stock Purchase Plan of Living Centers of America,
Inc. (filed as Exhibit 10.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1993,
File No. 33-44726, and incorporated herein by reference).
11 Statement regarding computation of per share earnings.
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP
24 Powers of Attorney
27 Financial Data Schedule
</TABLE>
- --------------
* Incorporated by reference as indicated.
+ Represents management contracts or compensatory plans or
arrangements required to be filed as exhibits to this Annual
Report by Item 601(b)(10)(iii) of Regulation S-K.
The Company will furnish a copy of any exhibit described above to any
beneficial holder of the Company's securities upon receipt of a written request
therefor provided that such request sets forth a good faith representation that
as of December 16, 1996, the date of record for the Company's 1997 annual
stockholder's meeting, such beneficial owner is entitled to vote at such
meeting, and provided further that such holder pays to the Company a fee
compensating the Company for its reasonable expenses in furnishing such
exhibits.
REPORTS ON FORM 8-K
There were no reports filed on Form 8-K during the quarter ended September 30,
1996.
- 56 -
<PAGE> 57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
LIVING CENTERS OF AMERICA, INC.
(Registrant)
By: /s/ Susan Thomas Whittle
---------------------------------------------
Susan Thomas Whittle
Vice President, General Counsel and Secretary
Date: December 16, 1996
- 57 -
<PAGE> 58
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of Living
Centers of America, Inc. and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title
<S> <C>
/s/ Edward L. Kuntz Chairman, Chief Executive Officer, and
- ------------------------------ Director (Principal Executive Officer)
Edward L. Kuntz
/s/ Leroy D. Williams President, Chief Operating Officer and
- ------------------------------ Director
Leroy D. Williams
/s/ Charles B. Carden Executive Vice President and Chief
- ------------------------------ Financial Officer (Principal Financial
Charles B. Carden Officer)
* Vice Chairman and Director
- ------------------------------
Donald C. Beaver
* Director
- ------------------------------
Roger J. Bulger, M.D. FACP
* Director
- ------------------------------
Anthony M. Frank
* Director
- ------------------------------
Eddy J. Rogers, Jr.
* Director
- ------------------------------
Robert H. Hurlbut
/s/ Ronald W. Fleming Controller and Chief Accounting Officer
- ------------------------------ (Principal Accounting Officer)
Ronald W. Fleming
</TABLE>
* Executed on behalf of the aforementioned directors by Susan Thomas
Whittle pursuant to the powers of attorney included in Exhibit 24.
/s/ Susan Thomas Whittle
------------------------------
Susan Thomas Whittle
Date: December 16, 1996
- 58 -
<PAGE> 59
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
LIVING CENTERS OF AMERICA, INC.
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Balance, Deduction Additions Balance,
Beginning Charged From From End of
of Period to Income Reserve Acquisitions Period
---------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Fiscal Year 1996:
Allowance for doubtful accounts ... $ 16,500 $ 16,666 $ (12,492) $ 2,109 $ 22,783
========== ========== ========== ========== ==========
Notes receivable reserves ......... $ 3,550 $ 0 $ (34) $ -- $ 3,516
========== ========== ========== ========== ==========
Fiscal Year 1995:
Allowance for doubtful accounts ... $ 6,632 $ 10,520 $ (11,071) $ 10,419 $ 16,500
========== ========== ========== ========== ==========
Notes receivable reserves ......... $ 2,850 $ 700 $ -- $ -- $ 3,550
========== ========== ========== ========== ==========
Fiscal Year 1994:
Allowance for doubtful accounts ... $ 3,781 $ 3,122 $ (2,978) $ 2,707 $ 6,632
========== ========== ========== ========== ==========
Notes receivable reserves ......... $ 5,424 $ (2,416)(a) $ (158) $ -- $ 2,850
========== ========== ========== ========== ==========
</TABLE>
(a) Includes reversal of reserves based on collections of notes previously
considered doubtful.
- 59 -
<PAGE> 1
Exhibit 2.7
RECAPITALIZATION AGREEMENT, AS AMENDED, BY AND AMONG LIVING CENTERS OF AMERICA,
INC., DEVCON HOLDING COMPANY, LIVING CENTERS-DEVCON, INC., AND GOLDER, THOMA,
CRESSEY, RAUNER FUND IV, L.P.
<PAGE> 2
RECAPITALIZATION AGREEMENT
DATED AS OF AUGUST 30, 1996
BY AND AMONG
LIVING CENTERS OF AMERICA, INC.,
DEVCON HOLDING COMPANY,
LIVING CENTERS-DEVCON, INC.,
AND
GOLDER, THOMA, CRESSEY, RAUNER FUND IV, L.P.
<PAGE> 3
TABLE OF CONTENTS
[PAGE NUMBERS IN THIS EXHIBIT DO NOT
CORRESPOND TO THIS TABLE OF CONTENTS]
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Authorization and Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1A. Authorizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1B. Purchase and Sale, Financing, Redemption and Related Transactions . . . . . . . . . . . . . . . . . . 3
1C. The Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1D. Repurchase Price Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2. Conditions of Purchaser's Obligations at the Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2A. Representations and Warranties; Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2B. Amendment of Articles of Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2C. Amendment of the Company's Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2D. Stockholders Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2E. Registration Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2F. Securities Law Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2G. Services Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2H. Bank and Subdebt Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2I. Transition Services Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2J. No Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2K. Reclassification of Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2L. Contribution; Repayment of Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2M. Opinion of the Company's Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2N. Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2O. Transfer of Real Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2P. Transfer of Excluded Assets and Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2Q. Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2R. Compliance with Applicable Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2S. Environmental Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2T. Interim Period Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2U. Company Closing Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2V. Thomas Care Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2W. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2X. Settlement of Interim Period Liabilities and Advances . . . . . . . . . . . . . . . . . . . . . . . . 9
2Y. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2-1. Conditions of the Company's and Existing Stockholders' Obligations at the Closing . . . . . . . . . . . . . 10
2-1A. Representations and Warranties; Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2-1B. Corporate Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2-1C. Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2-1D. Opinion of the Purchaser's Special Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2-1E. Compliance with Applicable Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
</TABLE>
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2-1F. Stockholders Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2-1G. Registration Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2-1H. Intercompany Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2-1I. Services Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2-1J. Transition Services Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2-1K. Environmental Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2-1L. Solvency Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2-1M. Company Closing Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2-1N. Thomas Care Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2-1O. Settlement of Interim Period Liabilities and Advances . . . . . . . . . . . . . . . . . . . . . . . 13
2-1P. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2-1Q. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3. Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3A. Interim Agreements of the Company and the Existing Stockholders . . . . . . . . . . . . . . . . . . 13
3B. Closing Conditions and Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3C. Exclusivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3D. Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3E. LCA Marks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3F. Tax Basis Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3G. Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3H. Transfer of Certain Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3I. Delivery of Offsite Tangible Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3J. Release of Guarantees, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4. Certain Covenants between Effective Time and Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
5. Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
5A. Organization, Corporate Power and Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
5B. Capital Stock and Related Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
5C. Subsidiaries; Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5D. Authorization; No Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5E. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5F. Absence of Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5G. No Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5H. Absence of Certain Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
5I. Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
5J. Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
5K. Contracts and Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
5L. Intellectual Property Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
5M. Litigation, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
5N. Brokerage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
5O. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
</TABLE>
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5P. Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
5Q. ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
5R. Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
5S. Environmental and Safety Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
5T. Affiliated Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
5U. Real Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
5V. Healthcare Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
5W. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
5X. Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
6. Remedies for Breaches of this Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
6A. Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
6B. Indemnification Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
6C. Matters Involving Third Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
6D. Environmental Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
6E. Other Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
6F. Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
7. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
7A. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
7B. Cross Reference to Other Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
8. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
8A. Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
8B. Purchaser's Representations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
8C. Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
8D. Employee Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
8E. Consent to Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
8F. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
8G. Generally Accepted Accounting Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
8H. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
8I. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
8J. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
8K. Descriptive Headings; Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
8L. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
8M. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
8N. No Strict Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
8O. Third Party Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
8P. Termination; Effect of Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
8Q. Specific Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
</TABLE>
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<PAGE> 6
SCHEDULES
Schedule 2T - Certain Leased Real Property
Schedule 5C - Subsidiaries
Schedule 5E - Financial Statements (to be attached)
Schedule 5F - Liabilities
Schedule 5G - Adverse Change
Schedule 5H - Developments
Schedule 5I - Assets
Schedule 5J - Taxes
Schedule 5K - Contracts
Schedule 5M - Litigation
Schedule 5N - Brokerage
Schedule 5O - Insurance
Schedule 5P - Employees
Schedule 5Q - Employee Benefits
Schedule 5R - Compliance
Schedule 5S - Environmental
Schedule 5T - Affiliated Transactions
Schedule 5U - Real Property
Schedule 5V - Healthcare
Schedule 7A - Liens
EXHIBITS
Exhibit 1A - Terms of Stock
Exhibit 1B - New Board of Directors
Exhibit 2C - Bylaws
Exhibit 2D - Stockholders Agreement
Exhibit 2E - Registration Agreement
Exhibit 2G - Services Agreement
Exhibit 2I - Transition Services Agreement (to be attached)
Exhibit 2M - Opinion of Company's Counsel
Exhibit 2-1C - Opinion of Purchaser's Special Counsel
Exhibit 2-1H - Form of Release
Exhibit 2-1N - Thomas Care Letter
Exhibit 7A - Exceptions to GAAP
- iv -
<PAGE> 7
RECAPITALIZATION AGREEMENT
THIS RECAPITALIZATION AGREEMENT (this "Agreement") is made as
of August 30, 1996, among Living Centers- Devcon, Inc., a Florida corporation
(the "Company"), Golder, Thoma, Cressey, Rauner Fund IV, L.P., a Delaware
limited partnership (the "Purchaser"), Living Centers of America, Inc. ("LCA")
and Devcon Holding Company ("Holding"). LCA and Holding are collectively
referred to herein as the "Existing Stockholders." Except as otherwise
indicated herein, capitalized terms used herein are defined in Section 7
hereof.
WHEREAS, Holding sought indications of interest with respect
to an acquisition of the Company;
WHEREAS, in connection with Holdings' solicitation of such
indications of interest, the Purchaser indicated an interest in pursuing a
transaction whereby it would purchase certain equity securities of the Company,
it would arrange for debt financing for the Company, and the Company would
effect a redemption of a substantial majority of the equity securities of the
Company held by Holding;
WHEREAS, in connection with the transactions described above,
the Company desires to reconstitute its capital structure through the
redemption of certain of its outstanding equity securities and the issuance and
sale of certain new equity securities on the terms and subject to the
conditions set forth herein;
WHEREAS, Holding desires to sell certain of its equity
securities of the Company on the terms and subject to the conditions set forth
herein;
WHEREAS, the Purchaser desires to acquire newly-issued equity
securities of the Company on the terms and subject to the conditions set forth
herein;
WHEREAS, prior to the closing of the transactions contemplated
by this Agreement, the Company's existing equity securities will be
recapitalized so that immediately prior to the Closing, the Company's
outstanding equity securities, including securities exercisable for or
convertible into equity securities, will consist solely of 100,000 shares of
Class B Common Stock, par value $.01 per share, all owned by Holding; and
WHEREAS, immediately following the Closing, American
Habilitation Services, Inc., a Delaware corporation will merge with and into
the Company (the "Merger"), with the Company being the surviving corporation
but being renamed "American Habilitation Services, Inc." in connection with
such Merger.
<PAGE> 8
NOW, THEREFORE, the parties hereto agree as follows:
Section 1. Authorization and Closing.
1A. Authorizations.
(i) Authorization of Recapitalization. Effective
as of the Closing, the New Board of Directors (as defined below) will
approve and ratify this Agreement and the transactions contemplated
hereby and, subject to the terms and conditions herein, Holding shall
have approved the transactions described in Sections 2B and 2K below
in its capacity as a stockholder of the Company.
(ii) Purchaser Stock. The New Board of Directors
shall authorize the issuance and sale to the Purchaser (or its
designees) of an aggregate of 13,900 shares of Class A Preference
Stock for a purchase price of $1,000.00 per share and an aggregate of
70,000 shares of Class C Common for a purchase of $ 1.43 per share,
each having the rights and preferences set forth in Exhibit 1A
attached hereto. The shares of Class A Preference Stock and Class C
Common to be purchased hereunder are collectively referred to herein
as the "Purchaser Stock."
(iii) Redemption. At the Closing, but effective
immediately after the issuance of the Purchaser Stock to the Purchaser
as contemplated by this Agreement, the New Board of Directors (as
defined below) shall authorize the Company's repurchase from Holding
and simultaneous cancellation of 80,000 shares of Class B Common for
an aggregate repurchase price of $47.5 million, reduced
dollar-for-dollar for the amount of the Company's Indebtedness at the
Closing (if any) and subject to further adjustment as set forth in
Section 1D hereof (as adjusted, the "Repurchase Price"). The shares
of Class B Common to be repurchased hereunder are collectively
referred to herein as the "Existing Stock."
(iv) Financing Arrangements. At the Closing, but
effective immediately before the issuance of the Purchaser Stock to
the Purchaser as contemplated by this Agreement, the New Board of
Directors shall authorize the execution, delivery and performance of
the Bank Agreement and Subdebt Agreement (as defined in Section 2H).
(v) Equity Agreements. At the Closing, but
effective immediately after the issuance of the Purchaser Stock to the
Purchaser as contemplated by this Agreement, the New Board of
Directors shall authorize the execution, delivery and performance of
the Equity Agreements.
(vi) Transition Services Agreement. At the
Closing, but effective immediately after the redemption of the
Existing Stock as contemplated by this Agreement, the New Board of
Directors shall authorize the execution, delivery and performance of
the Transition Services Agreement.
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<PAGE> 9
1B. Purchase and Sale, Financing, Redemption and Related
Transactions.
(i) Purchase and Sale of Purchaser Stock. At the
Closing, subject to the terms and conditions set forth herein, the
Company shall sell to the Purchaser (or its designees), and the
Purchaser (or its designees) shall purchase from the Company, the
number of shares of Class A Preference Stock and Class C Common set
forth in Section 1A(i) hereof for an aggregate purchase price of $14.0
million.
(ii) Financing. At the Closing (effective
immediately before the transaction described in Section 1B(i) above),
subject to the terms and conditions set forth herein, the Company
shall enter into the Bank Agreement and the Subdebt Agreement and
shall, in connection therewith, obtain or have available to it
(subject to the conditions precedent contained therein) loans and
advances totaling at least $35.0 million pursuant thereto.
(iii) Redemption of Existing Stock. At the Closing
(effective immediately after the transactions described in Sections
1B(i) and (ii) above), subject to the terms and conditions set forth
herein, the Company shall repurchase from Holding, and Holding shall
sell to the Company, the number of shares of Class B Common set forth
in Section 1A(ii) hereof for the Repurchase Price, payable as set
forth in Section 1C hereof.
(iv) New Board of Directors. At the Closing
(effective immediately before the transaction described in Section
1B(i) above), the members of the Board of Directors of the Company
serving immediately prior to the Closing shall resign and the Persons
designated on Exhibit 1B hereof shall be elected to the Company's
Board of Directors (the "New Board of Directors").
(v) Related Transactions. At the Closing
(effective immediately after the transactions described in Sections 1B
(i) through (iii) above), the Company, the Purchaser, and Holding, as
appropriate, shall enter into the Equity Agreements.
1C. The Closing. The closing of the purchase and sale of
the Purchaser Stock and redemption of the Existing Stock (the "Closing") shall
take place at the offices of Kirkland & Ellis, 200 East Randolph Drive,
Chicago, Illinois (or, at the Purchaser's election, at the offices of Winston &
Strawn, 200 Park Avenue, New York, New York) at 10:00 a.m. on September 6, 1996
or at such other place, on such other date, or at such other time as the
Company and the Purchaser may agree in writing (the "Closing Date"). At the
Closing, (i) the Company shall deliver to the Purchaser (or its designees)
stock certificates evidencing the Purchaser Stock to be purchased by the
Purchaser (or its designees), registered in the Purchaser's (or its designees'
names) upon payment by the Purchaser (or its designees) of the purchase price
therefor by a cashier's or certified check, or by wire transfer of immediately
available funds to such account as is designated by the Company, in the
aggregate amount set forth in Section 1B(i) hereof, (ii) the Company shall
enter into the financing arrangements described in Section 1B(ii) hereof, and
(iii) Holding shall deliver to the Company
- 3 -
<PAGE> 10
stock certificates evidencing the Existing Stock to be repurchased from Holding
by the Company upon payment of the Repurchase Price therefor by a cashier's or
certified check, or by wire transfer or immediately available funds to such
account as is designated by Holding.
1D. Repurchase Price Adjustment.
(i) Post-Closing Determination. On the Closing
Date, Holding and its auditors shall perform an inventory and such
other procedures as are reasonably necessary to be performed on such
date in order to enable the Parties to have an accurate and complete
Closing Review. Within 45 days after the Closing Date, Holding and
its auditors will conduct a review (the "Closing Review") of Working
Capital as of the open of business on the Closing Date and will
prepare and deliver to the Purchaser a computation of the amount of
Working Capital (the "Draft Balance Sheet") as of the open of business
on September 1, 1996 (the "Effective Time"). The Purchaser and its
auditors will cooperate fully with Holding and its auditors, and
Holding and its auditors will cooperate fully with the Purchaser and
its auditors, in connection with the Closing Review (including,
without limitation, making all relevant information available for
review and making all relevant personnel available for discussions).
Holding and its auditors shall give the Purchaser and its auditors an
opportunity to observe the Closing Review and shall make available to
such Persons all records and work papers used in preparing the Draft
Balance Sheet. The Purchaser shall be deemed for all purposes hereof
to have agreed with the computation of Working Capital as of the
Effective Time set forth on the Draft Balance Sheet (and such amount
will be conclusive and binding upon the Parties) unless the Purchaser,
within 20 days after receipt of the Draft Balance Sheet, delivers a
notice (an "Objection Notice") to Holding setting forth the
Purchaser's calculation of the disputed amount(s). Holding and the
Purchaser will use reasonable efforts to resolve any disagreements as
to such computations, but if they do not obtain a final resolution
within 20 days after Holding has received the Objection Notice,
Holding and the Purchaser will jointly retain an independent
accounting firm of recognized national standing (the "Firm") to
resolve any remaining disagreements. If Holding and the Purchaser are
unable to agree on the choice of the Firm, the Firm will be a
"big-six" accounting firm selected by lot (after excluding one firm
designated by each of Holding and the Purchaser). Holding and the
Purchaser shall direct the Firm to render a determination within 60
days of its retention, and the Parties and their respective employees
shall cooperate with the Firm during its engagement. The Firm shall
consider only those items and amounts in the Draft Balance Sheet set
forth in the Objection Notice which Holding and the Purchaser are
unable to resolve. The Firm's determination shall be based on the
definition of Working Capital included herein. The determination of
the Firm will be conclusive and binding upon the Parties. The Parties
shall bear the costs and expenses of the Firm based on the percentage
which the portion of the contested amount not awarded to each Party
bears to the amount actually contested by such Party. The amount of
Working Capital as of the Effective Time, as finally determined
pursuant to this Section 1D, is referred to herein as "Actual Working
Capital."
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<PAGE> 11
(ii) Post-Closing Adjustment. If Actual Working
Capital is greater than $5,483,437 ("Baseline Working Capital"), the
Company shall, within five (5) business days after the determination
thereof, pay to Holding an amount equal to such excess by wire
transfer or delivery of other immediately available funds. If Actual
Working Capital is less than Baseline Working Capital, Holding shall,
within five (5) business days after the determination thereof, pay to
the Company an amount equal to such deficiency by wire transfer or
delivery of other immediately available funds. All such payments
shall be treated as adjustments to the Repurchase Price. Baseline
Working Capital was calculated in the manner set forth on the Latest
Balance Sheet.
Section 2. Conditions of Purchaser's Obligations at the
Closing. The obligation of the Purchaser to purchase and pay for the Purchaser
Stock at the Closing is subject to the satisfaction as of the Closing of the
following conditions (provided, however, that the conditions set forth in
Sections 2W and 2Y shall have been satisfied on or before September 6, 1996 and
provided further that the parties shall have agreed to the form and substance
of the Transition Services Agreement on or before such date):
2A. Representations and Warranties; Covenants. The
respective representations and warranties contained in Section 5 and Section 8B
hereof shall be true and correct in all material respects at and as of the
Closing (not taking into account, for purposes of this condition, any updates
to the Schedules or other disclosures made to the Purchaser pursuant to Section
3A(iv)), and the Company and the Existing Stockholders shall have performed in
all material respects all of the covenants required to be performed by them
hereunder on or prior to the Closing; provided that to the extent the Company
takes any action or fails to take any action during the Interim Period at the
direction of the Purchaser as a result of which any representation or warranty
contained herein become untrue or inaccurate, such untruth or inaccuracy shall
not be taken into account for purposes of this condition.
2B. Amendment of Articles of Incorporation. The
Company's Articles of Incorporation (the "Articles of Incorporation") shall
have been duly amended to include the provisions set forth in Exhibit 1A
hereto, shall be in full force and effect under the laws of the State of
Florida as of the Closing as so amended, and shall not have been further
amended or modified.
2C. Amendment of the Company's Bylaws. The Company's
Bylaws shall have been duly restated as set forth in Exhibit 2C hereto, shall
be in full force and effect as of the Closing as so amended, and shall not have
been further amended or modified.
2D. Stockholders Agreement. The Company, the Purchaser,
Holding and each of the other stockholders of the Company shall have entered
into a stockholders agreement in form and substance as set forth in Exhibit 2D
attached hereto (the "Stockholders Agreement"), and the Stockholders Agreement
shall be in full force and effect as of the Closing.
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<PAGE> 12
2E. Registration Agreement. The Company, the Purchaser,
Holding and each of the other stockholders of the Company shall have entered
into a registration agreement in form and substance as set forth in Exhibit 2E
attached hereto (the "Registration Agreement"), and the Registration Agreement
shall be in full force and effect as of the Closing.
2F. Securities Law Compliance. The Company shall have
made all filings under all applicable federal and state securities laws to the
extent necessary to consummate the issuance of the Purchaser Stock pursuant to
this Agreement in compliance with such laws without registering the Purchaser
Stock for sale to the public in accordance with such laws.
2G. Services Agreement. The Company and GTCR IV, L.P.,
an Illinois limited partnership, shall have entered into a services agreement,
in form and substance as set forth in Exhibit 2G hereto (the "Services
Agreement"), and the Services Agreement shall be in full force and effect as of
the Closing.
2H. Bank and Subdebt Agreements.
(i) The Company and National Westminster Bank Plc
(the "Bank") shall have entered into a credit agreement and related
documents (collectively, as such agreement and documents are amended,
modified or waived from time to time, the "Bank Agreement") providing
for loans to the Company of up to $40.0 million in form and substance
satisfactory to the Purchaser, the Bank Agreement shall be in full
force and effect as of the Closing and shall not have been amended or
modified, and the Bank shall have advanced not less than $30.0 million
to the Company under the Bank Agreement; and
(ii) the Company and National Westminster Bank Plc
(the "Subdebt Lender") shall have entered into a credit agreement and
related documents (collectively, as such agreement and documents are
amended, modified or waived from time to time, the "Subdebt
Agreement") providing for loans to the Company of up to $10.0 million
in form and substance satisfactory to the Purchaser, the Subdebt
Agreement shall be in full force and effect as of the Closing and
shall not have been amended or modified, and the Subdebt Lender shall
have advanced not less than $5.0 million to the Company under the
Subdebt Agreement; provided that the Purchaser shall use reasonable
efforts to obtain the financing described in the commitment letters
from the Bank and the Subdebt Lender previously provided to the
Company.
2I. Transition Services Agreement. The Company and LC
Management Company, Inc. shall have entered into a transition services
agreement in form and substance satisfactory to the Purchaser and the Existing
Stockholders which will on the Closing Date be attached hereto as Exhibit 2I
(the "Transition Services Agreement") and the Transition Services Agreement
shall be in full force and effect as of the Closing.
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<PAGE> 13
2J. No Material Adverse Change. Since June 30, 1996, the
Company shall have not suffered a change in its business, assets, condition
(financial or otherwise), prospects or relations with its customers, suppliers
or employees that would be reasonably expected to have a Material Adverse
Effect (a "Material Adverse Change").
2K. Reclassification of Stock. The Company's existing
equity securities will have been recapitalized so that immediately prior to the
Closing the Company's outstanding equity securities, including securities
exercisable for or convertible in equity securities, will consist solely of
100,000 shares of Class B Common Stock, par value $.01 per share, all owned by
Holding.
2L. Contribution; Repayment of Indebtedness. All
intercompany liabilities owing from the Company to the Existing Stockholders or
their Affiliates as of the close of business on the day preceding the Effective
Time will be reclassified to capital of the Company (i.e., after the Closing
the Company shall not have any obligation to repay such intercompany
liabilities) and all of the Company's obligations relating to Indebtedness
accrued as of the close of business on the day preceding the Effective Time,
including, but not limited to, capitalized leases, accrued interest and
prepayment premiums accrued as of the close of business on the day preceding
the Effective Time will have been repaid in full.
2M. Opinion of the Company's Counsel. The Purchaser
shall have received from general or special counsel for the Company and the
Existing Stockholders reasonably acceptable to the Purchaser, opinions with
respect to the matters set forth in Exhibit 2M attached hereto, which shall be
addressed to the Purchaser and the Bank, dated the date of the Closing and in
form and substance reasonably satisfactory to the Purchaser.
2N. Proceedings. All corporate and other proceedings
taken or required to be taken by the Company and the Existing Stockholders in
connection with the transactions contemplated hereby to be consummated at or
prior to the Closing shall have been taken.
2O. Transfer of Real Property.
(i) The Existing Stockholders shall have caused
(i) the contribution, transfer and conveyance to the Company of each
parcel of real property used by the Company but owned by LCA or any
Subsidiary of LCA other than the Company (each, a "Real Property
Transferor"), each transfer of which shall be by general warranty deed
(unless the Real Property Transferor did not obtain title insurance in
connection with its acquisition of such parcel, in which case such
transfer shall be by special warranty deed), and (ii) the cancellation
of all leases concerning such owned real property to which the Company
is a party; provided that each such general warranty deed shall
specifically provide that the Company's recovery against the Real
Property Transferor in any way related to title matters concerning
prior title holders including, without limitation, defects, transfers
or encumbrances arising or existing prior to the date title vested in
such Real Property
- 7 -
<PAGE> 14
Transferor as shown in such title insurance policy shall be limited to
the Real Property Transferor's recovery (if any) against the
applicable title insurer.
(ii) The Existing Stockholders shall have caused
the contribution, transfer and conveyance to the Company of each
parcel of real property used by the Company, but leased from a third
party to LCA or any Subsidiary of LCA other than the Company, by
assignment of lease if permitted by the particular lease without the
necessity of obtaining the lessor's consent; provided that if an
assignment of lease is prohibited by the terms of such lease but a
sublease is permitted by the terms of such lease, such transfer shall
be by sublease.
2P. Transfer of Excluded Assets and Liabilities. The
Existing Stockholders shall have caused the termination of the lease of the
Company's Retama Manor-San Antonio South facility and the distribution,
transfer and conveyance to, and the assumption by, a Subsidiary of LCA (other
than the Company or any of its Subsidiaries) of all other assets and
liabilities (whether known or unknown, accrued, absolute, contingent,
unliquidated or otherwise, whether due or to become due and regardless of when
asserted) arising out of or relating to the Company's Retama Manor- San Antonio
South facility (collectively, the "Excluded Assets and Liabilities").
2Q. Expenses. At the Closing, the Company shall have
reimbursed the Purchaser for, or paid directly, the fees and expenses of the
Purchaser's special counsel as provided in Section 8A hereof.
2R. Compliance with Applicable Laws. The purchase of
Purchaser Stock by the Purchaser hereunder shall not be prohibited by any
applicable law or governmental rule or regulation and shall not subject the
Purchaser to any material penalty, liability or, in the Purchaser's reasonable
judgment, other materially onerous condition under or pursuant to any
applicable law or governmental rule or regulation, and the purchase of the
Purchaser Stock by the Purchaser hereunder shall be permitted by laws, rules
and regulations of the jurisdictions and governmental authorities and agencies
to which the Purchaser is subject.
2S. Environmental Report. The Phase I Environmental
Report (the "Environmental Report") to be prepared by the Purchaser's
environmental consultant concerning the following Facilities: Thomas Care
Center, Sherman Oaks Development Center, San Augustine Nursing and Development
Center, Green Acres Convalescent and Development Center, Robinson Development
Center and the Human Development Center, shall not disclose environmental
issues with respect to which the aggregate Adverse Consequences are reasonably
anticipated to exceed $500,000.
2T. Interim Period Decisions. The Purchaser shall be
satisfied with all significant decisions relating to the Company and its
Subsidiaries made during the Interim Period pursuant to Section 4(i)(a) below.
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<PAGE> 15
2U. Company Closing Documents. The Company shall have
delivered to the Purchaser all of the following documents:
(i) an Officer's Certificate, dated the date of
the Closing, stating that the conditions specified in Sections 2A, 2B,
2C, 2J, 2K, 2L, 2N (except to the extent the proceedings referred to
therein shall be by the New Board of Directors), 2O and 2P, inclusive,
have been fully satisfied;
(ii) certified copies of (a) the resolutions duly
adopted by the Company's Board of Directors authorizing the execution,
delivery and performance of this Agreement and each of the other
agreements contemplated hereby, the filing of the amendment to the
Articles of Incorporation referred to in Section 2B, the amendment to
the Company's Bylaws referred to in Section 2C, the issuance and sale
of the Purchaser Stock and the consummation of all other transactions
contemplated by this Agreement, and (b) the resolutions duly adopted
by the Company's stockholders adopting the amendment to the Articles
of Incorporation referred to in Section 2B;
(iii) certified copies of the amended Articles of
Incorporation, and the Company's amended Bylaws, each as in effect at
the Closing;
(iv) copies of all third party and governmental
consents, approvals and filings (other than as to matters described in
Section 5V) specifically required of the Existing Stockholders or the
Company to be obtained prior to the Closing in connection with the
consummation of the transactions hereunder (including, without
limitation, all waivers of all preemptive rights and rights of first
refusal);
(v) at the Company's sole cost and expense,
copies of all title insurance policies currently maintained by the
Company or any Affiliate of the Company (the "Title Policies") for
each parcel of Owned Real Property and Leased Real Property
(collectively, the "Real Property") insuring title to the Real
Property in the Company or such Affiliate of the Company;
(vi) at the Company's sole cost and expense,
copies of all Real Property surveys in the possession of the Company
or any Affiliate of the Company;
(vii) an estoppel certificate in such form as shall
be reasonably acceptable to Purchaser with respect to each parcel of
Leased Real Property identified on the Schedule 2T - Certain Leased
Real Property attached hereto; and
(viii) such other documents relating to the
transactions contemplated by this Agreement as the Purchaser may
reasonably request.
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<PAGE> 16
2V. Thomas Care Agreement. The Company and the Existing
Stockholders shall have entered into the side letter relating to the Thomas
Care Center in the form of Exhibit 2-1N attached hereto and such agreement
shall be in full force and effect.
2W. Financial Statements. The Existing Stockholders shall
have provided the Purchaser with the financial statements referred to in
Section 5E and the Purchaser shall be satisfied with such financial statements.
2X. Settlement of Interim Period Liabilities and
Advances. At the Closing, the Company and the Existing Stockholders, as
appropriate, shall have paid, in cash, the Interim Settlement Amount as
provided in Section 4(iii).
2Y. Insurance. On or before September 6, 1996, the
Purchaser, the Company and the Existing Stockholders shall have mutually agreed
as to the payment and allocation of costs and risks relating to retention of
uninsured claims, as among the Company and the Existing Stockholders,
associated with insurance (including, without limitation, health, life,
accident, dental, disability, and general liability insurance), workers'
compensation, and claims that would generally be covered by such policies.
Any condition specified in this Section 2 shall be waived if consented to in
writing by the Purchaser or if the Purchaser proceeds with the Closing with
knowledge that such condition has not been satisfied.
Section 2-1. Conditions of the Company's and Existing
Stockholders' Obligations at the Closing. The obligation of the Company to
issue the Purchaser Stock and the obligation of the Existing Stockholders to
sell the Existing Stock to the Company is subject to the satisfaction as of the
Closing of the following conditions (provided, however, that the conditions set
forth in Sections 2-1P and 2-1Q shall have been satisfied on or before
September 6, 1996 and provided further that the parties shall have agreed to
the form and substance of the Transition Services Agreement on or before such
date):
2-1A. Representations and Warranties; Covenants. The
representations and warranties contained in Section 8B shall be true and
correct in all material respects at and as of Closing.
2-1B. Corporate Proceedings. The Company's Board of
Directors shall have resigned and a New Board of Directors shall have been
elected. The New Board of Directors shall have authorized the execution of the
Bank Agreement, the Subdebt Agreement, the Services Agreement, the Solvency
Certificate and the redemption of the Existing Stock from the Existing
Stockholders utilizing the proceeds from the sale of the Purchaser Stock and
the financing received pursuant to the Bank Agreement and the Subdebt
Agreement.
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<PAGE> 17
2-1C. Financing.
(i) The Company and the Bank shall have entered
into the Bank Agreement providing for loans to the Company of up to
$40.0 million, the Bank Agreement shall be in full force and effect as
of the Closing and shall not have been amended or modified, and the
Bank shall have advanced not less than $30.0 million to the Company
under the Bank Agreement.
(ii) The Company and the Subdebt Lender shall have
entered into the Subdebt Agreement providing for loans to the Company
of up to $10.0 million, the Subdebt Agreement shall be in full force
and effect as of the Closing and shall not have been amended or
modified, and the Subdebt Lender shall have advanced not less than
$5.0 million to the Company under the Subdebt Agreement.
(iii) The Purchaser shall have purchased the
Purchaser Stock and in exchange therefor paid the Purchase Price in
immediately available funds.
2-1D. Opinion of the Purchaser's Special Counsel. The
Company and the Existing Stockholders shall have received from Kirkland &
Ellis, special counsel for the Purchaser, an opinion with respect to the
matters set forth in Exhibit 2-1C attached hereto, which shall be addressed to
the Company, the Existing Stockholders and the Bank, dated the date of the
Closing and in form and substance reasonably satisfactory to the Company and
the Existing Stockholders.
2-1E. Compliance with Applicable Laws. The issuance of
Purchaser Stock to the Purchaser hereunder and the subsequent purchase by the
Company of the Existing Stock shall not be prohibited by any applicable law or
governmental rule or regulation and shall not subject the Company or the
Existing Stockholders to any material penalty, liability or, in the Company or
the Existing Stockholders' reasonable judgment, other materially onerous
condition under or pursuant to any applicable law or governmental rule or
regulation, and the issue of the Purchaser Stock to the Purchaser and the
subsequent purchase by the Company of the Existing Stock hereunder shall be
permitted by laws, rules and regulations of the jurisdictions and governmental
authorities and agencies to which the Company or the Existing Stockholders are
subject.
2-1F. Stockholders Agreement. The Company, the Purchaser,
Holding and each of the other stockholders of the Company shall have entered
into the Stockholders Agreement, and the Stockholders Agreement shall be in
full force and effect as of the Closing.
2-1G. Registration Agreement. The Company, the Purchaser,
Holding and each of the other stockholders of the Company shall have entered
into the Registration Agreement, and the Registration Agreement shall be in
full force and effect as of the Closing.
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<PAGE> 18
2-1H. Intercompany Claims. The Company and its Subsidiary
shall have executed a Release, in form and substance as set forth in Exhibit
2-1H attached hereto and such Release shall be in full force and effect at
Closing.
2-1I. Services Agreement. The Company and GTCR IV, L.P.,
an Illinois limited partnership, shall have entered into the Services
Agreement, and the Services Agreement shall be in full force and effect as of
the Closing.
2-1J. Transition Services Agreement. The Company and LC
Management Company, Inc. shall have entered into the Transition Services
Agreement, and the Transition Services Agreement shall be in full force and
effect as of the Closing.
2-1K. Environmental Report. The Environmental Report shall
not disclose environmental issues with respect to which the aggregate Adverse
Consequences are reasonably anticipated to exceed $500,000.
2-1L. Solvency Certificate. The Company shall have
delivered to the Existing Stockholders a certificate of the Company (the
"Solvency Certificate") authorized by the New Board of Directors and executed
by Bill M. Wooten and Deborah Moffett, in their capacities as Chief Executive
Officer of the Company and Chief Financial Officer of the Company,
respectively, stating that:
(i) "the Company is solvent as of the Closing
and shall not become insolvent as a result of the consummation of the
transactions contemplated by this Agreement; the Company is, and after
giving effect to the transactions contemplated by this Agreement shall
be, able to pay its debts as they become due, and the Company's
property now has, and after giving effect to the transactions
contemplated hereby shall have, a fair salable value greater than the
amounts required to pay its debts (including a reasonable estimate of
the amount of all contingent liabilities); the Company has adequate
capital to carry on its business, and after giving effect to the
transactions contemplated by this Agreement, the Company shall have
adequate capital to conduct its business; and no transfer of property
is being made and no obligation is being incurred in connection with
the transactions contemplated by this Agreement with the intent to
hinder, delay or defraud either present or future creditors of the
Company;"
(ii) attached to such certificate are true and
correct records of the proceedings of the New Board of Directors
reflecting the New Board of Directors' determination that the Company
has sufficient capital and surplus to effect the purchase of the
Existing Stock as contemplated hereby in compliance with applicable
corporate law and the Company meets the solvency and other standards
described in Section 2-1L(i) above and ratifying and approving the
execution, delivery and performance of this Agreement by the Company;
and
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<PAGE> 19
(iii) attached to such certificate is an
acknowledgment of the Purchaser to the effect that it will not in the
future dispute, and will not in the future take a position which is
inconsistent with, the Company's certifications and determinations
referenced in Sections 2-1L(i) and (ii) above.
2-1M. Company Closing Documents. The Company shall have
delivered to the Existing Stockholders all of the following documents:
(i) an officer's certificate, dated the date of
Closing, stating that the conditions specified in Sections 2-1A
through 2-1L, inclusive, have been fully satisfied;
(ii) certified copies of (a) the resolutions duly
adopted by the Company's New Board of Directors authorizing the
execution, delivery and performance of the documents and certificates
described in Section 2-1B above, and (b) the resolutions duly adopted
by the Company's then stockholders adopting the redemption of the
Existing Stock and approving the actions of the New Board of Directors
described in Section 2-1B above;
(iii) copies of all third party and governmental
consents, approvals and filings specifically required to be obtained
by Purchaser and the Company hereunder in connection with the
consummation of the transactions hereunder;
(iv) the Solvency Certificate as provided in
Section 2-1L above; and
(v) such other documents relating to the
transactions contemplated by this Agreement as the Existing
Stockholders may reasonably request.
2-1N. Thomas Care Agreement. The Company and the Existing
Stockholders shall have entered into the side letter relating to the Thomas
Care Center in the form of Exhibit 2-1N attached hereto and such agreement
shall be in full force and effect.
2-1O. Settlement of Interim Period Liabilities and
Advances. At the Closing, the Company and the Existing Stockholders, as
appropriate, shall have paid, in cash, the Interim Settlement Amount as
provided in Section 4(iii).
2-1P. Insurance. On or before September 6, 1996, the
Purchaser, the Company and the Existing Stockholders shall have mutually agreed
as to the payment and allocation of costs and risks relating to retention of
uninsured claims, as among the Company and the Existing Stockholders,
associated with insurance (including, without limitation, health, life,
accident, dental, disability, and general liability insurance), workers'
compensation, and claims that would generally be covered by such policies.
2-1Q. Financial Statements. The condition to the
Purchaser's obligation set forth in Section 5W shall have been satisfied.
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<PAGE> 20
Any condition specified in this Section 2-1 shall be waived if consented to in
writing by the Company and the Existing Stockholders or if the Company and the
Existing Stockholders proceed with the Closing with knowledge that such
condition has not been satisfied.
Section 3. Covenants.
3A. Interim Agreements of the Company and the Existing
Stockholders. The Company covenants and agrees that prior to the Closing,
unless the Purchaser agrees otherwise in writing, or as otherwise expressly
contemplated or permitted by this Agreement, the Company will conduct its
business only in, and the Existing Stockholders will cause the Company to
conduct its business only in, the ordinary course of business, in substantial
accordance with all Legal Requirements and the Company's past custom and
practice. Without limiting the generality of the preceding sentence, each such
party covenants that except as contemplated hereby:
(i) the Company will not, directly or indirectly,
(a) sell, pledge, dispose of or encumber
any of its material assets, except in the ordinary course of
business consistent with the Company's past practice,
(b) engage in any activity which would
delay the payment of its accounts payable, or reduce or
otherwise restrict the amount of supplies on hand, other than
in the ordinary course of the conduct of such business,
(c) acquire (by merger, exchange,
consolidation, acquisition of stock or assets or otherwise)
any corporation, partnership, joint venture or other business
organization or division or material assets thereof,
(d) take any action with respect to the
grant of any bonuses, salary increases, severance or
termination pay, except in the ordinary course of business
consistent with the Company's past practice,
(e) declare, set aside, or pay any
dividend or make any distribution with respect to the capital
stock of the Company or redeem, purchase, or otherwise acquire
any of the capital stock of the Company except insofar as is
necessary to effect contribution of all intercompany
liabilities owing from the Company to the Existing
Stockholders or their Affiliates to capital of the Company, to
eliminate all cash balances (other than Interim Cash) and
except for the repurchase of the Existing Stock contemplated
by Section 1 above,
(f) take any action within its control
which would render, or which could reasonably be expected to
render, any representation or warranty made by the Company or
any Existing Stockholder in this Agreement untrue at (or at
any time prior to) the Closing,
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<PAGE> 21
(g) adopt or amend any employee benefit
or welfare plan insofar as such plan relates directly to the
Company's employees other than to provide the same treatments
and benefits to the Company's employees as are applied or
extended to employees of LCA and its consolidated
subsidiaries,
(h) engage in any activity which is
intended to delay or hinder the Company's capital expenditures
and commitments with a view to, or in anticipation of a
transaction of the type contemplated by Section 3C with the
Purchaser or any other Person, or
(i) enter into or modify, or propose to
enter into or modify, any agreement, arrangement or
understanding to take any of the actions referred to in
clauses (a) through (h) above;
(ii) the Company and each Existing Stockholder
will use its best efforts to cause the Company's current insurance
policies not to be canceled or terminated, and not to permit any of
the coverage pursuant to any such policy to lapse, unless at the time
of such termination, cancellation or lapse there is in full force and
effect a replacement policy which provides coverage in an amount which
is not less than the amount of the coverage pursuant to the canceled,
terminated or lapsed policy;
(iii) the Company and each Existing Stockholder
will:
(a) use commercially reasonable efforts
to (A) preserve intact the Company's organization, (B) keep
available the services of the key employees that are employed
at the Company's facilities, (C) maintain satisfactory
relationships with the Company's material suppliers and
customers and other Persons having business relationships with
the Company, and (D) maintain the Company's facilities and
assets in their existing condition, ordinary wear and tear
excepted,
(b) upon reasonable request, confer with
representatives of the Purchaser and the Purchaser's present
and proposed financing sources regarding the Company and its
business, and
(c) notify the Purchaser of any change
in the normal course of the Company's business or in the
condition of the Company's assets and any governmental or
third party complaint, investigation or hearing (or
communication indicating that such a complaint, investigation
or hearing is or may be contemplated) if such change,
complaint, investigation or hearing could reasonably be
expected to have a Material Adverse Effect;
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<PAGE> 22
(iv) the Company and each Existing Stockholder
promptly will notify the Purchaser if it obtains knowledge that any
representation or warranty by such Party set forth in this Agreement
was untrue when made or subsequently has become untrue; and
(v) the Company and each Existing Stockholder
will permit representatives of the Purchaser and the Purchaser's
present and proposed financing sources to have full access (at
reasonable times and in a manner so as not to unreasonably interfere
with the Company's normal business operations) to all the Company's
personnel and all premises, properties, books, records, contracts, Tax
records and other documents of the Company, and will allow such
Persons to make and retain copies of such documents; provided,
however, that as a condition to obtaining such access, each such
Person shall be required to execute and deliver a customary
confidentiality agreement to the Company, in form and substance
reasonably satisfactory to Holding.
3B. Closing Conditions and Consents. Each Party hereto
agrees to use its commercially reasonable efforts to cause the conditions to
the obligations of the respective Parties set forth in Section 2 to be
satisfied and to cooperate with the other Parties in respect to obtaining
necessary governmental or third party consents required to effectuate the
transactions to be consummated at the Closing.
3C. Exclusivity. Until the Closing (or until the date of
termination of this Agreement, if sooner), each of the Company or the Existing
Stockholders will not (and will not permit any Affiliate, employee, officer,
director, shareholder, agent or other person acting on its behalf to) (i)
solicit, initiate, or encourage the submission of any proposal or offer from
any Person relating to the acquisition of any capital stock or other voting
securities, or any substantial portion of the assets, of the Company (including
any acquisition structured as a merger, consolidation, or similar
reorganization) or (ii) participate in any discussions or negotiations
regarding, furnish any information with respect to, assist or participate in,
or facilitate in any other manner any effort or attempt by any Person to do or
seek any of the foregoing. Each of the Company and the Existing Stockholders
agrees to notify the Purchaser immediately if any Person makes any proposal,
offer, inquiry, or contact with respect to any of the foregoing.
3D. Further Assurances. From and after the Closing, each
party will execute all documents and take any other action which it is
reasonably requested to execute or take to effectuate further the transactions
contemplated by this Agreement and to consummate the Merger.
3E. LCA Marks. Immediately following the Closing, the
Merger will occur pursuant to which, among other things, Company's name will be
changed to "American Habilitation Services, Inc." or another name designated by
Purchaser which does not include, and is not confusingly similar to, the words
"Living Centers." The Company will cease using the name "Living Centers" as of
the Closing. In recognition of the fact that certain of the Company's assets
have imprinted thereon the words "Living Centers" and LCA's logotype and
variations thereof, the Company shall remove, within 30 days after the Closing,
such name or logotype from, or render the
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<PAGE> 23
same illegible on, all assets of the Company on which they are imprinted or
legible or, in the alternative, shall discontinue use of such assets. Subject
to the foregoing, during the 30 day period following Closing, the Company is
granted a non-exclusive, nonassignable royalty-free license to use all assets
utilizing the words "Living Centers," and LCA's logotype and variations thereof
(the "Marks"). The Company shall not use the Marks in any way indicating or
implying that the Marks are the property of the Company. The Company shall not
create any liabilities or obligations of LCA in connection with the use of the
Marks. The Company shall not use the Marks in any manner which indicates that
the Company is in any way related to or acting on behalf of LCA or any of its
Subsidiaries. The Company shall not assert any claim of ownership of, or any
claim to, any goodwill or reputation associated with the Marks by reason of the
Company's use of the Marks pursuant to this Section 3E or otherwise. The
Company shall not take action in derogation of any of the rights of LCA in the
Marks. The Company shall maintain quality standards for all assets utilizing
the Marks that are substantially equivalent to the standards currently used by
LCA in connection with such assets.
3F. Tax Basis Information. Within 30 days after the
Closing, the Existing Stockholders will deliver to the Purchaser a complete
list of the Company's assets and an estimate of the tax basis of such assets,
dated as of the Effective Time or as of a reasonable date preceding the
Effective Time. On or before June 30, 1997, the Existing Stockholders shall
furnish the Company with a final list of the tax basis of such assets.
3G. Cooperation. Purchaser, the Company and the Existing
Stockholders shall cooperate fully, as and to the extent reasonably requested
by the other party, in connection with (i) the preparation and audit of LCA's
consolidated financial statements or the Company's financial statements, (ii)
responses with respect to regulatory matters or (iii) administration of or with
respect to litigation and other claims, in each case for any period beginning
before the Closing Date or for any date occurring before or as of the Closing
Date. Such cooperation shall include the retention and (upon the other party's
request) the provision of records and information which are reasonably relevant
to any such preparation, audit, administration and response and making
employees available on a mutually convenient basis (without unreasonably
interfering with such employees' other business activities) to provide
additional information and explanation of any material provided hereunder. The
Company and the Existing Stockholders agree to retain all books and records
with respect to the matters covered by this Section 3G pertinent to the Company
relating to any period beginning before the Closing Date or to any date
occurring before or as of the Closing Date, in each case until the seventh
anniversary of the date hereof and to give the other party reasonable written
notice prior to transferring, destroying or discarding any such books and
records and, if the other party so requests, the Company or the Existing
Stockholders, as the case may be, shall allow the other party to take
possession of such books and records.
3H. Transfer of Certain Intellectual Property. Effective
as of the Closing, the Existing Stockholders hereby assign, transfer and
deliver to the Company, as is and without warranties, and the Company hereby
acquires and receives from the Existing Stockholders, for no additional
consideration, the Habilitation Documentation Software and the Devcon Quality
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<PAGE> 24
Information System, along with all copies and tangible embodiments thereof (in
whatever form or medium) (except that any data communications equipment located
at LCA's corporate headquarters used to transmit information between the
Facilities and LCA's corporate headquarters is not included), and all income,
royalties, damages and payments due or payable as of the Closing or thereafter,
including, without limitation, damages and payments for past, present or future
infringements or misappropriations thereof, the right to sue and recover for
past infringements or misappropriations thereof and any and all corresponding
rights that, now or hereafter, may be secured throughout the world. The
Transition Services Agreement sets forth the exclusive manner in which the
agreement set forth in the preceding sentence shall be performed by the
Existing Stockholders.
3I. Delivery of Offsite Tangible Property. Within seven
days after the Closing, the Existing Stockholders will deliver to the Company,
and the Company will receive from the Existing Stockholders, all of the
following items of tangible personal property to the extent they relate to the
Company and are currently located at LCA's corporate headquarters or at any
other location other than a Facility: all (i) minute books and stock record
books, (ii) records and other information pertaining to customers, suppliers
and employees, (iii) permits, licenses, certifications and approvals from all
permitting, licensing, accrediting and certifying agencies, (iv) leases,
contracts, and other agreements, (v) purchasing and sales records, accounting
records, tax or financial records, risk management records, and (vi) other
tangible property of any kind owned by the Company or its Subsidiaries.
3J. Release of Guarantees, etc. The Company shall use
commercially reasonable efforts to cause (and, in any event, by the 90th day
following the Closing, shall cause) the Existing Stockholders and their
Affiliates (other than the Company and its Subsidiaries) to be released and
discharged from the G.E. Capital vehicle leases and the Xerox machine leases
described on Schedule 7A-Liens to the extent such leases relate to, or are for
the benefit of, the Company or its Subsidiaries and the Existing Stockholders
or such Affiliates are directly or contingently liable with respect to such
leases for periods from and after the Closing. Such commercially reasonable
efforts shall include, without limitation, posting security in reasonable
amounts and executing reasonable financial assurances in favor of G.E. Capital
or Xerox, as the case may be.
Section 4. Certain Covenants between Effective Time and
Closing.
(i) During the period between the Effective Time
and the Closing (the "Interim Period"), the Company will be operated
on behalf of, and for the account of, the Purchaser, rather than the
Existing Stockholders. In connection therewith, the Company shall
maintain separate cash accounts into which all cash (the "Interim
Cash") arising from the operations of the Company and its Subsidiaries
will be placed and from which the only disbursements will be in
connection with the discharge of ordinary course liabilities and
obligations of the Company (including, but not limited to, overhead
charges in accordance with past custom and practice (including,
without limitation, expenses and obligations that were previously paid
or accrued at the LCA corporate level in behalf of the Company) and
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<PAGE> 25
Interim Period Liabilities in accordance with past custom and
practice). These accounts are referred to collectively as the "Interim
Cash Accounts." The Existing Stockholders shall keep an accurate and
complete memo account of the Interim Period Cash Account. In addition
to the other covenants contained in this Agreement, the Existing
Stockholders and the Company covenant and agree that during the Interim
Period, unless the Purchaser agrees otherwise in writing, the Company
will, and the Existing Stockholders will cause the Company to:
(a) promptly inform the Purchaser of any
significant issues and/or decisions relating to the Company
and its Subsidiaries;
(b) obtain the Purchaser's approval
(which approval shall not be unreasonably withheld or delayed)
of each of the Company's and its Subsidiaries' disbursements
out of the Interim Cash Accounts and each of the Company's and
its Subsidiaries' commitments in excess of $10,000, other than
(A) disbursements approved of or committed to prior to the
date hereof and (B) disbursements of amounts accrued as
current liabilities in the calculation of Actual Working
Capital;
(c) notify the Purchaser of any change
in the normal course of the Company's business or in the
condition of the Company's assets or of any governmental or
third party complaint, investigation or hearing of which the
Existing Stockholders have knowledge (or communication
indicating that such a complaint, investigation or hearing is
or may be contemplated);
(d) not, directly or indirectly, sell,
pledge, dispose of or encumber any of its assets, except in
the ordinary course of business consistent with the Company's
past practice,
(e) not, directly or indirectly, take
any action with respect to the grant of any bonuses, salary
increases, severance or termination pay (except for salary
increases, severance or termination pay made in the ordinary
course of business consistent with the Company's past
practice); and
(f) not, directly or indirectly,
declare, set aside, or pay any dividend or make any
distribution with respect to its capital stock or redeem,
purchase, or otherwise acquire any of its capital stock,
except in payment of the Repurchase Price, in connection with
the distribution of the Excluded Assets and Liabilities, and
except to the extent necessary to pay intercompany charges
attributable to disbursements in connection with the discharge
of ordinary course liabilities and obligations of the Company
(including, but not limited to, overhead charges in accordance
with past custom and practice).
(ii) The Purchaser, the Company and the Existing
Stockholders agree that all liabilities, expenses and obligations
incurred with respect to the Interim Period, and all
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<PAGE> 26
risk of loss or damage during the Interim Period, associated with the
Company's or its Subsidiaries' business, their activities, their
employees, and/or their assets or properties (the "Interim Period
Liabilities") shall be borne by the Company. To the extent that the
Existing Stockholders or their Affiliates (except the Company or its
Subsidiaries) become or are directly or indirectly liable for or
otherwise suffer or pay any Interim Period Liabilities, the Company
agrees that it will promptly upon request, without offset or deduction
for any claim hereunder or otherwise, pay all such Interim Period
Liabilities or reimburse the Existing Stockholders or such Affiliates
for any such payments that they make to the extent that Interim Period
Liabilities have not been paid pursuant to Section 4(iii) below.
Without limiting the foregoing, Interim Period Liabilities include (i)
any liabilities for any claims or occurrences during the Interim Period
with respect to matters covered by health, life, dental, casualty or
other insurance coverage of the type listed on Exhibit 7A-Exceptions to
GAAP provided through any of the Existing Stockholders or their
Affiliates (whether on a self-insured basis or otherwise), (ii)
employee payroll, withholding, bonus and benefit payments or
liabilities with respect to employees of the Company or its
Subsidiaries, (iii) all liabilities under vehicle leases as to vehicles
operated by the Company and supplies provided under any master supply
arrangement to the Company or the Subsidiary with respect to the
Interim Period. Notwithstanding the foregoing, nothing in this
paragraph shall be construed to limit or impair, or create any right of
setoff or counterclaim with respect to, any claim the Company may make
as a Purchaser Indemnified Party or Seller Indemnified Party against
any party hereto pursuant to this Section 6.
(iii) During the Interim Period, the Existing
Stockholders shall provide the Purchaser with a list of disbursements
to be made from the Interim Cash Account (or made as advances by the
Existing Stockholders on behalf of the Company) to satisfy liabilities
and expenses referenced in Section 4(i) above. Immediately prior to
the Closing, the Existing Stockholders shall provide a statement
listing the amount of Interim Cash deposited in, and disbursements
made from, the Interim Cash Accounts and liabilities and expenses
referenced in Section 4(i) above as to which no disbursements have
been made. To the extent that such statement reflects that the amount
of Interim Cash deposited exceeds the sum of such disbursements made,
such liabilities and expenses, the Interim Tax Amount (as defined
below) and the Prepaid Rent Amount (as defined below), the Company
will retain such excess and the Existing Stockholders will be entitled
to all amounts not so retained; to the extent that such statement
reflects that the amount of Interim Cash deposited is less than such
sum of disbursements made, liabilities and expenses, the Interim Tax
Amount and the Prepaid Rent Amount, then the Company shall pay to the
Existing Stockholders the amount of such deficiency at the Closing.
The amount of such excess or deficiency shall be referred to herein as
the "Interim Settlement Amount." The term "Interim Tax Amount" means
an amount equal to 25% of the excess (to the extent positive) of (A)
the amount of Interim Cash deposited in the Interim Cash Accounts in
the Interim Period, over (B) the sum of (x) the disbursements made
from the Interim Cash Accounts during the Interim Period and (y) the
liabilities and expenses referenced in Section 4(i) above (other than
contingent liabilities) with respect to the Interim Period as to which
no disbursements have been made. The Prepaid Rent Amount shall mean
lease payments made on behalf of the Company in the
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<PAGE> 27
amount of $132,562.62. LCA will pay and hold the Company harmless with
respect to the payroll payments due to the Company's and its
Subsidiary's employees on Wednesday September 4, 1996 (without limiting
the generality of the foregoing, the Interim Cash Account will not be
reduced by the amount of such payment). The preceding sentence will not
apply to any other payroll payments made during the Interim Period.
Section 5. Representations and Warranties. The Company
and the Existing Stockholders hereby jointly and severally represent and
warrant that:
5A. Organization, Corporate Power and Licenses. The
Company is a corporation duly organized, validly existing and in good standing
under the laws of the State of Florida and is qualified to do business in every
jurisdiction in which the failure to so qualify has had or would reasonably be
expected to have a Material Adverse Effect. The Company possesses all
requisite corporate power and authority and, except as to licenses, permits and
authorizations as to matters of the type described in Sections 5J, 5P, 5Q, 5S
and/or 5V, all material licenses, permits and authorizations necessary to own
and operate its properties, to carry on its businesses as now conducted and to
carry out the transactions contemplated by this Agreement (assuming approval of
such transactions by the New Board of Directors). The copies of the Company's
charter documents and Bylaws, which have been furnished to the Purchaser's
special counsel, reflect all amendments made thereto at any time prior to the
date of this Agreement and are correct and complete.
5B. Capital Stock and Related Matters.
(i) The authorized capital stock of the Company
consists of 1,000 shares of Common Stock, par value $1.00 per share,
all of which are issued and outstanding and owned beneficially and of
record by Holding. As of the Closing, the Company and each Subsidiary
shall not have outstanding any stock or securities convertible or
exchangeable for any shares of its capital stock or containing any
profit participation features, nor shall it have outstanding any
rights or options to subscribe for or to purchase its capital stock or
any stock or securities convertible into or exchangeable for its
capital stock or any stock appreciation rights or phantom stock plans,
except as set forth in the Equity Agreements. As of the Closing, the
Company and each Subsidiary shall not be subject to any obligation
(contingent or otherwise) to repurchase or otherwise acquire or retire
any shares of its capital stock or any warrants, options or other
rights to acquire its capital stock, except as contemplated by this
Agreement. All of the outstanding shares of the Company's and each
Subsidiary's capital stock are validly issued, fully paid and
nonassessable.
(ii) Except as contemplated by this Agreement,
there are no statutory or contractual stockholders preemptive rights
or rights of refusal with respect to the issuance of the Purchaser
Stock hereunder. The Company has not violated any applicable federal
or state securities laws in connection with the offer, sale or
issuance of any of its capital stock, and the offer, sale and issuance
of the Purchaser Stock hereunder do not require registration under the
Securities Act or any applicable state securities laws (assuming that
the Purchaser's
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<PAGE> 28
representations and warranties set forth herein are true and correct).
There are no agreements between the Existing Stockholders with respect
to the voting or transfer of the Company's or any Subsidiary's capital
stock or with respect to any other aspect of the Company's or any
Subsidiary's affairs, except as set forth in this Agreement.
(iii) Holding is the record and beneficial owner
and has good title to, the Existing Stock to be repurchased by the
Company hereunder. Immediately following the Closing, Holding will
have conveyed to the Company good title to all of such Existing Stock,
free and clear of all Liens, claims and encumbrances of any nature
whatsoever. The execution, delivery and performance of this Agreement
by such Existing Stockholder does not conflict or result in a breach
of any of the terms or provisions of, or constitute a default under,
any material contract, agreement or instrument to which such Existing
Stockholder is a party or by which such Existing Stockholder is bound.
5C. Subsidiaries; Investments. The attached Schedule
5C-Subsidiaries correctly sets forth the name of each Subsidiary the Company
has ever had, the jurisdiction of its incorporation and the Persons owning the
outstanding capital stock of such Subsidiary. Each Subsidiary is duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization and is qualified to do business in every
jurisdiction in which the failure to so qualify has had or would reasonably be
expected to have a Material Adverse Effect. Each Subsidiary possesses all
requisite corporate power and authority and, except as to licenses, permits and
authorizations as to matters of the type described in Sections 5J, 5P, 5Q, 5S
and/or 5V, all material licenses, permits and authorizations necessary to own
and operate its properties, to carry on its businesses as now conducted and to
carry out the transactions contemplated by this Agreement. The copies of each
Subsidiary's charter documents and bylaws, which have been furnished to the
Purchaser's special counsel, reflect all amendments made thereto at any time
prior to the date of this Agreement and are correct and complete.
5D. Authorization; No Breach.
(i) The execution, delivery and performance of
this Agreement, the amendment of the Articles of Incorporation and the
amendment of the Company's Bylaws have been duly authorized by the
Company. This Agreement constitutes a valid and binding obligation of
the Company, enforceable in accordance with its terms (assuming, for
purposes of this sentence, that this Agreement constitutes a valid and
binding obligation of each other party hereto and thereto, enforceable
in accordance with its terms). Assuming, for purposes of this
sentence that this Agreement provided for the sale of Existing Stock
by Holding to the Purchaser rather than the issuance of Purchaser
Stock by the Company to the Purchaser and the repurchase of the
Existing Stock by the Company from Holding, the execution and delivery
by the Company of this Agreement, the amendment of the Articles of
Incorporation and the Company's Bylaws and the fulfillment of and
compliance with the respective terms hereof and thereof by the
Company, would not (i) conflict with or result in a breach of the
terms, conditions or provisions of, (ii) constitute a default under,
(iii) result in the creation
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<PAGE> 29
of any lien, security interest, charge or encumbrance upon the
Company's capital stock or assets pursuant to, (iv) give any third
party the right to modify, terminate or accelerate any obligation
under, (v) result in a violation of, or (vi) except in connection with
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
and, except as to matters of the type addressed in Sections 5J, 5P,
5Q, 5S and/or 5V, require any authorization, consent, approval,
exemption or other action by or notice or declaration to, or filing
with, any court or administrative or governmental body or agency
pursuant to, the charter or Bylaws of the Company or any law, statute,
rule or regulation to which the Company is subject, or any material
agreement or instrument, order, judgment or decree to which the
Company is subject.
(ii) The execution, delivery and performance of
this Agreement and all other agreements contemplated hereby to which
either Existing Stockholder is a party have been duly authorized by
such Existing Stockholder. This Agreement and all other agreements
contemplated hereby to which either Existing Stockholder is a party
each constitutes a valid and binding obligation of such Existing
Stockholder, enforceable in accordance with its terms (assuming, for
purposes of this sentence, that each such agreement constitutes a
valid and binding obligation of each other party hereto and thereto,
enforceable in accordance with its terms). Assuming, for purposes of
this sentence that this Agreement provided for the sale of Existing
Stock by Holding to the Purchaser rather than the issuance of
Purchaser Stock by the Company to the Purchaser and the repurchase of
the Existing Stock by the Company from Holding, the execution and
delivery by each Existing Stockholder of this Agreement and all other
agreements contemplated hereby to which either Existing Stockholder is
a party, and the fulfillment of and compliance with the respective
terms hereof and thereof by each Existing Stockholder, would not (i)
conflict with or result in a breach of the terms, conditions or
provisions of, (ii) constitute a default under, (iii) result in the
creation of any lien, security interest, charge or encumbrance upon
either Existing Stockholder's capital stock or assets pursuant to,
(iv) give any third party the right to modify, terminate or accelerate
any obligation under, (v) result in a violation of, or (vi) except in
connection with the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended and, except as to matters of the type addressed in
Sections 5Q and/or 5V, require any authorization, consent, approval,
exemption or other action by or notice or declaration to, or filing
with, any court or administrative or governmental body or agency
pursuant to, the charter or bylaws of either Existing Stockholder or
any law, statute, rule or regulation to which either Existing
Stockholder is subject, or any material agreement or instrument,
order, judgment or decree to which either Existing Stockholder is
subject.
5E. Financial Statements. On or before September 6,
1996, there will be attached hereto as Schedule 5E - Financial Statements the
following financial statements:
(i) the unaudited balance sheets of the Company
as of September 30, 1995 and the related operating statements for the
twelve-month period then ended; and
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<PAGE> 30
(ii) the unaudited balance sheet of the Company as
of June 30, 1996 (the "Latest Balance Sheet"), and the related
operating statements for the nine-month period then ended.
Each of the foregoing financial statements has been prepared from the books and
records of account of the Company in conformity with the Company's prior
accounting practices on a consistent basis, and is in substantial accordance
with GAAP, subject to the absence of footnote disclosure and such other
qualifications as are described on the attached Schedule 5E - Financial
Statements, and, subject to the absence of footnote disclosure and such other
qualifications as are described on the attached Schedule 5E - Financial
Statements, is fairly stated or is true and correct in all material respects,
reflects accurately in all material respects the books and records of account
for the Company as of such dates and for such periods, and presents the
financial condition at such dates and results of operations of the Company for
the periods then ended. The Latest Balance Sheet additionally has been
adjusted on a pro forma basis to reflect the exclusion of the Excluded Assets
and Liabilities. In addition, LCA will furnish to the Purchaser on or before
September 6, 1996 copies of the internal trial balances for the Facilities as
of September 30, 1994 and the Devcon Area detailed operating statements for the
years ending September 30, 1993 and 1994. The trial balances described
properly and fairly reflect the transactions of the Facilities (except for the
items as set forth on the attached Schedule 5E - Financial Statements) for the
periods described above and have been produced from the books and records of
account of the Facilities on a consistent basis in accordance with LCA's past
accounting and reporting practices.
5F. Absence of Undisclosed Liabilities. Except as set
forth on the attached Schedule 5F - Liabilities, neither the Company nor any
Subsidiary has any obligation or liability that would be of a type required to
be reflected on a balance sheet (or in a note thereto) prepared in accordance
with GAAP other than: (i) liabilities set forth on the Latest Balance Sheet
(including any notes thereto), (ii) liabilities and obligations of the type set
forth on the Latest Balance Sheet which have arisen after the date of the
Latest Balance Sheet in the ordinary course of business (none of which is a
material liability resulting from breach of contract, breach of warranty, tort,
infringement, claim or lawsuit) and (iii) other liabilities and obligations
expressly disclosed in the other Schedules to this Agreement.
5G. No Material Adverse Change. Except as set forth on
the attached Schedule 5G - Adverse Change, since the date of the Latest Balance
Sheet, there has been no Material Adverse Change (other than changes in general
economic conditions or general changes similarly affecting similarly situated
participants in the Company's industry).
5H. Absence of Certain Developments. Except as expressly
contemplated by this Agreement or as set forth on the attached Schedule 5H -
Developments, since June 30, 1996 (and, with respect to items (v), (vii),
(viii), (ix), (x) and (xiv) below, since March 31, 1996), neither the Company
nor any Subsidiary has:
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<PAGE> 31
(i) engaged in any activity which accelerated the
collection of its accounts or notes receivable, delayed the payment of
its accounts payable, or reduced or otherwise restricted the amount of
supplies on hand, other than in the ordinary course of the conduct of
such business;
(ii) issued any notes, bonds or other debt securities or
any capital stock or other equity securities or any securities
convertible, exchangeable or exercisable into any capital stock or
other equity securities;
(iii) borrowed any amount or incurred or become subject to
any material liabilities, except liabilities incurred in the ordinary
course of business and liabilities under contracts entered into in the
ordinary course of business and except for Indebtedness that will be
discharged by the Existing Stockholders at the Closing;
(iv) discharged or satisfied any material Lien or paid any
material obligation or liability (other than as contemplated by this
Agreement), other than liabilities paid in the ordinary course of
business;
(v) declared or made any payment or distribution of
property (other than cash) or Interim Cash to its stockholders with
respect to its capital stock or other equity securities or purchased
or redeemed any shares of its capital stock or other equity securities
(including, without limitation, any warrants, options or other rights
to acquire its capital stock or other equity securities);
(vi) mortgaged or pledged any of its properties or assets
or subjected them to any material Lien, except Permitted Liens for
current property taxes not yet due and payable;
(vii) sold, assigned or transferred any of its assets or
canceled any debts or claims, except in the ordinary course of
business;
(viii) suffered any extraordinary losses or waived any
rights of material value, whether or not in the ordinary course of
business or consistent with past practice;
(ix) made capital expenditures or commitments therefor
that aggregate in excess of $50,000, except for capital expenditures
in substantial accordance with the Company's capital expenditure
budget and replacement programs (as in effect on March 31, 1996);
(x) engaged in any activity which was intended to delay
or hinder the Company's capital expenditures and commitments with a
view to, or in anticipation of, a transaction of the type contemplated
by Section 3C with the Purchaser or any other Person;
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<PAGE> 32
(xi) made any loans or advances to, guarantees for the
benefit of, or any Investments in, any Persons in excess of $50,000 in
the aggregate (except for those which will be discharged or released
at or prior to the Closing);
(xii) made any charitable contributions or pledges in
excess of $10,000 in the aggregate;
(xiii) made any Investment in or taken steps to incorporate
any Subsidiary; or
(xiv) entered into any other material transaction other
than in the ordinary course of business.
Included with the attached Schedule 5G - Adverse Change is a statement of
amounts expended by LCA and its Subsidiaries during the current fiscal year
with respect to the Company and its Subsidiaries and charged to the Company's
fixed asset additions account.
5I. Assets. Except as set forth on the attached Schedule
5I - Assets, the Company and each Subsidiary has good title to, or a valid
leasehold interest in, the material properties and assets used by it or shown
on the Latest Balance Sheet or acquired thereafter, free and clear of all Liens
other than Permitted Liens, except for (i) such properties and assets disposed
of in the ordinary course of business since the date of the Latest Balance
Sheet, (ii) Liens disclosed on the Latest Balance Sheet (including any notes
thereto), (iii) Liens for current property taxes not yet due and payable and
(iv) assets owned by the Existing Stockholders or their Affiliates which will
be made available to the Company pursuant to, and for the period provided in,
the Transition Services Agreement. Except to the extent addressed by Section
5U and except as described on Schedule 5I - Assets, the Company's and each
Subsidiary's material equipment and other material tangible assets are suitable
in condition and repair for their current use in all material respects, subject
to the provision of usual and customary maintenance provided in the ordinary
course of business with respect to assets of like nature, age, usage and
construction. Except as set forth on the attached Schedule 7A - Liens, the
Company and each Subsidiary owns, or have a valid leasehold interest in, all
material assets necessary for the conduct of its business as presently
conducted (except for assets owned by the Existing Stockholders or their
Affiliates which will be made available to the Company pursuant to, and for the
periods provided in, the Transition Services Agreement).
5J. Tax Matters.
(i) Except as set forth on the attached Schedule 5J -
Taxes, (A) the Company and each Subsidiary has filed all Tax Returns
which it is required to file under applicable laws and regulations,
all such Tax Returns are complete and correct and have been prepared
in compliance with all applicable laws and regulations; (B) each
Affiliated Group has timely filed all income Tax Returns (in which the
Company or any Subsidiary is includable) required to be filed with
respect to each taxable period during which the Company or any
Subsidiary was a member of the Affiliated Group, each such income Tax
Return has been
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<PAGE> 33
prepared in compliance with all applicable laws and regulations, in
all respects insofar as such income Tax Returns relate to the Company
and the Subsidiaries; (C) the Company and each Subsidiary has paid all
Taxes due and owing by it (whether or not such Taxes are required to
be shown on a Tax Return) and has withheld and paid over to the
appropriate taxing authority all Taxes which it is required to
withhold from amounts paid or owing to any employee, stockholder,
creditor or other third party; (D) all Taxes (for which the Company or
any Subsidiary may have any liability either directly or pursuant to
Treasury Regulation Section 1.1502-6 (and any similar provision of
state, local or foreign law)) due and payable by each Affiliated Group
with respect to each taxable period during which the Company or a
Subsidiary was a member of the Affiliated Group have been paid; (E)
neither the Company, nor any Subsidiary has waived any statute of
limitations with respect to any Taxes or agreed to any extension of
time with respect to any Tax assessment or deficiency and LCA has not
waived any statute of limitations or agreed to any extension of time
with respect to any Tax assessment or deficiency with respect to any
consolidated, combined or unitary Tax Return (in which the Company or
any Subsidiary is includable) filed by it during a period in which
either the Company or any Subsidiary was a member of LCA's Affiliated
Group; (F) the federal income Tax Returns of the Company and each
Subsidiary and the consolidated federal income Tax Return of LCA's
Affiliated Group have been audited or are closed for all tax years
through 1995; (G) no foreign, federal, state or local tax audits or
administrative or judicial proceedings are pending or being conducted
with respect to the Company or any Subsidiary; (H) no information
related to Tax matters has been requested in writing by any foreign,
federal, state or local taxing authority and no written notice
indicating an intent to open an audit or other review has been
received by the Company or any Subsidiary from any foreign, federal,
state or local taxing authority; and (I) no claim has ever been made
by a taxing authority in a jurisdiction where the Company or any
Subsidiary does not file Tax Returns that the Company or such
Subsidiary is or may be subject to Taxes assessed by such
jurisdiction.
(ii) The Company and each Subsidiary has not made an
election under IRC Section 341(f).
(iii) There are no liens for Taxes (other than for current
Taxes not yet due and payable) upon the assets of the Company or any
Subsidiary.
(iv) The Company and each Subsidiary will not be required
to include any amount in taxable income or exclude any item of
deduction or loss from taxable income for any taxable period (or
portion thereof) ending after the Closing Date (A) as a result of a
change in method of accounting for a taxable period ending on or prior
to the Closing Date, (B) as a result of any "closing agreement," as
described in IRC Section 7121 (or any corresponding provision of
state, local or foreign income Tax law) entered into on or prior to
the Closing Date, and (C) as a result of any sale reported on the
installment method where such sale occurred on or prior to the Closing
Date.
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(v) The Company and each Subsidiary has no obligation or
liability for the payment of Taxes of any other person, including but
not limited to the following, a liability of the Company or any
Subsidiary for the payment of any Tax arising (A) as a result of being
(or ceasing to be) a member of any Affiliated Group (other than the
Affiliated Group of which LCA is the common parent), or being included
(or required to be included) in any Tax Return relating thereto, (B)
as a result from any expressed or implied obligation to indemnify
another person, and (C) as a result from the Company assuming or
succeeding to the Tax liability of any other person as a successor,
transferee or otherwise.
(vi) The Company and each Subsidiary is not a party to or
bound by any Tax allocation or Tax sharing agreement and has no
current or potential contractual obligation to indemnify any other
person with respect to Taxes.
(vii) The Company and each Subsidiary is not and will not
become obligated (under any contract entered into on or before the
Closing Date) to make any payments, that will be non-deductible under
IRC Section 280G (or any corresponding provision of state, local or
foreign income Tax law).
(viii) The Company and each Subsidiary is a member of an
Affiliated Group that (A) includes LCA and Holding, (B) files a
consolidated federal income Tax Return and (C) has LCA as the parent
corporation.
5K. Contracts and Commitments.
(i) Except (i) as expressly contemplated by this
Agreement (ii) as set forth on the attached Schedule 5K - Contracts,
Schedule 5Q - Employee Benefits or Schedule 5U - Real Property, (iii)
for agreements which were contained in the facility files in the data
room at LCA's headquarters on June 19 and 20, 1996, the originals of
which will be delivered by LCA to the Company pursuant to Section 3I
(the "Facility File Contracts"), (iv) agreements provided to
Purchaser's special counsel through the date hereof, indices of which
are attached as Schedule 5K(iv)-Supplemental Contracts and (v) for
agreements which are terminable by the Company upon 90 days or less
notice without penalty or not otherwise material, neither the Company
nor any Subsidiary is a party to or bound by any written or oral:
(a) pension, profit sharing, stock
option, employee stock purchase or other plan or arrangement
providing for deferred or other compensation to employees or
any other employee benefit plan or arrangement, or any
collective bargaining agreement or any other contract with any
labor union, or severance agreements, programs, policies or
arrangements;
(b) contract for the employment of any
officer, individual employee or other Person on a full-time,
part-time, consulting or other basis
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<PAGE> 35
providing annual compensation in excess of $50,000 or contract
relating to loans to officers, directors or Affiliates;
(c) contract under which the Company or
any Subsidiary has advanced or loaned any other Person amounts
in the aggregate exceeding $50,000;
(d) agreement or indenture relating to
Indebtedness (other than borrowed money) in amounts in excess
of $50,000, any agreement or indenture relating to borrowed
money, or the mortgaging, pledging or otherwise placing a Lien
on any material asset or material group of assets of the
Company or any Subsidiary except for, in any case,
Indebtedness that will be discharged by the Existing
Stockholders at the Closing;
(e) guarantee of any obligation, other
than those to be released at or prior to the Closing;
(f) lease or agreement under which the
Company or any Subsidiary is lessee of or holds or operates
any property, real or personal, owned by any other party,
except for any lease of real or personal property under which
the aggregate annual rental payments do not exceed $50,000;
(g) lease or agreement under which the
Company or any Subsidiary is lessor of or permits any third
party to hold or operate any property, real or personal, owned
or controlled by the Company or any Subsidiary;
(h) contract or group of related
contracts with the same party or group of affiliated parties
the performance of which involves consideration in excess of
$50,000;
(i) assignment, license, indemnification
or agreement with respect to any intangible property
(including, without limitation, any Intellectual Property);
(j) any warranty agreement with respect
to its services rendered or its products sold or leased;
(k) agreement under which it has granted
any Person any registration rights (including, without
limitation, demand and piggyback registration rights);
(l) distribution or franchise agreement;
(m) contract or agreement expressly
prohibiting it from freely engaging in any business or
competing anywhere in the world; or
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<PAGE> 36
(n) any other agreement which involves a
consideration in excess of $50,000 annually.
(ii) Those Facility File Contracts which if
canceled or terminated could reasonably be expected to materially
impair the business of the Company or the Company's ability to provide
necessary services to a significant number of its patients or hinder
the Company's compliance with Legal Requirements, and all of the
contracts, agreements and instruments set forth on Schedule 5K -
Contracts, are referred to collectively as the "Applicable Contracts."
The Applicable Contracts are valid, binding and enforceable against
the Company in accordance with their respective terms. The Company
has performed all material obligations required to be performed by it
under the Applicable Contracts and is not, except as set forth on
Schedule 5K - Contracts, in material default under or in breach of nor
in receipt of any written claim of material default or breach under
any Applicable Contract; to the Existing Stockholders' knowledge, no
event has occurred which with the passage of time or the giving of
notice or both would result in a material default or breach by the
Company or any Subsidiary under any Applicable Contract; to the
Existing Stockholders' knowledge, there is no breach or anticipated
breach by the other parties to any Applicable Contract.
(iii) The Purchaser's special counsel has been
supplied with a true and correct copy of each of the written
instruments, plans, contracts and agreements and an accurate
description of each of the oral arrangements, contracts and agreements
which are referred to on Schedule 5K - Contracts, together with all
amendments, waivers or other changes thereto.
5L. Intellectual Property Rights. Except for the use of
the LCA mark, the name "Living Centers" or "Living Centers of America," the use
of the computerized information services used by the LCA group and the use of
the Habilitation Documentation Software and the Quality Information System,
neither the Company nor any Subsidiary owns or uses any material Intellectual
Property Rights. To the Existing Stockholders' knowledge, the conduct of the
Company's and its Subsidiaries' business has not infringed, misappropriated or
conflicted with and does not infringe, misappropriate or conflict with any
Intellectual Property Rights or other rights of other Persons.
5M. Litigation, etc. Except as set forth on the attached
Schedule 5M - Litigation, there are no (i) actions, suits, proceedings, orders
or claims pending or, to the Existing Stockholders' knowledge, threatened or
(ii) to the Existing Stockholders' knowledge, any investigations pending or
threatened, against or affecting the Company or any Subsidiary (or to the
Existing Stockholders' knowledge, pending or threatened against or affecting
any of the officers, directors or employees of the Company or any Subsidiary
with respect to its business or proposed business activities) at law or in
equity, or before or by any governmental department, commission, board, bureau,
agency or instrumentality (including, without limitation, any actions, suit or
proceedings with respect to the transactions contemplated by this Agreement)
which are not covered by insurance or described in Schedule 5V-Healthcare; the
Company and each Subsidiary is not subject to any arbitration
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<PAGE> 37
proceedings under collective bargaining agreements or otherwise or, to the
Existing Stockholders' knowledge, any governmental investigations or inquiries
not described in Schedule 5V-Healthcare.. The Company and each Subsidiary is
not subject to any judgment, order or decree of any court or other governmental
agency.
5N. Brokerage. Except as set forth on the attached
Schedule 5N - Brokerage, there are no claims for brokerage commissions,
finders' fees or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or agreement binding
upon the Company, any Subsidiary or either Existing Stockholder. The Existing
Stockholders shall pay, and hold the Purchaser, the Company and each Subsidiary
harmless against, any liability, loss or expense (including, without
limitation, reasonable attorneys' fees and out-of-pocket expenses) arising in
connection with any claim by, through or under the Company or the Existing
Stockholders.
5O. Insurance. The attached Schedule 5O - Insurance
contains a description of each insurance policy or program maintained on behalf
of the Company and each Subsidiary with respect to its properties, assets and
businesses, and each such policy or program is in full force and effect
immediately prior to the Closing. The Company and each Subsidiary is not in
default with respect to its obligations under any insurance policy maintained
by it. Except as set forth on Schedule 5O - Insurance, the Company and each
Subsidiary does not have any self-insurance or co- insurance programs, and the
reserves maintained by the Existing Stockholders on behalf of the Company and
its Subsidiaries are adequate to cover all anticipated liabilities of the
Company and its Subsidiaries to the Closing Date with respect to any such
self-insurance or co-insurance programs.
5P. Employees. Except as set forth on the attached
Schedule 5P - Employees, the Company is not aware that any of Johnny Creager,
Betsy Garner or Linda Mabile or any group of employees of the Company or any
Subsidiary has any plans to terminate employment with the Company or such
Subsidiary. The Company and each Subsidiary has complied in all material
respects with all laws relating to the employment of labor (including, without
limitation, provisions thereof relating to wages, hours, equal opportunity,
collective bargaining and the payment of social security and other taxes), and
neither the Company, any Subsidiary, nor any Existing Stockholder is aware that
the Company or any Subsidiary has any union organization activities, threatened
or actual strikes or work stoppages or material grievances. Except as set
forth on the attached Schedule 5P - Employees, the Company and each Subsidiary
is not subject to any noncompete, nondisclosure, confidentiality, employment,
consulting or similar agreements relating to, affecting or in conflict with the
present business activities of the Company or any Subsidiary, except for
agreements between the Company or any Subsidiary and its present and former
employees. The Company possesses all material licenses, permits and
authorizations concerning employee matters (if any) necessary to carry on its
businesses as now conducted and to carry out the transactions contemplated by
this Agreement. Assuming, for purposes of this sentence that this Agreement
provided for the sale of Existing Stock by Holding to the Purchaser rather than
the issuance of Purchaser Stock by the Company to the Purchaser and the
repurchase of the Existing Stock by the Company from Holding, then with respect
of employee matters, the execution and delivery by the Company of this
Agreement, the amendment of the Articles of Incorporation and the Company's
Bylaws and the
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fulfillment of and compliance with the respective terms hereof and thereof by
the Company, would not require any authorization, consent, approval, exemption
or other action by or notice or declaration to, or filing with, any court or
administrative or governmental body or agency pursuant to any law, statute,
rule or regulation to which the Company is subject, or any material agreement
or instrument, order, judgment or decree to which the Company is subject.
5Q. ERISA.
(i) Schedule 5Q - Employee Benefits sets forth
all of the bonus, deferred and incentive compensation, profit sharing,
retirement, vacation, sick leave, leave of absence, hospitalization,
severance, and fringe benefit plans, all "employee pension benefit
plans" (as defined in Section 3(2) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")) and all "employee welfare
benefit plans" (as defined in Section 3(1) of ERISA) which the Company
or any Subsidiary maintains, to which the Company or any Subsidiary
contributes or has an obligation to contribute, or with respect to
which the Company or any Subsidiary has any liability or reasonable
expectation of liability, whether or not any such plan has terminated
and whether or not any such plan is or was maintained or contributed
to by any current or former member of the Company's Controlled Group
(within the meaning of Section 414 of the IRC) (the "Plans") during
the six-year period immediately preceding the Closing Date. None of
the Plans (i) is subject to Title IV of ERISA or the minimum funding
requirements of Section 412 of the IRC or Section 302 of ERISA, (ii)
is a plan of the type described in Section 4063 of ERISA or Section
413(c) of the IRC, (iii) is a "multiemployer plan" (as defined in
Section 3(37) of ERISA), (iv) provides for medical or life insurance
benefits to current or future retired or former employees of the
Company or any Subsidiary (other than as required under IRC Section
4980B or applicable state law), or (v) obligates the Company or any
Subsidiary to pay any severance or similar benefit solely as a result
of a change in control or ownership within the meaning of Section 280G
of the IRC.
(ii) Each Plan is, in all material respects, in
compliance, and has been administered, maintained and funded in all
material respects in accordance, with the applicable provisions of
ERISA and the IRC and all other applicable laws, rules and
regulations, including, but not limited to, medical continuation under
IRC Section 4980B. None of the Company, any Controlled Group member,
any fiduciary or any other person has, other than in an immaterial
respect, with respect to any Plan, (i) engaged in any transaction
prohibited by ERISA, the IRC or other applicable law; (ii) breached
any fiduciary duty owed by it; or (iii) failed to file and distribute
timely and properly all reports and information required to be filed
or distributed in accordance with ERISA or the IRC. There are also
no pending or, to the Existing Stockholders' knowledge, threatened,
actions, suits, investigations or claims with respect to any Plan
(other than routine claims for benefits) which could reasonably be
expected to result in liability to the Company or any Subsidiary.
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<PAGE> 39
(iii) All contributions or premiums which are due
on or before the Closing Date with respect to the Plans have been
timely, or will have been prior to the Closing Date, paid.
(iv) Each Plan which is intended to be qualified
under section 401(a) of the IRC (i) has been timely amended to reflect
all requirements of the Tax Reform Act of 1986 ("TRA 86") and all
subsequent legislation which is required to be adopted prior to the
end of the TRA 86 remedial amendment period and (ii) has received from
the Internal Revenue Service a favorable determination letter which
considers the terms of the Plan as amended for such tax law changes.
Nothing has occurred since the date of such letter that could
adversely affect the qualified status of such Plan or the tax-exempt
status of any related trust.
(v) No under funded defined benefit plan has
been, during the five years preceding the Closing Date, transferred
out of the Company's Controlled Group.
(vi) Except as set forth on Schedule 5Q - Employee
Benefits, the Company and each Subsidiary has not incurred, and has no
reason to expect that it will incur, any material liability to the
Internal Revenue Service, the Department of Labor, the PBGC, any
multiemployer plan or otherwise under Title IV of ERISA (including any
withdrawal liability) or under the IRC with respect to any Plan or any
other plan that the Company or any member of its Controlled Group
maintains or ever has maintained or to which any of them contributes,
ever has contributed, or ever has been required to contribute.
(vii) With respect to each Plan, the Company has
provided Purchaser with true, complete and correct copies, to the
extent applicable, of (i) all documents pursuant to which the Plans
are maintained, funded and administered, (ii) the most recent annual
report (Form 5500 series) filed with the Internal Revenue Service
(with attachments), (iii) the most recent financial statement, and
(iv) all rulings, determinations, and opinions issued by any
Governmental Entity in the last three years (and pending requests for
governmental rulings, determinations, and opinions).
5R. Compliance with Laws. Except with respect to Legal
Requirements addressed by Sections 5J (Tax Matters), 5P (Employees), 5Q
(ERISA), 5S (Environmental and Safety Matters), and 5V (Healthcare Matters),
and except as set forth on the attached Schedule 5R - Compliance, the Company
and each Subsidiary is in substantial compliance with all Legal Requirements,
and the Company and each Subsidiary has not received notice of any such
non-compliance.
5S. Environmental and Safety Matters.
(i) For purposes of this Agreement, the term
"Environmental and Safety Requirements" shall mean all applicable
federal, state and local statutes, regulations, ordinances and other
provisions having the force or effect of law, and all applicable
judicial
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and administrative orders and determinations, in each case concerning
public health and safety, worker health and safety and pollution or
protection of the environment (including, without limitation, all
those relating to the presence, use, production, generation, handling,
transport, treatment, storage, disposal, distribution, labeling,
testing, processing, discharge, Release, threatened Release, control
or cleanup of any hazardous materials, substances or wastes,
pesticides, pollutants, contaminants, toxic chemicals, petroleum
products or byproducts, asbestos, polychlorinated biphenyls, noise or
radiation); "Release" shall have the meaning set forth in CERCLA (as
defined below); and "Environmental Lien" shall mean any Lien, whether
recorded or unrecorded, in favor of any governmental entity, relating
to any liability of the Company or any Subsidiary arising under any
Environmental and Safety Requirements.
(ii) Except as set forth on the attached Schedule
5S - Environmental:
(a) The Company and each Subsidiary has
complied with and is currently in compliance with all
Environmental and Safety Requirements, and the Company has not
received any notice, report or information regarding any
liabilities (whether accrued, absolute, contingent,
unliquidated or otherwise) or any corrective, investigatory or
remedial obligations arising under Environmental and Safety
Requirements which relate to the Company or any of its
properties or facilities.
(b) Without limiting the generality of
the foregoing, the Company and each Subsidiary has obtained
and complied with, and is currently in compliance with all
permits, licenses and other authorizations that may be
required pursuant to any Environmental and Safety Requirements
for the occupancy of its properties or facilities or the
operation of its business.
(c) None of the following exists at any
property or facility owned, occupied or operated by the
Company or any Subsidiary: (1) underground storage tanks or
regulated surface impoundments; (2) asbestos-containing
materials in any form or condition that could subject the
owner or operator of such property or facility to regulation;
(3) materials or equipment containing polychlorinated
biphenyls; or (4) landfills.
(d) The Company and each Subsidiary has
not treated, stored, disposed of, arranged for or permitted
the disposal of, transported, handled or Released any
substance (including, without limitation, any hazardous
substance) or owned, occupied or operated any facility or
property, in each case so as to give rise to liabilities of
the Company or any Subsidiary for response costs, natural
resource damages or attorneys' fees pursuant to the
Comprehensive Environmental Response, Compensation, and
Liability Act of 1980 ("CERCLA"), as amended, or any other
Environmental and Safety Requirements.
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<PAGE> 41
(e) Without limiting the generality of
the foregoing, there are no facts, events or conditions
relating to the past or present properties, facilities or
operations of the Company or any Subsidiary that would give
rise to any material corrective, investigatory or remedial
obligations, or material liabilities, whether accrued,
absolute, contingent, unliquidated or otherwise, pursuant to
Environmental and Safety Requirements (including, without
limitation, those liabilities relating to onsite or offsite
Releases or threatened Releases of hazardous materials,
substances or wastes, personal injury, property damage or
natural resources damage).
(f) The Company and each Subsidiary has
not, either expressly or by operation of law, assumed or
undertaken any liability or corrective, investigatory or
remedial obligation of any other Person relating to any
Environmental and Safety Requirements.
(g) No Environmental Lien has, to the
Existing Stockholders' knowledge, attached to any property
owned, leased or operated by the Company or any Subsidiary.
5T. Affiliated Transactions. Except as set forth on the
attached Schedule 5T - Affiliated Transactions, no officer, director or
Affiliate of LCA or any of its Subsidiaries or, to the Existing Stockholders'
knowledge, no employee of LCA or any of its Subsidiaries or any individual
related by blood, marriage or adoption to any officer, director, Affiliate or
employee of LCA or any of its Subsidiaries or any entity in which any such
Person owns a five percent (5%) or more beneficial interest, is a party to any
agreement, contract, commitment or transaction with the Company or any
Subsidiary or has any interest in any material property used by the Company or
any Subsidiary.
5U. Real Property.
(i) The attached Schedule 5U(i) - Real Property
sets forth a list of all of the real property owned by the Company and
its Subsidiaries (the "Owned Real Property"). With respect to each
parcel of the Owned Real Property: (i) each such parcel is owned in
fee simple subject only to the Permitted Liens; and (ii) except as
disclosed in Schedule 5V(b) - Thomas Care, all buildings, structures
and other improvements, which are material to the Company, located on
the Owned Real Property are suitable in condition and repair for their
current use in all material respects, subject to the provision of
usual and customary maintenance provided in the ordinary course of
business with respect to buildings, structures and improvements of
like nature, age, usage and construction and all water, gas,
electrical, steam, compressed air, telephone, sanitary and storm
sewage lines and other utilities and systems necessary to and serving
the Owned Real Property are sufficient to enable the continued
operation of the Owned Real Property as it is now operated in the
conduct of the business of the Company and its Subsidiaries.
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(ii) The attached Schedule 5U(ii) - Leases sets
forth a list of all of the leases and subleases (the "Leases") of real
property in which the Company and its Subsidiaries have a leasehold or
subleasehold interest (the "Leased Real Property") and all lease and
sublease documents. The Company has delivered to the Purchaser's
counsel complete and accurate copies of each of the Leases. With
respect to each Lease: (i) the Lease is legal, valid, binding,
enforceable and in full force and effect according to its terms and
the Company holds a valid leasehold or subleasehold interest in such
Lease; (ii) the Lease will continue to be legal, valid, binding,
enforceable and in full force and effect on identical terms as of
immediately following the Closing; (iii) neither the Company nor, to
the Existing Stockholders' knowledge, any other party to the Lease, is
in breach or default, and no event as to the Company or, to the
Existing Stockholders' knowledge, as to any other party, has occurred
which, with notice or lapse of time, would constitute such a breach or
default or permit termination, modification or acceleration under the
Lease; (iv) the Company has not, and to the Existing Stockholders'
knowledge, no other party to the Lease has, repudiated any provision
thereof; (v) there are no disputes, oral agreements, or forbearance
programs in effect as to the Lease; (vi) the Lease has not been
modified in any respect, except to the extent that such modifications
are disclosed by the documents delivered to the Purchaser's counsel;
(vii) the Company and each Subsidiary has not assigned, transferred,
conveyed, mortgaged, deeded in trust or encumbered any interest in the
Lease; (viii) to the Existing Stockholders' knowledge, all buildings,
improvements and other structures located upon the Leased Real
Property which are material to the operation of the business of the
Company have been operated and maintained in substantial accordance
with all applicable Legal Requirements (other than as to matters of
the type addressed in Section 5V) and the terms and conditions of the
Leases; and (ix) to the Existing Stockholders' knowledge, all
buildings, structures and other improvements located upon the Leased
Real Property which are material to the operation of the business of
the Company are in suitable condition and repair for their current use
in all material respects, subject to the provision of usual and
customary maintenance in the ordinary course of business, with respect
to buildings, structures and improvements of like nature, age, usage
and construction, and all water, gas, electrical, steam, compressed
air, telephone, sanitary and storm sewage and other utility lines and
systems necessary to and serving the Leased Real Property are
sufficient to enable the operation of the Leased Real Property as it
is now operated in the operation of the business of the Company.
(iii) The attached Schedule 5U(iii) - Managed
Property sets forth a list of all of the management agreements (the
"Management Agreements") for the property managed by the Company and
its Subsidiaries (the "Managed Property"). The Company has delivered
to the Purchaser's counsel complete and accurate copies of each of the
Management Agreements. With respect to each Management Agreement: (i)
the Management Agreement is legal, valid, binding, enforceable and in
full force and effect in accordance with its terms; (ii) the
Management Agreement will continue to be legal, valid, binding,
enforceable and in full force and effect on identical terms as of
immediately following the Closing; (iii) neither the Company nor, to
the Existing Stockholders' knowledge, any other party to the
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<PAGE> 43
Management Agreement, is in breach or default, and no event as to the
Company or, to the Existing Stockholders' knowledge, as to any other
party, has occurred which, with notice or lapse of time, would
constitute such a breach or default or permit termination,
modification or acceleration under the Management Agreement; (iv) the
Company has not, and to the Existing Stockholders' knowledge, no other
party to the Management Agreement has, repudiated any provision
thereof; (v) there are no disputes, oral agreements, or forbearance
programs in effect as to the Management Agreement; (vi) the Management
Agreement has not been modified in any respect, except to the extent
that such modifications are disclosed by the documents delivered to
the Purchaser's counsel; and (vii) the Company and each Subsidiary has
not assigned, transferred, conveyed, mortgaged, deeded in trust or
encumbered any interest in the Management Agreement.
(iv) The attached Schedule 5U(iv) - Utility Bonds
sets forth a list of all of the Company's utility bonds, each of which
will terminate as of the Closing Date.
5V. Healthcare Matters.
(i) Set forth in Schedule 5V(i) - Healthcare is a
list of each License maintained by the Company with respect to the
Company's operation of the Facilities. The number of beds Licensed at
each Facility on the Closing Date is set forth on Schedule 5V -
Healthcare. Except as set forth in Schedule 5V - Healthcare, the
Company has obtained or applied for all Licenses required by law, rule
or regulation from any applicable Governmental Entity necessary for
the legal operation of the Facilities as MR/DD Facilities or, where
applicable, long term care nursing Facilities.
(a) Except as set forth on Schedule
5V(b) - Thomas Care, the Company is in substantial compliance
with all Licenses listed on Schedule 5V - Healthcare; and
(b) Except as set forth on Schedule
5V(b) - Thomas Care, the Company has received no written
notice from any Governmental Entity in respect of the
threatened, pending, or possible suspension, revocation,
amendment or termination of any License listed on Schedule 5V
- Healthcare, which has not been determined in favor of the
Company nor to the Existing Stockholders' knowledge is there
any proposed or threatened issuance of any such notice.
Assuming, for purposes of this sentence that the Purchaser has and the
Company will post Closing properly file and timely file with all
necessary governmental authorities all necessary reports,
notifications or other documentation of the transactions described
herein and that this Agreement provided for the sale of Existing Stock
by Holding to the Purchaser rather than the issuance of Purchaser
Stock by the Company to the Purchaser and the repurchase of the
Existing Stock by the Company from Holding, the transactions described
herein would not,
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to the Existing Stockholders' knowledge, constitute a violation of any
License currently held by the Company.
(ii) (a) The Facilities listed on Schedule
5V(ii)(a) - Healthcare are certified to participate in the
Medicaid program of the state in which they are located and
are parties to Medicaid participation agreements (or
contracts) for payment by the Medicaid programs. Except as
set forth in Schedule 5V(ii)(a) - Healthcare and Schedule
5V(b) - Thomas Care, the Facilities with Medicaid
certification and Medicaid participation agreements
(contracts) have not been subject to or, to the Existing
Stockholders' knowledge, threatened with, loss of Medicaid
funding or termination of Medicaid participation agreements
during the 12-month period terminating on the Closing Date and
the Company has received no written notice of pending,
threatened or possible investigations by or loss of
participation in any Medicaid program for any such Facilities.
Assuming, for purposes of this sentence that the Purchaser has
and the Company will post Closing properly file and timely
file with all necessary governmental authorities all necessary
reports, notifications or other documentation of the
transactions described herein and that this Agreement provided
for the sale of Existing Stock by Holding to the Purchaser
rather than the issuance of Purchaser Stock by the Company to
the Purchaser and the repurchase of the Existing Stock by the
Company from Holding, the transactions described herein would
not, to the Existing Stockholders' knowledge, constitute a
breach of or a default under any contract between the Company
and the state with which the Medicaid provider agreement
exists.
(b) The Facilities listed on Schedule
5V(ii)(b) - Healthcare are all of the Facilities managed by
the Company under contract with the State of Florida
Residential MR District which owns the Facility and provider
agreement. Except as set forth in Schedule 5V(ii)(b), the
contracts with the State of Florida have not been subject to,
or to the Existing Stockholders' knowledge, threatened with,
termination during the 12-month period terminating on the
Closing Date and the Company has received no written notice of
pending, threatened or possible contract terminations by the
State of Florida for any such Facilities. Assuming, for
purposes of this sentence that the Purchaser has and the
Company will post Closing properly file and timely file with
all necessary governmental authorities all necessary reports,
notifications or other documentation of the transactions
described herein and that this Agreement provided for the sale
of Existing Stock by Holding to the Purchaser rather than the
issuance of Purchaser Stock by the Company to the Purchaser
and the repurchase of the Existing Stock by the Company from
Holding, the transactions described herein would not, to the
Existing Stockholders' knowledge, constitute a breach of or a
default under any management contract between the Company and
the State of Florida Residential MR District.
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<PAGE> 45
(c) The facilities listed on Schedule
5V(ii)(c) - Healthcare are all of the Facilities operated
under the Texas Home and Community-Based Services Waiver
Program under Section 1915(c) of the Social Security Act. The
Facilities listed on Schedule 5V(ii)(c) - Healthcare are
certified by the TDMHMR as HCS Program Providers.
(d) The Facilities listed on Schedule
5V(ii)(d) - Healthcare are contracted with the State of
Florida to provide service to waiver clients.
(iii) The Company has filed, in respect to all
Facilities for which Medicaid cost reports are required, all required
cost reports for the fiscal year 1995, and such reports have been
filed either on a timely basis or prior to the time any penalty could
be incurred for failure to file on a timely basis. Except for
inadvertent errors and good faith claims which may be subject to
challenge by the applicable state agency, to the Existing
Stockholders' knowledge, all such cost reports accurately reflect the
information to be included thereon and do not claim, and neither the
Facilities nor the Company has received, reimbursement in excess of
the amount provided by applicable governmental rules and regulations.
Schedule 5V(iii) - Healthcare hereto indicates which of such costs
reports have been audited and finally settled. The Company has made
available to Purchaser the status of such cost reports which have not
been audited and finally settled and notices of program reimbursement,
proposed or pending audit adjustments, disallowances, appeals of
disallowances and any and all other unresolved claims or disputes in
respect of such cost reports of which the Company has received notice.
Except as set forth on Schedule 5V(iii) - Healthcare, there are no
facts or circumstances which may reasonably be expected to give rise
to any material disallowance under any such cost reports.
(iv) Each Facility has a patient trust fund
account with a local financial institution as reflected on Schedule 5V
- Healthcare. The Company's patient trust fund department monitors
trust fund activity and ensures that proper documentation is in place
for all disbursements from trust funds. Except for inadvertent errors
which may nonetheless be subject to challenge upon audit by the
applicable state agency, to the Existing Stockholders' knowledge, all
such patient trust fund accounts in the aggregate accurately reflect
the amount of patient trust funds required to be maintained by each
facility. The Company has made available to Purchaser the status of
any patient trust fund audits which have not been finally settled and
notices of proposed or pending audit adjustments, disallowances,
appeals of disallowances and any and all other unresolved claims or
disputes of which the Company has received notice in respect of such
patient trust fund accounts. Except as set forth on Schedule 5V(iv) -
Healthcare, there are no facts or circumstances which may reasonably
be expected to give rise to any material audit adjustment regarding
any such patient trust fund accounts. Schedule 5V(iv) - Healthcare
reflects Patient Trust Security Bonds of the Company, each of which
will terminate as of the Closing Date.
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<PAGE> 46
5W. Disclosure. Neither this Agreement, nor any of the
schedules, attachments or Exhibits hereto, contains any untrue statement of a
material fact or omits a material fact necessary to make each statement
contained herein or therein, not misleading.
5X. Closing Date. The representations and warranties of
the Company and the Existing Stockholders contained in this Section 5 and
elsewhere in this Agreement and all information contained in any schedule
hereto shall be true and correct in all material respects on the date of the
Closing as though then made, except as affected by the transactions expressly
contemplated by this Agreement.
Section 6. Remedies for Breaches of this Agreement.
6A. Survival of Representations and Warranties. The
representations and warranties of the Company and the Existing Stockholders
contained in Section 5S above shall survive the Closing and continue in full
force and effect for a period of four years thereafter, the representations and
warranties of the Company and the Existing Stockholders contained in Sections
5A, 5B, 5C, 5J and 5Q and the first two sentences of Section 5D, and the
representations and warranties of the Purchaser contained in Section 8B, shall
survive the Closing and continue in full force and effect until the expiration
of the applicable statute of limitations after giving effect to any extensions
or waivers thereof, and all other written representations and warranties of the
parties contained in this Agreement shall survive the Closing and continue in
full force and effect for a period of two years thereafter.
6B. Indemnification Provisions.
(i) Indemnification by Existing Stockholders.
Subject to the limitations set forth herein, the Existing Stockholders
(but not the Company) agree jointly and severally to indemnify each of
the Purchaser (and certain management investors to be designated by
the Purchaser) and the Company and their respective officers,
directors, employees, partners, shareholders and agents (collectively,
the "Purchaser Indemnified Parties") from and against the entirety of
any Adverse Consequences any Purchaser Indemnified Party may suffer
through and after the date of the claim for indemnification (including
any Adverse Consequences any Purchaser Indemnified Party may suffer
after the end of any applicable survival period) resulting from,
arising out of, relating to, or caused by:
(i) the breach of any of the representations
or warranties contained in Section 5 (as such representations
and warranties are updated pursuant to Section 3A(iv) above
with respect to facts, events or circumstances occurring
during the Interim Period); provided that to the extent the
Company takes any action or fails to take any action during
the Interim Period at the direction of the Purchaser as a
result of which any representation or warranty contained
herein become untrue or inaccurate, such untruth or inaccuracy
shall not be considered a breach for purposes of this
paragraph (i);
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<PAGE> 47
(ii) the breach of any of the pre-Closing
covenants or agreements of the Company contained in this
Agreement;
(iii) the breach of any of the covenants or
agreements of the Existing Stockholders contained in this
Agreement;
(iv) any Tax of the Company for any taxable
period (or portion thereof) ending on or prior to the Closing
Date;
(v) any liability or obligation resulting
from, arising out of, relating to, or caused by the Excluded
Assets and Liabilities;
(vi) any liability or obligation resulting
from, arising out of, relating to, or caused by the management
fees paid to the Company with respect to its Florida
Facilities;
(vii) any environmental issue described in
the Environmental Report;
(viii) any liability or obligation arising
out of any transaction, event, occurrence or circumstance
occurring or existing at or prior to the Effective Time, which
is of a type which would normally be accrued or expensed on
the books and records of LCA or any of its Subsidiaries rather
than those of the Company and its Subsidiaries (including,
without limitation, all claims incurred prior to the Effective
Time with respect to health, life, dental, casualty and other
insurance (including those referred to on Exhibit 7A -
Exceptions to GAAP); workers' compensation and occupational
injury; accrued payroll, withholding, bonuses and 401(k) and
DRIP accruals and contributions; income, franchise and
deferred income taxes; and discontinued operations);
. (ix) any liability for the proposed
recoupment pursuant to the Proposed Retroactive Rate Reduction
referenced in the 8/31/95 letter from TDMHMR with respect to
the Thomas Care Center; or
(x) any liability or obligation resulting
from, arising out of, relating to, or caused by the items
disclosed on Schedule 5M - Litigation.
(ii) Indemnification by Purchaser. Subject to the
limitations set forth herein, the Purchaser agrees to indemnify each
of the Existing Stockholders and the Company and their respective
officers, directors, employees, partners, shareholders and agents
(collectively, the "Seller Indemnified Parties") from and against the
entirety of any Adverse Consequences any Seller Indemnified Party may
suffer through and after the date of the claim for indemnification
(including any Adverse Consequences any Seller Indemnified Party may
suffer after the end of any applicable survival period) resulting
from,
- 41 -
<PAGE> 48
arising out of, relating to, or caused by (i) the breach of any of the
representations or warranties contained in Section 8B, or (ii) the
breach of any of the covenants or agreements of the Purchaser
contained in this Agreement.
(iii) Indemnification by the Company. Subject to
the limitations set forth herein, the Company agrees to indemnify each
of the Purchaser (and certain management investors to be designated by
the Purchaser) and the Existing Stockholders, and each of their
respective officers, directors, employees, partners, shareholders and
agents (collectively, the "Company Indemnified Parties") from and
against the entirety of any Adverse Consequences any Company
Indemnified Party may suffer through and after the date of the claim
for indemnification (including any Adverse Consequences any Company
Indemnified Party may suffer after the end of any applicable survival
period) resulting from, arising out of, relating to, or caused by (A)
the breach of any of the post-Closing covenants or agreements of the
Company contained in this Agreement, (B) Interim Period Liabilities,
or (C) any liability or obligation of the Company arising out of the
Company's operations and activities from and after the Closing
(including, without limitation, obligations under leases and other
contracts assigned by the Existing Stockholders to the Company for
which the Existing Stockholders remain primarily or secondarily liable
to the other parties to such leases and other contracts); provided
that nothing in this paragraph (iii) shall be construed to limit or
impair, or create any right of setoff or counterclaim with respect to,
any claim the Company may make as a Purchaser Indemnified Party or
Seller Indemnified Party against any party hereto pursuant to this
Section 6; provided further that nothing contained in this Section 6
shall give the right of setoff (and no right of setoff shall be
asserted) as against any payment due from or obligation of the Company
by reason of the existence of any claim against the Existing
Stockholders hereunder.
(iv) Limitations on Indemnification. With respect
to claims for indemnification pursuant to Sections 6B(i) and 6B(ii)
above, the following provisions shall apply:
(a) If there is an applicable survival
period pursuant to Section 6A above with respect to such
claim, the party making such claim must make a written claim
for indemnification against the party from which such party is
seeking indemnification within such survival period, and with
respect to any Environmental Claim, the party making such
claim must make a written claim for indemnification against
the party from which such party is seeking indemnification on
or before the fourth anniversary of the Closing.
(b) The Existing Stockholders shall not
have any obligation to indemnify any Purchaser Indemnified
Party from and against any Adverse Consequences arising
pursuant to the breach of any of the representations or
warranties contained in Section 5S above or pursuant to clause
(vii) of Section 6B(i) above (each, an "Environmental Claim")
unless and until (and then, subject to the
- 42 -
<PAGE> 49
other limitations herein, only to the extent) Purchaser
Indemnified Parties have collectively suffered Adverse
Consequences by reason of all such breaches in excess of a
$500,000 aggregate basket (the "Environmental Sub-Basket").
(c) The Existing Stockholders shall not
have any obligation to indemnify any Purchaser Indemnified
Party from and against any Adverse Consequences arising
pursuant to clauses (i) or (vii) of Section 6B(i) above unless
and until (and then, subject to the other limitations herein,
only to the extent) Purchaser Indemnified Parties have
collectively suffered Adverse Consequences by reason of all
such breaches in excess of a $1,000,000 aggregate basket
(excluding for purposes of such calculation, any Adverse
Consequences used in satisfying the Environmental Sub-Basket,
it being the intent that as to Environmental Claims, the
Existing Stockholders will have the benefit of the
Environmental Sub-Basket and the provisions of this paragraph
(c) to the extent of any excess).
(d) The Purchaser shall not have any
obligation to indemnify any Seller Indemnified Party from and
against any Adverse Consequences arising pursuant to clause
(i) of Section 6B(ii) unless and until (and then, subject to
the other limitations herein, only to the extent) Seller
Indemnified Parties have collectively suffered Adverse
Consequences by reason of all such breaches in excess of a
$1,000,000 aggregate basket (at which point the Purchaser will
be obligated to indemnify Seller Indemnified Parties from and
against all such Adverse Consequences in excess of such
basket).
(e) In no event shall the aggregate
amount of any liability of the Existing Stockholders with
respect to Adverse Consequences arising pursuant to clauses
(i), (vi) or (vii) of Section 6B(i) exceed $10,000,000, and in
no event shall the aggregate amount of any liability of the
Purchaser with respect to Adverse Consequences arising
pursuant to clause (i) of Section 6B(ii) exceed $10,000,000.
(f) Neither Existing Stockholder shall
be liable under the indemnification provisions of this Section
6 hereof with respect to Adverse Consequences arising pursuant
to clause (i) of Section 6B(i) (other than with respect to the
breach of any of the representations or warranties contained
in Section 5E) to the extent that Bill M. Wooten or Tommy Ford
has knowledge of facts or circumstances not disclosed, which
if disclosed, would not constitute a breach at the Closing.
(g) Any set of common facts and
circumstances which constitute the basis for claims that both
(i) a representation or warranty has been breached and (ii) a
pre-Closing covenant or agreement has been breached, shall be
construed as being the basis for such claim that a
representation or warranty has been breached
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<PAGE> 50
rather than the basis for such claim that a pre-Closing
covenant or agreement has been breached.
(h) The amount of any indemnification
payable under Section 6 shall be (i) net of any insurance
recoveries received by the Indemnified Party, (ii) net of any
income Tax benefit realized by the Indemnified Party, (iii)
increased to take account of any income Tax cost incurred by
the Indemnified Party arising from the receipt or accrual of
indemnity payments hereunder (grossed up for such increase)
and (iv) in the case of a claim for indemnification with
respect to a matter for which a reserve was taken into account
in the determination of Actual Working Capital, decreased by
the amount of such reserve. In computing the amount of any
such Tax cost or Tax benefit, the Indemnified Party shall be
deemed to recognize all other items of income, gain, loss,
deduction or credit before recognizing any item arising from
the receipt or accrual of any indemnity payment hereunder or
the incurrence or payment of any indemnified Adverse
Consequences. Any indemnification payment hereunder shall
initially be made without regard to this paragraph and shall
be increased or reduced to reflect any such net Tax cost
(including gross-up) or net Tax benefit only after the
Indemnified Party has actually realized such cost or benefit.
For purposes of this Agreement, an Indemnified Party shall be
deemed to have "actually realized" a net Tax cost or a net Tax
benefit to the extent that, and at such time as, the amount of
Taxes payable by such Indemnified Party is increased above or
reduced below, as the case may be, the amount of Taxes that
such Indemnified Party would be required to pay but for the
receipt or accrual of the indemnity payment of the incurrence
or payment of such Adverse Consequences, as the case may be.
The amount of any increase or reduction hereunder shall be
adjusted to reflect any final determination (which shall
include the execution of Form 870-AD or successor form) with
respect to the Indemnified Party's liability for Taxes and
payments between the Existing Stockholders and the Purchaser
to reflect such adjustment shall be made if necessary. Any
indemnity payment under this Agreement shall be treated as an
adjustment to the Repurchase Price for Tax purposes, unless a
final determination (which shall include the execution of a
form 870-AD or successor form) with respect to the Indemnified
Party or any of its Affiliates causes any such payment not to
be treated as an adjustment to the Repurchase Price for United
States federal income Tax purposes. For purposes of the
preceding sentence, the amount of any state income tax benefit
or cost shall take into account the federal income tax effect
of such benefit or cost.
(i) If a Purchaser Indemnified Party
suffers any Adverse Consequences for which such Purchaser
Indemnified Party is entitled to indemnification under the
provisions of this Agreement by reason of a violation of a
Legal Requirement (a "Violation Based Loss"), then,
notwithstanding anything to the contrary contained in this
Agreement, to the extent the discovery of such violation by a
Governmental Entity or other third party or the incurring of
such
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<PAGE> 51
Violation Based Loss resulted from the Purchaser Indemnified
Party disclosing such matter to such Governmental Entity or
other third party under circumstances where such Purchaser
Indemnified Party was not obligated to do so under any Legal
Requirement or contractual obligation, neither Existing
Stockholder shall be liable to such Purchaser Indemnified
Party under the indemnification provisions of this Section 6
hereof to the extent the indemnification claim resulted from
such non-required disclosure.
(j) With respect to any Environmental
Claim for any Facility, the Existing Stockholders shall not
have any obligation to indemnify any Purchaser Indemnified
Party from and against any Adverse Consequences to the extent
such Adverse Consequences arise solely from the diminution in
fair market value of such Facility as a result of the facts
and circumstances underlying such Environmental Claim.
(k) With respect to any Environmental
Claim asserted hereunder, the Existing Stockholders'
obligation to provide indemnification hereunder shall not
exceed the amount of indemnification that would be required
with respect to such Environmental Claim if the use of the
relevant Facility were to remain the same as the use existing
as of the Closing Date.
6C. Matters Involving Third Parties.
(i) If any third party shall notify any Person
entitled to indemnification hereunder (each an "Indemnified Party")
with respect to any matter (a "Third Party Claim") which may give rise
to a claim for indemnification against any Party (each an
"Indemnifying Party") under Section 6B, then the Indemnified Party
shall promptly notify the Indemnifying Party thereof in writing;
provided, however, that no delay on the part of the Indemnified Party
in notifying the Indemnifying Party shall relieve any Indemnifying
Party from any obligation hereunder unless (and then solely to the
extent) such Indemnifying Party thereby is prejudiced.
(ii) Any Indemnifying Party will have the right to
defend the Indemnified Party against the Third Party Claim with
counsel of its choice so long as (A) the Indemnifying Party notifies
the Indemnified Party in writing within 15 days after the Indemnified
Party has given notice of the Third Party Claim that the Indemnifying
Party will indemnify the Indemnified Party from and against the
entirety of any Adverse Consequences the Indemnified Party may suffer
(subject to the limitations in this Agreement) resulting from, arising
out of, relating to, or caused by the Third Party Claim, and (B) the
Indemnifying Party conducts the defense of the Third Party Claim
diligently. The Indemnified Party shall provide the Indemnifying
Party with access to such information and materials (including the
right to make copies thereof) as may be reasonably necessary in order
for the Indemnifying Party to evaluate the Third Party Claim.
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<PAGE> 52
(iii) So long as the Indemnifying Party is
conducting the defense of the Third Party Claim in accordance with
Section 6C(ii) above, (A) the Indemnified Party may retain separate
co-counsel at its sole cost and expense and participate (but the
Indemnifying Party shall control) in defense of the Third Party Claim,
(B) the Indemnified Party will not consent to the entry of any
judgment or enter into any settlement with respect to the Third Party
Claim without the prior written consent of the Indemnifying Party, not
to be withheld unreasonably, and (C) the Indemnifying Party will not
consent to the entry of any judgment or enter into any settlement
containing injunctive or equitable relief (to the extent such
equitable relief cannot reasonably be satisfied with money damages)
with respect to the Third Party Claim without the prior written
consent of the Indemnified Party not to be withheld unreasonably.
Notwithstanding anything to the contrary in this Section 6C, any Third
Party Claim that is also an Environmental Claim shall also be subject
to the terms of Section 6D hereof; without limiting the generality of
the foregoing clause, the participation by the Indemnified Party in
the defense of such Third Party Claim shall be subject to the
provisions of Section 6D(i)- (ii) hereof.
(iv) In the event any of the conditions in Section
6C(ii) above is or becomes unsatisfied, however, (A) the Indemnified
Party may defend against, and consent to the entry of any judgment or
enter into any settlement with respect to, the Third Party Claim in
any manner it reasonably may deem appropriate (and the Indemnified
Party need not consult with, or obtain any consent from, any
Indemnifying Party in connection therewith), (B) to the extent the
Indemnified Party is entitled to indemnification as provided herein,
the Indemnifying Party will reimburse the Indemnified Party promptly
and periodically for the costs of defending against the Third Party
Claim (including reasonable attorneys' fees and expenses) (subject to
the limitations in this Agreement), and (C) the Indemnifying Party
will remain responsible for any Adverse Consequences the Indemnified
Party may suffer resulting from, arising out of, relating to, in the
nature of, or caused by the Third Party Claim to the fullest extent
provided in Section 6B (subject to the limitations in this Agreement).
6D. Environmental Management.
(i) Upon assertion by a Purchaser Indemnified
Party of an Environmental Claim hereunder, the Existing Stockholders
shall be entitled to assume Principal Management of the subject matter
of such claim. To assume Principal Management, the Existing
Stockholders must notify the Purchaser Indemnified Party within 30
days of such notice that it intends to assume Principal Management.
If exigent circumstances require action (including, without
limitation, release reporting or remedial action) more promptly than
is contemplated by the above-referenced 30-day period, the Purchaser
Indemnified Party may, if reasonable under the circumstances, specify
in its notice that the Existing Stockholders must provide their notice
within such shorter time as is specified in such notice by the
Purchaser Indemnified Party. In the event the Existing Stockholders
elect not to undertake Principal Management, the Purchaser Indemnified
Party shall assume Principal
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<PAGE> 53
Management of the subject matter of the claim. As of the Closing Date,
the Existing Stockholders are deemed to have assumed Principal
Management with respect to the matters so designated on Schedule 5S -
Environmental. "Principal Management" means the authority to
principally direct the handling of the subject matter of the
Environmental Claim, including, without limitation, selection of
consultants, contractors, experts or advisors; investigation,
evaluation, selection and implementation of remedial measures; and
negotiations with or challenges to any governmental agencies and third
parties. The party exercising Principal Management shall exercise
sole and exclusive authority to conduct any negotiations with
governmental agencies or third parties concerning the investigation,
evaluation, selection, and implementation of remedial measures,
subject to the express rights afforded to the party not exercising
Principal Management under Section 6D(ii) below.
(ii) The party not exercising Principal Management
with respect to a particular matter shall be entitled, at its sole
cost and expense, to reasonably participate in the management of such
matter. Such participation shall include, without limitation: (A) the
right to receive copies of all reports, work plans and analytical data
submitted to governmental agencies, all notices or other letters or
documents received from governmental agencies, any other documentation
and correspondence materially bearing to the claim, and notices of
material meetings; (B) the opportunity to attend such material
meetings; and (C) the right to reasonably consult with, and approve in
advance (which approval will not be unreasonably withheld or delayed)
material actions by, the party exercising Principal Management.
(iii) In the event they undertake Principal
Management of any matter, the Existing Stockholders shall, upon
reasonable notice to the Purchaser Indemnified Party, have reasonable
access to the relevant subject Facility. The Existing Stockholders
shall undertake all activities that they conduct or coordinate
hereunder in a manner that does not unreasonably interfere with the
day-to-day operation of such Facility of the Purchaser Indemnified
Party. The party undertaking Principal Management hereunder for any
matter shall manage the matter in good faith and in a responsible
manner, and any activities conducted in connection therewith shall be
undertaken promptly and completed expeditiously using commercially
reasonable efforts, subject to the schedules and approvals required by
the applicable governmental body. The parties agree to reasonably
cooperate with one another in connection with addressing any matter
hereunder. Without prejudicing its rights (or the rights of any other
party hereto) to indemnification under this Agreement, any party
hereto may take any reasonable action that is required to respond to
an actual or threatened emergency or imminent endangerment situation
arising from a matter otherwise covered hereunder.
(iv) Any matter covered hereunder shall be deemed
to have been adequately completed to the extent that it (A) attains
compliance with Environmental and Safety Requirements, including
without limitation, all action levels or cleanup standards
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<PAGE> 54
promulgated thereunder and (B) does not unreasonably interfere with
the operations of the affected property as such operations are now
conducted.
(v) In selecting a remedial measure for any
Environmental Claim asserted hereunder, the parties hereto agree to
use the most cost-effective remedy that satisfies the criteria
specified in clauses (A) and (B) of Section 6D(iv) hereof.
(vi) Notwithstanding anything to the contrary in
this Section 6D, any Environmental Claim that is also a Third Party
Claim shall also be subject to the terms of Section 6C hereof.
6E. Other Provisions. Each Existing Stockholder hereby
agrees that it will not make any claim for indemnification hereunder against
the Company by reason of the fact that (i) it was a director, officer,
employee, or agent of the Company or was serving at the request of the Company
as a partner, trustee, director, officer, employee, or agent of another entity
or (ii) the Company joined in making representations or warranties to the
Purchaser (whether such claim is for judgments, damages, penalties, fines,
costs, amounts paid in settlement, losses or expenses) with respect to any
action, suit, proceeding, complaint, claim, or demand brought by the Purchaser
against the Existing Stockholders (if such action, suit, proceeding, complaint,
claim, or demand is pursuant to this Agreement).
6F. Remedies. Except and only to the extent expressly
provided in this Agreement or the Equity Agreements, on and after the Closing
the Existing Stockholders, their officers, directors, employees, agents and
affiliates, and the officers and directors of the Company holding offices prior
to the election of the New Board members shall not have any liability,
responsibility or obligation to the Purchaser, American Habilitation Services,
Inc., the Company, the Company's Subsidiary or their respective officers,
directors, employees, agents or Affiliates with respect to or by reason of any
fact, circumstance, event, condition, act, omission, claim, transaction or
arrangement in any way relating to or affecting the Company and/or its
Subsidiary (including, without limitation, any environmental, corporate or
healthcare matter), regardless of whether such liability, responsibility or
obligation arising or is alleged to arise by reason of negligence or breach of
fiduciary duty. The indemnification provisions set forth in this Agreement,
together with specific performance under Section 8Q below, constitute the sole
and exclusive remedy of the parties hereto in connection with the matters set
forth herein and the transactions contemplated hereby and are in lieu of any
other statutory, equitable common law or other remedy that any such party may
have relative to such matters. In addition, THE PURCHASER AND EACH EXISTING
STOCKHOLDER EXPRESSLY WAIVES THE PROVISIONS OF CHAPTER XVII, SUBCHAPTER E.
SECTIONS 17.41 THROUGH 17.63, INCLUSIVE, (EXCEPT FOR SECTION 17.55) OF THE
TEXAS BUSINESS AND COMMERCE CODE, WHICH IS GENERALLY KNOWN AS THE TEXAS
DECEPTIVE TRADE PRACTICES ACT. THE PURCHASER AND EACH EXISTING STOCKHOLDER
REPRESENTS AND WARRANTS THAT IT (I) HAS ASSETS OF $5 MILLION OR MORE, (II) HAS
KNOWLEDGE AND EXPERIENCE IN FINANCIAL AND BUSINESS MATTERS THAT ENABLE SUCH
PARTY TO EVALUATE
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<PAGE> 55
THE MERITS AND RISKS OF THE TRANSACTIONS CONTEMPLATED HEREBY, (III) IS NOT IN A
SIGNIFICANTLY DISPARATE BARGAINING POSITION RELATIVE TO THE OTHER PARTIES AND
(IV) HAS BEEN REPRESENTED BY LEGAL COUNSEL IN CONNECTION WITH THE TRANSACTIONS
CONTEMPLATED HEREBY. Nothing set forth in this Section 6F is intended to be
construed or shall be construed to (a) modify, alter or otherwise affect in any
way the respective rights, undertakings, duties, obligations, claims or
liabilities of each of the parties under or arising out of this Agreement, the
Stockholders Agreement, the Registration Agreement, the Transition Services
Agreement, or any of the other documents, agreements, or instruments executed in
connection herewith or therewith, (b) exonerate or exculpate any such Person
with respect to any intentional fraud committed by such Person, or (c) limit or
impair (or create any right of setoff or counterclaim with respect to) any claim
the Company may make as a Purchaser Indemnified Party or Seller Indemnified
Party against any party hereto pursuant to this Section 6
Section 7. Definitions.
7A. Definitions. For the purposes of this Agreement, the
following terms have the meanings set forth below:
"Adverse Consequences" means all actions, suits, proceedings,
hearings, investigations, charges, complaints, claims, demands, injunctions,
orders, decrees, rulings, damages, dues, penalties, fines, costs, amounts paid
in settlement, liabilities, obligations, taxes, liens, losses, expenses, and
fees, including court costs and reasonable attorneys' fees and expenses, but
excluding consequential or incidental damages other than those of a third party
sought to be recovered by an Indemnified Party in a Third Party Claim.
"Affiliate" of any particular Person means any other Person
controlling, controlled by or under common control with such particular Person,
where "control" means the possession, directly or indirectly, of the power to
direct the management and policies of a Person whether through the ownership of
voting securities, contract or otherwise.
"Affiliated Group" means any affiliated group as defined in
IRC Section 1504 that has filed a consolidated return for federal income tax
purposes (or any similar group under state, local or foreign law) for a period
during which the Company was a member.
"Class A Preference Stock" means the Company's Class A
Preference Stock, par value $.01 per share.
"Class B Common" means the Company's Class B Common Stock, par
value $.01 per share.
"Class C Common" means the Company's Class C Common Stock, par
value $.01 per share.
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<PAGE> 56
"Equity Agreements" means the Stockholders Agreement, the
Registration Agreement and the Services Agreement.
"Facilities" means all Owned Real Property, Leased Real
Property and Managed Property.
"GAAP" means United States generally accepted accounting
principles, consistently applied.
"Governmental Entity" shall mean any court or any federal,
state, or local legislative body or administrative agency, governmental
municipality, department, commission, regulatory authority, board, bureau, or
other body, including, without limitation, any such entity having jurisdiction
over the operations of the Facilities owned or operated by the Company.
"Indebtedness" means at a particular time, without
duplication, (i) any indebtedness for borrowed money or issued in substitution
for or exchange of indebtedness for borrowed money, (ii) any indebtedness
evidenced by any note, bond, debenture or other debt security, (iii) any
indebtedness for the deferred purchase price of property or services with
respect to which a Person is liable, contingently or otherwise, as obligor or
otherwise (other than trade payables and other current liabilities incurred in
the ordinary course of business), (iv) any commitment by which a Person
expressly assures a creditor against loss (including, without limitation,
contingent reimbursement obligations with respect to letters of credit), (v)
any indebtedness guaranteed in any manner by a Person (including, without
limitation, guarantees in the form of an agreement to repurchase or reimburse),
(vi) any obligations under capitalized leases with respect to which a Person is
liable, contingently or otherwise, as obligor, guarantor or otherwise, or with
respect to which obligations a Person expressly assures a creditor against
loss, and (vii) any indebtedness secured by a Lien on a Person's assets other
than Permitted Liens.
"Intellectual Property Rights" means all (i) patents, patent
applications, patent disclosures and inventions (whether or not patentable and
whether or not reduced to practice), (ii) trademarks, service marks, trade
dress, trade names, logos and corporate names and registrations and
applications for registration thereof together with all of the goodwill
associated therewith, (iii) copyrights (registered or unregistered) and
copyrightable works and registrations and applications for registration
thereof, (iv) mask works and registrations and applications for registration
thereof, (v) computer software, data, data bases and documentation thereof,
(vi) trade secrets and other confidential information (including, without
limitation, ideas, formulas, compositions, inventions (whether patentable or
unpatentable and whether or not reduced to practice), know-how, manufacturing
and production processes and techniques, research and development information,
drawings, specifications, designs, plans, proposals, technical data,
copyrightable works, financial and marketing plans and customer and supplier
lists and information), (vii) other intellectual property rights, (viii) copies
and tangible embodiments thereof (in whatever protectable form or medium), and
(ix) license agreements related thereto.
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<PAGE> 57
"Investment" as applied to any Person means (i) any direct or
indirect purchase or other acquisition by such Person of any notes,
obligations, instruments, stock, securities or ownership interest (including
partnership interests and joint venture interests) of any other Person and (ii)
any capital contribution by such Person to any other Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and
any reference to any particular IRC section shall be interpreted to include any
revision of or successor to that section regardless of how numbered or
classified.
"knowledge" or "aware" as applied to any Person means the
actual knowledge or awareness of such Person (which as applied to the Existing
Stockholders shall mean such knowledge and awareness of Edward Kuntz, Lee
Williams, Susan Whittle, Sydney Boone, Gary Reicherzer and Ron Prince, and
which as applied to the Purchaser shall mean such knowledge and awareness of
Bill M. Wooten, Deborah Moffett, Tommy Ford, Bryan Cressey and Don Edwards).
"Legal Requirement" means any requirement arising under any
action, statute, law, ordinance, order, judgment, decree, treaty, rule,
regulation, determination or direction of any Governmental Entity, including
any Environmental and Safety Requirement.
"Licenses" shall mean all permits, licenses, registrations,
franchises, concessions, orders, certificates, consents, authorizations and
approvals of any Governmental Entity required in order to possess, use, alter,
repair, maintain, or operate the Facilities owned or operated by the Company.
"Liens" means any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (including, without limitation, any
conditional sale or other title retention agreement or lease in the nature
thereof), any sale of receivables with recourse against the Company or any
Affiliate, any filing or agreement to file a financing statement as debtor
under the Uniform Commercial Code or any similar statute other than to reflect
ownership by a third party of property leased to the Company under a lease
which is not in the nature of a conditional sale or title retention agreement,
or any subordination arrangement in favor of another Person (other than any
subordination arising in the ordinary course of business).
"Material Adverse Effect" means a material adverse effect upon
the financial condition, operating results, assets, operations or business
prospects of the Company and its Subsidiaries taken as a whole.
"Officer's Certificate" means a certificate signed by the
Company's president or its chief financial officer, stating that the officer
signing such certificate has made or has caused to be made such investigations
as are reasonably necessary in order to permit him to verify the accuracy of
the information set forth in such certificate.
"Permitted Liens" means:
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<PAGE> 58
(i) tax liens with respect to taxes not yet due
and payable or which are being contested in good faith by appropriate
proceedings and for which appropriate reserves have been established
in accordance with GAAP;
(ii) deposits or pledges made in connection with,
or to secure payment of, utilities or similar services, workers'
compensation, unemployment insurance, old age pensions or other social
security obligations;
(iii) purchase money security interests in any
property acquired by the Company to the extent permitted by this
Agreement;
(iv) interests or title of a lessor under any
Lease;
(v) mechanics', materialmen's or contractors'
liens or encumbrances or any similar lien or restriction arising or
incurred in the ordinary course of business for amounts which are not
delinquent and which are not, individually or in the aggregate,
material to the business of the Company and its Subsidiaries;
(vi) easements, rights-of-way, restrictions and
other similar charges and encumbrances not interfering with the
ordinary conduct of the business of the Company or detracting from the
value of the assets of the Company;
(vii) liens to secure Indebtedness being repaid at
the Closing; and
(viii) liens outstanding on the date hereof set
forth on Schedule 7A - Liens.
"Person" means an individual, a partnership, a corporation, a
limited liability company, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Provider Agreement" shall mean all agreements or contracts
with any state Governmental Entity for the provision of services to
Medicaid-eligible clients for which reimbursement is made under Title XIX of
the Social Security Act (the Medicaid Program) or a Medicaid Waiver Program.
"Securities Act" means the Securities Act of 1933, as amended,
or any similar federal law then in force.
"Subsidiary" means, with respect to any Person, any
corporation, limited liability company, partnership, association or other
business entity of which (i) if a corporation, a majority of the total voting
power of shares of stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by that Person or
one or more of the other Subsidiaries of that
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<PAGE> 59
Person or a combination thereof, or (ii) if a limited liability company,
partnership, association or other business entity, a majority of the
partnership or other similar ownership interest thereof is at the time owned or
controlled, directly or indirectly, by any Person or one or more Subsidiaries
of that Person or a combination thereof. For purposes hereof, a Person or
Persons shall be deemed to have a majority ownership interest in a limited
liability company, partnership, association or other business entity if such
Person or Persons shall be allocated a majority of limited liability company,
partnership, association or other business entity gains or losses or shall be
or control any managing director or general partner of such limited liability
company, partnership, association or other business entity.
"Tax" or "Taxes" means federal, state, county, local, foreign
or other income, gross receipts, ad valorem, franchise, profits, sales or use,
transfer, registration, excise, utility, environmental, communications, real or
personal property, capital stock, license, payroll, wage or other withholding,
employment, social security, severance, stamp, occupation, alternative or
add-on minimum, estimated and other taxes of any kind whatsoever (including,
without limitation, deficiencies, penalties, additions to tax, and interest
attributable thereto).
"Tax Return" means any return, information report or filing
with respect to Taxes, including any schedules attached thereto and including
any amendment thereof.
"TDMHMR" means the Texas Department of Mental Health and
Mental Retardation.
"Treasury Regulations" means the United States Treasury
Regulations promulgated under the IRC, and any reference to any particular
Treasury Regulation section shall be interpreted to include any final or
temporary revision of or successor to that section regardless of how numbered
or classified.
"Working Capital" shall mean (i) the Company's consolidated
current assets (other than the Excluded Assets and Liabilities) minus (ii) the
Company's consolidated current liabilities (other than Indebtedness (including
intercompany Indebtedness), current liabilities resulting from the Company's
obligations pursuant to Section 8A below and the Excluded Assets and
Liabilities), each determined on a consolidated basis in accordance with GAAP,
except for the exceptions to GAAP set forth on Exhibit 7A attached hereto.
7B. Cross Reference to Other Definitions. Set forth
below is a cross reference to other defined terms used in this Agreement:
<TABLE>
<CAPTION>
Term Section
---- -------
<S> <C>
Actual Working Capital 1D(i)
Agreement Preface
Applicable Contracts 5K(i)
Articles of Incorporation 2B
</TABLE>
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<PAGE> 60
<TABLE>
<S> <C>
Bank 2H(i)
Bank Agreement 2H(i)
Baseline Working Capital 1D(ii)
CERCLA 5S(ii)(e)
Closing 1C
Closing Date 1C
Closing Review 1D(i)
Company Preface
Company Indemnified Parties 6B(iii)
Draft Balance Sheet 1D(i)
Effective Time 1D(i)
Environmental and Safety Requirements 5S(i)
Environmental Sub-Basket 6B(iv)(b)
Environmental Claim 6B(iv)(b)
Environmental Lien 5S(i)
Environmental Report 2S
Environmental Sub-Basket 6B(iv)(b)
ERISA 5Q(i)
Excluded Assets and Liabilities 2P
Existing Stock 1A(iii)
Existing Stockholders Preface
Facility File Contracts 5K(i)
Firm 1D(i)
Health Plan 8D(v)
HMO Contracts 8D(vii)
Holding Preface
Incident 8D(iv)
Indemnified Party 6C(i)
Indemnifying Party 6C(i)
Interim Cash 4(i)
Interim Cash Accounts 4(i)
Interim Period 4(i)
Interim Period Liabilities 4(ii)
Interim Settlement Amount 4(iii)
Interim Tax Amount 4(iii)
Latest Balance Sheet 5E(ii)
Leased Real Property 5U(ii)
Leases 5U(ii)
Managed Property 5U(iii)
Management Agreements 5U(iii)
Marks 3E
Material Adverse Change 2J
Merger Recitals
</TABLE>
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<PAGE> 61
<TABLE>
<S> <C>
New Board of Directors 1B(iv)
Objection Notice 1D(i)
Owned Real Property 5U(i)
Plans 5Q(i)
Post-Closing Third Party Tax Claim 8C(vi)(b)
Pre-Closing Third Party Tax Claim 8C(vi)(a)
Principal Management 6D(i)
Purchaser Preface
Purchaser Indemnified Parties 6B(i)
Purchaser Stock 1A(ii)
Real Property 2T(v)
Real Property Transferor 2O(i)
Registration Agreement 2E
Release 5S(i)
Repurchase Price 1A(iii)
Seller Indemnified Parties 6B(ii)
Services Agreement 2G
Solvency Certificate 2-1L
Stockholders Agreement 2D
Subdebt Agreement 2H(ii)
Subdebt Lender 2H(ii)
Third Party Claim 6C(i)
Title Policies 2T(v)
TOI Plan 8D(ix)
TRA 86 5Q(iv)
Transfer Taxes 8C(v)
Transition Services Agreement 2I
Violation Based Loss 6B(iv)(i)
</TABLE>
Section 8. Miscellaneous.
8A. Expenses. The Company shall pay, and hold the
Purchaser and all holders of Purchaser Stock harmless against liability for the
payment of, (i) all of the fees and expenses of the Company and the Purchaser
in connection with this Agreement, the Equity Agreements and the other
transactions contemplated hereby, including the reasonable fees and expenses of
the Purchaser's legal counsel and accountants (subject to any separate
agreement between the Company and such Person) which shall be payable at the
Closing, (ii) the fees and expenses incurred with respect to any amendments or
waivers (whether or not the same become effective) under or in respect of this
Agreement, the Equity Agreements and the other agreements contemplated hereby,
the Articles of Incorporation (including, without limitation, in connection
with any proposed merger, sale or recapitalization of the Company), (iii) stamp
and other taxes which may be payable in respect of the execution and delivery
of this Agreement or the issuance, delivery or sale of any shares of Purchaser
Stock, (iv) the fees and expenses incurred with respect to the enforcement of
the rights
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<PAGE> 62
granted under this Agreement, the Equity Agreements and the other agreements
contemplated hereby, if the Purchaser or holder of Purchaser Stock prevails in
such enforcement action, and (v) the reasonable fees and expenses incurred by
each such Person in any required filing with any governmental agency with
respect to its investment in the Company or in any other required filing with
any governmental agency with respect to the Company which mentions such Person;
provided that none of the foregoing obligations of the Company (and no payments
by the Company in satisfaction of any such obligations) shall be deemed to
reduce Working Capital for purposes of Section 1D above and the Existing
Stockholders shall have no liability therefor under Section 6 or otherwise.
The Existing Stockholders shall pay all fees and expenses of attorneys,
investment bankers, brokers, consultants, and other advisors to the Company and
the Existing Stockholders relating to the transactions contemplated by this
Agreement.
8B. Purchaser's Representations. The Purchaser hereby
represents and warrants that:
(i) the Purchaser is a limited partnership duly
organized, validly existing and in good standing under the laws of
Delaware and is qualified to do business in every jurisdiction in
which the failure to so qualify has had or would reasonably be
expected to have a Material Adverse Effect; the Purchaser possesses
all requisite partnership power and authority and all material
licenses, permits and authorizations necessary to carry out the
transactions contemplated by this Agreement;
(ii) the execution, delivery and performance of
this Agreement have been duly authorized by the Purchaser;
(iii) this Agreement constitutes a valid and
binding obligation of the Purchaser enforceable in accordance with its
terms (assuming, for purposes of this sentence, that this Agreement
constitutes a valid and binding obligation of each other party hereto
and thereto, enforceable in accordance with its terms);
(iv) the execution and delivery by the Purchaser
of this Agreement, and the fulfillment of and compliance with the
respective terms hereof by it, do not and shall not (A) conflict with
or result in a breach of the terms, conditions or provisions of, (B)
constitute a default under, (C) result in a violation of, or (D)
require any authorization, consent, approval, exemption or other
action by or notice or declaration to, or filing with, any court or
administrative or governmental body or agency pursuant to, the
organizational documents of the Purchaser, or any law, statute, rule
or regulation to which it is subject, or any agreement, instrument,
order, judgment or decree to which it is bound or otherwise subject;
(v) the Purchaser is an "accredited investor" (as
such term is defined under Regulation D of the Securities Act) and is
acquiring the Purchaser Stock purchased hereunder or acquired pursuant
hereto for its own account with the present intention of holding such
securities for purposes of investment, and that it has no intention of
selling such
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<PAGE> 63
securities in a distribution in violation of the federal securities
laws or any applicable state securities laws; provided that nothing
contained herein shall prevent the Purchaser and subsequent holders of
Purchaser Stock from transferring such securities in compliance with
the provisions of the Stockholders Agreement;
(vi) there are no claims for brokerage
commissions, finders' fees or similar compensation in connection with
the transactions contemplated by this Agreement based on any
arrangement or agreement binding upon the Purchaser; the Purchaser
shall pay, and hold the Existing Stockholders harmless against, any
liability, loss or expense (including, without limitation, reasonable
attorneys' fees and out-of-pocket expenses) arising in connection with
any claim by, through or under the Purchaser; and
(vii) to the Purchaser's knowledge, the purchase of
Purchaser Stock by the Purchaser hereunder is not prohibited by any
applicable law or governmental rule or regulation and will not subject
the Purchaser to any material penalty, liability or, in the
Purchaser's reasonable judgment, other materially onerous condition
under or pursuant to any applicable law or governmental rule or
regulation, and the purchase of the Purchaser Stock by the Purchaser
hereunder is permitted by laws, rules and regulations of the
jurisdictions and governmental authorities and agencies to which the
Purchaser is subject.
8C. Tax Matters. The following provisions shall govern
the allocation of responsibility as between Purchaser and the Existing
Stockholders for certain tax matters following the Closing Date:
(i) Tax Periods Ending on or Before the Closing
Date. The Existing Stockholders shall prepare or cause to be prepared
and file or cause to be filed all Tax Returns for the Company and the
Subsidiaries for all periods ending on or prior to the Closing Date
which are filed after the Closing Date. The Existing Stockholders
shall be responsible for and shall indemnify Purchaser against any
liability of the Company and any Subsidiary for Taxes with respect to
such periods. The Company shall provide a power of attorney to the
Existing Stockholders to permit the Existing Stockholders to sign and
file such Tax Returns and the Existing Stockholders shall indemnify
and hold harmless all officers of the Company for any liability in
connection with the preparation and filing of such Tax Returns. Each
such Tax Return shall be prepared in a manner consistent with past
returns and in compliance with applicable law. The Existing
Stockholders shall provide copies of all such Tax Returns to the
Company within 15 days of filing such Tax Returns.
(ii) Affiliated Group Returns. The Existing
Stockholders shall prepare or cause to be prepared and file or cause
to be filed all income Tax Returns with respect to periods for which
the consolidated, unitary and combined income Tax Returns of LCA will
include the operations of the Company or any Subsidiary. The portion
of each such Tax Return relating to the Company and each Subsidiary
shall be prepared in a manner consistent with past returns, and each
such return shall be prepared in compliance with applicable law.
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<PAGE> 64
The Existing Stockholders shall be responsible for and shall indemnify
Purchaser against any liability of the Company and any Subsidiary
under Treasury Regulation Section 1.1502-6 (and any similar provision
of state, local or foreign law) for Taxes of any Affiliated Group.
The Existing Stockholders shall provide copies of the portions of all
such Tax Returns relating to the Company and each Subsidiary within 15
days of filing such Tax Returns.
(iii) Tax Periods Beginning Before and Ending After
the Closing Date. The Company shall prepare or cause to be prepared
and file or cause to be filed any Tax Returns of the Company for Tax
periods which begin before the Closing Date and end after the Closing
Date. The Existing Stockholders shall pay to the Company within 15
days of the date on which Taxes are paid with respect to such periods
an amount equal to the portion of such Taxes which relates to the
portion of such Taxable period ending on the Closing Date. For
purposes of this Section, in the case of any Taxes that are imposed on
a periodic basis and are payable for a Taxable period that includes
(but does not end on) the Closing Date, the portion of such Tax which
relates to the portion of such Taxable period ending on the Closing
Date shall (x) in the case of any Taxes other than Taxes based upon or
related to income or receipts, be deemed to be the amount of such Tax
for the entire Taxable period multiplied by a fraction the numerator
of which is the number of days in the Taxable period ending on the
Closing Date and the denominator of which is the number of days in the
entire Taxable period, and (y) in the case of any Tax based upon or
related to income or receipts be deemed equal to the amount which
would be payable if the relevant Taxable period ended on the Closing
Date. For purposes of this Section, in the case of any Tax credit
relating to a Taxable period that begins before and ends after the
Closing Date, the portion of such Tax credit which relates to the
portion of such Taxable period ending on the Closing Date shall (A) in
the case of a credit with respect to Taxes other than Taxes based upon
income or receipts, be the amount which bears the same relationship to
the total amount of such Tax credit as the amount of Taxes described
in (x) above bears to the total amount of such Taxes for such Taxable
period, and (B) in the case of a credit with respect to Taxes based
upon income or receipts, be the amount which bears the same
relationship to the total amount of such Tax credit as the amount of
Taxes described in (y) above bears to the total amount of such Taxes
for such Taxable period. All determinations necessary to give effect
to the foregoing allocations shall be made in a manner consistent with
prior practice of the Company. In the event of any disputes concerning
such determinations, procedures similar to those set forth in Section
1D(i) hereof shall be used.
(iv) Cooperation on Tax Matters.
(a) Purchaser, the Company and the
Existing Stockholders shall cooperate fully, as and to the
extent reasonably requested by the other party, (A) in
connection with the filing of Tax Returns pursuant to this
Section and any audit, litigation or other proceeding with
respect to Taxes and (B) in connection with respect to any Tax
planning of the Company, the Purchaser or the Existing
Stockholders. Such cooperation shall include the retention
and (upon the other
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<PAGE> 65
party's request) the provision of records and information which
are reasonably relevant to any such audit, litigation or other
proceeding and making employees available on a mutually
convenient basis to provide additional information and
explanation of any material provided hereunder. The Company
and the Existing Stockholders agree (A) to retain all books and
records with respect to Tax matters pertinent to the Company
relating to any taxable period beginning before the Closing
Date until the expiration of the statute of limitations (and,
to the extent notified by the Purchaser of the Company, any
extensions thereof) of the respective taxable periods, and to
abide by all record retention agreements entered into with any
taxing authority, and (B) to give the other party reasonable
written notice prior to transferring, destroying or discarding
any such books and records and, if the other party so requests,
the Company or the Existing Stockholders, as the case may be,
shall allow the other party to take possession of such books
and records.
(b) Purchaser and the Existing
Stockholders further agree, upon request, to provide the other
party with all information that either party may be required
to report pursuant to IRC Section 6043 and all Treasury
Department Regulations promulgated thereunder.
(v) Certain Taxes. The Purchaser on the one hand
and the Existing Stockholders on the other hand shall each be
responsible for 50% of all transfer, documentary, sales, use, stamp,
registration and other such Taxes and fees (including any penalties
and interest) incurred in connection with this Agreement ("Transfer
Taxes"). Any Tax Returns or other documentation with respect to
Transfer Taxes shall be timely prepared and filed by the party
normally obligated by law or regulation to make such filing. The
parties agree to cooperate with each other in connection with the
preparation and filing of such returns. At the time Transfer Taxes
are paid, the Purchaser on the one hand and the Existing Stockholders
on the other hand shall each pay 50% of such Transfer Taxes to the
applicable taxing authority.
(vi) Notice of Tax Audits/Claims.
(a) If any third party notifies any
member of the Existing Stockholders' Affiliated Group of the
existence of any audit, litigation or other proceeding
relating to Taxes of the Affiliated Group's combined,
consolidated or unitary Tax Return relating to any taxable
period during which the Company or any Subsidiary was a member
of such Affiliated Group (a"Pre-Closing Third Party Tax
Claim"), the Existing Stockholders shall give notice to the
Company and to the Purchaser within 15 days of the notice of
the Pre-Closing Third Party Tax Claim. The Existing
Stockholders further covenant not to settle or otherwise
dispose of any Pre-Closing Third Party Tax Claim, if such
claim shall have adverse Tax consequences to the Company, any
Subsidiary and/or the Purchaser (other than an adverse Tax
consequence to which the Existing Stockholders have a duty to
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<PAGE> 66
indemnify the Purchaser pursuant to Section 6 hereof), without
first obtaining written consent of such settlement or
disposition by the Company and the Purchaser. Such consent by
the Company and the Purchaser shall not be unreasonably
withheld. The Parties agree that, for purposes of this Section
8C(vi)(a), no consent shall be required from the Company or
Purchaser in the event a settlement or disposition of a
Pre-Closing Third Party Tax Claim (x) requires no change to the
Tax Returns (involved in the Pre-Closing Third Party Tax Claim)
as prepared and filed with the applicable taxing authority and
such Tax Returns are prepared consistent with the past practice
of the Company pursuant to this Section 8C, and (y) imposes no
conditions on the manner in which Tax Returns for any period
(or portion thereof) beginning after the Closing Date are
prepared.
(b) If any third party notifies the
Company of the existence of any audit, litigation or other
proceeding relating to Taxes of the Company or any Subsidiary
relating to any taxable period beginning on or after the
Closing which may have adverse tax consequences to the
Existing Stockholders (a "Post-Closing Third Party Tax
Claim"), the Company shall give notice to the Existing
Stockholders within 15 days of the notice of the Post-Closing
Third Party Tax Claim. If a proposed settlement or other
disposition of such claim actually would result in adverse Tax
consequences to the Existing Stockholders, the Purchaser shall
cause the Company not to agree to such settlement or other
disposition without first obtaining the written consent of the
Existing Stockholders. Such consent by the Existing
Stockholders shall not be unreasonably withheld.
8D. Employee Matters.
(i) LCA shall be responsible for all liabilities
and obligations arising under its Plans and the Company shall not
assume any liability or obligation arising under the Plans, except as
specifically provided below in this Section 8D.
(ii) LCA shall contribute a matching contribution
on behalf of each of the Company's employees who participated in the
Living Centers of America, Inc. Retirement Savings Plan or the Living
Centers of America, Inc. Deferred Retirement Income Plan at the same
time LCA makes such matching contributions on behalf of the other
active participants of such Plans (which contributions are expected to
occur in November or December of 1996), equal to the matching
contribution percentage then contributed on behalf of all other active
participants of such Plans pro rated based on the number of days
between the first day of LCA's current fiscal year or such employee's
commencement date in such Plan, whichever is later, and the Closing
Date. All employees of the Company and its Subsidiaries who have
account balances in the Living Centers of America, Inc. Retirement
Savings Plan or the Living Centers of America, Inc. Deferred
Retirement Income Plan immediately prior to the Closing Date
(including pursuant to the preceding sentence) shall be fully vested
in all of
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<PAGE> 67
their account balances as of the Closing Date and in the matching
contribution contributed to their accounts subsequent to the Closing
Date.
(iii) At the Closing Date or as soon as practicable
thereafter and also as soon as practicable after the date the matching
contribution, which is attributable to the plan year in which the
Closing Date occurs, is contributed to Company employees' accounts,
LCA, the Company, and the Purchaser shall execute and deliver such
documents and instruments as may be required to: (i) effect transfers
of all account balances of each of the Company's employees who
participated in the Living Centers of America, Inc. Retirement Savings
Plan, including notes evidencing participant loans, to a plan which is
sponsored by the Company and (ii) ensure that all assets of such plan
which correspond to such account balances, as the same exist as of the
most recent valuation date prior to each transfer, are transferred in
the form of cash and/or property mutually agreed upon by LCA and the
Company to a plan which is sponsored by the Company. Subsequent to
the Closing Date, but only with respect to the first plan year of the
Company's plan, LCA shall provide any information and assistance
reasonably requested by the Company in connection with the Company's
efforts to maintain the Company's plan, including any reporting,
disclosure or filing requirements arising after the Closing Date with
respect to the Company's plan.
(iv) LCA shall retain all liabilities and
obligations relating to statutory workers' compensation claims made by
any Company employee which relate to Incidents first arising before
the Closing Date, regardless of whether such claims were filed or
presented before or after the Closing Date. For the purposes of the
immediately preceding sentence, "Incident" includes, without
limitation, death, accident, disability, injury, or disease.
(v) LCA or its insurer shall be liable for all
liabilities with respect to long term disability benefits payable to
each Company employee covered under the Living Centers of America,
Inc. Group Life and Health Plan (the "Health Plan") and, subject to
the applicable terms and conditions of the Health Plan, whose
disability commenced prior to October 1, 1996 (regardless of whether
each such employee's disability status had actually been determined
prior to October 1, 1996 to constitute a "disability" as defined under
the Health Plan). For purposes of the preceding sentence, the term
"Company employees" shall include (a) all such employees who
participated in the Health Plan as of the Closing Date and who are in
receipt of or eligible to receive long-term disability benefits
thereunder prior to October 1, 1996, (b) all such employees who
participated in the Health Plan as of the Closing Date whose
disability commenced prior to October 1, 1996 and who remain disabled
for the length of the relevant waiting period under the Health Plan
and (c) all such employees who participated in the Health Plan as of
the Closing Date and who, as of the Closing Date, were absent from
active employment by reason of illness, pregnancy or injury but who,
as of the Closing Date, were reasonably expected to be able to perform
all of the duties of their respective positions within six months
after the Closing Date but subsequently are not able
- 61 -
<PAGE> 68
to return to active employment with the Company after the Closing Date
due to a disability that qualifies for long-term disability benefits
under the terms of the Health Plan.
(vi) Subject to the following provisions of this
paragraph and the terms and conditions of the Health Plan, LCA agrees
to continue to provide coverage under the HealthSelect coverage under
the Health Plan for and on behalf of Company employees (and their
covered dependents), who participated in the HealthSelect coverage
under the Health Plan immediately prior to the Closing Date, until
12:01 a.m. on September 15, 1996 as if such Company employees had
continued to be actively employed by LCA throughout the Transition
Period (as defined below). For the purposes of this paragraph, the
Transition Period is the period beginning at 12:01 a.m. on September
1, 1996 and ending at 12:01 a.m. on September 15, 1996.
(vii) The Company agrees to sponsor a group health
plan which provides major medical and other health benefits to (a)
Company employees (and their covered dependents) who participated in
the HealthSelect coverage under the Health Plan as of the Closing
Date, beginning as of 12:01 a.m. on September 15, 1996 and (b) Company
employees (and their covered dependents) who participated in the
Health Plan as of the Closing Date under either the Humana Health
Maintenance Organization coverage, the PCA Health Plans of Texas, Inc.
coverage, the HIP Health Maintenance Organization coverage or the
Travelers (Metra Health) Health Maintenance Organization coverage
(collectively referred to as "HMO Contracts"), beginning as of 12:01
a.m. on October 1, 1996. Coverage and eligibility under such group
health plan sponsored by the Company shall disregard, with respect to
each Company employee and covered dependent, pre-existing conditions,
in-patient hospitalization status (or other confinement in a
healthcare facility), waiting periods and any other eligibility
requirement with respect to those covered persons who participated in
the Health Plan or any HMO Contract immediately prior to the Closing
Date. In addition, with respect to each Company employee who did not
participate in the Health Plan or HMO Contract immediately prior to
the Closing Date, such Company employee may enroll himself or herself
(and his or her eligible dependents) in the Health Plan, effective
12:01 a.m. on October 1, 1996.
(viii) Subject to the following provisions of this
paragraph and the terms and conditions of the applicable plan, program
or insurance policy, LCA agrees to continue to provide coverage under
its (a) long-term disability coverage under the Health Plan, (b) group
term life insurance coverage under the Health Plan, (c) dental
insurance coverage under the Health Plan, (d) Starbridge plan and (e)
HMO Contracts, for and on behalf of those Company employees and their
covered dependents who participated in such plans immediately prior to
the Closing Date, during the Transition Period (as defined below) as
if such Company employees had continued to be actively employed by LCA
throughout the Transition Period. For purposes of this paragraph, the
Transition Period is the period beginning at 12:01 a.m. on September
1, 1996 and ending at 12:01 a.m. on October 1, 1996.
- 62 -
<PAGE> 69
(ix) With respect to those Company employees who
are covered as of the Closing Date under the LCA Texas Occupational
Injury/Illness Plan (the "TOI Plan"), which plan provides benefits for
work-related bodily injuries and occupational diseases, LCA agrees to
continue to provide coverage under the TOI Plan on their behalf,
during the period beginning at 12:01 a.m. on September 1, 1996 and
ending on 12:01 a.m. on October 1, 1996.
8E. Consent to Amendments. Except as otherwise provided
herein, no modification, amendment or waiver of any provision of this Agreement
shall be effective against the Company, the Existing Stockholders or the
Purchaser unless such modification, amendment or waiver is approved in writing
by the Company (as approved by the vote of the Company's Board of Directors),
the Existing Stockholders and the holders of a majority of the Purchaser Stock
then outstanding, respectively. No other course of dealing between the
Company, the Existing Stockholders and any holder of the Purchaser Stock or any
delay in exercising any rights hereunder shall operate as a waiver of any
rights of any such holders to the extent that there is no duplication of remedy
or recovery.
8F. Successors and Assigns. Except as otherwise
expressly provided herein, all covenants and agreements contained in this
Agreement by or on behalf of any of the parties hereto shall bind and inure to
the benefit of the respective successors and assigns of the parties hereto
whether so expressed or not. In addition, and whether or not any express
assignment has been made, the provisions of this Agreement which are for the
Purchaser's benefit as a purchaser or holder of Purchaser Stock are also for
the benefit of, and enforceable by, any subsequent holder of such Purchaser
Stock.
8G. Generally Accepted Accounting Principles. Where any
accounting determination or calculation is required to be made under this
Agreement or the exhibits hereto, such determination or calculation (unless
otherwise provided) shall be made in accordance with GAAP as in effect at the
Closing.
8H. Entire Agreement. This Agreement and the other
agreements contemplated hereby constitute the entire agreement among the
parties hereto with respect to the subject matter hereof and supersedes any
prior understanding, agreements, or representations by or among the parties
hereto, written or oral, to the extent they related in any way to the subject
matter hereof.
8I. Severability. Whenever possible, each provision of
this Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of this Agreement.
8J. Counterparts. This Agreement may be executed
simultaneously in two or more counterparts, any one of which need not contain
the signatures of more than one party, but all such counterparts taken together
shall constitute one and the same Agreement.
- 63 -
<PAGE> 70
8K. Descriptive Headings; Interpretation. The
descriptive headings of this Agreement are inserted for convenience only and do
not constitute a substantive part of this Agreement. The use of the word
"including" in this Agreement shall be by way of example rather than by
limitation. The use of specific dollar thresholds in any provision of this
Agreement shall not be determinative of the standard of materiality for
purposes of any other provision of this Agreement.
8L. Governing Law. All issues and questions concerning
the construction, validity, enforcement and interpretation of this Agreement
and the exhibits and schedules hereto shall be governed by, and construed in
accordance with, the laws of the State of Texas, without giving effect to any
choice of law or conflict of law rules or provisions (whether of the State of
Texas or any other jurisdiction) that would cause the application of the laws
of any jurisdiction other than the State of Texas.
8M. Notices. All notices, demands or other
communications to be given or delivered under or by reason of the provisions of
this Agreement shall be in writing and shall be deemed to have been given when
delivered personally to the recipient, one day after being sent to the
recipient by reputable overnight courier service (charges prepaid) or three
days after being mailed to the recipient by certified or registered mail,
return receipt requested and postage prepaid. Such notices, demands and other
communications shall be sent to the Purchaser and to the Company at the address
indicated below:
If to the Company before the Closing, to:
Living Centers-Devcon, Inc.
15415 Katy Freeway, Suite 800
Houston, TX 77094
Attention: Sydney K. Boone, Jr., Associate General Counsel
Facsimile: (713) 578-4654
with a copy to:
Mayor, Day, Caldwell & Keeton, L.L.P.
700 Louisiana, Suite 1900
Houston, TX 77002-2778
Attention: Eddy Rogers
Jeff C. Dodd
Facsimile: (713) 225-7047
If to the Company after the Closing, to:
American Habilitation Systems, Inc.
15915 Katy Freeway, Suite 340
- 64 -
<PAGE> 71
Houston, TX 77094
Attention: Bill M. Wooten
Facsimile: (713) 398-7999
with a copy to:
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Attention: Kevin R. Evanich
Sanford E. Perl
Facsimile: (312) 861-2200
If to the Purchaser, to:
Golder, Thoma, Cressey, Rauner Fund IV, L.P.
6100 Sears Tower
Chicago, Illinois 60606
Attention: Bryan C. Cressey
Donald J. Edwards
with a copy to:
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Attention: Kevin R. Evanich
Sanford E. Perl
Facsimile: (312) 861-2200
If to either Existing Stockholder, to:
Living Centers of America, Inc.
15415 Katy Freeway, Suite 800
Houston, TX 77094
Attention: Sydney K. Boone, Jr., Vice President and
Associate General Counsel
Facsimile: (713) 578-4654
- 65 -
<PAGE> 72
with a copy to:
Mayor, Day, Caldwell & Keeton, L.L.P.
700 Louisiana, Suite 1900
Houston, TX 77002-2778
Attention: Ed J. Rogers
Jeff C. Dodd
Facsimile: (713) 225-7047
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
8N. No Strict Construction. The parties hereto have
participated jointly in the negotiation and drafting of this Agreement. In the
event an ambiguity or question of intent or interpretation arises, this
Agreement shall be construed as if drafted jointly by the parties hereto, and
no presumption or burden of proof shall arise favoring or disfavoring any party
by virtue of the authorship of any of the provisions of this Agreement.
8O. Third Party Beneficiaries. Except as provided
herein, this Agreement shall not confer any rights or remedies upon any Person
other than the parties hereto and their respective successors, heirs and
assigns.
8P. Termination; Effect of Termination.
(i) Termination. This Agreement may be terminated as
provided below:
(a) by mutual written consent of the Company and
the Purchaser;
(b) by the Company if there has been a material
breach on the part of the Purchaser, and by the Purchaser if
there has been a material breach by the Company or the
Existing Stockholders, of any representation, warranty,
covenant or agreement contained in this Agreement;
(c) by the Purchaser if any of the conditions in
Section 2 has not been satisfied as of the Closing Date or if
satisfaction of such a condition is or becomes impossible
(other than through the failure of the Purchaser to comply
with its obligations under this Agreement) and the Purchaser
has not waived such condition on or before the Closing Date;
(d) by the Existing Stockholders if any of the
conditions in Section 2-1 has not been satisfied as of the
Closing Date or if satisfaction of such a condition is or
becomes impossible (other than through the failure of any of
the Existing Stockholders or the Company to comply with its
obligations under this Agreement)
- 66 -
<PAGE> 73
and the Existing Stockholders and the Company has not waived
such condition on or before the Closing Date;
(e) by either the Company or the Purchaser if the
transactions contemplated hereby have not been consummated on
or prior to September 13, 1996; provided that neither the
Company nor the Purchaser shall be entitled to terminate this
Agreement pursuant to this Section 8P if such party's material
breach of this Agreement has prevented the consummation of the
transactions contemplated hereby; or
(f) by the Existing Stockholders, the Purchaser
or the Company if any of the conditions set forth in Sections
2W, 2Y, 2-1P or 2-1Q are not satisfied on or before September
6, 1996 or if the Existing Stockholders, the Purchaser or the
Company have not agreed upon the form and substance of the
Transition Services Agreement by such date..
(ii) Effect of Termination. Each party's right of
termination under Section 8P(i) is in addition to any other rights it
may have under this Agreement or otherwise, and the exercise of a
right of termination will not be an election of remedies. If this
Agreement is terminated pursuant to Section 8P(i), all further
obligations of the parties under this Agreement will terminate, except
that the obligations in Section 8A will survive; provided, however,
that if this Agreement is terminated by a party because of the breach
of this Agreement by another party or because one or more of the
conditions to the terminating party's obligations under this Agreement
is not satisfied as a result of another party's failure to comply with
its obligations under this Agreement, the terminating party's right to
pursue all legal remedies will survive such termination unimpaired.
8Q. Specific Performance. Each of the parties hereto
acknowledges and agrees that the other parties hereto would be damaged
irreparably in the event any of the covenants and agreements of this Agreement
are not performed in accordance with their specific terms or otherwise are
breached. Accordingly, each of the parties hereto shall be entitled to an
injunction or injunctions to prevent breaches of the covenants and agreements
of this Agreement and to enforce specifically such provisions in this Agreement
and the terms and provisions thereof in any action instituted in any court of
the United States or any state thereof having jurisdiction over the parties
hereto and the matter at issue in addition to any other remedy to which they
may be entitled, at law or in equity, in accordance with the terms of this
Agreement.
* * * * *
- 67 -
<PAGE> 74
IN WITNESS WHEREOF, the parties hereto have executed this
Recapitalization Agreement on the date first written above.
LIVING CENTERS-DEVCON, INC.
By: /s/ [Signature Omitted]
-----------------------------------
Its: [Title Omitted]
-----------------------------------
GOLDER, THOMA, CRESSEY, RAUNER
FUND IV, L.P.
By: GTCR IV, L.P.
Its: General Partner
By: Golder, Thoma, Cressey,
Rauner, Inc.
Its: General Partner
By: /s/ [Signature Omitted]
-----------------------------------
Its: [Title Omitted]
-----------------------------------
THE EXISTING STOCKHOLDERS:
LIVING CENTERS OF AMERICA, INC.
By: /s/ [Signature Omitted]
-----------------------------------
Its: [Title Omitted]
-----------------------------------
DEVCON HOLDING COMPANY
By: /s/ [Signature Omitted]
-----------------------------------
Its: [Title Omitted]
-----------------------------------
<PAGE> 75
FIRST AMENDMENT TO RECAPITALIZATION AGREEMENT
THIS FIRST AMENDMENT, dated as of September 13, 1996 (this
"Amendment"), is made to the Recapitalization Agreement, dated as of August 30,
1996 (the "Agreement"), by and among Living Centers-Devcon, Inc., a Florida
corporation (the "Company"), Golder, Thoma, Cressey, Rauner Fund IV, L.P., a
Delaware limited partnership (the "Purchaser"), Living Centers of America, Inc.
("LCA") and Devcon Holding Company ("Holding"). LCA and Holding are
collectively referred to herein as the "Existing Stockholders." Terms used and
not otherwise defined herein have the meanings accorded to such terms in the
Agreement.
NOW, THEREFORE, the parties hereto agree as follows:
1. The side letter entered into by the parties hereto on
September 6, 1996 concerning, among other things, the Transition Services
Agreement and the Company's financial statements, is hereby incorporated by
reference to the full extent as if restated herein.
2. Section 1A(ii) of the Agreement is hereby deleted in
its entirety and the following provision is substituted in lieu thereof:
"(ii) Purchaser Stock. The New Board of Directors shall
authorize the issuance and sale to the Purchaser (or its
designees) of an aggregate of 13,978.27 shares of Class A
Preference Stock for a purchase price of $1,000.00 per share
and an aggregate of 68,409 shares of Class C Common for a
purchase of $ 1.43 per share, each having the rights and
preferences set forth in Exhibit 1A attached hereto. The
shares of Class A Preference Stock and Class C Common to be
purchased hereunder are collectively referred to herein as the
"Purchaser Stock.""
3. Section 1B(i) of the Agreement is hereby deleted in
its entirety and the following provision is substituted in lieu thereof:
"(i) Purchase and Sale of Purchaser Stock. At the
Closing, subject to the terms and conditions set forth herein,
the Company shall sell to the Purchaser (or its designees),
and the Purchaser (or its designees) shall purchase from the
Company, the number of shares of Class A Preference Stock and
Class C Common set forth in Section 1A(i) hereof for an
aggregate purchase price of $14,076,000."
4. Section 1C of the Agreement is hereby deleted in its
entirety and the following provision is substituted in lieu thereof:
" 1C. The Closing. The closing of the purchase and sale of
the Purchaser Stock and redemption of the Existing Stock (the
"Closing") shall take place at the offices of
<PAGE> 76
Kirkland & Ellis, 200 East Randolph Drive, Chicago, Illinois
(or, at the Purchaser's election, at the offices of Winston &
Strawn, 200 Park Avenue, New York, New York) at 10:00 a.m. on
September 13, 1996 (the "Closing Date"). At the Closing, (i)
the Company shall deliver to the Purchaser (or its designees)
stock certificates evidencing the Purchaser Stock to be
purchased by the Purchaser (or its designees), registered in
the Purchaser's (or its designees' names) upon payment by the
Purchaser (or its designees) of the purchase price therefor by
wire transfer of immediately available funds to such account
as is designated by the Company, in the aggregate amount set
forth in Section 1B(i) hereof (provided that the Purchaser
may, or it may permit one of its designees to, pay for up to
$76,000 of the Purchaser Stock with a promissory note in lieu
of cash), (ii) the Company shall enter into the financing
arrangements described in Section 1B(ii) hereof, and (iii)
Holding shall deliver to the Company stock certificates
evidencing the Existing Stock to be repurchased from Holding
by the Company upon payment of the Repurchase Price therefor
by a cashier's or certified check, or by wire transfer or
immediately available funds to such account as is designated
by Holding."
5. Section 4(iii) of the Agreement is hereby deleted in
its entirety and the following provision is substituted in lieu thereof:
"(iii) During the Interim Period, the Existing Stockholders
shall provide the Purchaser with a list of disbursements to be
made from the Interim Cash Account (or made as advances by the
Existing Stockholders on behalf of the Company) to satisfy
liabilities and expenses referenced in Section 4(i) above.
Immediately prior to the Closing, the Existing Stockholders
shall provide a statement listing the amount of Interim Cash
deposited in, and disbursements made from, the Interim Cash
Accounts and liabilities and expenses referenced in Section
4(i) above as to which no disbursements have been made. To
the extent that such statement reflects that the amount of
Interim Cash deposited exceeds the sum of such disbursements
made, such liabilities and expenses and the Prepaid Rent
Amount (as defined below), the Company will retain such excess
and the Existing Stockholders will be entitled to all amounts
not so retained; to the extent that such statement reflects
that the amount of Interim Cash deposited is less than such
sum of disbursements made, liabilities and expenses, and the
Prepaid Rent Amount, then the Company shall pay to the
Existing Stockholders the amount of such deficiency at the
Closing. The amount of such excess or deficiency shall be
referred to herein as the "Interim Settlement Amount." The
Prepaid Rent Amount shall mean lease payments made on behalf
of the Company in the amount of $132,562.62. LCA will pay and
hold the Company harmless with respect to the payroll payments
due to the Company's and its Subsidiary's employees on
Wednesday September 4, 1996 (without limiting the generality
of the foregoing, the Interim Cash Account will not be reduced
by the amount of such payment). The preceding sentence will
not apply to any other payroll payments made during the
Interim Period."
- 2 -
<PAGE> 77
6. Section 6B(i) of the Agreement is hereby amended to
add the following clauses 6B(i)(xi) through 6B(i)(xx):
"(xi) in connection with the San Augustine Development
Center, any liability or obligation arising under
that certain Deed of Trust dated August 7, 1980 to
First International Bank in Houston, NA securing the
amount of $355,000;
(xii) in connection with the Sweetbriar Development Center,
any liability or obligation arising under (a) that
certain Deed of Trust dated October 15, 1976 to Don
Aron, Trustee securing the amount of $450,000, and
(b) that certain Deed of Trust dated August 7, 1980
to Carl R. Graef, Trustee securing that amount of
$433,000;
(xiii) in connection with the Cypress Group Home, any
liability or obligation arising under that certain
Deed of Trust dated September 28, 1984 to Malcolm E.
Dorman, Trustee securing the amount of $55,920;
(xiv) in connection with the Commanche Flats development,
any liability or obligation arising under that
certain Deed of Trust dated September 20, 1988 to
Maurice S. Horine securing the amount of $80,000;
(xv) in connection with the West Road Group Home, any
liability or obligation arising under that certain
Mortgage to Duval Federal Savings and Loan
Association securing the amount of $45,800;
(xvi) in connection with the Gable Group Home, any
liability or obligation arising under that certain
Mortgage to Citibank, Federal Savings Bank dated
October 11, 1991 securing the amount of $19,864;
(xvii) in connection with the Sandy Oaks I and Sandy Oaks
II developments, any liability or obligation arising
under that certain tax suit filed on May 24, 1994 in
Denton County, Texas as Denton ISD, et al vs. Living
Center Devcon, Inc., Cause #C94319;
(xviii) in connection with the Jacksonville Business Office,
Normandy Village, Fern Group Home, Marlake Group
Home, Lake Margaret Group Home, and Norwalk Group
Home, any liability or obligation under the current
leases for said properties arising out of the Company
being denied the benefits or use and enjoyment of
said properties due to an alleged or actual failure
of the Existing Stockholders to provide a valid and
subsisting leasehold interest in said properties.
The Company hereby agrees to be bound by the terms of
the current leases for said properties;
- 3 -
<PAGE> 78
(xix) in connection with the development at 22 West Lake
Beauty Drive, Orlando, Florida, any liability or
obligation arising under the lease relating thereto
by reason of the failure of the Existing Stockholders
to obtain the necessary landlord consent to the
assignment of the lease for this development to the
Company;
(xx) in connection with the Riverview Group Home, the
Rincon Group Home, the Aransas Pass Group Home, the
Orange Grove Group Home, the Ricardo Group Home, the
Silverway Group Home, the Pendleton Group Home, and
the Harrison Group Home, any liability or obligation
arising out of the failure of the Existing
Stockholders to pay the remaining obligations on that
certain Promissory Note from ARA Living Centers of
Texas, Inc. to Brush County Services in the amount of
$518,000.
The Existing Stockholders hereby agree to use
reasonable efforts to obtain (1) releases for the
Deeds of Trust or Mortgages referenced in clauses
6B(i)(xi)-(xvi) and to provide same to the Company,
and (2) the dismissal of the tax suit referenced in
clause 6B(i)(xvii). The Existing Stockholders'
obligations under clauses 6B(i)(xi) through
6B(i)(xviii) above shall be limited to discharging
(or providing adequate security for the discharge of)
the liability, if any, secured by liens described
therein. In addition, the Existing Stockholders'
obligations under clause 6B(i)(xix) above shall be
limited to discharging the lease obligations in
clause 6B(i)(xix)."
7. Each reference in Sections 6B(i)(iv), 8C(i) and
8C(ii) to the term "Closing Date" is hereby replaced with the term "Effective
Time."
8. Section 8C of the Agreement is hereby amended to add
the following subsection (e)(ii):
"Effective Date. The parties agree for all purposes relating
to Tax matters (including, but not limited to, the preparation
of Tax Returns) they will treat the transactions contemplated
by Section 1 as having occurred as of the close of business on
August 31, 1996, notwithstanding the fact that the Closing
will occur after such date. Such treatment shall not
constitute a breach of the obligations of the Existing
Stockholders or the Company with respect to Taxes or a breach
of any representation or warranty concerning Taxes. The
Company hereby indemnifies each of the Existing Stockholders
and their Affiliates from any Adverse Consequences suffered by
the Existing Stockholders and their Affiliates resulting from,
arising out of or relating to any determination by any Tax
Governmental Authority that such tax treatment is incorrect;
provided that the Company's liabilities under the preceding
indemnity shall not exceed $50,000."
- 4 -
<PAGE> 79
9. Except as expressly amended or modified hereby, the
Agreement will and does remain in full force and effect.
10. This Amendment will be governed by and construed in
accordance with the domestic laws of the State of Texas, without giving effect
to any choice of law or conflict provision or rule (whether of the State of
Texas or any other jurisdiction) that would cause the laws of any jurisdiction
other than the State of Texas to be applied. In furtherance of the foregoing,
the internal law of the State of Texas will control the interpretation and
construction of this Amendment, even if under such jurisdiction's choice of law
or conflict of law analysis, the substantive law of some other jurisdiction
would ordinarily apply.
11. This Agreement may be executed simultaneously in two
or more counterparts, any one of which need not contain the signatures of more
than one party, but all such counterparts taken together shall constitute one
and the same Amendment.
* * * *
- 5 -
<PAGE> 80
IN WITNESS WHEREOF, the Parties have executed this First
Amendment to Recapitalization Agreement as of the date first written above.
LIVING CENTERS-DEVCON, INC.
By: /s/ [Signature Omitted]
----------------------------------
Its: [Title Omitted]
----------------------------------
GOLDER, THOMA, CRESSEY, RAUNER
FUND IV, L.P.
By: GTCR IV, L.P.
Its: General Partner
By: Golder, Thoma, Cressey,
Rauner, Inc.
Its: General Partner
By: /s/ [Signature Omitted]
----------------------------------
Its: [Title Omitted]
----------------------------------
THE EXISTING STOCKHOLDERS:
LIVING CENTERS OF AMERICA, INC.
By: /s/ [Signature Omitted]
----------------------------------
Its: [Title Omitted]
----------------------------------
DEVCON HOLDING COMPANY
By: /s/ [Signature Omitted]
----------------------------------
Its: [Title Omitted]
----------------------------------
- 6 -
<PAGE> 1
Exhibit 4.7
THIRD AMENDED AND RESTATED CREDIT AGREEMENT
<PAGE> 2
[Execution Copy]
================================================================================
$500,000,000.00
THIRD AMENDED AND RESTATED CREDIT AGREEMENT
Dated as of August 19, 1996
Among
LIVING CENTERS OF AMERICA, INC.
as Borrower,
THE BANKS NAMED IN THIS CREDIT AGREEMENT
as Banks,
CHASE SECURITIES INC.
as Syndication Agent,
TORONTO DOMINION (TEXAS), INC.
as Documentation Agent,
and
NATIONSBANK OF TEXAS, N.A.
as Administrative Agent
================================================================================
<PAGE> 3
TABLE OF CONTENTS
[PAGE NUMBERS IN THIS EXHIBIT DO NOT
CORRESPOND TO THIS TABLE OF CONTENTS]
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
Section 1.01. Certain Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.02. Computation of Time Periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 1.03. Accounting Terms; Changes in GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 1.04. Classes and Types of Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 1.05. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ARTICLE II
THE ADVANCES AND THE LETTERS OF CREDIT
Section 2.01. Tranche A and Tranche B Advances; Extension of Tranche A
Maturity Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 2.02. Method of Borrowing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 2.03. Competitive Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 2.04. Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 2.05. Reduction of the Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 2.06. Repayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Section 2.07. Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Section 2.08. Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 2.09. Breakage Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Section 2.10. Increased Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Section 2.11. Payments and Computations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Section 2.12. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 2.13. Sharing of Payments, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Section 2.14. Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Section 2.15. Bank Replacement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
ARTICLE III
CONDITIONS OF LENDING
Section 3.01. Conditions Precedent to Effectiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Section 3.02. Conditions Precedent to all Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . 48
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
Section 4.01. Corporate Existence; Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Section 4.02. Corporate Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
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Section 4.03. Authorization and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Section 4.04. Enforceable Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Section 4.05. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Section 4.06. True and Complete Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Section 4.07. Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Section 4.08. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Section 4.09. Investment Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Section 4.10. Public Utility Holding Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Section 4.11. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Section 4.12. Pension Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Section 4.13. No Burdensome Restrictions; No Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Section 4.14. Environmental Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Section 4.15. Permits, Licenses, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Section 4.16. Health Care Regulatory Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
ARTICLE V
AFFIRMATIVE COVENANTS
Section 5.01. Compliance with Laws, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Section 5.02. Maintenance of Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Section 5.03. Preservation of Corporate Existence, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . 56
Section 5.04. Payment of Taxes, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Section 5.05. Visitation Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Section 5.06. Reporting Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Section 5.07. Maintenance of Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Section 5.08. Additional Guaranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
ARTICLE VI
NEGATIVE COVENANTS
Section 6.01. Liens, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Section 6.02. Debts, Guaranties and Other Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Section 6.03. Agreements Restricting Liens and Distributions . . . . . . . . . . . . . . . . . . . . . . 62
Section 6.04. Merger or Consolidation; Asset Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Section 6.05. Restricted Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Section 6.06. Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Section 6.07. Acquisition Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Section 6.08. Affiliate Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Section 6.09. Compliance with ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Section 6.10. Cash Flow Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Section 6.11. Leverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Section 6.12. Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
</TABLE>
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Section 6.13. Indemnification Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
ARTICLE VII
REMEDIES
Section 7.01. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Section 7.02. Optional Acceleration of Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Section 7.03. Automatic Acceleration of Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Section 7.04. Cash Collateral Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Section 7.05. Non-exclusivity of Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Section 7.06. Right of Set-off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
ARTICLE VIII
THE ADMINISTRATIVE AGENT AND THE ISSUING BANKS
Section 8.01. Authorization and Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Section 8.02. Administrative Agent's Reliance, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Section 8.03. The Administrative Agent and Its Affiliates . . . . . . . . . . . . . . . . . . . . . . . . 71
Section 8.04. Bank Credit Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Section 8.05. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Section 8.06. Successor Administrative Agent and Issuing Banks . . . . . . . . . . . . . . . . . . . . . 73
ARTICLE IX
MISCELLANEOUS
Section 9.01. Amendments, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Section 9.02. Notices, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Section 9.03. No Waiver; Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Section 9.04. Costs and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Section 9.05. Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Section 9.06. Bank Assignments and Participations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Section 9.07. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Section 9.08. Execution in Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Section 9.09. Survival of Representations, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Section 9.10. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Section 9.11. Business Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Section 9.12. Usury Not Intended . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Section 9.13. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Section 9.14. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Section 9.15. Waiver of Jury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
</TABLE>
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EXHIBITS:
Exhibit A - Form of Assignment and Acceptance
Exhibit B - Form of Guaranty
Exhibit C - Form of Notice of Borrowing
Exhibit D - Form of Notice of Conversion or Continuation
Exhibit E-1 - Form of Tranche A Note
Exhibit E-2 - Form of Tranche B Note
Exhibit E-3 - Form of Competitive Advance Note
Exhibit F - Form of Compliance Certificate
Exhibit G-1 - Form of Competitive Bid Request
Exhibit G-2 - Form of Notice of Competitive Bid Request
Exhibit G-3 - Form of Competitive Bid
Exhibit G-4 - Form of Competitive Bid Acceptance/Rejection
SCHEDULES:
Schedule 1 - Notice Information for Banks
Schedule 4.01 - Subsidiaries
Schedule 6.01 - Certain Secured Debt
Schedule 6.02 - Certain Unsecured Debt
Schedule 6.08 - Certain Intercompany Arrangements
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THIRD AMENDED AND RESTATED CREDIT AGREEMENT
This Third Amended and Restated Credit Agreement dated as of August
19, 1996 is among (a) Living Centers of America, Inc., a Delaware corporation
("Borrower"); (b) the Banks (as defined below); (c) NationsBank of Texas, N.A.,
as Administrative Agent for the Banks; (d) Chase Securities Inc., as
Syndication Agent; and (e) Toronto Dominion (Texas), Inc., as Documentation
Agent.
The Borrower, the Banks, the Administrative Agent, the Syndication
Agent, and the Documentation Agent agree as follows:
INTRODUCTION
A. The Borrower, The Long-Term Credit Bank of Japan, Limited, New
York Branch, The Bank of Nova Scotia and Toronto Dominion (Texas), Inc., as
co-agents, the Administrative Agent, and certain of the Banks are parties to
the Second Amended and Restated Credit Agreement dated as of June 29, 1995 (as
the same has been amended, modified and supplemented since such date, the
"Existing Credit Agreement").
B. The Borrower, the Administrative Agent, the Syndication Agent,
the Documentation Agent, and the Banks have agreed to amend and restate the
Existing Credit Agreement by entering into this Agreement.
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
Section 1.01. Certain Defined Terms. As used in this Agreement,
the terms "Borrower" and "Existing Credit Agreement" shall have the meanings
set forth above and the following terms shall have the following meanings
(unless otherwise indicated, such meanings to be equally applicable to both the
singular and plural forms of the terms defined):
"Acquisition Expenditures" means, for any period, the aggregate of all
expenditures and costs of the Borrower and its Subsidiaries paid in cash, debt
securities, Property other than equity securities, or the assumption of Debt
during such period for (a) the purchase or expansion of care homes, care
centers, institutional pharmacies, rehabilitation clinics, or other business
assets from another Person, (b) the acquisition of stock, partnership,
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joint venture interests or other equity interests in any Person, and (c) the
construction or expansion of any care homes or care centers, institutional
pharmacies, rehabilitation clinics, or other business assets of the Borrower or
its Subsidiaries; excluding, however, the amount of the consideration paid
during such period in connection with the purchase of Property pursuant to the
options under the Unispec Leases in an amount not to exceed the lesser of (i)
the amount payable in connection with the exercise of any such option and (ii)
the fair market value of such Property on the date of such purchase.
"Adjusted Base Rate" means, for any day, the fluctuating rate per
annum of interest equal to the greater of (a) the Base Rate in effect on such
day and (b) the Federal Funds Rate in effect on such day plus 1/2%.
"Administrative Agent" means NationsBank of Texas, N.A. in its
capacity as an agent pursuant to Article VIII and any successor agent pursuant
to Section 8.06.
"Advance" means a Tranche A Advance, a Tranche B Advance or a
Competitive Advance.
"Affiliate" means, as to any Person, any other Person that, directly
or indirectly, through one or more intermediaries, controls, is controlled by,
or is under common control with, such Person or any Subsidiary of such Person.
The term "control" (including the terms "controlled by" or "under common
control with") means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of a Person,
whether through ownership of equity interests, by contract or otherwise.
"Agreement" means this Third Amended and Restated Credit Agreement
dated as of August 19, 1996 among the Borrower, the Banks, the Administrative
Agent, the Syndication Agent, and the Documentation Agent, as it may be
amended, modified, or supplemented from time-to-time.
"Applicable Lending Office" means, with respect to each Bank, such
Bank's Domestic Lending Office in the case of a Base Rate Advance and such
Bank's Eurodollar Lending Office in the case of a Eurodollar Rate Advance.
"Applicable Margin" means, at any time with respect to any Advance,
the commitment fee, or the Letter of Credit fees under Section 2.04, the
following percentages determined as a function of the Leverage Ratio most
recently determined as provided below in this definition:
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<TABLE>
<CAPTION>
============================================================================================================
Level I Level II Level III Level IV Level V
Ratio
Ratio greater greater than Ratio greater
than or equal or equal to than or equal Ratio greater
Ratio to .75, but 1.75, but to 2.50, but than or equal
less than less than less than less than 3.00 to 3.00
.75 1.75 2.50
============================================================================================================
<S> <C> <C> <C> <C> <C>
Eurodollar Rate Advance .250% .325% .425% .500% .575%
- Tranche A Advance
- ------------------------------------------------------------------------------------------------------------
Eurodollar Rate Advance .300% .375% .500% .575% .650%
- Tranche B Advance
- ------------------------------------------------------------------------------------------------------------
Base Rate Advance 0% 0% 0% 0% 0.0%
- ------------------------------------------------------------------------------------------------------------
Facility Fee - Tranche .15% .175% .20% .25% .30%
A Commitment
- ------------------------------------------------------------------------------------------------------------
Facility Fee - Tranche .10% .125% .125% .175% .225%
B Commitment
============================================================================================================
</TABLE>
The foregoing ratio (a) shall be deemed to be Level III until September 30,
1996 and (b) shall thereafter be determined from the financial statements of
the Borrower and its Subsidiaries most recently delivered pursuant to Section
5.06. Any change in the Applicable Margin after September 30, 1996 shall be
effective upon the date of delivery of the financial statements pursuant to
Section 5.06. If the Borrower fails to deliver such financial statements after
September 30, 1996 within the times specified in Section 5.06, such ratio shall
be deemed to be Level V until the Borrower delivers such financial statements
to the Administrative Agent and the Banks.
"Assignment and Acceptance" means an assignment and acceptance entered
into by a Bank and an Eligible Assignee, and accepted by the Administrative
Agent, in substantially the form of the attached Exhibit A.
"Banks" means the lenders listed on the signature pages of this
Agreement and each Eligible Assignee that shall become a party to this
Agreement pursuant to Section 9.06.
"Base Rate" means a fluctuating interest rate per annum as shall be in
effect from time-to-time equal to the rate of interest publicly announced by
NationsBank of Texas, N.A. as its base rate, whether or not the Borrower has
notice thereof.
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"Base Rate Advance" means an Advance which bears interest as provided
in Section 2.07(a).
"Borrowing" means a Tranche A Borrowing, a Tranche B Borrowing, or a
Competitive Borrowing.
"Business Day" means a day of the year on which banks are not required
or authorized to close in New York City and Dallas, Texas and, if the
applicable Business Day relates to any Eurodollar Rate Advances, on which
dealings are carried on by banks in the London interbank market.
"Capital Expenditures" means, for any four fiscal quarter period, the
greater of:
(a) the aggregate of all expenditures and costs (whether paid in
cash or accrued as liabilities during that period and including that portion of
Capital Leases incurred during such period which are capitalized on the balance
sheet of the Borrower) of the Borrower and its Subsidiaries during such period
that, in conformity with GAAP, are required to be included in or reflected by
the property, plant or equipment or similar fixed asset accounts reflected in
the consolidated balance sheet of the Borrower, excluding, however:
(i) the amount of the consideration paid that the
Borrower books as a capital expenditure during such period in
connection with the purchase of Property pursuant to the options under
the Unispec Leases;
(ii) Acquisition Expenditures made during such period; and
(iii) up to $25,000,000.00 of aggregate cash consideration
paid during such period for all purchases of facilities which have
been leased by the Borrower or any of its Subsidiaries for at least
three years before the date of such purchase and
(b) $400 times the average number of skilled nursing beds of the
Borrower and its Subsidiaries during such period.
"Capital Leases" means, as applied to any Person, any lease of any
Property by such Person as lessee which would, in accordance with GAAP, be
required to be classified and accounted for as a capital lease on the balance
sheet of such Person.
"Cash Collateral Account" means a special interest bearing cash
collateral account containing cash deposited pursuant to Section 7.02(b) or
7.03(b) to be maintained at the Administrative Agent's office in accordance
with Section 7.04.
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"Cash Flow" means, for any period, (a) the Borrower's EBITDA for such
period plus (b) to the extent deducted in determining Net Income and without
duplication, Lease Expense minus (c) cash taxes paid by the Borrower and its
Subsidiaries during such period minus (d) Net Restricted Payments made during
such period minus (e) Capital Expenditures for such period.
"CERCLA" means the Comprehensive Environmental Response, Compensation,
and Liability Act of 1980, as amended, state and local analogs, and all rules
and regulations and requirements thereunder in each case as now or hereafter in
effect.
"Class" has the meaning set forth in Section 1.04.
"Code" means the Internal Revenue Code of 1986, as amended, and any
successor statute.
"Commitments" means, as to any Bank, its Tranche A Commitment and its
Tranche B Commitment.
"Competitive Advance" means any advance by a Bank to the Borrower
pursuant to Section 2.03 and refers to a Eurodollar Auction Advance or a Fixed
Rate Auction Advance.
"Competitive Advance Note" means a promissory note of the Borrower
payable to the order of any Bank, in substantially the form of the attached
Exhibit E-3, evidencing indebtedness of the Borrower to such Bank resulting
from Competitive Advances owing to such Bank.
"Competitive Bid" means an offer by a Bank to make a Competitive
Advance pursuant to Section 2.03 in the form of Exhibit G-3.
"Competitive Bid Acceptance/Rejection" means a notification in the
form of Exhibit G-4 made by the Borrower pursuant to Section 2.03 to accept or
reject a Competitive Bid.
"Competitive Bid Rate" means, as to any Competitive Advance made by a
Bank, (i) in the case of a Eurodollar Auction Advance, the Margin, and (ii) in
the case of a Fixed Rate Auction Advance, the fixed rate of interest offered by
the Bank making such Competitive Bid.
"Competitive Bid Request" means a request by the Borrower in the form
of Exhibit G-1 for Competitive Bids.
"Competitive Borrowing" means a Borrowing consisting of a Competitive
Advance or concurrent Competitive Advances from the Bank or Banks whose
Competitive Bids for such Borrowing have been accepted by the Borrower under
the bidding procedure described in Section 2.03.
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"CON" means a certificate of need or other license or permit issued by
a state health facilities planning board or similar agency or body required for
the construction, expansion, or investment in a health facility.
"Control Percentage" means, with respect to any Person, the percentage
of the outstanding capital stock or other ownership interests of such Person
having ordinary voting power which gives the direct or indirect holder of such
stock or interests the power to elect a majority of the Board of Directors or
similar governing body of such Person.
"Controlled Group" means all members of a controlled group of
corporations and all trades (whether or not incorporated) under common control
which, together with the Borrower, are treated as a single employer under
Section 414 of the Code.
"Convert", "Conversion", and "Converted" each refers to a conversion
of Advances of one Type into Advances of another Type pursuant to Section
2.02(b).
"Credit Documents" means this Agreement, the Notes, the Guaranties,
the Letter of Credit Documents, and each other agreement, instrument or
document executed by the Borrower or any of its Subsidiaries at any time in
connection with this Agreement.
"Debt," for any Person, means without duplication:
(a) indebtedness of such Person for borrowed money;
(b) obligations of such Person evidenced by bonds, debentures,
notes or other similar instruments;
(c) obligations of such Person to pay the deferred purchase price
of property or services;
(d) obligations of such Person as lessee under Capital Leases;
(e) obligations of such Person under direct or indirect guaranties
in respect of, and obligations (contingent or otherwise) of such Person to
purchase or otherwise acquire, or otherwise to assure a creditor against loss
in respect of, indebtedness or obligations of another Person of the kinds
referred to in clauses (a) through (d) above;
(f) indebtedness or obligations of others of the kinds referred to
in clauses (a) through (e) secured by any Lien on or in respect of any Property
of such Person; and
(g) all liabilities of such Person in respect of unfunded vested
benefits under any Plan.
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"Default" means (a) an Event of Default or (b) any event or condition
which with notice or lapse of time or both would, unless cured or waived,
become an Event of Default.
"Devcon Stock Sale" means the sale by the Borrower of more than a
majority of its ownership interest in Living Centers-Devcon, Inc., a wholly
owned Subsidiary of the Borrower, for an amount not less than $47,500,000.00,
subject to post-closing working capital adjustments payable by the Borrower.
"Documentation Agent" means Toronto-Dominion (Texas), Inc.
"Dollar Equivalent" means the equivalent in another currency of an
amount in Dollars to be determined by reference to the rate of exchange quoted
by NationsBank, N.A., at 10:00 a.m. (Charlotte, North Carolina time) on the
date of determination, for the spot purchase in the foreign exchange market of
such amount of Dollars with such other currency.
"Dollars" and "$" means lawful money of the United States of America.
"Domestic Lending Office" means, with respect to any Bank, the office
of such Bank specified as its "Domestic Lending Office" opposite its name on
Schedule 1 or such other office of such Bank as such Bank may from time-to-time
specify to the Borrower and the Administrative Agent.
"EBITDA" means, for any period, (a) Net Income for such period plus
(b) to the extent deducted in determining Net Income, Interest Expense, taxes,
depreciation and amortization for such period.
"Effective Date" has the meaning set forth in Section 3.01.
"Eligible Assignee" means (a) a commercial bank organized under the
laws of the United States, or any State thereof, and having primary capital of
not less than $500,000,000.00 and approved by the Borrower, which approval will
not be unreasonably withheld, (b) a commercial bank organized under the laws of
any other country which is a member of the Organization for Economic
Cooperation and Development and having primary capital (or its equivalent) of
not less than $500,000,000.00 (or its Dollar Equivalent) and approved by the
Borrower, which approval by the Borrower will not be unreasonably withheld, (c)
a Bank, or (d) any other Person that has been approved by the Borrower in its
sole discretion and the Administrative Agent, which approval by the
Administrative Agent will not be unreasonably withheld.
"Environment" or "Environmental" shall have the meanings set forth in
43 U.S.C. Section 9601(8) (1988).
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<PAGE> 14
"Environmental Claim" means any third party (including governmental
agencies and employees) action, lawsuit, claim, demand, regulatory action or
proceeding, order, decree, consent agreement or notice of potential or actual
responsibility or violation (including claims or proceedings under the
Occupational Safety and Health Acts or similar laws or requirements relating to
health or safety of employees) which seeks to impose liability under any
Environmental Law.
"Environmental Law" means all Legal Requirements arising from,
relating to, or in connection with the Environment, health, or safety,
including without limitation CERCLA, relating to (a) pollution, contamination,
injury, destruction, loss, protection, cleanup, reclamation or restoration of
the air, surface water, groundwater, land surface or subsurface strata, or
other natural resources; (b) solid, gaseous or liquid waste generation,
treatment, processing, recycling, reclamation, cleanup, storage, disposal or
transportation; (c) exposure to pollutants, contaminants, hazardous, medical,
infectious, or toxic substances, materials or wastes; or (d) the manufacture,
processing, handling, transportation, distribution in commerce, use, storage or
disposal of hazardous, medical, infectious, or toxic substances, materials or
wastes.
"Environmental Permit" means any permit, license, order, approval or
other authorization under Environmental Law.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time-to-time.
"Eurocurrency Liabilities" has the meaning assigned to that term in
Regulation D of the Federal Reserve Board, as in effect from time-to-time.
"Eurodollar Advance" means any Eurodollar Rate Advance or Eurodollar
Auction Advance.
"Eurodollar Auction Advance" means any Competitive Advance which bears
interest as provided in Section 2.07(c).
"Eurodollar Lending Office" means, with respect to any Bank, the
office of such Bank specified as its "Eurodollar Lending Office" opposite its
name on Schedule 1 (or, if no such office is specified, its Domestic Lending
Office) or such other office of such Bank as such Bank may from time-to-time
specify to the Borrower and the Administrative Agent.
"Eurodollar Rate" means, for the Interest Period for each Eurodollar
Advance, the interest rate per annum (rounded upward to the nearest 1/100 of 1%
per annum) appearing on Telerate Page 3750 (or any successor page) as the
London interbank offered rate for deposits in Dollars at approximately 11:00
a.m. (London time) two Business Days before the first day of such
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<PAGE> 15
Interest Period for a term comparable to such Interest Period. If for any
reason such rate is not available, the term "Eurodollar Rate" shall mean, for
the Interest Period for each Eurodollar Advance, the interest rate per annum
(rounded upward to the nearest 1/100 of 1% per annum) appearing on Reuters
Screen LIBO page as the London interbank offered rate for deposits in Dollars
at approximately 11:00 a.m. (London time) two Business Days before the first
day of such Interest Period for a term comparable to such Interest Period;
provided, however, if more than one rate is specified on Reuters Screen LIBO
page, the applicable rate shall be the arithmetic mean of all such rates
"Eurodollar Rate Advance" means an Advance which bears interest as
provided in Section 2.07(b).
"Eurodollar Rate Reserve Percentage" of any Bank for the Interest
Period for any Eurodollar Rate Advance means 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 Federal Reserve Board for
determining the actual reserve requirement (including, without limitation, any
emergency, supplemental or other marginal reserve requirement) for such Bank
with respect to liabilities or assets consisting of or including Eurocurrency
Liabilities having a term equal to such Interest Period.
"Events of Default" has the meaning set forth in Section 7.01.
"Expiration Date" means, with respect to any Letter of Credit, the
date on which such Letter of Credit will expire or terminate in accordance with
its terms.
"Facility" means any nursing home or other health care facility
(including any facility operating an assisted living unit) operated by the
Borrower or any of its Subsidiaries.
"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 any such day
on such transactions received by the Administrative Agent from three Federal
funds brokers of recognized standing selected by it.
"Federal Reserve Board" means the Board of Governors of the Federal
Reserve System or any of its successors.
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<PAGE> 16
"Financial Statements" means the balance sheet and income, retained
earnings and cash flow statements dated September 30, 1995 referred to in
Section 4.05(a), copies of which have been delivered to the Administrative
Agent and the Banks.
"Fixed Rate Auction Advance" means any Competitive Advance which bears
interest as provided in Section 2.07(d).
"Fund," "Trust Fund," or "Superfund" means the Hazardous Substance
Response Trust Fund, established pursuant to 42 U.S.C. Section 9631 (1988) and
the Post-closure Liability Trust Fund, established pursuant to 42 U.S.C.
Section
9641 (1988), which statutory provisions have been amended or repealed by the
Superfunds Amendments and Reauthorization Act of 1986, and the "Fund," "Trust
Fund," or "Superfund" that are now maintained pursuant to Section 9507 of the
Code.
"Funded Debt" means the outstanding principal amount of all
indebtedness for borrowed money of any Person, but in any event shall include,
without duplication:
(a) any obligation with respect to the principal component of a
Capital Lease;
(b) the face amount of any standby letters of credit supporting
the repayment of indebtedness for borrowed money issued for the account of such
Person; and
(c) obligations of such Person under direct or indirect guaranties
in respect of, and obligations (contingent or otherwise) of such Person to
purchase or otherwise acquire, or otherwise to assure a creditor against loss
in respect of, debt for borrowed money of another Person, including obligations
of a type described in clauses (a) and (b) of this definition of another
Person; excluding, however any liabilities for insurance premiums financed by
the Borrower and its Subsidiaries.
In determining the amount of the foregoing clause (c), only the outstanding
principal amount or principal component of the obligation of the other Person
shall be used in such determination.
"GAAP" means United States generally accepted accounting principles as
in effect from time-to-time, applied on a basis consistent with the
requirements of Section 1.03.
"Governmental Authority" means any foreign governmental authority, the
United States of America, any state of the United States of America and any
subdivision of any of the foregoing, and any agency, department, commission,
board, authority or instrumentality, bureau or court having jurisdiction over
any Bank, the Borrower, or the Borrower's Subsidiaries or any of their
respective Properties.
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<PAGE> 17
"Governmental Proceedings" means any action or proceedings by or
before any Governmental Authority, including, without limitation, the
promulgation, enactment or entry of any Legal Requirement.
"Guarantor" means each Subsidiary of the Borrower that has entered
into a Guaranty, and "Guarantors" means such Persons collectively.
"Guaranty" means a guaranty in the form of the attached Exhibit B
executed by a Subsidiary of the Borrower, and "Guaranties" means all such
Guaranties.
"Hazardous Substance" means the substances identified as such pursuant
to CERCLA and those regulated under any other Environmental Law, including
without limitation pollutants, contaminants, petroleum, petroleum products,
radionuclides, radioactive materials, and medical and infectious waste.
"Hazardous Waste" means the substances regulated as such pursuant to
any Environmental Law.
"HCFA" means the Health Care Financing Administration of HHS and any
Person succeeding to the functions thereof.
"Health Facility License" means a license or permit under applicable
law to provide skilled or intermediate care nursing services, operate an
assisted living unit or otherwise operate a Facility.
"HHS" means the Department of Health and Human Services and any Person
succeeding to the functions thereof.
"Indemnification Agreement" means the Indemnification Agreement dated
as of February 21, 1992 between The ARA Group, Inc. and the Borrower.
"Interest Expense" means, for any period and any Person, total
interest expense for such Person net of any interest income for such period
(including any income received under an Interest Hedge Agreements during such
period, but other than interest income earned on any restricted cash listed on
such Person's balance sheet during such period), whether paid or accrued
(including that attributable to (a) obligations which have been or should be,
in accordance with GAAP, recorded as Capital Leases and (b) obligations payable
under Debt permitted by Section 6.02(m)), including, without limitation, all
commissions, discounts and other fees and charges owed with respect to letters
of credit and bankers' acceptance financing and net costs under Interest Hedge
Agreements, all as determined in conformity with GAAP.
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<PAGE> 18
"Interest Hedge Agreement" means an interest hedge, rate swap, or cap,
or similar arrangement between the Borrower or any of its Subsidiaries and a
financial institution providing for the exchange of nominal interest
obligations or the cap of the interest rate on the Advances made under this
Agreement.
"Interest Period" means, (a) for each Eurodollar Rate Advance, the
period commencing on the date of such Advance or the date of the Conversion of
any Base Rate Advance into such an Advance and ending on the last day of the
period selected by the Borrower pursuant to the provisions below and Section
2.02 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 the Borrower pursuant to the provisions below and Section 2.02,
which period shall be one, two, three, or six months, in each case as the
Borrower may, upon notice received by the Administrative Agent not later than
noon (Dallas, Texas time) on, the third Business Day prior to the first day of
such Interest Period select, (b) for each Eurodollar Auction Advance, the
period commencing on the date of such Advance and ending on the last day of the
period selected by the Borrower pursuant to the provisions below and Section
2.03, which period shall be one, two, three, or six months, in each case as the
Borrower may select in the Competitive Bid Request for such Advance and (c)
for each Fixed Rate Auction Advance, the period commencing on the date of such
Advance and ending on the date requested by the Borrower in the Competitive Bid
Request for such Advance, which period shall be not less than seven days or
more than 180 days; provided, however, that:
(a) no Interest Period for a Tranche A Advance may extend beyond
the Tranche A Maturity Date;
(b) the Borrower may not select any Interest Period for any
Tranche B Advance which ends after any scheduled principal repayment date
(including the Tranche B Commitment Termination Date) unless, after giving
effect to such selection, the aggregate unpaid principal amount of Tranche B
Advances that are Base Rate Advances and Tranche B Advances having Interest
Periods which end on or before such principal repayment date at least equal the
amount of Tranche B Advances due and payable on or before such principal
repayment date;
(c) Interest Periods commencing on the same date for Advances
comprising part of the same Borrowing shall be of the same duration;
(d) 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
in case of a Eurodollar Advance only, 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
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<PAGE> 19
(e) in case of a Eurodollar Advance only, any Interest Period
which begins on the last Business Day of a calendar month (or on a day for
which there is no numerically corresponding day in the calendar month at the
end of such Interest Period) shall end on the last Business Day of the calendar
month in which it would have ended if there were a numerically corresponding
day in such calendar month.
"Interim Financial Statements" means the unaudited balance sheet and
income and cash flow statements dated June 30, 1996 referred to in Section
4.05(a), copies of which have been delivered to the Administrative Agent and
the Banks.
"Issuing Bank" means any Bank which agrees at the request of the
Borrower to act as an issuer of a Letter of Credit hereunder, or any Bank
acting as a successor issuing bank pursuant to Section 8.06.
"Lease Expense" means, for any period, (a) all amounts payable by the
Borrower and its Subsidiaries during such period under any lease, sublease, or
other instrument (other than a Capital Lease) pursuant to which the Borrower or
any of its Subsidiaries is entitled to use any Property of another Person minus
(b) all rental income payable to the Borrower and its Subsidiaries during such
period under any lease, sublease, or other instrument (other than a Capital
Lease) pursuant to which the Borrower or any of its Subsidiaries was the lessor
or sublessor of its Property to another Person, all as determined in accordance
with GAAP.
"Legal Requirement" means any law, statute, ordinance, decree,
requirement, order, judgment, rule, regulation (or official interpretation of
any of the foregoing) of, and the terms of any license or permit issued by, any
Governmental Authority, including, but not limited to, Regulations G, T, U and
X.
"Letter of Credit" means, individually, any letter of credit issued by
an Issuing Bank which is subject to this Agreement, and "Letters of Credit"
means all such letters of credit collectively.
"Letter of Credit Documents" means, with respect to any Letter of
Credit, such Letter of Credit and any agreements, documents, and instruments
entered into in connection with or relating to such Letter of Credit.
"Letter of Credit Exposure" means, at any time, the sum of (a) the
aggregate undrawn maximum face amount of each Letter of Credit at such time and
(b) the aggregate unpaid amount of all Reimbursement Obligations at such time.
"Letter of Credit Obligations" means any obligations of the Borrower
under this Agreement in connection with the Letters of Credit.
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<PAGE> 20
"Leverage Ratio" means, as of the last day of any fiscal quarter of
the Borrower, the ratio of (a) the Borrower and its Subsidiaries' Funded Debt
plus, to the extent not included in Funded Debt, the face amount of any letters
of credit issued for the account of the Borrower or any of its Subsidiaries and
outstanding as of such day to (b) the Borrower's EBITDA for the four fiscal
quarters ending on such day plus, with respect to each acquisition permitted by
this Agreement and made during such period and without duplication, the
aggregate amount of the EBITDA during such period attributable to the business
acquired minus, with respect any asset sales permitted by this Agreement and
made during such period, the aggregate amount of the Borrower's EBITDA
attributable to the assets sold during such period.
"Lien" means any mortgage, lien, pledge, charge, deed of trust,
security interest, or encumbrance to secure or provide for the payment of any
obligation of any Person, whether arising by contract, operation of law or
otherwise (including, without limitation, the interest of a vendor or lessor
under any conditional sale agreement, Capital Lease or other title retention
agreement).
"Liquid Investments" means:
(a) direct obligations of, or obligations the principal of and
interest on which are unconditionally guaranteed by, the United States;
(b) (i) negotiable or nonnegotiable certificates of deposit, time
deposits, or other similar banking arrangements maturing within one year from
the date of acquisition thereof ("bank debt securities"), issued by (A) any
Bank that is a commercial bank or commercial financial institution or (B) any
other bank or trust company which has a combined capital surplus and undivided
profit of not less than $500,000,000.00 or the Dollar Equivalent thereof, if at
the time of deposit or purchase, such bank debt securities are rated not less
than "A" (or the then equivalent) by the rating service of Standard & Poor's
Corporation or of Moody's Investors Service, and (ii) commercial paper issued
by (A) any Bank that is a commercial bank or commercial financial institution
or (B) any other Person if at the time of purchase such commercial paper is
rated not less than "A-2" (or the then equivalent) by the rating service of
Standard & Poor's Rating Group or not less than "P-2" (or the then equivalent)
by the rating service of Moody's Investors Service, Inc., or upon the
discontinuance of both of such services, such other nationally recognized
rating service or services, as the case may be, as shall be selected by the
Borrower with the consent of the Majority Banks;
(c) repurchase agreements relating to investments described in
clauses (a) and (b) above with a market value at least equal to the
consideration paid in connection therewith, with any Person who regularly
engages in the business of entering into repurchase agreements and has a
combined capital surplus and undivided profit of not less than $500,000,000.00
or the Dollar
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<PAGE> 21
Equivalent thereof, if at the time of entering into such agreement the debt
securities of such Person are rated not less than "A" (or the then equivalent)
by the rating service of Standard & Poor's Rating Group or of Moody's Investors
Service, Inc.;
(d) such other instruments (within the meaning of Article 9 of the
Texas Business and Commerce Code) as the Borrower may request and the
Administrative Agent may approve in writing, which approval will not be
unreasonably withheld;
(e) money market mutual funds with a daily right of redemption and
a net asset value of $1.00 per share substantially all the assets of which are
comprised of investments of the types described in the preceding clauses (a)
through (d);
(f) investments by LCA Insurance Co., Ltd. made in compliance with
the requirements of all Governmental Authorities, including Medicare
Regulations; and
(g) demand deposit accounts with a bank or other financial
institution opened and maintained in the ordinary course of business.
"Majority Banks" means, at any time, Banks holding at least 51% of the
then aggregate unpaid principal amount of the Advances owed to the Banks and
the Letter of Credit Exposure of the Banks at such time, or, if no such
principal amount and Letter of Credit Exposure is then outstanding, Banks
having at least 51% of the aggregate amount of the Commitments at such time.
"Margin" means, as to any Eurodollar Auction Advance, the margin
(expressed as a percentage rate per annum in the form of a decimal to more than
four decimal places) to be added to or subtracted from the Eurodollar Rate in
order to determine the interest rate applicable to such Advance, as specified
in the Competitive Bid relating to such Advance.
"Material Adverse Change" means a material adverse change in the
business, financial condition, or results of operations of the Borrower and its
Subsidiaries, taken as a whole, since the date of the Financial Statements.
"Material Adverse Effect" means a material adverse effect (a) on the
Borrower's ability to perform its obligations under this Agreement, any Note or
any other Credit Document; (b) on the Guarantors', taken as a whole, ability to
perform their obligations under the Guaranties; or (c) on the business,
financial condition, or results of operations of the Borrower and its
Subsidiaries, taken as a whole.
"Maximum Rate" means the maximum nonusurious interest rate under
applicable law.
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<PAGE> 22
"Medicaid Certification" means certification by the state Medicaid
agency or its successor that a Facility complies with all the requirements for
participation set forth in the Medicaid Regulations.
"Medicaid Provider Agreement" means an agreement entered into between
the state Medicaid agency or its successor or other such entity administering
the Medicaid program and a Facility which the agency agrees to pay for covered
services provided by such Facility to eligible Medicaid recipients in
accordance with the terms of such agreement and Medicaid Regulations.
"Medicaid Regulations" means, collectively, (a) all Federal statutes
(whether set forth in Title XIX of the Social Security Act or elsewhere)
affecting the medical assistance program established by Title XIX of the Social
Security Act (42 U.S.C. Sections 1396, et seq.); (b) all applicable provisions
of all federal rules, regulations, manuals, final orders and administrative,
reimbursement and other guidelines of all Governmental Authorities promulgated
pursuant to or in connection with the statutes described in clause (a) above;
(c) all state statutes and regulations and plans for medical assistance enacted
in connection with the statutes and provisions described in clauses (a) and (b)
above; and (d) all applicable provisions of all rules, regulations, manuals,
final orders and administrative, reimbursement and other applicable guidelines
of all Governmental Authorities promulgated pursuant to or in connection with
any of the foregoing.
"Medicare Certification" means certification by HCFA or a state agency
or entity under contract with HCFA that a Facility complies with all the
applicable requirements for participation set forth in the Medicare
Regulations.
"Medicare Provider Agreement" means an agreement entered into between
HCFA or a state agency under contract with HCFA and a Facility under which HCFA
agrees to pay for covered services provided by such Facility to Medicare
beneficiaries in accordance with the terms of such agreement and Medicare
Regulations.
"Medicare Regulations" means, collectively, all Federal statutes
(whether set forth in Title XVIII of the Social Security Act or elsewhere)
affecting the health insurance program for the aged and disabled established by
Title XVIII of the Social Security Act (42 U.S.C. Sections 1395, et seq.),
together with all applicable provisions of all rules, regulations, manuals,
final orders and administrative, reimbursement and other applicable guidelines
of all Governmental Authorities, including HHS, HCFA, or the Office of the
Inspector General of HHS, or any Person succeeding to the functions of any of
the foregoing (whether or not having the force of law).
"Multiemployer Plan" means a "multiemployer plan" as defined in
Section 4001(a)(3) of ERISA to which the Borrower or any member of the
Controlled Group is making or accruing an obligation to make contributions.
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<PAGE> 23
"Net Cash Proceeds" means, with respect to any sale, transfer, or
other disposition of any of the Borrower's or any of its Subsidiaries' Property
(including the sale or transfer of stock in any such Subsidiary) all cash and
Liquid Investments received by the Borrower or any of its Subsidiaries from
such sale, transfer or other disposition after (a) provision for all income or
other taxes payable in respect of the fiscal year in which such sale, transfer
or other disposition occurs measured by or resulting from such sale, transfer,
or other disposition and which are payable in such fiscal year or the
succeeding fiscal year, (b) payment of, or provision for, all brokerage
commissions and other reasonable out-of-pocket fees and expenses actually
incurred, (c) payments in connection with such sale, transfer, or other
disposition made to repay any liabilities, and (d) the amount of reserves
recorded in accordance with GAAP for indemnity or similar obligations of the
Borrower and its Subsidiaries directly related to such sale, transfer or other
disposition.
"Net Income" means, for any period for any Person, such Person's net
income for such period after taxes, as determined in accordance with GAAP,
excluding, however, extraordinary items, including (a) any net gain or loss
during such period arising from the sale, exchange, or other disposition of
capital assets (such term to include all fixed assets and all securities) other
than in the ordinary course of business and (b) any write-up or write-down of
assets.
"Net Restricted Payments" means, for any period, (a) all Restricted
Payments made by the Borrower during such period minus (b) the sum of (i) the
Net Cash Proceeds received from any sales of the Borrower's common stock to any
of the Borrower's employees pursuant to any employee stock option plan,
employee compensation arrangement, or employee benefit plan during such period;
(ii) the amount paid by the Borrower to purchase any of its common stock during
such period that has been contributed to an employee benefit plan of the
Borrower during such period; and (iii) payments in amount not to exceed
$20,000,000.00 made for any purchases by the Borrower of its common stock
during the year ending December 31, 1996; provided that Net Restricted Payments
shall never be less than zero.
"Net Worth" means, at any date for any Person that is a corporation,
the sum of (a) the par value (or value stated on the books of such Person) of
the capital stock of all classes of such Person, (b) the additional paid-in
capital of such Person, and (c) the amount of the surplus and retained
earnings, whether capital or earned, of such Person, all determined in
accordance with GAAP, excluding, however, the value of any redeemable preferred
stock or similar capital stock of such Person.
"Nonprofit Subsidiary" means any of the Borrower's wholly-owned
Subsidiaries that are qualified under Section 501(c) of the Code as a nonprofit
corporation.
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<PAGE> 24
"Nonordinary Course Asset Sales" means (a) the sale of any division of
the Borrower or any of its Subsidiaries, (b) the sale of all of the Facilities
of the Borrower or any of its Subsidiaries in a specific geographic area, or
(c) the sale of stock of a Subsidiary of the Borrower by the Borrower or any of
its Subsidiaries, excluding, however, the Devcon Stock Sale.
"Note" means a Tranche A Note, a Tranche B Note or a Competitive
Advance Note.
"Notice of Borrowing" means a notice of borrowing in the form of the
attached Exhibit C signed by a Responsible Officer of the Borrower.
"Notice of Conversion or Continuation" means a notice of conversion or
continuation in the form of the attached Exhibit D signed by a Responsible
Officer of the Borrower.
"Obligations" means all Advances, Reimbursement Obligations, and other
amounts payable by the Borrower to the Administrative Agent, the Issuing Banks
or the Banks under the Credit Documents.
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"Permitted Liens" means the Liens permitted to exist pursuant to
Section 6.01.
"Person" means an individual, partnership, corporation (including a
business trust), joint stock company, trust, unincorporated association, joint
venture, limited liability company, or other entity, or a government or any
political subdivision or agency thereof or any trustee, receiver, custodian or
similar official.
"Plan" means an employee benefit plan (other than a Multiemployer
Plan) maintained for employees of the Borrower or any member of the Controlled
Group and covered by Title IV of ERISA or subject to the minimum funding
standards under Section 412 of the Code.
"Project QC" means the proposed acquisition by the Borrower or any of
its Subsidiaries of eight facilities from four limited partnerships the general
partner of which is a wholly-owned subsidiary of QualiCorp., Inc.
"Property" of any Person means any property or assets (whether real,
personal, or mixed, tangible or intangible) of such Person.
"Pro Rata Share" means, at any time with respect to any Bank, either
(a) the ratio (expressed as a percentage) of such Bank's Commitments at such
time to the aggregate Commitments at such
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<PAGE> 25
time, (b) if the Commitments have been terminated, the ratio (expressed as a
percentage) of such Bank's aggregate outstanding Advances and Letter of Credit
Exposure at such time to the aggregate outstanding Advances and Letter of
Credit Exposure of all the Banks at such time, or (c) if no Advances are then
outstanding and no Commitments then in effect, the ratio (expressed as a
percentage) of the aggregate principal amount of such Bank's Advances when most
recently outstanding to the aggregate principal amount of all Advances when
most recently outstanding.
"Register" has the meaning set forth in paragraph (c) of Section 9.06.
"Regulations G, T, U, and X" means Regulation G, T, U, and X of the
Federal Reserve Board, as each is from time-to-time in effect, and all official
rulings and interpretations thereunder or thereof.
"Reimbursement Obligations" means all of the obligations of the
Borrower set forth in paragraph (c) of Section 2.14.
"Release" shall have the meaning set forth in CERCLA or under any other
Environmental Law.
"Response" shall have the meaning set forth in CERCLA or under any
other Environmental Law.
"Responsible Officer" means the chief executive officer, president,
chief financial officer, treasurer, general counsel, or secretary of any
Person.
"Restricted Payment" means the making by any Person of any dividends
or other distributions (in cash, property, or otherwise) on, or any payment for
the purchase, redemption or other acquisition of, any shares of any capital
stock of such Person, other than dividends payable in such Person's stock.
"Revolving Borrowing" means a Tranche A Borrowing or a Tranche B
Borrowing.
"Subordinated Debt" means any Debt of the Borrower or any of its
Subsidiaries which is subordinated to their respective obligations under the
Credit Documents and which is on terms and conditions reasonably satisfactory
to the Administrative Agent and the Majority Banks.
"Subsidiary" of a Person means any corporation or other entity of
which more than 50% of the outstanding capital stock or other ownership
interests having ordinary voting power to elect a majority of the board of
directors or similar governing body of such corporation or other entity
(irrespective of whether at such time capital stock or other ownership
interests of any other class
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or classes of such corporation or other entity shall or might have voting power
upon the occurrence of any contingency) is at the time directly or indirectly
owned by such Person, by such Person and one or more Subsidiaries of such
Person or by one or more Subsidiaries of such Person.
"Syndication Agent" means Chase Securities Inc.
"Tangible Net Assets" means, as of any date, (a) total assets of a
Person indicated on its balance sheet less (b) the sum of the value indicated
on such Person's balance sheet of patents, trademarks, copyrights, goodwill,
and other intangible assets.
"Terminating Bank" has the meaning set forth in Section
2.01(c)(iii)(B).
"Termination Event" means (a) the occurrence of a Reportable Event
with respect to a Plan, as described in Section 4043 of ERISA and the
regulations issued thereunder (other than a Reportable Event not subject to the
provision for 30-day notice to the PBGC under such regulations), (b) the
withdrawal of the Borrower or any of its Affiliates from a Plan during a plan
year in which it was a "substantial employer" as defined in Section 4001(a)(2)
of ERISA, (c) the giving of a notice of intent to terminate a Plan under
Section 4041(c) of ERISA, (d) the institution of proceedings to terminate a
Plan by the PBGC, or (e) any other event or condition which constitutes grounds
under Section 4042 of ERISA for the termination of, or the appointment of a
trustee to administer, any Plan.
"Tranche A Advance" means any advance by a Bank to the Borrower as
part of a Tranche A Borrowing and refers to a Base Rate Advance or a Eurodollar
Rate Advance.
"Tranche A Borrowing" means a borrowing consisting of simultaneous
Tranche A Advances made by each Bank pursuant to Section 2.01(a) or Converted
by each Bank to Tranche A Advances of a different Type pursuant to Section
2.02(b). Except as provided in Sections 2.02(c)(iii) and (v) and 2.08(e), all
Advances included in a Borrowing shall be of the same Type.
"Tranche A Commitment" means, for each Bank, the amount set opposite
such Bank's name on the signature pages of this Agreement as its Tranche A
Commitment or, if such Bank has entered into any Assignment and Acceptance
after the Effective Date, set forth for such Bank as its Tranche A Commitment
in the Register maintained by the Administrative Agent pursuant to Section
9.06(c), as such amount may be reduced pursuant to Section 2.05.
"Tranche A Maturity Date" means the earlier of (a) August 19, 2001, as
such date may be extended pursuant to Section 2.01(c), provided the Tranche A
Maturity Date for any Terminating Bank shall be the date such Bank's Tranche A
Advances are payable in full pursuant to
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Section 2.01(c)(iii)(B) and (b) the earlier termination in whole of the
Commitments pursuant to Section 2.05 or Article VII.
"Tranche A Note" means a promissory note of the Borrower payable to
the order of any Bank, in substantially the form of the attached Exhibit E-1,
evidencing indebtedness of the Borrower to such Bank resulting from Tranche A
Advances owing to such Bank.
"Tranche B Advance" means any advance by a Bank to the Borrower as
part of a Tranche B Borrowing and refers to a Base Rate Advance or a Eurodollar
Rate Advance.
"Tranche B Borrowing" means a borrowing consisting of simultaneous
Tranche B Advances of the same Type made by each Bank pursuant to Section
2.01(b) or Converted by each Bank to Tranche B Advances of a different Type
pursuant to Section 2.02(b).
"Tranche B Commitment" means, for each Bank, the amount set opposite
such Bank's name on the signature pages of this Agreement as its Tranche B
Commitment or, if such Bank has entered into any Assignment and Acceptance
after the Effective Date, set forth for such Bank as its Tranche B Commitment
in the Register maintained by the Administrative Agent pursuant to Section
9.06(c), as such amount may be reduced pursuant to Section 2.05.
"Tranche B Commitment Termination Date" means the earlier of (a)
August 18, 1997 and (b) the earlier termination in whole of the Commitments
pursuant to Section 2.05 or Article VII.
"Tranche B Note" means a promissory note of the Borrower payable to
the order of any Bank, in substantially the form of the attached Exhibit E-2,
evidencing indebtedness of the Borrower to such Bank resulting from Tranche B
Advances owing to such Bank.
"Type" has the meaning set forth in Section 1.04.
"Unispec Leases" means the two Lease Agreements, each dated as of June
20, 1986, between Unispec Development Corporation and Geriatrics, Inc.
Section 1.02. Computation of Time Periods. In this Agreement in
the computation of periods of time from a specified date to a later specified
date, the word "from" means "from and including" and the words "to" and "until"
each means "to but excluding".
Section 1.03. Accounting Terms; Changes in GAAP.
(a) All accounting terms not specifically defined in this
Agreement shall be construed in accordance with GAAP applied on a consistent
basis with those applied in the
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preparation of the Financial Statements (except for changes to which the
Borrower's independent public accountants take no exception).
(b) Unless otherwise indicated, all financial statements of the
Borrower, all calculations for compliance with covenants in this Agreement, all
determinations of the Applicable Margin, and all calculations of any amounts to
be calculated under the definitions in Section 1.01 shall be based upon the
consolidated accounts of the Borrower and its Subsidiaries in accordance with
GAAP and consistent with the principles of consolidation applied in preparing
the Financial Statements (except for changes in the principles of consolidation
to which the Borrower's independent public accountants take no exception).
Section 1.04. Classes and Types of Advances. Advances are
distinguished by "Class" and "Type". The "Class" of an Advance refers to the
determination of whether such Advance is a Tranche A Advance or Tranche B
Advance, each of which constitutes a Class. The "Type" of an Advance refers to
the determination whether such Advance is a Eurodollar Rate Advance or Base
Rate Advance, each of which constitutes a Type.
Section 1.05. Miscellaneous. Article, Section, Schedule and
Exhibit references are to Articles and Sections of and Schedules and Exhibits
to this Agreement, unless otherwise specified.
ARTICLE II
THE ADVANCES AND THE LETTERS OF CREDIT
Section 2.01. Tranche A and Tranche B Advances; Extension of
Tranche A Maturity Date.
(a) Tranche A Advances. Each Bank severally agrees, on the terms
and conditions set forth in this Agreement, to make Tranche A Advances to the
Borrower from time-to-time on any Business Day during the period from the date
of this Agreement until the Tranche A Maturity Date in an aggregate amount not
to exceed at any time outstanding (i) such Bank's Tranche A Commitment less
(ii) such Bank's Pro Rata Share of the Letter of Credit Exposure at such time;
provided that, following the making of each Borrowing comprised of Tranche A
Advances, the aggregate outstanding principal amount of the Tranche A Advances,
Letter of Credit Exposure, Competitive Advances and Debt permitted under
Section 6.02(d) shall not exceed the aggregate amount of the Tranche A
Commitments. Each Tranche A Borrowing shall be in an aggregate amount not less
than (A) $500,000 and in integral multiples of $100,000.00 in excess thereof or
(B) if the aggregate outstanding amount of Tranche A Advances is $500,000.00 or
more, $100,000.00 and in integral multiples of $100,000.00 in excess thereof
and shall consist of
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Tranche A Advances of the same Type made on the same day by the Banks ratably
according to their respective Tranche A Commitments. Within the limits of each
Bank's Tranche A Commitment, the Borrower may from time-to-time borrow, prepay
pursuant to Section 2.08 and reborrow under this Section 2.01(a).
(b) Tranche B Advances. Each Bank severally agrees on the terms
and conditions set forth in this Agreement to make Tranche B Advances to the
Borrower from time-to-time on any Business Day during the period from the date
of this Agreement until the Tranche B Commitment Termination Date in an amount
equal to such Bank's Tranche B Commitment. Each Tranche B Borrowing shall be
in an aggregate amount not less than (A) $500,000.00 and in integral multiples
of $100,000.00 in excess thereof or (B) if the aggregate outstanding amount of
Tranche B Advances is $500,000.00 or more, $100,000.00 and in integral
multiples of $100,000.00 in excess thereof and shall consist of Tranche B
Advances of the same Type made on the same day by the Banks ratably according
to their respective Tranche B Commitments. Within the limits of each Bank's
Tranche B Commitment, the Borrower may from time-to-time borrow, prepay
pursuant to Section 2.08 and reborrow under this Section 2.01(b). After the
Tranche B Commitment Termination Date, no Tranche B Advances may be made other
than as Conversions or continuations pursuant to Section 2.02 of Tranche B
Advances outstanding on the Tranche B Commitment Termination Date.
(c) Extension of Tranche A Maturity Date.
(i) So long as no Default shall have occurred and be
continuing at such time, at least 90 but not more than 150 days before
each August 19 beginning August 19, 1998, the Borrower may request in
writing to the Administrative Agent and each Bank that the Banks
extend the Tranche A Maturity Date by one year. On or before the
immediately following July 1 after each such request, each Bank shall
notify the Administrative Agent and the Borrower in writing whether it
elects to so extend the Tranche A Maturity Date. Any failure by a
Bank to so notify the Administrative Agent and the Borrower shall be
deemed to be a decision by such Bank to not extend the Tranche A
Maturity Date.
(ii) If each Bank elects to extend the Tranche A Maturity
Date, the Tranche A Maturity Date shall automatically extend for one
year.
(iii) If the Majority Banks, but not all the Banks elect to
extend the Tranche A Maturity Date (A) the Tranche A Maturity Date and
the Tranche A Commitments of the Banks electing to extend shall extend
by one year, (B) the Tranche A Maturity Date for the Banks not
electing to extend (each a "Terminating Bank") shall remain unchanged
and each Terminating Bank's Tranche A Commitment shall terminate on
such Tranche A Maturity Date and the Borrower shall repay the
outstanding Tranche A Advances made by each
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Terminating Bank on such Tranche A Maturity Date to the extent that
the Tranche A Advances under such Terminating Bank's Tranche A
Commitment are not assumed pursuant to Section 2.15, (C) the Tranche A
Commitment of the Terminating Banks may be assumed and the Terminating
Banks may be replaced in accordance with the procedures in Section
2.15, and (D) if not all of the Terminating Banks' Tranche A
Commitments are assumed in accordance with Section 2.15, each
extending Bank's Pro Rata Share shall be recalculated to take into
account the termination of the Tranche A Commitments of the
Terminating Banks on the Tranche A Maturity Date for such Terminating
Banks.
(iv) If less than the Majority Banks elect to extend the
Tranche A Maturity Date, the Tranche A Maturity Date shall not be
extended for any Bank.
Section 2.02. Method of Borrowing.
(a) Notice. Each Revolving Borrowing shall be made pursuant to a
Notice of Borrowing, given not later than (i) noon (Dallas, Texas time) on the
third Business Day before the date of the proposed Borrowing, in the case of a
Eurodollar Rate Advance or (ii) 10:00 a.m. (Dallas, Texas time) on the Business
Day of the proposed Borrowing, in the case of a Base Rate Advance, by the
Borrower to the Administrative Agent, which shall give to each Bank prompt
notice and use best efforts to give notice not later than 12:00 p.m. (Dallas,
Texas time) on the day of receipt of timely Notice of Borrowing of such
proposed Borrowing by telecopier or telex. Each Notice of a Borrowing shall be
by telecopier or telex, confirmed immediately in writing specifying the
requested (i) date of such Borrowing, (ii) Type and Class of Advances
comprising such Borrowing, (iii) aggregate amount of such Borrowing, and (iv)
if such Borrowing is to be comprised of Eurodollar Rate Advances, Interest
Period for each such Advance. In the case of a proposed Borrowing comprised of
Eurodollar Rate Advances, the Administrative Agent shall promptly notify each
Bank of the applicable interest rate under Section 2.07(b). Each Bank shall
(i) in the case of all Revolving Borrowings other than Revolving Borrowings
made on the same day as the day the Notice of Borrowing is received, before
11:00 a.m. (Dallas, Texas time) on the date of such Revolving Borrowing and
(ii) in the case of Revolving Borrowings made on the same day as the date of
the Notice of Borrowing, before 1:00 p.m. (Dallas, Texas time), make available
for the account of its Applicable Lending Office to the Administrative Agent at
its address referred to in Section 9.02, or such other location as the
Administrative Agent may specify by notice to the Banks, in same day funds,
such Bank's Pro Rata Share of such Revolving Borrowing. After the
Administrative Agent's receipt of such funds and upon fulfillment of the
applicable conditions set forth in Article III, the Administrative Agent will
make such funds available to the Borrower at its account with the
Administrative Agent.
(b) Conversions and Continuations. In order to elect to Convert
or continue an Advance under this Section, the Borrower shall deliver an
irrevocable Notice of Conversion or
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Continuation to the Administrative Agent at the Administrative Agent's office
no later than (i) 11:00 a.m. (Dallas, Texas time) on the Business Day of the
proposed conversion date in the case of a Conversion to a Base Rate Advance and
(ii) no later than noon (Dallas, Texas time) three Business Days in advance of
the proposed Conversion or continuation date in the case of a Conversion to, or
a continuation of, a Eurodollar Rate Advance. Each such Notice of Conversion
or Continuation shall be in writing or by telex or telecopier, confirmed
immediately in writing specifying (i) the requested Conversion or continuation
date (which shall be a Business Day), (ii) the amount, Type, and Class of the
Advance to be Converted or continued, (iii) whether a Conversion or
continuation is requested, and if a Conversion, into what Type of Advance, and
(iv) in the case of a Conversion to, or a continuation of, a Eurodollar Rate
Advance, the requested Interest Period. Promptly after receipt of a Notice of
Conversion or Continuation under this paragraph, the Administrative Agent shall
provide each Bank with a copy thereof and, in the case of a Conversion to or a
Continuation of a Eurodollar Rate Advance, notify each Bank of the applicable
interest rate under Section 2.07(b). For purposes other than the making of
deemed representations and warranties pursuant to Section 3.02, the portion of
Advances comprising part of the same Borrowing that are converted to Advances
of another Type shall constitute a new Revolving Borrowing.
(c) Certain Limitations. Notwithstanding anything in paragraphs
(a) and (b) above:
(i) at no time shall there be more than eight Interest
Periods applicable to outstanding Eurodollar Rate Advances;
(ii) the Borrower may not select Eurodollar Rate Advances
for any Revolving Borrowing if the aggregate amount of such Revolving
Borrowing is less than $5,000,000.00 or at any time when a Default has
occurred and is continuing;
(iii) (A) if any Bank shall, at least one Business Day
before the date of any requested Revolving Borrowing, notify the
Administrative Agent that the introduction of or any change in or in
the interpretation of any law or regulation makes it unlawful, or that
any central bank or other Governmental Authority asserts that it is
unlawful, for such Bank or its Eurodollar Lending Office to perform
its obligations under this Agreement to make Eurodollar Rate Advances
or to fund or maintain Eurodollar Rate Advances, the right of the
Borrower to select Eurodollar Rate Advances for such Bank's Advances
included in such Borrowing or for such Bank's Advances included in any
subsequent Revolving Borrowing shall be suspended until such Bank
shall notify the Administrative Agent that the circumstances causing
such suspension no longer exist, and such Bank's Advances included in
such Revolving Borrowing shall be a Base Rate Advance; (B) such Bank
agrees to use commercially reasonable efforts (consistent with its
internal policies and legal and regulatory restrictions) to designate
a different Applicable Lending Office if the making of such
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designation would avoid the effect of this paragraph and would not, in
the reasonable judgment of such Bank, be otherwise materially
disadvantageous to such Bank; and (C) if such condition shall continue
for such Bank for 60 days, such Bank may be replaced in accordance
with the procedures in Section 2.15;
(iv) if the Administrative Agent is unable to determine
the Eurodollar Rate Advances comprising any requested Revolving
Borrowing, the right of the Borrower to select Eurodollar Rate
Advances for such Revolving Borrowing or for any subsequent Revolving
Borrowing shall be suspended until the Administrative Agent shall
notify the Borrower and the Banks that the circumstances causing such
suspension no longer exist, and each Advance comprising such Revolving
Borrowing shall be a Base Rate Advance;
(v) (A) if any Bank shall, at least one Business Day
before the date of any requested Revolving Borrowing, notify the
Administrative Agent that the Eurodollar Rate for such Bank's
Eurodollar Rate Advance included in such Revolving Borrowing will not
adequately reflect the cost to such Bank of making or funding its
Eurodollar Rate Advance included in such Revolving Borrowing, the
right of the Borrower to select a Eurodollar Rate Advance from such
Bank for such Revolving Borrowing or for any subsequent Revolving
Borrowing shall be suspended until such Bank shall notify the Borrower
and the Banks that the circumstances causing such suspension no longer
exist, and such Bank's Advance included in such Revolving Borrowing
shall be a Base Rate Advance; (B) such Bank agrees to use commercially
reasonable efforts (consistent with its internal policies and legal
and regulatory restrictions) to designate a different Applicable
Lending Office if the making of such designation would avoid the
effect of this paragraph and would not, in the reasonable judgment of
such Bank, be otherwise materially disadvantageous to such Bank; and
(C) if such condition shall continue for such Bank for 60 days, such
Bank may be replaced in accordance with the procedures in Section
2.15; and
(vi) if the Borrower shall fail to select the duration or
continuation of any Interest Period for any Eurodollar Advances in
accordance with the provisions contained in the definition of
"Interest Period" in Section 1.01 and paragraph (b) above, the
Administrative Agent will forthwith so notify the Borrower and the
Banks and such Advances will be made available to the Borrower on the
date of such Revolving Borrowing as Base Rate Advances or, if an
existing Advance, Convert into Base Rate Advances.
(d) Notices Irrevocable. Each Notice of Borrowing and Notice of
Conversion or Continuation shall be irrevocable and binding on the Borrower.
In the case of any Revolving Borrowing which the related Notice of Borrowing
specifies is to be comprised of Eurodollar Rate Advances, the Borrower shall
indemnify each Bank against any loss, out- of-pocket cost or expense actually
incurred by such Bank as a result of any failure to fulfill on or before the
date
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specified in such Notice of Borrowing for such Revolving Borrowing the
applicable conditions set forth in Article III, or any other failure to Convert
such Advances to Eurodollar Rate Advances on the applicable date for Conversion
or continuation, including, without limitation, any loss cost or expense
actually incurred by reason of the liquidation or reemployment of deposits or
other funds acquired by such Bank to fund the Advance to be made by such Bank
as part of such Revolving Borrowing when such Advance, as a result of such
failure, is not made on such date.
(e) Administrative Agent Reliance. Unless the Administrative
Agent shall have received notice from a Bank before the date of any Revolving
Borrowing that such Bank will not make available to the Administrative Agent
such Bank's Pro Rata Share of such Revolving Borrowing, the Administrative
Agent may assume that such Bank has made its Pro Rata Share of such Revolving
Borrowing available to the Administrative Agent on the date of such Revolving
Borrowing in accordance with paragraph (a) of this Section 2.02 and the
Administrative Agent may, in reliance upon such assumption, make available to
the Borrower on such date a corresponding amount. If and to the extent that
such Bank shall not have so made its Pro Rata Share of such Revolving Borrowing
available to the Administrative Agent, such Bank and the Borrower severally
agree to immediately repay to the Administrative Agent on demand such
corresponding amount, together with interest on such amount, for each day from
the date such amount is made available to the Borrower until the date such
amount is repaid to the Administrative Agent, at (i) in the case of the
Borrower, the interest rate applicable on such day to Advances comprising such
Revolving Borrowing and (ii) in the case of such Bank, the Federal Funds Rate
for such day. If such Bank shall repay to the Administrative Agent such
corresponding amount and interest as provided above, such corresponding amount
so repaid shall constitute such Bank's Advance as part of such Revolving
Borrowing for purposes of this Agreement even though not made on the same day
as the other Advances comprising such Revolving Borrowing.
(f) Bank Obligations Several. The failure of any Bank to make the
Advance to be made by it as part of any Revolving Borrowing shall not relieve
any other Bank of its obligation, if any, to make its Advance on the date of
such Revolving Borrowing. No Bank shall be responsible for the failure of any
other Bank to make the Advance to be made by such other Bank on the date of any
Revolving Borrowing.
(g) Notes. The indebtedness of the Borrower to each Bank
resulting from Tranche A Advances owing to such Bank shall be evidenced by a
Tranche A Note of the Borrower payable to the order of such Bank in
substantially the form of Exhibit E-1. The indebtedness of the Borrower to
each Bank resulting from Tranche B Advances owing to such Bank shall be
evidenced by a Tranche B Note of the Borrower payable to the order of such Bank
in substantially the form of Exhibit E-2.
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Section 2.03. Competitive Advances.
(a) Generally. Each Bank severally agrees that the Borrower may
request Competitive Borrowings under this Section 2.03 from time to time on any
Business Day during the period from the date hereof until the date occurring 30
days prior to the Tranche A Maturity Date in the manner set forth below;
provided that, following the making of each Competitive Borrowing, the
aggregate outstanding principal amount of the Tranche A Advances, Letter of
Credit Exposure, Competitive Advances and Debt permitted under Section 6.02(d)
shall not exceed the aggregate amount of the Tranche A Commitments. Within the
limits and on the conditions set forth in this Section 2.03, the Borrower may
from time to time borrow pursuant to paragraph (b) below, prepay and repay
pursuant to Section 2.08 below, and reborrow under this Section 2.03. The
Competitive Advances made by each Bank shall be evidenced by a Competitive
Advance Note in the aggregate amount of the Tranche A Commitments and payable
to the order of such Bank.
(b) Method of Advancing.
(i) The Borrower may request a Competitive Borrowing by
delivering to the Administrative Agent a Competitive Bid Request (A)
in the case of a Competitive Borrowing consisting of Eurodollar
Auction Advances not later than 11:00 a.m. (Dallas, Texas time) four
Business Days before the proposed date of such Borrowing and (B) in
the case of a Competitive Borrowing consisting of Fixed Rate Auction
Advances, not later than 10:00 a.m. (Dallas, Texas time) one Business
Day before the proposed day of such Borrowing. Without the prior
approval of the Administrative Agent, no Competitive Borrowing may be
requested within five Business Days after the delivery of any other
Competitive Bid Request and no more than three Competitive Bid
Requests may be delivered in any calendar month. A Competitive Bid
Request that does not conform substantially to the form of Exhibit G-1
may be rejected by the Administrative Agent and the Administrative
Agent shall promptly notify the Borrower of such rejection. Each
Competitive Bid Request shall specify (1) whether the Borrowing being
requested is to consist of Eurodollar Auction Advances or Fixed Rate
Auction Advances; (2) the date of such Borrowing (which shall be a
Business Day); (3) the aggregate principal amount of such Borrowing,
which shall be a minimum of $5,000,000.00 and in integral multiples of
$1,000,000.00; and (4) the Interest Period with respect thereto.
Promptly after its receipt of a Competitive Bid Request that is not
rejected, the Administrative Agent shall by telecopy in the form set
forth in Exhibit G-2 invite the Banks to bid to make Competitive
Advances pursuant to the Competitive Bid Request.
(ii) Each Bank may, in its sole discretion, make one or
more Competitive Bids to the Borrower as part of such proposed
Competitive Borrowing. Each Competitive Bid by a Bank must be received
by the Administrative Agent by telecopy in the form of Exhibit G-
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<PAGE> 35
3, (A) in the case of a Competitive Borrowing comprised of Eurodollar
Auction Advances, not later than 9:00 a.m. (Dallas, Texas time) three
Business Days before the proposed date of such Competitive Borrowing,
and (B) in the case of a Competitive Borrowing comprised of Fixed
Rate Auction Advances, not later than 9:00 a.m. (Dallas, Texas time)
on the proposed date of such Competitive Borrowing. Competitive Bids
that do not conform substantially to the form of Exhibit G-3 may be
rejected by the Administrative Agent, and the Administrative Agent
shall promptly notify the applicable Bank of such rejection. Each
Competitive Bid shall specify (1) the principal amount, which shall be
a minimum of $5,000,000.00 and in integral multiples of $1,000,000.00,
and may equal the entire principal amount of the Competitive Borrowing
requested, of the Competitive Advance or Advances that the Bank is
willing to make to the Borrower, (2) the Competitive Bid Rate or Rates
at which the Bank is prepared to make such Advance or Advances, and
(3) the Interest Period applicable to such Advance or Advances and the
last day thereof. Any Bank which has not responded to the
Administrative Agent prior to the time specified above shall be deemed
to have elected to decline to make such an offer. A Competitive Bid
submitted by a Bank pursuant to this subsection (ii) shall be
irrevocable. If the Administrative Agent shall elect to submit a
Competitive Bid in its capacity as a Bank, it shall submit such
Competitive Bid directly to the Borrower at least one quarter of an
hour earlier than the time by which the other Banks are required to
submit their Competitive Bids to the Administrative Agent pursuant to
this paragraph (ii).
(iii) The Administrative Agent shall promptly notify the
Borrower by telecopy of the Competitive Bid Rate and the principal
amount of each Competitive Bid in respect of which a Competitive Bid
shall have been made and the identity of the Bank that shall have made
each bid.
(iv) The Borrower shall before 10:00 a.m. (Dallas, Texas
time) at least three Business Days prior to the date of the proposed
Competitive Borrowing, with respect to Competitive Borrowings to be
comprised of Eurodollar Auction Advances, and on the Business Day of
the proposed Competitive Borrowing to be comprised of Fixed Rate
Auction Advances, either (A) cancel such Competitive Borrowing by
giving the Administrative Agent notice to that effect, or (B) accept
one or more of the Competitive Bids made by any Bank or Banks by
giving the Administrative Agent a Notice of Acceptance/Rejection
stating the amount of the Competitive Advances offered by the Banks
which the Borrower has accepted and of the rejection of the remaining
Competitive Bids made by the Banks. The failure of the Borrower to
give such timely notice shall be deemed to be a rejection of each
Competitive Bid. Any Notice of Acceptance/Rejection that does not
substantially conform to the form of Exhibit G-4 may be rejected by
the Administrative Agent by delivering prompt notice of the rejection
to the Borrower. If the Borrower elects to accept any Competitive
Bids, the resulting Competitive Borrowing must be in an aggregate
principal
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<PAGE> 36
amount of not less than $5,000,000.00 and in integral multiples of
$1,000,000.00 or an aggregate principal amount equal to the remaining
balance of the available commitments and cannot exceed the principal
amount specified in the relevant Competitive Bid Request. The
Borrower shall not accept a Competitive Bid made at a particular
Competitive Bid Rate if the Borrower has decided to reject a
Competitive Bid made at a lower Competitive Bid Rate. If the Borrower
shall accept a Competitive Bid or Bids made at a particular
Competitive Bid Rate but the amount of such Competitive Bid or Bids
would cause the total amount to be accepted by the Borrower to exceed
the amount specified in the Competitive Bid Request, then the Borrower
shall accept a portion of such Competitive Bid or Bids in an amount
equal to the amount specified in the Competitive Bid Request less the
amount of all other Competitive Bids so accepted, which acceptance, in
the case of multiple Competitive Bids at such Competitive Bid Rate,
shall be made pro rata in accordance with the amount of each such Bid.
If a Competitive Advance must be in an amount less than $5,000,000.00
because of the provisions above, such Competitive Advance may be for a
minimum of $1,000,000.00 or any integral multiple thereof, and in
calculating the pro rata allocation of acceptances of portions of
multiple bids at a particular Competitive Bid Rate, the amounts shall
be rounded to integral multiples of $1,000,000.00 in a manner which
shall be in the discretion of the Borrower. A notice given by the
Borrower pursuant to this paragraph (iv) shall be irrevocable.
(v) The Administrative Agent shall promptly notify each
bidding Bank by telecopy whether or not its Competitive Bid has been
accepted, and, if so, in what amount and at what Competitive Bid Rate,
and each successful bidder will thereupon become bound, upon the terms
and subject to the conditions hereof, to make the Competitive Advance
in respect of which its Competitive Bid has been accepted in the
amount so specified by the Administrative Agent. The Administrative
Agent shall thereafter promptly notify each Bank of the amount of each
Competitive Advance. Each Bank that is to make a Competitive Advance
as part of such Competitive Borrowing shall, before 2:00 p.m. (Dallas,
Texas time) on the date of such Competitive Borrowing specified in the
notice received from the Administrative Agent, make available to the
Administrative Agent at its address referred to in Section 9.02 such
Bank's Competitive Advance, in immediately available funds. Upon
fulfillment of the applicable conditions set forth herein and, except
as specified in paragraph (vi) below, after receipt by the
Administrative Agent of such funds, the Administrative Agent shall
make such funds available to the Borrower at its account with the
Administrative Agent.
(vi) Unless the Administrative Agent shall have received
notice from a Bank prior to the date of any Competitive Borrowing that
such Bank shall not make available to the Administrative Agent such
Bank's Competitive Advance, the Administrative Agent may assume that
such Bank has made such Advance available to the Administrative Agent
on the
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date of such Competitive Borrowing in accordance with paragraph (a) of
this Section 2.03 and the Administrative Agent may, in reliance upon
such assumption, make available to the Borrower on such date a
corresponding amount. If and to the extent that such Bank shall not
have so made its Competitive Advance available to the Administrative
Agent, such Bank and the Borrower severally agree to immediately repay
to the Administrative Agent on demand such corresponding amount,
together with interest on such amount, for each day from the date such
amount is made available to the Borrower until the date such amount is
repaid to the Administrative Agent, at (A) in the case of the
Borrower, the interest rate applicable on such day to Competitive
Advances comprising such Competitive Borrowing and (B) in the case of
such Bank, the Federal Funds Rate for such day. If such Bank shall
repay to the Administrative Agent such corresponding amount and
interest as provided above, such corresponding amount so repaid shall
constitute such Bank's Competitive Advance as part of such Competitive
Borrowing for purposes of this Agreement even though not made on the
same day as the other Advances comprising such Competitive Borrowing.
Section 2.04. Fees.
(a) Facility Fees.
(i) The Borrower agrees to pay to the
Administrative Agent for the account of each Bank a facility
fee on the amount of such Bank's Tranche A Commitment from the
date of this Agreement until the Tranche A Maturity Date at
the rate equal to the Applicable Margin for facility fees for
Tranche A Advances during such period. The fee payable
pursuant to this clause (i) is due quarterly in arrears on the
first day of each January, April, July, and October commencing
October 1, 1996 and on the Tranche A Maturity Date.
(ii) The Borrower agrees to pay to the
Administrative Agent for the account of each Bank a facility
fee on the amount of such Bank's Tranche B Commitment from the
date of this Agreement until the Tranche B Commitment
Termination Date at the rate equal to the Applicable Margin
for facility fees for Tranche B Advances during such period.
The fee payable pursuant to this clause (ii) is due quarterly
in arrears on the first day of each January, April, July, and
October commencing October 1, 1996 and on the Tranche B
Commitment Termination Date.
(b) Agents' Fees. The Borrower agrees to pay to the
Administrative Agent, the Documentation Agent and the Syndication Agent the
syndication, agent and other fees and expenses described in the letters dated
June 3, 1996 from the Borrower on the dates required by such letters.
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(c) Letter of Credit Fees. The Borrower agrees to pay (i) to the
Administrative Agent for the pro rata benefit of the Banks, a fee per annum for
each Letter of Credit equal to the Applicable Margin for Eurodollar Rate
Advances of the face amount of such Letter of Credit and (ii) to such Issuing
Bank, a fee for each Letter of Credit of 1/8% per annum of the face amount of
such Letter of Credit. Each such fee shall be based on the maximum amount
available to be drawn under such Letter of Credit from the date of issuance of
the Letter of Credit until its Expiration Date and be payable quarterly in
advance on the date of the issuance of the Letter of Credit for the period from
such date until the end of the calendar quarter in which such Letter of Credit
is issued and on the first day of each January, April, July, and October
thereafter until its Expiration Date.
Section 2.05. Reduction of the Commitments. (a) The Borrower shall
have the right, upon at least three Business Days' irrevocable notice to the
Administrative Agent, to terminate in whole or reduce ratably in part the
unused portion of the Tranche A Commitments or the Tranche B Commitments;
provided that each partial reduction shall be in the aggregate amount of
$5,000,000.00 or an integral multiple of $1,000,000.00.
(b) The Tranche A Commitments shall automatically reduce on the
first anniversary of any Nonordinary Course Asset Sale, by an amount equal to
the Net Cash Proceeds received by the Borrower or any of its Subsidiaries from
such Nonordinary Course Asset Sale, the proceeds of which are not used for
Acquisition Expenditures within one year from the date of the Nonordinary
Course Asset Sale. For purposes of this paragraph (b), the Net Cash Proceeds
from a Nonordinary Course Asset Sale will be deemed to be used to make the
first Acquisition Expenditures made during the one-year period after the date
of such Nonordinary Course Asset Sale.
(c) Any reduction or termination of the Commitments pursuant to
this Section 2.05 shall be permanent, with no obligation of the Banks to
reinstate such Commitments and the facility fees provided for in Section
2.04(a)(i) shall thereafter be computed on the basis of the Commitments, as so
reduced.
Section 2.06. Repayment.
(a) Tranche A Advances. The Borrower shall repay the outstanding
principal amount of each Tranche A Advance on the Tranche A Maturity Date.
(b) Tranche B Advances. The Borrower shall repay the outstanding
principal amount of each Tranche B Advance on the Tranche B Commitment
Termination Date or ratably based on each Bank's Pro Rata Share in 15
installments of 1/16th of the aggregate principal amount of the Tranche B
Advances outstanding on August 18, 1997, each such installment payable on the
first
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day of each calendar quarter beginning with October 1, 1997 and a final
installment equal to the outstanding principal amount of the Tranche B Advances
payable on July 1, 2001.
(c) Competitive Advances. The Borrower shall repay to the
Administrative Agent for the account of each Bank which has made a Competitive
Advance to the Borrower on the maturity date of each Competitive Advance (such
maturity date being that specified by the Borrower for repayment of such
Competitive Advance in the related Notice of Acceptance/Rejection delivered
pursuant to Section 2.03 above) the then unpaid principal amount of such
Competitive Advance.
Section 2.07. Interest. The Borrower shall pay interest on the
unpaid principal amount of each Advance made by each Bank from the date of such
Advance until such principal amount shall be paid in full, at the following
rates per annum:
(a) Base Rate Advances. If such Advance is a Base Rate Advance, a
rate per annum equal at all times to the lesser of (i) the Adjusted Base Rate
in effect from time-to-time plus the Applicable Margin and (ii) the Maximum
Rate, payable in arrears on the last day of each calendar quarter and on the
date such Base Rate Advance shall be paid in full, provided that any amount of
principal which is not paid when due (whether at stated maturity, by
acceleration or otherwise) shall bear interest from the date on which such
amount is due until such amount is paid in full, payable on demand, at a rate
per annum equal at all times to the lesser of (i) the Adjusted Base Rate in
effect from time-to-time plus the Applicable Margin plus 2% and (ii) the
Maximum Rate.
(b) Eurodollar Rate Advances. If such Advance is a Eurodollar
Rate Advance, a rate per annum equal at all times during the Interest Period
for such Advance to the lesser of (i) the Eurodollar Rate for such Interest
Period plus the Applicable Margin and (ii) the Maximum Rate, payable on the
last day of such Interest Period, and, in the case of six-month Interest
Periods, on the day which occurs during such Interest Period three months from
the first day of such Interest Period; provided that any amount of principal
which is not paid when due (whether at stated maturity, by acceleration or
otherwise) shall bear interest from the date on which such amount is due until
such amount is paid in full, payable on demand, at a rate per annum equal at
all times to the lesser of (i) rate required to be paid on such Advance
immediately prior to the date on which such amount became due plus 2% and (ii)
the Maximum Rate.
(c) Eurodollar Auction Advances. If such Advance is a Eurodollar
Auction Advance, a rate per annum equal at all times during the Interest Period
for such Advance to the lesser of (i) the sum of the Eurodollar Rate for the
Interest Period in effect for such Advance plus the Margin offered by the Bank
making such Advance and accepted by the Borrower pursuant to Section 2.03(b)
and (ii) the Maximum Rate, payable on the last day of such Interest Period,
and, in the case of six-month Interest Periods, on the day which occurs during
such Interest Period three
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months from the first day of such Interest Period; provided that any amount of
principal which is not paid when due (whether at stated maturity, by
acceleration or otherwise) shall bear interest from the date on which such
amount is due until such amount is paid in full, payable on demand, at a rate
per annum equal at all times to the lesser of (i) the rate required to be paid
on such Advance immediately prior to the date on which such amount became due
plus 2% and (ii) the Maximum Rate.
(d) Fixed Rate Auction Advances. If such Advance is a Fixed Rate
Auction Advance, a rate per annum equal at all times during the Interest Period
for such Advance to the lesser of (i) the fixed rate of interest offered by the
Bank making such Advance and accepted by the Borrower pursuant to Section
2.03(b) and (ii) the Maximum Rate, payable on the last day of such Interest
Period and, in the case of Interest Periods longer than three months, on the
day which occurs during such Interest Period three months from the first day of
such Interest Period and every three months thereafter; provided that any
amount of principal which is not paid when due (whether at stated maturity, by
acceleration or otherwise) shall bear interest from the date on which such
amount is due until such amount is paid in full, payable on demand, at a rate
per annum equal at all times to the lesser of (i) the rate required to be paid
on such Advance immediately prior to the date on which such amount became due
plus 2% and (ii) the Maximum Rate.
(e) Additional Interest on Eurodollar Advances. The Borrower
shall pay to each Bank, so long as any such Bank shall be required under
regulations of the Federal Reserve Board to maintain reserves with respect to
liabilities or assets consisting of or including Eurocurrency Liabilities,
additional interest on the unpaid principal amount of each Eurodollar Advance
of such Bank, from the later of (i) the date of such Advance and (ii) the date
such reserve requirement is imposed until the earlier of (A) the date such
principal amount is paid in full and (B) the date such reserve requirement is
suspended, at an interest rate per annum equal at all times to the remainder
obtained by subtracting (1) the Eurodollar Rate for the Interest Period for
such Advance from (2) the rate obtained by dividing such Eurodollar Rate by a
percentage equal to 100% minus the Eurodollar Rate Reserve Percentage of such
Bank for such Interest Period, payable on each date on which interest is
payable on such Advance. Such additional interest payable to any Bank shall be
determined by such Bank and notified to the Borrower through the Administrative
Agent (such notice to include the calculation of such additional interest,
which calculation shall be conclusive in the absence of manifest error). Each
Bank agrees to use commercially reasonable efforts (consistent with its
internal policy and legal and regulatory restrictions) to designate a different
Applicable Lending Office if the making of such a designation would avoid the
effect of this paragraph and would not, in the reasonable judgment of such
Bank, be otherwise materially disadvantageous to such Bank.
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(f) Usury Recapture. In the event the rate of interest chargeable
under this Agreement or the Notes at any time is greater than the Maximum Rate,
the unpaid principal amount of the Notes shall bear interest at the Maximum
Rate until the total amount of interest paid or accrued on the Notes equals the
amount of interest which would have been paid or accrued on the Notes if the
stated rates of interest set forth in this Agreement had at all times been in
effect.
In the event, upon payment in full of the Notes, the total
amount of interest paid or accrued under the terms of this Agreement and the
Notes is less than the total amount of interest which would have been paid or
accrued if the rates of interest set forth in this Agreement had, at all times,
been in effect, then the Borrower shall, to the extent permitted by applicable
law, pay the Administrative Agent for the account of the Banks an amount equal
to the difference between (i) the lesser of (A) the amount of interest which
would have been charged on the Notes if the Maximum Rate had, at all times,
been in effect and (B) the amount of interest which would have accrued on the
Notes if the rates of interest set forth in this Agreement had at all times
been in effect and (ii) the amount of interest actually paid or accrued under
this Agreement on the Notes.
In the event the Banks ever receive, collect or apply as
interest any sum in excess of the Maximum Rate, such excess amount shall, to
the extent permitted by law, be applied to the reduction of the principal
balance of the Notes, and if no such principal is then outstanding, such excess
or part thereof remaining shall be paid to the Borrower.
Section 2.08. Prepayments.
(a) Right to Prepay. The Borrower shall have no right to prepay
any principal amount of any Advance except as provided in this Section 2.08.
(b) Optional. The Borrower may elect to prepay any of the
Advances, after giving (i) by 9:00 a.m. (Dallas, Texas time) in the case of
Eurodollar Advances, at least two Business Days' or (ii) by 11:00 a.m. (Dallas,
Texas time) in case of Base Rate Advances or Fixed Rate Auction Advances, same
Business Day's prior written notice to the Administrative Agent stating the
proposed date and aggregate principal amount of such prepayment, whether such
prepayment should be applied to reduce outstanding Tranche A Advances, Tranche
B Advances, or Competitive Advances and, if applicable, the relevant Interest
Period for the Advances to be repaid. If any such notice is given, the
Borrower shall prepay Advances comprising part of the same Borrowing in whole
or ratably in part in an aggregate principal amount equal to the amount
specified in such notice, together with accrued interest to the date of such
prepayment on the principal amount prepaid and amounts, if any, required to be
paid pursuant to Section 2.09 as a result of such prepayment being made on such
date; provided, however, that each partial
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prepayment shall be in an aggregate principal amount in integral multiples of
$1,000,000.00 so long as $5,000,000.00 in principal is outstanding.
(c) Mandatory.
(i) On any date on which the outstanding principal amount
of the Tranche A Advances plus the outstanding principal amount of the
Competitive Advances plus the Letter of Credit Exposure plus the
outstanding principal amount of all Debt permitted under Section
6.02(d) exceeds the Tranche A Commitment, the Borrower agrees to make
a prepayment of the Tranche A Advances and, if the Tranche A Advances
have been repaid in full or are paid in full in connection with such
prepayment, of the Competitive Advances in the amount of such excess.
(ii) Before the Tranche B Commitment Termination Date, on
the date of each reduction of the aggregate Tranche B Commitments
pursuant to Section 2.05, the Borrower agrees to make a prepayment in
respect of the outstanding amount of Tranche B Advances to the
extent, if any, that the aggregate unpaid principal amount of all
Tranche B Advances exceeds the Tranche B Commitment, as so reduced.
(iii) Each prepayment pursuant to this Section 2.08(c)
shall be accompanied by accrued interest on the amount prepaid to the
date of such prepayment and amounts, if any, required to be paid
pursuant to Section 2.09 as a result of such prepayment being made on
such date.
(d) Application of Prepayments. Each prepayment of Tranche B
Advances made after the Tranche B Commitment Termination Date shall be applied
to future scheduled Tranche B Advance principal payments, at the Borrower's
option, (i) in the inverse order of their maturity or (ii) pro rata.
(e) Illegality. If any Bank shall notify the Administrative Agent
and the Borrower that the introduction of or any change in or in the
interpretation of any law or regulation makes it unlawful, or that any central
bank or other Governmental Authority asserts that it is unlawful for such Bank
or its Eurodollar Lending Office to perform its obligations under this
Agreement to maintain any Eurodollar Advances of such Bank then outstanding
hereunder, (i) the Borrower shall, no later than 11:00 a.m. (Dallas, Texas
time), (A) if not prohibited by law or regulation to maintain such Eurodollar
Advances for the duration of the Interest Period, on the last day of the
Interest Period for each outstanding Eurodollar Advance or (B) if prohibited by
law or regulation to maintain such Eurodollar Advances for the duration of the
Interest Period, on the second Business Day following its receipt of such
notice, prepay all of the Eurodollar Advances of such Bank then outstanding,
together with accrued interest on the principal amount prepaid to
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the date of such prepayment, (ii) such Bank shall simultaneously make a Base
Rate Advance or Fixed Rate Auction Advance, as applicable, to the Borrower on
such date in an amount equal to the aggregate principal amount of the
Eurodollar Advances prepaid to such Bank, and (iii) the right of the Borrower
to select Eurodollar Advances for any subsequent Borrowing from such Bank shall
be suspended until such Bank shall notify the Administrative Agent that the
circumstances causing such suspension no longer exist. Each Bank agrees to use
commercially reasonable efforts (consistent with its internal policies and
legal and regulatory restrictions) to designate a different Applicable Lending
Office if the making of such designation would avoid the effect of this
paragraph and would not, in the reasonable judgment of such Bank, be otherwise
materially disadvantageous to such Bank. If the condition requiring the
prepayment under this paragraph shall continue for such Bank for 60 days, such
Bank may be replaced in accordance with the procedures in Section 2.15.
(f) Ratable Payments; Effect of Notice. Each payment of any
Advance pursuant to this Section 2.08 or any other provision of this Agreement
shall be made in a manner such that all Advances comprising part of the same
Borrowing are paid in whole or ratably in part. All notices given pursuant to
this Section 2.08 shall be irrevocable and binding upon the Borrower.
Section 2.09. Breakage Costs. If (a) any payment of principal of
any Eurodollar Advance is made other than on the last day of the Interest
Period for such Advance, except as a result of Section 2.08(e) or (b) the
Borrower fails to make a principal or interest payment with respect to any
Eurodollar Advance on the date such payment is due and payable, the Borrower
shall, within 10 days of any written demand sent by any Bank to the Borrower
through the Administrative Agent, pay to the Administrative Agent for the
account of such Bank any amounts (without duplication of any other amounts
payable in respect of breakage costs) required to compensate such Bank for any
additional losses, out-of-pocket costs or expenses which it may reasonably
incur as a result of such payment or nonpayment, including, without limitation,
any loss, cost or expense actually incurred by reason of the liquidation or
reemployment of deposits or other funds acquired by any Bank to fund or
maintain such Advance.
Section 2.10. Increased Costs.
(a) Eurodollar Advances. If, due to either (i) the introduction
of or any change (other than any change by way of imposition or increase of
reserve requirements 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 Bank of agreeing to make or making, funding or maintaining
Eurodollar Advances, then the Borrower shall from time-to-time, upon demand by
such Bank (with a copy of such demand to the Administrative Agent), immediately
pay to the Administrative Agent for the account of such
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Bank additional amounts (without duplication of any other amounts payable in
respect of increased costs) sufficient to compensate such Bank for such
increased cost; provided, however, that, before making any such demand, each
Bank agrees to use commercially reasonable efforts (consistent with its
internal policy and legal and regulatory restrictions) to designate a different
Applicable Lending Office if the making of such a designation would avoid the
need for, or reduce the amount of, such increased cost and would not, in the
reasonable judgment of such Bank, be otherwise materially disadvantageous to
such Bank. A certificate as to the amount of such increased cost and detailing
the calculation of such cost submitted to the Borrower and the Administrative
Agent by such Bank shall be conclusive and binding for all purposes, absent
manifest error. If the condition requiring payment under this paragraph shall
continue for a Bank for 60 days, such Bank may be replaced in accordance with
the procedures in Section 2.15.
(b) Capital Adequacy. If any Bank or the Issuing Bank determines
in good faith 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) implemented or effective after the date of this
Agreement affects or would affect the amount of capital required or expected to
be maintained by such Bank or the Issuing Bank or any corporation controlling
such Bank or the Issuing Bank and that the amount of such capital is increased
by or based upon the existence of such Bank's commitment to lend or the Issuing
Bank's commitment to issue the Letters of Credit and other commitments of this
type, then, upon 30 days prior written notice by such Bank or the Issuing Bank
(with a copy of any such demand to the Administrative Agent), the Borrower
shall immediately pay to the Administrative Agent for the account of such Bank
or to the Issuing Bank, as the case may be, from time-to-time as specified by
such Bank or the Issuing Bank, additional amounts (without duplication of any
other amounts payable in respect of increased costs) sufficient to compensate
such Bank or the Issuing Bank, in light of such circumstances, (i) with respect
to such Bank, to the extent that such Bank reasonably determines such increase
in capital to be allocable to the existence of such Bank's commitment to lend
under this Agreement and (ii) with respect to the Issuing Bank, to the extent
that the Issuing Bank reasonably determines such increase in capital to be
allocable to the issuance or maintenance of the Letters of Credit. A
certificate as to such amounts and detailing the calculation of such amounts
submitted to the Borrower by such Bank or the Issuing Bank shall be conclusive
and binding for all purposes, absent manifest error. The Borrower shall not be
obligated to compensate any Bank or the Issuing Bank pursuant to this paragraph
(b) for reduced return accruing prior to the date which is 90 days before such
Bank or the Issuing Bank requests compensation; provided that if any law, rule
or regulation, or interpretation or administration thereof, or any request or
directive giving rise to reduced returns has retroactive effect, such Bank or
the Issuing Bank shall be entitled to claim compensation under this paragraph
for the period commencing on such date of retroactive effect through the date
of adoption or change or promulgation thereof without regard to the foregoing
limitation. If the condition requiring
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payment under this paragraph shall continue for a Bank for 60 days, such Bank
may be replaced in accordance with the procedures in Section 2.15.
(c) Letters of Credit. If any change in any law or regulation or
in the interpretation thereof by any court or administrative or Governmental
Authority charged with the administration thereof shall either (i) impose,
modify, or deem applicable any reserve, special deposit, or similar requirement
against letters of credit issued by, or assets held by, or deposits in or for
the account of, the Issuing Bank or (ii) impose on the Issuing Bank any other
condition regarding the provisions of this Agreement relating to the Letters of
Credit or any Letter of Credit Obligations, and the result of any event
referred to in the preceding clause (i) or (ii) shall be to increase the cost
to the Issuing Bank of issuing or maintaining any Letter of Credit (which
increase in cost shall be determined by the Issuing Bank's reasonable
allocation of the aggregate of such cost increases resulting from such event),
then, upon demand by the Issuing Bank, the Borrower shall pay to the Issuing
Bank, from time-to-time as specified by the Issuing Bank, additional amounts
which shall be sufficient to compensate the Issuing Bank for such increased
cost. The Issuing Bank agrees to use commercially reasonable efforts
(consistent with internal policy and legal and regulatory restrictions) to
designate a different Applicable Lending Office for the booking of its Letters
of Credit if the making of such designation would avoid the effect of this
paragraph and would not, in the reasonable judgment of the Issuing Bank, be
otherwise materially disadvantageous to the Issuing Bank. A certificate as to
such increased cost incurred by the Issuing Bank, as a result of any event
mentioned in clause (i) or (ii) above, and detailing the calculation of such
increased costs submitted by the Issuing Bank to the Borrower, shall be
conclusive and binding for all purposes, absent manifest error. If the
condition requiring payment under this paragraph shall continue for a Bank for
60 days, such Bank may be replaced in accordance with the procedures in Section
2.15.
Section 2.11. Payments and Computations.
(a) Payment Procedures. The Borrower shall make each payment
under this Agreement and under the Notes not later than 11:00 a.m. (Dallas,
Texas time) on the day when due in Dollars to the Administrative Agent at the
location referred to in the Notes (or such other location as the Administrative
Agent shall designate in writing to the Borrower) in same day funds. The
Administrative Agent will promptly thereafter, and in any event prior to the
close of business on the day any timely payment is made, cause to be
distributed like funds relating to the payment of principal, interest or fees
ratably (other than amounts payable solely to the Administrative Agent, the
Issuing Bank, or a specific Bank pursuant to Section 2.03, 2.04(b), 2.04(c),
2.07(c), (d), or (e), 2.09, 2.10, 2.12, or 9.07 but after taking into account
payments effected pursuant to Section 9.04) in accordance with each Bank's Pro
Rata Share to the Banks for the account of their respective Applicable Lending
Offices, and like funds relating to the payment of any other
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amount payable to any Bank or the Issuing Bank to such Bank for the account of
its Applicable Lending Office, in each case to be applied in accordance with
the terms of this Agreement.
(b) Computations. All computations of interest based on the Base
Rate shall be made by the Administrative Agent on the basis of a year of 365 or
366 days, as the case may be, and all computations of interest based on the
Eurodollar Rate, the Federal Funds Rate, and of fees shall be made by the
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. Each
determination by the Administrative Agent of an interest rate shall be
conclusive and binding for all purposes, absent manifest error.
(c) Non-Business Day Payments. Whenever any payment 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, that if such extension would cause payment of
interest on or principal of Eurodollar Rate Advances to be made in the next
following calendar month, such payment shall be made on the next preceding
Business Day.
(d) Administrative Agent Reliance. Unless the Administrative
Agent shall have received written notice from the Borrower prior to the date on
which any payment is due to the Banks that the Borrower will not make such
payment in full, the Administrative Agent may assume that the Borrower has made
such payment in full to the Administrative Agent on such date and the
Administrative Agent may, in reliance upon such assumption, cause to be
distributed to each Bank on such date an amount equal to the amount then due
such Bank. If and to the extent the Borrower shall not have so made such
payment in full to the Administrative Agent, each Bank shall repay to the
Administrative Agent forthwith on demand such amount distributed to such Bank,
together with interest, for each day from the date such amount is distributed
to such Bank until the date such Bank repays such amount to the Administrative
Agent, at the Federal Funds Rate for such day.
Section 2.12. Taxes.
(a) No Deduction for Certain Taxes. Any and all payments by the
Borrower shall be made, in accordance with Section 2.11, 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 Bank, the Issuing Bank, and the Administrative
Agent, taxes imposed on its income and franchise taxes imposed on it (all such
nonexcluded taxes, levies, imposts, deductions, charges, withholdings and
liabilities being hereinafter referred to as "Taxes"). If the Borrower shall
be required by law to deduct any Taxes from or in respect of any sum payable to
any Bank, the Issuing Bank, or the Administrative
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Agent, (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 2.12), such Bank, the Issuing Bank,
or the Administrative Agent (as the case may be) receives an amount equal to
the sum it would have received had no such deductions been made; provided,
however, that if the Borrower's obligation to deduct or withhold Taxes is
caused solely by such Bank's, the Issuing Bank's, or the Administrative Agent's
failure to provide the forms described in paragraph (d) of this Section 2.12
and such Bank, the Issuing Bank, or the Administrative Agent could have
provided such forms, no such increase shall be required; (ii) the Borrower
shall make such deductions; and (iii) the Borrower shall pay the full amount
deducted to the relevant taxation authority or other authority in accordance
with applicable law.
(b) Other Taxes. In addition, the 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 or from the
execution, delivery or registration of, or otherwise with respect to, this
Agreement, the Notes, or the other Credit Documents (hereinafter referred to as
"Other Taxes").
(c) Indemnification. The Borrower indemnifies each Bank, the
Issuing Bank, and the Administrative Agent for the full amount of Taxes or
Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by
any jurisdiction on amounts payable under this Section 2.12) paid by such Bank,
the Issuing Bank, or the Administrative Agent (as the case may be) and any
liability (including interest and expenses) arising therefrom or with respect
thereto, whether or not such Taxes or Other Taxes were correctly or legally
asserted. Each payment required to be made by the Borrower in respect of this
indemnification shall be made to the Administrative Agent for the benefit of
any party claiming such indemnification within 30 days from the date the
Borrower receives written demand detailing the calculation of such amounts
therefor from the Administrative Agent on behalf of itself as Administrative
Agent, the Issuing Bank, or any such Bank. If any Bank, the Administrative
Agent, or the Issuing Bank receives a refund in respect of any taxes paid by
the Borrower under this paragraph (c), such Bank, the Administrative Agent, or
the Issuing Bank, as the case may be, shall promptly pay to the Borrower the
Borrower's share of such refund.
(d) Foreign Bank Withholding Exemption. Each Bank and Issuing
Bank that is not incorporated under the laws of the United States of America or
a state thereof agrees that it will deliver to the Borrower and the
Administrative Agent on the date of this Agreement or upon the effectiveness of
any Assignment and Acceptance (i) two duly completed copies of United States
Internal Revenue Service Form 1001 or 4224 or successor applicable form, as the
case may be, certifying in each case that such Bank is entitled to receive
payments under this Agreement and the Notes payable to it, without deduction or
withholding of any United States federal income taxes, (ii) if applicable, an
Internal Revenue Service Form W-8 or W-9 or successor applicable
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form, as the case may be, to establish an exemption from United States backup
withholding tax, and (iii) any other governmental forms which are necessary or
required under an applicable tax treaty or otherwise by law to reduce or
eliminate any withholding tax, which have been reasonably requested by the
Borrower. Each Bank which delivers to the Borrower and the Administrative
Agent a Form 1001 or 4224 and Form W-8 or W-9 pursuant to the next preceding
sentence further undertakes to deliver to the Borrower and the Administrative
Agent two further copies of the said letter and Form 1001 or 4224 and Form W-8
or W-9, or successor applicable forms, or other manner of certification, as the
case may be, on or before the date that any such letter or form expires or
becomes obsolete or after the occurrence of any event requiring a change in the
most recent letter and form previously delivered by it to the Borrower and the
Administrative Agent, and such extensions or renewals thereof as may reasonably
be requested by the Borrower and the Administrative Agent certifying in the
case of a Form 1001 or 4224 that such Bank is entitled to receive payments
under this Agreement without deduction or withholding of any United States
federal income taxes. If an event (including without limitation any change in
treaty, law or regulation) has occurred prior to the date on which any delivery
required by the preceding sentence would otherwise be required which renders
all such forms inapplicable or which would prevent any Bank from duly
completing and delivering any such letter or form with respect to it and such
Bank advises the Borrower and the Administrative Agent that it is not capable
of receiving payments without any deduction or withholding of United States
federal income tax, and in the case of a Form W-8 or W-9, establishing an
exemption from United States backup withholding tax, such Bank shall not be
required to deliver such letter or forms. The Borrower shall withhold tax at
the rate and in the manner required by the laws of the United States with
respect to payments made to a Bank failing to timely provide the requisite
Internal Revenue Service forms.
Section 2.13. Sharing of Payments, Etc. If any Bank shall obtain
any payment (whether voluntary, involuntary, through the exercise of any right
of set-off or otherwise) on account of the Advances made by it in excess of its
Pro Rata Share of payments on account of the Advances or Letter of Credit
Obligations obtained by all the Banks, such Bank shall notify the
Administrative Agent and forthwith purchase from the other Banks such
participations in the Advances made by them or Letter of Credit Obligations
held by them as shall be necessary to cause such purchasing Bank to share the
excess payment ratably in accordance with the requirements of this Agreement
with each of them; provided, however, that if all or any portion of such excess
payment is thereafter recovered from such purchasing Bank, such purchase from
each Bank shall be rescinded and such Bank shall repay to the purchasing Bank
the purchase price to the extent of such Bank's ratable share (according to the
proportion of (a) the amount of the participation sold by such Bank to the
purchasing Bank as a result of such excess payment to (b) the total amount of
such excess payment) of such recovery, together with an amount equal to such
Bank's ratable share (according to the proportion of (a) the amount of such
Bank's required repayment to the purchasing Bank to (b) the total amount of all
such required
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repayments to the purchasing Bank) of any interest or other amount paid or
payable by the purchasing Bank in respect of the total amount so recovered.
The Borrower agrees that any Bank so purchasing a participation from another
Bank pursuant to this Section 2.13 may, to the fullest extent permitted by law,
unless and until rescinded as provided above, exercise all its rights of
payment (including the right of set-off) with respect to such participation as
fully as if such Bank were the direct creditor of the Borrower in the amount of
such participation.
Section 2.14. Letters of Credit.
(a) Issuance. From time-to-time from the date of this
Agreement until three months before the Tranche A Maturity Date, at the request
of the Borrower, an Issuing Bank shall, on the terms and conditions hereinafter
set forth, issue, increase, or extend the expiration date of Letters of Credit
for the account of the Borrower on any Business Day. No Letter of Credit will
be issued, increased, or extended:
(i) if such issuance, increase, or extension would cause
the Letter of Credit Exposure to exceed the lesser of (1)
$50,000,000.00 and (2) the aggregate Tranche A Commitments less the
aggregate outstanding principal amount of all Tranche A Advances,
Competitive Advances, and Debt permitted under Section 6.02(d);
(ii) unless such Letter of Credit has an Expiration Date
not later than the earlier of (A) one year after the date of issuance
thereof and (B) the Tranche A Maturity Date;
(iii) unless such Letter of Credit is in form and substance
acceptable to such Issuing Bank in its sole discretion;
(iv) unless such Letter of Credit is a standby letter of
credit not supporting the repayment of Funded Debt of any Person;
(v) unless the Borrower has delivered to such Issuing
Bank a completed and executed letter of credit application on such
Issuing Bank's standard form which shall contain terms no more
restrictive than the terms of this Agreement; and
(vi) unless such Letter of Credit is governed by the
Uniform Customs and Practice for Documentary Credits (1993 Revision),
International Chamber of Commerce Publication No. 500 or any successor
to such publication. If the terms of any letter of credit application
referred to in the foregoing clause (v) conflicts with the terms of
this Agreement, the terms of this Agreement shall control.
(b) Participations. (i) On the Effective Date, such Issuing Bank
shall be deemed to have sold to each Bank and each other Bank shall be deemed
to have purchased from such Issuing
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Bank a participation equal to such Bank's Pro Rata Share at such date in the
Letter of Credit Obligations related to each Letter of Credit issued under the
Existing Credit Agreement and outstanding on the Effective Date and (ii) upon
the date of the issuance or increase of a Letter of Credit occurring on or
after the Effective Date, such Issuing Bank shall be deemed to have sold to
each other Bank and each other Bank shall have been deemed to have purchased
from such Issuing Bank a participation in the related Letter of Credit
Obligations equal to such Bank's Pro Rata Share at such date and such sale and
purchase shall otherwise be in accordance with the terms of this Agreement.
Such Issuing Bank shall promptly notify each such participant Bank by telex,
telephone, or telecopy of each Letter of Credit issued or increased and the
actual dollar amount of such Bank's participation in such Letter of Credit.
(c) Reimbursement. The Borrower hereby agrees to pay on demand to
such Issuing Bank for the benefit of the Banks in respect of each Letter of
Credit an amount equal to any amount paid by such Issuing Bank under or in
respect of such Letter of Credit. In the event such Issuing Bank makes a
payment pursuant to a request for draw presented under a Letter of Credit and
such payment is not promptly reimbursed by the Borrower upon demand, such
Issuing Bank shall give notice of such payment to the Administrative Agent and
the Banks, and each Bank shall promptly reimburse such Issuing Bank for such
Bank's Pro Rata Share of such payment, and such reimbursement shall be deemed
for all purposes of this Agreement to constitute a Tranche A Borrowing
comprised of Base Rate Advances to the Borrower from such Bank. If such
reimbursement is not made by any Bank to the Issuing Bank on the same day on
which such Issuing Bank shall have made payment on any such draw, such Bank
shall pay interest thereon to such Issuing Bank at a rate per annum equal to
the Federal Funds Rate. The Borrower hereby unconditionally and irrevocably
authorizes, empowers, and directs the Administrative Agent and the Banks to
record and otherwise treat such payment under a Letter of Credit not
immediately reimbursed by the Borrower as a Tranche A Borrowing comprised of
Base Rate Advances to the Borrower.
(d) Obligations Unconditional. The obligations of the Borrower
under this Agreement in respect of each Letter of Credit shall be unconditional
and irrevocable, and shall be paid strictly in accordance with the terms of
this Agreement under all circumstances, notwithstanding the following
circumstances:
(i) any lack of validity or enforceability of any Letter
of Credit Documents;
(ii) any amendment or waiver of or any consent to
departure from any Letter of Credit Documents;
(iii) the existence of any claim, set-off, defense or other
right which the Borrower may have at any time against any beneficiary
or transferee of such Letter of Credit (or any
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Persons for whom any such beneficiary or any such transferee may be
acting), such Issuing Bank or any other person or entity, whether in
connection with this Agreement, the transactions contemplated in this
Agreement or in any Letter of Credit Documents or any unrelated
transaction;
(iv) any statement or any other document presented under
such Letter of Credit proving to be forged, fraudulent, invalid or
insufficient in any respect or any statement therein being untrue or
inaccurate in any respect to the extent the Issuing Bank would not be
liable therefor pursuant to the following paragraph (e);
(v) payment by such Issuing Bank under such Letter of
Credit against presentation of a draft or certificate which does not
comply with the terms of such Letter of Credit; or
(vi) any other circumstance or happening whatsoever,
whether or not similar to any of the foregoing;
provided, however, that nothing contained in this paragraph (d) shall be deemed
to constitute a waiver of any remedies of the Borrower in connection with the
Letters of Credit.
(e) Liability of Issuing Bank. The Borrower assumes all risks of
the acts or omissions of any beneficiary or transferee of any Letter of Credit
with respect to its use of such Letter of Credit. Neither such Issuing Bank
nor any of its officers or directors shall be liable or responsible for:
(i) the use which may be made of any Letter of Credit or
any acts or omissions of any beneficiary or transferee in connection
therewith;
(ii) the validity, sufficiency or genuineness of
documents, or of any endorsement thereon, even if such documents
should prove to be in any or all respects invalid, insufficient,
fraudulent or forged;
(iii) payment by such Issuing Bank against presentation of
documents which do not comply with the terms of a Letter of Credit,
including failure of any documents to bear any reference or adequate
reference to the relevant Letter of Credit, unless such payment was
due to such Issuing Bank's gross negligence or willful misconduct; or
(iv) any other circumstances whatsoever in making or
failing to make payment under any Letter of Credit (including such
Issuing Bank's own negligence, but other than through such Issuing
Bank's gross negligence or willful misconduct),
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except that the Borrower shall have a claim against the Issuing Bank, and the
Issuing Bank shall be liable to, and shall promptly pay to, the Borrower, to
the extent of any direct, as opposed to consequential, damages suffered by the
Borrower which the Borrower proves were caused by (A) such Issuing Bank's
willful misconduct or gross negligence in determining whether documents
presented under a Letter of Credit comply with the terms of such Letter of
Credit or (B) such Issuing Bank's willful failure to make lawful payment under
any Letter of Credit after the presentation to it of a draft and certificate
strictly complying with the terms and conditions of such Letter of Credit.
In furtherance and not in limitation of the foregoing, such Issuing Bank may
accept documents that appear on their face to be in order, without
responsibility for further investigation, regardless of any notice or
information to the contrary.
Section 2.15. Bank Replacement.
(a) Right to Replace. The Borrower shall have the right to
replace each Terminating Bank at any time and each Bank affected by a condition
under Section 2.02(c)(iii) or (v), 2.08(e), or 2.10 for more than 60 days (each
Terminating Bank and each such affected Bank, an "Affected Bank") with an
Eligible Assignee in accordance with the procedures in this Section 2.15.
(b) Procedure. Any replacement of a Bank pursuant to this Section
2.15 shall be (i) made by the Eligible Assignee designated by the Borrower or
by the Administrative Agent with the Borrower's consent and the selling Bank
entering into an Assignment and Acceptance and by following the procedures in
Section 9.06 for adding a Bank and (ii) shall close within 10 days after the
Administrative Agent's receipt of the notice of election to replace such Bank.
ARTICLE III
CONDITIONS OF LENDING
Section 3.01. Conditions Precedent to Effectiveness. This
Agreement shall become effective and the Existing Credit Agreement shall be
amended and restated as provided in this Agreement on the date the following
conditions precedent are met ("Effective Date"):
(a) The Borrower, each Bank, and the Administrative Agent shall
have duly and validly executed originals of this Agreement and delivered them
to the Administrative Agent;
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(b) The Administrative Agent shall have received the following
duly executed by all the parties thereto, in form and substance satisfactory to
the Administrative Agent, (except for the Notes) in sufficient copies for each
Bank:
(i) the Tranche A Notes, the Tranche B Notes and the
Competitive Advance Notes dated as of the Effective Date payable to
the order of each of the Banks, respectively;
(ii) a Guaranty executed by each of the Borrower's
Subsidiaries (other than its Nonprofit Subsidiaries and LCA Insurance
Co., Ltd.);
(iii) a certificate from the Chief Executive Officer,
President, Chief Financial Officer, or Treasurer of the Borrower dated
as of the Effective Date stating that as of such date (A) all
representations and warranties of the Borrower set forth in this
Agreement are true and correct in all material respects and (B) no
Default has occurred and is continuing;
(iv) copies, each certified as of the date of this
Agreement by a Secretary or Assistant Secretary of the Borrower and
each Guarantor (A) of the resolutions of the Board of Directors of the
Borrower or such Guarantor, as the case may be, and authorizing the
execution and delivery of each Credit Document to which such Person is
a party and (B) of the certificate of incorporation and bylaws of the
Borrower or such Guarantor, as the case may be;
(v) a certificate of the Secretary or an Assistant
Secretary of the Borrower and each Guarantor dated as of the date of
this Agreement certifying as of such date the names and true
signatures of officers of the Borrower or such Guarantor, as the case
may be, authorized to sign the Credit Documents to which such Person
is a party;
(vi) a favorable opinion of the Associate General Counsel
to the Borrower and the Guarantors, dated as of the Effective Date, in
form and substance satisfactory to the Administrative Agent; and
(vii) such other documents, governmental certificates,
agreements, licenses, lien searches as the Administrative Agent or any
Bank may reasonably request.
(c) The Borrower shall have paid to the Administrative Agent for
its account and the account of the Documentation Agent and the Syndication
Agent the fees and expenses required by Section 2.04(b) to be paid as of the
Effective Date.
(d) No Default or Event of Default shall have occurred and be
continuing.
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(e) The representations and warranties contained in Article IV and
in Section 6 of the Guaranties shall be true and correct in all material
respects.
Section 3.02. Conditions Precedent to all Borrowings. The
obligation of each Bank to fund an Advance on the occasion of each Borrowing
(other than the Conversion or continuation of any existing Borrowing) and of an
Issuing Bank to issue or increase any Letter of Credit shall be subject to the
further conditions precedent that on the date of such Borrowing or the issuance
or increase of such Letter of Credit the following statements shall be true
(and each of the giving of the applicable Notice of Borrowing and the
acceptance by the Borrower of the proceeds of such Borrowing or the issuance or
increase of such Letter of Credit shall constitute a representation and
warranty by the Borrower that on the date of such Borrowing or the issuance or
increase of such Letter of Credit such statements are true):
(a) the representations and warranties contained in Article IV
(excluding the representations and warranties contained in Sections 4.05(a),
4.06, 4.13(b), and 4.16(a)) and Section 6 of the Guaranties are correct in all
material respects on and as of the date of such Borrowing or the issuance or
increase of such Letter of Credit, before and after giving effect to such
Borrowing or to the issuance or increase of such Letter of Credit and to the
application of the proceeds from such Borrowing, as though made on and as of
such date and
(b) no Default has occurred and is continuing or would result from
such Borrowing or from the application of the proceeds therefrom.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants as follows:
Section 4.01. Corporate Existence; Subsidiaries. The Borrower is a
corporation duly organized, validly existing, and in good standing under the
laws of Delaware and in good standing and qualified to do business in each
jurisdiction where its ownership or lease of property or conduct of its
business requires such qualification and where a failure to be qualified would
reasonably be expected to cause a Material Adverse Effect. Each Subsidiary of
the Borrower is a corporation duly organized, validly existing, and in good
standing under the laws of its jurisdiction of incorporation and in good
standing and qualified to do business in each jurisdiction where its ownership
or lease of property or conduct of its business requires such qualification and
where a failure to be qualified would reasonably be expected to cause a
Material Adverse Effect. The Borrower has no Subsidiaries on the date of this
Agreement other than the Subsidiaries listed
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on the attached Schedule 4.01, and Schedule 4.01 lists the jurisdiction of
incorporation and the address of the principal office of each such Subsidiary
existing on the date of this Agreement.
Section 4.02. Corporate Power. The execution, delivery, and
performance by the Borrower of this Agreement, the Notes, and the other Credit
Documents to which it is a party and by the Guarantors of the Guaranties and
the consummation of the transactions contemplated hereby and thereby (a) are
within the Borrower's and the Guarantors' corporate powers, (b) have been duly
authorized by all necessary corporate action, (c) do not contravene (i) the
Borrower's or any Guarantor's certificate or articles, as the case may be, of
incorporation or by-laws or (ii) any law or any contractual restriction binding
on or affecting the Borrower or any Guarantor, the contravention of which would
reasonably be expected to cause a Material Adverse Effect and (d) will not
result in or require the creation or imposition of any Lien prohibited by this
Agreement. At the time of each Borrowing or the issuance or increase of each
Letter of Credit, such Borrowing and the use of the proceeds of such Borrowing
or the issuance or increase of such Letter of Credit will be within the
Borrower's corporate powers, will have been duly authorized by all necessary
corporate action, (a) will not contravene (i) the Borrower's certificate of
incorporation or by-laws or (ii) any law or any contractual restriction binding
on or affecting the Borrower the contravention of which would reasonably be
expected to cause a Material Adverse Effect and (b) will not result in or
require the creation or imposition of any Lien prohibited by this Agreement.
Section 4.03. Authorization and Approvals. No authorization or
approval or other action by, and no notice to or filing with, any Governmental
Authority is required for the due execution, delivery and performance by the
Borrower of this Agreement, the Notes, or the other Credit Documents to which
the Borrower is a party or by each Guarantor of its Guaranty or the
consummation of the transactions contemplated thereby. At the time of each
Borrowing or the issuance or increase of any Letter of Credit, no authorization
or approval or other action by, and no notice to or filing with, any
Governmental Authority will be required for such Borrowing or the use of the
proceeds of such Borrowing or the issuance or increase of such Letter of
Credit.
Section 4.04. Enforceable Obligations. This Agreement, the Notes,
and the other Credit Documents to which the Borrower is a party have been duly
executed and delivered by the Borrower and the Guaranties have been duly
executed and delivered by the Guarantors. Each Credit Document is the legal,
valid, and binding obligation of the Borrower and each Guarantor which is a
party to it enforceable against the Borrower and each such Guarantor in
accordance with its terms, except as such enforceability may be limited by any
applicable bankruptcy, insolvency, reorganization, moratorium, or similar law
affecting creditors' rights generally and by general principles of equity
(whether considered in proceeding at law or in equity).
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Section 4.05. Financial Statements. (a) The balance sheets of the
Borrower and its Subsidiaries as at September 30, 1995, and the related
statements of income, cash flow, and retained earnings of the Borrower and its
Subsidiaries for the fiscal year then ended, copies of which have been
furnished to each Bank, and the balance sheets of the Borrower and its
Subsidiaries as at June 30, 1996, and the related statements of income and cash
flow of the Borrower and its Subsidiaries for the nine months then ended, duly
certified by an authorized financial officer of the Borrower, copies of which
have been furnished to each Bank, fairly present, subject, in the case of said
balance sheets as at June 30, 1996 and said statements of income and cash flow
for the nine months then ended, to year-end audit adjustments, the financial
condition of the Borrower and its Subsidiaries as at such dates and the results
of the operations of the Borrower and its Subsidiaries for the periods ended on
such dates, and such balance sheets and statements of income, cash flow, and
retained earnings were prepared in accordance with GAAP.
(b) No Material Adverse Change has occurred.
Section 4.06. True and Complete Disclosure. No representation,
warranty, or other statement made by the Borrower or any Guarantor (or on
behalf of the Borrower or any Guarantor) in this Agreement or any other Credit
Document contains any untrue statement of a material fact or omits to state any
material fact necessary to make the statements contained therein not misleading
in light of the circumstances in which they were made as of the date of this
Agreement the effect of which would reasonably be expected to have a Material
Adverse Effect. There is no fact known to any Responsible Officer of the
Borrower on the date of this Agreement and on the Effective Date that has not
been disclosed to the Banks which would reasonably be expected to have a
Material Adverse Effect. All projections, estimates, and pro forma financial
information furnished by the Borrower or on behalf of the Borrower were
prepared on the basis of assumptions, data, information, tests, or conditions
believed to be reasonable at the time such projections, estimates, and pro
forma financial information were furnished.
Section 4.07. Litigation. Except as otherwise disclosed to the
Banks in writing after the date of this Agreement, there is no pending or, to
the best knowledge of the Borrower, threatened action or proceeding affecting
the Borrower or any of its Subsidiaries before any court, Governmental Agency
or arbitrator, which would reasonably be expected to have a Material Adverse
Effect or which purports to affect the legality, validity, binding effect or
enforceability of this Agreement, any Note, or any other Credit Document or the
consummation of any of the transactions contemplated hereby or thereby.
Section 4.08. Use of Proceeds. The proceeds of Advances may only
be used by the Borrower to refinance existing Indebtedness under the Existing
Credit Agreement and for general
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corporate purposes, including acquisitions, working capital needs and the
issuance of Letters of Credit. The Borrower is not engaged in the business of
extending credit for the purpose of purchasing or carrying margin stock (within
the meaning of Regulation U). No proceeds of any Advance will be used to
purchase or carry any margin stock in violation of Regulation G, T, U or X.
Following application of the proceeds of each Advance, not more than 25 percent
(or such greater percent as may be provided for in any amendment to Section
221.2(g)(2)(i) of Regulation U after the date of this Agreement) of the value
of the assets (either of the Borrower only or of the Borrower and its
Subsidiaries on a consolidated basis), which are subject to any arrangement
with the Administrative Agent or any Bank (herein or otherwise) whereby the
Borrower's or any Subsidiary's right or ability to sell, pledge or otherwise
dispose of assets is in any way restricted, will be margin stock (within the
meaning of Regulation U).
Section 4.09. Investment Company Act. Neither the Borrower nor any
of its Subsidiaries is an "investment company" or a company "controlled" by an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.
Section 4.10. Public Utility Holding Company Act. Neither the
Borrower nor any of its Subsidiaries is a "holding company", or a "Subsidiary
company" of a "holding company", or an "affiliate" of a "holding company" or of
a "Subsidiary company" of a "holding company", within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
Section 4.11. Taxes.
(a) Reports and Payments. All Returns required to be filed by or
on behalf of the Borrower, its Subsidiaries, or any member of the Controlled
Group (hereafter collectively called the "Tax Group") have been duly filed on a
timely basis or appropriate extensions have been obtained and such Returns are
and will be true, complete and correct, except where the failure to so file
would not be reasonably expected to have a Material Adverse Effect; and all
Taxes shown to be payable on the Returns or on subsequent assessments with
respect thereto will have been paid in full on a timely basis, and no other
Taxes will be payable by the Tax Group with respect to items or periods covered
by such Returns, except in each case to the extent of (i) reserves reflected in
the Financial Statements, (ii) taxes that are being contested in good faith, or
(iii) such Taxes, the failure to pay which would not have a Material Adverse
Effect. The reserves for accrued Taxes reflected in the financial statements
delivered to the Banks under this Agreement are adequate in the aggregate for
the payment of all unpaid Taxes, whether or not disputed, for the period ended
as of the date thereof and for any period prior thereto, and for which the Tax
Group may be liable in its own right, as withholding agent or as a transferee
of the assets of, or successor to, any Person, except for such Taxes or
reserves therefor, the failure to pay or provide for which does not and could
not have a Material Adverse Effect.
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(b) Taxes Definition. "Taxes" in this Section 4.11 shall mean all
taxes, charges, fees, levies, or other assessments imposed by any federal,
state, local, or foreign taxing authority, including without limitation,
income, gross receipts, excise, real or personal property, sales, occupation,
use, service, leasing, environmental, value added, transfer, payroll, and
franchise taxes (and including any interest, penalties, or additions to tax
attributable to or imposed on with respect to any such assessment).
(c) Returns Definition. "Returns" in this Section 4.11 shall mean
any federal, state, local, or foreign report, estimate, declaration of
estimated Tax, information statement or return relating to, or required to be
filed in connection with, any Taxes, including any information return or report
with respect to backup withholding or other payments of third parties.
Section 4.12. Pension Plans. No Termination Event has occurred
with respect to any Plan, and each Plan has complied with and been administered
in all material respects in accordance with applicable provisions of ERISA and
the Code. No "accumulated funding deficiency" (as defined in Section 302 of
ERISA) has occurred and there has been no excise tax imposed under Section 4971
of the Code. To the knowledge of any Responsible Officer of the Borrower, no
Reportable Event has occurred with respect to any Multiemployer Plan, and each
Multiemployer Plan has complied with and been administered in all material
respects with applicable provisions of ERISA and the Code. The present value
of all benefits vested under each Plan (based on the assumptions used to fund
such Plan) did not, as of the last annual valuation date applicable thereto,
exceed the value of the assets of such Plan allocable to such vested benefits
in any amount that would reasonably be expected to have a Material Adverse
Effect. Neither the Borrower nor any member of the Controlled Group has had a
complete or partial withdrawal from any Multiemployer Plan for which there is
any material withdrawal liability. As of the most recent valuation date
applicable thereto, neither the Borrower nor any member of the Controlled Group
has received notice that any Multiemployer Plan is insolvent or in
reorganization. Based upon GAAP existing as of the date of this Agreement and
current factual circumstances, the Borrower has no reason to believe that the
annual cost during the term of this Agreement to the Borrower or any of its
Subsidiaries for post-retirement benefits to be provided to the current and
former employees of the Borrower or any of its Subsidiaries under welfare
benefit plans (as defined in Section 3(1) of ERISA) could, in the aggregate,
reasonably be expected to have a Material Adverse Effect.
Section 4.13. No Burdensome Restrictions; No Defaults.
(a) Neither the Borrower nor any of its Subsidiaries is a
party to any indenture, loan or credit agreement or any lease or other
agreement or instrument or subject to any charter or corporate restriction or
provision of applicable Legal Requirement which would reasonably be expected to
have a Material Adverse Effect. The Borrower and the Guarantors are not in
default under or with respect to any contract, agreement, lease or other
instrument to which the Borrower
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or any Guarantor is a party and which would reasonably be expected to have a
Material Adverse Effect. To the knowledge of a Responsible Officer of the
Borrower, neither the Borrower nor any Guarantor has received any notice of
default under any contract, agreement, lease or other instrument to which the
Borrower or such Guarantor is a party which is continuing and which, if not
cured, would reasonably be expected to have a Material Adverse Effect.
(b) No Default has occurred and is continuing.
Section 4.14. Environmental Condition.
(a) The Borrower and its Subsidiaries, taken as a whole, (i) have
obtained all Environmental Permits necessary for the ownership and operation of
their respective material Properties and the conduct of their respective
businesses of which the failure to obtain would reasonably be expected to have
a Material Adverse Effect; (ii) have been and are in compliance with all terms
and conditions of such Environmental Permits and with all other material
requirements of applicable Environmental Laws of which the failure to comply
would reasonably be expected to have a Material Adverse Effect; (iii) have not
received notice of any violation or alleged violation of any Environmental Law
or Environmental Permit the violation of which would reasonably be expected to
have a Material Adverse Effect; and (iv) are not subject to any actual or
contingent Environmental Claim, which Environmental Claim would reasonably be
expected to have a Material Adverse Effect.
(b) To the knowledge of any Responsible Officer of the Borrower,
none of the present or previously owned or operated Property of the Borrower or
of any of its present or former Subsidiaries, wherever located, (i) has been
placed on or proposed to be placed on the National Priorities List, the
Comprehensive Environmental Response Compensation Liability Information System
list, or their state or local analogs, or have been otherwise designated,
listed, or identified as a potential site for removal, remediation, cleanup,
closure, restoration, reclamation, or other response activity under any
Environmental Laws; (ii) is subject to a Lien, arising under or in connection
with any Environmental Laws, that attaches to any revenues or to any Property
owned or operated by the Borrower or any of its Subsidiaries, wherever located,
which Lien would reasonably be expected to have a Material Adverse Effect; or
(iii) has been the site of any Release of Hazardous Substances or Hazardous
Wastes from present or past operations which has caused at the site or at any
third-party site any condition that has resulted in or would reasonably be
expected to result in the need for Response that would have a Material Adverse
Effect.
(c) Without limiting the foregoing, the present and, to the best
knowledge of any Responsible Officer of the Borrower, future liability, if any,
of the Borrower and its Subsidiaries, taken as a whole, which would reasonably
be expected to arise in connection with requirements under Environmental Laws
will not have a Material Adverse Effect.
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Section 4.15. Permits, Licenses, etc. The Borrower and its
Subsidiaries possess all permits, licenses, patents, patent rights or licenses,
trademarks, trademark rights, trade names rights and copyrights which the
failure to possess could reasonably be expected to have a Material Adverse
Effect. The Borrower and its Subsidiaries manage and operate their business in
accordance with all applicable Legal Requirements which the failure to so
manage or operate would reasonably be expected to have a Material Adverse
Effect.
Section 4.16. Health Care Regulatory Matters.
(a) To the knowledge of any Responsible Officer of the Borrower,
all necessary steps have been or are being taken to secure the renewal of any
Health Facility License, Medicaid Provider Agreement or Medicare Provider
Agreement issued with respect to any Facility which the failure to renew could
reasonably be expected to have a Material Adverse Effect and that is to expire
within 60 days after the date of this Agreement, and there is no reasonable
basis known to any Responsible Officer of the Borrower or its Subsidiaries that
any such renewal will not be obtained.
(b) There are no proceedings pending, or, to the best of the
Borrower's knowledge, threatened by any Governmental Authority seeking nor, to
the knowledge of any Responsible Officer of the Borrower or any of its
Subsidiaries, has the Borrower or any of its Subsidiaries taken any action to
the effect of which would be to adversely modify, revoke, withdraw, or suspend
any CON, Health Facility License, Medicaid Provider Agreement, Medicare
Provider Agreement, Medicare Certification or Medicaid Certification in a
manner that would reasonably be expected to have a Material Adverse Effect. To
the Borrower's knowledge, there is no decision to fail to renew or deny
payments under any Medicaid Provider Agreement or Medicare Provider Agreement
which failure or denial would reasonably be expected to have a Material Adverse
Effect.
ARTICLE V
AFFIRMATIVE COVENANTS
So long as any Note or any amount under any Credit Document shall
remain unpaid, any Letter of Credit shall remain outstanding, or any Bank shall
have any Commitment hereunder, the Borrower agrees, unless the Majority Banks
shall otherwise consent in writing, to comply with the following covenants.
Section 5.01. Compliance with Laws, Etc. The Borrower will comply,
and cause each of its Subsidiaries to comply, with all Legal Requirements of
which the failure to comply would
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reasonably be expected to have a Material Adverse Effect. Without limiting the
generality and coverage of the foregoing, the Borrower shall comply, and shall
cause each of its Subsidiaries to comply, in all material respects, with all
Environmental Laws and, in all material respects, all laws, regulations, or
directives with respect to equal employment opportunity and employee safety in
all jurisdictions in which the Borrower, or any of its Subsidiaries do
business; provided, however, that this Section 5.01 shall not prevent the
Borrower, or any of its Subsidiaries from, in good faith and with reasonable
diligence, contesting the validity or application of any such laws or
regulations by appropriate legal proceedings.
Section 5.02. Maintenance of Insurance. The Borrower will
maintain, and cause each of its Subsidiaries to maintain, insurance with
responsible and reputable insurance companies or associations in such amounts
and covering such risks as are usually carried by companies engaged in similar
businesses and owning similar properties in the same general areas in which the
Borrower or such Subsidiary operates, provided that the Borrower or such
Subsidiary may self-insure to the extent and in the manner normal for similarly
situated companies of like size, type and financial condition that are part of
a group of companies under common control.
Section 5.03. Preservation of Corporate Existence, Etc. The
Borrower will preserve and maintain, and cause each of its Subsidiaries to
preserve and maintain, its corporate existence, rights, franchises and
privileges in the jurisdiction of its incorporation, and qualify and remain
qualified, and cause each such Subsidiary to qualify and remain qualified, as a
foreign corporation in each jurisdiction in which qualification is necessary or
desirable in view of its business and operations or the ownership of its
properties, and, in each case, where failure to qualify or preserve and
maintain its rights and franchises would reasonably be expected to have a
Material Adverse Effect; provided, however, that nothing contained in this
Section 5.03 shall prevent any transaction permitted by Section 6.04.
Section 5.04. Payment of Taxes, Etc. The Borrower will pay and
discharge, and cause each of its Subsidiaries to pay and discharge, before the
same shall become delinquent and which the failure to timely pay or discharge
would reasonably be expected to have a Material Adverse Effect, (a) all taxes,
assessments and governmental charges or levies imposed upon it or upon its
income or profits or Property that are material in amount, prior to the date on
which penalties attach thereto and (b) all lawful claims that are material in
amount which, if unpaid, might by law become a Lien upon its Property;
provided, however, that neither the Borrower nor any such Subsidiary shall be
required to pay or discharge any such tax, assessment, charge, levy, or claim
which is being contested in good faith and by appropriate proceedings, and with
respect to which reserves in conformity with GAAP have been provided.
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Section 5.05. Visitation Rights. At any reasonable time and from
time-to-time and so long as any visit or inspection will not interfere with
patients' rights or unreasonably interfere with the Borrower's or any of its
Subsidiaries operations, upon reasonable notice, the Borrower will, and will
cause its Subsidiaries to, permit the Administrative Agent and any Bank or any
of its agents or representatives thereof, to examine and make copies of and
abstracts from the records and books of account of, and visit and inspect at
its reasonable discretion the properties of, the Borrower and any such
Subsidiary, to discuss the affairs, finances and accounts of the Borrower and
any such Subsidiary with any of their respective officers or directors.
Section 5.06. Reporting Requirements. The Borrower will furnish to
the Administrative Agent and each Bank:
(a) Defaults. As soon as possible and in any event within five
Business Days after the occurrence of each Default known to a Responsible
Officer of the Borrower or any of its Subsidiaries which is continuing on the
date of such statement, a statement of an authorized financial officer of the
Borrower setting forth the details of such Default and the actions which the
Borrower has taken and proposes to take with respect thereto;
(b) Quarterly Financials. As soon as available and in any event
not later than 45 days after the end of each of the first three quarters of
each fiscal year of the Borrower, the balance sheets of Borrower and its
Subsidiaries as of the end of such quarter and the statements of income and
cash flows of the Borrower and its Subsidiaries for the period commencing at
the end of the previous year and ending with the end of such quarter, all in
reasonable detail and duly certified with respect to such statements (subject
to year-end audit adjustments) by an authorized financial officer of the
Borrower as having been prepared in accordance with GAAP, together with a
compliance certificate duly executed by a Responsible Officer in substantially
the form of the attached Exhibit F;
(c) Annual Financials. As soon as available and in any event not
later than 90 days after the end of each fiscal year of the Borrower, a copy of
the annual audit report for such year for the Borrower and its Subsidiaries,
including therein balance sheets of the Borrower and its Subsidiaries as of the
end of such fiscal year and statements of income and retained earnings and of
cash flows of Borrower and its Subsidiaries for such fiscal year, in each case
certified by Ernst & Young or other nationally recognized independent certified
public accountants or other independent certified public accountants of
recognized standing acceptable to the Administrative Agent and including any
management letters delivered by such accountants to the Borrower in connection
with such audit, together with a compliance certificate duly executed by a
Responsible Officer in substantially the form of the attached Exhibit F;
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(d) Securities Law Filings. Promptly and in any event within 15
days after the sending or filing thereof, copies of all proxy material, reports
and other information which the Borrower or any of its Subsidiary sends to or
files with the United States Securities and Exchange Commission or sends to any
shareholder of the Borrower;
(e) Termination Events. As soon as possible and in any event (i)
within 30 days after the Borrower knows or has reason to know that any
Termination Event described in clause (a) of the definition of Termination
Event with respect to any Plan has occurred, and (ii) within 10 days after any
Responsible Officer of the Borrower knows or has reason to know that any other
Termination Event with respect to any Plan has occurred, a statement of a
Responsible Officer of the Borrower describing such Termination Event and the
action, if any, which the Borrower or such Affiliate proposes to take with
respect thereto;
(f) Termination of Plans. Promptly and in any event within two
Business Days after the knowledge of any Responsible Officer of the Borrower of
receipt thereof by the Borrower or any member of the Controlled Group from the
PBGC, copies of each notice received by the Borrower or any such member of the
Controlled Group of the PBGC's intention to terminate any Plan or to have a
trustee appointed to administer any Plan;
(g) Other ERISA Notices. Promptly and in any event within five
Business Days after the knowledge of any Responsible Officer of the Borrower of
receipt thereof by the Borrower or any member of the Controlled Group from a
Multiemployer Plan sponsor, a copy of each notice received by the Borrower or
any member of the Controlled Group concerning the imposition of withdrawal
liability pursuant to Section 4202 of ERISA in an amount that could reasonably
be expected to have a Material Adverse Effect;
(h) Environmental Notices. Promptly upon the knowledge of any
Responsible Officer of the Borrower of receipt thereof by the Borrower or any
of its Subsidiaries, a copy of any form of notice, summons or citation received
from the EPA, or any other Governmental Authority directly engaged in
protection of the Environment, concerning (i) material violations or alleged
violations of Environmental Laws, which seeks to impose liability therefor and
which, based upon information reasonably available to the Borrower at the time
or after such violation, would reasonably be expected to have a Material
Adverse Effect, (ii) any action or omission on the part of the Borrower or any
of its Subsidiaries in connection with Hazardous Waste or Hazardous Substances
which, based upon information reasonably available to the Borrower at the time
of such receipt, would reasonably be expected to have a Material Adverse
Effect, (iii) any notice of potential responsibility under CERCLA which would
reasonably be expected to have a Material Adverse Effect, or (iv) concerning
the filing of a Lien other than a Permitted Lien upon, against or in connection
with the Borrower, its present or former Subsidiaries, or any of their
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leased or owned material Property, wherever located, which would reasonably be
expected to have a Material Adverse Effect;
(i) Other Governmental Notices. Promptly and in any event within
five Business Days after receipt thereof by the Borrower or any Subsidiary and
the knowledge of such receipt by a Responsible Officer of the Borrower or any
inside counsel of the Borrower, (i) a copy of any notice, summons, citation, or
proceeding seeking to adversely modify in any material respect, revoke, or
suspend any CON, Health Facility License, Medicaid Provider Agreement, Medicare
Provider Agreement, Medicaid Certification, or Medicare Certification in a
manner that would reasonably be expected to have a Material Adverse Effect and
(ii) any revocation or involuntary termination of any Medicaid Provider
Agreement, Medicare Provider Agreement, Medicaid Certification, or Medicare
Certification that would reasonably be expected to have a Material Adverse
Effect;
(j) Material Changes. Prompt written notice of any condition or
event of which any Responsible Officer of the Borrower has knowledge, which
condition or event has resulted or could reasonably be expected to result in
(i) a Material Adverse Change or Material Adverse Effect or (ii) a breach of or
noncompliance with any term, condition, or covenant of any contract to which
the Borrower or any of its Subsidiaries is a party or by which they or their
properties may be bound, which breach or noncompliance would reasonably be
expected to have a Material Adverse Effect;
(k) Disputes, etc. Prompt written notice of any claims,
proceedings, or disputes, or to the knowledge of any Responsible Officer of the
Borrower threatened, or affecting the Borrower, or any of its Subsidiaries
which, if adversely determined, could reasonably be expected to have a Material
Adverse Effect; and
(l) Other Information. Such other information respecting the
business or Properties, or the condition or operations, financial or otherwise,
of the Borrower, or any of its Subsidiaries, as any Bank through the
Administrative Agent may from time-to-time reasonably request.
Section 5.07. Maintenance of Property. Borrower shall, and shall
cause each of its Subsidiaries to, (a) maintain all of its Property necessary
or useful in the proper conduct of its business in good working order and
condition, except where the failure to do so would not reasonably be expected
to have a Material Adverse Effect and (b) not knowingly or willfully permit the
commission of waste or other injury, or the occurrence of pollution,
contamination or any other condition in, on or about the owned or operated
property involving the Environment that would reasonably be expected to have a
Material Adverse Effect.
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Section 5.08. Additional Guaranties. Upon the creation or
acquisition after the Effective Date of any Material Subsidiary or promptly
after any Subsidiary which is not a Guarantor becomes a Material Subsidiary,
the Borrower will cause such Material Subsidiary to execute and deliver to each
Bank a Guaranty and such evidence of corporate authority to enter into such
Guaranty as the Administrative Agent may reasonably request; provided that as
of the last day of any fiscal quarter the Borrower and the Guarantors shall
have at least 85% of the Borrower's Tangible Net Assets on such day and at
least 85% of the Borrower's EBITDA for the four fiscal quarters ending on such
day. A "Material Subsidiary" is any Subsidiary of the Borrower which on the
date of its acquisition or formation or on any quarter end after the date of
this Agreement (a) has EBITDA for the four fiscal quarters ending immediately
preceding such date equal to or greater than 5% of the Borrower's EBITDA for
such period or (b) Tangible Net Assets equal to or greater than 5% of the
Borrower's Tangible Net Assets.
ARTICLE VI
NEGATIVE COVENANTS
So long as any Note or any amount under any Credit Document shall
remain unpaid, any Letter of Credit remain outstanding, or any Bank shall have
any Commitment, the Borrower agrees, unless the Majority Banks otherwise
consent in writing, to comply with the following covenants.
Section 6.01. Liens, Etc. The Borrower will not create, assume,
incur or suffer to exist, or permit any of its Subsidiaries to create, assume,
incur, or suffer to exist, any Lien on or in respect of any of its Property
whether now owned or hereafter acquired, or assign any right to receive income,
except that the Borrower and its Subsidiaries may create, incur, assume or
suffer to exist Liens:
(a) securing the Obligations;
(b) for taxes, assessments or governmental charges or levies on
Property of the Borrower or any Guarantor to the extent not required to be paid
pursuant to Sections 5.01 and 5.04;
(c) imposed by law, such as landlords', carriers', warehousemen's
and mechanics' liens and other similar Liens arising in the ordinary course of
business securing obligations which are not overdue for a period of more than
30 days or which are being contested in good faith and by appropriate
proceedings if adequate reserves with respect thereto are maintained on the
books of the Borrower and its Subsidiaries in accordance with GAAP;
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(d) arising in the ordinary course of business out of pledges or
deposits under workers' compensation laws, unemployment insurance, old age
pensions or other social security or retirement benefits, or similar
legislation or to secure public or statutory obligations of the Borrower or any
of its Subsidiaries;
(e) Liens securing purchase money Debt, Capital Leases, and
acquired Debt permitted under Section 6.02(k); provided that (i) in the case of
purchase money Debt and Capital Leases, each such Lien only encumbers the
property acquired in connection with the creation of such Debt of Capital Lease
and all proceeds therefrom and (ii) the fair market value of the collateral
securing any such Debt may exceed the outstanding principal amount of such Debt
only to the extent such excess is within customary commercial bank lending and
collateralization requirements;
(f) securing Debt listed on the attached Schedule 6.01; provided
that the Debt of the Borrower or any Subsidiary of the Borrower secured by such
Liens shall not be renewed, refinanced or extended if the amount of such Debt
so renewed is greater than the outstanding amount of such Debt on the date of
this Agreement;
(g) arising from litigation and which are effectively stayed from
execution and would not otherwise cause a Default to occur;
(h) in the nature of utility easements, building restrictions, and
such other encumbrances or charges against real property as are of a nature
generally existing with respect to properties of a similar character and which
do not in any material way affect the marketability of the same or interfere
with the use thereof in the business of the Borrower or its Subsidiaries;
(i) in the nature of any interest or title of a lessor in assets
being leased to the Borrower or one of its Subsidiaries; and
(j) encumbering the Property subject to the lease permitted by
Section 6.02(m).
Section 6.02. Debts, Guaranties and Other Obligations. The
Borrower will not, and will not permit any of its Subsidiaries to, create,
assume, suffer to exist or in any manner become or be liable in respect of any
Debt except:
(a) Debt of the Borrower and its Subsidiaries under the Credit
Documents;
(b) unsecured Debt listed on the attached Schedule 6.02 and all
renewals, extensions, rearrangements or refinancings of any such credit
arrangements on terms and for amounts substantially similar to the terms and
amounts existing as of the date of this Agreement;
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(c) intercompany Debt owed (i) by any wholly-owned Subsidiary of
the Borrower (other than a Nonprofit Subsidiary) to the Borrower; (ii) by the
Borrower to any of its wholly-owned Subsidiaries; and (iii) any wholly-owned
Subsidiary of the Borrower to another wholly-owned Subsidiary of the Borrower;
(d) unsecured borrowings at a market rate of interest with
maturities of less than 180 days of the Borrower not otherwise permitted by the
preceding paragraphs (a), (b), and (c) in an aggregate outstanding principal
amount not to exceed at any time the lesser of (i) $100,000,000.00 or (ii) the
amount by which the Tranche A Commitments exceeds the sum of the outstanding
Tranche A Advances, Letter of Credit Exposure, and Competitive Advances;
(e) Debt secured by the Liens permitted pursuant to paragraph (f)
of Section 6.01;
(f) current liabilities for the financing of the Borrower's and
its Subsidiaries' insurance premiums;
(g) the Borrower's guaranty under the Contract to Lease and
Surviving Master Agreement for Leases of Mayer, Trustee Nursing Homes dated as
of May 1, 1994 among the Borrower, Living Centers of Texas, Inc., and Clarence
Mayer, Trustee of the repayment of the residual value of the premises leased
thereby;
(h) guaranties (i) by the Borrower's Subsidiaries of any Debt of
the Borrower permitted by this Section 6.02 and (ii) by the Borrower of its
wholly-owned Subsidiaries' Debt permitted by this Section 6.02;
(i) reimbursement obligations of the Borrower in respect of any
surety bonds or letters of credit otherwise permitted under this Agreement
issued to secure payment of any insurance premiums, regulatory obligations, or
trust fund obligations for the Borrower or any of its Subsidiaries;
(j) unfunded vested liabilities under any Plan that would not
reasonably be expected to have a Material Adverse Effect;
(k) Debt incurred in connection with the purchase of any Property,
Capital Leases, and Debt assumed in connection with any Acquisition Expenditure
in an aggregate outstanding principal amount not to exceed at any time the
greater of (i) $75,000,000.00 or (ii) 15% of the Borrower's Net Worth at such
time;
(l) Subordinated Debt in an aggregate outstanding principal amount
not to exceed at any time $150,000,000.00; and
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(m) (i) obligations to pay rent under any lease that is treated as
an operating lease under GAAP but for which the Borrower or any of its
Subsidiaries is viewed as the owner of the leased Property under the Code and
(ii) guaranties by the Borrower or any of its Subsidiaries of the obligations
of the lessor of such leased Property which are secured by the payments due
under the lease of such Property.
Section 6.03. Agreements Restricting Liens and Distributions. The
Borrower will not, nor will it permit any of its Subsidiaries to, enter into
any agreement (other than a Credit Document) which (a) except with respect to
specific property encumbered to secure payment of Debt related to such
property, imposes restrictions greater than those under this Agreement upon the
creation or assumption of any Lien upon its properties, revenues or assets,
whether now owned or hereafter acquired or (b) limits Restricted Payments to or
any advance by any of the Borrower's Subsidiaries to the Borrower.
Section 6.04. Merger or Consolidation; Asset Sales. The Borrower
will not, and will not permit any of its Subsidiaries to,
(a) merge or consolidate with or into any other Person, except
that (i) the Borrower may merge with any of its wholly-owned Subsidiaries and
(ii) any of the Borrower's wholly-owned Subsidiaries may merge with another of
the Borrower's wholly-owned Subsidiaries, provided that immediately after
giving effect to any such proposed transaction no Default would exist and in
the case of any such merger to which the Borrower is a party, the Borrower is
the surviving corporation or
(b) sell, lease, transfer, or otherwise dispose of any asset
(including stock of a Subsidiary) other than the Devcon Stock Sale or the sale
of certain assets acquired in connection with Project QC if the fair market
value of such asset plus the fair market value of all assets (including stock
of a Subsidiary) disposed of during the four fiscal quarters immediately
preceding the date of such asset sale would exceed 5% of Tangible Net Assets of
the Borrower; provided that, for sales of assets in a single transaction or in
a related series of transactions with a fair market value in excess in
$15,000,000.00, the Administrative Agent shall have received a Compliance
Certificate demonstrating pro forma financial covenant compliance, including
adjustments to the Borrower's EBITDA for such divested assets.
Upon the closing of any transaction permitted by this Section 6.04 involving a
Guarantor the shares of stock of which is sold or that does not survive a
merger, such Guarantor shall automatically be released from its obligations
under its Guaranty, and, if requested by the Borrower, the Agent, on its behalf
and the behalf of the Banks, shall execute a release of such Guarantor from its
Guaranty.
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Section 6.05. Restricted Payments. The Borrower will not make or
pay any Restricted Payment if a Default exists or would result therefrom.
Section 6.06. Investments. The Borrower will not, and will not
permit any of its Subsidiaries to, make or permit to exist any loans, advances
or capital contributions to, or make any investment in, or purchase or commit
to purchase any stock or other securities or evidences of indebtedness of or
interests in any Person, except the following:
(a) the purchase of Liquid Investments;
(b) trade and customer accounts receivable which are for goods
furnished or services rendered in the ordinary course of business and are
payable in accordance with customary trade terms;
(c) ordinary course of business contributions, loans or advances
to, or investments in, (i) a direct or indirect Subsidiary of the Borrower,
other than a Nonprofit Subsidiary or (ii) the Borrower;
(d) the Borrower's ownership of the stock of any Nonprofit
Subsidiary;
(e) other capital investments not otherwise permitted by this
Section 6.06 in an aggregate amount of such investments outstanding at any time
not to exceed $5,000,000.00;
(f) holding of notes receivable included on the Borrower's balance
sheet at June 30, 1995 or received in connection with asset sales permitted by
Section 6.04 or acquired in connection with acquisitions by the Borrower
permitted by Section 6.07; and
(g) Acquisition Expenditures permitted under Section 6.07.
Section 6.07. Acquisition Expenditures. Except for up to
$25,000,000.00 of aggregate cash consideration paid during any consecutive four
fiscal quarter period for all purchases of facilities which have been leased by
the Borrower or any of its Subsidiaries for at least three years, the Borrower
shall not and shall not permit any of its Subsidiaries to make any Acquisition
Expenditure, unless (a) such Acquisition Expenditure is made in substantially
the same or complementary lines of business of the Borrower and does not
violate any other provision of this Agreement; (b) except for Project QC, (i)
the aggregate cash consideration paid during any four consecutive four fiscal
quarter period plus (ii) assumptions of Debt for all Acquisition Expenditures
made during such period does not exceed (A) $100,000,000.00 plus (B) an amount
not less than zero, but equal to (1) the Net Cash Proceeds received from asset
sales permitted by Section 6.04 during such period minus (2) the total
automatic Commitment reductions made
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under Section 2.05(b) during such period; (c) at the time of such Acquisition
Expenditure no Default has occurred and is continuing or would occur upon the
consummation of such acquisition; (d) for Acquisition Expenditures in excess of
$15,000,000.00, the Administrative Agent shall have received a Compliance
Certificate demonstrating pro forma financial covenant compliance, including
adjustments to the Borrower's EBITDA for such acquired business; and (e)
immediately following the making of such Acquisition Expenditure, the aggregate
amount of the Commitments exceeds the aggregate outstanding principal amount of
the Advances, the Letter of Credit Exposure, and the outstanding principal
amount of Debt permitted by Section 6.02(d) by at least $25,000,000.00.
Section 6.08. Affiliate Transactions. Except as expressly
permitted elsewhere in this Agreement, the Borrower will not, and will not
permit any of its Subsidiaries to, make, directly or indirectly: (a) any
investment in any Affiliate (other than a wholly-owned Subsidiary of the
Borrower); (b) any transfer, sale, lease, assignment or other disposal of any
assets to any such Affiliate or any purchase or acquisition of assets from any
such Affiliate; or (c) any arrangement or other transaction directly or
indirectly with or for the benefit of any such Affiliate (including without
limitation, guaranties and assumptions of obligations of an Affiliate);
provided that the Borrower and its Subsidiaries (i) may enter into any
arrangement or other transaction with any such Affiliate providing for the
leasing of property, the rendering or receipt of services or the purchase or
sale of inventory and other assets in the ordinary course of business if the
monetary or business consideration arising therefrom would be substantially as
advantageous to the Borrower and its Subsidiaries as the monetary or business
consideration which it would obtain in a comparable arm's length transaction
with a Person not such an Affiliate and (ii) may maintain the arrangements
listed on the attached Schedule 6.08.
Section 6.09. Compliance with ERISA. The Borrower will not, and
will not permit any of its Subsidiaries to, (a) terminate any Plan so as to
result in any material (in the opinion of the Majority Banks) liability of the
Borrower or any of its Affiliates to the PBGC or (b) permit to exist any
occurrence of any Reportable Event (as defined in Title IV of ERISA), or any
other event or condition, which presents a material (in the opinion of the
Majority Banks) risk of such a termination by the PBGC of any Plan under
Section 4042 of ERISA.
Section 6.10. Cash Flow Ratio. The Borrower will not permit the
ratio of (a) its Cash Flow as of the end of any fiscal quarter for the four
fiscal quarters then ended to (b) Interest Expense for such period plus its
current maturities of long-term debt as of the last day of such period plus its
Lease Expense as of the last day of such period to be less than 1.30.
Section 6.11. Leverage Ratio. The Borrower will not permit its
Leverage Ratio as of the last day of any fiscal quarter to be greater than
3.25.
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Section 6.12. Net Worth. The Borrower will not permit its Net
Worth to be less than $295,000,000.00 plus 75% of its cumulative positive Net
Income for each fiscal quarter after March 31, 1996 (excluding Net Income for
any fiscal quarter for which Net Income is negative) plus 50% of the increase
of Net Worth caused by any issuance of capital stock after March 31, 1996.
Section 6.13. Indemnification Agreement. The Borrower shall not
agree to amend any provision of the Indemnification Agreement if such amendment
would increase the Borrower's obligations under the Indemnification Agreement.
ARTICLE VII
REMEDIES
Section 7.01. Events of Default. The occurrence of any of the
following events shall constitute an "Event of Default" under any Credit
Document:
(a) Payment. The Borrower shall fail to pay any principal of any
Note or any Reimbursement Obligation when the same becomes due and payable, or
any interest on any Note or any fee or other amount payable hereunder or under
any other Credit Document within three Business Days after the same becomes due
and payable;
(b) Representation and Warranties. Any representation or warranty
made or deemed to be made (i) by the Borrower in this Agreement (other than the
representation and warranty in Section 4.13(b)) or in any other Credit
Document, (ii) by the Borrower (or any of its officers) in connection with this
Agreement or any other Credit Document, or (iii) by any Subsidiary in any
Credit Document shall prove to have been incorrect in any material respect when
made or deemed to be made;
(c) Covenant Breaches. (i) The Borrower shall (A) fail to perform
or observe any covenant contained in Section 5.03 or 5.04 or Article VI of this
Agreement or (B) fail to perform or observe any other term or covenant set
forth in this Agreement or in any other Credit Document which is not covered by
clause (i)(A) above or any other provision of this Section 7.01 if such failure
shall remain unremedied for 30 days after the earlier of written notice of such
default shall have been given to such Person by the Administrative Agent or any
Bank or a Responsible Officer of such Person's actual knowledge of such default
or (ii) any Guarantor shall fail to perform or observe any covenant contained
in its Guaranty if such failure shall remain unremedied for the same period, if
any, applicable to such covenant in this Agreement after the earlier of written
notice of such default shall have been given to such Person by the
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Administrative Agent or any Bank or a Responsible Officer of such Person's
actual knowledge of such default;
(d) Cross-Defaults. (i) The Borrower or any its Subsidiaries
shall fail to pay any principal of or premium or interest on its Debt which is
outstanding in a principal amount of at least $10,000,000.00 individually or
when aggregated with all such Debt of the Borrower or its Subsidiaries so in
default (but excluding Debt evidenced by the Notes) when the same becomes due
and payable (whether by scheduled maturity, required prepayment, acceleration,
demand or otherwise), and such failure shall continue after the applicable
grace period, if any, specified in the agreement or instrument relating to such
Debt; (ii) any other event shall occur or condition shall exist under any
agreement or instrument relating to Debt which is outstanding in a principal
amount of at least $10,000,000.00 individually or when aggregated with all such
Debt of the Borrower and its Subsidiaries so in default, and shall continue
after the applicable grace period, if any, specified in such agreement or
instrument, if the effect of such event or condition is to accelerate, or to
permit the acceleration of, the maturity of such Debt; or (iii) any such Debt
shall be declared to be due and payable, or required to be prepaid (other than
by a regularly scheduled required prepayment), prior to the stated maturity
thereof;
(e) Insolvency. The Borrower or any of its Subsidiaries 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 the Borrower or any of its Subsidiaries 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 or other similar official for it or for any substantial part
of its property and, in the case of any such proceeding instituted against the
Borrower or any such Subsidiary, either such proceeding shall remain
undismissed for a period of 30 days or any of the actions sought in such
proceeding shall occur; or the Borrower or any of its Subsidiaries shall take
any corporate action to authorize any of the actions set forth above in this
paragraph (e);
(f) Judgments. Any judgment or order for the payment of money in
excess of $5,000,000.00 (reduced for purposes of this paragraph for the amount
in respect of such judgment or order that a reputable insurer has acknowledged
as being payable under any valid and enforceable insurance policy) shall be
rendered against the Borrower or any of its Subsidiaries and either (i)
enforcement proceedings shall have been commenced by any creditor upon such
judgment or order or (ii) there shall be any period of 30 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;
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(g) Termination Events. Any Termination Event with respect to a
Plan shall have occurred, and, 30 days after notice thereof shall have been
given to the Borrower by the Administrative Agent, (i) such Termination Event
shall have created and caused to be continuing a material risk of Plan
termination or liability for withdrawal from the Plan as a substantive employer
and (ii) the then present value of such Plan's vested benefits exceeds the then
current value of assets accumulated in such Plan by more than the amount of
$10,000,000.00 (or in the case of a Termination Event involving the withdrawal
of a "substantial employer" (as defined in Section 4001(a)(2) of ERISA), the
withdrawing employer's proportionate share of such excess shall exceed such
amount);
(h) Plan Withdrawals. The Borrower or any member of the
Controlled Group as employer under a Multiemployer Plan shall have made a
complete or partial withdrawal from such Multiemployer Plan and the plan
sponsor of such Multiemployer Plan shall have notified such withdrawing
employer that such employer has incurred a withdrawal liability in an annual
amount exceeding $10,000,000.00;
(i) Guaranties. Any provision of any Guaranty requiring the
payment of the Guaranteed Obligations (as defined in the Guaranties) shall for
any reason cease to be valid and binding on the applicable Guarantor or the
applicable Guarantor shall so state in writing; or
(j) Change of Control. (i) as a result of one or more transactions
after the date of this Agreement, any "person" or "group" of persons acting in
concert (other than persons owning common stock of the Borrower on the
Effective Date (as defined in the Existing Credit Agreement) shall have
"beneficial ownership" of more than 30% of the outstanding common stock of the
Borrower (within the meaning of Section 13(d) or 14(d) of the Securities
Exchange Act of 1934, as amended, and the applicable rules and regulations
thereunder), provided that the relationships among the respective shareholders
of the Borrower on the date of this Agreement shall not be deemed to constitute
all or any combination of them as a "group" or (ii) during any period of 12
consecutive months, beginning with and after the Effective Date (as defined in
the Existing Credit Agreement), individuals who at the beginning of such
12-month period were directors of the Borrower shall cease for any reason to
constitute a majority of the board of directors of the Borrower at any time
during such period.
Section 7.02. Optional Acceleration of Maturity. If any Event of
Default (other than an Event of Default pursuant to paragraph (e) of Section
7.01) shall have occurred and be continuing, then, and in any such event,
(a) the Administrative Agent (i) shall at the request, or may with
the consent, of the Majority Banks, by notice to the Borrower, declare the
obligation of each Bank to make Advances and the obligation of the Issuing
Banks to issue, increase, or extend Letters of Credit
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to be terminated, whereupon the same shall forthwith terminate, and (ii) shall
at the request, or may with the consent, of the Majority Banks, by notice to
the Borrower, declare the Notes, all interest thereon, the Letter of Credit
Obligations, and all other amounts payable under this Agreement to be forthwith
due and payable, whereupon the Notes, all such interest, all such Letter of
Credit Obligations and all such amounts shall become and be forthwith due and
payable in full, without presentment, demand, protest or further notice of any
kind (including, without limitation, any notice of intent to accelerate or
notice of acceleration), all of which are hereby expressly waived by the
Borrower;
(b) the Borrower shall, on demand of the Administrative Agent at
the request or with the consent of the Majority Banks, deposit with the
Administrative Agent into the Cash Collateral Account an amount of cash equal
to the Letter of Credit Exposure as security for the Obligations to the extent
the Letter of Credit Obligations are not otherwise paid at such time; and
(c) the Agent shall at the request of, or may with the consent of,
the Majority Banks proceed to enforce its rights and remedies under the
Guaranties or any other Credit Document for the ratable benefit of the Banks by
appropriate proceedings.
Section 7.03. Automatic Acceleration of Maturity. If any Event of
Default pursuant to paragraph (e) of Section 7.01 shall occur,
(a) the obligation of each Bank to make Advances and the
obligation of the Issuing Banks to issue, increase, or extend Letters of Credit
shall immediately and automatically be terminated and the Notes, all interest
on the Notes, all Letter of Credit Obligations, and all other amounts payable
under this Agreement shall immediately and automatically become and be due and
payable in full, without presentment, demand, protest or any notice of any kind
(including, without limitation, any notice of intent to accelerate or notice of
acceleration), all of which are hereby expressly waived by the Borrower;
(b) the Borrower shall deposit with the Administrative Agent into
the Cash Collateral Account an amount of cash equal to the outstanding Letter
of Credit Exposure as security for the Obligations to the extent the Letter of
Credit Obligations are not otherwise paid at such time; and
(c) the Agent shall at the request of, or may with the consent of,
the Majority Banks proceed to enforce its rights and remedies under the
Guaranties or any other Credit Document for the ratable benefit of the Banks by
appropriate proceedings.
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Section 7.04. Cash Collateral Account.
(a) Pledge. The Borrower hereby pledges, and grants to the
Administrative Agent for the benefit of the Banks, a security interest in all
funds held in the Cash Collateral Account from time-to-time and all proceeds
thereof, as security for the payment of the Obligations, including all Letter
of Credit Obligations owing to the Issuing Banks or any other Bank due and to
become due from the Borrower to the Issuing Banks or any other Bank under this
Agreement in connection with the Letters of Credit. Nothing in this Section
7.04, however, shall either obligate the Administrative Agent to require any
funds to be deposited in the Cash Collateral Account or limit the right of the
Administrative Agent, which it may exercise at any time and from time-to-time,
to release to the Borrower any funds held in the Cash Collateral Account
pursuant to the other provisions of this Section 7.04.
(b) Application against Letter of Credit Obligations; Release of
Funds. The Administrative Agent may, at any time or from time-to-time apply
funds then held in the Cash Collateral Account to the payment of any Letter of
Credit Obligations owing to the Issuing Banks, in such order as the
Administrative Agent may elect, as shall have become or shall become due and
payable by the Borrower to the Issuing Banks under this Agreement in connection
with the Letters of Credit. So long as no Event of Default referred to in
paragraph (a) or (e) of Section 7.01 shall have occurred and be continuing, the
Administrative Agent will release to the Borrower at the Borrower's written
request funds held in the Cash Collateral Account in an amount up to but not
exceeding the excess, if any (immediately prior to the release of any such
funds), of (i) the total amount of funds held in the Cash Collateral Account
over (ii) the Letter of Credit Exposure.
(c) Duty of Care. The Administrative Agent shall exercise
reasonable care in the custody and preservation of any funds held in the Cash
Collateral Account and shall be deemed to have exercised such care if such
funds are accorded treatment substantially equivalent to that which the
Administrative Agent accords its own property, it being understood that the
Administrative Agent shall not have any responsibility for taking any necessary
steps to preserve rights against any parties with respect to any such funds.
Section 7.05. Non-exclusivity of Remedies. No remedy conferred
upon the Administrative Agent is intended to be exclusive of any other remedy,
and each remedy shall be cumulative of all other remedies existing by contract,
at law, in equity, by statute or otherwise.
Section 7.06. 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, if any, specified by Section 7.02 to authorize the
Administrative Agent to declare the Notes and any other amount payable
hereunder due and payable pursuant to the provisions of Section 7.02 or
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the automatic acceleration of the Notes and all amounts payable under this
Agreement pursuant to Section 7.03, each Bank 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 Bank
to or for the credit or the account of the Borrower against any and all of the
obligations of the Borrower now or hereafter existing under this Agreement, the
Note held by such Bank, and the other Credit Documents, irrespective of whether
or not such Bank shall have made any demand under this Agreement, such Note, or
such other Credit Documents, and although such obligations may be unmatured.
Each Bank agrees to promptly notify the Borrower after any such set-off and
application made by such Bank, provided that the failure to give such notice
shall not affect the validity of such set-off and application. The rights of
each Bank under this Section are in addition to any other rights and remedies
(including, without limitation, other rights of set-off) which such Bank may
have.
ARTICLE VIII
THE ADMINISTRATIVE AGENT AND THE ISSUING BANKS
Section 8.01. Authorization and Action. Each Bank hereby appoints
and authorizes the Administrative Agent to take such action as agent on its
behalf and to exercise such powers under this Agreement as are delegated to the
Administrative Agent by the terms hereof and of the other Credit Documents,
together with such powers as are reasonably incidental thereto. As to any
matters not expressly provided for by this Agreement or any other Credit
Document (including, without limitation, enforcement or collection of the
Notes), the Administrative Agent shall not be required to exercise any
discretion or take any action, but shall be required to act or to refrain from
acting (and shall be fully protected in so acting or refraining from acting)
upon the instructions of the Majority Banks, and such instructions shall be
binding upon all Banks and all holders of Notes; provided, however, that the
Administrative Agent shall not be required to take any action which exposes the
Administrative Agent to personal liability or which is contrary to this
Agreement, any other Credit Document, or applicable law.
Section 8.02. Administrative Agent's Reliance, Etc. Neither the
Administrative Agent nor any of its directors, officers, agents or employees
shall be liable for any action taken or omitted to be taken (including the
Administrative Agent's own negligence) by it or them under or in connection
with this Agreement or the other Credit Documents, except for its or their own
gross negligence or willful misconduct. Without limitation of the generality
of the foregoing, the Administrative Agent: (a) may treat the payee of any
Note as the holder thereof until the Administrative Agent receives written
notice of the assignment or transfer thereof signed by such payee and in form
satisfactory to the Administrative Agent; (b) may consult with legal counsel
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(including counsel for the Borrower), independent public accountants and other
experts selected by it 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; (c) makes no warranty or representation to any Bank and
shall not be responsible to any Bank for any statements, warranties or
representations made in or in connection with this Agreement or the other
Credit Documents; (d) shall not have any duty to ascertain or to inquire as to
the performance or observance of any of the terms, covenants or conditions of
this Agreement or any other Credit Document on the part of the Borrower or its
Subsidiaries or to inspect the property (including the books and records) of
the Borrower or its Subsidiaries; (e) shall not be responsible to any Bank for
the due execution, legality, validity, enforceability, genuineness, sufficiency
or value of this Agreement or any other Credit Document; and (f) shall incur no
liability under or in respect of this Agreement or any other Credit Document by
acting upon any notice, consent, certificate or other instrument or writing
(which may be by telecopier, telegram, cable or telex) believed by it to be
genuine and signed or sent by the proper party or parties.
Section 8.03. The Administrative Agent and Its Affiliates. With
respect to its Commitment, the Advances made by it and the Note issued to it,
the Administrative Agent shall have the same rights and powers under this
Agreement as any other Bank and may exercise the same as though it were not the
Administrative Agent. The term "Bank" or "Banks" shall, unless otherwise
expressly indicated, include the Administrative Agent in its individual
capacity. The Administrative Agent and its Affiliates may accept deposits
from, lend money to, act as trustee under indentures of, and generally engage
in any kind of business with, the Borrower or any of its Subsidiaries, and any
Person who may do business with or own securities of the Borrower or any such
Subsidiary, all as if the Administrative Agent were not an agent hereunder and
without any duty to account therefor to the Banks.
Section 8.04. Bank Credit Decision. Each Bank acknowledges that it
has, independently and without reliance upon the Administrative Agent or any
other Bank and based on the financial statements referred to in Section 4.05
and such other documents and information as it has deemed appropriate, made its
own credit analysis and decision to enter into this Agreement. Each Bank also
acknowledges that it will, independently and without reliance upon the
Administrative Agent or any other Bank and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit decisions in taking or not taking action under this Agreement.
Section 8.05. INDEMNIFICATION. THE BANKS SEVERALLY AGREE TO
INDEMNIFY THE ADMINISTRATIVE AGENT, THE SYNDICATION AGENT, THE DOCUMENTATION
AGENT, AND THE ISSUING BANKS (TO THE EXTENT NOT REIMBURSED BY THE BORROWER),
ACCORDING TO THEIR RESPECTIVE PRO RATA SHARES FROM AND AGAINST ANY AND ALL
LIABILITIES, OBLIGATIONS,
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LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR
DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER WHICH MAY BE IMPOSED ON,
INCURRED BY, OR ASSERTED AGAINST THE ADMINISTRATIVE AGENT AND THE ISSUING BANKS
IN ANY WAY RELATING TO OR ARISING OUT OF THIS AGREEMENT OR ANY ACTION TAKEN OR
OMITTED BY THE ADMINISTRATIVE AGENT, THE SYNDICATION AGENT, THE DOCUMENTATION
AGENT OR THE ISSUING BANKS UNDER THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT
(INCLUDING THE ADMINISTRATIVE AGENT'S, THE SYNDICATION AGENT'S, THE
DOCUMENTATION AGENT'S, AND THE ISSUING BANKS' OWN NEGLIGENCE), PROVIDED THAT NO
BANK SHALL BE LIABLE FOR ANY PORTION OF SUCH LIABILITIES, OBLIGATIONS, LOSSES,
DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS
RESULTING FROM THE ADMINISTRATIVE AGENT'S, THE SYNDICATION AGENT'S,
DOCUMENTATION AGENT'S, OR THE ISSUING BANKS' GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT. WITHOUT LIMITATION OF THE FOREGOING, EACH BANK AGREES TO REIMBURSE
THE ADMINISTRATIVE AGENT PROMPTLY UPON DEMAND FOR ITS RATABLE SHARE OF ANY
OUT-OF-POCKET EXPENSES (INCLUDING COUNSEL FEES) INCURRED BY THE ADMINISTRATIVE
AGENT IN CONNECTION WITH THE PREPARATION, EXECUTION, DELIVERY, ADMINISTRATION,
MODIFICATION, AMENDMENT OR ENFORCEMENT (WHETHER THROUGH NEGOTIATIONS, LEGAL
PROCEEDINGS OR OTHERWISE) OF, OR LEGAL ADVICE IN RESPECT OF RIGHTS OR
RESPONSIBILITIES UNDER, THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT, TO THE
EXTENT THAT THE ADMINISTRATIVE AGENT IS NOT REIMBURSED FOR SUCH EXPENSES BY THE
BORROWER.
Section 8.06. Successor Administrative Agent and Issuing Banks.
The Administrative Agent or any Issuing Bank may resign at any time by giving
written notice thereof to the Banks and the Borrower and may be removed at any
time with or without cause by the Majority Banks upon receipt of written notice
from the Majority Banks to such effect. Upon receipt of notice of any such
resignation or removal, the Majority Banks shall have the right to appoint a
successor Administrative Agent or Issuing Bank with, if an Event of Default has
not occurred and is not continuing, the consent of the Borrower, which consent
shall not be unreasonably withheld. If no successor Administrative Agent or
Issuing Bank shall have been so appointed, and shall have accepted such
appointment, within 30 days after the retiring Administrative Agent's or
Issuing Bank's giving of notice of resignation or the Majority Banks' removal
of the retiring Administrative Agent or Issuing Bank, then the retiring
Administrative Agent or Issuing Bank may, on behalf of the Banks and the
Borrower, appoint a successor Administrative Agent or Issuing Bank, which shall
be a commercial bank meeting the financial requirements of an Eligible Assignee
and, in the case of the Issuing Bank, a Bank. Upon the acceptance of any
appointment
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as Administrative Agent or Issuing Bank by a successor Administrative Agent or
Issuing Bank, such successor Administrative Agent or Issuing Bank shall
thereupon succeed to and become vested with all the rights, powers, privileges
and duties of the retiring Administrative Agent or Issuing Bank, and the
retiring Administrative Agent or Issuing Bank shall be discharged from its
duties and obligations under this Agreement and the other Credit Documents,
except that the retiring Issuing Bank shall remain the Issuing Bank with
respect to any Letters of Credit issued by it and outstanding on the effective
date of its resignation or removal and the provisions affecting the Issuing
Bank with respect to such Letters of Credit shall inure to the benefit of the
retiring Issuing Bank until the termination of all such Letters of Credit.
After any retiring Administrative Agent's or Issuing Bank's resignation or
removal hereunder as Administrative Agent or Issuing Bank, the provisions of
this Article VIII shall inure to its benefit as to any actions taken or omitted
to be taken by it while it was Administrative Agent or Issuing Bank under this
Agreement and the other Credit Documents.
Section 8.07. Documentation Agent and Syndication Agent. Neither
the Documentation Agent nor the Syndication Agent shall have any duties,
obligations, or liabilities in its capacity as the Documentation Agent or the
Syndication Agent respectively. Upon the resignation of the Documentation
Agent or the Syndication Agent, the Documentation Agent or the Syndication
Agent, as the case may be, shall not be replaced.
ARTICLE IX
MISCELLANEOUS
Section 9.01. Amendments, Etc. No amendment or waiver of any
provision of this Agreement, the Notes, or any other Credit Document, nor
consent to any departure by the Borrower or any Guarantor therefrom, shall in
any event be effective unless the same shall be in writing and signed by the
Majority Banks and the Borrower, and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given; provided, however, that no amendment, waiver or consent shall, unless in
writing and signed by all the Banks and the Borrower, do any of the following:
(a) waive any of the conditions specified in Section 3.01 or 3.02, (b) increase
the Commitments of the Banks, (c) reduce the principal of, or interest on, the
Notes or any fees or other amounts payable hereunder or under any other Credit
Document or, except as specifically provided in Section 2.01(c), extend the
Tranche A Maturity Date or the Tranche B Commitment Termination Date, (d)
postpone any date fixed for any payment of principal of, or interest on, the
Notes or any fees or other amounts payable hereunder, including any change in
required amortization of the Tranche B Advances under Section 2.06(c), (e)
change the number of Banks which shall be required for the Banks or any of them
to take any action hereunder or under any other Credit Document, (f) amend
Section
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2.13 or this Section 9.01, (g) release any Guarantor from its obligations under
any Guaranty, except as contemplated by Section 6.04; or (h) amend the
definition of "Majority Banks"; and provided, further, that no amendment,
waiver or consent shall, unless in writing and signed by the Administrative
Agent, the Documentation Agent, the Syndication Agent, or the Issuing Banks in
addition to the Banks required above to take such action, affect the rights or
duties of the Administrative Agent, the Documentation Agent, the Syndication
Agent, or the Issuing Banks, as the case may be, under this Agreement or any
other Credit Document.
Section 9.02. Notices, Etc. All notices and other communications
shall be in writing (including telecopy or telex) and mailed, telecopied,
telexed, hand delivered or delivered by a nationally recognized overnight
courier, if to the Borrower, at its address at 15415 Katy Freeway, Suite 800,
Houston, Texas 77094, Attention: Treasurer (telecopy: (713) 578-4735;
telephone: (713) 578-4700), with a copy to the Associate General Counsel
(telecopy (713) 578-4654; telephone (713) 578-4715); if to any Bank at its
Domestic Lending Office specified opposite its name on Schedule 1 or pursuant
to Section 2.11(b); if to the Administrative Agent, at its address at 700
Louisiana, 8th floor, Houston, Texas 77002, Attention: Mr. Frank T. Hundley,
Senior Vice President (telecopy: (713) 247-6719; telephone: (713) 247-6000);
and if a Notice of Borrowing or a Notice of Conversion or Continuation to the
Administrative Agent at the Domestic Lending Office for the Administrative
Agent specified opposite its name on Schedule 1 or, as to each party, at such
other address or teletransmission number as shall be designated by such party
in a written notice to the other parties. All such notices and communications
shall, when mailed, telecopied, telexed or hand delivered or delivered by
overnight courier, be effective three days after deposited in the mails, when
telecopy transmission is completed, when confirmed by telex answer-back or when
delivered, respectively, except that notices and communications to the
Administrative Agent pursuant to Article II or VIII shall not be effective
until received by the Administrative Agent.
Section 9.03. No Waiver; Remedies. No failure on the part of any
Bank, the Administrative Agent, or the Issuing Banks to exercise, and no delay
in exercising, any right hereunder or under any Note 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
remedies provided in this Agreement are cumulative and not exclusive of any
remedies provided by law.
Section 9.04. Costs and Expenses. The Borrower agrees to pay on
demand all out-of-pocket costs and expenses of the Administrative Agent in
connection with the preparation, execution, delivery, administration,
modification and amendment of this Agreement, the Notes and the other Credit
Documents including, without limitation, the reasonable fees and out-of-pocket
expenses of counsel for the Administrative Agent and with respect to advising
the Administrative Agent as to its rights and responsibilities under this
Agreement, and all reasonable out-of-pocket costs
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and expenses, if any, of the Administrative Agent, the Issuing Bank, and each
Bank (including, without limitation, reasonable counsel fees and expenses of
the Administrative Agent, the Issuing Banks, and each Bank, including allocated
costs of in-house counsel) in connection with the enforcement (whether through
negotiations, legal proceedings or otherwise) of this Agreement, the Notes and
the other Credit Documents.
Section 9.05. Binding Effect. This Agreement shall become
effective when it shall have been executed by the Borrower and the
Administrative Agent, and when the Administrative Agent shall have, as to each
Bank, either received a counterpart hereof executed by such Bank or been
notified by such Bank that such Bank has executed it and thereafter shall be
binding upon and inure to the benefit of the Borrower, the Administrative
Agent, the Issuing Banks, and each Bank and their respective successors and
assigns, except that the Borrower shall not have the right to assign its rights
or delegate its duties under this Agreement or any interest in this Agreement
without the prior written consent of each Bank.
Section 9.06. Bank Assignments and Participations.
(a) Assignments. Any Bank may assign to one or more banks or other
entities all or any portion of its rights and obligations under this Agreement
(including, without limitation, all or a portion of its Commitment, the
Advances owing to it, the Notes held by it, and the participation interest in
the Letter of Credit Obligations held by it); provided, however, that (i) each
such assignment shall be of a constant, and not a varying, percentage of all of
such Bank's rights and obligations under this Agreement, (ii) the amount of the
Commitments and Advances of such Bank being assigned pursuant to each such
assignment (determined as of the date of the Assignment and Acceptance with
respect to such assignment) shall in no event be less than $10,000,000.00 and
shall be an integral multiple of $1,000,000.00, (iii) each such assignment
shall be to an Eligible Assignee, (iv) the parties to each such assignment
shall execute and deliver to the Administrative Agent, for its acceptance and
recording in the Register, an Assignment and Acceptance, together with the
Notes subject to such assignment, and (v) each Eligible Assignee (other than an
Eligible Assignee of the Administrative Agent) shall pay to the Administrative
Agent a $2,500 administrative fee. Upon such execution, delivery, acceptance
and recording, from and after the effective date specified in each Assignment
and Acceptance, which effective date shall be at least three Business Days
after the execution thereof, (A) the assignee thereunder shall be a party
hereto for all purposes 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 Bank hereunder and (B) such Bank
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
such Bank's rights and obligations under this Agreement, such Bank shall cease
to be a party hereto).
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<PAGE> 82
(b) Term of Assignments. By executing and delivering an
Assignment and Acceptance, the Bank 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 Bank 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 of value of this Agreement or any other instrument or document
furnished pursuant hereto; (ii) such Bank makes no representation or warranty
and assumes no responsibility with respect to the financial condition of the
Borrower or the Guarantors or the performance or observance by the Borrower or
the Guarantors of any of their 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 Section 4.05 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 the Administrative Agent, such Bank or
any other Bank and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking action under this Agreement; (v) such assignee appoints and
authorizes the Administrative Agent to take such action as agent on its behalf
and to exercise such powers under this Agreement as are delegated to the
Administrative Agent by the terms hereof, together with such powers as are
reasonably incidental thereto; and (vi) 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 Bank.
(c) The Register. The Administrative Agent shall maintain at its
address referred to in Section 9.02 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 Banks and the Commitments of, and principal amount of the
Advances owing to, each Bank from time-to-time (the "Register"). The entries
in the Register shall be conclusive and binding for all purposes, absent
manifest error, and the Borrower, the Administrative Agent, the Issuing Bank,
and the Banks may treat each Person whose name is recorded in the Register as a
Bank hereunder for all purposes of this Agreement. The Register shall be
available for inspection by the Borrower or any Bank at any reasonable time and
from time-to-time upon reasonable prior notice.
(d) Procedures. Upon its receipt of an Assignment and Acceptance
executed by a Bank and an Eligible Assignee, together with the Tranche A Notes,
Tranche B Notes, and Competitive Bid Notes subject to such assignment, the
Administrative Agent shall, if such Assignment and Acceptance has been
completed and is in substantially the form of the attached Exhibit A, (i)
accept such Assignment and Acceptance, (ii) record the information contained
therein in the Register, and (iii) give prompt notice thereof to the Borrower.
Within five Business Days after its receipt of such notice, the Borrower, at
its own expense, shall execute and deliver to the
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<PAGE> 83
Administrative Agent in exchange for the surrendered Tranche A Notes, Tranche B
Notes, and Competitive Bid Notes, a new Tranche A Note and Tranche B Note to
the order of such Eligible Assignee in an amount equal to the respective
Commitments assumed by it pursuant to such Assignment and Acceptance and a new
Competitive Bid Note in an amount equal to the Tranche A Commitment assumed by
it and, if such Bank has retained any Commitment hereunder, a new Tranche A
Note and a new Tranche B Note to the order of such Bank in an amount equal to
the Commitments, respectively, retained by it hereunder and a new Competitive
Bid Note in an amount equal to the Tranche A Commitment retained by such Bank.
Such new Notes shall be dated the effective date of such Assignment and
Acceptance and shall otherwise be in substantially the form of the attached
Exhibits E-1, E-2, and E-3.
(e) Participations. Each Bank may sell participations to one or
more banks or other entities in or to all or a portion of its rights and
obligations under this Agreement (including, without limitation, all or a
portion of its Commitments, the Advances owing to it, its participation
interest in the Letter of Credit Obligations, and the Notes held by it);
provided, however, that (i) such Bank's obligations under this Agreement
(including, without limitation, its Commitments to the Borrower hereunder)
shall remain unchanged, (ii) such Bank shall remain solely responsible to the
other parties hereto for the performance of such obligations, (iii) such Bank
shall remain the holder of any such Notes for all purposes of this Agreement,
(iv) the Borrower, the Administrative Agent, and the Issuing Banks and the
other Banks shall continue to deal solely and directly with such Bank in
connection with such Bank's rights and obligations under this Agreement, and
(v) such Bank shall not require the participant's consent to any matter under
this Agreement, except for change in the principal amount of the Notes,
reductions in fees or interest, change in amortization of Tranche B Advances,
or, except as specifically provided in Section 2.01(c), extending the Tranche A
Maturity Date or the Tranche B Commitment Termination Date. The Borrower
hereby agrees that a Bank may pass through to any of its participants the same
rights under Sections 2.09, 2.10, 2.12(c), 9.04 and 9.07 to the extent of their
respective participations, provided that no participant shall be able to
collect in excess of amounts payable to the Bank selling to such participant
under such Sections in respect of the interest sold to such participant or to
collect any such amounts from the Borrower.
(f) Notwithstanding anything to the contrary in Section 9.06(a),
any Bank may assign, as collateral or otherwise, any of its rights (including,
without limitation, rights to payments of principal of and/or interest on the
Notes) under any Credit Document to any Federal Reserve Bank without notice to
or consent of the Borrower or the Administrative Agent.
Section 9.07. INDEMNIFICATION. THE BORROWER SHALL INDEMNIFY THE
ADMINISTRATIVE AGENT, THE SYNDICATION AGENT, THE DOCUMENTATION AGENT, THE
BANKS, THE ISSUING BANKS, AND EACH AFFILIATE THEREOF AND THEIR RESPECTIVE
DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS FROM, AND DISCHARGE, RELEASE, AND
HOLD EACH OF THEM HARMLESS AGAINST,
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<PAGE> 84
ANY AND ALL LOSSES, LIABILITIES, CLAIMS OR DAMAGES TO WHICH ANY OF THEM MAY
BECOME SUBJECT, INSOFAR AS SUCH LOSSES, LIABILITIES, CLAIMS OR DAMAGES ARISE
OUT OF OR RESULT FROM (I) ANY ACTUAL OR PROPOSED USE BY THE BORROWER OR ANY
AFFILIATE OF THE BORROWER OF THE PROCEEDS OF ANY ADVANCE, (II) ANY BREACH BY
THE BORROWER OF ANY PROVISION OF THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT,
(III) ANY INVESTIGATION, LITIGATION OR OTHER PROCEEDING (INCLUDING ANY
THREATENED INVESTIGATION OR PROCEEDING) RELATING TO THE FOREGOING, OR (IV) ANY
ENVIRONMENTAL CLAIM OR REQUIREMENT OF ENVIRONMENTAL LAWS CONCERNING OR RELATING
TO THE PRESENT OR PREVIOUSLY-OWNED OR OPERATED PROPERTIES, OR THE OPERATIONS OR
BUSINESS, OF THE BORROWER OR ANY OF ITS SUBSIDIARIES, AND THE BORROWER SHALL
REIMBURSE THE ADMINISTRATIVE AGENT, THE SYNDICATION AGENT, THE DOCUMENTATION
AGENT, THE ISSUING BANKS, AND EACH BANK, AND EACH AFFILIATE THEREOF AND THEIR
RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS, UPON DEMAND FOR ANY
REASONABLE OUT-OF-POCKET EXPENSES (INCLUDING LEGAL FEES) INCURRED IN CONNECTION
WITH ANY SUCH INVESTIGATION, LITIGATION OR OTHER PROCEEDING; AND EXPRESSLY
INCLUDING ANY SUCH LOSSES, LIABILITIES, CLAIMS, DAMAGES, OR EXPENSE INCURRED BY
REASON OF THE PERSON BEING INDEMNIFIED'S OWN NEGLIGENCE, BUT EXCLUDING ANY SUCH
LOSSES, LIABILITIES, CLAIMS, DAMAGES OR EXPENSES INCURRED BY REASON OF THE
GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE PERSON TO BE INDEMNIFIED.
Section 9.08. 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 9.09. Survival of Representations, etc. All
representations and warranties contained in this Agreement or made in writing
by or on behalf of the Borrower in connection herewith shall survive the
execution and delivery of this Agreement and the Credit Documents, the making
of the Advances and any investigation made by or on behalf of the Banks, none
of which investigations shall diminish any Bank's right to rely on such
representations and warranties. All obligations of the Borrower provided for
in Sections 2.09, 2.10, 2.12(c), and 9.07 shall survive any termination of this
Agreement and repayment in full of the Obligations.
Section 9.10. Severability. In case one or more provisions of this
Agreement or the other Credit Documents shall be invalid, illegal or
unenforceable in any respect under any applicable
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<PAGE> 85
law, the validity, legality and enforceability of the remaining provisions
contained herein or therein shall not be affected or impaired thereby.
Section 9.11. Business Loans. The Borrower warrants and represents
that the Loans evidenced by the Notes are and shall be for business,
commercial, investment or other similar purposes and not primarily for
personal, family, household or agricultural use, as such terms are used in
Chapter One ("Chapter One") of the Texas Credit Code. At all such times, if
any, as Chapter One shall establish a Maximum Rate, the Maximum Rate shall be
the "indicated rate ceiling" (as such term is defined in Chapter One) from time
to time in effect.
Section 9.12. Usury Not Intended. It is the intent of the Borrower
and each Bank in the execution and performance of this Agreement and the other
Credit Documents to contract in strict compliance with applicable usury laws,
including conflicts of law concepts, governing the Advances of each Bank
including such applicable laws of the State of Texas and the United States of
America from time-to-time in effect. In furtherance thereof, the Banks and the
Borrower stipulate and agree that none of the terms and provisions contained in
this Agreement or the other Credit Documents shall ever be construed to create
a contract to pay, as consideration for the use, forbearance or detention of
money, interest at a rate in excess of the Maximum Rate and that for purposes
hereof "interest" shall include the aggregate of all charges which constitute
interest under such laws that are contracted for, charged or received under
this Agreement; and in the event that, notwithstanding the foregoing, under any
circumstances the aggregate amounts taken, reserved, charged, received or paid
on the Advances, include amounts which by applicable law are deemed interest
which would exceed the Maximum Rate, then such excess shall be deemed to be a
mistake and each Bank receiving same shall credit the same on the principal of
its Notes (or if such Notes shall have been paid in full, refund said excess to
the Borrower). In the event that the maturity of the Notes are accelerated by
reason of any election of the holder thereof resulting from any Event of
Default under this Agreement or otherwise, or in the event of any required or
permitted prepayment, then such consideration that constitutes interest may
never include more than the Maximum Rate and excess interest, if any, provided
for in this Agreement or otherwise shall be canceled automatically as of the
date of such acceleration or prepayment and, if theretofore paid, shall be
credited on the applicable Notes (or, if the applicable Notes shall have been
paid in full, refunded to the Borrower of such interest). In determining
whether or not the interest paid or payable under any specific contingencies
exceeds the Maximum Rate, the Borrower and the Banks shall to the maximum
extent permitted under applicable law amortize, prorate, allocate and spread in
equal parts during the period of the full stated term of the Notes all amounts
considered to be interest under applicable law at any time contracted for,
charged, received or reserved in connection with the Obligations. The
provisions of this Section shall control over all other provisions of this
Agreement or the other Credit Documents which may be in apparent conflict
herewith.
-79-
<PAGE> 86
Section 9.13. Confidentiality. Each Bank agrees that it will use
its best efforts not to disclose without the prior consent of the Borrower
(other than to its subsidiaries and affiliates conducting business related to
the making and syndication of loans and its and such subsidiaries and
affiliates' employees, auditors or counsel or to another Bank if the disclosing
Bank or the disclosing Bank's holding or parent company in its sole discretion
determines that any such party should have access to such information) any
information with respect to the Borrower or its Subsidiaries which is furnished
pursuant to this Agreement or any other Credit Document and which is designated
by the Borrower to the Banks in writing as confidential, provided that any Bank
may disclose any such information (a) as has become generally available to the
public, (b) as may be required or appropriate in any report, statement or
testimony submitted to any municipal, state or federal regulatory body having
or claiming to have jurisdiction over such Bank or to the Federal Reserve Board
or the FDIC or similar organizations (whether in the United States or
elsewhere), (c) as may be required or appropriate in response to any summons or
subpoena or in connection with any litigation, (d) in order to comply with any
law, order, regulation or ruling applicable to such Bank, and (e) to the
prospective transferee or participant in connection with any contemplated
transfer of any of the Notes or any interest therein by such Bank, provided,
that such prospective transferee or participant executes an agreement with the
Borrower containing provisions substantially identical to those contained in
this Section.
Section 9.14. Governing Law. This Agreement, the Notes and the
other Credit Documents shall be governed by, and construed and enforced in
accordance with, the laws of the State of Texas.
Section 9.15. Waiver of Jury. THE BORROWER, THE BANKS, THE
ADMINISTRATIVE AGENT, AND THE ISSUING BANKS HEREBY IRREVOCABLY WAIVE ANY AND
ALL RIGHT TO TRIAL BY JURY IN RESPECT OF ANY LEGAL PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT, ANY OTHER CREDIT DOCUMENT, OR ANY OF THE
TRANSACTIONS CONTEMPLATED HEREBY.
PURSUANT TO SECTION 26.02 OF THE TEXAS BUSINESS AND COMMERCE CODE, A
LOAN AGREEMENT IN WHICH THE AMOUNT INVOLVED IN THE LOAN AGREEMENT EXCEEDS
$50,000.00 IN VALUE IS NOT ENFORCEABLE UNLESS THE LOAN AGREEMENT IS IN WRITING
AND SIGNED BY THE PARTY TO BE BOUND OR THAT PARTY'S AUTHORIZED REPRESENTATIVE.
THE RIGHTS AND OBLIGATIONS OF THE PARTIES TO AN AGREEMENT SUBJECT TO
THE PRECEDING PARAGRAPH SHALL BE DETERMINED SOLELY FROM THE WRITTEN LOAN
AGREEMENT, AND ANY PRIOR ORAL AGREEMENTS BETWEEN THE PARTIES ARE SUPERSEDED BY
AND MERGED INTO THE LOAN AGREEMENT. THIS WRITTEN AGREEMENT AND THE CREDIT
DOCUMENTS, AS
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<PAGE> 87
DEFINED IN THIS AGREEMENT, REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND
MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT
ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
[Remainder of page intentionally left blank]
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<PAGE> 88
EXECUTED as of the 19th day of August, 1996.
BORROWER:
LIVING CENTERS OF AMERICA, INC.
By:/s/ [signature omitted]
------------------------------------
Boyd P. Gentry
Vice President and Treasurer
ADMINISTRATIVE AGENT:
NATIONSBANK OF TEXAS, N.A.
By:/s/ [signature omitted]
------------------------------------
Frank T. Hundley
Senior Vice President
BANKS:
TRANCHE A COMMITMENT NATIONSBANK OF TEXAS, N.A.
$31,500,000.00
TRANCHE B COMMITMENT By:/s/ [signature omitted]
------------------------------------
$13,500,000.00 Frank T. Hundley
Senior Vice President
-82-
<PAGE> 89
TRANCHE A COMMITMENT THE CHASE MANHATTAN BANK, N.A.
$31,500,000.00
TRANCHE B COMMITMENT By:/s/ [signature omitted]
$13,500,000.00 ------------------------------------
Name:[printed name omitted]
----------------------------------
Title:[title omitted]
---------------------------------
TRANCHE A COMMITMENT TORONTO DOMINION (TEXAS), INC.
$31,500,000.00
TRANCHE B COMMITMENT By:/s/ [signature omitted]
$13,500,000.00 ------------------------------------
Name:[printed name omitted]
----------------------------------
Title:[title omitted]
---------------------------------
TRANCHE A COMMITMENT BANK OF AMERICA NATIONAL TRUST AND
$24,500,000.00 SAVINGS ASSOCIATION, as a Bank and
as co-agent
TRANCHE B COMMITMENT
$10,500,000.00
By:/s/ [signature omitted]
------------------------------------
Name:[printed name omitted]
----------------------------------
Title:[title omitted]
---------------------------------
TRANCHE A COMMITMENT THE LONG-TERM CREDIT BANK OF JAPAN,
$24,500,000.00 LIMITED, NEW YORK BRANCH, as a Bank
and co-agent
TRANCHE B COMMITMENT
$10,500,000.00 By:/s/ [signature omitted]
------------------------------------
Name:[printed name omitted]
----------------------------------
Title:[title omitted]
---------------------------------
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<PAGE> 90
TRANCHE A COMMITMENT CREDIT LYONNAIS NEW YORK BRANCH,
$24,500,000.00 as a Bank and a co-agent
TRANCHE B COMMITMENT
$10,500,000.00 By:/s/ [signature omitted]
------------------------------------
Name:[printed name omitted]
----------------------------------
Title:[title omitted]
---------------------------------
TRANCHE A COMMITMENT COOPERATIVE CENTRALE RAIFFEISEN
$24,500,000.00 BOERENLEENBANK B.A., "RABOBANK
NEDERLAND", NEW YORK BRANCH, as a
TRANCHE B COMMITMENT Bank and as a co-agent
$10,500,000.00
By:/s/ [signature omitted]
------------------------------------
Name:[printed name omitted]
----------------------------------
Title:[title omitted]
---------------------------------
By:/s/ [signature omitted]
------------------------------------
Name:[printed name omitted]
----------------------------------
Title:[title omitted]
---------------------------------
TRANCHE A COMMITMENT BANQUE PARIBAS HOUSTON AGENCY
$15,750,000.00
TRANCHE B COMMITMENT By:/s/ [signature omitted]
$6,750,000.00 ------------------------------------
Name:[printed name omitted]
----------------------------------
Title:[title omitted]
---------------------------------
By:/s/ [signature omitted]
------------------------------------
Name:[printed name omitted]
----------------------------------
Title:[title omitted]
---------------------------------
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<PAGE> 91
TRANCHE A COMMITMENT THE BANK OF NOVA SCOTIA
$15,750,000.00
TRANCHE B COMMITMENT By:/s/ [signature omitted]
$6,750,000.00 ------------------------------------
Name:[printed name omitted]
----------------------------------
Title:[title omitted]
---------------------------------
TRANCHE A COMMITMENT PNC BANK NATIONAL ASSOCIATION
$15,750,000.00
TRANCHE B COMMITMENT By:/s/ [signature omitted]
$6,750,000.00 ------------------------------------
Name:[printed name omitted]
----------------------------------
Title:[title omitted]
---------------------------------
TRANCHE A COMMITMENT AMSOUTH BANK OF ALABAMA
$15,750,000.00
TRANCHE B COMMITMENT By:/s/ [signature omitted]
$6,750,000.00 ------------------------------------
Name:[printed name omitted]
----------------------------------
Title:[title omitted]
---------------------------------
TRANCHE A COMMITMENT FIRST UNION NATIONAL BANK OF NORTH
$15,750,000.00 CAROLINA
TRANCHE B COMMITMENT
$6,750,000.00 By:/s/ [signature omitted]
------------------------------------
Name:[printed name omitted]
----------------------------------
Title:[title omitted]
---------------------------------
TRANCHE A COMMITMENT MELLON BANK, N.A.
$15,750,000.00
TRANCHE B COMMITMENT By:/s/ [signature omitted]
$6,750,000.00 ------------------------------------
Name:[printed name omitted]
----------------------------------
Title:[title omitted]
---------------------------------
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<PAGE> 92
TRANCHE A COMMITMENT THE SANWA BANK, LIMITED, DALLAS
$5,750,000.00 AGENCY
TRANCHE B COMMITMENT By:/s/ [signature omitted]
$6,750,000.00 ------------------------------------
Name:[printed name omitted]
----------------------------------
Title:[title omitted]
---------------------------------
TRANCHE A COMMITMENT THE FUJI BANK, LIMITED, HOUSTON
$15,750,000.00 AGENCY
TRANCHE B COMMITMENT By:/s/ [signature omitted]
$6,750,000.00 ------------------------------------
Name:[printed name omitted]
----------------------------------
Title:[title omitted]
---------------------------------
TRANCHE A COMMITMENT THE SUMITOMO BANK, LIMITED
$15,750,000.00
TRANCHE B COMMITMENT By:/s/ [signature omitted]
$6,750,000.00 ------------------------------------
Name:[printed name omitted]
----------------------------------
Title:[title omitted]
---------------------------------
TRANCHE A COMMITMENT UNION BANK OF CALIFORNIA, N.A.
$15,750,000.00
TRANCHE B COMMITMENT By:/s/ [signature omitted]
$6,750,000.00 ------------------------------------
Name:[printed name omitted]
----------------------------------
Title:[title omitted]
---------------------------------
TOTAL TRANCHE A COMMITMENTS
$350,000,000.00
TOTAL TRANCHE B COMMITMENTS
$150,000,000.00
-86-
<PAGE> 1
EXHIBIT 10.2
EXTENSION AND RATIFICATION OF EMPLOYMENT AGREEMENT BETWEEN LIVING
CENTERS OF AMERICA, INC. AND EDWARD L. KUNTZ
<PAGE> 2
[LIVING CENTERS OF AMERICA LETTERHEAD]
December 13, 1996
Mr. Edward L. Kuntz
15415 Katy Freeway, Suite 800
Houston, Texas 77094
Re: Extension and Ratification of Employment Agreement
Dear Mr. Kuntz:
As you are aware, Living Centers of America, Inc. ("Company") has agreed
to ratify and extend the Employment Agreement between you and the Company
effective as of January 1, 1993 and to give effect to the automatic extension
therein so that term of employment is extended until January 1, 2000. If the
foregoing is agreeable to you, please sign this letter in the space indicated
below.
Very truly yours,
LIVING CENTERS OF AMERICA, INC.
By /s/ Leroy D. Williams
------------------------------------------
Name: Leroy D. Williams
---------------------------------------
Title: Chief Operating Officer and President
--------------------------------------
AGREED TO AND ACCEPTED BY:
/s/ Edward L. Kuntz
- -------------------------
Edward L. Kuntz
<PAGE> 1
EXHIBIT 10.4
EXTENSION AND RATIFICATION OF EMPLOYMENT AGREEMENT BETWEEN LIVING
CENTERS OF AMERICA, INC. AND LEROY D. WILLIAMS
<PAGE> 2
December 13, 1996
Mr. Leroy D. Williams
15415 Katy Freeway, Suite 800
Houston, Texas 77094
Re: Extension and Ratification of Employment Agreement
Dear Mr. Williams:
As you are aware, Living Centers of America, Inc. ("Company") has agreed
to ratify and extend the Employment Agreement between you and the Company
effective as of January 1, 1993 and to give effect to the automatic extension
therein so that term of employment is extended until January 1, 2000. If the
foregoing is agreeable to you, please sign this letter in the space indicated
below.
Very truly yours,
LIVING CENTERS OF AMERICA, INC.
By /s/ Edward L. Kuntz
------------------------------------------
Name: Edward L. Kuntz
---------------------------------------
Title: Chief Operating Officer and President
--------------------------------------
AGREED TO AND ACCEPTED BY:
/s/ Leroy D. Williams
- -------------------------
Leroy D. Williams
<PAGE> 1
EXHIBIT 10.5
EMPLOYMENT AGREEMENT BETWEEN LIVING CENTERS OF AMERICA, INC. AND
CHARLES B. CARDEN
<PAGE> 2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, dated this 13th day of December , 1996, by and
between LIVING CENTERS OF AMERICA, INC., a Delaware corporation (the
"Employer"), and CHARLES B. CARDEN (the "Employee");
W I T N E S S E T H:
For and in consideration of the agreement of the Employer to employ the
Employee at the salary and upon the terms and conditions herein set forth, and
the Employee's agreement to accept such employment and to serve the Employer
for such salary and on such terms and conditions, the parties hereto hereby
agree as follows:
1. Employment. Employer hereby employs the Employee, and Employee hereby
accepts employment upon the terms and conditions set forth in this Employment
Agreement effective as of October 1, 1996.
2. Duties. The Employer agrees to employ the Employee and the Employee
agrees to accept employment by the Employer and to serve the Employer, in such
capacities and with such powers and duties as may from time to time be
determined by the Chief Executive Officer of the Employer, on a basis involving
the Employee's full working time. It is anticipated that in performing such
services the Employee will serve as Executive Vice President and Chief
Financial Officer of the Employer, but such title or office shall in no way
diminish or inhibit the authority of the Chief Executive Officer of the
Employer to reasonably enlarge or restrict the duties and functions of the
Employee. Such duties shall be performed in Houston, Texas and at such other
places as the Chief Executive Officer may reasonably require without
necessitating any change in the Employee's place of residence.
-1-
<PAGE> 3
3. Annual Compensation. As his compensation for services to the Employer
under this Employment Agreement, in whatever capacity or capacities rendered,
the Employer shall pay to the Employee during the term of this Employment
Agreement a salary, in the aggregate of Two Hundred Forty Thousand Dollars
($240,000.00) per year, plus such increases as may be granted by the Board of
Directors, ("Annual Compensation"), payable bi-weekly, subject only to such
payroll and withholding deductions as may be required by law. The Employee
shall be reimbursed for all of the actual costs and expenses incurred by him in
the performance of his services and duties hereunder, including travel and
entertainment expenses.
4. Bonuses, Stock Options and Other Benefits. The Employee shall
participate in the Employer's Management Incentive Bonus Plan ("MIB Plan"),
1992 Stock Option Plan, Executive Benefits Plan, Employee Stock Purchase Plan,
all of which as may be amended from time to time, and other present or future
benefits provided for other employees of the Employer. The Annual Compensation
to be paid to the Employee shall not operate as a limitation upon or as a
direction against the exercise by the Board of Directors of the Employer of its
power and discretion to grant bonuses, options, awards or other additional
direct or indirect benefits to or on behalf of the Employee if, in the judgment
of such Board of Directors, such action is in the best interest of the
Employer.
5. Term and Termination.
5.1 This Employment Agreement shall be for a term of two (2) years,
commencing on the effective date hereof. The term shall be extended for
additional one (1) year periods on the anniversary date of each one year period
of the term with the Employee's consent and the approval of the Board of
Directors. This Employment Agreement may be terminated at will, with or without
cause, by the Employer prior to the expiration of such term upon thirty (30)
-2-
<PAGE> 4
days written notice of election so to terminate; provided, however, that if
this Employment Agreement is terminated by the Employer without good cause
prior to the expiration of the three year term, the Employee's Annual
Compensation hereunder shall continue for the remainder of the two(2) year term
and the Employee shall be paid his prorata bonus pursuant to the MIB Plan for
the fiscal year in which this Employment Agreement is terminated.
5.2 Termination for "good cause" shall include termination for such
things as fraud or dishonesty, willful failure to perform assigned duties,
willful violation of the Employer's Business Conduct Policy, or intentionally
working against the best interest of the Employer.
6. Extent of Services. Consistent with his obligations hereunder, the
Employee shall regulate his own hours of employment, performing the duties
assigned to him from time to time by the Chief Executive Officer of the
Employer to the best of his ability and with reasonable care and diligence.
7. Obligations Surviving Employment.
7.1 Employer is an operator of long-term health care centers and
provides long term care and assisted living services, and rehabilitation
therapy services, and pharmaceutical and infusion therapy services and supplies
throughout various states. It has a valuable, special, unique and proprietary
interest in its various business methods and systems, which include, but are
not limited to, strategic operating plans and budgets, policy and procedure
manuals, computer programs, financial forms and information, supplier
information, accounting forms and procedures, personnel policies, information
on the needs of residents, techniques and methods of operation, prospects,
research and data developed by or for the benefit of the Employer, and
information relating to strategic plans, revenues, costs, profits and the
financial condition of the Employer, and all other information developed by or
for the benefit of the Employer, all of which
-3-
<PAGE> 5
information is considered by the Employer to be confidential trade secrets
("Confidential Information"), to the extent such information is not publicly
disclosed.
7.2 The Employer may, pursuant to Employee's employment hereunder,
provide and confide to Employee, and Employee will have access to the
Employer's Confidential Information, which were developed at great expense by
or on behalf of the Employer, all of which Employee recognizes and acknowledges
to be unique valuable and confidential assets of the Employer. Further, as an
adjunct of Employee performing his duties hereunder, Employee may develop
additional information, techniques and programs for the Employer which Employee
agrees shall be the sole and exclusive property of the Employer. Employee
agrees that he shall not, and he shall not, during or after the term of
employment hereunder, directly or indirectly, in any manner, utilize, disclose
or otherwise divulge to any person, firm, corporation, association or other
entity engaged in the same business as Employer, for any reason whatsoever, any
such Confidential Information or other such information, techniques, methods of
operations, or programs, whether developed by him on behalf of, or by the
Employer independent of Employee, which is not generally known to the public or
recognized as standard practice in the industry in which the Employer shall be
engaged.
7.4 This Employment Agreement by Employee shall cover and be
enforceable by the Employer in all states in which the Employer is engaged in
business at the termination of Employee's employment or has been so engaged at
any time during the term hereof. For purposes of this Article 7, the term
"Employer" shall include the Employer as herein defined and any direct or
indirect subsidiary or affiliate.
-4-
<PAGE> 6
8. Remedies.
8.1 Employee acknowledges that in the event of any violation by
Employee of the provisions set forth in Article 7 hereof the Employer will
sustain serious, irreparable and substantial harm to its business, the extent
of which will be difficult to determine and impossible to remedy solely by an
action at law for money damages. Accordingly, Employee agrees that, in the
event of such violation or threatened violation by Employee, the Employer shall
be entitled to, in addition to all such other legal and equitable remedies as
may be available to the Employer, an injunction before trial from any court of
competent jurisdiction as a matter of course upon the posting of not more than
a nominal bond, restraining Employee from such violation or threatened
violation. Nothing herein contained shall be construed as limiting or
prohibiting the Employer from pursuing other remedies available to the Employer
therefor, including recovery of money damages through an action at law against
Employee. Employee further agrees that, in the event any of the provisions of
this Agreement are determined by a court of competent jurisdiction to be
contrary to any applicable statute, law or rule, or for any reason
unenforceable as written, such court may modify any of such provisions so as to
permit enforcement thereof as thus modified.
8.2 In the event a legal action is filed by either party to enforce its
rights under this Employment Agreement, the prevailing party shall be
reimbursed by the other party for the prevailing party's reasonable enforcement
costs, including without limitation, attorneys' fees and costs of investigation
and court.
9. Change of Control of the Employer. In the event of a change of control
of the Employer and either the Employee's (a) involuntary termination by the
Employer or (b) voluntary termination for good cause after a change of control,
then the Employee shall be entitled to receive a lump sum payment from the
Employer of an amount equal to two times (i) Employee's Annual
-5-
<PAGE> 7
base salary in effect at the date of termination plus (ii) Employee's base
bonus for Employee's grade as of the date of termination as set forth in
Employer's policy statement on the Management Incentive Bonus Program. For
purposes of this Article 9 "voluntary termination for good cause after a change
of control" shall include within the six month time period after a change of
control, a change in title or working responsibilities. For purposes of this
Article 9, "change of control" is the occurrence of one or more of the
following events: (i) any person or entity, together with all associates of
such person or entity, becomes the beneficial owner of 30% or more of the
Employer's outstanding common stock, except where such person or entity is
bound by the terms of a standstill agreement under which the parties cannot
acquire more than 30% of the outstanding common stock or (ii) during any two
year period, directors serving at the beginning of such period cease for any
reason to constitute a majority of the directors serving, unless the election
of at least 75% of the new directors was approved by at least 75% of the
directors in office at the time of election.
10. Binding Effect. The respective rights and obligations of the Employer
and the Employee under this Employment Agreement shall inure to the benefit of
and shall be binding upon the Employer and the Employee and the respective
successors and assigns of the Employer. This Employment Agreement shall not be
assignable by the Employee. As used herein, the term "successors and assigns"
shall include any corporation or corporations which acquire all or
substantially all of the assets and businesses of the Employer whether by
purchase, merger, consolidation or otherwise.
11. Applicable Law. This Employment Agreement shall be interpreted and
construed in accordance with the laws of the State of Texas.
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<PAGE> 8
IN WITNESS WHEREOF, the Employer and the Employee have executed this
Employment Agreement in duplicate originals as of the date first above written.
LIVING CENTERS OF AMERICA, INC.
/s/ Charles B. Carden By: /s/ Edward L. Kuntz
- ----------------------------------- -----------------------------------
CHARLES B. CARDEN Name: Edward L. Kuntz
"EMPLOYEE" Title: Chairman and Chief Executive
Officer
"EMPLOYER"
-7-
<PAGE> 1
EXHIBIT 10.7
EMPLOYMENT AGREEMENT BETWEEN LIVING CENTERS OF AMERICA, INC. AND
PAULINE BONNER
<PAGE> 2
EMPLOYMENT AGREEMENT
THIS AGREEMENT is between the undersigned individual ("Employee") and LC
MANAGEMENT COMPANY ("LC Management"), a wholly owned subsidiary of Living
Centers of America, Inc. ("LCA").
R E C I T A L S:
A. LCA, through its operating subsidiaries, is an operator of long-term
health care centers, Progressive Care Centers providing subacute care,
Alzheimer's care centers, assisted living centers, retirement apartments,
centers and programs for people with mental retardation and developmental
disabilities, and a company providing pharmaceutical services and supplies.
B. LCA and LC Management have a proprietary interest in its business methods,
opportunities, operations and systems which include, but are not limited to,
internal financial and operating reports and data, strategic plans, business
acquisition and development opportunities, policy and procedure manuals,
management information programs and systems, financial forms and information,
supplier and vendor information, accounting forms and procedures, personnel
policies and information on the needs of residents, clients and patients and
their families, and the financial condition of LCA all of which information
("Corporation Information") not publicly disclosed is considered by LCA and LC
Management and recognized by Employee to be confidential.
C. LC Management intends to employ or continue to employ Employee in a
position where Employee will have access to this Corporate Information, and
therefore, LCA will be vulnerable to unfair post-employment competition by
Employee.
<PAGE> 3
D. In consideration of the severance and other employment benefits provided
for herein, Employee is willing to enter into this Agreement with LC Management
as a condition of employment.
NOW, THEREFORE, intending to be legally bound, the parties agree as follows
effective the day and date set opposite their signatures below:
ARTICLE 1.
Term of Employment
Employee acknowledges that LC Management has the right to terminate
Employee's employment at any time for any reason whatsoever; provided, however,
that any termination by LC Management for reasons other than "good and
sufficient cause," as defined in Article 2., Paragraph E below, shall result in
the severance benefits described in Article 2 below, to become due in
accordance with the terms of this Agreement. Employee further acknowledges
that the severance payments made and other benefits provided by LC Management
are in full satisfaction of any claims that Employee may have against LC
Management resulting from LC Management's exercise of its right to terminate
Employee's employment, except for those fringe benefits which are intended to
survive termination such as the rights to receive payments pursuant to
retirement plans and similar rights.
ARTICLE 2.
Severance Benefits
If Employee's employment with LC Management is terminated by LC Management
for any reason other than "good and sufficient cause," Employee shall be
entitled to the following severance benefits:
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<PAGE> 4
A. Severance Pay: Employee shall receive severance payments equivalent to
Employee's base salary in effect at the time of termination for the number of
months set forth below:
================================================================================
Years of Living Centers Continuous Service
Completed from Last Hire Date
-----------------------------
- --------------------------------------------------------------------------------
1 2 3 4 5 6 7 8 9 10 or more
- --------------------------------------------------------------------------------
Months of Severance Pay
-----------------------
- --------------------------------------------------------------------------------
6 8 10 12 14 16 18 20 22 24
================================================================================
B. Other Severance Benefits:
(1) Group medical and life insurance coverages shall continue under then
prevailing terms as long as severance payments are being made to Employee.
Deductions for Employee's share of the premiums will be made from Employee's
severance payments. Group medical coverage provided during such period shall
be applied against LC Management's obligation to continue group medical
coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985
("COBRA"). Upon termination of group medical and life insurance coverage,
Employee may convert, at his cost, to individual policies.
(2) Employee shall receive payment at the Employee's then prevailing rate,
for Employee's earned, but unused, and accrued vacation days through the date
of termination.
(3) Employee's eligibility to receive or participate in all other benefit
and compensation plans, including, but not limited to Management Incentive
Bonus, Long Term Disability, Retirement Savings, and Stock Option Plans, shall
terminate as of the effective
-3-
<PAGE> 5
date of Employee's termination except as provided otherwise hereunder or under
the terms of a particular benefit or compensation plan.
C. Change of Control of the Employer. In addition to the Severance Pay and
Other Severance Benefits provided for in Paragraphs A and B, immediately above,
in the event of a "change of control" of LCA and either the Employee's (a)
involuntary termination or (b) "voluntary termination for good cause in
anticipation of, during or after a change of control";
(1) The Employee shall be entitled to receive a lump sum payment from LC
Management of an amount equal to twelve (12) month's salary, which shall be the
Employee's base salary in effect at the date of termination plus Employee's
base bonus for Employee's grade as of the date of termination as set forth in
LCA's policy statement on the Management Incentive Bonus Program; and
(2) All stock options granted to Employee under the Living Centers of
America, Inc. 1992 Stock Option Plan, as amended (the "Option Plan"), as of the
date of termination shall "vest" and become exercisable, as that term is
defined in the Option Plan, as of the termination date, and Employee shall
thereupon have all rights applicable thereto as set forth in the Option Plan
pertaining to Employee's Stock Options.
For purposes of this Agreement, "voluntary termination for good cause in
anticipation of, during or after a change of control" shall mean Employee's
electing to terminate his employment with LC Management as a result of an
adverse change in title or working responsibilities of the Employee within the
six (6) month time period before and the twelve (12) month time period after a
"change of control." For purposes of this Paragraph C,
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<PAGE> 6
"change of control" is the occurrence of one or more of the following events:
(i) any person or entity, together with all associates of such person or
entity, becomes the owner, beneficial or otherwise, of 30% or more of the then
outstanding common stock of LCA, or (ii) during any two (2) year period,
directors of LCA serving at the beginning of such period cease for any reason
to constitute a majority of the directors serving, unless the election of at
least 75% of the new directors was approved by at least 75% of the directors in
office immediately prior to the election.
D. Right to Terminate Severance Pay and Benefits. If Employee is terminated
by LC Management for reasons other than "good and sufficient cause," as that
term is defined in Section E of this Article 2, Employee will receive the
severance payments and benefits described in Paragraphs A, B and C of this
Article 2. Notwithstanding the foregoing, if Employee commences other
employment while receiving such severance payments and benefits said severance
payments and benefits shall cease as of the date Employee commences such other
employment, but in no event shall the severance payments and benefits provided
in Paragraphs A and B of this Article 2 be terminated prior to Employee's
receiving severance payments and benefits for a two (2) month period. However,
if Employee commences other employment and the base salary Employee is paid in
the course of the other employment is less than the base salary Employee
received from LC Management at Employee's termination, LC Management shall pay
to Employee the difference in said base salaries each month for the remaining
number of months Employee would otherwise be entitled to severance pay as
provided in Section A of this Article 2 at the commencement of said other
employment, starting with the first full month after Employee commences said
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<PAGE> 7
other employment. Notwithstanding the foregoing, in the event of a "change of
control" of LCA and either the Employee's (a) involuntary termination or (b)
"voluntary termination for good cause in anticipation of, during or after a
change of control" and if Employee commences other employment while receiving
severance payments and benefits described in Paragraphs A, B and C of this
Article 2, said severance payments and benefits shall not cease as of the date
Employee commences such other employment, and shall continue pursuant to
Paragraph A of this Article 2. LC Management reserves the right to terminate
all continuing severance payments and benefits described in Paragraphs A and B
of this Article 2 if Employee violates any of the non-disclosure covenants set
forth in Article 3 or the non-piracy covenant set forth in Article 4 below.
E. "Good and Sufficient Cause" Defined. Termination for "good and sufficient
cause" shall include termination for such things as fraud or dishonesty,
willful failure to perform assigned duties, willful violation of LCA's Business
Conduct Policy, or intentionally working against the best interests of LCA.
F. Termination for Good and Sufficient Cause. If Employee's employment with
LC Management is terminated by LC Management for "good and sufficient cause" as
that term is defined in Section E of this Article 2, Employee will not receive
the severance payments and benefits described in Paragraphs A, B, C, and D of
this Article 2.
G. Voluntary Termination by Employee. If Employee voluntary terminates
his/her employment with LC Management Company, (and said termination is other
than "voluntary termination for good cause in anticipation of, during or after
a change of control"
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<PAGE> 8
as defined in this agreement), Employee will not receive the severance payments
and benefits described in Paragraphs A, B, C, and D of this Article 2.
H. Parachute Payment. If the Employee is liable for the payment of any
excise tax (the "Basic Excise Tax") because of Section 4999 of the Internal
Revenue Code of 1986, as amended (the "Code"), or any successor or similar
provision, with respect to any payments or benefits received or to be received
from LC Management or any successor to LC Management, whether provided under
this Agreement or otherwise, LC Management shall pay the Employee an amount
(the "Special Reimbursement") which, after payment by the Employee (or on the
Employee's behalf) of any federal, state and local taxes applicable thereto,
including, without limitation, any further excise tax under such Section 4999
of the Code, on, with respect to or resulting from the Special Reimbursement,
equals the net amounts of the Basic Excise Tax.
I. Survival. The provisions of this Article 2 shall survive the termination
of Employee's employment with LC Management.
ARTICLE 3
Non-Disclosure Agreement
Employee acknowledges and recognizes that in the course of Employee's
employment, Employee has had and will continue to have or will have access to
Corporate Information; and that LC Management may provide and confide to
Employee Corporation Information, techniques and methods of operation developed
at great expense by LCA, all of which Employee recognizes to be unique assets
of LCA. Employee agrees that Employee shall not, during or after the term of
employment, directly or indirectly, in any manner utilize,
-7-
<PAGE> 9
appropriate, disclose, communicate, divulge, copy or relate to any person,
firm, corporation, association or other entity, except where required by law,
or use or make use of any such Corporate Information, any such techniques or
methods of operation; data of any kind; or any information relating to
strategic plans, revenues, costs, profits or the financial condition of LCA,
which is not generally known to the public or recognized as standard practice
in the industry in which LCA is or shall be engaged. The provisions of this
Article 3 shall survive the termination of Employee's employment with LC
Management.
ARTICLE 4
Non-Competition Agreement
A. Duration; Applicability. Subject to the provisions of Paragraphs B and E
below, Employee agrees that for a period of two (2) years following Employee's
Voluntary termination of Employee's employment with LC Management (other than
"voluntary termination for good cause in anticipation of, during or after a
change of control" as defined in this Agreement), or Employee's termination by
LC Management for "good and sufficient cause" as that term is defined in
Section E of Article 2 of this Agreement, employee shall not, without LC
Management's prior written permission, which may be withheld by LC Management
in its sole discretion, directly or indirectly, on Employee's behalf or on
behalf of any other person, firm, corporation, association or other entity,
engage in, or in any way be employed by, connected with, concerned with,
involved with, consult for or negotiate for, or acquire or maintain any
ownership interest in any business or activity which is the same, similar to or
competitive with that conducted by, or engaged in by the LCA operating
subsidiary, indicated on Schedule A, which is attached hereto and incorporated
by reference
-8-
<PAGE> 10
herein as if reproduced verbatim for which Employee primarily provided
services. Employee and LC Management agree that Employee, for purposes of the
application of Paragraph A of this Article 4, primarily provides services to
the LCA operating subsidiary listed on Schedule A. If Employee's employment
with LC Management is terminated by LC Management for any reason other than
"good and sufficient cause" as that term is defined in Section E of Article 2
of this Agreement, the provisions of this Article 4 shall not apply to
Employee and shall not be enforced as against Employee.
B. Area. The provisions set forth in Paragraph A. above shall apply to any
area within a 25 miles radius of any center, or facility, or location operated
by the operating subsidiary of LCA indicated on Schedule A hereof.
C. Non-Piracy. Employee further agrees that Employee shall not for a period
of two (2) years following the termination of Employee's employment for any
reason, directly or indirectly, or through third parties, for himself or for
others, at any time in any manner, induce or attempt to influence any employees
of any subsidiary of LCA to terminate their employment with such subsidiary,
nor shall Employee have an interest in, directly or indirectly, any entity
which shall, with Employee's direct or indirect participation, induce or
attempt to influence any employee of any subsidiary of LCA to terminate their
employment with such subsidiary.
D. Remedies. Employee acknowledges that in the event of any violation or
threatened violation by Employee of the provisions set forth in Article 3 or
this Article 4, LCA will sustain serious, irreparable, continuing and
substantial harm and damage to its business, the extent of which will be
difficult to determine and impossible to remedy by an
-9-
<PAGE> 11
action at law for money damages. Accordingly, Employee agrees that, in the
event of such violation or threatened violation by Employee, LCA shall be
entitled to an injunction preventing such violation or threatened violation
before trial from any court of competent jurisdiction as a matter of course in
addition to and not in lieu of any and all such other legal and equitable
remedies as may be available to LCA. Should any court of competent
jurisdiction determine, consistent with the established precedent of the forum
jurisdiction, that the public policy of such jurisdiction requires a more
limited restriction in geographic area, duration, nature of restricted
activities, or any combination thereof, it would be in furtherance of the
intentions of the parties hereto for the court to so interpret and construe the
terms of this Article 4 to apply only to the extent of such more limited
restrictions.
E. Survival. The provisions of this Article 4 shall survive the termination
of Employee's employment with LC Management.
ARTICLE 5
Miscellaneous
A. Definition. As used throughout this Agreement, "LC Management" shall
include all subsidiaries of LCA, affiliates, and any corporation, joint
venture, or other entity in which LCA or its subsidiaries or affiliates has an
equity interest in excess of ten percent (10%).
B. Gender. Reference to the masculine gender shall include the feminine
gender.
C. Supersede. This Agreement shall supersede and substitute for any previous
employment or severance agreement between Employee and LCA or LC Management,
and is entered into in consideration of the mutual undertakings of the parties,
the cancellation of
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<PAGE> 12
all previous agreements, and the release of the parties of their respective
rights and obligations under any previous employment or severance agreement,
excepting only such rights and obligations which by their nature are intended
to survive termination or cancellation of such employment agreement.
D. Hire Date. Employee and LC Management acknowledge that for purpose of
Article 2, Employee's last hire date with LC Management is that date provided
in Schedule B hereof, which is attached hereto and incorporated by reference
herein as if reproduced verbatim.
E. Binding Effect. The respective rights and obligations of LC Management
and the Employee under this Employment Agreement shall inure to the benefit of
and shall be binding upon LCA, LC Management and the Employee and the
respective successors and assigns of LCA and LC Management. This Employment
Agreement shall not be assignable by the Employee, but shall inure to the
benefit of Employee's heirs, legal and personal representatives. As used
herein, the term "successors and assigns" shall include any corporation or
corporations which acquire all or substantially all of the assets and
businesses of LCA whether by purchase, merger, consolidation or otherwise,
including without limitation a surviving corporation upon a "change in control"
as defined herein.
F. Arbitration. Any dispute under this Employment Agreement, except for
those arising under Articles 3 and 4 hereof, shall be resolved by arbitration.
The arbitration shall be conducted in Houston, Texas, under the auspices of the
American Arbitration Association and under its rules for commercial
arbitrations generally. The prevailing party in such proceedings shall be
entitled to its costs and attorneys' fees.
-11-
<PAGE> 13
G. Applicable Law. This Employment Agreement shall be interpreted and
construed in accordance with the laws of the State of Texas.
It is understood and agreed that LCA will benefit from the covenants and
agreements of Employee hereunder, and, therefore by its execution hereof,
guarantees the performance by LC Management of its obligations and agreements
hereunder.
IN WITNESS WHEREOF, LC Management, LCA and the Employee have executed this
Employment Agreement in duplicate originals as of the date first above written.
Date: 12/26/95 /s/ Pauline Bonner
------------------------- --------------------------------
"EMPLOYEE"
LC MANAGEMENT COMPANY
Date: 12/27/95 By: /s/ C. W. Frank
------------------------- -----------------------------
"LC MANAGEMENT"
LIVING CENTERS OF AMERICA, INC.
Date: 12/27/95 By: /s/ C. W. Frank
------------------------- -----------------------------
"LCA"
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<PAGE> 14
SCHEDULE A
LCA Operating subsidiary for which Employee primarily provides services:
Living Centers - Rocky Mountain, Inc..
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<PAGE> 15
SCHEDULE B
Employee's last hire date: June 6, 1980
---------------
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<PAGE> 1
EXHIBIT 10.15
EMPLOYMENT AGREEMENT BETWEEN LIVING CENTERS OF AMERICA, INC.
AND JOHN D. LEE, III
<PAGE> 2
EMPLOYMENT AGREEMENT
THIS AGREEMENT is between the undersigned individual ("Employee") and
LC MANAGEMENT COMPANY ("LC Management"), a wholly owned subsidiary of Living
Centers of America, Inc. ("LCA").
R E C I T A L S:
A. LCA, through its operating subsidiaries, is an operator of
long-term health care centers, Progressive Care Centers providing subacute
care, Alzheimer's care centers, assisted living centers, retirement apartments,
centers and programs for people with mental retardation and developmental
disabilities, and a company providing pharmaceutical services and supplies.
B. LCA and LC Management have a proprietary interest in its
business methods, opportunities, operations and systems which include, but are
not limited to, internal financial and operating reports and data, strategic
plans, business acquisition and development opportunities, policy and procedure
manuals, management information programs and systems, financial forms and
information, supplier and vendor information, accounting forms and procedures,
personnel policies and information on the needs of residents, clients and
patients and their families, and the financial condition of LCA all of which
information ("Corporation Information") not publicly disclosed is considered by
LCA and LC Management and recognized by Employee to be confidential.
C. LC Management intends to employ or continue to employ Employee
in a position where Employee will have access to this Corporate Information,
and therefore, LCA will be vulnerable to unfair post-employment competition by
Employee.
<PAGE> 3
D. In consideration of the severance and other employment
benefits provided for herein, Employee is willing to enter into this Agreement
with LC Management as a condition of employment.
NOW, THEREFORE, intending to be legally bound, the parties agree as
follows effective the day and date set opposite their signatures below:
ARTICLE 1.
Term of Employment
Employee acknowledges that LC Management has the right to terminate
Employee's employment at any time for any reason whatsoever; provided, however,
that any termination by LC Management for reasons other than "good and
sufficient cause," as defined in Article 2., Paragraph E below, shall result in
the severance benefits described in Article 2 below, to become due in
accordance with the terms of this Agreement. Employee further acknowledges
that the severance payments made and other benefits provided by LC Management
are in full satisfaction of any claims that Employee may have against LC
Management resulting from LC Management's exercise of its right to terminate
Employee's employment, except for those fringe benefits which are intended to
survive termination such as the rights to receive payments pursuant to
retirement plans and similar rights.
ARTICLE 2.
Severance Benefits
If Employee's employment with LC Management is terminated by LC
Management for any reason other than "good and sufficient cause," Employee
shall be entitled to the following severance benefits:
-2-
<PAGE> 4
A. Severance Pay: Employee shall receive severance payments
equivalent to Employee's base salary in effect at the time of termination for
the number of months set forth below:
===============================================================================
Years of Living Centers Continuous Service
Completed from Last Hire Date
-----------------------------
- --------------------------------------------------------------------------------
1 2 3 4 5 6 7 8 9 10 or more
- --------------------------------------------------------------------------------
Months of Severance Pay
-----------------------
- --------------------------------------------------------------------------------
6 8 10 12 14 16 18 20 22 24
================================================================================
B. Other Severance Benefits:
(1) Group medical and life insurance coverages shall continue
under then prevailing terms as long as severance payments are being made to
Employee. Deductions for Employee's share of the premiums will be made from
Employee's severance payments. Group medical coverage provided during such
period shall be applied against LC Management's obligation to continue group
medical coverage under the Consolidated Omnibus Budget Reconciliation Act of
1985 ("COBRA"). Upon termination of group medical and life insurance coverage,
Employee may convert, at his cost, to individual policies.
(2) Employee shall receive payment at the Employee's then
prevailing rate, for Employee's earned, but unused, and accrued vacation days
through the date of termination.
(3) Employee's eligibility to receive or participate in all other
benefit and compensation plans, including, but not limited to Management
Incentive Bonus, Long Term Disability, Retirement Savings, and Stock Option
Plans, shall terminate as of the effective
-3-
<PAGE> 5
date of Employee's termination except as provided otherwise hereunder or under
the terms of a particular benefit or compensation plan.
C. Change of Control of the Employer. In addition to the
Severance Pay and Other Severance Benefits provided for in Paragraphs A and B,
immediately above, in the event of a "change of control" of LCA and either the
Employee's (a) involuntary termination or (b) "voluntary termination for good
cause in anticipation of, during or after a change of control";
(1) The Employee shall be entitled to receive a lump sum payment
from LC Management of an amount equal to twelve (12) month's salary, which
shall be the Employee's base salary in effect at the date of termination plus
Employee's base bonus for Employee's grade as of the date of termination as set
forth in LCA's policy statement on the Management Incentive Bonus Program; and
(2) All stock options granted to Employee under the Living Centers
of America, Inc. 1992 Stock Option Plan, as amended (the "Option Plan"), as of
the date of termination shall "vest" and become exercisable, as that term is
defined in the Option Plan, as of the termination date, and Employee shall
thereupon have all rights applicable thereto as set forth in the Option Plan
pertaining to Employee's Stock Options.
For purposes of this Agreement, "voluntary termination for good cause
in anticipation of, during or after a change of control" shall mean Employee's
electing to terminate his employment with LC Management as a result of an
adverse change in title or working responsibilities of the Employee within the
six (6) month time period before and the twelve (12) month time period after a
"change of control." For purposes of this Paragraph C,
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<PAGE> 6
"change of control" is the occurrence of one or more of the following events:
(i) any person or entity, together with all associates of such person or
entity, becomes the owner, beneficial or otherwise, of 30% or more of the then
outstanding common stock of LCA, or (ii) during any two (2) year period,
directors of LCA serving at the beginning of such period cease for any reason
to constitute a majority of the directors serving, unless the election of at
least 75% of the new directors was approved by at least 75% of the directors in
office immediately prior to the election.
D. Right to Terminate Severance Pay and Benefits. If Employee is
terminated by LC Management for reasons other than "good and sufficient cause,"
as that term is defined in Section E of this Article 2, Employee will receive
the severance payments and benefits described in Paragraphs A, B and C of this
Article 2. Notwithstanding the foregoing, if Employee commences other
employment while receiving such severance payments and benefits said severance
payments and benefits shall cease as of the date Employee commences such other
employment, but in no event shall the severance payments and benefits provided
in Paragraphs A and B of this Article 2 be terminated prior to Employee's
receiving severance payments and benefits for a two (2) month period. However,
if Employee commences other employment and the base salary Employee is paid in
the course of the other employment is less than the base salary Employee
received from LC Management at Employee's termination, LC Management shall pay
to Employee the difference in said base salaries each month for the remaining
number of months Employee would otherwise be entitled to severance pay as
provided in Section A of this Article 2 at the commencement of said other
employment, starting with the first full month after Employee commences said
-5-
<PAGE> 7
other employment. Notwithstanding the foregoing, in the event of a "change of
control" of LCA and either the Employee's (a) involuntary termination or (b)
"voluntary termination for good cause in anticipation of, during or after a
change of control" and if Employee commences other employment while receiving
severance payments and benefits described in Paragraphs A, B and C of this
Article 2, said severance payments and benefits shall not cease as of the date
Employee commences such other employment, and shall continue pursuant to
Paragraph A of this Article 2. LC Management reserves the right to terminate
all continuing severance payments and benefits described in Paragraphs A and B
of this Article 2 if Employee violates any of the non-disclosure covenants set
forth in Article 3 or the non-piracy covenant set forth in Article 4 below.
E. "Good and Sufficient Cause" Defined. Termination for "good
and sufficient cause" shall include termination for such things as fraud or
dishonesty, willful failure to perform assigned duties, willful violation of
LCA's Business Conduct Policy, or intentionally working against the best
interests of LCA.
F. Termination for Good and Sufficient Cause. If Employee's
employment with LC Management is terminated by LC Management for "good and
sufficient cause" as that term is defined in Section E of this Article 2,
Employee will not receive the severance payments and benefits described in
Paragraphs A, B, C, and D of this Article 2.
G. Voluntary Termination by Employee. If Employee voluntary
terminates his/her employment with LC Management Company, (and said termination
is other than "voluntary termination for good cause in anticipation of, during
or after a change of control"
-6-
<PAGE> 8
as defined in this agreement), Employee will not receive the severance payments
and benefits described in Paragraphs A, B, C, and D of this Article 2.
H. Parachute Payment. If the Employee is liable for the payment
of any excise tax (the "Basic Excise Tax") because of Section 4999 of the
Internal Revenue Code of 1986, as amended (the "Code"), or any successor or
similar provision, with respect to any payments or benefits received or to be
received from LC Management or any successor to LC Management, whether provided
under this Agreement or otherwise, LC Management shall pay the Employee an
amount (the "Special Reimbursement") which, after payment by the Employee (or
on the Employee's behalf) of any federal, state and local taxes applicable
thereto, including, without limitation, any further excise tax under such
Section 4999 of the Code, on, with respect to or resulting from the Special
Reimbursement, equals the net amounts of the Basic Excise Tax.
I. Survival. The provisions of this Article 2 shall survive the
termination of Employee's employment with LC Management.
ARTICLE 3
Non-Disclosure Agreement
Employee acknowledges and recognizes that in the course of Employee's
employment, Employee has had and will continue to have or will have access to
Corporate Information; and that LC Management may provide and confide to
Employee Corporation Information, techniques and methods of operation developed
at great expense by LCA, all of which Employee recognizes to be unique assets
of LCA. Employee agrees that Employee shall not, during or after the term of
employment, directly or indirectly, in any manner utilize,
-7-
<PAGE> 9
appropriate, disclose, communicate, divulge, copy or relate to any person,
firm, corporation, association or other entity, except where required by law,
or use or make use of any such Corporate Information, any such techniques or
methods of operation; data of any kind; or any information relating to
strategic plans, revenues, costs, profits or the financial condition of LCA,
which is not generally known to the public or recognized as standard practice
in the industry in which LCA is or shall be engaged. The provisions of this
Article 3 shall survive the termination of Employee's employment with LC
Management.
ARTICLE 4
Non-Competition Agreement
A. Duration; Applicability. Subject to the provisions of
Paragraphs B and E below, Employee agrees that for a period of two (2) years
following Employee's Voluntary termination of Employee's employment with LC
Management (other than "voluntary termination for good cause in anticipation
of, during or after a change of control" as defined in this Agreement), or
Employee's termination by LC Management for "good and sufficient cause" as that
term is defined in Section E of Article 2 of this Agreement, employee shall
not, without LC Management's prior written permission, which may be withheld by
LC Management in its sole discretion, directly or indirectly, on Employee's
behalf or on behalf of any other person, firm, corporation, association or
other entity, engage in, or in any way be employed by, connected with,
concerned with, involved with, consult for or negotiate for, or acquire or
maintain any ownership interest in any business or activity which is the same,
similar to or competitive with that conducted by, or engaged in by the LCA
operating subsidiary, indicated on Schedule A, which is attached hereto and
incorporated by reference
-8-
<PAGE> 10
herein as if reproduced verbatim for which Employee primarily provided
services. Employee and LC Management agree that Employee, for purposes of the
application of Paragraph A of this Article 4, primarily provides services to
the LCA operating subsidiary listed on Schedule A. If Employee's employment
with LC Management is terminated by LC Management for any reason other than
"good and sufficient cause" as that term is defined in Section E of Article 2
of this Agreement, the provisions of this Article 4 shall not apply to
Employee and shall not be enforced as against Employee.
B. Area. The provisions set forth in Paragraph A. above shall
apply to any area within a 25 miles radius of any center, or facility, or
location operated by the operating subsidiary of LCA indicated on Schedule A
hereof.
C. Non-Piracy. Employee further agrees that Employee shall not
for a period of two (2) years following the termination of Employee's
employment for any reason, directly or indirectly, or through third parties,
for himself or for others, at any time in any manner, induce or attempt to
influence any employees of any subsidiary of LCA to terminate their employment
with such subsidiary, nor shall Employee have an interest in, directly or
indirectly, any entity which shall, with Employee's direct or indirect
participation, induce or attempt to influence any employee of any subsidiary of
LCA to terminate their employment with such subsidiary.
D. Remedies. Employee acknowledges that in the event of any
violation or threatened violation by Employee of the provisions set forth in
Article 3 or this Article 4, LCA will sustain serious, irreparable, continuing
and substantial harm and damage to its business, the extent of which will be
difficult to determine and impossible to remedy by an
-9-
<PAGE> 11
action at law for money damages. Accordingly, Employee agrees that, in the
event of such violation or threatened violation by Employee, LCA shall be
entitled to an injunction preventing such violation or threatened violation
before trial from any court of competent jurisdiction as a matter of course in
addition to and not in lieu of any and all such other legal and equitable
remedies as may be available to LCA. Should any court of competent
jurisdiction determine, consistent with the established precedent of the forum
jurisdiction, that the public policy of such jurisdiction requires a more
limited restriction in geographic area, duration, nature of restricted
activities, or any combination thereof, it would be in furtherance of the
intentions of the parties hereto for the court to so interpret and construe the
terms of this Article 4 to apply only to the extent of such more limited
restrictions.
E. Survival. The provisions of this Article 4 shall survive the
termination of Employee's employment with LC Management.
ARTICLE 5
Miscellaneous
A. Definition. As used throughout this Agreement, "LC
Management" shall include all subsidiaries of LCA, affiliates, and any
corporation, joint venture, or other entity in which LCA or its subsidiaries or
affiliates has an equity interest in excess of ten percent (10%).
B. Gender. Reference to the masculine gender shall include the
feminine gender.
C. Supersede. This Agreement shall supersede and substitute for
any previous employment or severance agreement between Employee and LCA or LC
Management, and is entered into in consideration of the mutual undertakings of
the parties, the cancellation of
-10-
<PAGE> 12
all previous agreements, and the release of the parties of their respective
rights and obligations under any previous employment or severance agreement,
excepting only such rights and obligations which by their nature are intended
to survive termination or cancellation of such employment agreement.
D. Hire Date. Employee and LC Management acknowledge that for
purpose of Article 2, Employee's last hire date with LC Management is that date
provided in Schedule B hereof, which is attached hereto and incorporated by
reference herein as if reproduced verbatim.
E. Binding Effect. The respective rights and obligations of LC
Management and the Employee under this Employment Agreement shall inure to the
benefit of and shall be binding upon LCA, LC Management and the Employee and
the respective successors and assigns of LCA and LC Management. This
Employment Agreement shall not be assignable by the Employee, but shall inure
to the benefit of Employee's heirs, legal and personal representatives. As
used herein, the term "successors and assigns" shall include any corporation or
corporations which acquire all or substantially all of the assets and
businesses of LCA whether by purchase, merger, consolidation or otherwise,
including without limitation a surviving corporation upon a "change in control"
as defined herein.
F. Arbitration. Any dispute under this Employment Agreement,
except for those arising under Articles 3 and 4 hereof, shall be resolved by
arbitration. The arbitration shall be conducted in Houston, Texas, under the
auspices of the American Arbitration Association and under its rules for
commercial arbitrations generally. The prevailing party in such proceedings
shall be entitled to its costs and attorneys' fees.
-11-
<PAGE> 13
G. Applicable Law. This Employment Agreement shall be
interpreted and construed in accordance with the laws of the State of Texas.
It is understood and agreed that LCA will benefit from the covenants
and agreements of Employee hereunder, and, therefore by its execution hereof,
guarantees the performance by LC Management of its obligations and agreements
hereunder.
IN WITNESS WHEREOF, LC Management, LCA and the Employee have executed
this Employment Agreement in duplicate originals as of the date first above
written.
Date: 12/22/95 /s/ John D. Lee
------------------------- -----------------------------
"EMPLOYEE"
LC MANAGEMENT COMPANY
Date: 12/27/95 By: /s/ C. W. Frank
------------------------- -----------------------------
"LC MANAGEMENT"
LIVING CENTERS OF AMERICA, INC.
Date: 12/27/95 By: /s/ C. W. Frank
------------------------- -----------------------------
"LCA"
-12-
<PAGE> 14
SCHEDULE A
LCA Operating subsidiary for which Employee primarily provides services:
Living Centers Southeast, Inc.
-13-
<PAGE> 15
SCHEDULE B
Employee's last hire date: May 16, 1994
--------------
-14-
<PAGE> 1
EXHIBIT 10.17
EMPLOYMENT AGREEMENT BETWEEN LIVING CENTERS OF AMERICA, INC.
AND KENNETH MORGAN
<PAGE> 2
EMPLOYMENT AGREEMENT
THIS AGREEMENT is between the undersigned individual ("Employee") and
LC MANAGEMENT COMPANY ("LC Management"), a wholly owned subsidiary of Living
Centers of America, Inc. ("LCA").
R E C I T A L S:
A. LCA, through its operating subsidiaries, is an operator of
long-term health care centers, Progressive Care Centers providing subacute
care, Alzheimer's care centers, assisted living centers, retirement apartments,
centers and programs for people with mental retardation and developmental
disabilities, and a company providing pharmaceutical services and supplies.
B. LCA and LC Management have a proprietary interest in its
business methods, opportunities, operations and systems which include, but are
not limited to, internal financial and operating reports and data, strategic
plans, business acquisition and development opportunities, policy and procedure
manuals, management information programs and systems, financial forms and
information, supplier and vendor information, accounting forms and procedures,
personnel policies and information on the needs of residents, clients and
patients and their families, and the financial condition of LCA all of which
information ("Corporation Information") not publicly disclosed is considered by
LCA and LC Management and recognized by Employee to be confidential.
C. LC Management intends to employ or continue to employ Employee
in a position where Employee will have access to this Corporate Information,
and therefore, LCA will be vulnerable to unfair post-employment competition by
Employee.
<PAGE> 3
D. In consideration of the severance and other employment
benefits provided for herein, Employee is willing to enter into this Agreement
with LC Management as a condition of employment.
NOW, THEREFORE, intending to be legally bound, the parties agree as
follows effective the day and date set opposite their signatures below:
ARTICLE 1.
Term of Employment
Employee acknowledges that LC Management has the right to terminate
Employee's employment at any time for any reason whatsoever; provided, however,
that any termination by LC Management for reasons other than "good and
sufficient cause," as defined in Article 2., Paragraph E below, shall result in
the severance benefits described in Article 2 below, to become due in
accordance with the terms of this Agreement. Employee further acknowledges
that the severance payments made and other benefits provided by LC Management
are in full satisfaction of any claims that Employee may have against LC
Management resulting from LC Management's exercise of its right to terminate
Employee's employment, except for those fringe benefits which are intended to
survive termination such as the rights to receive payments pursuant to
retirement plans and similar rights.
ARTICLE 2.
Severance Benefits
If Employee's employment with LC Management is terminated by LC
Management for any reason other than "good and sufficient cause," Employee
shall be entitled to the following severance benefits:
-2-
<PAGE> 4
A. Severance Pay: Employee shall receive severance payments
equivalent to Employee's base salary in effect at the time of termination for
the number of months set forth below:
================================================================================
Years of Living Centers Continuous Service
Completed from Last Hire Date
-----------------------------
- --------------------------------------------------------------------------------
1 2 3 4 5 6 7 8 9 10 or more
- --------------------------------------------------------------------------------
Months of Severance Pay
-----------------------
- --------------------------------------------------------------------------------
6 8 10 12 14 16 18 20 22 24
================================================================================
B. Other Severance Benefits:
(1) Group medical and life insurance coverages shall continue
under then prevailing terms as long as severance payments are being made to
Employee. Deductions for Employee's share of the premiums will be made from
Employee's severance payments. Group medical coverage provided during such
period shall be applied against LC Management's obligation to continue group
medical coverage under the Consolidated Omnibus Budget Reconciliation Act of
1985 ("COBRA"). Upon termination of group medical and life insurance coverage,
Employee may convert, at his cost, to individual policies.
(2) Employee shall receive payment at the Employee's then
prevailing rate, for Employee's earned, but unused, and accrued vacation days
through the date of termination.
(3) Employee's eligibility to receive or participate in all other
benefit and compensation plans, including, but not limited to Management
Incentive Bonus, Long Term Disability, Retirement Savings, and Stock Option
Plans, shall terminate as of the effective
-3-
<PAGE> 5
date of Employee's termination except as provided otherwise hereunder or under
the terms of a particular benefit or compensation plan.
C. Change of Control of the Employer. In addition to the
Severance Pay and Other Severance Benefits provided for in Paragraphs A and B,
immediately above, in the event of a "change of control" of LCA and either the
Employee's (a) involuntary termination or (b) "voluntary termination for good
cause in anticipation of, during or after a change of control";
(1) The Employee shall be entitled to receive a lump sum payment
from LC Management of an amount equal to twelve (12) month's salary, which
shall be the Employee's base salary in effect at the date of termination plus
Employee's base bonus for Employee's grade as of the date of termination as set
forth in LCA's policy statement on the Management Incentive Bonus Program; and
(2) All stock options granted to Employee under the Living Centers
of America, Inc. 1992 Stock Option Plan, as amended (the "Option Plan"), as of
the date of termination shall "vest" and become exercisable, as that term is
defined in the Option Plan, as of the termination date, and Employee shall
thereupon have all rights applicable thereto as set forth in the Option Plan
pertaining to Employee's Stock Options.
For purposes of this Agreement, "voluntary termination for good cause
in anticipation of, during or after a change of control" shall mean Employee's
electing to terminate his employment with LC Management as a result of an
adverse change in title or working responsibilities of the Employee within the
six (6) month time period before and the twelve (12) month time period after a
"change of control." For purposes of this Paragraph C,
-4-
<PAGE> 6
"change of control" is the occurrence of one or more of the following events:
(i) any person or entity, together with all associates of such person or
entity, becomes the owner, beneficial or otherwise, of 30% or more of the then
outstanding common stock of LCA, or (ii) during any two (2) year period,
directors of LCA serving at the beginning of such period cease for any reason
to constitute a majority of the directors serving, unless the election of at
least 75% of the new directors was approved by at least 75% of the directors in
office immediately prior to the election.
D. Right to Terminate Severance Pay and Benefits. If Employee is
terminated by LC Management for reasons other than "good and sufficient cause,"
as that term is defined in Section E of this Article 2, Employee will receive
the severance payments and benefits described in Paragraphs A, B and C of this
Article 2. Notwithstanding the foregoing, if Employee commences other
employment while receiving such severance payments and benefits said severance
payments and benefits shall cease as of the date Employee commences such other
employment, but in no event shall the severance payments and benefits provided
in Paragraphs A and B of this Article 2 be terminated prior to Employee's
receiving severance payments and benefits for a two (2) month period. However,
if Employee commences other employment and the base salary Employee is paid in
the course of the other employment is less than the base salary Employee
received from LC Management at Employee's termination, LC Management shall pay
to Employee the difference in said base salaries each month for the remaining
number of months Employee would otherwise be entitled to severance pay as
provided in Section A of this Article 2 at the commencement of said other
employment, starting with the first full month after Employee commences said
-5-
<PAGE> 7
other employment. Notwithstanding the foregoing, in the event of a "change of
control" of LCA and either the Employee's (a) involuntary termination or (b)
"voluntary termination for good cause in anticipation of, during or after a
change of control" and if Employee commences other employment while receiving
severance payments and benefits described in Paragraphs A, B and C of this
Article 2, said severance payments and benefits shall not cease as of the date
Employee commences such other employment, and shall continue pursuant to
Paragraph A of this Article 2. LC Management reserves the right to terminate
all continuing severance payments and benefits described in Paragraphs A and B
of this Article 2 if Employee violates any of the non-disclosure covenants set
forth in Article 3 or the non-piracy covenant set forth in Article 4 below.
E. "Good and Sufficient Cause" Defined. Termination for "good
and sufficient cause" shall include termination for such things as fraud or
dishonesty, willful failure to perform assigned duties, willful violation of
LCA's Business Conduct Policy, or intentionally working against the best
interests of LCA.
F. Termination for Good and Sufficient Cause. If Employee's
employment with LC Management is terminated by LC Management for "good and
sufficient cause" as that term is defined in Section E of this Article 2,
Employee will not receive the severance payments and benefits described in
Paragraphs A, B, C, and D of this Article 2.
G. Voluntary Termination by Employee. If Employee voluntary
terminates his/her employment with LC Management Company, (and said termination
is other than "voluntary termination for good cause in anticipation of, during
or after a change of control"
-6-
<PAGE> 8
as defined in this agreement), Employee will not receive the severance payments
and benefits described in Paragraphs A, B, C, and D of this Article 2.
H. Parachute Payment. If the Employee is liable for the payment
of any excise tax (the "Basic Excise Tax") because of Section 4999 of the
Internal Revenue Code of 1986, as amended (the "Code"), or any successor or
similar provision, with respect to any payments or benefits received or to be
received from LC Management or any successor to LC Management, whether provided
under this Agreement or otherwise, LC Management shall pay the Employee an
amount (the "Special Reimbursement") which, after payment by the Employee (or
on the Employee's behalf) of any federal, state and local taxes applicable
thereto, including, without limitation, any further excise tax under such
Section 4999 of the Code, on, with respect to or resulting from the Special
Reimbursement, equals the net amounts of the Basic Excise Tax.
I. Survival. The provisions of this Article 2 shall survive the
termination of Employee's employment with LC Management.
ARTICLE 3
Non-Disclosure Agreement
Employee acknowledges and recognizes that in the course of Employee's
employment, Employee has had and will continue to have or will have access to
Corporate Information; and that LC Management may provide and confide to
Employee Corporation Information, techniques and methods of operation developed
at great expense by LCA, all of which Employee recognizes to be unique assets
of LCA. Employee agrees that Employee shall not, during or after the term of
employment, directly or indirectly, in any manner utilize,
-7-
<PAGE> 9
appropriate, disclose, communicate, divulge, copy or relate to any person,
firm, corporation, association or other entity, except where required by law,
or use or make use of any such Corporate Information, any such techniques or
methods of operation; data of any kind; or any information relating to
strategic plans, revenues, costs, profits or the financial condition of LCA,
which is not generally known to the public or recognized as standard practice
in the industry in which LCA is or shall be engaged. The provisions of this
Article 3 shall survive the termination of Employee's employment with LC
Management.
ARTICLE 4
Non-Competition Agreement
A. Duration; Applicability. Subject to the provisions of
Paragraphs B and E below, Employee agrees that for a period of two (2) years
following Employee's Voluntary termination of Employee's employment with LC
Management (other than "voluntary termination for good cause in anticipation
of, during or after a change of control" as defined in this Agreement), or
Employee's termination by LC Management for "good and sufficient cause" as that
term is defined in Section E of Article 2 of this Agreement, employee shall
not, without LC Management's prior written permission, which may be withheld by
LC Management in its sole discretion, directly or indirectly, on Employee's
behalf or on behalf of any other person, firm, corporation, association or
other entity, engage in, or in any way be employed by, connected with,
concerned with, involved with, consult for or negotiate for, or acquire or
maintain any ownership interest in any business or activity which is the same,
similar to or competitive with that conducted by, or engaged in by the LCA
operating subsidiary, indicated on Schedule A, which is attached hereto and
incorporated by reference
-8-
<PAGE> 10
herein as if reproduced verbatim for which Employee primarily provided
services. Employee and LC Management agree that Employee, for purposes of the
application of Paragraph A of this Article 4, primarily provides services to
the LCA operating subsidiary listed on Schedule A. If Employee's employment
with LC Management is terminated by LC Management for any reason other than
"good and sufficient cause" as that term is defined in Section E of Article 2
of this Agreement, the provisions of this Article 4 shall not apply to
Employee and shall not be enforced as against Employee.
B. Area. The provisions set forth in Paragraph A. above shall
apply to any area within a 25 miles radius of any center, or facility, or
location operated by the operating subsidiary of LCA indicated on Schedule A
hereof.
C. Non-Piracy. Employee further agrees that Employee shall not
for a period of two (2) years following the termination of Employee's
employment for any reason, directly or indirectly, or through third parties,
for himself or for others, at any time in any manner, induce or attempt to
influence any employees of any subsidiary of LCA to terminate their employment
with such subsidiary, nor shall Employee have an interest in, directly or
indirectly, any entity which shall, with Employee's direct or indirect
participation, induce or attempt to influence any employee of any subsidiary of
LCA to terminate their employment with such subsidiary.
D. Remedies. Employee acknowledges that in the event of any
violation or threatened violation by Employee of the provisions set forth in
Article 3 or this Article 4, LCA will sustain serious, irreparable, continuing
and substantial harm and damage to its business, the extent of which will be
difficult to determine and impossible to remedy by an
-9-
<PAGE> 11
action at law for money damages. Accordingly, Employee agrees that, in the
event of such violation or threatened violation by Employee, LCA shall be
entitled to an injunction preventing such violation or threatened violation
before trial from any court of competent jurisdiction as a matter of course in
addition to and not in lieu of any and all such other legal and equitable
remedies as may be available to LCA. Should any court of competent
jurisdiction determine, consistent with the established precedent of the forum
jurisdiction, that the public policy of such jurisdiction requires a more
limited restriction in geographic area, duration, nature of restricted
activities, or any combination thereof, it would be in furtherance of the
intentions of the parties hereto for the court to so interpret and construe the
terms of this Article 4 to apply only to the extent of such more limited
restrictions.
E. Survival. The provisions of this Article 4 shall survive the
termination of Employee's employment with LC Management.
ARTICLE 5
Miscellaneous
A. Definition. As used throughout this Agreement, "LC
Management" shall include all subsidiaries of LCA, affiliates, and any
corporation, joint venture, or other entity in which LCA or its subsidiaries or
affiliates has an equity interest in excess of ten percent (10%).
B. Gender. Reference to the masculine gender shall include the
feminine gender.
C. Supersede. This Agreement shall supersede and substitute for
any previous employment or severance agreement between Employee and LCA or LC
Management, and is entered into in consideration of the mutual undertakings of
the parties, the cancellation of
-10-
<PAGE> 12
all previous agreements, and the release of the parties of their respective
rights and obligations under any previous employment or severance agreement,
excepting only such rights and obligations which by their nature are intended
to survive termination or cancellation of such employment agreement.
D. Hire Date. Employee and LC Management acknowledge that for
purpose of Article 2, Employee's last hire date with LC Management is that date
provided in Schedule B hereof, which is attached hereto and incorporated by
reference herein as if reproduced verbatim.
E. Binding Effect. The respective rights and obligations of LC
Management and the Employee under this Employment Agreement shall inure to the
benefit of and shall be binding upon LCA, LC Management and the Employee and
the respective successors and assigns of LCA and LC Management. This
Employment Agreement shall not be assignable by the Employee, but shall inure
to the benefit of Employee's heirs, legal and personal representatives. As
used herein, the term "successors and assigns" shall include any corporation or
corporations which acquire all or substantially all of the assets and
businesses of LCA whether by purchase, merger, consolidation or otherwise,
including without limitation a surviving corporation upon a "change in control"
as defined herein.
F. Arbitration. Any dispute under this Employment Agreement,
except for those arising under Articles 3 and 4 hereof, shall be resolved by
arbitration. The arbitration shall be conducted in Houston, Texas, under the
auspices of the American Arbitration Association and under its rules for
commercial arbitrations generally. The prevailing party in such proceedings
shall be entitled to its costs and attorneys' fees.
-11-
<PAGE> 13
G. Applicable Law. This Employment Agreement shall be
interpreted and construed in accordance with the laws of the State of Texas.
It is understood and agreed that LCA will benefit from the covenants
and agreements of Employee hereunder, and, therefore by its execution hereof,
guarantees the performance by LC Management of its obligations and agreements
hereunder.
IN WITNESS WHEREOF, LC Management, LCA and the Employee have executed
this Employment Agreement in duplicate originals as of the date first above
written.
Date: 12/28/95 /s/ Kenneth L. Morgan
--------------- --------------------------------------------
"EMPLOYEE"
LC MANAGEMENT COMPANY
Date: 12/28/95 By: /s/ Sydney K. Boone, Jr., Vice President
--------------- ---------------------------------------------
"LC MANAGEMENT"
LIVING CENTERS OF AMERICA, INC.
Date: 12/28/95 By: /s/ Sydney K. Boone, Jr., Vice President
--------------- ---------------------------------------------
"LCA"
-12-
<PAGE> 14
SCHEDULE A
LCA Operating subsidiary for which Employee primarily provides services:
Living Centers of Texas, Inc.
-13-
<PAGE> 15
SCHEDULE B
Employee's last hire date: January 9, 1995
-------------------
-14-
<PAGE> 1
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
<PAGE> 2
LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share amount)
(unaudited)
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
ASSUMING FULL DILUTION (a)
Net Income $43,180 $24,234 $26,616
Pro forma taxes (b) 0 599 899
------- ------- -------
Pro forma net income $43,180 $23,635 $25,717
======= ======= =======
Applicable Common Shares:
Weighted average shares outstanding
during the period 20,124 18,851 16,923
Weighted average shares issuable
upon exercise of common stock
options using the treasury stock
method 191 193 209
Weighted average shares issuable
upon exercise of warrants using
the treasury stock method - - -
------- ------- -------
Total shares 20,315 19,044 17,132
======= ======= =======
Earnings per share (fully diluted) (c) $ 2.13 $ 1.27 $ 1.55
======= ======= =======
Pro forma earnings per share (fully diluted(c) $ 2.13 $ 1.24 $ 1.50
======= ======= =======
</TABLE>
(a) This calculation is submitted in accordance with Regulation S-K,
item 601 (b) (1 by footnote 2 to paragraph 14 of APB Opinion No. 15
because it results in less
(b) The pro forma provision is included to reflect the estimated taxes
that would ha BCC Entities S corporations
(c) Excluding non-recurring merger and acquisition and other related
costs of $14.3 per share and pro forma earnings per share in 1995
would have been $1.94 and $
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
<PAGE> 2
LIVING CENTERS OF AMERICA, INC.
DIRECT AND INDIRECT SUBSIDIARIES
<TABLE>
<CAPTION>
State/Country
Incorporated
<S> <C>
Living Centers of America, Inc. DE
Subsidiaries
- ------------
Beaver Properties/Newco, Inc. NC
LC Management Company DE
LCR, Inc. DE
LCA Insurance Co., Ltd. Cayman Islands
Living Centers Holding Company DE
Living Centers - Southeast, Inc. NC
Living Centers - Southeast Development Corporation NC
Brian Center Health & Retirement/Lawrenceville, Inc. NC
Brian Center Health & Retirement/Weber City, Inc. NC
Brian Center of Asheboro, Inc. NC
Brian Center Health & Retirement/Alleghany, Inc. NC
Brian Center Health & Retirement/Bastian, Inc. NC
Brian Center Nursing Care/Fincastle, Inc. NC
Living Centers of Texas, Inc. DE
Devcon Holding Company DE
Living Centers - Rocky Mountain, Inc. NV
Living Centers - East, Inc. DE
TOICA, Inc. DE
Brian Center Health & Rehabilitation/Tampa, Inc. AL
American Pharmaceutical Services, Inc. DE
Driftwood Pharmacy Services, Inc. FL
American Pharmaceutical Services of Georgia, LLC GA
Mauch Care - Atlanta, Inc. NC
Allied Pharmacy Management, Inc. TX
Nann-Dan Corporation FL
Professional RX Systems, Inc. FL
APS Holding Company, Inc. TN
Progressive Care Centers of America, Inc. DE
Brian Center Health & Retirement/Wallace, Inc. NC
Brian Center Nursing Care/Powder Springs, Inc. NC
Brian Center of Raleigh, Inc. NC
Brian Center Health & Retirement/St. Simons, Inc. NC
Brian Center Nursing Care/Waynesville, Inc. NC
Brian Center Health & Retirement/Wilson, Inc. NC
Brian Center Nursing Care/Austell, Inc. NC
Brian Center Nursing Care/Hickory, Inc. NC
Health Care Investors, Inc. NC
Brian Center of Central Columbia, Inc. NC
Brian Center Management Corporation NC
Med-Care Sales and Rentals, Inc. NC
American Rehabilitation Services, Inc. UT
American Rehabilitation Management, Inc. TN
American Therapy Services, Inc. DE
Workhealth Healthcare Management, Inc. DE
Therapy Management Innovations, Inc. NV
Quest Rehab, LLC UT
Med-Therapy Rehabilitation Services, Inc. NC
Med-Therapy Rehabilitation Services/Florida, Inc. NC
NS&H, Inc. DE
Rehability Health Services, Inc. TX
Gulf Coast Physical Therapy Group, Inc. MS
Metro Physical Therapy (51%) MS
Industrial Therapy Center (50%) MS
TheraCare Home Health Agency, Inc. TN
Living Centers LTCP Development Company DE
American Geriatric Management Service, Inc. (75%) TX
LCA Hospice Services Corporation DE
Heart of America Hospice, LLC (50%) KS
Hospice Care of Louisiana, LLC (50%) LA
Hospice Management Partners, LLC (66.7%) DE
American Geriatric Management Services, Inc. DE
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
<PAGE> 2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-09707) pertaining to the 1992 Stock Option Plan of Living
Centers of America, Inc. of our report dated November 25, 1996, with respect to
the consolidated financial statements and schedule of Living Centers of
America, Inc. included in its Annual Report (Form 10-K) for the year ended
September 30, 1996.
/s/ ERNST & YOUNG LLP
December 16, 1996
Houston, Texas
<PAGE> 1
EXHIBIT 24
POWERS OF ATTORNEY
<PAGE> 2
LIVING CENTERS OF AMERICA, INC.
DIRECTORS'
POWERS OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT each of the undersigned directors of
Living Centers of America, Inc., a Delaware Corporation, does hereby make,
constitute and appoint EDWARD L. KUNTZ and SUSAN THOMAS WHITTLE, and each of
them, either one of whom may act without joinder of the other, his true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him in his name, place and stead, in any and all
capacities, to execute, deliver and file an Annual Report on Form 10-K for the
fiscal year ended September 30, 1996, with the Securities and Exchange
Commission, together with any and all amendments thereto, with all exhibits
thereto and other documents in connection therewith or supplemental thereto,
hereby granting unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform each and every act and thing as said
attorney or attorneys may deem necessary or advisable to carry out fully the
intents and purposes of the foregoing as the undersigned might or could do
personally or in the capacity or capacities as aforesaid, hereby ratifying and
confirming all acts and things which said attorneys-in-fact and agents, and
each of them, or the substitute or substitutes of any or all of them, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney effective
/s/ Edward L. Kuntz
- ----------------------------------- December 12, 1996
Edward L. Kuntz
/s/ Leroy D. Williams
- ----------------------------------- December 12, 1996
Leroy D. Williams
/s/ Eddy J. Rogers, Jr.
- ----------------------------------- December 12, 1996
Eddy J. Rogers, Jr.
/s/ Roger J. Bulger, M.D.
- ----------------------------------- December 12, 1996
Roger J. Bulger, M.D.
/s/ Anthony M. Frank
- ----------------------------------- December 12, 1996
Anthony M. Frank
/s/ Robert Hurlbut
- ----------------------------------- December 12, 1996
Robert Hurlbut
/s/ Donald C. Beaver
- ----------------------------------- December 12, 1996
Donald C. Beaver
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 21,394
<SECURITIES> 0
<RECEIVABLES> 204,462
<ALLOWANCES> 22,783
<INVENTORY> 16,582
<CURRENT-ASSETS> 281,561
<PP&E> 476,051
<DEPRECIATION> 186,333
<TOTAL-ASSETS> 821,734
<CURRENT-LIABILITIES> 180,470
<BONDS> 262,702
203
0
<COMMON> 0
<OTHER-SE> 329,112
<TOTAL-LIABILITY-AND-EQUITY> 821,734
<SALES> 1,114,491
<TOTAL-REVENUES> 1,114,491
<CGS> 0
<TOTAL-COSTS> 1,024,935
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,461
<INCOME-PRETAX> 77,095
<INCOME-TAX> 33,759
<INCOME-CONTINUING> 43,180
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,180
<EPS-PRIMARY> 2.13
<EPS-DILUTED> 2.13
</TABLE>
